SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS marketing Sprint PCS. If financial difficulties are experienced by Sprint or any Affiliate, it could have an adverse impact on the Company’s results. The Company’s PCS network is part of Sprint’s nationwide wireless network. The network is owned and operated by Sprint and its Affiliates. The financial viability of Sprint and its Affiliates is critical to the success of operating and The current competitive nature of the wireless industry may prompt major wireless providers to strive for financial improvements through industry consolidation. Such consolidation could include Sprint. It is not clear to what extent consolidation may occur or which companies will be involved, but certain consolidation transactions may have an adverse impact on the operating results and valuation of the Company’s wireless operations. The Company’s access revenue may be adversely impacted by legislative or regulatory actions that decrease access rates or exempt certain traffic from paying access to the Company’s regulated telephone network. The Federal Communications Commission is currently reviewing the issue of Voice Over Internet Protocol (VOIP) as it relates to access charges. An unfavorable finding may have an adverse effect on the Company’s telephone operations. There has been a trend for incumbent local exchange carriers to see a decrease in access lines due to the effect of wireless and wireline competition, a slow down in the economy, and the elimination of a second line dedicated to dial up Internet as customers migrate to broadband connections. Although the Company has not seen a material reduction in its number of access lines to date, it experienced line decreases in each of the last two quarters. There is a significant risk that this trend could have a material adverse effect on the Company’s telephone operations in the future. On May 24, 2004, Local Number Portability (LNP) will be required in the Company’s local wireline service area. The Company’s customers will be able to retain their existing wireline phone number and use it to obtain service from a competing wireline or wireless provider in the service area. At this time, the Company cannot estimate the potential impact on its telephone operations. If a significant number of customers disconnect the Company’s service, it will have an adverse impact on the Company’s telephone operating results. The Company’s revenue from fiber leases may be adversely impacted by further erosion in demand or in price competition for these facilities. There is also the potential for additional bankruptcies of the Company’s customers. The Company monitors each of its fiber lease customers closely to minimize the risk related to this business. The Company operates the cable television system in Shenandoah County, Virginia. The Company has seen increased competition from satellite providers that are larger and have cost advantages over the Company in the procurement of programming. The continued success of the satellite television providers may have an adverse impact on the Company’s cable television results. The Company currently has a 12-month, $1.2 million contract with the Virginia Department of Transportation (VDOT) to provide 511 Travel services in the I-81 corridor of Virginia. This contract expires in February 2005. VDOT has recently requested a proposal for a three-year contract with two two-year extensions to extend 511 services to the entire state. Although the Company plans to submit a proposal for the new VDOT contract, there is no certainty that the Company will be selected to provide these services after the end of its current contract. The Company may not be able to utilize all of its net operating loss carry forwards for taxes in certain states before they expire, resulting in the Company writing off some of its deferred tax assets and impacting its cash position. The Company’s market risks relate primarily to changes in interest rates on instruments held for other than trading purposes. Our interest rate risk involves three components, although only one is of any significance at this time. The first component is outstanding debt with variable rates. As of December 31, 2003, the Company’s variable rate debt balance was zero. The Company has a variable rate line of credit totaling $0.5 million with SunTrust Banks. The Company’s remaining debt has fixed rates through its maturity. A 10.0% decline in interest rates would increase the fair value of the fixed rate debt by approximately $1.1 million, while the estimated current fair value of the fixed rate debt is approximately $42.6 million. The second component of interest rate risk is temporary excess cash, primarily invested in overnight repurchase agreements and short-term certificates of deposit and money market funds. The Company currently has approximately $27.9 million of cash equivalents in money market funds, which are earning rates of approximately 1% per year. The cash is currently in short-term investment vehicles that have limited interest rate risk. Management continues to evaluate the most beneficial use of these funds. 55 ■  2003 ANNUAL REPORT Market Risk