THE STEWART REPORT HOTLINE

Special Update: International Card Establishment, Inc.

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Summary of Audio Message from Monday, August 28, 2006

(Next HotLine Planned for Sunday, September 10, 2006)

 

OVERVIEW:

As was highly emphasized in the prior HotLine message, August has proved to be the overture to a whole new era. More than ever, I believe that International Card Establishment, Inc., Emergency Filtration Products, Inc. and Amarillo Biosciences, Inc. have simultaneously entered into an unusual climate of great opportunity and change. Soon, the opportunities will be fully realized. The change will continue to be evidenced by a rapid cadence of frequent news releases.

 

Last week alone, we saw the issuance of two highly significant announcements - one from Emergency Filtration Products, Inc and the other from International Card Establishment, Inc. But it's the announcement disseminated by ICRD that I wish to focus on because it's the one I'm most appreciative of, and because ICRD is your best very near-term opportunity.

 

INTERNATIONAL CARD ESTABLISHMENT, INC.

Nasdaq/BB: -- $0.21, at time of HotLine recording. Now: $0.25

Strong BUY

This stock will prove to be extremely satisfying if put away for three to five months. By then the Q-3 numbers will be printed. The Company will be cash-flow positive at that time, providing investors with black and white evidence that the red ink is disappearing. On or before the fifth month, the trading pace will quicken even more as it becomes more apparent that the Company will print its first-ever profits sometime during Q-4. I therefore view ICRD stock as a strong buy and an easy double to be priced at 50 cents before year's end.

 

The basis for my reasoning was the hour-long teleconference that I participated in with CEO William Lopshire, Esq. As mentioned last time, Bill's background is in corporate law, so I knew it was pointless to attempt any contact until after the Q-2 numbers were made public.  

 

As expected, the second quarter numbers were absolutely lurid. For the three months ended June 30, 2006, International Card Establishment lost nearly $2.3 million, or 8 cents per-share. Clearly, that's a hellacious loss for a 25-cent stock - but worth every penny! Why? Because it was the final expression of one of the most comprehensive corporate overhauls I have ever witnessed. Much of the credit for its successful re-tooling is due to the appointment of a new General Manager, Dana E. Marlin. Dana has the credential of a CPA and the MO of a surgeon who wields a long-handled ax with the same precision as a scalpel.

 

Division by division, the cuts Dana Marlin effected went like this:

 

I.                    Global Leasing: This division was sold outright to net the Company $2.3 million and enable it to retire all long-term debt. Better yet, the division was sold for a profit.

 

That aside, Marlin correctly identified leasing as a long-term, capital intensive operation. One where you can make a bundle the last two years of a four year contract, but only if you can afford to lose a bundle the first two. ICRD simply didn't have that ability. At least not without diluting the stock with private placement funding which, as we all know, is the thing that murdered the share price twice in as many years. (Conversely, as of June 30, 2006, the Company has issued just 80,000 shares since the close of 2005. In terms dilution, for a company with 29.4 million outstanding, that's almost nothing.)

 

II.                 Credit Card Processing: Without a doubt, transforming the Company from being just another Independent Service Organization (ISO) to become a direct bankcard processor was the highlight of 2005. This was a long, delicate and demanding process, but the attainment of Merchant Account status (by teaming with industry giant First Data Corp) proved to be a real door-opener for ICRD.

 

I mention this, in part, because if this Special Update had a theme, it would be, "If At First You Don't Succeed . Restructure." I like that. It's snappy and cute. Unfortunately, such a statement is patently unfair because it implies failure. In truth, International Card Establishment's merchant account revenues grew from zero in all of CY 2004, to $1.3 million for the 2^nd quarter of 2005 - and then nearly doubled to $2.5 million in the same period 2006.

