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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2003

or

For the transition period from      to      

Commission File Number: 0-16718

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

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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 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 June 30, 2003, its statements of operations for the six and three months ended June 30, 2003 and 2002, and its statements of cash flows for the six months ended June 30, 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 Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the reporting 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 the 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 practical. 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:

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Amortization of loan fees for the remainder of 2003 and through the remaining useful life of the assets is expected to be as follows:

(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:

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     In addition, the revenue, expenses and other items attributable to the operations of the Washington Systems for the period from January 1, 2003 to March 11, 2003 (the date of the sale of the Washington Systems), and for the six and three months ended June 30, 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 Expense to Discontinued Operations,” the Partnership allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Partnership’s credit facility and approximately $18,713,000 in principal payments, which were applied to the credit facility as a result of the sale of the Washington Systems.

(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.

Under the terms of the Partnership’s amended credit agreement, the Partnership has agreed to restrictive covenants that require the maintenance of certain ratios, as defined in the amended credit agreement, including a maximum ratio of Funded Debt to EBITDA of 5.45 to 1.0 and a minimum ratio of Operating Cash Flow to Interest Expense of 2.25 to 1.0. As of June 30, 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 $20,086,759 at a LIBOR based interest rate of 5.10%. This interest rate expires August 29, 2003, at which time a new rate will be established.

(5) Subsequent Event

In August 2003, the Partnership agreed to certain terms and conditions with a new lender in anticipation of refinancing its credit facility. The refinancing is subject to completion of final agreements and management believes it is probable that these agreements will be finalized, however, no assurances can be given that the refinance will be completed. The terms and conditions of the new agreement would modify the existing debt repayment schedule, applicable interest rates, certain financial covenants, and fees to be paid to the lenders and would establish a maturity date of March 31, 2009. Based on the terms of the new agreement, the Partnership would be required to make the following principal payments:

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PART I (continued)

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

Six Months Ended June 30, 2003 and 2002

Revenues totaled $7,000,958 for the six months ended June 30, 2003 representing an increase of $308,328 or approximately 5% over the same period in 2002. Of these revenues, $4,534,543 (65%) was derived from basic services, $559,275 (8%) from premium services, $940,058 (13%) from expanded basic services, $102,200 (1%) from digital services, $464,880 (7%) from advertising, $135,488 (2%) from late fees, and $264,514 (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 $456,747 for the six months ended June 30, 2003, remaining relatively constant with the same period in 2002.

General and administrative expenses totaled $1,769,756 for the six months ended June 30, 2003, an increase of $149,206 or approximately 9% 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 $2,378,665 for the six months ended June 30, 2003, increasing $198,964 or 9% 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 six months ended June 30, 2003 decreased $39,432 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 and loan fees allocated to continuing operations for the six months ended June 30, 2003 decreased approximately 18% over the same period in 2002 due primarily to a decrease in the Partnership’s effective interest rate from 7.12% in the first half of 2002 to 6.38% in the first half of 2003 and required principal payments. In addition, the Partnership’s average bank debt outstanding decreased from $41,042,060 during the first half of 2002 to $28,995,143 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.

In accordance with EITF 87-24, “Allocation of Interest Expense to Discontinued Operations,” the Partnership allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Partnership’s credit facility and approximately $18,713,000 in principal payments, which were applied to the credit facility as a result of the sale of the Washington Systems.

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.

Three Months Ended June 30, 2003 and 2002

Revenues totaled $3,547,096 for the three months ended June 30, 2003 representing an increase of $142,155 or approximately 4% over the same period in 2002. Of these revenues, $2,309,002 (65%) was derived from basic services, $276,918 (8%) from premium services, $465,231 (13%) from expanded basic services, $50,234 (2%) from digital services, $260,785 (7%) from advertising, $68,088 (2%) from late fees, and $116,838 (3%) 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 totaled $236,541 for the three months ended June 30, 2003, remaining relatively constant with the same period in 2002.

General and administrative expenses totaled $926,521 for the three months ended June 30, 2003, an increase of $92,499 or approximately 11% 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.

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Programming expenses totaled $1,189,265 for the three months ended June 30, 2003, increasing $84,902 or 7% 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 June 30, 2003 decreased $18,273 or approximately 3% 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 and loan fees for the three months ended June 30, 2003 decreased approximately 32% over the same period in 2002 due primarily to a decrease in the Partnership’s effective interest rate from 7.09% in the second quarter of 2002 to 5.24% in the second quarter of 2003 and required principal payments. In addition, the Partnership’s average bank debt outstanding decreased from $40,872,007 during the second quarter of 2002 to $20,659,838 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.

In accordance with EITF 87-24, “Allocation of Interest Expense to Discontinued Operations,” the Partnership allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Partnership’s credit facility and approximately $18,713,000 in principal payments, which were applied to the credit facility as a result of the sale of the Washington Systems.

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 and planned capital expenditures over the next twelve-month period.

