EXHIBIT 99.6
[KPMG LOGO]
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Financial Statements
December 31, 2005 and 2004
(Report of Independent Registered Public Accounting Firm Thereon)
[KPMG LOGO]
KPMG
Suite 900
801 Second Avenue
Seattle, WA 98104
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Partners
Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Seven Limited Partnership (a Washington limited partnership) as of December 31,
2005 and 2004, and the related statements of operations, changes in partner'
capital (deficit), and cash flows for each of the years in the three year period
ended December 31, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Seven Limited Partnership as of December 31, 2005 and 2004, and the results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 2005 in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Seattle, Washington
February 10, 2006
KPMG LLP, a U.S. limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative.
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Balance Sheets
December 31, 2005 and 2004
ASSETS 2005 2004
--------------- ----------------
Cash $ 877,365 65,547
Accounts receivable 230,728 341,965
Due from affiliates 83,810 111,960
Prepaid expenses 74,950 134,282
System sale receivable 1,779,553 411,600
Investment in cable television properties:
Property and equipment 17,046,470 27,885,405
Less accumulated depreciation (10,477,977) (17,294,389)
--------------- ----------------
6,568,493 10,591,016
Franchise agreements (net of accumulated amortization
of $9,995,974 and $10,321,249 in 2005 and 2004, respectively) 9,606,966 9,607,185
--------------- ----------------
Total investment in cable television properties 16,175,459 20,198,201
--------------- ----------------
Loan fees and other intangibles (net of accumulated amortization
of $729,673 and $852,973 in 2005 and 2004, respectively) 124,277 586,327
--------------- ----------------
Total assets $ 19,346,142 21,849,882
=============== ================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities:
Accounts payable and accrued expenses $ 1,183,102 1,262,921
Due to Managing General Partner and affiliates 46,643 69,425
Deposits 16,335 20,852
Subscriber prepayments 184,811 346,281
Notes payable 3,827,998 18,275,000
--------------- ----------------
Total liabilities 5,258,889 19,974,479
--------------- ----------------
Commitments and contingencies
Partners' capital (deficit):
General Partners:
Contributed capital (25,367) (25,367)
Accumulated deficit (44,421) (168,347)
--------------- ----------------
(69,788) (193,714)
--------------- ----------------
Limited Partners:
Contributed capital, net (49,656 units) 18,554,844 18,735,576
Accumulated deficit (4,397,803) (16,666,459)
--------------- ----------------
14,157,041 2,069,117
--------------- ----------------
Total liabilities and partners' capital (deficit) $ 19,346,142 21,849,882
=============== ================
See accompanying notes to financial statements.
2
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Statements of Operations
Years ended December 31, 2005, 2004, and 2003
2005 2004 2003
----------- ---------- -----------
Revenue $ 8,366,133 8,638,009 8,813,801
---------- --------- ---------
Expenses:
Operating (including $131,060, $143,934, and $131,816, net, paid to
affiliates in 2005, 2004, and 2003, respectively), excluding
depreciation and amortization expense
recorded below 831,395 797,500 749,206
General and administrative (including
$849,330, $849,330, and $901,830, net,
paid to affiliates in 2005, 2004, and 2003,
respectively) 2,199,450 2,232,441 2,100,659
Programming (including $2,605, $2,440,
and $55,867, net, paid to affiliates
in 2005, 2004, and 2003, respectively) 2,688,255 2,651,617 2,753,915
Depreciation expense 1,587,491 1,529,666 1,495,551
Loss (gain) on disposal of assets (40,697) 28,951 21,294
----------- ---------- -----------
7,265,894 7,240,175 7,120,625
----------- ---------- -----------
Operating income 1,100,239 1,397,834 1,693,176
Other income (expense):
Interest expense and amortization of loan fees (354,263) (408,641) (396,572)
Gain on extinguishment of debt -- -- 35,591
Interest income and other, net 2,555 4,832 (1,471)
----------- ---------- -----------
Income from continuing operations 748,531 994,025 1,330,724
Discontinued operations (note 11):
Income (loss) from operations of Brenham, Bay City and Washington
Systems, net (including gain on sale systems of $12,547,285 and
$14,027,857 in 2005 and 2003, respectively) 11,644,051 (202,335) 13,380,636
----------- ---------- -----------
Net income $ 12,392,582 791,690 14,711,360
=========== ========== ===========
Allocation of net income:
General Partners $ 123,926 7,917 147,114
Limited Partners 12,268,656 783,773 14,564,246
Net income per limited partnership unit 247 16 293
Income from continuing operations per
limited partnership unit 15 20 27
Income (loss) from discontinued operations per
limited partnership unit 232 (4) 267
See accompanying notes to financial statements.
3
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Statements of Changes in Partners' Capital (Deficit)
Years ended December 31, 2005, 2004, and 2003
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
------------ -------------- -------------
Balance, December 31, 2002 $ (348,745) (13,278,902) (13,627,647)
Net income 147,114 14,564,246 14,711,360
------------ -------------- -------------
Balance, December 31, 2003 (201,631) 1,285,344 1,083,713
Net income 7,917 783,773 791,690
------------ -------------- -------------
Balance, December 31, 2004 (193,714) 2,069,117 1,875,403
Net income 123,926 12,268,656 12,392,582
Distribution declared to Limited Partners
for income taxes -- (180,732) (180,732)
------------ -------------- -------------
Balance, December 31, 2005 $ (69,788) 14,157,041 14,087,253
============ ============== =============
See accompanying notes to financial statements.
