THE STEWART REPORT HOTLINE SUMMARY

Friday, May 20, 2005

(Next HotLine Scheduled for Tuesday, May 31, 2004)

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FEATURED STOCK:

International Card Establishment, Inc.

Nasdaq/BB: ICRD -- $0.33

Strong BUY to $0.50

Exactly one year ago, I whole-heartedly recommended International Card Establishment at $1.15. Since then, I have recommended it several more times at lower prices. Much lower – including today’s bottom-of-the-barrel, bargain-basement offering of just 33 cents. Admittedly, I’ve probably got a real-life "Cry Wolf" parable in the making -- at least I hope I do.

Oh sure, the kid who did all the yelling was thoroughly embarrassed. Even mutilated. But at the end of the day, at least the little bastard was right.

And I just know that if he’d somehow lived to tell the tale, he’d have grown up to be an unapologetic stock analyst, an in-your-face newsletter publisher and a successful private professional investor for his own account. Also, that account’s investment in the shares of International Card Establishment would have grown, too – by exactly 100,000 shares – because that’s how many I acquired this week.

Popular or not, it was the smart move.

Yesterday, May 19, International Card Establishment made formal the long-awaited contractual relationship with First Data Corp. on the NYSE, as well as with Fleetwood National Bank – a division of Bank of America.

On a scale of one to ten, this was "The 10."

Even beyond growing its first full-year revenues from $1.2 million to $14.7 million; the Neos acquisition; or the appointment of former Navy Seal Wain Swap as chief financial officer (all of which paved the way for bare-bones cost-cutting, subsequent operational streamlining and our overnight entry into the explosive gift and loyalty card market), everything pales compared to the First Data Corp. deal.

This relationship was the last tile in the mosaic; the final expression of a year-long effort to form a bankcard corporation that’s (1) scalable, and (2) portable. I’ve given emphasis to both terms because they will serve as the Thesis Statement for the balance of this report.

Which is only appropriate. After all, scalability and portability were the theoretical basis for The Stewart Report’s original 8-page BUY recommendation one year ago. It’s just that, now, my first theories are, finally, ICRD’s reality ... wooff J

PORTABILITY:

Simply put, portability is Wall Street’s term for a bankcard company that owns its portfolio of merchant accounts. Obviously, if you own something, then you also have the right to sell it. The ability to ultimately sell these wonderfully liquid assets is what makes a bankcard company portable -- and it’s stock desirable. Especially when the portable value of a company’s merchant accounts reaches $100 million in annual revenues, which is bankcard’s benchmark for a company to be an attractive acquisition.

This is precisely why ICRD was formed: To grow its three-pronged revenue base (consisting of the Global leasing unit, the Neos gift and loyalty card business and its merchant card operation) to $100 million annually … and then sell it.

To that end, International Card Establishment has advantaged the obvious synergies of its revenue drivers to march toward the magic $100 million mark. I’ll offer a more detailed explanation of just how fast the revenues are growing when I review the 10-K – and I’ll also explain why ICRD’s already impressive growth curve is about to go vertical. All that in a moment.

First, let’s rewind to ICRD’s previous merchant-banking model. That’s the only way to fully appreciate the magnitude of all that was just transacted.

Before yesterday, May 19, when the First Data deal was made public, International Card Establishment, Inc., was classified as an Independent Sales Organization, or "ISO." Like most sales organizations, ISOs have accounts that generate commissions. In this case, the accounts are merchant accounts – like restaurants and retail shops – while the commissions are the residual transaction fees earned each time a credit card is used at the merchant’s business. It’s all good and fine, except that at the end of the day, the ISO owns nothing more than the income stream from the account, not the account itself. That asset – i.e., the portable asset – belongs to the direct credit card processor.

The deal with First Data and Fleet National Bank made International Card Establishment a direct credit card processor. The distinctions – as well as the advantages – are large and several. For starters, ICRD can now book all of the transaction fees as revenues, making the magic $100 million top-line revenue goal all the more attainable. Also, because it controls those revenues initially, it has flexibility in setting the commission structure for the ISOs. In turn, this makes it easier to attract more ISO merchant portfolios, which furthers revenue growth even more.

That’s not to say that, with the added opportunity, there isn’t added responsibility – and risk.

