SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Significant Contractual Relationship (Continued) As an exclusive PCS Affiliate of Sprint, the Company has the exclusive right to build, own and maintain its portion of Sprint’s nationwide PCS network, in the aforementioned areas, to Sprint’s specifications. The initial term of the Agreement is for 20 years and is automatically renewable for three 10-year options, unless terminated by either party under provisions outlined in the Agreement. Under the Sprint agreements, Sprint provides the Company significant support services such as customer service, billing, collections, long distance, national network operations support, inventory logistics support, use of the Sprint brand names, national advertising, national distribution and product development. Additionally, the Company derives substantial travel revenue and incurs substantial travel expenses when Sprint and Sprint’s PCS Aff iliate partners’ subscribers incur minutes of use in the Company’s territory and when the Company’s subscribers incur minutes of use in Sprint and Sprint’s PCS Aff iliate partners’ territories. These transactions are recorded as travel revenue, network operating cost and travel cost, cost of equipment and selling and marketing expense in the Company’s consolidated statements of income. Cost of service related to access to the nationwide network, including travel transactions and long distance expenses, are recorded in network operating costs. The costs of services such as billing, collections and customer service are included in selling, general and administrative costs. Cost of equipment transactions between the Company and Sprint relate to inventory purchased and subsidized costs of handsets. These costs also include transactions related to subsidized costs on handsets and commissions paid to Sprint for sales of handsets through Sprint’s national distribution programs. Historically, Sprint determined monthly service charges at the beginning of each calendar year. Sprint calculated the costs to provide these services for its network partners and required a final settlement against the charges actually paid. If the costs to provide these services were less than the amounts paid by the Sprint’s network partners, Sprint issued a credit for these amounts. If the costs to provide the services were more that the amounts paid by Sprint’s network partners, Sprint charged the network partners for these amounts. For the years presented, the Company recorded the actual costs, after the adjustments, which were recorded for these services provided by Sprint. The wireless market is characterized by significant risks as a result of rapid changes in technology, increasing competition and the cost associated with the build-out and enhancement of Sprint’s nationwide digital wireless network. Sprint provides back-office and other services including travel clearing-house functions to the Company. In the past, there was no prescribed formula defined in the agreements with Sprint for the calculation of the fee charged to the Company for these services. Sprint adjusted these fees at least annually. This situation changed with the execution of an amendment to the Agreement which occurred on January 31, 2004, retroactive to January 1, 2004 (the Amended Agreement). The Amended Agreement provides greater certainty to the Company for certain future expenses and revenues during the term of the agreement and simplifies the methods used to settle revenue and expenses between the Company and Sprint. The Company’s PCS subsidiary is dependent upon Sprint’s ability to execute certain functions such as billing, customer care, collections and other operating activities under the Company’s agreements with Sprint. Due to the high degree of integration within many of the Sprint systems, and the Company’s dependency on these systems, in many cases it would be difficult for the Company to perform these services in-house or to outsource the services to another provider. If Sprint was unable to perform any such service, the change could result in increased operating expenses and have an adverse impact on the Company’s operating results and cash flow. Additionally, the Company’s ability to attract and maintain a sufficient customer base is critical to generatingpositive cash flow from operations and ultimately profitability for its PCS operation. Changes in technology, increased competition, or economic conditions in the wireless industry or the economy in general, individually and/or collectively, could have an adverse effect on the Company’s financial position and results of operations. Through December 31, 2003, the Agreement provided that Sprint retains 8% of all collected service revenue from subscribers with their service home in the Company’s territory, and 8% of the roaming revenue generated by non-Sprint wireless subscribers who use the Company’s network. With the adoption of the new Amended Agreement, the Company will record its service revenue and receive payment from Sprint based on billed revenue, net of the 8% of billed revenue retained by Sprint, customer credits and allocated write offs. The Company receives and pays travel fees for inter-market usage of the network by Sprint wireless subscribers not homed in a market in which they may use the service. Sprint and its PCS Affiliates pay the Company for the use of its network by their wireless subscribers, while the Company pays Sprint and its PCS Affiliates reciprocal fees for Company subscribers using other segments of the network not operated by the Company. The rates paid on inter- market travel were reduced during 2001. The inter-market travel rate was $0.20 per minute from inception of the Sprint agreement through April 30, 2001, $0.15 per minute from May 1, 2001 through September 30, 2001, and $0.12 per minute from October 1, 2001 through December 31, 2001. The rate was further reduced to $0.10 per minute as of January 1, 2002. The $0.10 rate was in effect for the full year of 2002. The travel rate for 2003 was $0.058 per minute and will remain at this rate through December 31, 2006. 29 ■  2003 ANNUAL REPORT