---

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q


(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
|- |  | -------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------




| |  | For the quarterly period ended March 31, 2002
| |  | ---------------------------------------------




OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
|- |  | --------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------




| |  | For the transition period
fromto
| |  | --------------------------------




Commission file number





---




NEXTMEDIA
OPERATING, INC.


(Exact name of registrant as specified in its charter)





Delaware

84-154397(State or other jurisdiction of
incorporation or organization)

(IRS Employer Identification
No.)6312 S. Fiddlers Green Circle, Suite 360E Englewood Colorado

80111(Address of principal executive offices)

(Zip Code)





(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  ̈ No  þ





The total number of shares of common stock, par value $.01 per share, outstanding as of May 22, 2002 was 3,000. The Registrant has no
other class of common stock outstanding.





---





---




NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(Dollars in
thousands)


(unaudited)





December 31, 2001


March 31, 2002AssetsCurrent assets:Cash and cash equivalents

$
30,501


$
18,095Accounts receivable, less allowance for doubtful accounts of $1,209 at December 31, 2001 and $1,381 at March 31, 2002,
respectively


13,604



12,265Prepaid expenses and other current assets


2,129



2,239Total current assets


46,234



32,599Property and equipment, net


40,844



41,209Other assets


10,576



10,757Other intangibles, net


1,169



1,303Goodwill, net


148,297



151,450FCC licenses, net


252,544



251,838Total assets

$
499,664


$
489,156Liabilities and Stockholders EquityCurrent liabilities:Accounts payable

$
2,284


$
1,195Accrued expenses


15,116



8,988Deferred revenue


676



689Other current liabilities


9



1,402Total current liabilities


18,085



12,274Long-term debt


197,102



197,152Other long-term liabilities


1,846



16,818Total liabilities

$
217,033


$
226,244Commitments and contingencies (Note 7)Common stock, $0.01 par value; 3,000 shares authorized, issued and outstanding


1



1Additional paid-in capital


297,244



297,478Accumulated deficit


(14,614
)


(34,567
)Total stockholders equity


282,631



262,912Total liabilities and stockholders equity

$
499,664


$
489,156





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




1




---




NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands)


(unaudited)





Three Months Ended March 31,2001


2002Gross revenue

$
15,391


$
20,748Less: agency commissions


911



1,581Net revenue


14,480



19,167Operating expenses


10,010



13,668Corporate expenses


2,018



2,091Depreciation and amortization


2,681



1,271Local marketing agreement fees


15



Total operating expenses


14,724



17,030Operating income (loss)


(244
)


2,137Other operating income (expense):Interest income


11



70Interest expense


(2,546
)


(5,652
)Other income (expense)






(668
)Loss before provision for income taxes


(2,779
)


(4,113
)Provision for income taxes


45



15,840Net loss

$
(2,824
)

$
(19,953
)











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




2




---

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(unaudited)





Three Months Ended March
31,2001


2002Cash flows from operating activities:Net loss

$
(2,824
)

$
(19,953
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


2,681



1,271Non-cash compensation






19Provision for bad debt


157



172Non-cash interest expense


105



294Unrealized (gain)/loss on interest rate swaps






656Provision for deferred taxes






15,540Changes in assets and liabilities, net of effects of acquisitions:Deferred revenue


(83
)


13Accounts receivable


1,467



1,167Prepaid expenses and other current assets


(595
)


(120
)Accounts payable and accrued expenses


(3,021
)


(7,217
)Net cash used in operating activities


(2,113
)


(8,158
)Cash flows from investing activities:Acquisitions, net of cash acquired


(7,461
)


(3,454
)Proceeds from sale of assets






755Capital expenditures


(1,373
)


(1,517
)Net cash used in investing activities


(8,834
)


(4,216
)Cash flows from financing activities:Proceeds from senior credit facilities


14,000



Payments on senior credit facilities


(8,946
)


Payments of financing costs


(60
)


(416
)Capital contributions from Parent


9,297



215Other


(11
)


(30
)Increase in seller working capital






199Net cash provided by (used in) financing activities


14,280



(32
)Net increase (decrease) in cash and cash equivalents


3,333



(12,406
)Cash and cash equivalents at beginning of period


836



30,501Cash and cash equivalents at end of period

$
4,169


$
18,095Supplemental Cash Flow Information:Cash payments during the period for interest

$
2,976


$
10,750








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




3




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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.    INTERIM FINANCIAL DATA





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.