4
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 2005, 2004, and 2003
2005 2004 2003
--------------- ------------ -------------
Cash flows from operating activities:
Net income $ 12,392,582 791,690 14,711,360
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 1,663,369 2,197,582 2,334,566
Loan fee amortization 97,981 137,986 743,198
(Gain) loss on asset dispositions (12,804,336) 28,951 (14,006,563)
Loss (gain) on extinguishment of debt 717,485 -- (35,589)
Other -- 41,218 12,878
Changes in certain assets and liabilities:
Accounts receivable 54,202 109,013 420,688
Prepaid expenses 44,977 (31,698) 3,009
Accounts payable and accrued expenses (567,373) 105,680 (1,968,519)
Due to/from General Partner and affiliates 5,368 (27,086) (953,228)
Deposits 2,674 2,642 (90)
Subscriber prepayments (32,254) (11,848) (174,090)
--------------- ------------ -------------
Net cash provided by operating
activities 1,574,675 3,344,130 1,087,620
--------------- ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (1,340,443) (1,518,294) (992,861)
Proceeds from sale of systems 15,100,846 708,894 19,281,427
Insurance proceeds from fund maintained by
affiliate 24,242 -- --
Proceeds from sale of assets 36,562 1,000 2,500
--------------- ------------ -------------
Net cash provided by (used in)
investing activities 13,821,207 (808,400) 18,291,066
--------------- ------------ -------------
Cash flows from financing activities:
Proceeds from notes payable -- -- 21,500,000
Principal payments on notes payable (14,447,002) (3,225,000) (40,054,185)
Loan fees (137,062) (3,877) (743,343)
--------------- ------------ -------------
Net cash used in financing activities (14,584,064) (3,228,877) (19,297,528)
--------------- ------------ -------------
Increase (decrease) in cash 811,818 (693,147) 81,158
Cash, beginning of year 65,547 758,694 677,536
--------------- ------------ -------------
Cash, end of year $ 877,365 65,547 758,694
=============== ============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,146,412 1,302,671 1,532,108
Distribution declared to Limited Partners
for income taxes (180,732) -- --
See accompanying notes to financial statements.
5
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
(1) ORGANIZATION AND PARTNERS' INTERESTS
(A) FORMATION AND BUSINESS
Northland Cable Properties Seven Limited Partnership (the
Partnership), a Washington limited partnership, was formed on April
17, 1987. The Partnership was formed to acquire, develop, and
operate cable television systems. The Partnership began operations
on September 1, 1987. The Partnership's systems include a system
serving four cities in or around Vidalia, Georgia; a system serving
two cities in or around Sandersville, Georgia; and two systems
serving several communities in and around Toccoa and Royston,
Georgia. The Partnership has 17 nonexclusive franchises to operate
the cable systems for periods, which will expire at various dates
through 2024.
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 Washington Systems). 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
Sequim, Camano Island, Bay City and Brenham systems as discontinued
operations.
Northland Communications Corporation is the General Partner (the
General Partner or Northland) of the Partnership. Certain affiliates
of the Partnership also own and operate other cable television
systems. In addition, Northland manages cable television systems for
another limited partnership and an LLC for which it serves as
General Partner and Managing Member, respectively.
FN Equities Joint Venture, a California joint venture, is the
Administrative General Partner of the Partnership.
Collectively, the General Partner and the Administrative General
Partner are referred to herein as the General Partners.
The Partnership is subject to certain risks as a cable television
operator. These include competition from alternative technologies
(e.g., satellite), requirements to renew its franchise agreements,
availability of capital, and compliance with note payable covenants.
(B) CONTRIBUTED CAPITAL, COMMISSIONS, AND OFFERING COSTS
The capitalization of the Partnership is set forth in the
accompanying statements of changes in partners' capital (deficit).
No Limited Partner is obligated to make any additional contribution.
Northland contributed $1,000 to acquire its 1% interest in the
Partnership.
Pursuant to the Partnership Agreement, brokerage fees paid to an
affiliate of the Administrative General Partner and other offering
costs paid to the General Partner were recorded as a reduction of
Limited Partners' capital upon formation of the Partnership. The
Administrative General Partner received a fee for providing certain
administrative services to the Partnership.
6 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
(2) BASIS OF PRESENTATION
Certain prior period amounts have been reclassified to conform to the
current period presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ACQUISITION OF CABLE TELEVISION SYSTEMS
Cable television system acquisitions are accounted for as purchase
transactions and their cost is allocated to the estimated fair
market value of net tangible assets acquired and identifiable
intangible assets, including franchise agreements. Any excess is
allocated to goodwill.
(B) ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from customers
for cable television or advertising services provided by the
Partnership, and are net of an allowance for doubtful accounts of
$10,900 at December 31, 2005 and $14,500 at December 31, 2004.
Receivables are stated at net realizable value and are written-off
when the Partnership deems specific customer invoices to be
uncollectible.
(C) 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.
In accordance with Statement of Financial Accounting Standards
(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 are charged
to operating expense 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.
At the time of retirements, sales or other dispositions of property,
the original cost and related accumulated depreciation are removed
from the respective accounts, and the gains or losses are included
in the statements of operations.
