威訊通訊 (VZ) 2002 Q3 法說會逐字稿

Good morning and welcome to the RCC third quarter financial release teleconference.

This call is being recorded.

If you do have any any objections, disconnect at this time.

Your lines have been placed on listen-only mode until the question and answer segment of today's call.

I would now like to introduce Mr. Chris Boraas, Director of Investor Relations.

Thank you sir.

You may begin.

Good morning, everyone.

I would like to remind you this is being broadcast live at our web site at www.rccc.com.

An archive will also be available in our investor relations section of the web site.

In addition, the dial-in replay will be available through November 22, 2002, after the completion of this call.

The required information to log onto these replay is included in the press release.

A form 8 K will be also filed today including the exhibits from today's conference and our third quarter financial press release.

Tomorrow, of course, we plan to file our third quarter form 10-Q.

Presenting this morning will be Richard Ekstrand, RCC's President and CEO and Wesley Schultz, RCC's Chief Financial Officer.

Following opening remarks, Rick, Wes, and Ann Newhall, RCC's Chief Operating Officer will be available to take your questions.

Before we begin, I want to state any comments about RCC's future prospects are forward looking and therefore involve certain risks and uncertainties.

Including but not limited to competitive considerations.

Successful customer enrollments and retention initiatives, ability to increase wireless usage and reduce customer acquisition costs.

Successful integration and required operations with RCC's existing operations.

Ability to negotiate favorable roaming agreements, ability to service debt, the revolution of certain network technologies issues and other factors that occur from time to time in RCC's Form 10-K through December 31, 2001, and other filings with the Securities and Exchange Commission.

With that, I'll turn it over to Rick Ekstrand.

Thanks, Chris.

Good morning, everyone.

We are faced today with a lot of questions in the telecommunications industry.

This difficult time is on the heels of the unmet expectations of the dot-com boom, a national recession, growing corporate distrust coupled with the world concerns regarding the potential for war in the Middle East.

I've heard some refer to this convergence of events as the perfect storm.

Yet, we are a determined and resolute group and intend to keep talking about our business, which continues to go beyond words and projections, demonstrating solid financial performance that consistently outperforms its peers.

To once again with much going on outside of our control we continue to stay focused on running our business, including bringing continued efficiency to operations, building and positioning networks for the future, growing and keeping the right customers and generating increasing cash flow through these actions.

Our operating and EBITDA margins have historically been strong and the among the best in the industry and this quarter's EBITDA margin of 49% highlights this once again.

Going into next year, we will continue to focus on operations and look forward to even greater efficiencies.

From a network evolution standpoint we are evaluating our alternatives for next generation services.

At the same time we are continuing to strengthen our existing networks through cell site construction while also deploying government mandated services such as E 911.

We remain confident that the continuity of existing roaming relationships together with created uses of technology will result in a stable roaming environment and quite possibly an opportunity to expand our roaming revenues.

As discussed last quarter, we have signed agreements with national roaming partners positioning RCC for the continuation of solid roaming revenue in 2003 and beyond.

We continue to see increased competition in each of our regions with our decentralized approach, our management teams are well positioned to move quickly.

Understanding that rural penetration lags metro areas, we continue to see upside as we attract new customers.

Having said this, our robust networks often end up giving us a competitive edge in our service areas.

Our customers would rather have a phone that works wherever they go rather than a phone from a provider with glitzy promotions but spotty coverage.

As evidenced by the anticipated completion during the fourth quarter of 40 additional new cell sites, our network continues to be a strategic focus.

Although limited PCS overbuilds in our service areas are likely for national players, there are some very good arguments against comprehensive over building of rural areas with the PCS spectrum.

Today's difficult capital markets together with required capital expenditures necessary for next generation deployment in urban areas continues to [INAUDIBLE] in over building rural markets.

Also contributing to our momentum is wire line replacement.

As already highlighted for us by several wire line releases this quarter, wireless continues to grow as a preferred voice communications solution.

We also look forward to making continued progress in our ETC efforts.

Our previously announced authorization in Washington State, together with the headway made in other states, positions ETC to make a meaningful impact in our financial performance in 2003.

Under our -- understanding our strategies is useful, I'd also like to point out some qualities that are somewhat unique to our company and position us for the long haul.

RCC operations are strong.

With many wireless companies just breaking into EBITDA positive performance, we have been EBITDA positive for many years producing industry-leading margins.

More importantly, we are positive free cash flow and have been for five consecutive quarters.

As you can see on the cash line item of our balance sheet, we have increased our cash reserves through operations by approximately $19 million in the third quarter and already positioned to meet next year's required debt amortization.

Although the fourth quarter of next year presents a challenging step down in our credit facilities total debt leverage ratio, we continue to anticipate being in compliance with all of our covenants through 2003.