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 $11.6 million to deferred tax expense to establish an additional valuation allowance against our deferred tax assets. We recorded additional deferred tax expense of $3.9
million to establish a valuation allowance against net operating loss carry-forwards generated during the quarter ended March 31, 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 April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(Statement 145). Statement 145 rescinds FASB Statement No.4, Reporting Gains and Losses from Extinguishment of Debt and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Statement 145 also rescinds
FASB Statement No. 44, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Statement 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Early adoption of Statement 145 is
encouraged and may be as of the beginning of the fiscal year or as of the beginning of the interim period in which the statement was issued. Management does not believe the adoption of this statement will have a material impact on our financial
position, cash flows of results of operations.





3.    ACQUISITIONS AND DISPOSITIONS





During the first quarter of 2002, we acquired certain 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.





4.    PROPERTY AND EQUIPMENT





Property and equipment consist
of the following:




4




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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Depreciable Life

December 31, 2001


March 31, 2002(in thousands)Land and improvements



$
5,161


$
5,161Construction in progress




376



462Buildings

20


7,927



7,927Leasehold improvements

10


1,779



1,877Broadcast equipment

5-20


6,757



6,910Office equipment

7


2,106



2,263Computer software and systems

3-5


951



1,019Tower and antennae

5-20


3,189



3,218Vehicles

3


988



1,167Furniture and fixtures

7


1,175



1,192Advertising frames

3-15


15,055



15,753Sub-total




45,464



46,949Less accumulated depreciation




(4,620
)


(5,740
)Total



$
40,844


$
41,209





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 three months
ended March 31, 2001:





Three Months Ended March 31, 2001(in thousands)Reported Net Loss

$
(2,824
)Add Back: Goodwill Amortization


177Add Back: License Amortization


1,585Tax Impact


(5,718
)Adjusted Net Loss

$
(6,780
)





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 asset at March 31, 2002 and December 31, 2001:





December 31, 2001

March 31, 2002Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization(in thousands)Non-compete agreements

$
1,872

$
801

$
1,882

$
946Other


99


1


368


1Total

$
1,971

$
802

$
2,250

$
947




5




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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Total amortization expense from definite-lived intangibles for the
three months ended March 31, 2002 and for the year ended December 31, 2001 was approximately $148,000 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:





(in thousands)2003

$5012004

2005

2006

2007







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 value 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:





December 31, 2001

March 31, 2002(in thousands)Accrued compensation and bonuses

$
980

$
627Accrued commissions


444


506Accrued interest


10,511


5,152Accrued property taxes


336


401Accrued franchise taxes


725


490Accrued rent


931


1,010Other


1,189


802Total

$
15,116

$
8,988




6




---



NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







7.    COMMITMENTS AND CONTINGENCIES





As of March 31, 2002, we had $115,000 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 COMMITMENT





As of March 31, 2002, there were no
borrowings outstanding under our $100.0 million senior credit facility and no amounts were available for borrowing.





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 scheduled 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 March
31, 2002, we recorded a non-cash charge of approximately $656,000 to record our swap arrangement at fair value. We will continue to recognize quarterly income or expense to record the swap arrangements at fair value in future periods.





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 and networks for which we are the licensee or for which we program and sell on-air advertising time under local marketing agreements. At
March 31, 2002, the radio broadcasting segment included 56 radio stations and one 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 March 31, 2002, the outdoor advertising segment owned or operated approximately 29,000 indoor advertising display faces and approximately 4,200 outdoor billboard
displays.





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.





There
are no customers who accounted for more than 10% of our consolidated revenues for the three months ended March 31, 2002 or 2001.




7




---



NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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.





