THE STEWART REPORT HOTLINE SUMMARY

Tuesday, August 16, 2005

Next HotLine Planned for Wednesday, September 14, 2005

Budweiser Relocates to Utah and …

The sun will rise in the west, Budweiser will move its headquarters to Salt Lake City and Jimmy Hoffa will be found alive and well and pumping 50-cent gas into Ralph Nader’s Volkswagen long before you’ll see Wall Street recruiting from the Philosophy Department at Berkeley – or any other university. That’s more than a little ironic considering the heavy emphasis placed on philosophy by virtually every great investor of the last 100 years.

Look back at Charles Dow and B.C. Forbes, or living legends like Sir John M. Templeton and Warren Buffett, or fast forward to post-modern icons like Marty Zweig or Peter Lynch. Regardless of the man or the market – or the time or their temperament – you can’t help but notice the common denominator in their books, their speeches and their interviews. Specifically, each of them is very big on philosophy.

True, their ideas about the ecumenical are as varied as their secular interpretations of value. However, independent of those differences, I have the sense that, with every calculation – every buy decision, every industry chosen and every opportunity identified – they all seem to weigh the hard facts on their desks against the philosophical yardsticks in their minds. If the two sets of knowledge don’t pair up – if the Ying doesn’t balance the Yang – they know to rethink their final decision.

This is why I believe that philosophy is itself a touchstone – a genuine test of artful skill that usually differentiates the better investors from the rest of the pack. It also goes a long way toward explaining why, every day, a dozen or so CPA’s and Harvard MBA’s get slaughtered on Wall Street.

Clearly, laptops and linear thinking are not enough. You must teach yourself to see beyond the black and the white of it all. This is especially true with emerging-growth stocks, where the black and white is almost always printed in red, while the real future of the company is found by reading between the lines – by giving gut instinct the same weight as hard facts.

In anticipation of each of our companies being within a day or two of reporting their Q2 numbers, I decided to advantage the temporary void and phone each for an extensive update, as follows:

Amarillo Biosciences, Inc. – Nasdaq/BB: AMAR – $0.32
Favorite Speculation: BUY

On June 1, in a Special HotLine devoted entirely to AMAR, I gave a rather detailed description of the company’s new relationship and first-ever royalties from BioVet, Inc. (Refer to your hard copy of that document, which I mailed to everyone the day after I recorded it, or go to The Stewart Report’s website, where it’s archived with the other 2005 HotLines.) In a nutshell, the deal works like this:

Hayashibara – Amarillo’s billion dollar buddy, benefactor, long-term owner of approximately 20% of all AMAR shares outstanding and manufacturer of Amarillo’s patented oral interferon – has been providing BioVet with the pharmaceutical for several months. BioVet then resells the drug to its ranching clientele, who use it to treat diseased cattle. Financially, Amarillo gets a royalty check every 45 days, with the amount based on 8% of Hayashibara’s sales to BioVet, which is currently licensed only in Japan.

Although the relationship is young and the Japanese cattle population small, Hayashibara sold BioVet half a million dollars worth, right out of the gate. It’s also believed to have more than matched that first order in the second 45-day period, which ended last Friday. That’s the same day Joe Cummins confided to me that a top BioVet executive will be coming to Amarillo for a meeting on Wednesday, August 17.

As for BioVet itself, the product has proven so successful at the retail level that the company now finds itself in the throes of a highly anticipated public stock offering based largely on its first-year sales (mostly interferon-originated), which have been estimated at $10 million.

With that as the back story – and knowing that, right about now, a VIP with BioVet, Inc., is boarding a Texas-bound flight in Tokyo – I’ve tried to put myself in his miserable shoes and imagine what he might be thinking during the 11-hour flight to LAX, the two-hour layover when he arrives there, and the final three and a half hours before he hits Amarillo. In my scenario, I’ve also tried to give him every possible advantage, perfect luck and the full benefit of the doubt.

So, even though he lives in Japan, let’s assume he doesn’t smoke and that 17 or 18 torturous hours without nicotine will mean nothing. Let’s assume too that nobody loses his bags; that he cares nothing for saki; suffers zero jet lag (despite the fact he’ll be crossing more time zones than CNN); that he finds strange delight in the special attention afforded by U.S. Customs officers to non-white foreigners; and that he doesn’t contract a strange illness from one of the thousand or so airport travelers he comes in contact with, including the two Krishnas who ask if they can give him money. Hell, we’ll even assume he doesn’t die from culture shock the first time he realizes, as I did, that the City of Amarillo has more vintage Cadillacs buried at 75-degree angles, nose-first in the Panhandle dirt, than it does traffic lights and sushi bars combined. Anybody carrying a passport and a post-9/11 travel grudge would have to agree, this is a very generous scenario.

Even so, you can pretty much bet that the outcome of tomorrow’s meeting will be determined by Dr. Joe Cummins, and the executive from BioVet will have all of today and most of tonight to realize I’m 100 percent right.