Because of this and our track record of success, our relationship with our bank group is strong in spite of today's challenging capital markets.

Regarding customer growth, it is important for you to appreciate that RCC is selective in its customer growth and does not have bank covenants that require customer growth at any cost.

We are not burdened with low credit quality customers.

Our consistently strong retention levels together with low levels of bad debt reflect this strategy.

So in summary, when you stand back and look at RCC and the options available to us, you have to appreciate the fact that, number one, we have options and number two, one option is to run the business steady as she goes.

RCC is positioned to weather this storm, grow its business and achieve profitability.

Now on that note I want to thank our employees for their dedication and hard work.

It's not easy, but once again with all their efforts we have a great company and another solid quarter under our belt.

With that I'll turn it over to Wesley Shultz, our CFO for our financial wrap-up of the third quarter.

Thank you Rick.

This quarter's EBITDA once again exceeded market expectations coming in at $60.7 million.

The first $60 million quarter in the company's history.

Also this quarter's 49% EBITDA margins ranks as one of the best in the industry.

Year to date free cash flow is also ahead of last year by 158%.

To put it another way we are continuing to take in more cash than we spend, which resulted in approximately $19 million of positive free cash flow during the quarter and $63 million year to date.

In fact we have had positive free cash flow in nine out of the past 11 quarters.

Contributing to our excellent financial results were strong roaming revenues.

We appreciate these reliable revenue streams and are pleased with the roaming agreements we have with national carriers such as AT&T, Verizon, Cingular, Sprint and T-mobile.

These agreements provide us the opportunity for continued long-term growth in roaming revenues.

As we indicated in our second quarter call, we expected third quarter roaming revenues to decline, which they did.

This makes the 7% increase in year-over-year EBITDA growth even more meaningful.

Our average per minute roaming yield for the third quarter was 27 cents this year compared with 36 cents last year while minutes increased approximately 30% over last year.

Resulting in a decline in revenue as we discussed last quarter is expected to be offset in the near future by continued increases in minutes and, having said that, we expect to see fourth quarter roaming revenues at or slightly more than last year.

In-collect minutes continue to grow yet as we have talked about in previous calls the increase in minutes has been more than offset by declines in our cost per minute.

For the third quarter average in collect costs per minute was 17 cents compared to 24 cents last year, resulting in in-collect expense for the quarter declining to 12.7 million.

Before we get too far into the expense detail of the P&L, I'm pleased to highlight that network costs and SG&A added together decreased by 9% year over year.

Network cost as a percentage of total revenues decreased to 20% compared to 22% last year.

SG&A also continues to decline as a percentage of total revenues coming in at 23% compared with 25% last year.

This decline is largely tied to lower bad debt expense and other cost reduction initiatives.

Our bad debt expense decreased this quarter to 2 million from 4.6 million during the third quarter last year.

With our strong performance during the first nine months of this year we are comfortable once again increasing our EBITDA guidance for the year from 215 million to approximately 217 million.

Clearly in excess of the original guidance of $211 million.

Now let's talk about customers.

During the third quarter we had a one-time customer reclassification of 3,125 customers from post-paid to wholesale.

This reclassification consistently categorizes our different customer groups within our four regions and with a result of amending our contract with one of our wholesale customers.

Without this one-time adjustment, it was approximately 7800 for the quarter as compared to a negative 900 during last year's third quarter.

We had 44,000 post-paid gross ads this quarter which is consistent with the two previous quarters this year.

Our focus as we discussed in the past and continue to demonstrate is obtaining quality post paid customers.

Our prepaid customer base declined by 6300 this quarter.

Digital customers now account for approximately 74% of the total customer base.

Year to date capital expenditures have been 41 1/2 million and we expect to spend an additional 25 million during the fourth quarter.

Much of the capital allocation this quarter and next is for new cell site construction.

As Rick mentioned we expect to turn up approximately 40 additional cell sites during the fourth quarter.

At September 30 of this year we had 712 cell sites as compared to 684 at the beginning of the year.

As we stated in our last call we expected to discontinue using our phone leasing program in the third quarter of this year, which we did and we do not expect to use it in the fourth quarter of this year.

At the end of the third quarter we had 794 million outstanding under our credit facility with an additional 259 million available under the revolver.

RCC is in compliance with all of its bank covenants.

Regarding our status with NASDAQ we announced on October 10 that we had received a NASDAQ staff determination indicating the company does not comply with the minimum bid price requirements and its common shares are subject to delisting.

We have requested a hearing before a NASDAQ listing qualifications panel to review this determination.

We received confirmation from NASDAQ establishing a hearing date of November 22 for this hearing.

There can be no assurance the panel will grant our request for continued listing.

