NCT Group, Inc. (NCTI)
Interview with:
Michael J. Parrella, Chairman
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
patent-pending software-based technology that accelerates data transmission over any existing communications link, routinely delivers a 5X speed improvement over 56 Kbs dial-up connections and wireless mobile telephones.

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NCT Group is experiencing significant growth patterns in their Artera Group subsidiary that focuses on optimizing the Internet and enterprise networks

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Electronic INST. & Controls

NCT Group, Inc.

20 Ketchum Street
Westport, CT 06880
Phone: 203-226-4447

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Michael J. Parrella

Interview conducted by:
Diane Reynolds
Associate Publisher
September 2004

Mr. Parrella
is currently Chairman and Chief Executive Officer of NCT Group, Inc. He has led the TAPS Division of Informatics General Corporation, a engaged in the development and marketing of systems software. Informatics acquired the TAPS product line from Decision Strategies Corporation; a company established and owned by MR. Parrella. As an entrepreneur and inventor with a computer systems background, Mr. Parrella has been involved in several High-technology start-up ventures during his career. Mr. Parrella is a true visionary who has transformed anti-noise technology from a laboratory science into a marketable commodity. Under his direction, NCT has built one of the largest intellectual property portfolios in the industry. NCT technology is now available in a wide range of consumer, commercial and industrial products.

Company Profile:
NCT Group, Inc. is a publicly-traded, high-tech company with a strong technology base. NCTI is rich in intellectual property with 595 patents and related rights. The company’s major focus is the development of its communications subsidiaries. Artera Group, Inc. is the developer of patent-pending software-based technology that accelerates data transmission over any existing communications link. As a “Virtual Bandwidth” solution, Artera Turbo routinely delivers a 5X speed improvement over 56 Kbs dial-up connections and wireless mobile telephones. The technology also speeds ISDN, DSL, T1/E1, cable and satellite links. For residential and small business use, Artera Turbo service optimizes all web traffic, all email protocols and Native File Transfer Protocol (FTP) uploads and download. For enterprises and extended range of protocols are optimized. Artera Turbo residential service also includes an ultra-secure firewall and parental control features. For enterprises, government agencies and other large networks, application of Artera Turbo technology results in a 70%-85% reduction in bandwidth consumption for web-based applications, yielding significantly increased network capacity with virtually no capital expenditure. PRO Tech Communications, Inc. (OTCBB: PCTU) is a manufacturer fo headsets and other communications products for a variety of applications. Pro Tech is currently a leader in headsets for the fast food market and has a strategic agreement with the McDonald’s Corporation. In addition to expanding its product lines to address the rapidly-growing telephony, multimedia and cellular markets, PRO Tech is developing products for other applications including consumer audio, industrial safety, spectator racing, two-way radio communications and aviation. NCTI also has strategic licensing relationships with manufacturers for integration of certain NCTI technologies into products and applications.

CEOCFOinterviews: Mr. Parrella, please tell our readers a little bit about the company.

Mr. Parrella: “NCT Group Inc. is a company that has approximately 600 patents on a worldwide basis. We exploit the value of those patents by either licensing them or creating subsidiary companies that exploit the patents by developing them to third parties for particular markets. NCTT’S main focus is on communications technology.”

CEOCFOinterviews: What are these patents in relation to?

Mr. Parrella: ‘Many of our patents relate to various form of noise cancellation. One area is cancellation of noise and vibration by using anti-noise and anti-vibration waveforms. Another is the cancellation of noise within communications, both echo and noise. For example, on a noisy communications line we actually take the noise out and leave the voice. That applies to all forms of telephony and voice recording. Yet another area is the cancellation of noise for individuals by using headsets and earplugs where we cancel the noise when an individual is in a noisy environment. Some of our more recent patents pending are in the area of networking technologies, which is the focus of our Artera subsidiary. With Artera Turbo we can both speed up the network and make the network more cost effective. Those are basically the fundamental technologies that we have in our patent pool.”