7 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
Depreciation of property and equipment is calculated using the
straight-line method over the following estimated service lives:
<Table>
Buildings 20 years
Distribution plant 10 years
Other equipment 5-20 years
</Table>
The Partnership periodically evaluates the depreciation periods of
property and equipment to determine whether events or circumstances
warrant revised estimates of useful lives.
The Partnership recorded depreciation expense within continuing
operations of $1,587,491, $1,529,666, and $1,495,551 in 2005, 2004,
and 2003, respectively, and depreciation expense within discontinued
operations of $75,878, $667,916 and $839,015 in 2005, 2004 and 2003,
respectively.
In accordance with SFAS No. 144, long-lived assets, such as property
and equipment, and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in
the balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated. The
assets and liabilities of a disposed group classified as held for
sale would be presented separately in the appropriate asset and
liability sections of the balance sheets.
(D) INTANGIBLE ASSETS
Effective January 1, 2002, the Partnership adopted SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 required that the
Partnership cease amortization of goodwill and any other intangible
assets determined to have indefinite lives, and established a new
method of testing these assets for impairment on an annual basis 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. The Partnership determined
that its franchise agreements met the definition of indefinite lived
assets due to the history of obtaining franchise renewals, among
other considerations. Accordingly, amortization of these assets also
ceased on December 31, 2001. The Partnership tested these
intangibles for impairment during the fourth quarter of each year
presented and determined that the fair value of the assets exceeded
their carrying value. The Partnership determined that there are no
conditions such as obsolescence, regulatory changes, changes in
demand, competition, or other factors that would change their
indefinite life determination. The Partnership will continue to test
these assets for impairment annually, or more frequently as
warranted by events or changes in circumstances.
8 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
(E) LOAN FEES
Loan fees are being amortized using the straight-line method, which
approximates the effective interest method, over periods of five to
six years (current weighted average remaining useful life of 3.25
years). The Partnership recorded loan fee amortization expense
attributable to continuing operations of $33,719, $41,370, and
$181,988 in 2005, 2004, and 2003, respectively as interest expense.
Amortization expense attributable to discontinued operations was
$64,262, $96,616 and $561,210 in 2005, 2004 and 2003, respectively.
Amortization of loan fees for each of the next five years and
thereafter is expected to be as follows:
<Table>
2006 $ 38,239
2007 38,239
2008 38,239
2009 9,560
2010
-----------
$ 124,277
===========
(F) SELF INSURANCE
The Partnership began self-insuring for aerial and underground plant
in 1996. Beginning in 1997, the Partnership began making quarterly
contributions into an insurance fund maintained by an affiliate
which covers all Northland entities and would defray a portion of
any loss should the Partnership be faced with a significant
uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership would absorb any such loss. If the
Partnership were to sustain a material uninsured loss, such reserves
could be insufficient to fully fund such a loss. The cost of
replacing such equipment and physical plant could have a material
adverse effect on the Partnership, its financial condition,
prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the
Partnership and its affiliates, are expensed as incurred and are
included in the statements of operations. To the extent a loss has
been incurred related to risks that are self-insured, the
Partnership records an expense for the amount of the loss, net of
any amounts to be drawn from the fund. Management suspended
contributions throughout 2002 based on its assessment that the
current balance would be sufficient to meet potential claims. In
2005 and 2004, the Partnership was required to make contributions
and was charged $6,385 and $2,663, respectively, by the fund. As of
December 31, 2005, the fund (related to all Northland entities) had
a balance of $202,270.
(G) 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. Local spot advertising
revenues earned in continuing operations were $275,917, $263,784,
and $580,796 in 2005, 2004, and
9 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
2003, respectively, and local spot advertising revenues in
discontinued operations were $319,653, $567,755 and $540,097 in
2005, 2004 and 2003, respectively.
(H) ADVERTISING COSTS
The Partnership expenses advertising costs as they are incurred.
Advertising costs attributable to continuing operations were $926,
$11,417, and $256,118 in 2005, 2004, and 2003, respectively, and
advertising costs attributable to discontinued operations were
$190,075, $337,550 and $346,755 in 2005, 2004 and 2003,
respectively.
(I) SEGMENT INFORMATION
The Partnership follows SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. The Partnership manages its
business and makes operating decisions at the operating segment
level. Following the operating segment aggregation criteria in SFAS
No. 131, the Partnership reports business activities under a single
reportable segment, telecommunications services. Additionally, all
of its activities take place in the United States of America.
(J) CONCENTRATION OF CREDIT RISK
The Partnership is subject to concentrations of credit risk from
cash investments on deposit at various financial institutions that
at times exceed insured limits by the Federal Deposit Insurance
Corporation. This exposes the Partnership to potential risk of loss
in the event the institution becomes insolvent.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash and notes payable. The fair
value of the notes payable approximates their carrying value because
of their variable interest rates (note 8).
(L) RECENTLY ADOPTED ACCOUNTING PRINCIPLES
In November 2004, the EITF ratified its consensus on Issue No.
03-13, Applying the Conditions in paragraph 42 of FASB Statement No.
144 in Determining Whether to Report Discontinued Operations, (EITF
03-13). EITF 03-13 relates to components of an enterprise that are
either disposed of or classified as held for sale. EITF 03-13 allows
significant events or circumstances that occur after the balance
sheet date but before the issuance of financial statements to be
taken into consideration in the evaluation of whether a component
should be presented as discontinued or continuing operations, and
modifies the assessment period guidance to allow for an assessment
period of greater than one year. The implementation of EITF 03-13
did not have a material impact on the Partnership's financial
statements.
