ZENON Reports Operating Profit And Increased Revenue At End Of First Quarter

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For Immediate Release

ZENON Reports Operating Profit And Increased Revenue At End Of First Quarter

CANADA, May. 21 -/E-Wire/-- ZENON Environmental Inc. (TSE:ZEN; TSE:ZEN.A) today announced that it has reported an operating profit for the first quarter ended

March 31, 2001 along with a 47% increase in revenue over the previous year's quarter.

Financial Highlights --------------------

For the three months ended March 31, 2001:

2001 2000 ($000s) -----------------------------

Revenue 23,476 15,976

Income before income taxes 389 (1,844)

Net loss (238) (1,617)

Net Earnings per Share (0.01) (0.07)

"We are seeing a significant turnaround in operating performance where profit before

tax shows major improvement in the first quarter over the same period a year ago,'

stated Andrew Benedek, Chairman and Chief Executive Officer. "The low level of profit

in the quarter is usual, in fact, operating loss is quite typical for the first

quarter of the year.'

Revenue for the three months ended March 31, 2001 rose significantly to $23.5 million

from $16 million for the same period last year; representing a 47% increase. The

revenue increase is due to the significantly higher backlog recorded at the end of

last year versus the backlog at the end of the previous year.

The growth of ZENON's municipal division is clearly evident in the most recent announcement of orders for North America. In light of fears of bacterial outbreaks in

the drinking water supply, more municipalities are recognizing that membranes are the

solution. Municipal orders are also increasing in Europe with the recently announced

$10 million order in Italy.

"Water contamination is a global problem, and in Canada we've been sitting on a false assumption of safety of our drinking water,' continued Mr. Benedek. "The tragedies of the last year have already stressed the need for improvements to the

treatment of drinking water all across the country. ZENON is well positioned to meet

the increasing demand for our reliable technology, proven to be effective against a

wide array of contaminants.'

Infrastructure funding for municipalities, now allows a cost effective alternative

for upgrading existing systems with ZENON's ZeeWeedÂ® membrane technology. The ZeeWeedÂ®

1000, recently introduced to the municipal market, is targeted specifically for those

communities wanting to upgrade their existing system cost effectively, in addition to

providing residents with superior water quality.

Significant announcements made to date also include ZENON's strategic partnership

with Evac to target the marine wastewater industry. With Evac's proven record of

experience and reference list of more than 6500 ships, and ZENON's success with its

shipboard grey and black water treatment systems for Holland America Lines' cruise

ships, the potential for growth is substantial and will benefit both companies in

servicing this industry.

ZENON's industrial customer base is on the rise with substantial new orders secured

during the first quarter. Orders from the chemical industry for wastewater treatment

and from the power sector for process water treatment are already continuing to

increase in the second quarter.

Management's Discussion and Analysis

The following commentary should be read in conjunction with the Management's Discussion and Analysis section of the Company's 2000 Annual Report.

ZENON's strategic positioning of the last two years is beginning to show positive

results. Revenue at $23.5 million increased significantly from the first quarter of

2000 at $16.0 million. This improvement was generated largely from sales in ZENON

systems in North America, where revenues increased 75% to $20.5 million compared with

$11.7 million for the same period last year. Sales of systems in Europe and the Middle

East were down slightly in the quarter at $3.0 million compared with $3.3 million for

the first quarter 2000.

Backlog of $72 million, at quarter end, is further enhanced by the addition of letters of intent from customers committing to $21 million in orders. In essence, the

orders received during the quarter slightly exceed revenue. Normally orders increase

significantly in the second quarter as opposed to the first. Early indications for the

second quarter are that the backlog will grow significantly by the end of the

The gross profit as a percentage of revenue at 42.5% compares favourably to the first

quarter of 2000, which was at 39.7% and to the twelve-month year-end 2000 rate of

36.7%. The improvement reflects production mix in the quarter and management's focus on cost reduction and improved processes.

Selling, general and administrative expenses (SG&A;) at $7.1 million is up 10% from

the first quarter of 2000, reflecting the increase in staffing and infrastructure

costs occurred during 2000 in preparation for the growth in orders that were

forecasted and have now begun to materialize. The SG&A; for the first quarter is

essentially the same as that of the last quarter of 2000.

