**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

**(MARK ONE)**

 

ý   **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIESEXCHANGE ACT OF 1934**

 

**FOR THE PERIOD ENDEDJUNE 30, 2003**

 

**OR**

 

o   **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITIONPERIOD FROM             TO             **

 

**COMMISSION FILE NUMBER 001-13715**

 

**BIG CITYRADIO, INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                                    |   | **13-3790661**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |
| **1888 Century Park East,  Suite 212, Los Angeles, CA 90067**   |
| (Address and zip code of principal  executive offices)          |
|                                                            |
| **(310) 556-2489**                                              |
| (Registrant’s telephone number, including  area code)      |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   YES ý  NO o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).   YES o  NO ý

 

The number of shares of the registrant’s Class A common stock and ClassB common stock outstanding as of August 11, 2003, was 6,226,817 and8,250,458, respectively.

 

 

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|  

**BIG CITY RADIO, INC.  PART 1 - FINANCIAL INFORMATION** |
|------------------------------------------------------------------|
|                                                             |
| Item 1.                                                          | Financial Statements |
|                                                             |   |
|                                                             | Consolidated Balance Sheets |
|                                                             |   |
|                                                             | Consolidated Statement of Operations |
|                                                             |   |
|                                                             | Consolidated Statement of Cash Flows |
|                                                             |   |
|                                                             | Consolidated Statement of Stockholders’  Equity (Deficiency) |
|                                                             |   |
|                                                             | Notes to Consolidated Financial Statements |
|                                                             |   |
| Item 2.                                                          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                                             |   |
| Item 3.                                                          | Quantitative  and Qualitative Disclosures About Market Risk |
|                                                             |   |
| Item 4.                                                          | Controls  and Procedures |
|                                                             |   |
| **PART II – OTHER INFORMATION**                             |
|                                                             |   |
| Item 1.                                                          | Legal  Proceedings |
|                                                             |   |
| Item 2.                                                          | Changes in  Securities and Use of Proceeds |
|                                                             |   |
| Item 3.                                                          | Defaults Upon Senior  Securities |
|                                                             |   |
| Item  4.                                                         | Submission  of Matters to a Vote of Security Holders |
|                                                             |   |
| Item 5.                                                          | Other  Information |
|                                                             |   |
| Item 6.                                                          | Exhibits and Reports  on Form 8-K |
|                                                             |
| Signatures                                                       |
|                                                             |
| Section 302 Certifications                                       |
|                                                             |
| Exhibits                                                         |

 

2

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Part 1 – Financial Information

 

Item 1. Financial Statements

 

