THE STEWART REPORT HOTLINE SUMMARY

Thursday, October 21, 2004

Next HotLine Recording Scheduled for Wednesday, November 17, 2004
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A large part of why I waited until today to do the HotLine was so that it would include this morning’s news releases. At least that’s my story – and I’m sticking to it!

There was a pair of them – one issued by Emergency Filtration Products and another from International Card Establishment. ICRD first ...

International Card Establishment, Inc. (NASDAQ/BB: ICRD), closed at 61 cents – up 4 cents for the day – supported by strong volume (over 81,000 shares traded). The activity was in reaction to Thursday’s announcement that Fifth Third Bank of Cincinnati will roll out ICRD’s smartcard-based loyalty program to its merchant customers nationwide. I’m not familiar with Fifth Third Bank – and I have absolutely no idea how it arrived at its name. It could be related to how high it ranks in the banking industry or how big it wants to be. I simply don’t know – but do I know Fifth Third is big. Big enough to process 9 billion ATM and point-of-sale (POS) transactions annually for more than 207,000 merchant locations and 1,350 financial institutions worldwide. Fifth Bank is also known for developing “JEANIE” – America’s first modern ATM network.

The announcement went on to include the usual “we are pleased” and “we are excited” managerial quotes. Those are as fictitious as they are predictable – so, in their place, I’ll quote Inc. Magazine as a reminder of why the loyalty card industry is such a good place to be vested, and why smart companies like Fifth Third Bank are buying them. According to Inc., “Acceptance of loyalty cards continues to rise. Forty-one percent of consumers report loyalty benefits influence where they shop,” and 43% say, “They shop more often at retailers whose cards they carry.”

The current information on the “gift” side of the gift-and-loyalty card equation is even more interesting. As noted in a recent piece by the Los Angeles Times, “Consumers using gift certificates receive their change in cash, which can be spent elsewhere. Electronic gift cards keep the money from leaving the store.” That’s an important distinction – and a big advantage. In fact, knowing what I know now about gift-and-loyalty cards, I could easily write a fresh eight-page Report on that subject alone. Truly, the advantages of smart cards are so wide and numerous – and the technologies embedded in each one so affordable and flexible – it’s hard to imagine a retail business of any kind that wouldn’t benefit from a gift-and-loyalty program.

Today’s announcement, similar to virtually every upcoming announcement expected from the Company (and believe me, there are a lot of big announcements forthcoming), was generated by ICRD’s recently acquired Neos unit. Just prior to today’s release, I visited Neos to meet with its founder and president, Wain Swapp. I’ll likely be seeing Wain quite frequently because he’s only 20 minutes up the Coast (which is wonderfully convenient), and also because of the expanded managerial role I envision him assuming – almost immediately.

When ICRD founding President and CFO Jonathan Severn correctly identified and subsequently effected the Neos acquisition, he really outdid himself – figuratively and, perhaps, even literally. Not long after he picked this thing up, everyone involved began to realize that we got more than we bargained for – or at least more than we thought we paid for. Of course, relative to acquisitions, getting more is a “good thing.” And, based on that, what Jonathan did was nothing less than great.

The “sky’s-the-limit” potential that’s now so clearly evident within the Neos enterprise is, by Jonathan’s own admission, larger than his managerial skill set. Despite all his prior successes in the card industry, Jonathan believes he’s not adequately equipped to rapidly and effectively grow the smartcard “Gift-and-Loyalty” division to its fullest potential. That’s because smartcards are marketed differently than bankcards and, with the Neos acquisition, smartcard revenues will now make up such a large proportion of ICRD’s overall business mix.

As such, I’m almost certain that Jonathan will step sideways (or slightly down) to allow Wain Swapp – who does have the smartcard knowledge; who does understand the gift-and-loyalty sector; who has built several companies to over $100 million – to take a top-level management slot at International Card Establishment.

In anticipation of this, I met with Wain to review not just Neos, but the entire Company – and to get a good idea of where things are going. In a word, they’re going FAST – and in all the right directions.