In some respects, it’s like the difference between being a stockbroker and owning the brokerage firm that employs him. If a customer doesn’t pay, it’s the firm that takes the hit – not the broker. The same thing applies to bad credit cards and the direct processors who handle them. Now, as a direct card processor, ICRD also requires the brokerage house equivalent of a clearing firm and a transfer agent, etc. That’s why the affiliation with First Data and Fleet National Bank was necessary.

CEO Bill Lopshire stressed that point during our hour-long conversation Friday, May 20. He also noted there were a number of "Grand Canyon-sized hurdles and logistical challenges to overcome" in putting the deal together, as well as many operational intricacies to work out. It took a lot of time, a lot of money and a lot of finesse.

It was all pretty amazing. Here was ICRD – a small puppy sitting at the Big Dog table. How they pulled this off, I don’t know. Don’t care either. The price of attainment was a one-time-only expense, while the monster relationship with First Data, et al., will be rich and residual.

"For everything else, there’s MasterCard," and believe me, from here on out, each time someone swipes one through one of ICRD’s merchant machines (which, incidentally, is likely to be a machine leased through ICRD’s Global unit), the transaction revenue to the company will be substantial.

SCALABILITY:

I’ve discussed portability, added risk and responsibility. Now for a "101" briefing on "scalability." On this one, you’ll have to trust the strangeness of money relative to the economies of scale. And you’ll have to trust me, too, relative to my respect for Bill Lopshire’s particular genius. When it comes to understanding the higher financial concepts – and then being among the first and fastest to implement that knowledge to the stockholder’s benefit … Well, let’s just say that he’s the guy. I seriously doubt if altruism is the motivating factor. After all, the man has a law degree, so kindness, human good and the betterment of civilization are probably foreign terms to his evil attorney heart. But he is ICRD’s only remaining founder, and easily one of the company’s largest shareholders. To me, this means he is at risk, at opportunity and in it for "The One Hundred Million Dollar Haul."

Back to the trust thing. I spent serious energy getting my mind around the hair-splitting mathematics of direct-card processing. It’s a game in which you strive to make a million or two extra pennies on two or three million extra transactions – which, in turn, paves the way for seven or eight million more transactions, which generates nine or ten million more pennies. Small coins. Big math. Huge revenue growth.

Another equally beneficial aspect is that ever-escalating scalability creates an ever-shrinking unit cost basis, thereby enabling the company to attract even more ISO portfolios – and at even better rates.

It goes on and on. And so could I. And believe me, so could Bill!

For a man with a law degree, he’s strangely likeable. He’s also a man who’s staked his personal fortune on the eventuality of ICRD being bought out at a number that will dwarf today’s penny ante price tag, which makes him entirely plausible. But forget that ... all that.

The dynamics of bankcard at this level are so strange and mathematically wonderful that the only known way to compare what is likely to occur to our company and ICRD’s share price is to appreciate the difference between a 5.7 earthquake and a 5.9 earthquake. The difference is, quite literally, logarithmic.

If you have the ability to absorb the inevitable real-world hiccups, endure a delay here and there as numbers come to light and, most importantly, play this stock to the final execution of the business plan, then I’m quite sure you will be well rewarded. Wooff.

FINANCIAL STATEMENTS: REVIEW AND OUTLOOK

In the last HotLine, I explained that ICRD was forced to add an "E" to its stock symbol because its most recent financial numbers hadn’t been finalized and reported to the SEC and shareholders. As promised, those numbers are now in, the "E" is gone and the future looks a whole lot clearer.

As already noted, the Income Statement showed a jump in annual revenues from $1.2 million a year ago to $14.7 million for the past 12 months. That sounds pretty impressive – representing, as it does, an increase of 1,125 percent. However, to be brutally honest, the $14.7 million number is well short of the $22 million low-end projection I made in my original recommendation in May 2004. It also glosses over the heavy price paid to acquire those revenues, most of which came via acquisitions that resulted in substantial stockholder dilution (so-called "acid financing").

The good news is that that is already old news. International Card Establishment, Inc., now has $1.8 million in cash in the bank and First Data Corp and Fleetwood Financial at its side. In other words, ICRD is sitting in the catbird’s seat – meaning it will be able to negotiate the future acquisition of rich merchant portfolios at very favorable terms. To wit, the net per-share value effect will be positive, not negative. On that, Bill Lopshire gave me his promise.