CECCFOinterviews: Communications, media and technology; out of those areas where is the majority of your growth coming from?

Mr. Parrella: “Right now we are focused on communications, specifically through our Artera subsidiary. Artera is the developer of proprietary Internet accelerations and optimization technologies for residential users, small businesses, enterprises, government agencies and service providers. As a “Virtual Bandwidth” solution, Artera Turbo™ routinely achieves speeds equivalent to broadband over standard dial-up (56 Kbs) connections and wireless mobile telephones, a 5X speed improvement. Performance improvements by up to a factor of five are also achieved over ISDN, DSL, T1/E1, cable and even satellite links. When we apply Artera Turbo to broadband networks we reduce bandwidth consumption by 70%-85%, yielding significantly increased network capacity with virtually no capital expenditure. This is very compelling for business networks because the optimization techniques we employ are equally effective for both Internet and private Intranet traffic. Also, for ISPs, Artera technology can be applied simultaneously to the network and used by subscribers which significantly impacts EBITDA per subscriber. This is a very exciting area for our company, and we expect some pretty significant growth in this subsidiary.”

CEOCFOinterviews: I noticed much of your company news is about Artera Group.

Mr. Parrella: “If you think about it, let’s take any example you want, say India. India has 250-260 million potential Internet users right now. They have an incredibly weak infrastructure for delivering services to both corporations and residential because their telephony infrastructure has to be redone. So we deliver tremendous value to a country like India. The same goes for China or any of the South American countries where you go in with a product and change the entire EBITDA of a service provider. With Artera Turbo, we can deliver the same results, eliminate 70-85% of the bandwidth cost and improve the speed at the same time within 2-5x. This is done just by installing the right software in the network, and that is what we have developed. It’s quite a breakthrough and we feel it is going to provide significant shareholder value appreciation in the next 12-24 months.”

CEOCFOinterviews: I noticed on your financial reports, it was a little lower than the past, what contributed to this?

Mr. Parrella: “Over the past few years we had a lot of up front licensing revenues, such as from NXT, which were amortized over a specified period of time. A lot of those contracts are coming into volume production. As those upfront license fees become fully recognized the license revenue recognized from such agreements declined as royalty revenue began to increase. So what you are seeing now is the metamorphosis of our company from a licensing environment to an operational product royalty revenue environment where the revenues each month are increasing and will get to a point where our operational revenues will be in the black. From that moment on we will be eff3ectively converted from an R&D company to a real operational company with positive cash flows and good messages to deliver to our shareholders.”

CEOCFOinterviews: You also mentioned in the press release that you believe that one subsidiary should have an improvement in the next quarter or two.

Mr. Parrella: “Pro Tech Communications, Inc. is a subsidiary focused on headsets and other communications products. What we’ve done with Pro Tech is granted them an expanded license to over 50 patents, patents pending and innovations relating to active noise reduction (ANR) and noise and echo cancellation. The license now encompasses all styles of headsets, which is an expansion from lightweight, open back styles, including headphones, earmuffs, earbuds, earplugs, etc. It also includes all markets including lightweight cellular, multimedia, telephony, consumer audio, industrial safety, spectator racing, two-way radio communications and aviation. We well now be bringing them into the marketplaces where they can compete with technologies that no one else has. You will see some significant changes and improvements in the next several quarters.”

CEOCFOinterviews: Out of all of the subsidiaries, how are you helping them financially?

Mr. Parrella: “In most cases, we fund them. We fund their operations until they are in a position to produce their own positive cash flows. In the case of the Pro Tech they are pretty close to that right now. In the case of one of our other subsidiaries we will be getting there. We typically fund them like an incubator would until they get into a place where their cash flows are making them self-sustaining.”

CEOCFOinterviews: As far as their marketing strategies and manufacturing abilities, do you leave them alone on that or do you have a large input on that area as well?

Mr. Parrella: “When you look at manufacturing, where do you think people manufacturing today? China. If you are saying do we use our contacts in China that we have developed over the years to help each of our subsidiaries, then the answer is yes. We help them from the perspective of setting up initial contacts from the Chinese manufacturers and help them set up the deals, and then we leave them alone and it is a matter of executing, building inventory, putting it on the boat, getting it over here and getting it to the distribution channels.”