If we do not prevail our common stock would likely be quoted on the OTC bulletin board.

And now for some accounting matters, as we discussed in August on our last call, it was determined that some of our derivative and hedge instruments did not qualify for hedge accounting treatment under statement of financial accounting standards No. 133.

Subsequent to this, and as we discussed in our second quarter 10-Q we decided to have Deloitte & Touche, independent auditors, perform an audit of our 2001 financial statements.

It is now complete subject to final review procedures by Deloitte Touche.

I'm pleased to report there were no adjustments relative to operations or cash.

There were also no adjustments made to revenue, operating income or EBITDA from the numbers we had previously reported.

However, it was discovered that some additional hedges did not qualify for hedge accounting treatment under FAS 133.

As a result, 2001 interest expense will increase by approximately 15.2 million to reflect this noncash adjustment.

A correction was also made to our calculation for the noncash dividends on our class M preferred stock to reflect the compound effect of previous dividend accruals.

We plan to amend our 2001 annual report on Form 10-Q K and our 2002 first and second quarter 10-Qs to reflect these changes.

I think it's important again to point out there were no adjustments to any operational aspects of our business affecting revenue, operating income or EBITDA and the adjustments taken were all noncash items.

In addition, these changes will not impact any debt-related covenants contained in our credit facility.

I would encourage you to review our third quarter 10-Q which we expect to file tomorrow for further explanation of these restatements.

Because of the increased potential for noncash interest volatility in our interest expense line item we are now reporting free cash flow excluding noncash interest expense.

We believe this will give investors a more accurate measurement of the free cash flow generated during the quarter.

Moving on, we are nearing completion of the second phase of our evaluation to determine the amount of impairment to certain assets according to SFAS 142 and anticipate taking a noncash charge of approximately $420 million retroactive to the first quarter of 2002.

This charge will be included in the restated 10-Qs that we previously discussed.

If we are unable to complete this evaluation prior to tomorrow's expected filing of our 10-Q, we will need to amend the third quarter 10-Q as well.

Going forward, we will evaluate these assets for impairment annually in the fourth quarter using the fair value approach.

Thank you and I will now turn the teleconference back to Michelle, who will poll you for any questions you may have.

Thank you, sir.

If you do have any questions press star one on your touch tone phones.

Your questions will be taken in the order they are received.

Again, star one if you do have any questions.

Pat Dison, you may ask your question.

Pat Dison Credit Suisse First Boston.

Had a few questions this morning.

First, could you give us any sense as far as your timetable for determining when you will endeavor towards the technology upgrade and in that vein, can you give us a sense as far as what maintenance Cap Ex would be in '03 and potentially again when you would expect to make the technology upgrade decision.

Secondly, again stepping back a little bit, if you could give us your characterization of how growth will occur on the EBITDA line given the fact that roaming revenue has ticked down here year-over-year and likely will do so over the next few years and then finally just from the preferred dividend standpoint, if you could update us on your present thoughts as far as how you'll address the preferred dividend, the preferred stock cash paid next year, thanks.

This is Ann Newhall.

I'll address the first question and refer to Wes for the other two.

With respect to when we will make our technology upgrade decision, we are in the midst of working on that now, particularly as we are engaged in designing our 2003 business plan and budget.

As we have said in prior calls, our conversations with our roaming partners are ongoing and were developing the details of what our arrangements might be with them as we have said, we feel that what is driving our timing of deployment is the activities of our roaming partners and agreements with them and their progress in their market as opposed to a specific need for our customers at this time.

So, I would say that as far as a possible times for deployment, while we're still working on that decision, it would not be before the -- towards the end of 2003 or in 2004.

You -- just to follow up on that, you would expect that would likely be more on a region by region basis and spread out over a couple of years?

Oh, definitely.

I'll try to address the EBITDA growth question that you had.

I think it's important to point out that in the third quarter as we show on our P&L, we actually had declining roaming revenues and yet EBITDA grew by approximately 7% so the opportunity for us to continue to grow EBITDA isn't entirely dependent on the growing of roaming revenues.

Having said that, one of the views that our company certainly has is roaming revenues are not automatically going to decline.

We see them a lot more stable and with the opportunity for growth within our roaming revenue line items that I think are probably different from what some people view.

So, while we are not in a position right now that would indicate we are saying roaming revenues will decline.

We also believe there are other opportunities to grow revenues, through voice usage but as we talked about or Rick talked about, ETC, we are gaining momentum there.

We believe we will get ETC status in more than the one state we have currently in Washington State even before the end of the year and we anticipate that ETC will have a more meaningful impact on the revenues as early as 2003 but certainly as it grows into the year subsequent to that.

