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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Northland Cable Properties Seven Limited Partnership

(206) 621-1351

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No x

This filing contains 15 pages. Exhibits index appears on page 12.

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PART 1 — FINANCIAL INFORMATION

ITEM 1. Financial Statements

NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
BALANCE SHEETS — (UNAUDITED)

The accompanying notes are an integral part of these balance sheets.

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NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS — (UNAUDITED)

The accompanying notes are an integral part of these statements.

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NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS — (UNAUDITED)

The accompanying notes are an integral part of these statements.

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NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS

(1)  Basis of Presentation

These unaudited financial statements are being filed in conformity with Rule 10-01 of Regulation S-X regarding interim financial statement disclosure and do not contain all of the necessary footnote disclosures required for a fair presentation of the balance sheets, statements of operations and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, this data includes all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Partnership’s financial position at March 31, 2003, its statements of operations for the three months ended March 31, 2003 and 2002, and its statements of cash flows for the three months ended March 31, 2003 and 2002. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. These financial statements and notes should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2002.

Effective January 1, 2003, the Partnership adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS No. 143”) which addresses financial accounting and reporting for obligations associated with the reporting of obligations associated with the retirement of tangible long-lived assets and associated asset retirement obligations (“ARO”). Under the scope of this pronouncement, the Partnership has ARO associated with removal of equipment from poles and headend sites that are leased from third parties. Based on management's analyses, the Partnership has concluded that for the reasons mentioned below, it is not able to reasonably estimate the fair values of the ARO. First, to operate the cable television network, the Partnership will always need to have equipment deployed at these poles and headend sites. Additionally, the Partnership has not historically incurred any ARO and, given the length of time in the future when any potential obligations might exist, management believes that estimating any probability at this time is not practicable. As a result, upon adoption of SFAS No. 143 the Partnership did not record any ARO associated with the obligation to remove the equipment.

On March 11, 2003, the Partnership sold the operating assets and franchise rights of its cable systems in and around Sequim and Camano Island, Washington. The accompanying financial statements have been restated to report the discontinued operations of the Partnership, effected for this sale.

(2)  Intangible Assets

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Partnership does not amortize goodwill or any other intangible assets determined to have indefinite lives. The Partnership has determined that its franchises meet the definition of indefinite lived assets. The Partnership tests these assets for impairment on an annual basis during the fourth quarter, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value on an annual basis. The book value of the Partnership’s intangible assets, effecting for the sale of the Washington Systems described in note 3, is presented in the following table:

     Amortization expense including amortization of loan fees for each of the next five years is expected to be as follows:

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(3)  System Sales

On March 11, 2003, the Partnership sold the operating assets and franchise rights of its cable systems in and around the communities of Sequim and Camano Island, Washington (the “Washington Systems”). The Washington Systems were sold at a price of approximately $20,340,000 of which the Partnership received approximately $19,280,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $1,060,000 will be held in escrow and released to the Partnership one year from the closing of the transaction, subject to general representations and warranties. Historically, the Partnership has entered into similarly structured transactions, and has collected the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Partnership’s credit agreement.

The sale was made pursuant to an offer by Wave Division Networks, LLC, which was formalized in a Purchase and Sale Agreement dated October 28, 2002. Based on the offer made by Wave Division Networks, LLC, management determined that acceptance would be in the best economic interest of the Partnership, and that the sale was not a result of declining or deteriorating operations nor was it necessary to create liquidity or reduce outstanding debt. It is the opinion of management that the Partnership could have continued existing operations and met all obligations as they became due.

The assets and liabilities attributable to the Washington Systems as of December 31, 2002 have been reported as assets and liabilities from discontinued operations in the accompanying balance sheets, and consist of the following:

In addition, the revenue, expenses and other items attributable to the operations of the Washington Systems for the period form January 1, 2003 to March 11, 2003 (the date of the sale of the Washington Systems), and for the three months ended March 31, 2002 have been reported as discontinued operations in the accompanying statements of operations, and include the following:

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In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Partnership allocated interest expense based on the historical weighted average effective interest rate.

(4)  Notes Payable

On March 31, 2002, the Partnership agreed to certain terms and conditions with its bank and amended its credit agreement. The new terms and conditions modify the debt repayment schedule, applicable interest rates, certain financial covenants, and fees to be paid to the lenders. The new agreement matures on March 31, 2004, and has an applicable interest rate of LIBOR plus 4% and provided for scheduled increases in 2003 and 2004. However, if the Partnership sells assets and reduces the debt by at least $15,000,000, the interest rate increases scheduled for 2003 and 2004 would not occur and certain fees would be reduced pro rata by the amount of the debt repayment. The sale of the Washington Systems in March of 2003 met the asset sale criteria, reducing the fees and applicable interest rate margin over the remaining term of the loan agreement.

The Partnership intends to pursue a complete or partial asset sale during the remaining term of the amended credit agreement but no assurances can be given that such a transaction will occur. It is management’s opinion that the Partnership could renegotiate the terms of its credit agreement prior to its maturity if asset sales sufficient to repay the outstanding bank debt are not completed by March 31, 2004.

Under the terms of the Partnership’s amended credit agreement, the Partnership has agreed to restrictive covenants that require the maintenance of certain ratios including a maximum ratio of Funded Debt to EBITDA of 5.90 to 1.0 and a minimum ratio of Operating Cash Flow to Interest Expense of 2.25 to 1.0. As of March 31, 2003 the Partnership was in compliance with its required financial covenants.

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As of the date of this filing, the balance under the credit facility is $20,586,759 at a LIBOR based interest rate of 5.30%, which expires May 30, 2003.

