Court Quality Executive Summary(12!03!03)

Digitalcourt Executive Summary

Executive Summary Market and Market Size Digitalcourt Recorder is a product addressing the $150,000,000 market1 opportunity of 4 Track digital audio recording in courtrooms and other places that require court quality recordings in the US2. This represents a $30,000,000 to $60,000,0003 profit opportunity given the device’s high profit margin (i.e., >50%). Digitalcourt will first focus on covering its start-up costs which are estimated to be around $20K to $30K. It will then grow organically aiming to reach an annual revenue stream of at least $480,0004 by 24 months. Courtroom Quality Recording and Product Overview Courtroom quality recording is a critical part of the judicious process. Those whose job it is to manage the court record have but one goal, “an accurate and complete record.” This is due to one reason, “if it’s not in the record, it didn’t happen.” Given its critical nature, courts have always made efforts to improve their ability to capture and manage more accurate and complete court records. Technology is clearly the key to these court record practices improvements. The market opportunity articulated by this business plan is based on a third or fourth generation version of a technological advancement in today’s courtrooms referred to “electronic reporting.” In its usual sense “electronic reporting” refers to the use of voice recording devices that are used in lieu of stenographic or stenomask reports. Microphones are installed in the courtroom, and court proceedings are recorded on audio tape or computer disk, and/or videotape. Large numbers of courts, especially courts of limited jurisdiction, use basic systems consisting of microphones and an audio-tape deck. Around 1997 a new and important option became available: digital audio systems that save the audio record to computer hard disk with back-up to digital tape or CD-rom. Although digital systems are more expensive than analog tape, they offer many more options including ease of use, easier replication and more efficient storage and handling of huge libraries of official court proceedings.

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Court21 representative estimated the number of courts in the US is between 30,000 and 40,000. $150,000,000 comes from assuming a $5,000 retail price per device per courtroom. This number may be driven down by our low cost alternative product pricing. An unknown percent of courts do not currently allow such devices (they require real time transcription). Our assumptions are that a) this percent is not big, and b) those courts are moving towards accepting this device as courts are clearly evolving towards digital multimedia centers. 2 Competitors also approach courtrooms outside of the US. Digitalcourt also plans to, but for focus purposes, those numbers have been left out to be conservative. 3 The profit margin per device would be somewhere between $1,000 to $2,000, resulting in a $30,000,000 to $60,000,000 total available profit. 4

Conservatively assuming around 20 devices month with $2,000 revenue per machine. 1

Digitalcourt Executive Summary All of these newly introduction digital systems were software based and ran on a regular pc’s with upgraded hardware. Courts were slower then expected to adopt them due to court personnel’s trouble operating the complicated software along with their fear (both reality and perception based) of the computer running the software crashing causing official court proceedings to be lost forever. The current world leader of such digital courtroom systems is FTR Ltd. FTR Ltd. is owned by FTR Holdings, a public company listed on the Australian Stock Exchange (sym: FTR). The company has headquarters in Perth, Western Australia and in Phoenix, Arizona. “FTR Gold” was one of the leading software solutions first implemented in courtrooms. FTR ReporterDeck™ launched at the end of 2001 with much anticipation. Given it is a stand-alone hardware solution (i.e., running its previous software on a computer-based system) it addressed the operating complexity issue and started to address the concern of having the full computer crashing during official court proceedings. The CEO of FTR Pty Ltd, Steve Townsend notes, “we knew the FTR ReporterDeck™ would be popular, but we had no idea there was this level of demand for this simple and reliable device.” Since May of 2002, FTR reportedly has implemented 2,000 court recording systems (note: not all being the FTR ReporterDeck). They claim to be in over 7,0005 municipal, state and federal courts, government agencies, law enforcement departs, and educational institutions worldwide. Digitalcourt plans to position itself as a lower cost alternative to FTR ReporterDeck. With adoption, digital court will add redundant systems to increase the reliability of its product and possibly sell it as a premium product at an equal or greater price then the FTR ReporterDeck. In addition to price and reliability, Digitalcourt plans to differentiate itself by creating a more court-and-vendor-friendly maintenance program and to find alternative disruptive channels to sell through. Long Term Theoretical Company Model Digitalcourt Recorder is the introductory product of the parent company DCQ < replace with real proposed name of a parent company > that may result from the successful execution of the Digitalcourt Recorder experience. With enhancements to performance and reliability, DCQ takes proven commoditized-computer-based hardware and integrates specialized software which together drives down the fixed and variable costs typically associated with bringing to market formerly specialized hardware solutions. DCQ enters a market only after the product category has been established by an early innovator whom must keep their prices 5