(4) INCOME ALLOCATION
All items of income, loss, deduction, and credit are allocated 99% to the
Limited Partners and 1% to the General Partners until the Limited Partners
have received aggregate cash distributions in an amount equal to aggregate
capital contributions as defined in the limited partnership agreement.
Thereafter, the General Partners are allocated 25% and the Limited
Partners are allocated 75% of partnership income and losses.
10 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
Cash distributions from operations will be allocated in accordance with
the net income and net loss percentages then in effect. Prior to the
General Partners receiving cash distributions from operations for any
year, the Limited Partners must receive cash distributions in an amount
equal to the lesser of (i) 50% of the Limited Partners' allocable share of
net income for such year or (ii) the federal income tax payable on the
Limited Partners' allocable share of net income using the then highest
marginal federal income tax rate applicable to such net income. Any
distributions other than from cash flow, such as from the sale or
refinancing of a system or upon dissolution of the Partnership, will be
determined according to contractual stipulations in the Partnership
Agreement.
The Limited Partners' total initial contributions to capital were
$24,893,000 ($500 per partnership unit). As of December 31, 2005,
$3,108,554 ($62.50 per partnership unit) had been distributed to the
Limited Partners, and the Partnership has repurchased $65,000 of limited
partnership units (130 units at $500 per unit).
(5) TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES
(A) MANAGEMENT FEES
The General Partner receives a fee for managing the Partnership
equal to 5% of the gross revenues of the Partnership, excluding
revenues from the sale of cable television systems or franchises.
Management fees charged to continuing operations by the General
Partner were $418,214, $431,900, and $440,690, for 2005, 2004, and
2003, respectively. Management fees charged to discontinued
operations by the General Partner were $137,300, $261,913 and
$312,620 in 2005, 2004 and 2003, respectively. Management fees are
included as a component of general and administrative expenses in
the accompanying statements of operations.
(B) REIMBURSEMENTS
The General Partner provides or causes to be provided certain
centralized services to the Partnership and other affiliated
entities. The General Partner is entitled to reimbursement from the
Partnership for various expenses incurred by it or its affiliates on
behalf of the Partnership allocable to its management of the
Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental
fees and licenses, headquarters' supplies and expenses, pay
television expenses, equipment and vehicle charges, operating
salaries and expenses, administrative salaries and expenses, postage
and office maintenance.
The amounts billed to the Partnership are based on costs incurred by
the General Partner in rendering the services. The costs of certain
services are charged directly to the Partnership, based upon the
personnel time spent by the employees rendering the service. The
cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes
that the methods used to allocate services to the Partnership are
reasonable. Amounts charged to continuing operations for these
services were $549,815, $538,664, and $528,682\ for 2005, 2004, and
2003, respectively. Amounts charged to discontinued operations for
these services were $136,945, $272,943 and $394,929 in 2005, 2004
and 2003, respectively.
11 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
The Partnership has entered into operating management agreements
with certain affiliates managed by the General Partner. Under the
terms of these agreements, the Partnership or an affiliate serves as
the managing agent for certain cable television systems and is
reimbursed for certain operating, programming, and administrative
expenses. The Partnership's continuing operations received $1,350,
$55, and $44,572 under the terms of these agreements during 2005,
2004, and 2003, respectively. The Partnership's discontinued
operations include $76,400, $135,463 and $135,449 of costs received
under the terms of these agreements during 2005, 2004 and 2003,
respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the
General Partner, was formed to provide billing system support to
cable systems owned and managed by the General Partner. In addition,
NCSC provides technical support associated with the build out and
upgrade of Northland affiliated cable systems. Cable Ad Concepts, a
subsidiary of NCSC, manages the development of local advertising as
well as billing for video commercial advertisements to be cablecast
on Northland affiliated cable systems. Prior to 2004, the
Partnership recorded gross advertising revenues and related expenses
on its statement of operations. Beginning in 2004, the Partnership
and CAC modified their agreement such that CAC retains all the
credit risks associated with the advertising activities and a net
fixed percentage of the related revenues are remitted to the
Partnership, which are recorded as net advertising revenues. In
2005, 2004, and 2003, the Partnership's continuing operations
include $80,376, $132,872, and $83,825, respectively, for these
services. Of this amount, $48,870 and $107,787 were capitalized in
2005 and 2004, respectively, related to the build out and upgrade of
cable systems. The Partnership's discontinued operations include
$11,007, $18,883 and $51,010 in 2005, 2004 and 2003, respectively,
for these services. None of these amounts were capitalized.
