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KauaiPI

05/08/03 10:01 PM

#3486 RE: Mr. Ed #3484

Mr. Ed~(DFNS)...your concern is understandable!

DFNS,don't like that hold on new orders,on watchlist for now

I too thought long and hard about this very point. After all, DFNS has approximately 45% market share in the Israeli defense market. That *could* put a lot of orders on HOLD lol ...and they only have an approximately 9% share of the Israeli civilian market ... a market that is 41% controlled by other Israeli companies and 50% made up by imported goods. In 2002 that was a total market of $25,000,000 or 250% the size of the Israeli defense market.

During this period of *uncertainty*, which I hope is short lived lol, I would point out the following; the strategy to push into the Israeli civilian market, if successful, would give them an even bigger piece of the total pie. Also, I don't think the Israeli defense market is just going away. On *hold* is merely that and they seem to dominate that market, as the #2 competitor is credited with only 20% market share. If DFNS could double their share of the Israeli civilian market, they would still be only 18% of that market but would improve that revenue sector by at least $2.25M replacing much of the Israeli defense market potential short fall and again, I don't think it could be argued that the Israeli defense market would be zero for the year.


SEGMENTED INFORMATION

SALES

--------------------------------$2002 ------$2001
Local market-civilian 3,117,066 2,652,696
Local market-military 4,919,567 4,959,197
Export market-military 2,592,967 1,329,120


all areas showed growth except the Local market-military. I liked the improvement in the export market and and the company's decision to broaden products to the local civilian market seems to also be a good business decision.

The order "hold" you referrence will not be for long IMO and while I hope that a degree of peace in the area is reached, I would also think that the area will have the need for the company's products (or a competitor's) for some time to come and as such I am optimistic regarding the future.

I thought it was also significant that they mentioned the fact;

At the beginning of the first quarter of 2003, $1.2 million of the orders placed on hold in the last quarter of 2002 were released.

Also, while they disclosed, "In October 2002, we signed a licensee agreement for a period of three years with Smith & Wesson Holding Corporation that enables us to use the Smith & Wesson trademark on several of our bullet-proof vests. The Company believes that the Smith & Wesson brand name will be extremely helpful for introducing its protective products into the American market, and particularly to the market segment known as Law Enforcement, and another segment of the private market" they further disclosed, in note 18, "SUBSEQUENT EVENTS: Effective January 1, 2003, the Company entered into a licensing agreement with a firearms manufacturer to use the manufacturer's trademarks in connection with the manufacture and sales of the Company's armored vests and apparel and armored wall fabric products worldwide. The agreement expires June 30, 2006, but can be extended upon mutual agreement for an additional three-year term. The agreement {b]requires the Company to pay a royalty of 5% of net sales of products with the licensee's trademarks with a minimum guaranteed royalty of $50,000 for the first contract period (January 1, 2003 through June 30, 2004), $100,000 for the second contract period (July 1, 2004 through June 30, 2005) and $150,000 for the third contract period (July 1, 2005 through June 30, 2006) with each payment due within 30 days following the end of the previous calendar quarter commencing April 30, 2003. The agreement also requires the Company to spend a minimum of 4% of the net sales from the licensed products for promotional activities."

As such, it would appear that they will not be sitting on their thumbs and will be using this connection to their mutual benefit, or so it is my opinion. The 4% requirement for promotional activities should be money well spent.

