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April 4, 2011
By email
Mr. C. Hayden McKenzie
Chairman, Board of Directors
North State Telecommunications Corporation
111 North Main Street
High Point, North Carolina 27260
Dear Mr. McKenzie:
For your consideration in addressing shareholder interests at the
annual meeting later this week, investor reactions to North State’s
recently distributed 2010 Operations & Financial Summary seemed to
focus on these issues:
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Sustainability of dividend – Some shareholders
were concerned that 2010 was the second year in a row in which the
company did not generate enough net income to cover its dividends.
Counting just the “regular” $1.30 quarterly dividends, without last
year’s “special one-time dividend,” only 60% of that long-standing
$5.20 annual distribution came from the company’s $3.08 earnings per
share. (Even the theoretical $4.63 “Normalized Earnings Per Share”
reported in your Summary, calculated to eliminate results of
investments and discontinued projects addressed below, would cover
less than 90% of dividends.) This raises the question of how the
company will continue dividend payments at recent levels without
further draining of the company’s previously accumulated capital.
►
Risks of technology investments – The report of
a “one-time charge of $11 million due to the write-down of an
unsuccessful IT project” was viewed by some shareholders as the kind
of investment loss that has to be expected from time to time in a
technology company. This experience makes it clear that the funding
of these experimental projects is actually an essential element of
North State’s planned transformation from a traditional utility to
an innovative technology company. Shareholders therefore need to
know how the company will manage these unpredictable costs without
sacrificing either its capital expenditures for existing service
maintenance or its regular dividends.
These issues are of course related, and should be considered in the
context of the importance of dividends to a very high proportion of
your shareholders who responded to the Forum’s recent survey.
Please let me know how your responses to these issues or any other
shareholder questions, including those presented in the Forum’s
survey, will be made available to shareholders other than the
holders of Class A shares who are allowed to attend this week’s
annual meeting.
Your commitment to improved investor reporting, as promised in your
introduction of the new Operations & Financial Summary, should be
widely appreciated by North State’s shareholders. I will of course
welcome any opportunity for the Forum to support your efforts to
provide all of your shareholders with fair, timely access to the
information they need for their investment decisions.
Sincerely,
The Shareholder Forum
/s
Gary Lutin, Chairman
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