SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reflected in the 2003 results are several unusual items, which should be noted in understanding the financial results of the Company for 2003. 1. Certain access revenue rate elements billed by the Company to interexchange carriers were disputed and subsequently refunded to the carriers. During 2003, the Company recorded a reduction in access revenue of $1.2 million from interexchange customers related to the disputed access revenue the Company previously billed for switching facilities and the local exchange network. The disputes cover a two-year period beginning in 2001 through and including the second quarter of 2003. The total amount of the reduction related to 2003 was $0.7 million. 2. The Company changed its employee vacation policy so that employees now earn and use their vacation benefits in the same year. Previously, vacation benefits were earned in the year prior to the year the benefits were available to the employee. As a result of this change in employee benefit policy, the Company did not accrue employee vacation expense for 2004 in 2003, thereby reducing its benefit expenses by $0.5 million for the 2003 year. 3. The Company adjusted its estimate of deferred revenue for the PCS operation in the fourth quarter of 2003. The adjustment decreased deferred revenue by $0.6 million and increased revenue in 2003 by the same amount. 4. The Company received a reimbursement from Sprint of $0.2 million related to 2002 for its portion of the E911 surcharge collected from PCS subscribers. The reimbursement is to offset the Company’s portion of handset costs incurred to make the customers’ phones E911 compliant. This entry decreased cost of goods expenses. On January 30, 2004, the Company, a PCS Affiliate of Sprint, signed agreements with Sprint that resolved disputed items and documented changes in the management and operating agreements between the two companies related to the operations of the nationwide Sprint PCS network. The agreements provide the Company with the ability to better estimate the future costs of certain operating expenses and in the Company’s opinion improve the contract between Sprint and itself. Under the agreements: 1. Sprint agreed to compensate the Company for lost travel revenue related to usage by Sprint customers in the Company’s territory for the period prior to 2003, and change the method of allocating certain software maintenance fees between Sprint and its Affiliates for fees recorded in 2002 and 2003. These items had the effect of increasing operating income by $0.7 million in the 4$^{th}$ quarter of 2003. 2. The method used to price certain services performed by Sprint on behalf of the Company was simplified. The CCPU (cash cost per user) rate for the periods 2004 through 2006 was set at $7.70 per user per month. This fee covers customer service, billing, collections, network operations and other costs to support the customer. However, Sprint may discontinue such services if Sprint is discontinuing such services to all other Sprint PCS affiliates and Sprint’s own  end-users. It is estimated that this rate will decrease the amount the Company will pay Sprint compared to payments under the previous method by approximately $120,000 per month in 2004. 3. There will be a maximum until the year 2007, on the non-direct Costs per Gross Additions (CPGA) at the greater of 6.3% of the Sprint published CPGA rate or $25. With the volatility of CPGA, the Company cannot determine the amount of potential savings, but the change does provide more certainty in estimating future costs. 4. For the period 2004 through 2006, the travel and reseller rates between the Company and Sprint were set at $0.058 per minute for voice and $0.002 per kilobyte for data. Without this agreement the voice travel rate for 2004 would have decreased to $0.041. Since the Company is in a net receivable position related to travel with Sprint, the impact on net travel and reseller revenue would have been a reduction of $1.5 million had the $0.041 rate been in effect in 2003. Beginning in 2007, the Sprint travel and reseller rate will be changed annually to equal 90% of Sprint’s retail yield from the prior year. Sprint’s retail yield will be determined based on Sprint’s average revenue per PCS user for voice services divided by the average minutes of use per user. 41 ■  2003 ANNUAL REPORT