(C) DUE FROM AFFILIATES
The receivable from the affiliates consists of the following:
<Table>
<Caption>
DECEMBER 31
---------------------------
2005 2004
------------ -------------
Reimbursable operating costs, net $ 5,239 15,569
Other amounts due from affiliates, net 78,571 96,391
----------- -------------
$ 83,810 111,960
=========== =============
12 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
(D) DUE TO GENERAL PARTNER AND AFFILIATES
The payable to the General Partner and affiliates consists of the
following:
<Table>
<Caption>
DECEMBER 31
---------------------------
2005 2004
------------ -------------
Management fees $ (203) (10,595)
Reimbursable operating costs, net 53,004 82,664
Other amounts due to (from) General Partner and
affiliates, net (6,158) (2,644)
----------- ------------
$ 46,643 69,425
=========== ============
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<Table>
<Caption>
DECEMBER 31
----------------------------
2005 2004
------------ -------------
Land and buildings $ 627,654 885,708
Distribution plant 14,824,989 24,757,732
Other equipment 1,259,418 2,148,600
Leasehold improvements 6,331 26,178
Construction in progress 328,078 67,187
------------ -------------
17,046,470 27,885,405
Accumulated depreciation (10,477,977) (17,294,389)
------------ -------------
Property and equipment, net of
accumulated depreciation $ 6,568,493 10,591,016
============ =============
13 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
<Table>
<Caption>
DECEMBER 31
----------------------------
2005 2004
----------- -------------
Accounts payable $ 189,484 100,888
Program license fees 439,053 478,102
Interest 57,535 108,584
Franchise fees 208,525 283,670
Pole rental 30,870 136,385
Payroll 36,289 60,195
Taxes 25,332 67,531
Copyright fees 10,872 26,322
Limited Partners tax liability 180,732 --
Other 4,410 1,244
----------- ------------
$ 1,183,102 1,262,921
=========== ============
(8) NOTE 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, 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.
As of December 31, 2005 and 2004, the balance of the Refinanced Credit
Facility was $3,827,998 and $18,275,000, respectively.
14 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
Annual maturities of the note payable after December 31, 2005, are as
follows:
<Table>
2006 $ 941,713
2007 1,165,633
2008 1,387,554
2009 333,098
-----------
$ 3,827,998
===========
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 will not be
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 December 31, 2005, the Partnership was in compliance
with the terms of the loan agreement.
(9) INCOME TAXES
Income taxes have not been recorded in the accompanying financial
statements because they are obligations of the partners. The federal and
state income tax returns of the Partnership are prepared and filed by the
General Partner.
The tax returns, the qualification of the Partnership as such for tax
purposes, and the amount of distributable partnership income or loss are
subject to examination by federal and state taxing authorities. If such
examinations result in changes with respect to the Partnership's
qualification or in changes with respect to the income or loss, the tax
liability of the partners would likely be changed accordingly.
As a result of the sales of the Brenham and Bay City systems, the Limited
Partners were allocated taxable income in 2005. State income taxes to be
paid by the Partnership on behalf of the Limited Partners have been
recorded as a reduction of Limited Partner's capital. There was no taxable
income allocated to the Limited Partners in 2004 or 2003. Generally,
subject to the allocation procedures discussed in the following paragraph,
taxable income to the Limited Partners is different from that reported in
the statement of operations principally due to the differences in
depreciation and amortization expense allowed for tax purposes and the
amounts recognized under accounting principles generally accepted in the
United States of America. Historically, there were no other significant
differences between taxable income and the net loss reported in the
statements of operations.
The Partnership agreement provides that tax losses may not be allocated to
the Limited Partners if such loss allocation would create a deficit in the
Limited Partners' Capital Account. Such excess losses are
15 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
reallocated to the General Partner (Reallocated Limited Partner Losses).
In subsequent years, 100% of the Partnership's taxable income is allocated
to the General Partner until the General Partner has been allocated
taxable income in amounts equal to the Reallocated Limited Partner Losses.
Under current federal income tax laws, a partner's allocated share of tax
losses from a partnership is allowed as a deduction on his individual
income tax return only to the extent of the partner's adjusted basis in
his partnership interest at the end of the tax year. Any excess losses
over adjusted basis may be carried forward to future tax years and are
allowed as deductions to the extent the partner has an increase in his
adjusted basis in the Partnership through either an allocation of
partnership income or additional capital contributions to the Partnership.
In addition, current tax law does not allow a taxpayer to use losses from
a business activity in which he does not materially participate (a passive
activity, e.g., a Limited Partner in a limited partnership) to offset
other income such as salary, active business income, dividends, interest,
royalties, and capital gains. However, such losses can be used to offset
other income from passive activities. Disallowed losses can be carried
forward indefinitely to offset future income from passive activities.
Disallowed losses can be used in full when the taxpayer recognizes gain or
loss upon the disposition of his entire interest in the passive activity.
(10) COMMITMENTS AND CONTINGENCIES
(A) LEASE ARRANGEMENTS
The Partnership leases certain office facilities and other sites
under leases accounted for as operating leases. Rental expense
attributable to continuing operations, related to these leases was
$22,072, $26,606, and $27,250 in 2005, 2004, and 2003, respectively.
Rental expense attributable to discontinued operations related to
these leases was $7,175, $12,300 and $19,798 in 2005, 2004 and 2003,
respectively. Minimum lease payments through the end of the lease
terms are as follows:
<Table>
2006 $ 10,074
2007 744
--------------
$ 10,818
==============
The Partnership also rents utility poles in its operations.
Generally, pole rentals are cancelable on short notice, but the
Partnership anticipates that such rentals will recur. Rent expense
incurred for pole rentals attributable to continuing operations for
the years ended December 31, 2005, 2004, and 2003 was $166,782,
$162,024, and $117,272, respectively. Rent expense incurred for pole
rentals attributable to discontinued operations for the years ended
December 31, 2005, 2004 and 2003 was $34,981, $59,968 and $84,910,
respectively.
