Northland Cable Properties Seven Limited Partnership 10-Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

or

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

For the transition period from                    to                    

Commission File Number:0-16718

Northland Cable Properties Seven Limited Partnership

(Exact Name of Registrant as Specified in Charter)

Washington	91-1366564
(State of Organization)	(I.R.S. Employer Identification No.)

101 Stewart Street, Suite 700, Seattle, Washington	98065
(Address of Principal Executive Offices)	(Zip Code)

(206) 621-1351
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 been subject to such filing requirements for the past 90 days.

Yes  þ  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o  Accelerated filer  o  Non-accelerated filer  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No  þ

TABLE OF CONTENTS

	PART 1 — FINANCIAL INFORMATION
	ITEM 1. Financial Statements
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.Controls and Procedures
PART II — OTHER INFORMATION
ITEM 1Legal proceedings
ITEM 1ARisk Factors
ITEM 2Changes in securities
ITEM 3Defaults upon senior securities
ITEM 4Submission of matters to a vote of security holders
ITEM 5Other information
ITEM 6Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.(A)
EXHIBIT 31.(B)
EXHIBIT 32.(A)
EXHIBIT 32.(B)

PART 1 — FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

	September 30,			December 31,
	2006			2005
ASSETS
Cash	$	213,147		$	877,365
Accounts receivable		167,356			230,728
Due from affiliates		62,804			83,810
Prepaid expenses		146,356			74,950
System sale receivable		1,776,027			1,779,553
Property and equipment, net of accumulated depreciation of $11,585,226 and $10,477,977, respectively		6,585,952			6,568,493
Franchise agreements, net of accumulated amortization of $9,995,974, respectively		9,606,966			9,606,966
Loan fees and other intangibles, net of accumulated amortization of $758,353 and $729,673, respectively		95,597			124,277
Total assets	$	18,654,205		$	19,346,142
LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT)
Accounts payable and accrued expenses	$	784,188		$	1,183,102
Due to Managing General Partner and affiliates		49,347			46,643
Deposits		17,085			16,335
Subscriber prepayments		166,967			184,811
Notes payable		3,122,157			3,827,998
Total liabilities		4,139,744			5,258,889
Partners’ capital (deficit):
General Partners:
Contributed capital, net		(25,367	)		(25,367	)
Accumulated deficit		(40,144	)		(44,421	)
		(65,511	)		(69,788	)
Limited Partners:
Contributed capital, net		18,554,382			18,554,844
Accumulated deficit		(3,974,410	)		(4,397,803	)
		14,579,972			14,157,041
Total partners’ capital (deficit)		14,514,461			14,087,253
Total liabilities and partners’ capital (deficit)	$	18,654,205		$	19,346,142

The accompanying notes are an integral part of these statements.

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

	For the nine months ended September 30,
	2006			2005
Service revenues	$	6,438,892		$	6,298,226
Expenses:
Cable system operations (including $113,225 and $98,829 to affiliates in 2006 and 2005, respectively), excluding depreciation and amortization shown below		593,959			587,923
General and administrative (including $648,125 and $654,324 to affiliates in 2006 and 2005, respectively)		1,777,582			1,656,646
Programming (including $3,727 and $1,788 to affiliates in 2006 and 2005, respectively)		2,227,596			2,052,218
Depreciation		1,128,693			1,177,103
Loss (gain) on disposal of assets		1,225			(36,692	)
		5,729,055			5,437,198
Income from operations		709,837			861,028
Other income (expense):
Interest expense and amortization of loan fees		(284,363	)		(258,308	)
Interest income and other, net		2,196			858
		(282,167	)		(257,450	)
Income from continuing operations	$	427,670		$	603,578
Discontinued operations (note 3) Income from operations of Brenham and Bay City systems, net (including gain on sale of systems of $12,388,296 in 2005)		—			12,066,929
Loss on sale of Washington Systems		—			(312,971	)
Net income		427,670			12,357,536
Allocation of net income:
General Partners	$	4,277		$	123,575
Limited Partners	$	423,393		$	12,233,961
Income from continuing operations per limited partnership unit (49,656 units):	$	9		$	12
Income from discontinued operations per limited partnership unit (49,656 units):	$	—		$	234
Net income per limited partnership unit:
(49,656 units)	$	9		$	246

The accompanying notes are an integral part of these statements.

