Staff has continued to implement Navigant suggested recommendations during the quarter and also accomplished a TV Tier realignment and rate increase for both CATV and Cable Modem via Council Action on December 21, 2004.

AFN staff has implemented the majority of Navigant ideas, but continue to work on new and different approaches to some of the same initiatives. So far, staff has implemented the following ideas in the first half of FY 04-05:

1.	Increased rate-- (Twice-June 2004 & Feb 2005)
2.	Began an active TV promotion designed to migrate users to higher tiers of service and to promote Pay per View offerings
3.	Mailed out coupons for free movies in exchange for customers enabling their Pay per View features
4.	Added an intermediate cable modem product
5.	Enhanced ISP contracts
6.	Promoted a customer service guarantee
7.	Bundled our CATV product and cable modem product for the return of SOU students
8.	Staffed a booth at the SOU Student Orientation Event
9.	Worked with SOU and RVTV to provide an AFN exclusive SOU Homecoming Game Broadcast
10.	Participated in the Buy In for Books Program in conjunction with the Ashland Schools Foundation
11.	Revised the quarterly report format.
12.	Met with the AFN Advisory Committee in December 2004.
13.	Worked in conjunction with Finance to develop a more accurate AFN revenue model that can be used for cash flow information and operational decisions.
14.	Realigned TV Tiers to improve operational efficiencies and to reduce future programming costs.
15.	Added a new staff person in AFN to help with technical issues, provide more support for the programming, and the marketing functions of AFN. In addition, a new Network Administrator has been added, as per the budget, and the revised AFN Business Plan. (1.5 FTE)

The previous Quarterly Report tracked both bulk CATV accounts and High Speed Data equivalents but these are not included anymore. This is because the revised plan relies on no significant future growth in either of these product lines. The plan calls for 140 bulk TV accounts for the remainder of the planning period. We currently have 143.3. High Speed data equivalents are shown in the plan remaining at 35 and we currently have 24.12. This dropped from 32.34 in September because the SOU dorm infrastructure costs were amortized as a part of their monthly costs during their initial contract which expired at the end of August. Their new contract only includes port and bandwidth costs which accounts for this reduction.

Cable TV numbers for Dec. 31, 2004 stood at 3,209 and showed no growth during the quarter. The Navigant report projects that by June 30, 2005 as a result of the initiatives, AFN should have 3,532 CATV subscribers. This means we would have to add 323 or about 54 new customers per month throughout the remainder of the fiscal year. Since most of the Navigant recommendations that are related to increasing TV customers and have already been implemented; it looks like achieving the CATV numbers in the revised plan is very questionable. Staff has modeled this number at 3,240 at the end of the fiscal year.

On the Cable modem side, AFN had 3,718 active accounts on Dec. 31, 2004. The Business plan target with Navigant initiatives for June 30, 2005 is 3,842. This means that 124 new customers or about 21 Cable Modem customers would need to be added each month to meet this goal. Staff feels that achieving 3,740 is a realistic conservative goal to use in modeling revenue for the remainder of the fiscal year.

It is important to know that cash flow variations are normal (the balance increased to $593,000 in January) however, the City goal is to build cash each month and year to meet the debt service requirements. Even though cash rebounded in January and the newly adopted rates will impact cash by March, the short and long-term trends for cash are of concern.

AFN has seen some promising changes in specific revenues and expenses but not enough to offset the two items mentioned above. Examples of promising changes are:

1.	Cable modem revenue exceeds budgeted amounts
2.	A new contract for service to Ashland Community Hospital has been negotiated
3.	Staffing costs are below expectations
4.	A change in bandwidth costs will soon be realized
5.	Capital outlay for the year is expected to be light

Any budget comparison should include the changes to revenues and expenses precipitated by the refinancing which included monies to cover issuance costs and an amount to aid in the first debt payment. The following table compares the original budget, the January Supplemental Budget done for the August bond issue, and resultant impact (Revised). Actual represents revenues and expenses to date as of December 31:

Please note:

•	After all resources and requirements (including carry forward and refinancing) the original budget projected an Ending Fund Balance of $954,723.
•	However, AFN started the year with $111,532 less carry over than anticipated, and this will reduce the Ending Fund Balance to $843,191.
•	Operational expenses for the first six months of the year were $1,300,515, while operational revenue was $1,292,198, for a net loss of $8,317.
•	Additional shortfalls in revenue will likely reduce the $843,191 even further.

