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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

OR

Commission file number                                      

NextMedia Operating, Inc.
(Exact name of registrant as specified in its charter)

(303) 694-9118
(Registrant’s telephone number, including area code)

Not Applicable
(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 x No o

The total number of shares of common stock, par value $.01 per share, outstanding as of November 13, 2002 was 3,000. The Registrant has no other class of common stock outstanding.

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NEXTMEDIA OPERATING, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

The accompanying Notes are an integral part of these Consolidated Financial Statements

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NEXTMEDIA OPERATING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(unaudited)

The accompanying Notes are an integral part of these Consolidated Financial Statements

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NEXTMEDIA OPERATING, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

The accompanying Notes are an integral part of these Consolidated Financial Statements

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NEXTMEDIA OPERATING, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.      INTERIM FINANCIAL DATA AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Management believes that we have made all adjustments necessary for a fair presentation of results of the interim periods and that these adjustments were of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. The interim results of operations and cash flows are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2002 due to seasonality and other factors. The consolidated financial statements should be read in conjunction with the consolidated financial statements of NextMedia Operating, Inc. and the notes thereto included in the registration statement on Form S-4, as filed with the Securities and Exchange Commission on March 15, 2002 relating to $200.0 million aggregate principal amount of our senior subordinated notes (the “registration statement”). In this quarterly report on Form 10-Q, the terms “we”, “our” and “us” refer to NextMedia Operating, Inc. and its subsidiaries, and the term “NextMedia” refers only to NextMedia Operating, Inc.

Short-term Investments

From time to time, we invest cash on-hand in liquid investments with maturities at date of purchase of one year or less. These investments are typically certificates of deposit or U.S. government securities, such as Treasury Bills. These investments are classified as available for sale.

2.      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement 142”). Statement 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. Statement 142 establishes new accounting for goodwill and other intangible assets recorded in business combinations. Under the new rules, goodwill and intangible assets deemed to have indefinite lives, such as FCC broadcast licenses, are no longer amortized but are subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives.

In connection with the suspension of amortization of these assets, we currently expect that our deferred tax liabilities will not reverse within our net operating loss carry-forward period. Accordingly, on January 1, 2002, we recorded a one time non-cash charge of $8.3 million to deferred tax expense to establish an additional valuation allowance against its deferred tax assets. We recorded additional deferred tax expense of $11.4 million to establish a valuation allowance against net operating loss carry-forwards generated during the nine months ended September 30, 2002, resulting from amortization of goodwill and broadcast licenses that is deductible for tax purposes, but is no longer amortized in the financial statements. We do not expect the adoption of Statement 142 to have any impact on our cash flow.

In June 2002, the FASB issued Statement No. 146 (“Statement 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and replaces Emerging Issues Taskforce Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other

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Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring).” The provisions of Statement 146 are effective for exit or disposal activities initiated after December 31, 2002. We believe that Statement 146 may have a prospective effect on our financial statements for costs associated with future exit or disposal activities.

3.      ACQUISITIONS AND DISPOSITIONS

During the first quarter of 2002, we acquired outdoor advertising assets in several transactions with an aggregate purchase price of approximately $2.6 million, excluding acquisition costs of $270,000 and sold radio station WKKD-AM, located in Aurora, Illinois for approximately $800,000.

During the second quarter of 2002, we acquired outdoor advertising assets in several transactions with an aggregate purchase price of approximately $3.1 million. In addition, we entered into a contract to sell the assets of radio stations WYOO-FM, WPCF-AM, WQJM-FM, WILN-FM and WYYX-FM in exchange for approximately $5.5 million in cash. The assets to be sold consist primarily of FCC licenses, broadcast equipment and accounts receivable. We have recorded a loss of approximately $3.3 million in discontinued operations in the second quarter for the difference between the carrying value of this reporting unit and the expected proceeds of the sale, less expected selling costs. We have classified the remaining carrying value of the assets to be sold as held for sale on the balance sheet and the results of operations for this reporting unit have been classified as discontinued operation in all periods presented. During the three and nine month periods ended September 30, 2002, these assets generated net revenues of approximately $66,000 and $736,000, respectively, and pre-tax losses of $187,000 and $201,000, respectively. Management decided to sell these assets because we believe there are alternative uses of capital which may provide a higher return on investment.