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

	For the three months ended September 30,
	2006				2005
Service revenues	$	2,150,525			$	2,063,527
Expenses:
Cable system operations (including $28,734 and $34,698 to affiliates in 2006 and 2005, respectively), excluding depreciation and amortization shown below		203,659				207,294
General and administrative (including $215,213 and $222,793 to affiliates in 2006 and 2005, respectively)		576,721				580,161
Programming (including $1,460 and $734 to affiliates in 2006 and 2005, respectively)		788,317				670,590
Depreciation		366,029				395,139
Loss (gain) on disposal of assets		681				(15,479	)
		1,935,407				1,837,705
Income from operations		215,118				225,822
Other income (expense):
Interest expense and amortization of loan fees		(92,424	)			(92,952	)
Interest income and other, net		683				590
		(91,741	)			(92,362	)
				��
Income from continuing operations	$	123,377			$	133,460
Discontinued operations (note 3)
Income from operations of Brenham and Bay City systems, net (including gain on sale of systems of $5,134,467 in 2005)		—				4,904,574
Loss on sale of Washington Systems		—				(312,971	)
Net income		123,377				4,725,063
Allocation of net income:
General Partners	$	1,234			$	47,251
Limited Partners	$	122,143			$	4,677,812
Income from continuing operations per limited partnership unit (49,656 units):	$	2			$	3
Income from discontinued operations per limited partnership unit (49,656 units):	$	—			$	92
Net income per limited partnership unit:
(49,656 units)	$	2			$	94

The accompanying notes are an integral part of these statements.

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

	For the nine months ended September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	427,670		$	12,357,536
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		1,128,693			1,252,981
Loan fee amortization		28,680			88,421
Loss (gain) on sale of assets		1,225			(12,147,754	)
Other		—			26,645
(Increase) decrease in operating assets:
Accounts receivable		66,898			101,502
Due from affiliates		21,006			(16,094	)
Prepaid expenses		(71,406	)		20,846
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses		(399,920	)		(684,122	)
Due to Managing General Partner and affiliates		2,704			(5,143	)
Deposits		750			2,699
Subscriber prepayments		(17,844	)		(17,703	)
Net cash provided by operating activities		1,188,456			979,814
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,188,270	)		(1,079,519	)
Proceeds from sale of systems		—			15,214,680
Proceeds from the sale of assets		41,437			26,171
Proceeds from related party insurance fund		—			24,242
Net cash (used in) provided by investing activities		(1,146,833	)		14,185,574
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings		(705,841	)		(14,391,356	)
Loan fees		—			(137,062	)
Net cash used in financing activities		(705,841	)		(14,528,418	)
(DECREASE) INCREASE IN CASH		(664,218	)		636,970
CASH, beginning of period		877,365			65,547
CASH, end of period	$	213,147		$	702,517
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	269,816		$	1,197,552

The accompanying notes are an integral part of these statements.

NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED 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 full 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, these statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Partnership’s financial position at September 30, 2006, its statements of operations for the nine and three months ended September 30, 2006 and 2005, and its statements of cash flows for the nine months ended September 30, 2006 and 2005. 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, 2005.

On June 30, 2005 and August 1, 2005, the Partnership sold the operating assets and franchise rights of its cable systems serving the communities of Bay City and Brenham, Texas, respectively. The accompanying financial statements present the results of operations and the sales of the Bay City and Brenham systems as discontinued operations.

(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.

Loan fees are being amortized using the straight-line method, which approximates the effective interest rate method. Future amortization of loan fees is expected to be approximately as follows:

2006 (3 months)		9,559
2007		38,239
2008		38,239
2009		9,560
	$	95,597

(3) System Sales

On June 30, 2005, the Partnership completed the sale of the operating assets and franchise rights of its cable systems in and around the community of Bay City, Texas to McDonald Investment Company, Inc., an unaffiliated third party. The Bay City system was sold at a price of approximately $9,345,000 of which the Partnership received approximately $8,449,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $935,000 will be held in escrow and released to the Partnership eighteen months from the closing of the transaction subject to indemnification claims made, if any, by the buyer pursuant to the terms of the purchase and sale agreement. Substantially all of the proceeds were used to pay down amounts outstanding under the Partnership’s term loan agreement. The Partnership recorded a gain from the sale of the Bay City System of approximately $7,122,000.

On August 1, 2005, the Partnership completed the sale of the operating assets and franchise rights of its cable systems in and around the community of Brenham, Texas to Cequel III Communications I, LLC, an unaffiliated third party. The Brenham system was sold at a price of approximately $7,572,000 of which the Partnership received approximately $6,638,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $850,000 will be held in escrow and released to the Partnership eighteen months from the closing of the transaction subject to indemnification claims made, if any, by the buyer pursuant to the terms of the purchase and sale agreement. Under the terms of an amendment to the term loan agreement, executed in August of 2005, the Partnership was allowed to retain $300,000 of these proceeds for capital spending purposes. The proceeds, less $300,000 retained for capital spending purposes, were used to pay down amounts outstanding under

the term loan agreement. The Partnership recorded a gain from the sale of the Brenham system of approximately $5,266,000.