(B) EFFECTS OF REGULATIONS
The operation of a cable system is extensively regulated at the
federal, local, and, in some instances, state levels. The Cable
Communications Policy Act of 1984, as amended, the Cable Television
Consumer Protection and Competition Act of 1992 (the 1992 Cable
Act), and the 1996
16 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
Telecommunications Act (the 1996 Telecom Act, and, collectively, the
Cable Act) establish a national policy to guide the development and
regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the
policies of the Cable Act. Many aspects of such regulation are
currently the subject of judicial proceedings and administrative or
legislative proposals. Legislation and regulations continue to
change.
Cable Rate Regulation - Although the FCC established the rate
regulatory scheme pursuant to the 1992 Cable Act, local
municipalities, commonly referred to as local franchising
authorities, are primarily responsible for administering the
regulation of the lowest level of cable service called the basic
service tier. The basic service tier typically contains local
broadcast stations, public, educational, and government access
channels and various entertainment and home shopping channels.
Before a local franchising authority begins basic service rate
regulation, it must certify to the FCC that it will follow
applicable federal rules. Many local franchising authorities have
voluntarily declined to exercise their authority to regulate basic
service rates. In a particular effort to ease the regulatory burden
on small cable systems, the FCC created special rate rules
applicable for systems with fewer than 15,000 subscribers owned by
an operator with fewer than 400,000 subscribers. The special rate
rules allow for a simplified cost-of-service showing for basic
service tier programming. All of Northland's systems are eligible
for these simplified cost-of-service rules, and have calculated
rates in accordance with those rules.
Cable Entry into Internet - The U.S. Supreme Court recently ruled
that cable television systems may deliver high-speed Internet access
and remain within the protections of Section 703 of the
Telecommunications Act of 1996 (the Pole Attachment Act). National
Cable & Telecommunications Assoc. v. Gulf Power Co., Nos. 00-832 and
00-843, 534 U.S. (January 16, 2002). The Court reversed the Eleventh
Circuit's decision to the contrary and sustained the FCC decision
that applied the Pole Attachment Act's rate formula and other
regulatory protections to cable television systems' attachments over
which commingled cable television and cable modem services are
provided. The data services business, including Internet access, is
largely unregulated at this time apart from federal, state and local
laws and regulations applicable to businesses in general. Some
federal, state, local and foreign governmental organizations are
considering a number of legislative and regulatory proposals with
respect to Internet user privacy, infringement, pricing, quality of
products and services and intellectual property ownership. It is
uncertain how existing laws will be applied to the Internet in areas
such as property ownership, copyright, trademark, trade secret,
obscenity and defamation. Additionally, some jurisdictions have
sought to impose taxes and other burdens on providers of data
services, and to regulate content provided via the Internet and
other information services. Northland expects that proposals of this
nature will continue to be debated in Congress and state
legislatures in the future. Additionally, the FCC is now considering
a proposal to impose obligations on some or all providers of
Internet access services to contribute to the cost of federal
universal service programs, which could increase the cost of
Internet access. Currently, Federal court rulings and FCC order
provide that cable modem revenue be excluded from gross revenues for
purposes of franchise fee calculations. Cable Modem Services have
been classified as an "interstate information service," which has
historically meant that no regulations apply to the provision of
this service. However, there is likely to be continuing uncertainty
about the classification and regulation of cable modem services.
17 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
Electric Utility Entry into Telecommunications and Cable Television
- The 1996 Telecom Act provides that registered utility holding
companies and subsidiaries may provide telecommunications services,
including cable television, notwithstanding the Public Utility
Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and
must apply to the FCC for operating authority. Like telephone
companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable
systems. Several of these utilities have been granted broad
authority to engage in activities that could include the provision
of video programming.
Must Carry and Retransmission Consent - The 1992 Cable Act contains
broadcast signal carriage requirements. Broadcast signal carriage is
the transmission of broadcast television signals over a cable system
to cable customers. These requirements, among other things, allow
local commercial television broadcast stations to elect once every
three years between "must carry" status or "retransmission consent"
status. Less popular stations typically elect must carry, which is
the broadcast signal carriage rule that allows local commercial
television broadcast stations to require a cable system to carry the
station. Must carry requests can dilute the appeal of a cable
system's programming offerings because a cable system with limited
channel capacity may be required to forego carriage of popular
channels in favor of less popular broadcast stations electing must
carry. More popular stations, such as those affiliated with a
national network, typically elect retransmission consent, which is
the broadcast signal carriage rule that allows local commercial
television broadcast stations to negotiate terms (such as mandating
carriage of an affiliated cable network or a digital broadcast
signal) for granting permission to the cable operator to carry the
stations. Retransmission consent demands may require substantial
payments or other concessions. The FCC has an on-going
administrative proceeding in which it has evaluated various
proposals for mandatory carriage of digital television signals. In
its initial decision the FCC, in part, (i) declined to order the
carriage of both the analog and digital signals of television
stations; (ii) determined that a television broadcast station
licensee that is operating only on its authorized digital channel
and/or that has surrendered its analog broadcast channel has
mandatory cable carriage rights within the broadcaster's local
service area for only the "primary video" programming stream of the
broadcaster's digital broadcast channel and does not have the right
to require the cable operator to carry multiple digital programming
streams, commonly called "multicasting". In February 2005, the FCC
reaffirmed its earlier decision not to impose (i) a dual carriage
regulation, and (ii) denial of any "multicast" requirement. The
broadcast industry trade association and several broadcasters have
announced that they will challenge the FCC's ruling and will lobby
Congress for favorable legislation. The FCC may evaluate additional
modifications to its digital broadcast signal carriage requirements
in the future. Northland cannot predict the ultimate outcome of this
proceeding, or the impact any new carriage requirements may have on
the operation of its cable systems. The President has signed into
law legislation establishing February 2009 as the deadline to
complete the broadcast transition to digital spectrum and to reclaim
analog spectrum. Cable operators may need to take additional
operational steps at that time to ensure that customers not
otherwise equipped to receive digital programming, retain access to
broadcast programming.