CEOCFOinterviews: With all of the conflict in the government right now, about outsourcing and using other countries and taking jobs away from the people here in the United States, has any of this affected you or do you see this affecting this company in the future?

Mr. Parrella: “No, I don’t think so. The issue is where can you make the products with quality at the cheapest prices?  Right now the answer is China. If you are looking at all of the major corporations, they are doing their manufacturing in China. The United States has to look to other areas to develop its autonomy like maintaining its leadership in the information revolution. To become more competitive in the manufacturing they have to use more advanced ways of making things to compete with the low prices of China and everywhere else in Asia. I prefer getting our manufacturing contracts in the United States, but how do I stay competitive if I do that?”

CEOCFOinterviews: All of the subsidiaries do have competition in the different areas that they represent, whether it may be headphone, the NoiseBuster®, or whatever area, how are they competing with the other larger companies?

Mr. Parrella: “One of the main reasons for patenting technology is to protect some technological differentiation you have created. In our focus areas, we have differentiating technologies and therefore we can compete effectively.”

CEOCFOinterviews: How much longer do you have the patents for?

Mr. Parrella: “Some of the patents haven’t been granted yet. Usually I would say on an average between 12-17 years.”

CEOCFOinterviews: Since you have come to this company what would you consider being your biggest challenge as far as getting these subsidiaries together?

Mr. Parrella: “I think our biggest accomplishment was making this company survive during the biggest dot com collapse in the last 3 years. When the dot coms all went out of business, hundreds of companies had to declare bankruptcy because they couldn’t acquire any capital they needed for their growth. An incubator like us needs capital to develop its subsidiaries and the capital just wasn’t available so we had to get creative and had to findsources of capital where a lot of other companies weren’t able to. I credit that to my management team, myself, and our employees that we got through that in a very effective way and we are now able to deliver some very exciting products to the marketplace that I think will significantly change shareholder value.”

CEOCFOinterviews: I saw that happen and knew there was going to be a crunch. You then knew who were the good companies and the ones who were going to survive.

Mr. Parrella: “The ability to continue to develop your technology and bring it to a state of market readiness when sources of capital have dried up is very difficult to do. I think it has impacted America’s entrepreneurship very much by not having sources of capital. I also feel the dot com era was one where people lost focus. It was more hpye than reality and when the hype was disclosed everyone else was damaged because the capital world went into a spin. It is just getting out of that spin right now and I think surviving that period was quite a challenge.”

CEOCFOinterviews: It is a slow precess coming out of it. Lots of people geared away from those companies because they didn’t know who was going to be around when the dirt cleared and I think that it is slowly coming around but NCT Group is not the only one in this position who has subsidiaries and are building on that. There are other companies doing that. What makes this company unique in this area?

Mr. Parrella: “I think it’s the nature of the technologies we have and the nature of the needs that those technologies meet. However, selling technology is not what we do—we are really selling the opportunity for substantial cost savings. When you can translate your technology into significant savings and significant benefits where it impacts an EBITDA ten the technology gets itself quite readily accepted. Let me give you an example. You have a satellite and the satellite has a fixed bandwidth asset and the satellite is delivering over the Internet. You can take that fixed bandwidth asset and you can handle five times the number of subscribers in that fixed asset, and increase the speed three to five times. That changes the whole EBITDA return on the investment for that asset called a satellite, so if we go in there and prove by simply demonstrating to that satellite company who now has a million subscribers that they can have five million subscribers on the same exact satellite it completely changes the financial characteristics of the satellite company. That is what we can do. When you can do that and demonstrate that, then you have a product that is going to change the nature of return on investment on Internet delivery or communications delivery. That is what we do, we prove it, we demo it, we trial it for anyone who wants to and when you bring those kinds of financial forces to a balance sheet and to a P&L statement, we will be successful.”


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