The revenue, expenses and other items attributable to the operations of the Brenham and Bay City systems for the nine and three months ended September 30, 2005 have been reported as discontinued operations in the accompanying statements of operations, and include the following:

	For the nine months ended
	September 30, 2005
Service revenues	$	2,750,502
Expenses:
Operating (including $35,270 received from affiliates)		244,957
General and administrative (including $243,342 paid to affiliates)		779,764
Programming (including $787 paid to affiliates)		1,132,189
Depreciation and amortization		75,878
Gain on disposal of assets		(12,889,646	)
		(10,656,858	)
Income from operations		13,407,360
Other expense:
Interest expense and amortization of loan fees		(622,727	)
Loss on extinguishment of debt		(717,704	)
Income from operations of Brenham and Bay City systems, net	$	12,066,929

	For the three months ended
	September 30, 2005
Service revenues	$	193,680
Expenses:
Operating (including $8,982 received from affiliates)		55,496
General and administrative (including $14,215 paid to affiliates)		147,469
Programming (including $204 received from affiliates)		82,614
Gain on disposal of assets		(5,349,397	)
		(5,063,818	)
Income from operations		5,257,498
Other expense:
Interest expense and amortization of loan fees		(45,189	)
Loss on extinguishment of debt		(307,735	)
Income from operations of Brenham and Bay City systems, net	$	4,904,574

The Partnership allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Partnership’s term loan and approximately $14,207,000 in principal payments, which were applied to the term loan upon closing of the transactions. In addition, the Partnership was required to pay a prepayment fee of approximately $218,000 to its lender, as a result of the prepayment of the term loan with the Brenham and Bay City proceeds. This entire amount has been allocated to discontinued operations.

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”). In association with this transaction, approximately $1,060,000 was to be held in escrow and released to the Partnership one year from the closing of the transaction, subject to general representations and warranties. In March of 2004, the Partnership received notice from the buyer of the Washington Systems of certain claims, which were made under the holdback agreement provisions of the purchase and sale agreement. Approximately $412,000 of the original escrow proceeds remained in escrow until such claims were resolved. The escrow proceeds in excess of the claims were released to the Partnership in March of 2004.

On August 26, 2005, the Partnership settled its ongoing litigation with the buyer of the Washington Systems. As a result of the settlement reached, the Partnership received approximately $128,400 of the escrow funds, approximately all of which were used to pay down amounts outstanding under the Partnership’s term loan agreement. The remaining escrow proceeds, approximately $283,200, were remitted to the buyer of the Washington Systems, and were allocated to discontinued operations as a loss from the sale of the Washington Systems in the Partnership’s statement of operations for the nine and three months ended September 30, 2005. The Partnership also recorded $35,736 in legal fees in connection with the settlement of this litigation

(4) Notes Payable

In March and August of 2005, in anticipation of and as a result of the sale of the Brenham and Bay City systems, the Partnership amended the terms and conditions of its term loan agreement. The terms of the amendments modify the principal repayment schedule, the interest rate margins and various covenants (described below), and allowed the Partnership to retain $300,000 of the proceeds from the sale of the Brenham system, to be used for capital spending purposes. The Partnership capitalized $137,062 of fees, which were paid to the lender in connection with these transactions. The term loan is collateralized by a first lien position on all present and future assets of the Partnership and matures March 31, 2009. The interest rate per annum applicable to the Partnership’s existing credit facility (the Refinanced Credit Facility) is a fluctuating rate of interest measured by reference to either: (i) the U.S. dollar prime commercial lending rate announced by the lender (Base Rate), plus a borrowing margin; or (ii) the London interbank offered rate (LIBOR),

plus a borrowing margin. Under the amendment to the term loan agreement, the applicable borrowing margins vary, based on the Partnership’s leverage ratio, from 2.75% to 3.50% for Base Rate loans and from 3.75% to 4.50% for LIBOR loans.

Because the Partnership prepaid the Refinanced Credit Facility in excess of $5,375,000 prior to the third anniversary of the closing of the refinancing transaction, the Partnership was required to pay a prepayment fee to the lender, as defined by the terms of the Refinanced Credit Facility. The Partnership paid approximately $125,000 as a result of the prepayment of the term loan with the Bay City proceeds, and paid approximately $93,000 upon remitting the Brenham sale proceeds.