Joe wouldn’t tell me why the guy from BioVet is paying him a visit, but I doubt he flew all the way from Tokyo to hand deliver the royalty check, real quick-like, so he can take in Amarillo’s dazzling urban nightlife. No, I’m thinking that he’s thinking:

“BioVet is on the verge of going public. Based on interferon sales in Japan alone – which is the only territory we now have license to – we look to raise millions in the IPO ... But how many more millions could our offering command if we also had the marketing rights for South America? There’s a lot of cattle in Argentina. Hmmm …What’s that worth? Triple? Quadruple? Or what about the North American rights – or even just the 150-mile radius around Amarillo’s headquarters, where some 7 million head is corralled annually. Do I dare dream it!?”

Trust me, that’s exactly what he’s thinking.

At the end of the day, I’ll be very disappointed if the BioVet guest doesn’t wind up back at the airport, having left Joe with a big ol’ Southern smile on his face and a check for a half-million or so in his doctor’s bag. For a company with an operating budget as lean as a Texas tri-tip (the last time I looked, Amarillo’s monthly nut was only $30,000), $500,000 would buy a lot of leg room. Even more importantly, if Joe does, in fact, negotiate a large check in return for an equally large expansion in the nations that BioVet is licensed to market in, it’s axiomatic that Amarillo’s royalty checks will grow proportionately to BioVet’s new revenue opportunities.

Is this 100 percent conjecture on my part? You bet it is – but it’s an intelligent bet all the same. One that’s clearly worth making, right now, while the stock is so stupidly cheap. Besides, even if I’m wrong as to the near-term events I envision, the longer-term value of the company is more than solid. With 17 patents, four FDA clinical trials in progress, $36 million invested to date, 1,400 shareholders (including many scientists and the Hayashibara Group, Japan’s largest privately held biotech company), just 17 million shares on NASDAQ and a total market cap of only $5.5 million, where’s the downside? You tell me, because I just don’t see it.

Amarillo Biosciences should be at least a buck a share right where it stands. Before year’s end, it probably will. BUY!

Emergency Filtration Products, Inc. – Nasdaq/BB: EMFP – $0.38
Short-Term HOLD, But Smart Long-Term BUY

Ironically, I probably spent more time on the phone with Doug Beplate, EMFP’s founding President and CEO, than I did with any one else, yet my review of the company will be kept intentionally brief.

Don’t get me wrong. I was intrigued by the conversation on many levels – which is typical. I’ve always marveled at how Doug started the company by acquiring the rights to the 2-H filters from 3M Corp. (NYSE: MMM) without anyone really noticing – just as Bill Gates started Microsoft by acquiring the rights to DOS from IBM. 3M didn’t know what it had – but Doug did. A great bit of technology had slipped through the corporate cracks, and he was there to catch it. Indeed, the more I understand the potential of what EMFP can provide, worldwide, the more I feel like an early investor in Velcro.™

Typically, world-class innovations of this ilk find commercial acceptance by first garnering military approval. To that end, enormous strides have been made, as you already know. Each and every time Uncle Sam has tested the technology, EMFP filters have passed with flying colors. Whenever the government has contracted with independent sources to re-validate the results, the third-party opinions have come back each time even better than EMFP’s own reports. Just consider the recent study by Nelson Laboratory: Not only did their scientists validate all of EMFP’s filtration claims, they went on to specifically list 1,000 different and specific uses for the filters themselves!

No doubt, the core technology has been proven – but it’s not yet perfect. After speaking with Doug on Friday, it’s clear there is one last hurdle to cross. It has to do with a number of government uses involving extremely uneven surfaces – surfaces with contours, such as folds or pleats, that can greatly complicate the smooth application of the nano particles. Sometimes, the nano bits want to move around or tend to sag under the influence of gravity. Other times, the difficulty is in making the particles adhere – or in making them adhere for long enough periods.

Thus, there are still some snags to work out. To that end, Doug has been in Kansas working with nano technology people in private industry, as well as with university scientists. The key, they now believe, is to magnetize the particles. Doug thinks they have the problem sorted out. However, until he knows they have it sorted out, I’ll formally rate this stock a HOLD – although I do intend to buy a few shares in a couple of days, after each of you have had a chance to act on this HotLine.

International Card Establishment, Inc. – Nasdaq/BB: ICRD – $0.37
Smartest Mid- to Long-Term BUY

In the 14 months that have passed since the poorly timed “buy” recommendation originally issued by yours truly back in June 2004, when ICRD was at $1.15, we’ve seen the stock as high as $1.32 and as low as $0.22. We’ve witnessed revenues climb from virtually nothing to a present run rate of probably $30 million annualized. Along the way, a mistake was made on the cost side of the equation ... a big mistake involving the very expensive 29th floor office lease in Oxnard, which was as much of an embarrassment to me as it was to ICRD’s income statement. After all, I was the one who painted it as a symbol of corporate growth. In reality, it was an expression of one man’s extravagance. That man is gone. Wain Swapp took his place.