**BIG CITY RADIO, INC.**

**ConsolidatedBalance Sheets**

**(Unaudited)**

 
|                                                                                                                            |   | **June 30,  2003** |       | **December 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                      |   |                    | ** ** |                        | ** ** |
| Current  assets:                                                                                                                |   |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                      |   | $                       | 541,000    |                        | $          | 732,000 |   |
| Cash held in  investment, restricted                                                                                            |   | —                  |       | 1,085,000                   |       |
| Marketable  securities                                                                                                          |   | 43,275,000              |       | 1,861,000                   |       |
| Accounts  receivable, net of allowance of $224,000 and $362,000 in 2003 and 2002,  respectively                                 |   | 68,000                  |       | 1,997,000                   |       |
| Interest  receivable                                                                                                            |   | 1,000                   |       | 6,000                       |       |
| Assets held  for sale                                                                                                           |   | 510,000                 |       | 79,571,000                  |       |
| Receivable  from sale of station                                                                                                |   | 3,000,000               |       | —                      |       |
| Prepaid  expenses and other current assets                                                                                      |   | 490,000                 |       | 289,000                     |       |
| Total current  assets                                                                                                           |   | 47,885,000              |       | 85,541,000                  |       |
| Property and  equipment, net                                                                                                    |   | 14,000                  |       | 376,000                     |       |
| Deferred  financing fees, net                                                                                                   |   | —                  |       | 1,441,000                   |       |
| Other assets                                                                                                                    |   | 16,000                  |       | 170,000                     |       |
| Total assets                                                                                                                    |   | $                       | 47,915,000 |                        | $          | 87,528,000 |   |
|                                                                                                                            |   |                    |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                   |   |                    | ** ** |                        | ** ** |
| Current  liabilities:                                                                                                           |   |                    |       |                        |       |
| Accounts  payable                                                                                                               |   | $                       | 948,000    |                        | $          | 883,000 |   |
| Accrued  expenses                                                                                                               |   | 3,951,000               |       | 1,644,000                   |       |
| Interest  payable                                                                                                               |   | 5,530,000               |       | 15,983,000                  |       |
| Senior  discount notes                                                                                                          |   | —                  |       | 174,000,000                 |       |
| Income tax  payable                                                                                                             |   | 9,967,000               |       | —                      |       |
| Other current  liabilities                                                                                                      |   | —                  |       | 74,000                      |       |
| Total current  liabilities                                                                                                      |   | 20,396,000              |       | 192,584,000                 |       |
| Long-term  liabilities:                                                                                                         |   |                    |       |                        |       |
| Other  long-term liabilities                                                                                                    |   | 6,000                   |       | 301,000                     |       |
| Stockholders’  equity (deficiency):                                                                                        |   |                    |       |                        |       |
| Preferred  stock, $0.01 par value. Authorized 20,000,000 shares; zero shares issued and  outstanding in 2003 and 2002           |   | —                  |       | —                      |       |
| Common stock,  Class A, $0.01 par value. Authorized 80,000,000 shares issued and outstanding  6,226,817 shares in 2003 and 2002 |   | 62,000                  |       | 62,000                      |       |
| Common stock,  Class B, $0.01 par value. Authorized 20,000,000 shares issued and outstanding  8,250,458 shares in 2003 and 2002 |   | 83,000                  |       | 83,000                      |       |
| Additional  paid-in capital                                                                                                     |   | 29,492,000              |       | 29,492,000                  |       |
| Other  comprehensive loss                                                                                                       |   | —                  |       | (8,000                      | )          |
| Accumulated  deficit                                                                                                            |   | (2,124,000              | )          | (134,986,000                | )          |
|                                                                                                                            |   | 27,513,000              |       | (105,357,000                | )          |
| Total  liabilities and stockholders’ equity (deficiency)                                                                   |   | $                       | 47,915,000 |                        | $          | 87,528,000 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**Big City Radio, Inc.**

**Consolidated Statements of Operations**

**(Unaudited)**

 
|                                                                            |   | **Three Months Ended  June 30,** |        | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|-------------|-------------------------------------|--------|
|                                                                            |   | **2003**                              |        | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                            |   |                                  |        | **(As Restated)**                   |   |   |   | **(As Restated)** |   |
| Net revenues                                                                    |   | $                                     | —      |                                | $      | — |   | $ | — |   | $ | — |   |
|                                                                            |   |                                  |        |                                |   |   |   |   |   |
| Operating expenses:                                                             |   |                                  |        |                                |   |   |   |   |   |
| Corporate, general and administrative  expenses                                 |   | 2,509,000                             |        | 1,000,000                           |   | 4,688,000 |   | 1,916,000 |   |
| Depreciation and amortization                                                   |   | 21,000                                |        | 30,000                              |   | 50,000 |   | 60,000 |   |
| Total operating expenses                                                        |   | 2,530,000                             |        | 1,030,000                           |   | 4,738,000 |   | 1,976,000 |   |
| Operating loss from continuing operations                                       |   | (2,530,000                            | )           | (1,030,000                          | )      | (4,738,000 | ) | (1,976,000 | ) |
|                                                                            |   |                                  |        |                                |   |   |   |   |   |
| Other income (expenses):                                                        |   |                                  |        |                                |   |   |   |   |   |
| Interest income/(expense)                                                       |   | 3,000                                 |        | 31,000                              |   | 8,000 |   | 105,000 |   |
| Loss on disposal of fixed assets                                                |   | (245,000                              | )           | —                              |   | (245,000 | ) | — |   |
| Gain on sales of marketable securities                                          |   | 665,000                               |        | —                              |   | 665,000 |   | — |   |
| Unrealized gain on marketable securities                                        |   | 17,544,000                            |        | —                              |   | 17,544,000 |   | — |   |
| Other, net                                                                      |   | 15,000                                |        | (1,000                              | )      | 61,000 |   | 15,000 |   |
| Total other income                                                              |   | 17,982,000                            |        | 30,000                              |   | 18,033,000 |   | 120,000 |   |
|                                                                            |   |                                  |        |                                |   |   |   |   |   |
| Income/(loss) from continuing operations  before income taxes                   |   | 15,452,000                            |        | (1,000,000                          | )      | 13,295,000 |   | (1,856,000 | ) |
| Income tax expense, net                                                         |   | (5,588,000                            | )           | —                              |   | (5,588,000 | ) | (8,631,000 | ) |
| Income/(loss) from continuing operations                                        |   | 9,864,000                             |        | (1,000,000                          | )      | 7,707,000 |   | (10,487,000 | ) |
| Discontinued operations (note 6):                                               |   |                                  |        |                                |   |   |   |   |   |
| Radio operations                                                                |   | 132,404,000                           |        | (6,236,000                          | )      | 125,155,000 |   | (13,042,000 | ) |
| Publishing operations                                                           |   | —                                |        | (382,000                            | )      | — |   | (595,000 | ) |
| Income/(loss) from discontinued operations,  net of income tax expense (note 6) |   | 132,404,000                           |        | (6,618,000                          | )      | 125,155,000 |   | (13,637,000 | ) |
| Net income/(loss)                                                               |   | $                                     | 142,268,000 |                                | $      | (7,618,000 | ) | $ | 132,862,000 |   | $ | (24,124,000 | ) |
|                                                                            |   |                                  |        |                                |   |   |   |   |   |
| Basic and diluted earnings/(loss) per  share:                                   |   |                                  |        |                                |   |   |   |   |   |
| Income/(loss) from continuing operations                                        |   | $                                     | 0.68        |                                | $      | (0.07 | ) | $ | 0.53 |   | $ | (0.72 | ) |
| Income/(loss) from discontinued operations                                      |   | 9.15                                  |        | (0.46                               | )      | 8.65 |   | (0.94 | ) |
| Net income/(loss)                                                               |   | $                                     | 9.83        |                                | $      | (0.53 | ) | $ | 9.18 |   | $ | (1.67 | ) |
|                                                                            |   |                                  |        |                                |   |   |   |   |   |
| Weighted average shares outstanding                                             |   | 14,477,000                            |        | 14,477,000                          |   | 14,477,000 |   | 14,477,000 |   |