 

But along the way, the industry grew as fast as the ultra-premium prices that majors like iPayment were willing to pay for acquisitions. Competition was truculent. And not only were acquisitions getting too expensive, frequently, the quality of the portfolios being bought were entirely suspect. Poor "quality" equates to large groups of credit card transactions where the card holder defaults, sticking the merchant provider with the loss. Worse still, to sweeten deals, the majors were (and still are) offering initial ISO payout deals upwards of 90-percent. At that level, the merchant entity loses money from the outset, with the idea of recouping the loss by renegotiating the payout at a later date, or by eventually selling the portfolios to a third party. Similar to the hurdles posed by the leasing industry, the proposition became too taxing for a company our size. Recognizing the shift, and basically admitting that internal growth via outside acquisitions was no longer attractive, Dana Marlin made a tactical decision to cease those activities, and instead, grow the Company organically.

 

To explain this right, I need to back-up for a moment to discuss the enormity of the cost-cutting measures he put into place. Prior to the restructuring, the company was being grown fast. Now it's being grown smart. First, they had to tear it apart. Which they did .. and in a big way.

 

But before they put it back together, fantastic attention was given to the smallest details - right down to  postage stamps. From there they went on to cut overhead and slash executive salaries. Today, no one in management is paid more than $3,000 monthly. As a corporate attorney, Lopshire alone was use to making that in a day. It closed a number of offices and reduced headcount by 50-percent. Accounting was streamlined to do away with a preponderance of interoffice accounting which had become a back and forth, division-to-division nightmare - one that had nothing to do with making money, just keeping unnecessary track of it. All told, Bill Lopshire said the cost savings come to $200,000 per-month! gement is paid more than $3,000 monthly. place. losed a number of offices and reduced headcount by 50-per

                 

Returning now, to explain further the strategies to grow the Company organically .

 

Thorough identification of all expenses (as well as all of the consequent cost-cutting steps) had to be finalized before the new paradigm for the Merchant Account division could be instigated. That's because, implicit to the paradigm is the firm directive to turn cash flow positive in Q-3 and achieve profitability in Q-4. Both goals have been stated publicly, in print. Both goals will almost certainly be achieved if for no other reason than they are virtually guaranteed due to contractual consent.

 

Here's how it works: Every single ISO is now a true independent - even those who work out of ICRD sales offices. Also, every one of their contracts has been re-written. Now they earn a 50-percent payout after a full allowance for costs incurred by ICRD. As such, the only way ICRD's ISO's can cost us money is if they make us money. Which is good, but it begs the question, "Why should they accept 50% when the big players in bankcard offer as much as 90%?"

 

Lopshire's answer was a good one: "Because we're giving them great stock incentives. They, like us, believe the bigger payday is likely to be in the shares. I'm not going to tell you that we didn't lose a few people in the rewrite, but you know that those who did sign the new contract are very loyal soldiers." He also reminded me that the Company recently raised $1 million cash to grow the new effort and to alleviate any concerns about ICRD's stability - or its staying power. Importantly, the million came from an unsecured note, so there was no dilution . just interest. And the rate was great: Prime, plus 3. That's less than what Ford Motors pays for money.

                           

III.               Gift and Rewards: The Neos Merchant Solutions division - as headed by former Navy Seal Wain Swapp - was found to be a tight ship. Marlin left Neos largely untouched. Indeed, the only recognizable change occurred on Aug. 22 - just two days after the last HotLine. That's when the stock was just $0.18 and ICRD was able to announce that Neos had signed the nation's largest retail candy store chain for credit card processing, and the Gift and Rewards program. The latter will employ Neos' proprietary smart card to offer "Sweet Factory" and its customers a number of distinct advantages. Those include:

 

1.)    Faster check-out lines: Customer data is contained in the card itself, so there's no need to verify customer credit with a dial-up service.

2.)    Brand loyalty: The customer earns points towards future purchases with each use. Also, they see the card - and therefore the Sweet Factory name and logo - just about every time they open their wallet or purse.

3.)    Improved cash flow: Smart cards are pre-paid in cash against future purchases.

 

When we got to this point, the phone conference turned towards revenue goals and comparative analysis. Bill Lopshire was good in providing the numbers, pointing me to some interesting research and in offering some good and proper guidance as to valuing the shares:

 

FT Ventures and First Annapolis are the respected management and consulting firms known to specialize in bankcard industry analysis. If you look at their research, merchant providers are valued somewhere between 25-to-40 times monthly net processing revenues, with 36 being the mean.  Currently, ICRD's net processing revenues are $175,000. Using the 36X multiple, the Merchant Account division is worth $6.3 million. Applying the same formula to Neos' Gift and Rewards operation division adds another $3.6 million for an aggregate corporate valuation of $9.9 million. Relative to today's market cap of 7.5 million (based on stock priced @ 25 cents per share). So the company is ostensibly cheap - especially since $9.9 million gives no allowance for its value as ongoing concern .

