SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS increased again on July 1, 2002 to $6.50, and comparable rate increases also impacted business subscribers. Tied to the SLC rate increases were declines in rates charged to interexchange carriers for interstate minutes of use. The 2002 results reflect a significantly larger increase in network usage, which more than offset the decline in rates. Facility lease revenue contributed $5.7 million to wireline revenues, a decrease of $0.8 million or 12.6% from 2001. The decrease was primarily the result of declining lease rates associated with competitive pricing pressure, and the economic downturn in the telecommunications industry. Billing and collection services contributed $0.4 million to wireline revenues, which was the same as 2001 results. Revenues from this service had declined in recent years, with interexchange carriers now issuing a greater proportion of their bills directly to their customers. Wireline revenues from cable television services were $4.3 million, an increase of $0.5 million or 14.5%. In December 2001, the Company increased its basic service charge by $6.00 per month, which produced $0.3 million of the increase in cable television revenue. The remaining $0.2 million was generated by an increased penetration of digital services and increased pay per view sales. Within other revenues, Internet and 511Virginia contract revenues from the Virginia Department of Transportation, were $5.1 million in 2002, an increase of $1.2 million or 30.4%. The Company had 18,050 dial-up Internet subscribers at December 31, 2002, compared to 17,423 subscribers at the end of 2001. Total Internet service revenue was $4.2 million, an increase of $0.6 million or 15.7%. Services provided under the 511Virginia contract contributed $0.9 million to other revenues, an increase of $0.6 million. Telecommunications equipment sales, services and lease revenues were $1.2 million, a nominal increase over 2001 results. Total operating expenses were $83.6 million, an increase of $21.3 million or 34.3%. The continued growth in the PCS operation was principally responsible for the change. Cost of goods and services was $10.5 million, an increase of $3.1 million or 41.8%. The PCS cost of goods sold was $8.3 million, an increase of $2.8 million or 50.2%. This change is due primarily to higher volumes of handsets sold through Company owned stores and PCS handset subsidies paid to third-party retailers. The cable television programming (cost of service) expense was $1.4 million, an increase of $0.1 million or 4.6%. The other cost of goods sold increased $0.3 million, compared to the same period in 2001. Network operating costs were $32.5 million, an increase of $5.8 million or 21.5%. Line and switching costs were $9.7 million, an increase of $2.6 million or 37.4%, due principally to the impact of the expanded PCS network. Travel expense, generated by the Company’s PCS subscribers’ use of minutes on other providers’ portions of the Sprint wireless network, was $10.7 million, an increase of $0.9 million or 8.4%. The increase in customer travel usage more than offset the travel rate explained above in travel revenue. Plant specific costs were $9.6 million, which include the operation, and maintenance of the networks increased $2.3 million or 30.7%. Tower, building, and land rentals, as well as PCS equipment maintenance, were major contributors to the increase in plant specific expenses. Other network costs such as power, network administration, and engineering, were $2.7 million, the same as in 2001. Depreciation and amortization expense was $14.5 million, an increase of $3.2 million or 28.6%. The PCS operation had depreciation expense of $8.6 million, an increase of $3.6 million or 72.7%. The PCS operation added 53 additional base stations during 2002. Selling, general and administrative expenses were $26.1 million, an increase of $9.3 million or 55.0%. Customer support costs were $7.8 million, an increase of $2.8 million or 55.3%. The growth in Sprint wireless subscribers was the primary driver for this increase. Advertising expense was $4.3 million, an increase of $1.5 million or 55.8%. This change was primarily due to the stepped-up and ongoing marketing efforts to support the PCS operations in the Quad State market and particularly the Central Penn market. PCS sales staff expenses were $2.7 million, an increase of $0.7 million or 32.7%. The increase was principally due to the full year operations of the three retail locations and adding additional sales staff. The Company experienced significant bad debt losses in its PCS operations related to the Sprint Clear PayS program. The program was initially targeted at customers in sub-prime credit classes and did not require a deposit upon activation of service. As a result of default rates that exceeded projections, the Company experienced a substantial increase in bad debt expense, which rose from $1.2 million in 2001 to $4.4 million in 2002. The reinstatement of deposit requirements in April 2002 caused some moderation in bad debt expense by the end of the year. Total PCS bade debt expense for 2002 was $3.7 million of this expense is associated with several large telecommunications customers who filed bankruptcies in 2002. pr ogram. sm SHENANDOAH TELECOMMUNICATIONS COMPANY ■  50