THE STEWART REPORT HOTLINE SUMMARY

Wednesday, December 1, 2004

Next HotLine Recording Scheduled for Tuesday, December 21, 2004
________________________________________________________________________________

Overview:

Taxation, relative to investing, is an interesting and important subject. But it’s also one that’s chock full of contradiction and ambivalence.

On one hand, it’s true: The only profit that counts is the after-tax profit. After all, that’s the only profit you can put in your pocket, so it does deserve a certain focus. On the other hand – and all too often – investors become overly focused on the tax angle, and it costs them dearly.

When I was a stockbroker, I was repeatedly amazed at the number of investment decisions I witnessed wherein the tax consideration was the only consideration – especially when tax shelters were in vogue. It was truly incredible how many wealthy, presumably skilled investors would willingly throw $50,000 into some really dicey shelters – and usually lose it all. Strangely though, there were those who seemed to prefer losing the entire $50,000 over writing the Feds a check for $25,000.

Another common tax mistake – especially this time of year – is to postpone selling a stock that’s trading at its 52-week high until after year-end to push the tax burden forward into the next year. More times than not, trading desks will take advantage of this well-known form of Group-Think, shorting these stocks and causing the investor to lose the tax advantage entirely because he lost the profit entirely. The obvious flip-side to this (which is also the side relative to all three of my stock selections) is to sell stocks trading near their 52-week lows to offset gains made elsewhere. But, in year 2004, unless you bought TASER International or some other upside anomaly, there really is no “elsewhere.”

Even today, with the DJIA up 162 and the Nasdaq up 41, and both within inches of their 52-week highs, the year’s remarkably narrow trading range also means that neither index is noticeably above its 52-week low. At the close, the Dow was only 9.5 percent higher than its absolute 2004 bottom-point; the NASDAQ only 22 percent – if, you caught the perfect bottom. Obviously, almost no one ever does. So, again, unless you are one of the few investors who hooked-on to one of the years’ few real winners, you probably have few gains to sell against.

Lord knows I’m not one of them, which leads me to a point as important as it is embarrassing. Specifically, if this were any year but this year, the idea that all three Stewart Stocks would be victims of year-end tax selling would be a consideration. But it’s not. There are simply are too few profits out there to be sold against.

Moreover, most every investor in these stocks is an informed investor, as well as a long-term investor. I feel secure in saying this because I know how many subscribers I have. I also know approximately how many shareholders each company has. The two match up too well to be a coincidence – which, I think, is good.

Obviously, there are many, many investors in each of these stocks who did not buy shares on my recommendation. However, they are mostly private professionals and fund managers, who are rarely given to mere price-watching. Their job, same as mine, is to look at the value placed on a company’s stock relative to the value of the company itself and the direction and rate at which the company is growing. Relative to all three of our stocks, the prices are clearly on the low end; the safe end. Clear, too, is the evidence that all three are growing – and growing fast. International Card Establishment, Inc. (NASDAQ/BB: ICRD), is a case in point:

With a 52-week high of $1.47, a low of 49 cents and a Wednesday afternoon closing price of just 55 cents, the stock is certainly at the bottom of its trading range; a perfect opportunity if you like to buy low. As for growth? Those aspects were fairly well defined on Monday when ICRD announced results for the third quarter and nine-month period ending September 30.

If you missed it (and apparently a lot of people did), in Q3 of 2004, International Card Establishment generated net revenues of $3.7 million compared to less than one-quarter million in 2003. Without meaning to sound condescending, I think it’s safe to say that a 16-fold increase in quarterly revenues qualifies as growth.

Results for the full nine months were almost as impressive, with 2004 revenues for that period coming in at $10.7 million, versus approximately three-quarters of a million in 2003 – a 14-fold increase. Even more impressive is the fact that those figures do not fully reflect the acquisition of Neos Merchant Solutions. For accounting reasons, those revenues won’t post until later on. This is a big part of why CEO Bill Lopshire said, “Overall, we are confident that pro-forma revenues for calendar 2004 will come in between $18 million and $23 million, while 2005 revenues are expected to reach between $30 million and $40 million, depending on the outcome of our acquisition program.”

Of course, that’s the same acquisition program that has basically tripled the number of shares from 7.7 million to 22 million. That’s big dilution and, generally speaking, dilution is not good ... unless tripling the number of shares causes revenues to grow 15- to 20-fold in an industry where companies are always valued on the basis of revenues! Well, almost always …

On November 15, Forbes.com published an exceptional piece featuring Ipayment (NASDAQ: IPMT). I say “exceptional” because of the fast and obvious comparisons to be drawn between the huge success that IPMT has become and the equally huge success ICRD is becoming. The piece began with a subhead that read, “Ipayment finds Credit Card Profits with Small Merchants that Big Rivals Can’t Be Bothered With.” Sound familiar?