You can fully expect many, many more news announcements coming out of ICRD over the next several weeks – almost non-stop. The reason is simple. Last month, the Company said – in print – that it would do $22 million in CY2004. That’s roughly $8 million more than the then-current revenue run rate of $12 million. Thus, I’m looking for lots of news between now and New Year’s Eve … $8 million worth. They will come in the form of new gift-and-loyalty card deals – like today’s contract with Fifth Third – or the 67-store, four-state deal signed with Juice It Up on October 8, which will bring the Neos total to approximately 2,700 merchants with about 4,000 roof tops. Wain said he has three acquisition targets clearly scoped out, so one of those might get squeezed in before year-end.

There are also a number of items that are not likely to be announced per sé, but will definitely be evidenced in the financial statements. For example, now that Neos and ICRD are one, savings can be realized by deleting redundant operations and merging others. By the end of November, these savings will drop the current bottom-line burn rate from approximately $150,000 per month to just $35,000, with the Company turning cash-flow positive in Q1.

Ironically, one of the bigger top-line items is the one item ICRD would love to announce, but hasn’t – and probably won’t for a year or so. It has to do with Marriott International – and the only reason I know is because I play golf with a sales representative for Newport Coast Villas. His position there enables us to play for $40 a round instead of the usual $190. The Villas is a one- or two-billion-dollar coastal property project of Marriott’s. Not only is The Villas Marriott’s most expensive project ever, it is also the most lucrative. That makes it a real flagship property, meaning they only use the best – which, in this particular instance, turns out to be Neos Merchant Solutions.

We were playing the backside of Monarch Beach on Tuesday (the day after I met with Wain Swapp), when the subject of stocks came around. So, I gave my sales rep friend the rundown on ICRD – and, naturally, the Neos gift-and-loyalty concept was mentioned, too. That’s when he told me about “The Experience Card” – a smartcard Marriott recently began using with extraordinary success to generate leads for The Villas. The “Neos” name rang a bell, so we went back to his office and, sure enough, on Marriott’s website, Neos is listed as a “Registered Vendor.” According to one of his associates, the program has already signed 250-plus shops and restaurants in the Newport Beach/Corona Del Mar area. She said that, soon, these cards would be tied in somehow with the Resort’s entry keys – and even the golf carts.

It was almost funny. Here I am waiting, if not praying, to find out the name of the “Major Hotel Chain” ICRD is courting, only to find that the project is already up and running – right in my own backyard. Hell, they’ve even signed up the Dana Point Chamber of Commerce and Natale’s – the local espresso bar I hit nearly every afternoon!

Armed with proof, I had Wain all but cornered, so I phoned to ask why the Marriott deal had not been announced. He said the attorneys prefer that it not be fully disclosed until the entire program has been rolled out, worldwide. That could easily take a year. As for the “National Restaurant Chain” that’s been referenced in prior news releases, Wain said he’s not sure what to think because that corporation just hired a new marketing director, which could be a plus, a minus – or a complete nothing at all. We’ll just have to wait on that one.

Even more important than just about anything mentioned thus far is the very high likelihood that ICRD will attain full “acquiring merchant” (A.M.) status. The value of this cannot be over emphasized, which is why so much of the original Stewart Report focused on the importance of ICRD’s intent to gain this status through First Data Corp. In fact, if you were to go back and re-read that Report, you’d see that acquiring Neos and gaining the status of “acquiring merchant” were the two big things that had to happen before anything else could – including a good run in the share price.

Now, with Neos all ours and the merchant-bank arrangement rumored to be no more than two or three weeks away, the stock should start moving nicely. The deal may be cut with First Data, as I originally surmised – or ICRD might go with Lynk, Vital or even Chase Manhattan. At the end of the day, all that really matters is the legal and financial benefits of the A.M. title.