We also believe the data revenue opportunities are available to us, certainly we have just recently begun having the ability to charge for SMS messages and we have seen some very encouraging uptick in usage for SMS and we think that that is a revenue source for us as well as various other data services that in time will provide additional revenue opportunities for us.

So having said all of that, we do believe that EBITDA is going to continue to grow, we do not believe EBITDA will go down next year as compared to this year and although we aren't anticipating double digit kinds of growth we do believe we will continue to see EBITDA growth.

As it relates to your question on preferred dividends, everyone knows that our senior preferred stock has been on a picking basis.

It will be able to be picked through the may dividend next year, so starting with the August dividend there are two dividends that potentially would be cash pay next year.

We will continue to evaluate what makes the most sense for the company as we get nearer to that date, but our intentions, as they always have been, have been to honor the -- our agreements, and we are going on that basis but we'll continue to evaluate what makes the most sense if our company at that time.

Okay, great, thanks.

Bill Heffron, you may ask your question.

Please state your company name.

Regimen capital.

Can you just provided a little bit more color on reclassifying the 3,000 customers from post paid to wholesale and what that's all about and what are the implications and potential for more of that to come?

This is Ann again.

What we did was reclassify some wholesale customers when a number of companies don't make a clear distinction between retail and wholesale customers.

We always have.

However, in one of our properties that was acquired with the Tritan acquisition, they had a special contract with one of our wholesale customers that had a very high access rate for a wholesale customer, access rate that was very comparable to the type of retail plans that we sold.

And as a result of renegotiating a contract overall for our entire company, with that particular wholesale customer, those rates were adjusted, we felt they were no longer comparable to what our retail rate was and so they should be reflected as a wholesale -- as a wholesale customer in our account.

We have only a limited number of wholesale customers, of course.

Three or four with a number of their own retail customers, but we don't anticipate a similar type of reclassification of any wholesale customer anywhere else.

Thank you.

Would you like to go to the next question?

Yes.

Anthony Clearman, you may ask your question.

Please state your company name.

Deutsche Bank.

Just a follow-up question to the earlier question on the preferred.

Are there any restrictive covenants in either your bank facility or bond indentures which would limit your ability to pay a cash dividend even if you chose to do so unless you met certain liquidity or other types of tests?

No, there are not.

There are no restrictions in either our bank or our other securities that would preclude that from being able to be paid.

Thank you.

Thank you.

Once again, star one if you have any questions.

Adam Tuckman, you may ask your question and state your company name.

Adam Tuckman, Goldman Tree, quick question on the subs, did all of the clusters contribute positive net ads and if not, which ones didn't?

We have not usually differentiated between our regional information as to whole company information.

What I can say about it is that we seem to have -- although we have differences from time to time in the rate of customer addition across our regions, in the last couple of quarters we have had strong contribution from all of the regions.

So you're not seeing any difference across the regions?

I see differences every month across the regions, but they change as to which region they are depending on the factors of competition and economics from those regions.

Adam, I'll add a little color to that, Ann maybe wasn't willing to.

All of our regions had positive post paid net ads for the quarter.

Terrific.

The second thing is.

What kind of steps are you guys taking to increase subscriber growth without sacrificing RPO?

I know you're sensitive to adding strong customers only.

Well, I guess I would say that what we do are typical steps, in that when we have a customer who would like service from us, we do credit checks, we have standards as to how we bring those customers on board as far as requiring deposits or requiring the types of plan they're involved with and also the sales and discovery process, as we call it, with the customer, understanding what type of plan that customer will need and explaining the type of plan to them so each customer has the ability to understand what charges they will incur and to control their usage appropriately, and we found that that's one of the strongest ways to make sure we have a customer that unders things.

Yeah, this is Rick Ekstrand.

Earlier this year we endeavored on a program to enhance our sales training efforts in a number of our regions taking time tested and proven efforts in -- that we have used in other region regions and spread across the company, allowing our sales force and agents as everyone on the call knows, are very important to us, to become more professional, more adept at the sales process itself.

So we, through training, through additional retail stores, and outlets and just a refinement of our system, it's an ongoing process of running our business in terms of looking at marketing, looking at distribution, training people, and continuing to evolve our team in a productive manner.

So we are very confident and comfortable in that process and again we have been doing that for a long time, and over the years it's proved successful and we have every confidence it will be successful now.

Thanks, guys.

Good quarter.

Thank you.

Todd Rethemeir, ask your question and please state your name.

Todd Rethemeir from Bear Stearns.

Can you tell us how many total growth ads you had in the quarter and what would you estimate your market share is of those growth ads?

Related to that do you see any competitors that are stronger than others?

I'll answer the numbers part of this and then I'll let Ann perhaps help you with the second half of your questions.