Forbes talked about the Ipayment formula for success, which is to go “after small merchants doing $200,000 a year in sales and averaging $75 per transaction.” Same as ICRD.

Forbes contrasted IPMT with $8.4 billion First Data Corp. (which you’ll likely recall from my original Report on ICRD, as well as in numerous subsequent HotLines), saying, “While First Data tends to use salaried sales forces, Ipayment relies on independent contractors, who bear the costs and may also sell a point of sale credit card reader, which Ipayment doesn’t provide.” Again, this is the same as ICRD, except that ICRD does provide the readers, meaning it profits from machine sales – and even more from equipment lease revenues.

Forbes noted that, since its inception in 2000 and subsequent to its public offering, IPMT “has paid more than $80 million, mostly borrowed money” to acquire merchant accounts “that helped boost revenue by $85.5 million.” In other words, every dollar IPMT raised added one dollar in revenues. By contrast, ICRD has gone to the market instead of to lenders for money but, as I clearly put forth above, for every dollar ICRD has raised, it has added between $5 and $7 in revenues.

If the comparisons are wonderfully eerie, it’s purposely so ... IPMT is the company I used to illustrate just how high ICRD might fly in the original 8-page Stewart Report back in June – five months before the Forbes article.

Today, IPMT is a $38-per-share, Forbes-worthy superstar with a market capitalization of $634 million. ICRD, still in its infancy and known by few outside our little circle, is a 55-cent security with a market cap of $12 million. For the first nine months of 2004, Ipayment did $262.8 million and sells for 2.4X revenues.

As mentioned, ICRD did $10.7 million and sells for 1.1X revenues – about half the multiple IPMT sells for. And that figure is without the full benefit of the Neos acquisition, the addition of Wain Swap, Swap’s enormous November overhead cost cuts, the Company’s announcement that it will become a direct bankcard processor within the next 30 days, or ICRD’s proclamation that it will go cash flow positive in Q1 and turn profitable in 2005.

I phoned CEO Bill Lopshire at home tonight and we talked for quite a while. Actually, he talked and I listened. Bill was talking about so many things on so many different levels that I’d be a liar if I said I understood more than a third of what he said. But the one thing I did grasp fully was the huge enthusiasm the usually staid Lopshire presently has for all that ICRD is doing.

His beliefs are well founded. The Company is exceptionally well managed and growing rapidly. The bankcard industry reeks of opportunity. The stock is within pennies of its low, and at a fraction of its high. My advice on this one is to BUY yourself a terrific little Christmas present … the idea being to open half around Valentine’s Day at over a buck, then hold the other half for a year or two. Seriously, do not miss this stock ... not at this price!

Amarillo Biosciences, Inc. (NASDAQ/BB: AMAR): 21 Cents

As it turns out, the best possible update on this stock was written for me. Two days ago, Amarillo’s founding CEO, Joe Cummins, posted a brief and very well-written “Message to the Shareholders” that provides a nice overview of the Company, its 20-year history as a company, its 15-year relationship with the multi-billion dollar Hayashibara Chemical Laboratories, its 16 patents on alpha Interferon technology and the $37 million invested in its biopharmaceuticals to date.

The Letter can be found at the Company’s website – http://www.amarbio.com/ – or, if you are listening to this message and do not have easy access to the Internet, just call us here at The Stewart Report and we’ll mail you a copy. Either way, it’s well worth the two or three minutes it takes to read it, especially since it covers most every aspect of Amarillo’s business that I typically do not.

As you know, my interest in this stock is focused principally – if not entirely – on oral Interferon as an alternative to the slaughter of livestock if (and when) terrorists introduce foot-and-mouth disease (FMD) to the U.S. cattle industry. That’s the potential event that would send this stock from 21 cents to $2 in about the time it takes to say it.

You know my opinion as to the high probability of that occurring, have seen that Mad Cow disease is back in the news, and may have even noticed the November 7 Washington Post article titled “U.S. Remains Unprepared for Bioterror Attack – Despite Increased Funding, Experts Still See Vulnerabilities.” Be that as it may, many of you never saw the original June 2000 Stewart Report on Amarillo Biosciences. And, because the Mad Cow disruption in Canada in the summer of 2003 forced me to shift my investment focus away from Amarillo’s core business – to concentrate on the terrorist angle almost exclusively – I suspect that many subscribers are unaware of what the core business really is ... Just one more reason to visit Amarillo’s website and see everything else backing every single penny share of this remarkable little company. Amarillo is still my favorite long-term speculation – and, percentage-wise, the Stewart Stock most likely to enjoy a big bounce in January. BUY.