That’s the credential that allows payouts to be made monthly, instead of daily – which is beneficial to cash flow. That’s the credential that will permit ICRD to show the merchant fees as revenues, instead of having them go to First Data, which is currently the case. It’s also the credential that will significantly lower transaction costs, which improves profit margins. But, more important than all of that, combined, will be the benefit of owning each and every merchant account – because, cumulatively, this is the portfolio of accounts the Company could someday sell. And, since this is a Company that was essentially formed for the sole purpose of being sold, owning all the things that you will be selling is kind of important.

There is so much that is now in play – and so much more to come – I really see this thing coming together nicely. The stock has been disagreeable, but I think it’s fairly obvious that we’ve weathered the worst with our long-haul shares – and even scored a couple of wins with our short-term shares. As for the Big Win – i.e., the “whale check” that I originally promised? I believe that, late this year or early next year, so much will be so clearly in place that even a naysayer with no imagination will be able to see the writing on the wall and begin counting the zeros on that check. Near term: BUY.

Emergency Filtration Products, Inc. (NASDAQ/BB: EMFP): 50 Cents

For the last 18 months, EMFP has been collaborating with Itochu Technochemical to bring EMFP products to market. Initial sales are slated for Japan, growing outward to the remainder of Asia, with global distribution the eventual goal.

To that end, eight of those 18 months were spent trying to garner FDA approval in the United States and Japan. As you probably recall, the ease and speed with which U.S. approval was granted was almost eerie ... like going to the DMV on a Friday at ten minutes till four and leaving with a smile at 3:59. On the flip side, Koseisho (Japan’s version of our FDA) did its bureaucratic best to act as a monster arm of a major government is supposed to act … painfully slow. No matter. Not now anyway because, early Thursday morning, the Certificate of Import and Certificate of Sale were finally granted, opening a probable floodgate of sales slips for EMFP and its wide array of respiratory medical products. In Japan alone, the market for these products is $300 million annually – and growing rapidly.

Wall Street’s reaction to the news release was almost as impressive as the release itself. At the final bell, shares were 4 cents higher on more than 600,000 shares – one of the 10 highest-volume trading days in the Company’s history. Equally identifiable has been the sustained buy-side interest virtually each and every day for the past several weeks, pushing the price above 50 cents a few times. As I noted last time, all penny stocks find a glass ceiling as they approach the 50-cent mark. It’s not a big deal. Glass is easily shattered –especially by shares that are under accumulation, because accumulation always translates to appreciation.

Itochu, ranked by Forbes as the 11th largest company in the world, will soon be sending a team to Tucson, where EMFP’s manufacturing is performed. EMFP President Doug Beplate is confident the Itochu executives will be carrying several trade agreements in their satchels – as well as the first purchase orders.

There’s no telling – or even guessing – just how large the initial shipments will be, but they should be substantial. It’s difficult to imagine an $85 billion global conglomerate investing a year and a half of travel, science and legal fees just to earn the right to buy EMFP products, then flying top executives out from Japan, only to plop down a peanut-sized purchase order. I just don’t see it. But what I can see, quite easily, is the obvious top-line advantage to this relationship – i.e., lots and lots of money.

Less obvious, but equally lucrative, will be the added sales opportunities that will likely spawn from a relationship of this magnitude. At this level of play, nobody wants to be first at bat. You can have all the patents, the independent laboratory findings, the slick brochures, the pretty packaging – yet, invariably, the first major sell is a hard sell. But, it’s been my experience – both as the owner of a manufacturing company and as an investor in manufacturing deals – that once you get your first major account, everybody else is suddenly interested, too.

I envision just such a circumstance in EMFP’s immediate future – largely because I’ve spent the last six years analyzing the Company’s possibilities, which are now rapidly morphing into probabilities, and its probabilities, which are now on the verge of becoming certainties.

The potential applications for a patented and proprietary nano filter technology of this exceptional caliber is as unsurpassed as the technology itself. Remember: The 2H filter repels virtually everything except air. What it doesn’t repel, it traps – and whatever gets trapped, the nano particles eat. Its unsurpassed in its ability to protect against virtually every known airborne contaminant but nerve gas (and that’s only because nerve gas reacts with the skin, thereby necessitating a fully enclosed body suit).