We talked about post-paid gross ads were approximately 44,000 for the quarter which is pretty similar to what we have had in each of the preceding two quarters this year.

As far as do we see any competitors stronger than others, that's an interesting question.

The answer probably varies by each region and by each month or quarter with what's going on with the competition.

I guess I would say that what we see is we don't see any competition slacking off.

In other words, we face at least several competitors in each one of our markets, and they all seem to be very vigorous now, as all carriers gear up for fourth quarter, which is usually a very busy time for all of us.

Okay, thanks.

Wes, could you tell us what the gross ads were in the other segments, prepaid and wholesale?

In both -- in the wholesale we do it really just essentially on a net basis, so we don't have gross per se.

We reported wholesale customers of 47,751 as of the end of the third quarter.

We had 42,252 at the end of the second quarter.

Obviously there was the 3125 adjustment.

So whatever is the additional number would need to be there to get us to the 47,751.

I don't have that math right in front of me, but it looks like it would be additional customers added during the quarter, a little over 2,000.

As far as prepaid is concerned, we really have been de-emphasizing prepaid as a part of our service offering.

Obviously it has its place, it's useful to put in place where credit worthiness, per se, of a customer wouldn't allow us to give the customer service without a pretty high deposit or what have you.

It has its place, but it's not where our emphasis has been.

For the quarter it looks like we had approximately 4500 gross adds in prepaid.

Thank you.

Thank you.

Oliver Volinn, you may ask your question.

Please state your company name.

Invesco.

My going back to the subscriber reclassification, I was wondering if you could tell us how many retail subs that you have that are still arguably wholesale?

In other words, that you don't have the direct customer relationship, and if you can't give the number, if you could talk about how you actually go through the decision process of identifying something as wholesale or not.

It sounds like you use an equivalent subscriber method, if you could talk about that for a second?

The first question is easy, zero customers.

We have no -- no other customers that would be in this particular situation.

And as to the second question of whether we use a formula of equivalent subscribers, no, we don't.

We have one special situation as a result of an acquisition with an unusually high access rate for a wholesale customer.

The prior owner had classified him as a regular post-paid customer.

So we did for a period of time too until we looked back at it and decided it would be fairer to reflect it the way we are this quarter and decided to make the change.

There are three customers that comprise all of our wholesale customers.

At least one of them most carriers, I would submit, would probably consider them as customers under the methodology they used to report the number of customers they have.

As we have for a number of quarters now, we just have felt more comfortable showing wholesale as a separate category because obviously we have a lot less control over what happens to those customers at some point in time.

We have seen some of the other carriers in the last couple of quarters have customer count challenges because of some of their wholesale customer group.

That is precisely why we felt it was very important for us to treat wholesale as a separate category of customers, not to have it end up distorting what our retail customer base was.

But as Ann had indicated, it's really simple.

We believe we have now taken all customers out of the post and prepaid that we report from any of those traditional wholesale customer groups.

Could I ask a question on the alliance, the Voice Stream JV, which is Voice Stream's been doing a lot of marketing and push in terms of adding subscribers or at least in a couple markets like California and New York.

I was wondering if you've seen any concerted effort in your properties to do likewise or what the outlook is in terms of adding subscribers there, in terms of growing the base and what sort of T mobile's outlook is in terms of increasing that part of the business?

Well, the wireless alliance, which is our joint venture with Voice Stream, now T mobile, is -- our property was 700,000 pops which we operate and which we control the marketing and the customer and all the rest of.

They do not have overlapping spectrums in those markets, so they are not competing against us or seeking customers in those particular markets.

Now having said that, we have seen this year very positive net add growth in the wireless alliance and clear uptick in that particular group of markets for us that's been very positive and encouraging.

Also we benefit from a roaming arrangement with Voice Stream that resulted in, as we reported last quarter, a settlement where we received some payments for prior periods but on a continuing, go-forward basis we have seen positive EBITDA in that joint venture and growing revenue as a result of their growing customer base in many other areas.

Also we market under our own brand there, which is Unicell, we do not market under the T mobile brand.

Thank you.

Thank you.

Robert Hague, you may ask your question, please state your company name.

Invesco in Denver.

I was wondering if you could give us some additional information.

You mentioned fourth quarter of 2003 that there is some challenging step-downs in your credit facility credit ratios.

Can you provide more color or commentary on that?

Also if you have anything else to say about the ETC efforts in Washington, where you stand, what kind of momentum, et cetera, you might be seeing, thank you.

Robert, I'll try to help you on the first question.

The stepdown that we are talking about that is obviously clear from our credit facility that is public information is that we stepped down from a total average of 575 at the end of the quarter to five times at the end of the fourth quarter.

Even now our second and third quarters have historically been our strongest quarters and we would anticipate they would continue to be that way.