** **

See accompanying notes to consolidatedfinancial statements

 

4

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**BIG CITY RADIO, INC.**

**Consolidated Statements of Cash Flows**

**Six months ended June 30, 2003 and 2002**

**(Unaudited)**

 
|                                                                         |   | **2003**    |      | **2002**    |   |
|------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|
| Cash flows from operating activities:                                        |   |        |      |        |   |
|                                                                         |   |        |      |        |   |
| Net income/(loss) from continuing operations.                                |   | $           | 7,707,000 |        | $      | (10,487,000 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |        |      |        |   |
| Depreciation and amortization                                                |   | 50,000      |      | 60,000      |   |
| Non cash change in other comprehensive income                                |   | 8,000       |      | —      |   |
| Unrealized gain on marketable securities                                     |   | (17,544,000 | )         | —      |   |
| Deferred income taxes                                                        |   | 5,588,000   |      | 8,631,000   |   |
| Loss on disposal of fixed assets                                             |   | 245,000     |      | —      |   |
| Change in operating assets and liabilities                                   |   |        |      |        |   |
| (Increase) decrease in assets:                                               |   |        |      |        |   |
| Accounts receivable                                                          |   | 3,000       |      | 407,000     |   |
| Interest receivable                                                          |   | 5,000       |      | 10,000      |   |
| Prepaid expenses and other current assets                                    |   | (326,000    | )         | (178,000    | )      |
| Other assets                                                                 |   | 5,000       |      | 2,000       |   |
| Increase (decrease) in liabilities:                                          |   |        |      |        |   |
| Accounts payable                                                             |   | 186,000     |      | (136,000    | )      |
| Accrued expenses                                                             |   | 2,736,000   |      | (622,000    | )      |
| Other liabilities                                                            |   | —      |      | (1,000      | )      |
| Net cash used in operating activities                                        |   | (1,337,000  | )         | (2,314,000  | )      |
|                                                                         |   |        |      |        |   |
| Cash flows from investing activities:                                        |   |        |      |        |   |
| Sales of marketable securities                                               |   | 1,240,000   |      | 10,567,000  |   |
| Decrease in cash held in restricted investment                               |   | 1,085,000   |      | 24,000      |   |
| Net cash provided by investing activities                                    |   | 2,325,000   |      | 10,591,000  |   |
|                                                                         |   |        |      |        |   |
| Net cash provided by financing activities                                    |   | —      |      | —      |   |
| Cash used in discontinued operations (note 6)                                |   | (1,179,000  | )         | (11,167,000 | )      |
| Change in cash and cash equivalents                                          |   | (191,000    | )         | (2,890,000  | )      |
| Cash and cash equivalents at beginning of period                             |   | 732,000     |      | 3,194,000   |   |
| Cash and cash equivalents at end of period                                   |   | $           | 541,000   |        | $      | 304,000 |   |