A former Navy SEAL turned bankcard executive, Wain Swapp is known to have an almost encyclopedic knowledge of the industry and the experience of having built several companies to over $100 million.

Acting as ICRD’s new Chief Financial Officer, you might recall Swapp’s first initiative: To cancel the Oxnard lease and terminate virtually everyone associated with it. The savings were large and immediate. It took a couple of months for the shake-up to make itself apparent on the financial statements – and the stock still doesn’t reflect it – but ICRD’s monthly operating budget today is a fraction of what it was, even though revenues continue to rise rapidly.

Much of that growth is fueled internally. In my book, that’s rock-solid testimony to the symbiotic synergies that can be generated when you have a bankcard division, a leasing division and a gift-card division that continually cross-pollinate each other’s sales efforts. Additional revenues have been driven by a number of acquisitions. (Not so long ago, I remember a HotLine where I said ICRD was averaging one a month!) And that’s good, too. After all, growth through acquisitions was the game plan from Day One.

Of course, that meant issuing new shares. Regrettably, some of those shares fell into the filthy hands of an offshore cartel that was illegally short-selling bulletin board stocks from the safety of international waters.

The bad Karma will be theirs forever, but the temporary stock loss is ours. Because they were successful in using our own company’s stock to drive our shares down, the resulting devaluation in share prices made ICRD’s acquisition costs noticeably higher than they should have been. So, even though ICRD acquisitions made in 2004 were elegant in the strategic sense, the resulting dilution was an unfortunate setback to the business plan.

But the business plan is still in place – and, frankly, that’s all that really matters.

Throughout it all, Bill Lopshire has stuck intrepidly to his original idea: Build a company from scratch for the sole purpose of selling it. It’s a simple plan, really, but one whose genius has yet to be fully expressed. Indeed, it won’t be until ICRD reaches bankcard’s magic $100 million mark and the company allows itself to be bought out.

In turn, this has made it relatively simple (not easy, but simple) for me to stick with my game plan, too. That means delivering my subscribers the “Whale Check” – on time and as promised – sometime in 2007. Despite the setbacks, I’m strangely on target to do just that.

Forget price watching. That’s for amateurs. And get ready to forget some of what I said earlier about emerging-growth companies not having much in the way of black and white. International Card Establishment’s second-quarter financial statements are still a day or two away but, thanks to improved cash flow and a new credit line, I’m guessing the previous escalation in the number of shares outstanding will likely flatten to just 29 million.

I doubt the statements will enable us to appreciate the profound top- and bottom-line benefits of the recent direct card-processing relationship with First Data Corp. (NYSE: FDC) due to the one-time-only costs associated with establishing it. What will be visible, however, are Wain Swapp’s aforementioned cost reductions to ICRD’s G&A. A comparison of this year’s Q2 to the same period in 2004 could show a savings in overhead of as much as $250,000 a month. That’s $3 million annualized.

Okay. Having said all that, I fully realize that, with many investors, numbers – even big numbers – tend to fall on deaf ears. That’s because they prefer stock charts. And, if those chart lovers happen to be original Stewart Report subscriber/members from way the hell back in 1994 – when muscle cars were cheap, somebody else was president and I had a ponytail – then the ears they fell on were very, very long ... like a Rabbit’s.

And here we are now, 11 years later … Prices being paid for muscle cars have gotten so out of hand that Barrett-Jackson may as well auction them by the ounce. My hair’s a whole lot shorter, and I have to dye it. I still don’t know who the president is – but that’s okay; sometimes, he doesn’t either.

So what does this leave us with? Let me tell you ... A strange confluence of early subscribers who’ve grown to accept personal computing as a way of life, send e-mails and gather stock quotes on-line. Just as importantly, they’ve managed to keep their ’63 split-window Vettes and the like, but wisely sell their SUVs to buy even more Stewart stocks. They’ve also requested the return of The Rabbit. Those of you who know what I’m talking about know what I’m talking about. Those of you who don’t should visit stewartreport.com, click on the Rabbit’s icon and read his technical take on ICRD’s chart. It’ll have you lookin’ up.

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

J. David Stewart
Analyst and Publisher, The Stewart Report

Note: David’s HotLines are also available by dialing (949) 583-6057, and entering
your subscriber-protected, 2-digit Pass Code at the prompt.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Acting as an investor, and also as a consultant to the Company, David Stewart purchased 100,000 shares of Amarillo Biosciences, restricted under Rule 144, in addition to the 60,000 free-trading shares he has presently. J. David Stewart currently owns 100,000 shares of ICRD common stock and two days after the release of this update, he will likely purchase EMFP shares on the open market. Affiliates of The Stewart Report may also have additional long or short positions in these and other securities discussed herein, including warrants and/or options, and may buy or sell same at their own discretion. This report contains or may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the US Private Securities Litigation Reform Act of 1995. This report is intended for informational purposes only and does not have regard for or take into consideration the reader's investment objective, financial situation or suitability for this security. Consult with your financial advisor and perform your own due diligence. Copyright © The Stewart Report, 2005.