Also:

•	AFN cash balance was $6,848 at July 1, 2004; cash proceeds from refinancing were $640,000 in August and the balance at December 31, 2004, was $551,743.
•	Predicted revenues compared to expenses estimate a shortfall of $163,000 in cash set aside for the debt service amount of $802,021due in July.

During FY 2004-05, the goal was to closely monitor activities and try and manage expenditures to adhere to projections included in the pro forma and budget. While the majority of Navigant initiatives have been implemented in some form, staff plans to implement the remaining ones during the January-March, 2005 quarter and to re-engineer and re-offer some of the early initiatives during this time frame.

The rate increase approved by the Council in January takes effect in February 2005. This should improve cash flow by $85,000 during the February-June period. Also planned is replacing one of our two main Internet connections (bandwidth) with a new contract. The old contract expired in December 2004 and was costing about $12,000 per month. The new provider will be able to provide equivalent service for about $4,500 per month. Four months of net savings at $7,500 should reduce costs by about $30,000 for the remainder of this year and reduce annual costs in future years by over $95,000. We expect to further reduce future bandwidth costs in August as another Internet connection contract expires and related expenses can be reduced under a new contract.

Staff has modeled the remainder of the year in both the revenue and expense sides of AFN's budget and it looks like projected revenue will be about $2,617,380. We project costs of about $2,805,759 which is a short fall of about $188,379.

One of the Council highest priority goals from the recent goal setting was to determine a way to provide alternative income to AFN to ensure its financial viability. Because of the upcoming and future debt service payments we need to consider alternate income and /or subsidies to meet our commitments.

One source of revenue could be a refund of Cable Modem Franchise fees paid by AFN to the City for the first four years of operation. During that time, AFN paid a total of $186,150 in Franchise fees for Cable Modems. This is in addition to the $115,147 paid in cable TV Franchise fees. These Cable Modem fees have never been paid by Charter and AFN no longer paid these fees as of July 1, 2004. These fees have been ruled illegal by the FCC and subsequently the decision has been upheld by the courts. It would seem appropriate to arrange a credit to AFN for repaying these fees. This could come out of the fund balance of the City's General Fund. This would give us a minimum cash balance of about $845,000 on June 30. Any savings of capital expenditure beyond the projections would add to this amount.

This strategy would give AFN breathing room to work on identifying and developing a low level City Contribution to AFN as per the Council goal of providing a low level investment in AFN to ensure financial stability.

The same model that was used to predict our position on June 30, 2005, is also able to make future year's revenue and expenses. It predicts with a modest 3% rate increase in Cable Modem fees and a 6% increase in CATV fees in January, 2006, that revenue for FY05-06 should be about $2,823,000 and operating expenses should be about $2,556,000. This yields $267,000 toward debt service, combined with cash of 844,706, provides $1,111,706 to pay the total of $1,234,000 (including the $802,221) that year. That leaves a $128,000 cash short fall at June 30, 2006, with nothing set aside for the July 2006 debt service of $432,000. The model indicates that a $400,000 -$425,000 subsidy per year will be needed starting in FY 05-06. Third Quarter results and preparation of the AFN budget for FY 05-06 will allow staff to refine this number and provide better certainty with respect to the actual amount needed.

Staff had identified a number of potential ways to provide these resources. Listed below are some of those possibilities.

1)	Provide for a General Fund subsidy to AFN recognizing the impact of having AFN in the community and the benefit received by citizens.
2)	Allocate a portion of the Transient Occupancy Tax not dedicated to tourism promotion of AFN, recognizing AFN's contribution to Economic Development.
3)	Utilize a portion of proceeds from the sale of City fixed assets or property such as the Imperative Property and use it to subsidize AFN.

The total of all of these sources would need to be in the $400,000- $425,000 per year range until such time as other AFN activities or changes are implemented to better match revenues with requirements. Such subsidies could be viewed as paying for equipment upgrades or retiring city debt. If the projected conservative scenarios are exceeded, the subsidy could be reduced or debt service accelerated.

Revenue enhancement can also displace all or a portion of the size of any AFN subsidy. For example an AFN increase in 500 CATV customers, 550 Cable Modem customers, 10 Data Customers, and 12 Point to Point Customers would generate the following amounts of additional revenue:

1)	500	CATV Customers	---	$63,000
2)	550	CM Customers	---	$174,000
3)	10	Data Customers	---	$78,000
4)	12	Point to Point Cust.	---	$43,000
Total				$358,000

While we don't believe this to be a likely scenario, but our continued focus is to improve revenue by attracting more customers.