So when you look at it from a fourth quarter perspective, that presents a challenge to us obviously.

At this point in time as we had indicated based on our current assumptions, our current expectations, we believe we will be within compliance throughout that period of time.

Having said that, it is going to be tight, it is going to be very close, based on our current thinking.

With respect to the ETC efforts in Washington, we have been granted ETC status in Washington state.

We are actively marketing and working in the areas that provide us support from the universal service funds and expect revenues from those funds to begin to flow first quarter next year.

Also we are heavily engaged internally in making sure all of our customer databases are complete, with the correct i.d. files for our customers so that as each area gets the proper ETC authorization, we will have the customer base and information ready to immediately and properly file in order to start the revenue flows as promptly as possible.

Thank you.

Just as a additional comment where I left off, obviously we are talking at total leverage at five times.

That is at much, much lower levels than some of the other leverage levels that companies are currently dealing with banks to get amendments with.

We believe the fact that we are at a five times leverage instead of eight or nine times leverage puts us in a completely different position, if it comes to that, dealing with our banks.

In the meantime, we have over a year in order to do various things to help make that five times test make that much easier for us to comply with.

And just to clarify, that leverage test is X preferred, correct?

That is not including preferred,us the high yield and bank debt.

Excellent.

Thank you.

Thank you.

Dimitri Fakon, you may state your question and company name.

It's Gobelli and Company.

Good morning, guys.

Couple questions for you.

Just from the income statements, it seems like given the gross adds equipment sales were a little higher than I expected.

I was wondering if you changed the pricing policy on the handsets and second question is, going back to the -- I guess the next generation technology questions, that you were asked before, how should we think about it conceptually.

I understand you're not going to be doing anything until probably the end of next year, given what some of your peers have done, in terms of your roaming being exposed to AT&T and Verizon with different technology path, is it conceivable that you are going to try to migrate to GSM and CGMA given your 25 Meg Hertz of spectrum or you're just going to stick with one technology?

Obviously the cost will depend on that as well.

And then one follow-up question after that.

On the pricing policy of the happened sets, the biggest issue that changed between second quarter and third quarter is in third quarter we did not use our phone leasing program.

We talked about that at the end of the second quarter we wouldn't do that.

So that's the biggest difference between second and third quarter, is that the vast majority of our customers that came on in the second quarter are -- or even migrated in the second quarter from some one plan to the next or from one hand set to another hand set received that hand set through a leasing program.

In the third quarter they either received a -- they purchased it, essentially, at various prices, depending on the type of hand set that it was and what kind of plan they might have been signing up for.

What is the aggregate I guess adjustment that one would have to make to go to -- assuming you sold every hand set as opposed leased it for this year?

That's a theoretical question, Dimitri, that depending on who you are, you could come up with completely different answers.

What you don't understand at the time, when you offer it under a leasing program, you don't know what you might have been able to sell that phone for.

So it really is a very difficult question to be able to answer.

I know that we had a release the amount that we had spent on those phones in our first and in our second quarter conference calls.

I don't have those numbers fully committed to memory.

But that would be a starting point.

Certainly some portion of each of those would have resulted in revenue as it did result in the third quarter this year for many of those customers.

So you just don't know what you would have been selling those phones for.

Okay.

With respect to the network overbuild, the possibility of both GSM and CDMA, from what we know today, what we see today, the current discussions that we are in, we expect that we will choose dominant technology with overlay in each one of our regions, its choices may differ from region to region.

It is always possible that we will, identify one or two -- a small number of spots where it might be beneficial or useful to us to put an alternate technology in, but we would expect that to be very limited for very special situations where we had a clear path towards revenue to make that worthwhile.

But we are looking at all possibilities because we always do.

Okay.

And Rick, this is probably a question to you.

You, I guess tried to address it in your opening remarks, but I mean, given what's going on with the industry and you seem to be in a much better position than some of your peers at least from the freakish low position standpoint, but given the -- over the next couple of years you should be okay unless things really fall apart and hopefully they won't, in term of us being able to service your debt and pay your preferred dividend, but at some point, and I know we might be fast forward in three or four years, but at some point, you know, something has to happen.

I know a lot of it is hypothetical.

What can you guys do to get out of the leverage situation that the company is in?

Well, I guess I would repeat what I said in the first place as a starting note, and that's the most important thing is we do, we control what -- we do well at what we control, and that's running our business and together taking and caring for our customers, retaining customers and looking for opportunities to grow our revenue stream through both existing and new customers.

Again, we have been doing that for a long time and we are very confident in our ability to do that.

That's part of the picture.

Second part of the picture is, as we have stated before on previous calls, in fact we have -- we operate in 44 markets, and we -- we are not opposed talking to people about assets they might find more attractive in terms of whether they are clustered, as opposed to where we are clustered.