As I’ve said numerous times, the potential applications for filters sporting these qualities are literally in the thousands. Most can be broken down into three categories:
1. Commercial uses, such as filtering the cabin air in commercial jetliners, office buildings and homes.
2. Military purposes, such as protecting the ventilation systems in places like the Pentagon, the White House or the cockpits of tanks.
3. Medical uses, like the SARs masks for civilians it sold last year to Taiwan, or hospital filters for clean rooms, vapor isolation valves, resuscitation masks and breathing circuits (like Itochu will be marketing).

Two weeks ago, I agreed to a guest interview for a radio program on KCEO AM 1000 that focuses on nanotechnology. To ready myself for the interview, I began studying nanotechnology. I wasn’t even five or six hours into the task before I became thoroughly engrossed by it all. The potential applications for miniaturization at the molecular level are both dazzling and profound. Everything from “self-healing” paint for military vehicles to jet motors the size of a shirt button, which might someday replace battery packs, all the way to quantum computing and floating fiberoptics.

That’s all wonderful – but virtually everything I’ve read ends with the words “one day” or “someday” or phrases such as, “ready for market in late 2006, or early ’07.” My point is this: Even though fantastic breakthroughs are about to be made, 99.9% of them remain on the proverbial horizon or, at best, just around the figurative corner.

By contrast, probably 70% of everything EMFP wants to make has already been made. And tested. And patented. Bottom line: Virtually all its offerings are available right here, right now. I’m familiar with no other nanotechnology enterprise – public or private – that can make these claims.

That makes EMFP one very special stock play – and it’s a “pure play” at that! For small-stock speculators like us, it just doesn’t get any better than this.

Just as importantly – and equally unique – is the fact that EMFP’s products are in the final stages of independent government testing for use in every single branch of the U.S. military, worldwide. In my mind, there is little doubt as to the outcome of the military’s tests because we already know the results of earlier tests by independent labs. So, unless Nelson Laboratories, the FDA, the Japanese Ministry of Health, two universities and the scientists at Itochu Chemical individually singled out EMFP to benefit from bastardized lab results, there’s no need for concern … just a little more patience.

Few would argue that the nano-technology sector is one of the few bright lights in an otherwise lackluster market. Obviously, I’m not alone in singling out the overall opportunity – i.e., the nano opportunity as being THE OPPORTUNITY. The fact that Merrill Lynch now has a Nanotechnology Stock Index says a lot. So does the table of contents for an MIT publication I subscribe to. Technology Review is logically broken down into nine basic categories – large sectors such as “Transportation,” “Communications” and “Energy.” That’s to be expected. But then you see “Nanotechnology” as a separate, albeit specific, area of interest unto itself.

Little things like that grab me. Similarly small items enabled me to identify, and subsequently recommend, the world’s first MRI stock, the first Y2K stocks, one of the first Internet stocks and the first asbestos-abatement stock, to name just a few. Each of these “firsts” made me – and my customers – millions because being in a hot sector is far more important than being in a hot market.

Study after study has proven this point: Bull or Bear, you can make a fortune if you are early to recognize an emerging industry – and that industry goes on to capture Wall Street’s fancy. There’s no doubt about it, nanotechnology is one such industry. On a par with the exciting prospects for stem-cell research, nanotechnology is one of the most significant “Frontier Technologies” of our day. As such, the long and the short of it are not that complex:

EMFP’s opportunities – commercial, medical and military – are numerous. They are global in scope. They are as timely as timely gets. And they are, without question, so inherently lucrative and on such a grand scale as to now command almost all of my interest. This deal is completely surrounded by a climate of opportunity. I plan to run with it. I also plan on owning a lot more of it – and I would whole-heartedly encourage you to do the same. BUY.

As always, thank you for listening – and for subscribing,

J. David Stewart

Analyst and Publisher, The Stewart Report