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May 3, 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:
A few of North State Telecommunication’s shareholders have
encouraged the Forum’s suggesting your consideration of an exchange
offer that would allow them to choose a more secure form of
investment in their company, as an alternative to the current common
stock that exposes their capital and income to the recently
undertaken risks of technology competition.
An example of how this might be done would be to authorize a new
class of preferred stock that existing shareholders could elect to
receive in exchange for common stock, with provisions such as these:
§
One-for-one exchange of common-for-preferred
§
$135 per share preferred redemption value (based on
the lower range of market values estimated in a 2009 Balhoff &
Williams analysis,
subject to adjustment for an updated valuation by an independent
expert)
§
$1.50 quarterly ($6.00 annual rate) cumulative
dividend
§
Restriction of common stock dividends to 25% of net
income attributable to common stock (after payment of preferred
stock dividends), unless total book value of stockholders equity is
at least 200% of the redemption value of outstanding preferred stock
§
Limit of exchange to 50% of currently outstanding
shares of common stock (both A and B classes), with exchanges to be
made pro rata if more than 50% of common stock is presented
An exchange structured like this would not only give the investors
selecting preferred stock a more predictable investment, but would
also give those keeping the common stock an enhanced participation
in whatever profits the company generates in excess of the base
allocations to preferred stock. Notably, this example’s increased
$6.00 annual dividend for the preferred stock combined with a
restriction on common stock dividends would actually reduce the
company’s total burden of dividend payments, compared with the
recent $5.20 annual dividends for all currently outstanding shares
of common stock. The shareholders concerned with security therefore
get improved capital protection, and the shareholders interested in
technology competition get more capital available for innovation.
This example is of course presented only for the purpose of
stimulating your thinking about alternatives to address the investor
interests defined in the Forum’s survey of shareholders,
and particularly their concerns about the sustainability of
dividends and risks of technology investments summarized in my April
4 letter.
I look forward to learning how you wish to proceed with this
exploration, and to your advice of how the Forum can most
effectively support your response to shareholder interests.
Sincerely,
The Shareholder Forum
/s
Gary
Lutin, Chairman
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