He also reinforced my earlier forecast that – even without acquisitions or anything else remotely fancy – the company will slightly more than double its 2004 revenues, showing at least $30 million in 2005. Be aware as well that the $30 million number actually under-performs the company’s true potential. That’s because, as a direct-card processor, ICRD can set its own commission structure. And, as a new direct-card processor, it will likely make that structure intentionally generous in order to attract new portfolios – and added revenues. You know why. Enough said.

The other side of the ICRD stock-price enhancement equation will come from the Balance Sheet – which is already showing a marked improvement thanks to Wain Swap’s emphasis on optimum operating efficiency. That emphasis has already slashed ICRD’s monthly nut from $300,000 to roughly $45,000 (my original target, forecast in 2004, of $35,000 a month will thankfully not be met due to growth).

Obviously, you don’t have to be a C.P.A. to recognize that cutting $255,000 a month (or $3.06 million annually) out of the operating expenses of a company bringing in $30 million a year will have a major positive impact on the bottom line – and on the stock price!

You also don’t have to be a genius to realize I was way off base in praising former CEO Jonathan Severn for originally locating the company in 19th floor, ocean-view office space. True, it was beautiful – but it was also incredibly wasteful. As a stockholder with some serious at-risk money, I should have viewed that as the financial equivalent of an Amber Alert – and I didn’t. Now, thanks to Wain and Bill, I’ve come back to my senses and am devoting my attention to what’s really important: The bare-bones cost-cutting measures of those with whom I’ve invested my money – and advised you to invest yours!

Ironically, when you get the Q1 financial reports cited above (scheduled for official release in a week or two), they won’t readily reflect the savings I just detailed. That’s because, net-net, they were offset by one-time-only accounting adjustments reflecting penalties for breaking the office lease, returning excess equipment, terminating furniture lease agreements, etc. Such is the price of "lean and mean" – but it’s a short-term price. When next quarter’s numbers come out, the savings will be brilliantly apparent.

IN THE MEANTIME …

From today’s closing price of 33 cents per share, I forecast an easy double before the end of summer, so at least stick around for that. Looking forward, a dollar is entirely doable by January, and $2 is certainly attainable this time next year.

OTHER QUOTES & QUICK NOTES:

Emergency Filtration Products, Inc.

Nasdaq/BB: EMFP – $0.43

Good BUY at Current Levels

For now, virtually all of what can be said about EMFP (aside from the fact that I think it’s a good BUY at current levels) has already been put forth very well in the company’s "Progress Report" from April 14. That document – which covers military initiatives, Itochu Techno Chemical and manufacturing & distribution developments for the NanoMask and the E.L.V.I.S. product – is easily found at our web site, www.stewartreport.com.

Amarillo Biosciences, Inc.

Nasdaq/BB: AMAR – $0.34

Favorite Speculation: BUY

By now you should have received Amarillo’s notice of "Annual Meeting of Stockholders" to be held May 27, and the attached proxy statement.

Speaking of proxies …

As you know, I normally winter in Amarillo and summer in Monaco. Don’t we all? But this year I decided to flip-flop, skip Monaco entirely and avoid Amarillo by taking a very long nap – which is the same as being in Amarillo anyway. All of which brings me to Larry Spears, The Stewart Report’s Editor-in-Chief, because he lives there. As such, Larry has, by geographical default, agreed to be our proxy at AMAR’s shareholder meeting.

Quite honestly, most shareholder meetings are insufferable formalities. But, to be equally frank, so much is now in the works at Amarillo Biosciences, Larry’s presence there may, in fact, ferret out some rare tidbit that’s actually worth knowing – especially since he’s a former LA Times Syndicate guy who I’ve found to be thoroughly skilled at asking the "who, what, when and where" stuff – particularly once when he came to help me check out of The Beverly Plaza Hotel and found himself forced to make increasingly incredulous queries, such as, "David did what? … He spent how much?" … Public menace! That’s an awfully harsh word; don’t you think? … or do you?"

Wooff J

Actually, and quite seriously, the Featured Stock for the next HotLine will definitely be Amarillo Biosciences. If even half the Street chatter on this one is true, I will likely have much to review. There could be some extraordinary items to report. In fact, I expect it.

AMAR remains my favorite speculation and should be bought – especially if you do not already own shares.

J. David Stewart

Analyst and Publisher, The Stewart Report

Note: David’s HotLines are also available 24/7 by dialing (949) 583-6057, and

entering your subscriber-protected, 2-digit Pass Code at the prompt.