Annual maturities of the note payable after September 30, 2006, are as follows:

2006 (3 months)		235,872
2007		1,165,633
2008		1,387,554
2009		333,098
	$	3,122,157

The amendment executed in August of 2005 also further modified the covenants, which require the Partnership to comply with specified financial ratios, including maintenance, as tested on a quarterly basis going forward after effecting for the sale of the Brenham and Bay City systems, of: (A) a Maximum Total Leverage Ratio (the ratio of Funded Debt to Annualized EBITDA (as defined)) of not more than 2.25 to 1.00; (B) a Minimum Interest Coverage Ratio (the ratio of Annualized EBITDA (as defined) to aggregate Interest Expense for the immediately preceding four consecutive fiscal quarters) of not less than 2.50 to 1.00, increasing over time to 3.50 to 1.00; (C) a Minimum Total Debt Service Coverage Ratio (the ratio of Annualized EBITDA (as defined) to the Partnership’s debt service obligations for the following twelve months) of not less than 1.00 to 1.00, increasing over time to 1.10 to 1.00 (this covenant was not measured during 2005 under the terms of the amendment to the term loan agreement); and (D) Maximum Capital Expenditures of not more than $2,500,000. As of September 30, 2006, the Partnership was in compliance with the terms of the loan agreement.

As of the date of this filing, the balance under the credit facility is $3,122,157 and applicable interest rates are as follows: $2,584,325 at a LIBOR based interest rate of 9.99% and $537,832 at a LIBOR based interest rate of 9.82%. These interest rates expire during the fourth quarter of 2006, at which time, new rates will be established.

(5) Litigation

In March 2005, Northland filed a complaint against one of its programming networks seeking a declaration that a December 2004 contract between Northland and the programmer was an enforceable contract related to rates Northland would pay for its programming and damages for breach of that contract. The programmer counter-claimed, alleging copyright infringement and breach of contract.

On September 14, 2006 Northland and the programmer entered into a Settlement Agreement, under which, (i) the parties mutually released each other from and against all claims, (ii) the parties agreed to dismiss the lawsuit, and (iii) the parties set forth the definitive terms of carriage of the programmers services for the period commencing December 1, 2004, through December 31, 2007.

In addition, under the terms of the Settlement Agreement, Northland shall make payment in full of all license fees from all Northland affiliates, including NCP-7, for the period of December 1, 2004, through July 31, 2006, all of which have been previously accrued. In addition, Northland shall pay to the programmer, in four installments, a Supplemental License fee, approximately $120,000 of which will be remitted by NCP-7. The Partnership recorded a charge of $71,000 in expense associated with this supplemental license fee during the three months ended September 30, 2006, which has been classified as programming expense. The remaining $49,000 will be recorded on a pro rata basis over the remaining contract period. Based on Management’s analysis the Partnership has adequate liquidity to meet the remaining Supplemental License Fee obligation without impairing its ability to meet its future obligations in the ordinary course of business and payment of this obligation will not result in the violation of any financial covenant under its loan agreement.

The Partnership is party to ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the

aggregate, have a material adverse effect on the Partnership, its financial statements, prospects or debt service abilities.

(6) Solicitation of Interest from Potential Purchasers

The Managing General Partner is currently working with a nationally recognized brokerage firm to solicit interest from potential buyers for the Partnership’s cable systems. In September of 2006, the broker contacted potential purchasers and solicited their respective expressions of interest. The Partnership anticipates receiving potential offers from interested purchasers during the fourth quarter of 2006, however, no assurances can be given as to the likelihood that any sale or sales will ultimately be consummated.

PART I(continued)

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

Results of Continuing Operations — Nine Months Ended September 30, 2006 and 2005

Total basic subscribers attributable to continuing operations decreased from 13,391 as of December 31, 2005 to 12,942 as of September 30, 2006. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. To reverse this customer trend, the Partnership is increasing its customer retention efforts and its emphasis on bundling its video and data products.

Revenue from continuing operations totaled $6,438,892 for the nine months ended September 30, 2006, an increase of approximately 2% from $6,298,226 for the nine months ended September 30, 2005. Revenues from continuing operations for the nine months ended September 30, 2006 were comprised of the following sources:

• $5,137,474 (80%) from basic and expanded services,

• $397,726 (6%) from premium services

• $63,213 (1%) from digital services

• $291,731 (5%) from high speed Internet services

• $245,839 (4%) from advertising

• $134,587 (2%) from late fees

• $168,322 (2 %) from other sources.