Amortization at $1.8 million is a 26% increase over the first quarter of 2000, reflecting the infrastructure costs for building and equipment that ZENON invested in

during 2000. Although interest cost at $718,000 has increased over the same period

last year of $264,000, the current bank indebtedness has decreased from $25.0 million

at December 31, 2000 to $19.1 million.

Operating profit for the quarter at $389,000 has improved $2.2 million compared to

the quarterly operating loss of $1.8 million posted in 2000. Provision for income tax

at $627,000 is in excess of operating results due to the geographical distribution of

profits and losses during the quarter. North America posted profits in the quarter

whereas other regions posted losses, which have not been tax affected.

As a result of the tax provision, the Company has a net loss of $238,000. This compares very favourably to the net loss of $1.6 million recorded in the first

quarter of 2000. Management feels confident that with the strong backlog we will see improvements in each quarter for the balance of the year.

Capital Expenditures and Liquidity

Expenditures on property, plant and equipment at $3.7 million are down from last year's first quarter at $5.9 million. The major outlay in 2001 has been devoted to

equipment for the development of ZENON's proprietary membrane technology. This

reflects ZENON's commitment to maintaining a strong competitive advantage with

strategic investments for growth.

As at March 31, 2001, the Company is reflecting on the balance sheet a deferred technology credit of $3.5 million from a contract with Technology Partnerships

Cash flow provided by operating activities amounted to $8.5 million in the first quarter. The major contribution to this reduction was a decrease in total accounts

receivable of $9.2 million. Total accounts receivable, including government funding as

at March 31st, was $31.8 million compared to $41.0 million as at December 31, 2000.

In addition, $448,000 in stock options were exercised in the quarter, which added to

the improvement in cash balances.

Overall, along with the $5.9 million decrease in bank indebtedness to $19.1 million,

cash and cash equivalents increased by $2.1 million to $6.3 million.

Management continues to remain confident that the upward trend for water treatment

will continue and that it will translate to future revenues for ZENON as the Company

takes control of the membrane segment of the water treatment industry through

technological advancements and successful market penetration.

ZENON is a world leader in providing advanced membrane products and services for water purification, wastewater treatment and water reuse.

Chosen as one of Canada's Top 100 Employers, the ZENON group of companies operates

from nine locations in North America, six in Europe, and one in each of Asia, Latin

America, and the Middle East.

ZENON's products and services are marketed for a variety of municipal and industrial

applications through ZENON's offices and representatives located throughout the

Additional information is available at the Company's web site www.zenonenv.com.

ZENON Environmental Inc.

Consolidated Balance Sheets

2001 2000 (All figures in thousands) $ $ --------------------------------------------------------------------- Assets Current Cash and cash equivalents 6,268 3,605 Restricted cash 240 2,106 Accounts receivable 30,315 19,641 Accounts receivable - government funding 1,445 158 Unbilled revenue 28,011 25,670 Inventories 9,093 9,311 Prepaid expenses and deposits 857 980 Future income taxes 524 - ---------------------------------------------------------------------

Total current assets 76,753 61,471

Capital assets, net 45,674 33,703 Patents, goodwill and other assets 11,565 12,874 Future income taxes 2,890 1,000 --------------------------------------------------------------------- 136,882 109,048 --------------------------------------------------------------------- ---------------------------------------------------------------------

Liabilities and Shareholders' Equity Current Bank indebtedness 19,118 9,959 Accounts payable and accrued liabilities 27,501 17,648 Current portion of long-term debt 169 125 ---------------------------------------------------------------------

Total current liabilities 46,788 27,732 Long-term debt 10,243 10,209 Deferred technology credit [note 5] 3,540 - ---------------------------------------------------------------------

Total liabilities 60,571 37,941 ---------------------------------------------------------------------

Shareholders' equity Capital stock [note 4] 70,180 69,170 Retained earnings 8,996 4,622 Unrealized translation adjustment (2,865) (2,685) ---------------------------------------------------------------------

Total shareholders' equity 76,311 71,107 --------------------------------------------------------------------- 136,882 109,048 --------------------------------------------------------------------- ---------------------------------------------------------------------

ZENON Environmental Inc.