During the third quarter of 2002, we acquired the assets of Flack Outdoor Advertising, Inc. for $24.9 million, excluding acquisition costs. As a result of the acquisition, we acquired over 1,600 outdoor displays located primarily in the Northern Colorado, Wyoming and Missouri markets. Also in the third quarter of 2002, we acquired outdoor advertising assets in several other transactions with an aggregate purchase price of approximately $4.0 million.

With the exception of Flack Outdoor Advertising, Inc., each of the foregoing acquisitions were asset purchases. The assets of Flack Outdoor Advertising, Inc. were contributed to a newly formed entity, NextMedia of Northern Colorado, Inc. We acquired 100% of the common stock of the this entity.

Each of the acquisitions was consummated as part of our ongoing strategy of growth through acquisition and consolidation of radio broadcasting and outdoor advertising assets. The accounting for these acquisitions resulted in a significant portion of the purchase price being allocated to goodwill because the value of the businesses acquired significantly exceeded the value of the tangible and identifiable intangible assets. The results of operations of these acquisitions are included in our operating results from the date each acquisition was consummated. All of the acquisitions were funded with cash on hand or cash contributed by private investment funds.

In August  2002, we entered into an agreement to purchase three FM stations and one AM station in the Sherman/Dennison, Texas and Ardmore, Oklahoma television markets for $5.5 million. To secure our obligations under the agreement, we provided a $275,000 letter of credit. Also, in October 2002, we entered into an agreement to purchase four FM stations and one AM station in the Saginaw/Bay City/Midland, Michigan market from Wilks Broadcasting, LLC for $55.5 million. To secure our obligations under the agreement, we provided a $5.6 million letter of credit. We expect to close the acquisitions in the first quarter of 2003 utilizing cash generated from operations, private equity contributions and borrowings under our credit facility.

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4.      PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

5.      INTANGIBLE ASSETS AND GOODWILL

The following table presents the impact of Statement 142 on net earnings (loss) as if the standard had been in effect for the nine months ended September 30, 2001:

Definite-lived Intangibles

We have definite-lived intangible assets recorded that continue to be amortized in accordance with Statement 142. These assets consist primarily of non-compete agreements and other contractual rights which are amortized over the respective lives of the agreements. In accordance with the transitional requirements of Statement 142, we reassessed the useful lives of these intangibles and made no material changes to their useful lives. The following table presents the gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets (in thousands):

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Total amortization expense from definite-lived intangibles for the nine months ended September 30, 2002 and for the year ended December 31, 2001 was approximately $436,000 and $568,000, respectively. The following table presents our estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles as of January 1, 2002:

Indefinite-lived Intangibles and Goodwill

Under the guidance in Statement 142, our FCC licenses are considered indefinite-lived intangibles. These FCC licenses and goodwill are not subject to amortization, but will be tested for impairment at least annually. In accordance with Statement 142, we tested our FCC licenses for impairment as of January 1, 2002 by comparing their fair value to their carrying value at that date. The test resulted in no impairment. We used the income approach to value FCC licenses, which involved estimating future cash flows expected to be generated from the licenses, discounted to their present value using a risk-adjusted discount rate. Terminal values were also estimated and discounted to their present value. In estimating future cash flows, we took into account the economic slow down in the radio industry at the end of 2001. Statement 142 requires us to test goodwill for impairment using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. We completed the two-step impairment test during the first quarter of 2002. As a result of this test, we recognized no impairment. Consistent with our approach to valuation of FCC licenses, the income approach was used to determine the fair value of each of our reporting units. Our reporting units are the individual markets in which our radio and outdoor advertising businesses operate.