Average monthly revenue per subscriber increased $3.32 or approximately 7% from $50.44 for nine months ended September 30, 2005 to $53.76 for the nine months ended September 30, 2006. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2006, increased penetration of new products, specifically, high-speed Internet services, and increased advertising revenue. These increases in average monthly revenue per subscriber were offset by a decrease in total subscribers from 13,447 as of September 30, 2005 to 12,942 as of September 30, 2006.

Operating expenses, excluding general and administrative, programming, and depreciation expenses, attributable to continuing operations totaled $593,959 for the nine months ended September 30, 2006, representing an increase of approximately 1% from $587,923 for the nine months ended September 30, 2005. This increase is primarily attributable to an increase in employee salary and benefit costs, and an increase in system utility and vehicle operating costs in certain of the Partnership’s systems, offset by a decrease in pole rental costs. Employee wages, which represent the primary component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.

General and administrative expenses attributable to continuing operations totaled $1,777,582 for the nine months ended September 30, 2006, representing an increase of approximately 7% from $1,656,646 for the same period in 2005. This increase is primarily attributable to an increase in administrative salary and benefit costs, increased marketing expenses and increased accounting and legal expenses.

Programming expenses attributable to continuing operations totaled $2,227,596 for the nine months ended September 30, 2006, an increase of 9% from $2,052,218 for the nine months ended September 30, 2005. This increase is partially attributable to the recognition of $71,000 in additional programming expense associated with settlement of litigation with one of the Partnership’s programmers. The increase is also attributable to higher costs charged by various program suppliers, increased costs associated with high-speed Internet services, offset by decreased subscribers from 13,447 as of September 30, 2005 to 12,942 as of September 30, 2006. Rate increases from program suppliers, as well as new fees due to the launch of additional channels and high-speed Internet services, will contribute to the trend of increased programming costs in the future, assuming that the number of subscribers remains constant.

Depreciation expense allocated to continuing operations decreased approximately 4%, from $1,177,103 for the nine months ended September 30, 2005 to $1,128,693 for the nine months ended September 30, 2006. This decrease is attributable to certain assets becoming fully depreciated, offset by depreciation of recent purchases related to the upgrade of plant and equipment.

Interest expense and amortization of loan fees allocated to continuing operations increased approximately 10% from $258,308 for the nine months ended September 30, 2005 to $284,363 for the nine months ended September 30, 2006. Lower average outstanding indebtedness, as a result of required principal repayments, was more than offset by higher interest rates in 2006 compared to 2005.

In accordance with EITF 87-24, “Allocation of Interest 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 $14,207,000 in principal payments, which were applied to the credit facility as a result of the sale of the Brenham and Bay City systems. In addition, the Partnership was required to pay a prepayment fee of approximately $218,000 to its lender, as a result of the prepayment of the term loan with the Brenham and Bay City proceeds. This entire amount, which has been netted against the gain on sale of system, has been allocated to discontinued operations.

Results of Continuing Operations — Three Months Ended September 30, 2006 and 2005

Total basic subscribers attributable to continuing operations decreased from 13,300 as of June 30, 2006 to 12,942 as of September 30, 2006. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. To reverse this customer trend, the Partnership is increasing its customer retention efforts and its emphasis on bundling its video and data products.

Revenue from continuing operations totaled $2,150,525 for the three months ended September 30, 2006, an increase of approximately 4% from $2,063,527 for the three months ended September 30, 2005. Revenues from continuing operations for the three months ended September 30, 2006 were comprised of the following sources:

• $1,695,660 (79%) from basic and expanded services,

• $130,440 (6%) from premium services

• $20,592 (1%) from digital services

• $115,403 (5%) from high speed Internet services

• $86,620 (4%) from advertising

• $47,659 (2%) from late fees

• $54,151 (3 %) from other sources.

Average monthly revenue per subscriber increased $4.14 or approximately 8% from $50.86 for three months ended September 30, 2005 to $55.00 for the three months ended September 30, 2006. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2006, increased penetration of new products, specifically, high-speed Internet services, and increased advertising revenue. These increases in average monthly revenue per subscriber were offset by a decrease in total subscribers from 13,447 as of September 30, 2005 to 12,942 as of September 30, 2006.

Operating expenses, excluding general and administrative, programming, and depreciation expenses, attributable to continuing operations totaled $203,659 for the three months ended September 30, 2006, representing a decrease of approximately 2% from $207,294 for the three months ended September 30, 2005. This decrease is primarily attributable to a decrease in employee salary and pole rental costs, offset by an increase in vehicle maintenance costs.