Three months ended March
31,2001


2002(in thousands)Net revenue:Radio Broadcasting

$
12,502


$
13,634Outdoor Advertising


1,978



5,533Consolidated


14,480



19,167Operating expenses:Radio Broadcasting


9,020



9,427Outdoor Advertising


990



4,241Consolidated


10,010



13,668BCF:Radio Broadcasting


3,482



4,207Outdoor Advertising


988



1,292Consolidated


4,470



5,499Corporate expenses


2,018



2,091Depreciation and amortization


2,681



1,271Local marketing agreement fees


15



Operating income (loss)


(244
)


2,137Interest income


11



70Interest expense


(2,546
)


(5,652
)Other income (expense)






(668
)Loss before taxes

$
(2,779
)

$
(4,113
)Total assets:Radio Broadcasting

$
306,730


$
329,515Outdoor Advertising


25,154



159,641Consolidated

$
331,884


$
489,156





10.    SUPPLEMENTAL GUARANTOR INFORMATION





Our senior subordinated notes are guaranteed on a senior subordinated basis, jointly and severally, by all of our 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.




8




---




NEXTMEDIA OPERATING, INC.





SUPPLEMENTAL COMBINING BALANCE SHEET


As of March 31, 2002





NextMedia Operating Inc.


Guarantor Subsidiaries


Eliminating Entries


TotalCash

$
18,946


$
(851
)





$
18,095Accounts Receivable


8,715



3,550







12,265Prepaid Expenses and Other Current Assets


564



1,675







2,239Total Current Assets


28,225



4,374







32,599Fixed Assets


25,318



15,891







41,209Investment in Subsidiaries


405,136






$
(405,136
)


Other Assets


13,013



53



(2,309
)


10,757FCC Licenses & Other Intangibles


13,430



391,161







404,591Total Assets

$
485,122


$
411,479



(407,445
)

$
489,156Accounts Payable

$
1,225


$
(30
)





$
1,195Accrued Expenses


7,059



1,929







8,988Deferred Revenue


103



586







689Other Current Liabilities


8



3,703



(2,309
)


1,402Total Current Liabilities


8,395



6,188







12,274Notes Payable


197,152











197,152Other Long Term Liabilities


16,663



155







16,818Total Liabilities

$
222,210


$
6,343






$
226,244Additional Paid in Capital


297,479



404,772



(404,772
)


297,479Accumulated Deficit


(34,567
)


364



(364
)


(34,567
)Stockholders Equity

$
262,912


$
405,136



(405,136
)

$
262,912Total Liabilities and Shareholders Equity

$
485,122


$
411,479



(407,445
)

$
489,156




9




---




NEXTMEDIA OPERATING, INC.





SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS


For the Three Months ended
March 31, 2002





NextMedia Operating Inc.


Guarantor Subsidiaries


Eliminating Entries


TotalNet Revenue

$
13,634


$
5,533





$
19,167Total Operating Expenses


9,427



4,241






13,668Corporate Expenses


1,369



722






2,091Depreciation and Amortization


892



379






1,271Operating income/(loss)

$
1,946


$
191





$
2,137Interest Expense


5,655



(3
)





5,652Other Income


(598
)









(598
)Equity in Earnings of Subsidiaries


194






(194
)


Income (loss) before provision for income taxes

$
(4,113
)

$
194


(194
)

$
(4,113
)Provision for Income Taxes


(15,840
)









(15,840
)Net income (loss)

$
(19,953
)

$
194


(194
)

$
(19,953
)





NEXTMEDIA OPERATING, INC.





SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS


For the Three Months ended March 31, 2001





NextMedia Operating Inc.


Guarantor Subsidiaries


Eliminating Entries

TotalNet Revenue

$
12,502


$
1,978




$
14,480Total Operating Expenses


9,020



990





10,010Corporate Expenses


1,380



638





2,018Depreciation and Amortization


1,046



1,635





2,681Local marketing agreement fees


15









15Operating income/(loss)

$
1,041


$
(1,285
)



$
(244
)Interest Expense


2,442



104





2,546Other Income


11









11Equity in Earnings of Subsidiaries


(1,389
)





1,389


0Income (loss) before provision for income taxes

$
(2,779
)

$
(1,389
)

1,389

$
(2,779
)Provision for Income Taxes


(45
)








(45
)Net income (loss)

$
(2,824
)

$
(1,389
)

1,389

$
(2,824
)




10




---




NEXTMEDIA OPERATING, INC.





SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS


For the Three Months ended
March 31, 2001





NextMedia Operating Inc.


Guarantor Subsidiaries


Eliminating Entries

TotalNet Cash provided by (used in) operations

$
(1,941
)

$
(172
)



$
(2,113
)Cash Flows From Investing ActivitiesAcquisitions, net of cash acquired


(7,461
)








(7,461
)Capital Expenditures


(1,089
)


(284
)




(1,373
)Net cash used in investing activities

$
(8,550
)

$
(284
)



$
(8,834
)Cash Flows From Financing ActivitiesProceeds from revolving credit facilities


14,000









14,000Repayment of revolving credit facilities


(8,946
)








(8,946
)Payments of financing costs


(60
)








(60
)Capital contributions from Parent


9,297









9,297Other


(11
)








(11
)Net cash provided in financing activities

$
14,280


$





$
14,280Net increase in cash


3,789



(456
)




3,333Cash at beginning of period


325



511





836Cash at end of period

$
4,114


$
55




$
4,169





NEXTMEDIA OPERATING, INC.





SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS


For the Three Months ended March 31, 2002





NextMedia Operating Inc.


Guarantor Subsidiaries


Eliminating Entries

TotalNet Cash provided by (used in) operations

$
(8,569
)

$
411




$
(8,158
)Cash Flows From Investing ActivitiesAcquisitions, net of cash acquired


(3,454
)








(3,454
)Proceeds from sale of assets


755









755Capital Expenditures


(599
)


(918
)




(1,517
)Net cash used in investing activities

$
(3,298
)

$
(918
)



$
(4,216
)Cash Flows From Financing ActivitiesPayments of financing costs


(416
)








(416
)Capital contributions from Parent


215









215Increase in seller working capital


0



199





199Other


(30
)








(30
)Net cash used in financing activities

$
(231
)

$
199




$
(32
)Net decrease in cash


(12,098
)


(308
)




(12,406
)Cash at beginning of period


31,044



(543
)




30,501Cash at end of period

$
18,946


$
(851
)



$
18,095




11




---




Item 2.Managements Discussion and Analysis of Financial
Condition and Results of Operations





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




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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 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.





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 (in
thousands).





Three Months Ended March 31,2001


%

2002


%Consolidated Operating Data:Net revenues

$
14,480


100.0

$
19,167


100.0Operating expenses


10,010


69.1


13,668


71.3Corporate expenses


2,018


13.9


2,091


10.9Depreciation and amortization


2,681


18.5


1,271


6.6Local marketing agreement fees


15


0.1





NMOperating income (loss)


(244
)

NM


2,137


NMInterest and other income (expense), net


(2,535
)

NM


(6,250
)

NMIncome tax expense


45


NM


15,840


NMNet loss

$
(2,824
)

NM

$
(19,953
)

NMOther Data:Broadcast cash flow

$
4,470


30.9

$
5,499


28.7EBITDA

$
2,452


16.9

$
3,408


17.8Radio Broadcasting Operating Data:Net revenues

$
12,502


100.0

$
13,634


100.0Operating expenses


9,020


72.1


9,427


69.1Depreciation and amortization


2,527


20.2


892


6.5Local marketing agreement fees


15


0.1





NMOperating income

$
940


7.5

$
3,315


24.3Other Data:Broadcast cash flow

$
3,482


27.9

$
4,207


30.9Outdoor Advertising Operating Data:Net revenues

$
1,978


100.0

$
5,533


100.0Operating expenses


990


50.1


4,241


76.6Depreciation and amortization


154


7.8


379


6.8Operating income (loss)

$
834


42.2

$
913


16.6Other Data:Broadcast cash flow

$
988


49.9

$
1,292


23.4




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Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001





Net Revenues.    Consolidated net revenues increased $4.7 million to $19.2
million for the three months ended March 31, 2002 from $14.5 million for the prior year period. Radio net revenues increased $1.1 million to $13.6 million for the three months ended March 31, 2002 from $12.5 million for the prior year period.
Outdoor advertising net revenues increased $3.6 million to $5.5 million for the three months ended March 31, 2002 from $1.9 million for the prior year period. The increases in outdoor advertising were attributable primarily to acquisitions completed
in 2001, while growth in radio was driven by continued implementation of our sales strategies and improved advertising market conditions.