Included the 7,000 sites are sites outside of the US. Using as a rough estimate, this indicates that at most (assuming at most 7,000 sites in the US) FTR’s market imprint is at 25% in the US. The assumption is that FTR has proven a market exists, but the bulk of the market is still up for grabs and will take two to four years to be fully exploited as a clerk in a court suggested. 2

Digitalcourt Executive Summary artificially high to get a return on their early investment in creating the market. DCQ endeavors to remain mean and lean outsourcing manufacturing, assembly and any other work that is required which lays outside DCQ’s expertise. It also seeks to be creative in finding disruptive sales channels that larger companies cannot themselves implement. DCQ’s targeted market timing is to enter a market where the market remains extremely price sensitive, while there is little brand loyalty.

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Digitalcourt Executive Summary Competition

Product

Description/Pricing/Etc.

OLD CASSETTE TAPE; NEW MINIDISC DIGITAL RECORDING

Company: SONY Product: BM246 Court Room Recorder; Sony MDCC-2000 Retail Price (cassette): $2,195 Retail Price (mini-disc): $6,000 Manufacturer’s Price: Unknown

DIGITAL CD BASED (SOFTWARE AND HARDWARE STAND ALONE VERSION)

Comments and Market Data: Traditional court recorder, requires expensive tape to CD conversion process. Their digital recorder requires recording on unpopular minidiscs. The problem one vendor said with it was that no one wants to use mini-discs. (Sony is trapped by wanting to increase their storage standard.) Company: FTR Product: FTR Reporter Deck (stand alone hardware solution) Retail Price: $6,995 Manufacturer’s Price: $3,000 Comments and Market Data: First stand alone record to CD devlice on the market, and current market leader. Existing software solution digital court recording (requiring hardware upgrades). FTR Reporter Software: $3,999 + $996 (mixer) + $1,500 (PC MCI card) = $6,495 “FTR digital audio recording systems are operating in approximately 6,000 courtrooms in 15 countries around the world. With sites in Hong Kong, Sydney, Halifax, and Washington, D.C., FTR Ltd. is the clear choice for courts moving into the next century.” - website

POSSIBLE LOWER COST COMPETITOR

Digitalcourt’s

VARS Complaint: So far they have not certified any of their VARS to do maintenance (if box is opened the warrantee is immediate terminated) and requires the device to be sent to Arizona to be repaired. Holding a back-up machine still costs $3,000 and is too expensive for some of the dealers. Another issue is that you have to convert the files or listen to them with their player (a perceived hassle even if the player software is free). Also, if you want to listen to them with a regular CD player you have to convert them again. Company: Laslo with Tawain Manufacturer (marketing: Martel Electronics). Product: Court Scribe. Retail Price: Estimated at $4,000 to $5,000. Manufacture’s price: Estimated at $1,400 but may change. Comments and Market Data: Will market through Martel Electronics with a one to two tier distribution channel. Product remains unfinished with initial beta testers requesting some changes. Company: QRS Product: Digitalcourt Estimated Retail price: $4,000 to $5,000. Estimated Manufacturer’s price: $1,500 to $2,000. Comments and Market Data: Priced to give distributors at least 55% profit margins. Will have simplest interface and no unwanted features. It will come with a vendor friendly maintenance plan with cheaper costs for backup machines. Possibly partly or entirely uses an alternative distribution channel (e.g., MBA Tuition scholarships, court tech implementers, etc.) Estimated costs to manufacture: $700 to $1,000. LOWER COST ALTERNATIVE DIGITAL RECORDING USING SUPERIOR PROVEN TECHNOLOGY