Access Channels - Local franchising authorities can include
franchise provisions requiring cable operators to set aside certain
channels for public, educational and governmental access
18 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
programming. Federal law also requires cable systems to designate a
portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The FCC has
adopted rules regulating the terms, conditions, and maximum rates a
cable operator may charge for commercial leased access use.
Access to Programming - The Communications Act and the FCC's
"program access" rules generally prevent satellite video programmers
affiliated with cable operators from favoring cable operators over
competing multichannel video distributors, such as DBS, and limit
the ability of such programmers to offer exclusive programming
arrangements to cable operators. The FCC has extended the
exclusivity restrictions through October 2007. Given the heightened
competition and media consolidation, it is possible that we will
find it increasingly difficult to gain access to popular programming
at favorable terms. Such difficulty could adversely impact our
business.
Copyright - Cable systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. The
possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could
adversely affect our ability to obtain desired broadcast
programming. Moreover, the Copyright Office has not yet provided any
guidance as to the how the compulsory copyright license should apply
to newly offered digital broadcast signals. Copyright clearances for
nonbroadcast programming services are arranged through private
negotiations. Cable operators also must obtain music rights for
locally originated programming and advertising from the major music
performing rights organizations. These licensing fees have been the
source of litigation in the past, and we cannot predict with
certainty whether license fee disputes may arise in the future.
State and Local Regulation - Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a
municipality or other state or local government entity in order to
cross public rights-of-way. Federal law now prohibits local
franchising authorities from granting exclusive franchises or from
unreasonably refusing to award additional or renew existing
franchises.
Cable franchises generally are granted for fixed terms and in many
cases include monetary penalties for noncompliance and may be
terminable if the franchisee fails to comply with material
provisions. The specific terms and conditions of franchises vary
materially among jurisdictions. Each franchise generally contains
provisions governing cable operations, service rates, franchising
fees, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service
standards, and indemnification protections. One of the state in
which Northland conducts business has centralized the jurisdiction
over franchising with a state governmental agencies, rather than
with municipalities. These new regulations are similar to those that
govern a public utility. Several other states are also considering
regulating cable franchises at the state governmental level. The
effect of such legislation is to simplify and expedite entrance of
new competitive providers of video, data and voice services into the
market. Northland anticipate that this trend towards simplified
entrance into the market will continue. Although state and local
franchising authorities have considerable discretion in establishing
franchise terms, there are certain federal limitations. For example,
local franchising authorities cannot insist on franchise fees
exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the
19 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
system, and cannot specify video programming other than identifying
broad categories of programming.
Federal law contains renewal procedures designed to protect
incumbent franchisees against arbitrary denials of renewal. Even if
a franchise is renewed, the local franchising authority may seek to
impose new and more onerous requirements, such as significant
upgrades in facilities and service or increased franchise fees as a
condition of renewal. Historically, most franchises have been
renewed and transfer consents granted to cable operators that have
provided satisfactory services and have complied with the terms of
their franchise.
Phone Service - The 1996 Telecom Act, which amended the
Communications Act, created a more favorable regulatory environment
for us to provide telecommunications services. In particular, it
limited the regulatory role of local franchising authorities and
established requirements ensuring that we could interconnect with
other telephone companies to provide a viable service. Many
implementation details remain unresolved, and there are substantial
regulatory changes being considered that could impact, in both
positive and negative ways, our primary telecommunications
competitors and our own entry into the field of phone service. The
FCC and state regulatory authorities are considering, for example,
whether common carrier regulation traditionally applied to incumbent
local exchange carriers should be modified. The FCC has concluded
that alternative voice technologies, like certain types of VOIP,
should be regulated only at the federal level, rather than by
individual states. A legal challenge to that FCC decision is
pending. While the FCC's decision appears to be a positive
development for VoIP offerings, it is unclear whether and how the
FCC will apply certain types of common carrier regulations, such as
intercarrier compensation and universal service obligations to
alternative voice technology. The FCC has already determined that
providers of phone services using Internet Protocol technology must
comply with traditional 911 emergency service obligations (E911) and
it has extended requirements for accommodating law enforcement
wiretaps to such providers. It is unclear how these regulatory
matters ultimately will be resolved and how they will affect our
potential expansion into phone service.
The foregoing summary does not purport to describe all present and
proposed federal, state and local regulations and legislation
affecting the cable or telephony industries. Other existing federal
regulations, copyright licensing and, in many jurisdictions, state
and local franchise requirements currently are the subject of a
variety of judicial proceedings, legislative hearings, and
administrative and legislative proposals that could alter, in
varying degrees, the manner in which cable or information service
systems operate. Northland cannot predict at this time the outcome
of these proceedings or their impact upon the industry or upon
Northland's business and operations.