Further, I like the business stategy taken from their 10K;

STRATEGY

Our strategy is to capitalize on our significant research and development capabilities and the strength of our brand identity and achieve greater economies of scale. With the increase in international tensions, we believe the demand for our products will continue to grow. We expect to address this growth by offering a comprehensive array of high quality branded security products to meet the needs of our customers around the world. We intend to enhance our leadership position through additional strategic acquisitions by creating a broad portfolio of products and services to satisfy all of our customers' increasingly complex security products needs. The following elements define our growth strategy.

o CAPITALIZE ON EXPOSURE TO MILITARY PROBLEMS. We believe the events of September 11, 2001, the subsequent "War on Terrorism", the increasing likelihood of military conflicts abroad, and recent actual events in saving lives through the performance of armor systems, are all likely to result in additional interest in our products.

o EXPAND DISTRIBUTION AND NETWORKS AND PRODUCT OFFERINGS. We expect to continue to leverage our distribution network by expanding our range of branded law enforcement equipment through the acquisition of niche defensive security products manufacturers, and by investing in the development of new and enhanced products which complement our existing offerings. A broader product line will strengthen our relationships with distributors and enhance our brand appeal with military, law enforcement and other end users.

o PURSUE STRATEGIC ACQUISITIONS. We selectively pursue strategic acquisitions that complement and/or expand our product offerings, provide access to new geographic markets, and provide additional distribution channels and new customer relations.
--------------------

As I have stated, they have a good share in the local business and that should continue to allow them to play to their strengths as the uncertainties become less a concern and purse strings are once again opened and they seem to have markets to grow;

Our share of the Israeli defense market for applicable products in 2002 was approximately 45% of a total market of $10,000,000. We have one major competitor in this market: Rabintex with approximately 20% of the market.

Our share of the Israeli civilian market for applicable products in 2002 was approximately 9% of a total market of $25,000,000, with 41% controlled by other Israeli companies and 50% made up by imported goods.

Internationally, our competitors in the defense market include companies such as Point Blank, Safari Land of Ontario, California and A.B.A. in the United States, L.B.A. in England, Indigo in Spain, Systema Compositi in Italy, Hellenic Arms Industries in Greece and Barman in Sweden. In each case, the competing manufacturers specialize in a more limited product line than does Defense Industries.

In the civilian market, we are aware of approximately 20 companies manufacturing similar products. A number of major manufacturers with resources and reputations larger than those of Defense Industries compete for the same market. We intend to market its products over the Internet as well as through a network of distributors.


It is also important to me that they hold patent and trademark *assets*

PATENTS AND TRADEMARKS

We hold several patents from various countries for our ballistic wall coverings, dry storage systems and mine protective shoes. Our subsidiary Achidatex holds several of our patents.
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I am glad you are at least keeping it on your watch list. I don't normally take a position for the short term and am prepared to hold this one for 12 months or more. I know for some this is a long period to hold (tie up funds) but I have to think that KCSA didn't come on board to just sit on their thumbs and a point I haven't addressed yet is DFNS's association with KPMG. KPMG is no small player! As stated in their latest filing;

On October 24, 2002, the Company entered into a consulting agreement with KPMG Corporate Finance, LLC ("KPMG") whereby KPMG shall act as the Company's exclusive financial advisor and private placement agent. KPMG is entitled to an engagement fee of $25,000 upon execution of the agreement and an additional $25,000 for a retainer fee upon completion of the Memorandum to be used in any private placement. KPMG will attempt to raise up to $10,000,000 in a private placement of the Company's securities in return for a success fee of 7.0% of the proceeds raised. KPMG will assist the Company in identifying possible acquisitions including and up to final negotiations in return for (1) 75% of KPMG's normal hourly fees and (2) 2.0% of the aggregate consideration paid by the Company including any liabilities assumed.

While these funds are desireable to speed the R & D and introduction of new products, it is not essential as the company stated they could generate enough money from their current business model although the progress would be slower.

If Defense is unable to effect an offering of its securities, it may fund its research and development through its operating funds. In such event, the timing of its anticipated research and development and subsequent production schedule would be slowed.

So all said, I like the story and the potential here and am willing to give them some time to sort things out. While I would like everyone to take a bite along with me <g> the fact remains given a quarter or two I think I will have even more company in this company.

Thanks again for taking a look and I guess you know I will keep the board informed as more unfolds!

Best!
kp