Emergency Filtration Products, Inc. (NASDAQ/BB: EMFP): 35 Cents

I can update this one for you in three words: Volume, volume, volume! In the past seven trading days, EMFP has traded 6.8 million shares. That’s a pile of stock for a company that has only has 30 million or so shares outstanding and typically trades about 50,000 daily.

No doubt, if any of you are peeved at me for being so unconscionably late in delivering this HotLine, it’s because of questions and curiosity regarding this outrageous volume – volume from out of nowhere that occurred on no news … not from The Stewart Report and not from the Company.

The last time I spoke with CEO Doug Beplate was on November 18, when he was in Colorado, before the stock got so rowdy. If memory serves, he was there to discuss things with the Air Force. The last two times I’ve phoned (which would be yesterday and today), he’s been in New York, but hasn’t returned my calls – which is usually a good sign – a terrific sign, really. It means he has something he’d love to tell me, but prefers freedom from SEC interrogations to my sparkling conversation. No matter. As thoroughly covered in the last HotLine message, I see significant developments taking place that will likely result in military contracts, as well as a large commercial deal with Itochu Chemical. Nothing has changed there. As for the volume? Well, after reviewing the EDGAR reports, it’s a good news/bad news situation.

Bad news first: About 75 days ago, management was concerned – not that it would get certain orders, but that it would get the orders and not be able to fulfill them. That takes money – and the Company had none. So it did what every publicly traded, developmental-stage company with no money and a bad credit rating is supposed to do in moments like these … it did a private stock offering.

The offering consisted of approximately 3 million shares, with some warrants attached. Because the money was raised essentially under duress, the terms were not as favorable as they could have been. The price of 29 cents per share was fine. More than fine, actually. However, the provision enabling the buyers to sell as early as 60 days out was not so good – especially when the deal involved such a big block of stock.

At this juncture, it’s important to understand that private professionals who partake in these types of offerings are not like you or me – or anybody else, for that matter. They are not investors, per sé. They are prosaic-minded moneymen. They simply want a better-than-current-market return on capital, with very little consideration as to the potential of the underlying investment. Their only concern is the ability of the market to withstand the selling pressure so they can get their money back. And they sold, and they got their money back – in spades. Period. End of story.

As for the good news? 1) Obviously, as recently as two months ago, Doug foresaw a large and immediate need to raise some big money to fill some big orders. He wouldn’t have paid so dearly for the money if he wasn’t confident of the contracts being signed – and he certainly wouldn’t have gone to the Wall Street equivalent of a pawn shop if he didn’t think the money would be needed fast. 2) Even though the stock is down 15 cents from last time, I’m thoroughly impressed that so many shares could be sold in such a short time and result in so little damage. This shows great liquidity and enormous resiliency. 3) I’d rather see the shares at 35 cents temporarily, and have money in the bank to fulfill contracts with the government and/or Itochu Chemical, than to have things the other way around – i.e., to have the stock back at 50 cents, but with the Company unable to finance these mammoth opportunities. 4) If you read the fine print, you’ll notice there were “A” and “B” warrants attached to the private offering. Interestingly, the “B” warrants can be canceled by the Company if, within 90 days of the offering, EMFP should secure a Letter of Intent from the U.S. Military. 5) Since the 90-day period ends in mid-January, that’s my personal target date to see the announcement we’ve all been hoping for. Worth noting, too, is the wording that says EMFP doesn’t even need a contract – just a Letter of Intent. That means that if things go reasonably well, even if the government takes its time finalizing the contract, we still keep the money, but the dilution will be less.

Clearly, this is what Doug is counting on. So am I. BUY!!! ( I don’t think I’ve ever used that many exclamation marks in my life – not in a business document anyway. It’s my own small way of avoiding multiple hypish additives, while still making my sincere desire known … I want all of you own this stock.)

The applications of this technology are as universal to the filtration industry as Velcro™ is to the adhesives industry. That’s not an exaggeration. Indeed, the uses for 2H nano filters are so vast that the U.S. Patent office categorizes technologies of such wide-usage potential as being “Platform Technologies.” This is one of them. Another remarkable aspect is the very real possibility that every branch of the U.S. military will be instructed to buy EMFP technology – which is exceedingly rare. The last time I’m aware of that statement being true was in WWII, when Uncle Sam gave Jeep a blanket contract.

Bottom Line: With the stock so low, and with years of developmental progress, thousands of man hours and millions of dollars so close to the contract tables of so many buyers – major buyers, both commercial and governmental, both here and abroad – I just don’t see how a resounding BUY recommendation on this stock at this time could be anything less than very good advice.

As always, thank you for listening and for subscribing,

J. David Stewart

Analyst and Publisher, The Stewart Report