 

One that's freshly re-structured; one that's poised to grow fast and profitably against a huge tax loss carry forward that will exempt most of its future windfalls from the hands of the IRS.

 

As for comparative analysis, we were only able to look at Heartland Payment Systems, Inc. (NYSE: HPY -- $26.97) and Pipeline Data, Inc. (Nasdaq: PPDA -- $1.31). Note: iPayment can no longer be used for comparison. Its founders took the company private in a $903 million transaction in May, 2006.

 

Ostensibly, PPDA and HPY are quite expensive when compared to International Card Establishment. Especially, PPDA. Be that as it may, their true value (to us) might simply be that they're really the only two other publicly traded merchant account providers that offer stock analysts a reasonable comparison.

 

Somehow I ended up discussing some of this with my dad, who is no more interested in stocks than he is in political correctness or technical verbiage. Even so, he made a wonderful point by reminding me that with so few stocks to chose from, now that the industry is heating up and investors are looking for bankcard plays, "Your I-Card thing sticks out like a diamond in a goat's ass." Well put, dad.   

 

As per Lopshire: The revenue target for 2006 is $10 million. Since Q-2 came in at $2.5 million, the annualized run rate makes the number easy to accept. As for 2007, the official goal is $15 million but he said, "If the Company doesn't do $20 million - I'll quit. I can't live forever on $3,000 month. None of us can. Each of us is betting on our respective skills. We're also betting that in the log haul, ICRD stock will increase five-to-ten fold. That will be the real payday and it's paramount that we be right. Our current mantra is, 'We Kill What We Eat,' meaning, the days we miss our goals are the days we don't eat. We are on the same side of the fence as every one of our stockholders. The same exact thing can be said of our ISOs . everybody involved has a vested interest in making all the right moves so that the stock does too."

 

Selfishly, that's when I realized the same thing is true for me. I purchased 100,000 144 shares that are tied up for another year. As such, the $20 million goal is an all-or-nothing target for me as well. Bottom Line: I think I made a smart long-term bet. I'm also pleased to have 100,000 shares of unrestricted common to capitalize on the short-term moves, too. Hopefully, you have found the logic and forecasts in this Report cogent, because the real Bottom Line is for The Stewart Report to make its Subscriber/Members money. International Card Establishment will do just that. Cumulatively, I believe ICRD has a very workable game plan for the future; a plan that's as intelligent in it's design as it was intrepid in its creation. It signals a very real and profound shift in ICRD's future and our fortunes. Buy ICRD - at least up to $0.30.

 

As always, thank you for subscribing,

 

 

 

J. David Stewart

Analyst and Publisher, The Stewart Report

 

Post Script:

Please look the other way if this document is riddled with flowery English, bad grammar and garrulous sentences. Ignore any off-color language, crazed colloquialisms, dangling participles (whatever those are), errant analogies, typos, etc. My Editor ain't available rite now. He’s in Las Vegas and claims to be writing another investment book ... Yeah ... Right.

 

1.)     His absence will serve to whitewash the e-mail error on Monday night, which listed the phone number for the HotLine incorrectly.

2.)     He's also the reason why I was forced to quickly (and conveniently) delegate the blame onto my Webmaster.

3.)    For those of you who are not on the Internet, the correct HotLine phone number is:

      (949) 583 - 6057. Enter the pass code at the prompt. Currently, that number is 66. 

 

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. J. David Stewart owns 150,000 common shares of International Card Establishment, Inc. David has also subscribed to purchase an additional 100,000 ICRD shares Restricted under Rule 144. J. David Stewart has 100,000 common shares and 100,000 144 shares of Amarillo as well as 10,000 common shares of Emergency Filtration Products, Inc. Biosciences Inc. J. David Stewart and affiliates of The Stewart Report may also have 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, 2006.