** **

See accompanying notes to consolidated financial statements

 

5

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**BIG CITY RADIO, INC.**

**Consolidated Statements of Stockholders’Equity (Deficiency)**

**(Unaudited)**

 
|                                      |   | **Common stock** |   | **Additional  paid-in  capital** |    | **Other  comprehensive  loss** |   | **Accumulated  deficit** |   | **Total**   |   |
|-------------------------------------------|--------|------------------|--------|----------------------------------|---------|--------------------------------|--------|--------------------------|--------|-------------|--------|
|                                      |   |             |   |
| **Shares**                                |   | **Amount**       |   |                             |    |                           |
|                                      |   |             |   |                             |    |                           |   |                     |   |        |   |   |   |
| Balance at  December 31,2002         |   | 14,477,275       |   | $                                | 145,000 |                           | $      | 29,492,000               |   | $           | (8,000 | ) | $ | (134,986,000 | ) | $ | (105,357,000 | ) |
| Realized income on  marketable securities |   |             |   |                             |    |                           |   | 8,000                    |   |        |   | 8,000 |   |
| Net income                                |   | —           |   | —                           |    | —                         |   | —                   |   | 132,862,000 |   | 132,862,000 |   |
| Total comprehensive income,  net.         |   | —           |   | —                           |    | —                         |   | 8,000                    |   | 132,862,000 |   | 132,870,000 |   |
|                                      |   |             |   |                             |    |                           |   |                     |   |        |   |   |   |
| Balance at June 30,  2003            |   | 14,477,275       |   | $                                | 145,000 |                           | $      | 29,492,000               |   | $           | — |   | $ | (2,124,000 | ) | $ | 27,513,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**BIGCITY RADIO, INC.**

 

**NOTES TO CONSOLIDATED****FINANCIAL STATEMENTS**

 

**1.****              Organization,Business and Basis of Presentation**

 

Big City Radio, Inc. (“Big City Radio” or the“Company”, formerly Odyssey Communications, Inc.) was incorporated in Delawareon August 2, 1994 and commenced operations on January 1, 1995. OnMay 30, 1996, Big City Radio merged with Q Broadcasting, Inc., with BigCity Radio being the surviving company. Big City Radio and Q were owned 94% and100%, respectively by Stuart and Anita Subotnick. Accordingly, the merger wasaccounted for as a combination of entities under common control. As a result, thecombination of Big City Radio and Q was effected utilizing historical costs. Atthe date of conversion from S Corporation status to C Corporation status, theCompany formed five wholly owned subsidiaries, Big City Radio - LA, LLC; BigCity Radio - NYC, LLC; Big City Radio - CHI, LLC; WRKL Rockland Radio, LLC; andOdyssey Traveling Billboards, Inc.

 

The Company owned and operated radio broadcasting stations.  As of June 30, 2003, the Company ownedone FM station, WYXX-FM in Morris, Illinois. During the quarter endedJune 30, 2003, Big City Radio completed the sale of its previously ownedradio stations in Southern California, the New York area, and Illinois(excluding WYXX-FM). The sale of WVIV-FM was reported as of May 2, 2003when the non-FCC license assets of WVIV-FM were transferred to HispanicBroadcasting Corporation (HBC) for $29.875 million plus $3 million due at theearlier of 18 months from May 2, 2003 or the transfer of the FCC licenses.As the $3 million receivable was not contingent to the transfer of the FCClicenses, the Company included such amount in the gain on sale of stations. Asmore fully discussed in note 8, the transfer of the Federal CommunicationsCommission (“FCC”) license of WVIV-FM, Highland Park, Illinois was effectedsubsequent to the quarter end on July 18, 2003, on which date the Companyreceived the  $3 million. The Companyundertook this series of asset sales as part of an auction process that theCompany announced on November 4, 2002. Between December 24, 2002 andJanuary 2, 2003, Big City Radio signed four, separate definitive assetpurchase agreements to sell eleven of its twelve FCC FM licenses and associatedradio station assets. Big City Radio sold these radio stations to raise thefunds necessary to pay all principal of, and accrued and unpaid interest on,its 111⁄4% senior discount notes due 2005. Noteholders have accelerated paymentof the senior notes as a result of defaults by Big City Radio under thesenotes. As discussed in note 6, the radio station operations have been treatedas discontinued operations.