Consolidated Statements of Income

For the three months ended March 31

2001 2000 (All figures in thousands except for earnings per share) $ $ ---------------------------------------------------------------------

Revenue 23,476 15,976

Cost of sales and services 13,490 9,638 ---------------------------------------------------------------------

Gross profit 9,986 6,338 ---------------------------------------------------------------------

Selling, general and administrative 7,069 6,419 Amortization 1,810 1,437 Interest net 718 264 --------------------------------------------------------------------- 9,597 8,120 ---------------------------------------------------------------------

Operating income (loss) before the following 389 (1,782)

Expenses relating to gain on settlement agreement - 62 ---------------------------------------------------------------------

Operating income (loss) before income taxes 389 (1,844)

Provision for income taxes 627 (227) ---------------------------------------------------------------------

Net loss for the period (238) (1,617) --------------------------------------------------------------------- ---------------------------------------------------------------------

Earnings per share Basic (0.01) (0.07) --------------------------------------------------------------------- Fully diluted (0.01) (0.07) ---------------------------------------------------------------------

ZENON Environmental Inc.

Consolidated Statements of Retained Earnings

For the three months ended March 31

2001 2000 (All figures in thousands) $ $ --------------------------------------------------------------------- Retained earnings - beginning of period 9,254 5,439

Transitional adjustment on adoption of new tax accounting rules - 1,000

Net loss for the period (238) (1,617)

Dividends on preference shares (20) (20)

Write down in carrying value of share purchase loan - (180) ---------------------------------------------------------------------

Retained earnings - end of period 8,996 4,622 --------------------------------------------------------------------- ---------------------------------------------------------------------

ZENON Environmental Inc.

Consolidated Statements of Cash Flows

For the three months ended March 31 2001 2000 (All figures in thousands) $ $ -------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income for the period (238) (1,617) Add items not affecting cash Amortization 1,810 1,437 Write-down on share purchase loans - 180 Future income tax provision 356 - -------------------------------------------------------------------- 1,928 - Net change in non-cash working capital balances related to operations 6,613 1,182 --------------------------------------------------------------------

Cash flows provided by operating activities 8,541 1,182 --------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES Decrease in bank indebtedness (5,902) - Increase in bank indebtedness - 4,286 Stock options exercised 448 179 Increase in deferred technology credit 3,540 - Proceeds from long-term debt - 2,530 Repayment of long-term debt (14) - Repayment of capital leases (25) (26) -------------------------------------------------------------------- Cash flows (used in) provided by financing activities (1,953) 6,969 --------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES Purchase of capital assets (3,685) (5,944) Proceeds on disposal of capital assets 37 21 Increase in patents, goodwill and other assets (854) (365) Increase in restricted cash - (1,106) --------------------------------------------------------------------

Cash used in investing activities (4,502) (7,394) --------------------------------------------------------------------

Effect of exchange rate changes on cash (21) (155) --------------------------------------------------------------------

Net increase in cash during the period 2,065 602 Cash and cash equivalents, beginning of period 4,203 3,003 --------------------------------------------------------------------

Cash and cash equivalents, end of period 6,268 3,605 -------------------------------------------------------------------- --------------------------------------------------------------------

Supplemental cash flow information Cash taxes paid 132 26 Cash interest paid 720 429 --------------------------------------------------------------------

ZENON Environmental Inc.

Segmented information For the three months ended March 31, 2001 and 2000

The Company operates in Canada, United States, Europe and the Middle East, in the water treatment industry. Its reportable operating segments are strategic business units that offer membrane-based systems for water and wastewater treatment.

Operations and identifiable assets by industry segment and geographic region for the identified three month periods ended March 31 are presented below.

