prelim report, page-20

Hi Forrest,

Firstly the $40m sales figure is not mine, I was using it to demonstrate that a 40% NPAT margin that others have used, is highly unlikely. Secondly if you look at numbers I have assumed, clearly I am not assuming a doubling of overheads. I am assumming that margins will improve, and quite significantly so.

My assumptions above are:

Sales $40m (112% increase)
Gross margin 60% = gross profit of $24m (115% increase)
PBT margin 25% = PBT of $10m (342% increase)
gives overhead of $14m (57% increase)

So clearly in that example I am assuming overheads increasing at only half the rate of sales. As stated previously though $40m in sales is not my forecast. My forecasts are:

Sales $32m (increase of 70%)

GP margin 60% = GP $19.2m

PBT margin 30% = PBT $5.76m

NPAT $5.76m assuming the company pays no tax.

Thus I'm assuming overheads of about $13.4m (51% increase)

Again I'm assuming overheads growing slower than sales. Some of that is due to the extra interest income earned on the company's cash balance. Basically I don't see a great reduction in the rate of overhead as the compny states in it's FY08 report:

"Cellestis will be increasing expenditures in the marketing and distribution of QFT seeking to grow the existing customer base and expand into new markets. Moderate investment is also planned for product development, to exploit the new product areas available and obtain the benefits of product improvements Cellestis is uncovering."

I'll acknowledge that the assumptions regarding overhead are far from robust, although the undelrying forecast still assumes considerable margin improvement.