The opportunity for us to look at assets that are less strategic than others certainly would be part of the picture, and as all of you know, that that's always ongoing discussion amongst us and probably always will be as part of American business.

So we do those things.

We run business, look at assets, make sure we are operating as well as we can, get the most margin we can efficiently and effectively deliver in caring for our customers.

We are opportunistic in terms of how assets line up and how efficient the clusters all.

That being said, you've worked through that process and I don't think there's any question as companies continue to look at putting more spectrum in their pockets, more footprint in their pockets, industry consolidation will occur once capital markets start behaving where we all believe they will.

Okay.

Thanks.

And Wes, one more question.

In '03 you mentioned that EBITDA should grow maybe at not double digits, but should grow nevertheless, what about margins, do you expect margins to be at Q3 level, assuming that's the most recent quoted?

We'll see some seasonality certainly in our margins.

There's no question that our third quarter's margins are typically some of our strongest.

But we are firm believers that we can maintain these kind of margins and hopefully still be able to grow them if we see some of this other revenue sources truly coming to bear.

They're at very high margin levels for us.

We would anticipate we we should be able to continue with strong margins going forward.

At 45%?

We are not in a position at this point to specifically talk about margins, but I think that's certainly a reasonable number to be at or above.

Thank you.

Thank you.

Martin Rohr, you may ask your question and please state your company name.

Yes, it is MSR Capital Partners.

Good morning.

My question regards your interest expense line going forward.

I realize you have collared a portion of your floating rate debt.

Could you give us some guidance on what that number may look like, assuming rates don't change from current levels in 2003?

Martin, it's Wes Schultz, that is going to be probably one of our biggest if not our biggest challenge to estimate going forward.

There are a couple of concepts I think it's important for people to appreciate.

Interest expense from a cash per perspective, we are at unprecedented levels currently, and that's where all of our floating debt is tied to a LIBOR, and we are seeing lower LIBOR rates and I think most of us can remember for a long, long time, if forever, so that fundamentally will help our interest expense line item to be at a lower level.

We also anticipate, based on what the yield curves are looking like, that there's not expected huge increases in LIBOR in the next year, which should bode well for 2003.

From a cash perspective, with interest rates at lower levels and with our debt at its lowest level that we have had for quite some time, we would anticipate those would fundamentally bring our interest expense at lower levels.

What makes it more difficult is with the hedging instruments we have in place that do not qualify for hedge accounting treatment, as they have in the past, lower interest rates end up causing some of those items to produce noncash interest expense.

The good news is that most of those hedge instruments actually expire in may of next year and so the impact of the interest rate fluctuations on those particular instruments is going to essentially disappear in may of next year.

Now we do have requirements to hedge up to -- at least 50% of our outstanding, so we will need to put new hedges in place.

Those new hedges arguably will be a lot closer to market than where they are today.

We have seen just a dramatic drop in interest rates from when those hedges were first required to be put in place from the Tritan acquisition.

Right now our financial statements unfortunately reflect a lot of the swing in those interest rates as they impact various derivatives some in different ways.

I realize that's kind of a long-winded answer to your question, Marty, but I think everyone should be at least of the fundamental understanding that we are in a very good interest rate environment now, and that does have a positive impact for the company because from a cash interest expense perspective, there's no question that we have seen a pretty large decline in our interest expense this year versus last year.

We would anticipate that that will continue on based on what we know today of interest rates.

That's a very good answer.

But is your step-down in the leverage covenant, is that on cash interest or the total interest calculation?

Marty, I'm sorry, I am having a hard time hearing you.

The -- This better?

I little bit.

As the leverage covenant that you referred to earlier, is that based on your cash interest expense or the total of the two interest?

Actually that is determined based on what our outstanding debt is and what our EBITDA is.

So that doesn't -- interest expense in and of itself does not directly impact -- how interest expense would get impacted is that we have been our credit facility different margins on top of LIBOR depending on what what leverage level we are at.

We are currently at an under six times leverage level so it has interest rates at a certain rate or certain margin on top of LIBOR.

If we're down below 5, it changes again.

If we're above 6, it changes again.

The lower our leverage point is, also, impacts having lower interest expense for us as well.

That's a good point.

Thank you very much.

Thank you.

Our last question comes from Oliver Bowen, you may ask your question.

Please state your company name.

It's Invesco again.

Actually I have two questions.

One going back to the capital expenditure decision that you're going through right now on the budget, I guess my question is how quickly in '03 or '04 could you roll out an overlay by whatever region, and the reason I ask this question, it seems like your largest roaming partners are entrepreneuring full speed ahead with their overlays and I understand that in a dual mode phone they can roam onto your TDMA existing networks but I guess from a long-term strategic/value point of view, what's the thought process in terms of what you need to do in order to remain on relevant to them in terms of the overlay and the timing on that?