Technology, Europe, Membranes North Middle East and America and Asia Corporate Systems Systems Total Total --------------------------------------------------------- 2001 2000 2001 2000 2001 2000 2001 2000 (all figures $ $ $ $ $ $ $ $ in thousands) -------------------------------------------------------------------- Revenue from external customers 37 924 20,477 11,707 2,962 3,345 23,476 15,976

Intersegment revenue 4,764 3,483 44 28 - - 4,808 3,511

Amortization of capital assets and goodwill 757 634 771 576 282 227 1,810 1,437

Segment profit (loss) before interest and taxes 841 1,033 1,538 (1,422)(1,272)(1,191) 1,107 (1,580)

Total assets 104,222 87,731 28,676 15,867 3,984 5,450 136,882 109,048

Capital assets and goodwill expend- itures 3,992 4,772 324 1,310 223 227 4,539 6,309

Reconciliation of Income 2001 2000 $ $ ----------------------- Total income for reportable segments 1,107 (1,580) Net interest (718) (264) Recovery of (provision for) income taxes (627) 227 ----------------------- Net loss for the period (238) (1,617) ----------------------- -----------------------

Additional Information Europe, United Middle East Canada States and Asia Total Total ---------------------------------------------------------- (all 2001 2000 2001 2000 2001 2000 2001 2000 figures in thousands) $ $ $ $ $ $ $ $ -------------------------------------------------------------------- Revenue 8,920 9,408 11,594 3,223 2,962 3,345 23,476 15,976

Capital assets and goodwill 52,552 41,915 1,234 1,156 3,453 3,506 57,239 46,577 --------------------------------------------------------------------

ZENON Environmental Inc.

Notes to Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared following the accounting policies as set out in the fiscal 2000 annual consolidated

financial statements, except as described in note 2. These unaudited condensed notes

to the consolidated statements should be read in conjunction with the audited

financial statements and notes included in the Company's 2000 Annual Report.

2. Change in Accounting Policy

In December 2000, The Canadian Institute of Chartered Accountants issued new accounting recommendations for the presentation and disclosure of basic and fully

diluted earnings per share. Effective January 1, 2001, the Company adopted these

recommendations on a retroactive basis. The most significant change under the new

recommendations is the use of the treasury stock method instead of the imputed

earnings approach to computing diluted earnings per share.

Under the treasury stock method:

the exercise of options is assumed to have taken place at the beginning of the period

(or at the time of issuance, if later); the proceeds from the exercise are assumed to

be used to purchase common stock at the average market price during the period; and

the incremental shares (the difference between the number of shares assumed issued and

the number of shares assumed purchased) are included in the denominator of the diluted

earnings per share calculation. There was no retroactive impact of adopting the new recommendations on the three months ended March 31, 2000, as there were no earnings per share in that period.

3. Comparative Consolidated Financial Statements

The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2001 consolidated financial statements.

4. Capital stock 2001 2000 $ (000's) $ -------------------------------------------------------------------- Authorized 300,000, 2% cumulative, redeemable, convertible, voting Series I preference shares Unlimited non-voting convertible, participating Class A shares Unlimited common shares

Issued 300,000 Series I preference shares 4,000 4,000 3,900,000 (2000 - 3,900,000) Class A shares 47,859 47,859 19,969,462 (2000 - 19,617,364) common shares 20,032 19,111 -------------------------------------------------------------------- 71,891 70,970

Less share purchase loans receivable (1,711) (1,800) -------------------------------------------------------------------- 70,180 69,170 -------------------------------------------------------------------- --------------------------------------------------------------------

The Class A shares are convertible into common shares on a share-for-share basis on

The Series I preference shares are redeemable at $ 13.33 per share plus any unpaid

dividends. The Series I preferrence shares are convertible into common shares at any

time at a conversion price equal to the weighted average trading price for the common

shares during the five trading day period immediately prior to conversion.

As at March 31, 2001, the Company has outstanding stock options for 1,141,432 common

shares of which 824,556 are vested and 180,100 Class A non-voting shares outstanding

of which 78,040 are vested.

5. Technology Credit

During 2000, the Company entered into an agreement with Technology Partnerships Canada("TPC') which will provide funding from TPC for a three year period up to a

maximum of approximately $9.9 million for a specific research contract. The Company is

obligated under its agreement to repay TPC by way of a royalty based upon the total

revenue of the Company. The agreement contemplates that this royalty will have both a

minimum and maximum amount. As at March 31, 2001, the Company had received $2.1

million and had a receivable from TPC of $1.4 million. The balance of $3.5 million has

been reflected in the accounts as a liability.

ZENON Environmental Inc.

http://http://zenonenv.com

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