SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The wireless industry in the late 1990’s became increasingly competitive and the Company was not  immune to these industry issues. The Clear Pay$^{SM}$ program, introduced by Sprint as a no-deposit offering in 2001, attracted high credit risk customers in the Company’s markets. As the results began to materialize, the Company implemented deposits on this program (mid-April 2002), and experienced high levels of customer turnover (churn) and uncollectable accounts. The write-offs of uncollectable accounts peaked in the third quarter of 2002. During the fourth quarter of 2002 there was some evidence that the strengthened credit policy was having a favorable impact. Nonetheless, the 2002 net loss in the PCS operation was $5.4 million, as compared to $5.5 million in 2001. Despite the disappointing financial results for 2002, the PCS customer base grew by over 40%. While the PCS operation was adding customers, the cellular operation continued to lose its local customer base. The growing belief that national branding was critical to our wireless operations, the expectation that roaming revenues from our analog cellular operation would not continue to grow, and the increase in the number of wireless competitors in our markets, prompted the Company to exit the cellular business in order to focus on our PCS operations. The Company entered into an agreement on November 21, 2002, to sell its 66% ownership interest in the Virginia 10 RSA cellular operation which was classified as a discontinued operation. The closing occurred February 28, 2003. The Company received $37.0 million in proceeds, including $5.0 million in escrow for two years and $1.7 million for working capital. In many respects, 2003 was a successful year. Churn and levels of uncollectable accounts in the PCS operation returned to more acceptable levels. PCS revenues reached $67.0 million, and total revenues reached $105.9 million. The PCS operation recognized a small profit for the year, including favorable adjustments associated with settlement of disputed items with Sprint. Excluding the favorable adjustments, the PCS operation recognized a profit in the fourth quarter. With improved operating cash flow and reduced capital spending in 2003, the Company prepaid $4.6 million in debt, selecting those notes with nominal prepayment penalties. Additionally, after receiving the cash and paying taxes on the gain of the sale of the Virginia 10 partnership interest, the Company invested the remaining proceeds in liquid financial instruments, available for future deployment. Additionally, the Company has been successful at decreasing its dependency on wireline revenues. Wireline revenues, at $29.0 million in 2003 compared to $18.6 million in 1998, were 27.4% of total revenues in 2003 compared to 76.6% in 1998. The Company had several significant transactions during 2003. The largest was the sale of its 66% interest in the Virginia 10 RSA cellular operation, as described above. The Company originally entered into the agreement with Verizon Wireless in November 2002. The Company was the general partner of the limited partnership which operated an analog cellular network in the six-county area of Northwestern Virginia, including Clarke, Frederick, Page, Rappahannock, Shenandoah, and Warren counties, and the city of Winchester. The sales price was $37.0 million plus the Company’s 66% share of the partnership’s working capital, which was approximately $1.7  million. The Company was required to do a working capital true up following the closing, from which the Company recorded a charge for $23 thousand after taxes. In the fourth quarter the Company recorded an additional charge for taxes of $0.2 million to reflect the consolidated effective tax rate based on the final operating results for the year. The sale of this business is reflected in the discontinued operations section of the income statement along with the results of operations for the two months of 2003 that the operation remained a part of the Company. Significant Transactions Entering 2004, the Company is pleased with the milestone of a profitable quarter in the PCS operation, but recognizes that much work remains to ultimately earn a reasonable return on this investment. The recently announced signing of an addendum to the management and services agreements with Sprint is expected to lead to cost savings and greater certainty in fees paid to Sprint. However, the consolidation predicted for the wireless industry in recent years, including the recently announced Cingular/ATT deal and anticipated improvements in the overall economics of wireless services, has not yet materialized. Future Sprint marketing efforts, designed to meet the competition, could potentially have an unfavorable impact on the Company and lead to additional losses. The risks associated with the Sprint PCS affiliation are described in further detail elsewhere in this document. The Company is now reviewing alternatives for other businesses to further diversify our revenue base, from either a services platform or a geographic concentration. SHENANDOAH TELECOMMUNICATIONS COMPANY ■  40