Operating Expenses.    Consolidated operating expenses increased $3.7 million to $13.7 million for the three months ended March 31, 2002 from $10.0 million for the prior year period. Radio
operating expenses increased $407,000 to $9.4 million for the three months ended March 31, 2002 from $9.0 million for the prior year period. Outdoor advertising operating expenses increased $3.2 million to $4.2 million for the three months ended
March 31, 2002 from $1.0 million for the prior year period. These increases were attributable primarily to acquisitions completed in 2001. As a percentage of net revenues, consolidated operating expenses for the three months ended March 31, 2002
increased from 69.1% to 71.3% as a result of higher programming and general and administrative costs. The increase in programming and general and administrative is attributable primarily to implementation of our operating strategy in developmental
markets.





Corporate Expenses.    Corporate expenses increased $73,000 to $2.1 million
for the three months ended March 31, 2002 from $2.0 million for the prior year period. This increase was attributable primarily to additional staff, office and administrative costs made necessary by the higher volume of business and administration
resulting from acquisitions in 2001.





Other Operating Expenses.    Consolidated
depreciation and amortization decreased $1.4 million to $1.3 million for the three months ended March 31, 2002. Radio depreciation and amortization decreased $1.6 million to $892,000 for the three months ended March 31, 2002. Outdoor
advertising depreciation and amortization increased $225,000 to $379,000 for the three months ended March 31, 2002. The decrease in radio was attributable primarily to the adoption of Statement of Financial Accounting Standards No.142, which
required that goodwill and intangible assets with indefinite useful lives no longer be amortized. The increase in outdoor was attributable primarily to acquisitions in 2001, offset by the impact of the adoption of SFAS No.142.





Other Expense.    Other expense, consisting primarily of interest expense, increased $3.7 million
for the three months ended March 31, 2002 from $2.5 million for the prior year period attributable primarily to indebtedness incurred in connection with our acquisitions. Also included in other expense for the three months ended March 31, 2002 also
includes a non-cash charge of approximately $656,000 to record our swap arrangement at fair value.





Provision
for Income taxes.    We had a net operating loss during the three months ended March 31, 2001 and March 31, 2002. On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminates
the annual amortization of goodwill and certain long-lived assets with indefinite lives, such as FCC broadcast licenses. 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 $11.6 million to deferred tax expenses to establish a valuation allowance against its deferred tax assets. We
recorded additional deferred tax expense of $3.9 million to establish a valuation allowance against net operating loss carry-forwards generated during the quarter ended March 31, 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 SFAS 142 to have any impact on our cash flow. We pay taxes to various states in which we operate.




15




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Net Loss.    As a result of the factors described
above, our consolidated net loss increased $17.2 million to $20.0 million for the three months ended March 31, 2002 compared to $2.8 million for the prior period.





Broadcast Cash Flow.    As a result of the factors described above, consolidated broadcast cash flow increased $1.0 million to $5.5 million for
the three months ended March 31, 2002 from $4.5 million for the 2001 period. Radio broadcast cash flow increased $725,000 to $4.2 million for the three months ended March 31, 2002 from $3.5 million for the 2001 period. Outdoor advertising broadcast
cash flow increased $304,000 to $1.3 million for the three months ended March 31, 2002 from $1.0 million for the 2001 period. The consolidated broadcast cash flow margin declined slightly to 28.7% for the three months ended March 31, 2002 compared
to 30.9% for the 2001 period, as a result of marginally higher operating expenses as a percentage of net revenue.





EBITDA.    As a result of the factors described above, EBITDA increased $956,000 to $3.4 million for the three months ended March 31, 2002 from $2.5 million in the 2001 period. EBITDA margin increased to
17.8% for the three months ended March 31, 2002 from 16.9% for the 2001 period, primarily because the increased revenue from acquisitions did not require a proportionate increase in corporate expenses.





Liquidity and Capital Resources





Our cash balance at March 31, 2002 was approximately $18.1 million compared to $30.5 million at December 31, 2001. Approximately $3.0 million of the balance at December 31, 2001 was used to close acquisitions of outdoor advertising
properties in the first quarter of 2002. The remaining decrease in cash from December 31, 2001 to March 31, 2002 primarily resulted from our $10.8 million interest payment on January 2, 2002.