PART I (continued)

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations

Three Months Ended March 31, 2003 and 2002

Revenues totaled $3,453,863 for the three months ended March 31, 2003 representing an increase of $166,176 or approximately 5% over the same period in 2002. Of these revenues, $2,225,540 (64%) was derived from basic services, $282,357 (8%) from premium services, $474,827 (14%) from expanded basic services, $51,965 (2%) from digital services, $204,095 (6%) from advertising, $67,401 (2%) from late fees, and $147,678 (4%) from other sources. The increase in revenues is primarily attributable to: (i) rate increases implemented in the Partnership’s systems during the first quarter of 2003 and (ii) increased penetration in expanded and digital services.

Cable system operating expenses, which consist primarily of salary and benefit costs, totaled $220,207 for the three months ended March 31, 2003, remaining relatively constant with the same period in 2002.

General and administrative expenses totaled $843,236 for the three months ended March 31, 2003, an increase of $56,708 or approximately 7% over the same period in 2002. This increase is primarily attributable to increases in revenue based fees such as management and franchise fees, marketing expense and other overhead costs.

Programming expenses totaled $1,189,396 for the three months ended March 31, 2003, increasing $114,058 or 11% over the same period in 2002. This increase is due primarily to higher costs charged by various program suppliers as well as costs incurred as the result of offering additional channels and digital programming in some of the Partnership’s systems.

Depreciation and amortization expense for the three months ended March 31, 2003 decreased $21,159 or approximately 4% over the same period in 2002. Such decrease is primarily attributable to certain assets becoming fully depreciated offset by depreciation of recent purchases related to the upgrade of plant and equipment.

Interest expense for the three months ended March 31, 2003 decreased approximately 24% over the same period in 2002. The Partnership’s average bank debt outstanding decreased from $41,169,600 during the first quarter of 2002 to $35,246,622 during the same period in 2003, due primarily to the fact that the proceeds from the sale of the Washington Systems were used to repay debt in March of 2003. The Partnership’s effective interest rate increased from 7.17% in the first quarter of 2002 to 7.42% in the first quarter of 2003, due to increases in the margin to be paid to the Partnership’s lenders, as required under the terms of the amended loan agreement.

In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Partnership allocated interest expense based on the historical weighted average effective interest rate.

Loan fee expense for the three months ended March 31, 2003 totaled $127,145 representing an increase of $109,429 over the same period in 2002. This increase is attributable to fees paid under the terms of the credit agreement, as amended on March 31, 2002.

The Partnership has elected not to designate its interest rate swap agreements as hedges under SFAS No. 133. Agreements in place as of December 31, 2001 expired during the first quarter of 2002, and the Partnership has elected not to enter into any new agreements.

Liquidity and Capital Resources

The Partnership’s primary source of liquidity is cash flow provided from operations. The Partnership generates cash through the monthly billing of subscribers for cable services. Losses from uncollectible accounts have not been material. Based on management’s analysis, the Partnership’s cash flow from operations will be sufficient to cover future operating costs, debt service and planned capital expenditures over the next twelve-month period.

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Net cash provided by operating activities totaled $138,625 for the three months ended March 31, 2003. Adjustments to the $13,982,339 net income for the period to reconcile to net cash provided by operating activities consisted primarily of a gain of $14,098,999 related primarily to the sale of the Washington Systems and decreases in operating liabilities of $615,304, offset by loan fees of 271,832 and depreciation and amortization of $719,654.

Net cash provided by investing activities consisted of proceeds from the sale of the Washington Systems of $19,281,427, offset by $232,545 in capital expenditures for the three months ended March 31, 2003.

Net cash used in financing activities for the three months ended March 31, 2003, consisted of $19,221,761 in principal payments on long-term debt, due primarily to the sale of the Washington Systems.

Notes Payable

On March 31, 2002, the Partnership agreed to certain terms and conditions with its bank and amended its credit agreement. The new terms and conditions modify the debt repayment schedule, applicable interest rates, certain financial covenants, and fees to be paid to the lenders. The new agreement matures on March 31, 2004, and has an applicable interest rate of LIBOR plus 4% and provided for scheduled increases in 2003 and 2004. However, if the Partnership sells assets and reduces the debt by at least $15,000,000, the interest rate increases scheduled for 2003 and 2004 would not occur and certain fees would be reduced pro rata by the amount of the debt repayment. The sale of the Washington Systems in March of 2003 met the asset sale criteria, reducing the fees and applicable interest rate margin over the remaining term of the loan agreement.

The Partnership intends to pursue a complete or partial asset sale during the remaining term of the amended credit agreement but no assurances can be given that such a transaction will occur. It is management’s opinion that the Partnership could renegotiate the terms of its credit agreement prior to its maturity if asset sales sufficient to repay the outstanding bank debt are not completed by March 31, 2004.

Under the terms of the Partnership’s amended credit agreement, the Partnership has agreed to restrictive covenants that require the maintenance of certain ratios including a maximum ratio of Funded Debt to EBITDA of 5.90 to 1.0 and a minimum ratio of Operating Cash Flow to Interest Expense of 2.25 to 1.0. As of March 31, 2003 the Partnership was in compliance with its required financial covenants.

As of the date of this filing, the balance under the credit facility is $20,586,759 at a LIBOR based interest rate of 5.30%, which expires May 30, 2003.

System Sale

On March 11, 2003, the Partnership sold the operating assets and franchise rights of its cable systems in and around the communities of Sequim and Camano Island, Washington (the “Washington Systems”). The Washington Systems were sold at a price of approximately $20,340,000 of which the Partnership received approximately $19,280,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expense