 

The Company owns HIH Acquisition, Inc.(“HIH”) which owns the discontinued TodoAhora.com website, and also in turnowns United Publishers of Florida, Inc. (“UPF”) which published the Hispanicmusic trade magazine, “Disco,” operated a graphic design business, and owns theLatinMusicTrends.com website. In response to the continued downturn in themusic industry advertising marketplace, during December 2001 the Companyceased its internet operations, and during June 2002 the Company ceasedthe operation of UPF, and wrote-off the remaining $108,000 of goodwillassociated with UPF. As discussed in Note 6, the Company has treated theseoperations as discontinued operations. The Company also owns Independent RadioReps, LLC (“IRR”), an in-house rep firm to represent it in generating nationalHispanic radio business. As a result of the sales of the radio stationsdetailed above, IRR ceased operations during the quarter ended March 31,2003.

 

The accompanying consolidated financial statements include the accountsof Big City Radio and all its subsidiaries. All significant intercompanyaccounts and transactions have been eliminated. As a result of the Company’sdecisions during 2002 to close down publishing operations and to sell the radiostations, the publishing and radio station operations of the Company have beenpresented as discontinued operations (see note 6).

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of 

 

7

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revenues and expenses duringthe reporting period. Actual results could differ from those estimates and theassumptions could prove to be inaccurate.

 

The accompanying interim consolidated financial statements have beenprepared without audit pursuant to the rules and regulations of the Securitiesand Exchange Commission (“SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations, although the Company believes that the disclosures madeare adequate to make the information presented not misleading. These financialstatements should be read in conjunction with the consolidated financialstatements and related footnotes included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2002 (the “2002 Form10-K”).  In the opinion of managementall adjustments, consisting only of normal recurring adjustments, necessary topresent fairly in all material respects the financial position of the Companyas of June 30, 2003 and the results of its operations for the three monthsand six months ended June 30, 2003 and 2002, and its cash flows for the threemonths and six months ended June 30, 2003 and 2002, have beenincluded.  The results of operations forthe interim period are not necessarily indicative of the results which may berealized for the full year.

 

On January 1, 2002, the Company adopted the provisions of SFAS 142and stopped amortizing its FCC broadcast licenses as these intangible assetswere determined to have an indefinite useful life. Accordingly, deferred taxliabilities related to these intangible assets could no longer be utilized tosupport the realization of deferred tax benefits. The Company has restated itsquarterly results to record an additional deferred tax valuation allowance ofapproximately $8.6 million during the quarter ended March 31, 2002 andadditional tax expense relating to the increase in the deferred tax liabilityof approximately $0.5 million during the quarters ended March 31, 2002,June 30, 2002, and September 30, 2002. Furthermore, the June 30,2002 quarterly information has been restated to reflect the reclassification ofthe Company’s radio station and publishing assets as discontinued operations(see note 6).

 

**2.****              Earningsper Share**

 

Basic earnings per share excludes all dilutive securities.  It is based upon the weighted average numberof common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution thatwould occur if securities to issue common stock were exercised or convertedinto common stock.  In calculatingdiluted earnings per share, no potential shares of common stock are included inthe computation when a loss from continuing operations available to commonstockholders exists. At June 30, 2003 and 2002, the Company hadantidilutive options amounting to 1,303,000****and 1,701,000 respectively, which were notincluded in the computation of diluted EPS. In addition, if an acquisition byany person, group of affiliated persons or entity of all of the stock of theCompany or of all or substantially all of the assets of the Company occurs onor prior to November 1, 2004 at a price of at least $4.00 per share ofClass A Common Stock, the former stockholders of HIH will be entitled toreceive 600,000 shares of the Company’s Class A Common Stock. The Company wasnot required to issue these shares as a result of the radio station sales describedin Note 6.