Net cash used in operating activities was $8.2 million compared to $2.1 million in the previous period. The increase was due primarily to the semi-annual payment of
interest $10.8 million on our senior subordinated notes. Cash used in investing activities decreased to $4.2 million from $8.8 million primarily due to decreased acquisition activity in the current period. Cash used in financing activities was
$32,000 compared to cash provided of $14.3 million in the previous period, with the change due primarily to decreased financing needs for acquisition activity in the current period and financing fees.





Sources and Uses of Funds





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





Capital expenditures,
excluding acquisitions, increased from approximately $1.4 million in the first quarter of 2001 to $1.5 million in same period of 2002. Capital expenditures increased due the increase in the number of radio stations, billboards and displays owned in
the first quarter of 2002 as compared to the first quarter of 2001. The increase in the first quarter of 2002 was due primarily to additional spending relating to facility consolidation resulting from acquisitions, technological upgrades of
operating assets, and the construction of new advertising displays.




16




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First Quarter 2002 Capital ExpendituresRadio

Outdoor

Total(in thousands)Recurring

$
295

$
35

$
330Non-recurring projects


304


118


422Revenue producing





765


765$
599

$
918

$
1,517





We expect future acquisitions of radio broadcasting stations,
outdoor advertising facilities, and other media-related properties effected in connection with the implementation of our acquisition strategy are expected to be financed from cash on hand, borrowings under the credit facility, existing private
equity commitments and cash flow from operations.





We use a significant portion of our capital resources to
consummate acquisitions. Through March 31, 2002, we funded our acquisitions from the following sources: capital contributions of approximately $297.4 million from NextMedia Investors, funded by equity investments from several private investment
funds and our senior management, and aggregate borrowings of approximately $200.0 million. We expect to obtain financing for future acquisitions through the incurrence of debt, additional equity contributions, internally generated funds or a
combination of the foregoing. There can be no assurance, however, that external financing will be available to us on terms we consider favorable or that cash flow from operations will be sufficient to fund our acquisition strategy.





Under the terms of our senior subordinated notes, we will pay semi-annual interest payments of approximately $10.8 million each
January and July 1. The indenture governing the notes contains certain restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends and make capital expenditures. As of March 31, 2002, we were in
compliance with all these covenants.





We believe that cash on-hand and cash flow from operations, as well as the
proceeds from securities offerings made from time to time, will be sufficient to fund all required future interest and principal payments on the credit facility and the notes and anticipated capital expenditures.





On July 31, 2000, we entered into a $125.0 million senior credit facility. Amounts available under the senior credit facility begin
decreasing quarterly, commencing in October 2003. The senior credit facility bears interest at floating rates and matures on July 31, 2007. Pursuant to the third amendment to the senior credit facility, and in connection with the offering of the
notes, the total loan commitments under the senior credit facility were reduced to $100.0 million. As of May 15, 2002, we had no borrowings outstanding under the senior credit facility. Amounts available for borrowing under the senior credit
facility are determined based on certain leverage requirements. No amounts were available for borrowing under the senior credit facility as of March 31, 2002.





Our senior credit 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 senior 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 March 31, 2002, we were in compliance with all these covenants.





Item 3.Market Risk





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




17




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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. We will recognize quarterly income or expense to record the swap arrangements at fair value.





Our remaining long-term debt has a fixed interest rate. Consequently, we do not believe we are currently exposed
to any material interest rate or market risk in connection with our remaining long-term debt.





PART II





Item 1.Legal Proceedings





We are not currently a party to any material lawsuit or proceeding.





Item 6.Exhibits and Reports on Form 8-K.





None.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





NEXTMEDIA OPERATING, INC. (Registrant)DATE: MAY 23 , 2002

By:

/s/    STEVEN DINETZSteven Dinetz Chief Executive
Officer and President (Principal Executive Officer)DATE: MAY 23, 2002

By:

/s/    SCHUYLER
HANSENSchuyler Hansen Chief
Accounting Officer, Treasurer and Assistant Secretary (Principal Accounting Officer)




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