General and administrative expenses attributable to continuing operations totaled $576,721 for the three months ended September 30, 2006, remaining relatively constant with the same period in 2005. Decreases in administrative salary costs were partly offset by increased accounting and legal expenses.

Programming expenses attributable to continuing operations totaled $788,317 for the three ended September 30, 2006, an increase of 18% from $670,590 for the three months ended September 30, 2005. This increase is primarily attributable to the recognition of $71,000 in additional programming expense associated with settlement of litigation with one of the Partnership’s programmers. The increase is also attributable to higher costs charged by various program suppliers, increased costs associated with high-speed Internet services, offset by decreased subscribers from 13,447 as of September 30, 2005 to 12,942 as of September 30, 2006.

Depreciation expense allocated to continuing operations decreased approximately 7%, from $395,139 for the three months ended September 30, 2005 to $366,029 for the three months ended September 30, 2006. This decrease is attributable to certain assets becoming fully depreciated, offset by depreciation of recent purchases related to the upgrade of plant and equipment.

Interest expense and amortization of loan fees allocated to continuing operations totaled $92,424 for the three months ended September 30, 2006, remaining relatively constant with the same period in 2005. Lower average outstanding indebtedness, as a result of required principal repayments, was offset by higher interest rates in 2006 compared to 2005.

In accordance with EITF 87-24, “Allocation of Interest 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 $14,207,000 in principal payments, which were applied to the credit facility as a result of the sale of the Brenham and Bay City systems. In addition, the Partnership was required to pay a prepayment fee of approximately $218,000 to its lender, as a result of the prepayment of the term loan with the Brenham and Bay City proceeds. This entire amount, which has been netted against the gain on sale of system, has been allocated to discontinued operations.

Liquidity and Capital Resources

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

Net cash provided by operating activities totaled $1,188,456 for the nine months ended September 30, 2006. Adjustments to the $427,670 net income for the period to reconcile to net cash provided by operating activities consisted primarily of depreciation of $1,128,693, loan fee amortization of $28,680, offset by changes in other operating assets and liabilities of $397,812.

Net cash used in investing activities totaled $1,146,833 for the nine months ended September 30, 2006 and consisted primarily of $1,188,270 in capital expenditures.

Net cash used in financing activities for the nine months ended September 30, 2006 consisted of $705,841 in principal payments that were made under the amended term loan agreement.

Notes Payable

In March and August of 2005, in anticipation of and as a result of the sale of the Brenham and Bay City systems, the Partnership amended the terms and conditions of its term loan agreement. The terms of the amendments modify the principal repayment schedule, the interest rate margins and various covenants (described below), and allowed the Partnership to retain $300,000 of the proceeds from the sale of the Brenham system, to be used for capital spending purposes. The Partnership capitalized $137,062 of fees, which were paid to the lender in connection with these transactions. The term loan is collateralized by a first lien position on all present and future assets of the Partnership and matures March 31, 2009.

The interest rate per annum applicable to the Partnership’s existing credit facility (the Refinanced Credit Facility) is a fluctuating rate of interest measured by reference to either: (i) the U.S. dollar prime commercial lending rate announced by the lender (Base Rate), plus a borrowing margin; or (ii) the London interbank offered rate (LIBOR), plus a borrowing margin. Under the amendment to the term loan agreement, the applicable borrowing margins vary, based on the Partnership’s leverage ratio, from 2.75% to 3.50% for Base Rate loans and from 3.75% to 4.50% for LIBOR loans.

Because the Partnership prepaid the Refinanced Credit Facility in excess of $5,375,000 prior to the third anniversary of the closing of the refinancing transaction, the Partnership was required to pay a prepayment fee to the lender, as defined by the terms of the Refinanced Credit Facility. The Partnership paid approximately $125,000 as a result of the prepayment of the term loan with the Bay City proceeds, and paid approximately $93,000 upon remitting the Brenham sale proceeds.

Annual maturities of the note payable after September 30, 2006, are as follows:

2006 (3 months)		235,873
2007		1,165,633
2008		1,387,554
2009		333,097
	$	3,122,157

The amendment executed in August of 2005 also further modified the covenants, which require the Partnership to comply with specified financial ratios, including maintenance, as tested on a quarterly basis going forward after effecting for the sale of the Brenham and Bay City systems, of: (A) a Maximum Total Leverage Ratio (the ratio of Funded Debt to Annualized EBITDA (as defined)) of not more than 2.25 to 1.00; (B) a Minimum Interest Coverage Ratio (the ratio of Annualized EBITDA (as defined) to aggregate Interest Expense for the immediately preceding four consecutive fiscal quarters) of not less than 2.50 to 1.00, increasing over time to 3.50 to 1.00; (C) a Minimum Total Debt Service Coverage Ratio (the ratio of Annualized EBITDA (as defined) to the Partnership’s debt service obligations for the following twelve months) of not less than 1.00 to 1.00, increasing over time to 1.10 to 1.00 (this covenant was not measured during 2005 under the terms of the amendment to the term loan agreement); and (D) Maximum Capital Expenditures of not more than $2,500,000. As of September 30, 2006, the Partnership was in compliance with the terms of the loan agreement.