Well, I think the question of speed is really a question of how long can you delay your decisions or delay your capital investments and still reach revenue and keeping a solid relationships with our roaming partners.

It's a question we talk about and think about a lot.

As to the absolute amount of time that it would take to roll out a network if we are talking about on a regional basis, it's certainly in terms of a few months as opposed to a year.

If you're talking about across the company, you it probably would take us up to a year to cover all of our sites.

One thing I would like to point out the reason that shorter time rather than a longer time, largely when we are about an overlay, we are talking about existing sites that are in place where we know our customers and roaming customers want to use their service so we are putting additional equipment on existing towers which is a less burdensome process than it is to completely identify new locations and all of that.

Okay.

My last question is not to -- maybe I need to re-read the 8 K from this, but on the whole -- I guess what I'm having trouble with on the derivatives between the noncash and cash interest portion is I guess the cash interest part I understand obviously, but what I guess troubles me is -- and maybe I'm missing something here, is if there's a mark to market element and what it's I'm assuming is the different derivatives are essentially out of the money, and I guess to what extent does -- is that future liability, what's the present value of that today, in other words on a cash basis, great, cash interest is some number that's lower than the total interest, but what is the total liability that's out there that -- and where is that reflected I guess on the balance sheet with respect to how to calculate if I wanted to calculate a firm value here.

Well, that is a line item that end up showing up in our balance sheet as well as detail -- in great detail in the 10-Q.

The liability is roughly $49 million as of the end of September.

But the point that you had made was what net present value of the liability, that's essentially what the net present value is.

A mark to market essentially is just trying to calculate the extra interest expense that you're going to pay that's out of the money on that particular instrument versus what current interest rate expectations are for the remaining life of that contract.

As I said earlier, we have a number of these contracts that are going to be coming due in -- expiring essentially in May.

So there's a liability that's associated with each of those derivatives.

Right now that will disappear between now and May and will essentially come through the P&L over the next two, three quarters.

In the -- as higher interest expense and we would have had otherwise if those derivatives would not have been required to be put in place.

Right, but in May, is there a true up payment you're going to make to the counterparts?

There are no payments that will need to be made other than what we were contractually obligated to pay during the life of the derivatives in the form of higher interest than we would have if we'd have kept it floating.

So there is one of the big benefits that probably goes a little bit under the screen right now, is that interest expense starting in May, knowing what we know now with all of these various derivatives coming off that are, like you said, out of the money will automatically reduce our interest expense -- cash interest expense as well because we are paying cash at higher interest rates than current rates are because of these derivatives.

On the other hand, we have the reverse swap that we talked about before that benefits from lower interest rates where we are actually receiving money back because that is out of the money from the other party's perspective.

That is -- has helped offset some of this as that -- some of these other derivatives in the past, if a derivative was qualified under hedge accounting treatment, the mark to market did not all flow through the interest expense line item.

That's been the biggest change, that there are now several of these derivatives that are not qualifying for hedge accounting treatment so the interest expense line item reflects the full difference in the mark to market in that quarter.

And that's why they'll be a bunch -- that's why there is pretty significant fluctuation in our interest expense line item because of the impact of interest rate changes and the remaining amount of time left on the derivatives has a big impact on what the mark to market value is on that particular derivitave.

In your 10-Q, will the 49 million be in the I guess otherwise known as GAAP debt or is that going to be a separate line item?

No, it will definitely be in there just as it has been me the past.

The number's been me 40 million range for each of the last several quarter are quarters.

It's now I believe 49 million.

There will be a full detail of exactly each of the derivatives, what the mark to market is, there's a full page in the 10-Q as there has been for I think probably the last several quarters that's been going on over a year where it details in great detail exactly how that calculation gets determined.

Okay.

It has been there in the past.

It's just now the effects are going straight through the expense -- interest expense line item rather than through various other line items in our profit and loss statement.

I guess what I'm more worried about is when each of these expires, what is the actual cash that has to --

There is no cash that will go out when any of these expire.

Okay.

Thank you.

I'll turn the call back over to you, sir for for closing comments.

Thanks again for your interest in Rural Cellular.

Throughout our call today I hope we have made it clear RCC is well positioned to survive these difficult times.

Our management is strong, customer growth is solid and networks are the best in our service areas.

Because of these qualities, we have strong operations and liquidity that together with the ownership of strategic assets position us to have substantial upside to our current equity valuation.

With that, we'll look forward to discussing's our fourth quarter progress in February.

Thank you.

This concludes today's Rural Cellular conference call.

Have a nice day.