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Digitalcourt Executive Summary Marketing Further market research is required to solidify how to segment the market and to develop a “go to market” plan. The current thinking to be tested consists of targeting the smaller state courts. Specifically, the state courts that we have a contact within or that has a strong desire to use a digital voice recorder (with CD burner) but can not fit one in their budget given the current $7,000 budget. Additionally, the ones that have bought one, tested it out, like it, but have to wait to buy more due to the size of a large order would come to. Preliminary discussions with a federal judge in Hawaii indicate there is an important distinction between federal and state courts. Federal courts are slow and have a 9 month budget cycle which can result in a 12 to 18 month selling cycle starting from scratch. They tend to make decisions centrally, though, with large batch sizes. Every year they line up all of the courtroom technology vendors at a conference and shop that way, the next such conference is probably in August, 2004. State courts have much more autonomy over their budget resulting in greater flexibility. They also usually have bigger budgets then federal courts. However, both courts have tighter budgets then usual and are very price sensitive. With more validation that the Digitalcourt technology works and its company delivers, we will slowly walk up the value chain until we have further established a credible reputation and start going after prestigious court houses. Until then we will capitalize on our ability to provide lower prices to state courts that really want the device but that can not afford the current market price. The federal judge referred to us his technology expert who is responsible for all technology in his court. In response to his assessment of where Digital Recorders are in the courtroom today, he essentially said, “It is still an early market. Lots of courts will be adopting this technology. I think the massive switch from tapes to CD will happen in the next two to four years. Some courts will be more slow then others, primarily due to the older age of the judges who make most of the decisions.” Hawaii Federal Court Example The Hawaii federal court contacted was relatively small with three majesties. They had purchased an FTR ReporterDeck one to two years ago. They just purchased two more. Their ordered “piggy-backed” the state court’s recent purchase of 40 FTR ReporterDeck’s. The price the federal court paid was around $7,000/device. Up to now, we have no data suggesting any discount given due to volume. Competitive Positioning Digitalcourt Recorder will be carefully positioned as a low cost alternative to the current models, while retaining the same, if not better performance and reliability. The positioning will point to a lean company that takes simple proven technology (e.g., computer chips,

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Digitalcourt Executive Summary sound encoders, clever software, etc.) and eliminates the need for previously costly audio hardware without giving up any performance or reliability. Most of the product’s messaging will refer to its new approach to providing this product allowing the price to come down compared to competitors. Comparing market info on prices and performances will be a key part of the product’s messaging. Because the company will be virtual, it will have the luxury of gaining the same, if not greater, profit margins despite the lower price. Possibly the price will be the same as competitors but a buy one get one free or buy three get fourth one free deals can lower the ultimate price to the consumer without devaluing the system. Digitalcourt believe FTR’s early entrance into this market helps their credibility but has accumulated a lot of cost which keeps their prices high. Digitalcourt will pay extra attention to differentiate itself from the possible entrance of CourtScribe like competitors. In addition to price, other ways to differentiate the Digitalcourt will be formulated and tested. Such areas include how we set-up maintenance and back-up systems, how we create and then use disruptive distribution channels (e.g., MBA tuition scholarship channel, etc.), different storage media features (e.g., CD and/or DVD player, removable hard drives to track specific cases, etc.) and redundant systems that substantially increase the reality and perception of reliability of our Digitalcourt recorder. Manufacturing CourtQuality Recorder will mitigate manufacturing and assembly risks by relying primarily on generic off the shelf products and configurations, and by contracting the actual manufacturing and assembly of the product to a proven manufacturer such as AQS Inc6. With market validation and initial revenue, if market research supports it, custom design will be incorporated. Cost reduction per machine will go into effect once larger numbers of units are ordered. At this point, we estimate with a batch size of 10 the per machine assembly cost will be less then $35. At this time there is a $250 to $350 minimum batch size order, although we think this is open for negotiation. Technology (Add more accurate and descriptive information from Joe) The current technology utilizes proven commoditized-computer-based hardware ran by specialized software, which reduces the complexity and cost structure of traditional audio hardware (re-write with accurate information). Product Road Map 6

AQS, Inc. is short for “All Quality & Services, Inc.” which is a contract Manufacturing company located in San Jose. It customers range from small start-ups, to mid-size ready to go public companies like AlphaSmart all the way up large global companies such as IBM. Initial talks with them indicated they can provide us a full solution from engineering design to packaging and shipping. 6