 

**3.****              Accounting for StockOptions**

 

On January 1, 1996, the Company adopted Statement of FinancialAccounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,”which permits entities to recognize as expense over the vesting period the fairvalue of all stock-based awards on the date of grant. Alternatively, SFAS No.123 allows entities to continue to apply the provisions of APB Opinion No. 25and provide pro forma net income and disclosure for employee stock grants made in1995, 1996 and future years as if the fair-value-based method defined in SFASNo. 123 had been applied. The Company has elected to continue to apply theprovisions of APB Opinion No. 25 and provide the pro forma disclosureprovisions of SFAS No. 123.

 

For the six months ended June 30, 2003 and 2002, had the Companydetermined compensation cost based on the fair value at the grant date for itsstock options under SFAS No. 123, the Company’s net income (loss) would havebeen as follows:

 

8

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|                                                                                     |   | **Six months Ended  June 30,** |        |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|-------------|
|                                                                                     |   | **2003**                            |        | **2002** |   |
| Net income/(loss):                                                                       |   |                                |        |   |   |
| As reported                                                                              |   | $                                   | 132,862,000 |   | $ | (24,124,000 | ) |
| Stock based compensation expense determinedunder fair value based method  for all awards |   | (1,919,000                          | )           | (2,033,000 | ) |
| Pro forma                                                                                |   | $                                   | 130,943,000 |   | $ | (26,157,000 | ) |
|                                                                                     |   |                                |        |   |   |
| Income/(loss) per share:                                                                 |   |                                |        |   |   |
| As reported                                                                              |   | $                                   | 9.18        |   | $ | (1.67 | ) |
| Pro forma                                                                                |   | $                                   | 9.04        |   | $ | (1.81 | ) |

 

**4****.**              **Recent Accounting Pronouncements**

 

*Business Combinations and Goodwill and Other Intangible Assets*

 

In accordance with SFAS No.142, the Company discontinued theamortization of goodwill and intangible assets (comprised solely of broadcastlicenses) effective January 1, 2002. During the quarter ended March 31, 2002, the Company completed thetransitional impairment test, which did not result in impairment of recordedintangible assets. In June 2002, the Company ceased the operation of UPF,and wrote off the remaining $108,000 of goodwill associated with UPF. Duringthe fourth quarter of 2002, the Company made the decision to sell its broadcastlicenses. In accordance with SFAS No.144, these licenses are reported as assetsheld for sale. The Company compared the licenses’ carrying value to their fairvalue, less the estimated cost to sell them. This review of the carrying valueof its intangible assets resulted in a charge of $630,000 relating to theimpairment in value of some of its FCC broadcast licenses. As of June 30,2003, the WYXX-FM, Morris, IL station remained unsold.  As of June 30, 2003 andDecember 31, 2002, the Company has no remaining un-amortized goodwill, andthe carrying amount of unamortized intangible assets are as follows:

 
|                |   | **June 30, 2003** |    | **December 31, 2002** |   |
|---------------------|--------|------------------------|---------|----------------------------|--------|
|                |   |                   |    |                       |   |
| Broadcast  licenses |   | $                      | 435,000 |                       | $      | 76,325,000 |   |
|                     |        |                        |         |                            |        |  |  |

 

As discussed more fully in note 6, the Broadcast licenses above relateto the radio stations to be sold. Therefore, these assets are reported asassets held for sale at June 30, 2003 and December 31, 2002.

 

*Accounting forCosts Associated with Exit and Disposal Activities*

 

In June 2002, the Financial Accounting Standards Board issued FASBStatement No. 146, *Accounting for Costs Associated with Exit or DisposalActivities (“SFAS 146”)* which nullifies Emerging Issues Task Force(EITF) Issue No. 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity* (*including Certain Costs Incurred in a Restructuring*)(“Issue 94-3”).

 

The principal difference between this Statement and Issue 94-3 relatesto its requirements for recognition of a liability for a cost associated withan exit or disposal activity. This Statement requires that a liability for acost associated with an exit or disposal activity be recognized when theliability is incurred. Under Issue 94-3, a liability for an exit cost asdefined in Issue 94-3 was recognized at the date of an entity’s commitment toan exit plan. Under

 

9

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SFAS 146, a commitment to aplan, by itself, does not create a present obligation to others that meets thedefinition of a liability. SFAS 146 also establishes that fair value is theobjective for initial measurement of the liability.