(1) SYSTEM SALE
On March 11, 2003, the Partnership sold the operating assets and franchise
rights of its 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. Substantially all of the proceeds
were used to pay down amounts outstanding under the Partnership's credit
agreement. The sales price was adjusted at closing for the proration of
certain revenues and expenses and 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
20 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
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 2004.
On August 26, 2005, the Partnership and Northland Cable Television, Inc.
(NCTV), a related party affiliate, settled their ongoing litigation with
the buyer (Buyer) of the Washington Systems. Buyer had asserted various
claims against the Partnership and NCTV and withheld sales proceeds of
$411,600 and $433,200, respectively from each selling company. As a result
of the settlement Buyer received $390,000 of the aggregate retained sales
proceeds. Of this amount, $283,200 was allocated to the NCP7 sales
transaction and has been reflected in discontinued operations as a loss
from the sale of the systems in the Partnership's statement of operations.
The Partnership also recorded $35,736 in legal fees in connection with the
settlement of this litigation.
The Partnership does not expect that the settlement of these claims, or
the write off of the amounts remitted to the buyer of the Washington
Systems, will have any further implication on the Partnership's financial
statements.
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.
21 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
The assets and liabilities attributable to the Brenham and Bay City
systems as of December 31, 2004 consisted of the following:
<Table>
<Caption>
DECEMBER 31,
2004
------------
Cash $ 16,893
Accounts receivable 179,757
Prepaid expenses 54,039
Property and equipment 12,032,462
Accumulated depreciation (8,336,538)
------------
3,695,924
Franchise agreements (net of accumulated
amortization of $325,275) 219
------------
Total assets $ 3,946,832
============
Accounts payable and accrued expenses $ 433,206
Deposits 6,552
Subscriber prepayments 176,969
------------
Total liabilities $ 616,727
============
22 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
The revenue, expenses and other items attributable to the operations of
the Washington, Brenham and Bay City systems for the years ended December
31, 2005, 2004, and 2003 have been reported as discontinued operations in
the accompanying statements of operations and include the following:
<Table>
<Caption>
2005 2004 2003
------------ ------------ ------------
Revenue $ 2,750,502 5,238,241 6,252,406
Expenses:
Operating (including $35,277 and
$42,829, received from affiliates, and
$23,017 paid to affiliates in 2005,
2004 and 2003, respectively) 244,957 401,672 533,077
General and administrative (including
$243,342, $461,524, and $573,422
paid to affiliates in 2005, 2004, and
2003, respectively) 860,500 1,383,478 1,583,455
Programming (including $787 paid to
affiliates, $419 received from
affiliates, and $26,671 paid to
affiliates in 2005, 2004 and 2003,
respectively) 1,132,189 2,033,154 2,317,967
Depreciation and amortization 75,878 667,916 839,015
------------ ------------ ------------
Income from operations 436,978 752,021 978,892
Other income (expense):
Interest expense and amortization of
loan fees (622,727) (954,356) (1,626,113)
Loss on extinguishment of debt (717,485) -- --
Gain on sale of systems 12,547,285 -- 14,027,857
------------ ------------ ------------
Income (loss) from operations
of Washington, Brenham
and Bay City systems, net $ 11,644,051 $ (202,335) 13,380,636
============ ============ ============
The Partnership allocated interest expense to discontinued operations
using the historic weighted average interest rate applicable to the
Partnership's term loan and approximately $18,713,000 in principal
payments related to the sale of the Washington systems and approximately
$14,207,000 in principal payments related to the sales 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, plus a ratable portion of deferred debt costs are
classified as loss on extinguishment of debt and have been allocated to
discontinued operations.
23 (Continued)
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2005 and 2004
(12) SOLICITATION OF INTEREST FROM POTENTIAL BUYERS
The General Partner has been working with a nationally recognized
brokerage firm to solicit offers from potential purchasers for the sale of
the Partnership's assets for fair value.
Despite ongoing efforts, the General Partner has been unable to secure any
offers for the sale of the Partnership's assets at this time. Management
does not feel that the lack of viable purchase offers for the
Partnership's remaining cable systems reflect a lack of value in those
systems or a concern over the operational capabilities of those systems.
Instead, based on experience, many factors affect the market for cable
television systems over time, including whether the various companies
participating in the cable television industry are generally in an
acquisition mode, the availability of financing through lenders or
investors and the number of other systems that are either on the market or
forecasted to soon be offered for sale.
It is Management's experience, after many years in the cable television
industry, that it is difficult to forecast the likelihood of receiving a
solid purchase offer from a financially viable purchaser at any specific
time. Notwithstanding, the General Partner will continue its efforts to
solicit offers from potential purchasers from time to time with the goal
of securing more than one viable offer for the partnership's cable
systems, however, Management is unable at this time to forecast the
ultimate outcome of these activities.
(13) LITIGATION
In March 2005, Northland filed a compliant 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. The Partnership is currently in discovery and a
trial date is set for May 1, 2006. At this time Management cannot
reasonably estimate the probability of a favorable or unfavorable outcome
of this case nor can it reasonably estimate the amount of any potential
recovery or damages that could result from any such outcome.
24