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Forum Report: North State Telecommunications Corporation


Alternatives for More Secure Capital and Dividend Payments

The letter copied below was sent this afternoon to the chairman of North State's board of directors to encourage the company's development of alternatives that would allow shareholders to reduce the exposure of their capital and income to management's recently undertaken risks of technology competition.

The request for a company proposal was supported by a few Forum participants holding over 100,000 shares of North State common stock. It should be noted that while they shared an interest in reducing their investment risk exposure to the company's current strategy, they had different views of the most effective way to achieve that objective. The views of other North State shareholders are also expected to vary, and your comments will be welcomed to guide this exploration.

GL – May 3, 2011


Gary Lutin

Chairman, The Shareholder Forum

c/o Lutin & Company, 575 Madison Avenue, New York, New York 10022

Tel: 212-605-0335



The Shareholder Forum

c/o Lutin & Company

575 Madison Avenue – 10th Floor, New York, New York 10022

Telephone: (212) 605-0335


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,[1] 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,[2] and particularly their concerns about the sustainability of dividends and risks of technology investments summarized in my April 4 letter.[3] 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.


The Shareholder Forum



Gary Lutin, Chairman

is managed by

The Shareholder Forum, Inc.



This Forum program is open to all shareholders of North State Telecommunications Corporation, and to any fiduciaries or professionals concerned with their investment decisions. Participation is free of charge, according to the Forum's standard Conditions of Participation.

The purpose of the program is to provide shareholders with access to information and a free exchange of views relating to their consideration of issues described in the Forum Summary. As stated in the Conditions, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants. Forum polices are intended to support anonymous communication, and provide that participants will not be identified or quoted without their explicit permission.

Inquiries and requests to be included in the Forum's distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.