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.

1
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.

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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.

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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
OLD CASSETTE TAPE; NEW MINI-
DISC DIGITAL RECORDING
DIGITAL CD BASED (SOFTWARE AND
HARDWARE STAND ALONE VERSION)
POSSIBLE LOWER COST
COMPETITOR
Digitalcourt’s
Description/Pricing/Etc.
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
Comments and Market Data:
Traditional court recorder, requires expensive tape to CD conversion
process. Their digital recorder requires recording on unpopular mini-
discs. 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
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.

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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. $300
Development: Finish features (list them), integrate
the system, debug, etc.
II (CONTAIN) CPU Box ($xyz) $500
III (CLONE) Parts for each Clone Contained Frank ($800), etc. $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. $200
Product testing and quality control measures $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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