6.      ACCRUED EXPENSES

Accrued expenses consist of the following:

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7.      COMMITMENTS AND CONTINGENCIES

As of September 30, 2002, we had $1.5 million in letters of credit outstanding as deposits to secure obligations including asset purchase agreements.

From time to time, we are subject to routine litigation incident to our business. Management does not expect these matters to have a material adverse effect upon our liquidity, results of operations or financial position.

8.      DEBT AND EQUITY COMMITMENTS

Subsequent to the third quarter, we amended our $100.0 million credit facility. As a result of the amendment: (i) in the event that we do not utilize the facility, we will not be required to comply with the maximum total leverage ratio until July 1, 2003; (ii) the commitments under the facility have been reduced from $100.0 million to $75.0 million; and (iii) certain financial covenants related to senior leverage, total leverage and interest coverage have been relaxed. The amended facility contains customary restrictive covenants that, among other things, limit our ability to incur additional indebtedness and liens in connection therewith, pay dividends and make capital expenditures above specified limits. Under the credit facility, we must satisfy specified financial covenants, such as a maximum leverage ratio and a minimum ratio of consolidated EBITDA to consolidated net cash interest expense. As of September 30, 2002, we were in compliance with all these covenants. As of October 31, 2002, no amounts were available for borrowing under the facility.

Except for the amendments in clause (i) above, which has already become effective, the foregoing amendments will not become effective until at least $65.0 million of a $75.0 million private equity commitment has been funded. As of October 31, 2002, $44.9 million of that equity commitment has been funded to complete acquisitions. The remaining committed but unfunded amount is $30.1 million.

In January 2002, we entered into two interest rate swap agreements with an aggregate notional amount of $75.0 million. Pursuant to the swap arrangements, we will pay interest on the notional amount at a floating rate based on LIBOR and we will receive a fixed rate of 10.75% on the notional amount until the expiration of the agreements in January 2004. For every 0.5 % increase in interest rates, we would experience an increase of approximately $375,000 in annual interest expense and, to the extent that the three month LIBOR plus 7.3% exceeds 10.75% in the future, we would be required to pay amounts in excess of the fixed payments we receive under the swap arrangements. During the three months ended September 30, 2002, we recorded a non-cash gain of approximately $715,000 to record our swap arrangements at fair value.

9.      SEGMENT DATA

Our business consists of two out-of-home media divisions: radio broadcasting and outdoor advertising.

The radio broadcasting segment is comprised of radio stations for which we are the licensee or for which we program and sell on-air advertising time under local marketing agreements. At September 30, 2002, the radio broadcasting segment owned and operated 51 radio stations and one unwired sales network.

The outdoor advertising segment includes traditional outdoor advertising displays, such as roadside bulletins, posters and transit displays that we own or operate under lease arrangements, as well as advertising displays that we install in public locations, including restaurants, health clubs, retail stores and entertainment venues. At September 30, 2002, the outdoor advertising segment owned or operated approximately 29,000 indoor advertising display faces and over 5,725 outdoor billboard displays.

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The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the registration statement. There are no intersegment sales or transfers.

No customer accounted for more than 10% of our consolidated revenues for the three or nine months ended September 30, 2002 or 2001.

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Although broadcast cashflow (BCF) is not a measure of performance calculated in accordance with generally accepted accounting principles, we believe it is useful in evaluating our operating performance and comparing us to other companies in our business who report similar measures. BCF consists of operating income before local marketing agreement fees, depreciation and amortization and corporate expenses.

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10.      SUPPLEMENTAL GUARANTOR INFORMATION

Our senior subordinated notes are guaranteed on a senior subordinated basis, jointly and severally, by all of our subsidiaries (the “Guarantor Subsidiaries”). We have collateralized the revolving credit facility by granting a first priority-perfected pledge of our assets including, without limitation, the capital stock of NextMedia Operating, Inc. and our subsidiaries.