Digitalcourt Executive Summary

The current product targets the minimum specks to prove the model. With some adoption and revenues, future designs will evolve adding to the reliability of the product. Redundant systems, back up power supplies and surge protectors (etc.) can be integrated. More research will have to be conducted to nail down the order or timing of each. 1. Reliability features (e.g., warnings, diagnostic, redundant systems, etc.) 2. Publishing and digital media distribution management (possibly) 3. Etc. Sales Plan Digitalcourt Recorder plans to take extreme caution with making any large expenditure until the product and market have been tested. The company plans to grow organically with the revenues received from the initial sales. The first sales target will be to cover the expense of start-up capital. Start-up includes the possible $13,000 required to outsource the engineering designed required to productize the prototype, along with the parts cost of the prototypes and the initial productized models (estimated between $5K to $10K). In addition to market forces, sales will be influenced by how much capital we have grown organically along with how much money we will reserve for maintenance and money back guarantee related issues. Sales Channel Digitalcourt Recorder will be creating a virtual sales force utilizing when possible existing sales channels. Further research will determine the set of Sales Channels to approach and what the terms are for each. It is the going assumption the Sales Channel will requiring at least a 50% profit margin based off the price they receive the device for. Sales Channels already identified to be further investigated include: Court Technology Consulting Firms, VARS (court room and audio equipment), etc. Revenue is not counted until the money is received and will be held for some specified time before allocation given money back guarantee period considerations. One possible channel to explore is college students, possibly in Law school or MBA programs, who would enroll in a tuition scholarship program set-up by Digitalcourt. In this way we would mimic the fine example set by Michael Dell. This would be a 100% commissioned in house sales force selling direct to the consumer. Sales Cycle Given the specialty and the high performance requirements of this market, special attention will be paid early on to determine the likely sales cycle of the device. This is a major issue we will address ASAP.

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Digitalcourt Executive Summary With a working product we believe it will be someplace between 9 to 18 months by targeting the right courts. Keeping costs low and having key members of Digialcourt independent of Digitalcourt salaries (at least initially), will allow this lead time to work towards our advantage. Sales will be easier to predict and we will only build to order with plenty of lead time. Sales Projection At this point it is hard to say. We anticipate that within 24 months we could be shipping at least 20 to 50 devices per month. If we achieve those levels we will further build our processes to receive higher margins and deliver faster and more devices on short notice. Also at that point we may be willing to spend more money to ramp up the sales to support a full company to realize the true size of this market opportunity. Development Plan To minimize the amount of capital needed up front, the product will be brought to market after a few well planned phases. The intention is that at each phase a major milestone will be achieved that will allow additional capital to be infused into the company (mostly like from friends and family). Phase I (Code Name: FRANK) A prototype of the product is in the final stages of being put together. It runs the alpha version of the software and its hardware is exposed without a casing. This prototype will be used to assess where the software is with respect to development as well as determine what needs to be done with the hardware to make it robust. A list of features has to then be agreed upon and after further development, testing and debugging, the code must be frozen. Phase II (Code Name: CONTAIN FRANK) Once FRANK has been tested and debugged, and the list of features is locked, a box needs to be created to “CONTAIN” FRANK. The purpose is to have the device in a state that can be easily transported from on place to another. Also, it will determine where we are with respect to the external development with regard to the box and interface. The requirements for this device is simple: it must be able to be placed into a courtroom (or courtroom like) environment, and start recording once it is plugged in, turned on and the record button is pressed. Phase III (Code Name: CLONE CONTAINED FRANK) Once Frank is contained the goal is to clone it once or twice and implemented it into a testing environment. Due to cost we may only make one Clone. However, having two or three Clones would allow multiple sites to test the device, and would allow for better discussions with potential sales channel partners.

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Digitalcourt Executive Summary

Development Costs of Phases I, II & III (Need to insert REAL NUMBERS) PHASE

DESCRIPTION

COST

I (FRANK)

Parts: Slime CD Burner ($xyz), 4 amps ($zyz), etc. Development: Finish features (list them), integrate the system, debug, etc. CPU Box ($xyz) Parts for each Clone Contained Frank ($800), etc.

$300

II (CONTAIN) III (CLONE)

$500 $1,000 – $2,000

We may have to give the device in exchange for the testing. If contained frank works well, it is possible we could sell to the testers the clone at or about the cost of parts…assuming it fulfills a need of theirs. PHASE IV (Code Name: “Go to Market”) Once the technology fits the performance and reliability requirements, a robust market version will be engineer designed and manufactured. At this time there is a quote from AQS to do this step for around $13,000. A new team member may be recruited exchanging equity for such services. Once robust version of Digitalcourt is completed, it will be sold to initial customers at full price. Team 1. Description of the team, both in house and contracted out, required to execute this plan. 2. A short description of each member of the team with their background and role with the company. Attach resumes in the index. 3. Any require positions to fill upon success and growth. Timeline (Draft Timeline, need to agree and commit to one…sample one below)

Risk The four bullets represent the four biggest issues that contribute most to the risk of this endeavor:

•

Product Performance Risk: Product performance is not up to expected level initially or over time.