Net cash provided by operating activities totaled $670,379 for the six months ended June 30, 2003. Adjustments to the $14,238,432 net income for the period to reconcile to net cash provided by operating activities consisted primarily of a gain of $14,096,562 related primarily to the sale of the Washington Systems, increases in operating assets of $182,221 and decreases in operating liabilities of $946,953, offset by depreciation and amortization of $1,255,978 and loan fees of $401,705.

Net cash provided by investing activities consisted of proceeds from the sale of the Washington Systems of $19,281,427, offset by $466,852 in capital expenditures for the six months ended June 30, 2003.

Net cash used in financing activities for the six months ended June 30, 2003, consisted of $19,730,719 in principal payments on long-term debt, due primarily to the sale of the Washington Systems and loan fee payments of $317,891.

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.

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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 5.45 to 1.0 and a minimum ratio of Operating Cash Flow to Interest Expense of 2.25 to 1.0. As of June 30, 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 $20,086,759 at a LIBOR based interest rate of 5.10%. This interest rate expires August 29, 2003, at which time a new rate will be established.

In August 2003, the Partnership agreed to certain terms and conditions with a new lender in anticipation of refinancing its credit facility. The refinancing is subject to completion of final agreements and management believes it is probable that these agreements will be finalized, however, no assurances can be given that the refinancing will be completed. The terms and conditions of the new agreement would modify the existing debt repayment schedule, applicable interest rates, certain financial covenants, and fees to be paid to the lenders and would establish a maturity date of March 31, 2009. Based on the terms of the new agreement, the Partnership would be required to make the following principal payments:

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 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.

In addition to working capital needs for ongoing operations, the Partnership has capital requirements for (i) annual maturities and interest payments related to the term loan and (ii) required minimum operating lease payments. The following table summarizes the contractual obligations of the Partnership, after effecting for the sales of the Washington Systems and the anticipated effect of these obligations on the Partnership’s liquidity for the remainder of 2003 and in future years:

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Capital Expenditures

During the first six months of 2003, the Partnership incurred approximately $467,000 in capital expenditures, including various line extensions, plant upgrades and the continuation of digital service deployment. Planned expenditures for the remainder of 2003 include the initial phase of an upgrade of the distribution plant to 450MHz in Royston, GA, as well as the construction of additional extensions and continued digital deployment.

Recently Issued Accounting Standards

Effective January 1, 2003, the Partnership adopted Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the reporting 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 the 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 practical. As a result, upon adoption of SFAS No. 143 the Partnership did not record any ARO associated with the obligation to remove the equipment.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based on the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting policies, which have been chosen among alternatives, require a more significant amount of management judgment than other accounting policies the Partnership employs.

Revenue Recognition - Cable television service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public.

Property and Equipment - Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis. The Partnership periodically performs evaluations of these estimates as warranted by events or changes in circumstances.

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In accordance with SFAS No. 51, “Financial Reporting by Cable Television Companies,” the Partnership also capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.

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.

Management believes the franchises have indefinite lives because the franchises are expected to be used by the Partnership for the foreseeable future and effects of obsolescence, competition and other factors are minimal. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises are not material in relation to the carrying value of the franchises. While the franchises have defined lives based on the franchising authority, renewals are routinely granted, and management expects them to continue to be granted. This expectation is supported by management’s experience with the Partnership’s franchising authorities and the franchising authorities of the Partnership’s affiliates.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Partnership is subject to market risks arising from changes in interest rates. The Partnership’s primary interest rate exposure results from changes in LIBOR or the prime rate, which are used to determine the interest rate applicable to the Partnership’s debt facilities. The Partnership has from time to time entered into interest rate swap agreements to partially hedge interest rate exposure. Interest rate swaps have the effect of converting the applicable variable rate obligations to fixed or other variable rate obligations. As of the date of this filing, the Partnership is not involved in any interest rate swap agreements. The potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate of all of the Partnership’s variable rate obligations would be approximately $203,000.

Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Litigation Reform Act of 1995. Statements contained or incorporated by reference in this document that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements may be identified by use of forward-looking terminology such as “believe”, “intends”, “may”, “will”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms, variations of those terms or the negative of those terms.

ITEM 4. Controls and procedures

Based on their evaluation as of the end of the period covered by this report, the General Partner’s Chief Executive Officer and President (Principal Financial and Accounting Officer) have concluded that the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Partnership in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There were no significant changes in the Partnership’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II — OTHER INFORMATION

ITEM 1 Legal proceedings

     None

ITEM 2 Changes in securities

     None

ITEM 3 Defaults upon senior securities

     None

ITEM 4 Submission of matters to a vote of security holders

     None

ITEM 5 Other information

     None

ITEM 6 Exhibits and Reports on Form 8-K

(a)

Exhibit Index

	(b)		Reports on Form 8-K
			None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP

BY: Northland Communications Corporation,
General Partner