NextMedia Operating, Inc.
Supplemental Combining Balance Sheet
As of September 30, 2002
(in thousands)

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NextMedia Operating, Inc.
Supplemental Combining Statement of Operations
For the Three Months Ended September 30, 2002
(in thousands)

NextMedia Operating, Inc.
Supplemental Combining Statement of Operations
For the Three Months Ended September 30, 2001
(in thousands)

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NextMedia Operating, Inc.
Supplemental Combining Statement of Operations
For the Nine Months Ended September 30, 2002
(in thousands)

NextMedia Operating, Inc.
Supplemental Combining Statement of Operations
For the Nine Months Ended September 30, 2001
(in thousands)

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NextMedia Operating, Inc.
Supplemental Combining Statement of Cash Flows
For the Nine Months Ended September 30, 2002
(in thousands)

NextMedia Operating, Inc.
Supplemental Combining Statement of Cash Flows
For the Nine Months Ended September 30, 2001
(in thousands)

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The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated unaudited interim financial statements and related notes thereto included elsewhere in this quarterly report. Our actual results could differ materially from those discussed herein. This quarterly report contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding the intent, belief or current expectations of our Company, directors and officers primarily with respect to our future operating performance. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties. Our actual results may differ from those in the forward-looking statements as a result of various factors, including without limitation, risks and uncertainties relating to leverage, the need for additional funds, FCC and government approval of future acquisitions, our inability to renew one or more of our broadcast licenses, inability to renew tower or site leases, changes in interest rates, consummation of our future acquisitions, integration of the future acquisitions, our ability to eliminate certain costs, our management of rapid growth, the popularity of radio as a broadcasting and advertising medium and changing consumer tastes. Many of these risks and uncertainties are beyond our control and would significantly alter the results set forth in these statements.

General

Our business consists of two out-of-home media divisions: radio broadcasting and outdoor advertising. Our radio broadcasting business sells on-air advertising time on radio stations for which we provide programming. Our outdoor advertising business includes traditional outdoor advertising displays, such as bulletins, posters and wall-sides, as well as alternative advertising displays that we install in public locations, including restaurants, health clubs, retail stores and entertainment venues.

Radio Broadcasting Division

We derive our radio broadcast revenues primarily from the sale of advertising time to local, regional and national advertisers. Our radio division operating expenses consist primarily of employee salaries and commissions, programming expenses, research, advertising and promotion expenses, rental for studio premises, rental of transmission tower space and music license royalty fees. We seek to merge these expenses by centralizing certain functions, such as finance, accounting, legal, human resources and management information systems and the overall programming management function and by requiring adherence to strict cost controls at the station level.

Our radio advertising revenues generally reflect the advertising rates that our radio stations can charge and the number of advertisements that we can broadcast without jeopardizing listener levels and resulting ratings. We typically base our advertising rates upon demand for a station’s advertising inventory and its ability to attract audiences in targeted demographic groups, as well as by the number of stations competing in the market.

Most of our markets are mid-sized or suburban markets, which typically attract a larger percentage of advertising revenues from local, rather than national, advertising.

The radio broadcast industry typically experiences seasonal revenue fluctuations due primarily to fluctuations in advertising expenditures by local and national advertisers, with revenues typically being the lowest in the first calendar quarter and the highest in the second and fourth calendar quarters of each year. A radio station’s operating results in any period also may be affected by advertising and

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promotional expenditures that do not necessarily produce revenues in the period in which the expenditures are made.

During the second quarter of 2002, we entered into a contract to sell the assets of radio stations WYOO-FM, WPCF-AM, WQJM-FM, WILN-FM and WYYX-FM for approximately $5.5 million in cash. The assets to be sold consist primarily of FCC licenses, broadcast equipment and accounts receivable. We have recorded a loss of approximately $3.3 million in discontinued operations in the second quarter for the difference between the carrying value of this reporting unit and the expected proceeds of the sale, less expected selling costs. We have classified the remaining carrying value of the assets to be sold as held for sale on the balance sheet and the results of operations for this reporting unit have been classified as discontinued operation in all periods presented. During the three- and nine-month periods ended September 30, 2002, these assets generated net revenues of approximately $66,000 and $736,000, respectively. Management decided to sell these assets because we believe there are alternative uses of capital which may provide a higher return on investment.