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Digitalcourt Executive Summary

• • •

Resource Risk: Not having the required funding/resources to bring product to the market with respect to design, manufacturing and sales. Marketing Risk: Not being able to break into the market due to credibility issues (i.e., costs more to sale then it costs). Pricing Risk: More competitors like us enter the market driving prices down further.

Major Milestones The major milestones below begin to address the four biggest risks above: 1. Test and get endorsements regarding Cloned Contained Frank’s performance (requires to raise $1,000 to $2,000). 2. Strengthen the engineering design and pass Beta version through thorough performance and durability testing. (Based on testing success, requires to raise potentially around $20K to $25K) 3. Create marketing material and get two to three referenceable paying pilot users using the “Go to Market” device in actual courtrooms. 4. Get two to three customers paying targeted price. 5. Sale enough devices to pay back principle and interest of equity (i.e., either in profit sharing or in a payout.) 6. Start scaling smartly. Advisory Board Management: David Watkins type person, if not him. Manufacturing: AQS VP or Global Operations guy at AlphaSmart type person. Channel: Either court tech implementer or a major distributor…and a university dean. Court user: a judge. Court implementer: tech guy working for judge.

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Digitalcourt Executive Summary Financials (conceptual at this point) High Level Assumptions to use when creating financial sheets. Upfront Costs Engineering Design (e.g., AQS around 130hrs @ $95/hr) We would have four meetings with them, each time refining the inputs and out puts. At the end, they would had over the design.

$13,000

Components (e.g., $1,000/device X 5) Have enough for up to 5 devices. These will be used for proof of concent, beta, performance testing and potentially a pilot (assumes assembly cost is $35 and is included)

$5,000

Marketing Costs TBA (Assume $1,000/device X 5 devices)

$5,000

Incorporating as a Hawaii LLC fees (e.g., around $180 filing fees). Use templace from Mekanismresearch, LLC that cost $600 at a deep discount. Product testing and quality control measures

$200 $500

Total

$23,700

Cost of Sales The cost of selling each device will rely on many factors such as the retail price, the selected channel, the size of accounts we sale to (e.g., one at a time or large orders), etc. Below are some preliminary numbers starting the exercise to understand the cost of sales. VARS Channel Retail price: $4,000 - %5,000 (current retail price: $7,000) Manufacturer’s price: $1,500 - $2,500 (current price: $3,000) VARS profit: roughly 62% to 70% (current profit margin: 57%) Variables to nail down: Sales Channel - Direct: Cost to sale one device = x - Two Tier VARS Channel o Distributor’s % = y o Retailer’s % = Z Retail Price = $xyz Recover Start-up Costs Although getting the device widely distributed allowing the shareholders of Digitalcourt substantial profits is the reason for pursuing this endeavor, special care is taken to reduce the risks of the initial investors. As such, the initial phase of the sales plan

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Digitalcourt Executive Summary has been created with the intention of showing how well Digitalcourt must perform to return all investor’s money back with a 50% profit within a 18 months. Money barrowed: up to $30,000 Profit on barrowed money: $15,000 Total investor payout: $45,000 Profit on each device: around $1,000 Payout trigger: Principle and profit returned (unless people want the debt to convert to equity) when profits reach $60,000. Number of devices to be sold: 60 devices. If the Engineering Design is done in house for equity by a new team member, the start-up investment is significantly reduced and the number of machines required to return investor’s money and profit back is around 20 machines. Conclusion The above business plan is a work in progress. It contains the market research and thinking conducted by Digitalcourt to date. Raising more money sooner makes things go faster and reduce technical and market risks. However, if no money becomes available, it remains possible to continue forward, though at a slower pace, at greater technical risk and with more dilution to the current share holders (giving equity for additional partners). This opportunity seems perfect for a lean and mean company wanting to prove itself, build its member’s experience and knowledge, and to build upon their personal resources for future endeavors (e.g., properly building out QRS).

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