As of the date of this filing, the balance under the credit facility is $3,122,157 and applicable interest rates are as follows: $2,584,325 at a LIBOR based interest rate of 9.99% and $537,832 at a LIBOR based interest rate of 9.82%. These interest rates expire during the fourth quarter of 2006, at which time, new rates will be established.

System Sales

On June 30, 2005, the Partnership completed the sale of the operating assets and franchise rights of its cable systems in and around the community of Bay City, Texas to McDonald Investment Company, Inc., an unaffiliated third party. The Bay City system was sold at a price of approximately $9,345,000 of which the Partnership received approximately $8,449,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $935,000 will be held in escrow and released to the Partnership eighteen months from the closing of the transaction subject to indemnification claims made, if any, by the buyer pursuant to the terms of the purchase and sale agreement. Substantially all of the proceeds were used to pay down amounts outstanding under the Partnership’s term loan agreement. The Partnership recorded a gain from the sale of the Bay City System of approximately $7,122,000.

On August 1, 2005, the Partnership completed the sale of the operating assets and franchise rights of its cable systems in and around the community of Brenham, Texas to Cequel III Communications I, LLC, an unaffiliated third party. The Brenham system was sold at a price of approximately $7,572,000 of which the Partnership received approximately $6,638,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $850,000 will be held in escrow and released to the Partnership eighteen months from the closing of the transaction subject to indemnification claims made, if any, by the buyer pursuant to the terms of the purchase and sale agreement. Under the terms of an amendment to the term loan agreement, executed in August of 2005, the Partnership was allowed to retain $300,000 of these proceeds for capital spending purposes. The proceeds, less $300,000 retained for capital spending purposes, were used to pay down amounts outstanding under the term loan agreement. The Partnership recorded a gain from the sale of the Brenham system of approximately $5,266,000.

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”). In association with this transaction, approximately $1,060,000 was to be held in escrow and released to the Partnership one year from the closing of the transaction, subject to general representations and warranties. In March of 2004, the Partnership received notice from the buyer of the Washington Systems of certain claims, which were made under the holdback agreement provisions of the purchase and sale agreement. Approximately $412,000 of the original escrow proceeds remained in escrow until such claims were resolved. The escrow proceeds in excess of the claims were released to the Partnership in March of 2004.

On August 26, 2005, the Partnership settled its ongoing litigation with the buyer of the Washington Systems. As a result of the settlement reached, the Partnership received approximately $128,400 of the escrow funds,

approximately all of which werre used to pay down amounts outstanding under the Partnership’s term loan agreement. The remaining escrow proceeds, approximately $283,200, were remitted to the buyer of the Washington Systems, and were allocated to discontinued operations as a loss from the sale of the Washington Systems in the Partnership’s statement of operations for the nine and three months ended September 30, 2005. The Partnership also recorded $35,736 in legal fees in connection with the settlement of this litigation

Obligations and Commitments

In addition to working capital needs for ongoing operations, the Partnership has capital requirements for annual maturities related to the Refinanced Credit Facility and required minimum operating lease payments. The following table summarizes the Partnership’s contractual obligations as of September 30, 2006:

			Payments Due By Period
			Less than 1		1 — 3		3 — 5		More than
	Total		year		years		years		5 years
Notes payable	$	3,122,157	$	1,110,097	$	2,012,060		—		—
Minimum operating lease payments		2,421		1,677		744		—		—
Total	$	3,124,578	$	1,111,774	$	2,012,804

(a)	These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2006.
(b)	The Partnership also rents utility poles in its operations. Amounts due under these agreements are not included in the above minimum operating lease payments amounts as, generally, pole rentals are cancelable on short notice. The Partnership does however anticipate that such rentals will recur.
(c)	Note that obligations related to the Partnership’s notes payable exclude interest expense.