Outdoor Advertising Division

We derive our outdoor advertising revenues primarily through contracts with local and national advertisers. Our outdoor division operating expenses consist primarily of employee salaries and commissions, rental of sites for advertising displays, costs for the installation of advertisements, maintenance and shipping costs, printing of advertisements and reproduction costs.

Our outdoor advertising revenues reflect advertising rates prevailing in the relevant market, the location of our displays and our available inventory. We generally base our advertising rates on a particular display’s exposure, or number of “impressions” delivered, in relation to the demographics of the particular market and its location within that market. Our outdoor advertising display contracts typically have terms ranging from three months to one year.

We estimate the number of impressions delivered by an outdoor display, for example, by estimating the number of individuals viewing the site during a defined period. We apply a similar formula for determining advertising rates for our other display products. Because roadside bulletin displays and wall-sides are large and generate a higher number of impressions than other outdoor products, advertising rates for bulletins and wall-sides are significantly higher than those for our other outdoor and alternative display products.

Factors Affecting Comparability

We commenced operations in late-1999 when we completed our first acquisition. Our results of operations from period to period are not directly comparable because of the impact of the various acquisitions and dispositions that we have completed as well as our rapid build-up in personnel in anticipation of additional acquisitions. Moreover, our expected growth through acquisitions is likely to continue to limit the comparability of our results of operations. The following is a summary of our acquisition and disposition activity since December 31, 2001 affecting comparability and should be read in conjunction with our financial statements for the year ended December 31, 2001.

During the first quarter of 2002, we acquired outdoor advertising assets in several transactions with an aggregate purchase price of approximately $2.6 million, excluding acquisition costs of $270,000 and sold radio station WKKD-AM, located in Aurora, Illinois for approximately $800,000.

During the second quarter of 2002, we acquired outdoor advertising assets in several transactions with an aggregate purchase price of approximately $3.1 million. In addition, we entered into a contract to sell the

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assets of radio stations WYOO-FM, WPCF-AM, WQJM-FM, WILN-FM and WYYX-FM in exchange for approximately $5.5 million in cash. The assets to be sold consist primarily of FCC licenses, broadcast equipment and accounts receivable. We have recorded a loss of approximately $3.3 million in discontinued operations in the second quarter for the difference between the carrying value of this reporting unit and the expected proceeds of the sale, less expected selling costs. We have classified the remaining carrying value of the assets to be sold as held for sale on the balance sheet and the results of operations for this reporting unit have been classified as discontinued operation in all periods presented. During the three and nine month periods ended September 30, 2002, these assets generated net revenues of approximately $66,000 and $736,000, respectively, and pre-tax losses of $187,000 and $201,000, respectively. Management decided to sell these assets because we believe there are alternative uses of capital which may provide a higher return on investment.

During the third quarter of 2002, we acquired the assets of Flack Outdoor Advertising, Inc. for $24.9 million, excluding acquisition costs. As a result of the acquisition, we acquired over 1,600 outdoor displays located primarily in the Northern Colorado, Wyoming and Missouri markets. Also in the third quarter of 2002, we acquired outdoor advertising assets in several other transactions with an aggregate purchase price of approximately $4.0 million.

In the following analysis, broadcast cash flow consists of operating income before local marketing agreement fees, depreciation and amortization and corporate expenses. EBITDA consists of operating income before local marketing agreement fees, depreciation and amortization. Although broadcast cash flow and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles, we believe that they are useful to an investor in evaluating our operating performance and comparing us to other companies in our business who report similar measures. However, you should not consider broadcast cash flow and EBITDA in isolation or as a substitute for operating income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of liquidity or profitability. Moreover, the way in which we calculate broadcast cash flow and EBITDA may differ from that of companies reporting similarly-named measures.

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RESULTS OF OPERATIONS

The following tables present certain summary historical financial data for the periods indicated on a consolidated basis and for each of our out-of-home media divisions (dollars in thousands).