Capital Expenditures

During the first nine months of 2006, the Partnership incurred $1,188,270 in capital expenditures. These expenditures included the continued upgrades to 550 MHz capacity and two-way plant activation in Toccoa and Vidalia, Georgia, which allow for further deployment of high-speed Internet services and provide additional capacity for the addition of future services.

Management has estimated that the Partnership will spend approximately $400,000 on capital expenditures during the remainder of 2006. Planned expenditures include the continuation of distribution plant upgrades to increase channel capacity and two-way capability in both Toccoa and Vidalia, Georgia, potential line extension opportunities and the continued deployment of high-speed Internet services in certain areas of the Partnership’s systems.

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 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 performs evaluations of these estimates as warranted by events or changes in circumstances.

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 the assets below its carrying value.

Management believes the franchises have indefinite lives because the franchises are expected to be used by the Partnership for the foreseeable future as determined based on an analysis of all pertinent factors, including changes in legal, regulatory or contractual provisions and effects of obsolescence, demand and competition. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises is 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.

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 term loan and approximately $14,207,000 in expected principal payments, which were applied to the term loan upon closing of the transactions. In addition, the Partnership was required to pay prepayment fees of approximately $218,000 to its lender, as a result of the prepayment of the term loan with the Brenham and Bay City proceeds. This entire amount, plus a ratable portion of deferred debt costs, have been classified as loss on extinguishment of debt and have been allocated to discontinued operations.

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 $31,000.

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

The Partnership maintains disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Chief Executive Officer and President (Principal Financial and Accounting Officer) of the Managing General Partner have evaluated these disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

There has been no change during the most recent quarter in the Partnership’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1Legal proceedings

In March 2005, Northland filed a complaint against one of its programming networks seeking a declaration that a December 2004 contract between Northland and the programmer was an enforceable contract related to rates Northland would pay for its programming and damages for breach of that contract. The programmer counter-claimed, alleging copyright infringement and breach of contract.

On September 14, 2006 Northland and the programmer entered into a Settlement Agreement, under which, (i) the parties mutually released each other from and against all claims, (ii) the parties agreed to dismiss the lawsuit, and (iii) the parties set forth the definitive terms of carriage of the programmers services for the period commencing December 1, 2004, through December 31, 2007.

In addition, under the terms of the Settlement Agreement, Northland shall make payment in full of all license fees from all Northland affiliates, including NCP-7, for the period of December 1, 2004, through July 31, 2006, all of which have been previously accrued. In addition, Northland shall pay to the programmer, in four installments, a Supplemental License fee, approximately $120,000 of which will be remitted by NCP-7. As of September 30, 2006, the Partnership had recorded approximately $71,000 in expense associated with this supplemental license fee. The remaining $49,000 will be recorded on a pro rata basis over the remaining contract period. Based on Management’s analysis the Partnership has adequate liquidity to meet the remaining Supplemental License Fee obligation without impairing its ability to meet its future obligations in the ordinary course of business and payment of this obligation will not result in the violation of any financial covenant under its loan agreement.

The Partnership is party to ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Partnership, its financial statements, prospects or debt service abilities.

ITEM 1ARisk Factors

There have been no material changes from the Partnership’s risk factors as disclosed in the 2005 Form 10-K.

ITEM 2Changes in securities

     None

ITEM 3Defaults upon senior securities

     None

ITEM 4Submission of matters to a vote of security holders

     None

ITEM 5Other information

     None

ITEM 6Exhibits and Reports on Form 8-K

(a) Exhibit Index

31 (a).	Certification of Chief Executive Officer of Northland Communications Corporation, the Managing General Partner, dated November 14, 2006 pursuant to section 302 of the Sarbanes-Oxley Act
31 (b).	Certification of President (Principal Financial and Accounting Officer) of Northland Communications Corporation, the Managing General Partner, dated November 14, 2006 pursuant to section 302 of the Sarbanes-Oxley Act

32 (a).	Certification of Chief Executive Officer of Northland Communications Corporation, the Managing General Partner, dated November 14, 2006 pursuant to section 906 of the Sarbanes-Oxley Act
32 (b).	Certification of President (Principal Financial and Accounting Officer) of Northland Communications Corporation, the Managing General Partner, dated November 14, 2006 pursuant to section 906 of the Sarbanes-Oxley Act

(b)	Reports on Form 8-K
	Form 8-K filed September 20, 2006 regarding settlement of ongoing litigation.

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,
Managing General Partner

SIGNATURES	CAPACITIES	DATE
/S/ RICHARD I. CLARKRichard I. Clark	Executive Vice President, Treasurer and Assistant Secretary	11-14-06
/S/ GARY S. JONESGary S. Jones	President	11-14-06