 

The Company is required to adopt SFAS 146 on exit and disposalactivities that are initiated after December 31, 2002, with earlyapplication encouraged. The Company has adopted SFAS No. 146 in relation toexit and disposal activities initiated after September 30, 2002. Duringthe quarter ended June 30, 2003, the Company recorded lease terminationcosts of  $1.41 million.

 

*Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others*

 

In November 2002, the FASB issued Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*(“FIN 45”)*,* which addresses thedisclosure to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees.  The disclosure requirements are effective for interim and annualfinancial statements ending after December 15, 2002.

 

FIN 45 also requires the recognition of a liability by a guarantor atthe inception of certain guarantees. FIN 45 requires the guarantor to recognize a liability for thenon-contingent component of a guarantee, which is the obligation to stand readyto perform in the event that specified triggering events or conditionsoccur.  The initial measurement of thisliability is the fair value of the guarantee at inception. The recognition ofthe liability is required even if it is not probable that payments will berequired under the guarantee or if the guarantee was issued with a premiumpayment or as part of a transaction with multiple elements.  The initial recognition and measurementprovisions are effective for all guarantees within the scope of FIN 45 issuedor modified after December 31, 2002.

 

As noted above we have adopted the disclosure requirements of FIN 45and will apply the recognition and measurement provisions for all guaranteesentered into or modified after December 31, 2002.  To date we have not entered into anyguarantees.

 

*Consolidation of Variable Interest Entities*

 

In February 2003, the FASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities*(“FIN 46”), which addresses theconsolidation by business enterprises of variable interest entities, which haveone or both of the following characteristics: (1) the equity investment at riskis not sufficient to permit the entity to finance its activities without additionalfinancial support from other parties, or (2) the equity investors lack one ormore of the following essential characteristics of a controlling financialinterest: (a) the direct or indirect ability to make decisions about theentity’s activities through voting or similar rights, (b) the obligation toabsorb the expected losses of the entity if they occur, or (c) the right toreceive the expected residual returns of the entity if they occur.  FIN 46 will have a significant effect onexisting practice because it requires existing variable interest entities to beconsolidated if those entities do not effectively disburse risks among partiesinvolved.  In addition, FIN 46 containsdetailed disclosure requirements.  FIN46 applies immediately to variable interest entities created afterJanuary 31, 2003, and to variable interest entities in which an enterpriseobtains an interest after that date.  Itapplies in the first fiscal year or interim period beginning afterJune 15, 2003, to variable interest entities in which an enterprise holdsa variable interest that it acquired before February 1, 2003.  This Interpretation may be appliedprospectively with a cumulative-effect adjustment as of the date on which it isfirst applied or by restating previously issued financial statements for one ormore years with a cumulative-effect adjustment as of the beginning of the firstyear restated. Management expects the application of this interpretation willnot have a material effect on the Company’s consolidated financial statements.

 

10

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**5.****              SeniorDiscount Notes**

 

*Offering of Senior Discount Notes*

 

The Company completed a private placement of $174.0 million aggregateprincipal amount, at maturity, of 11.25% Senior Discount Notes due 2005 (the“Notes” or “senior notes”) on March 17, 1998 (the “Notes Offering”),generating approximately $125.4 million of gross proceeds for the Company ofwhich the Company used approximately $32.6 million to repay outstandingindebtedness under its previous credit facility.  The Company used the proceeds of the Notes Offering to financethe acquisition costs of radio station properties and the remaining proceedswere used for general working capital purposes.  On March 15, 2001, the Notes commenced accruing cashinterest at 11.25% per annum. Semi-annual cash interest payments of $9.8million commenced on September 15, 2001. (For a discussion of theCompany’s current liquidity issues, including events of default under theIndenture governing the Notes and the acceleration of the principal of andinterest on the Notes, see note 8 below.)

 

*Subsidiary Guarantors*

 

Pursuant to the terms of the indenture relating to the Notes (the“Indenture”), the direct subsidiaries of Big City Radio, Inc.– consisting ofOdyssey Traveling Billboards, Inc., Big City Radio-NYC, L.L.C., Big CityRadio-LA, L.L.C., Big City Radio-CHI, L.L.C. (collectively, the “SubsidiaryGuarantors”) , jointly and severally, fully and unconditionally guaranteed theobligations of Big City Radio, Inc. with respect to the Notes.

 

All of the then existing Subsidiary Guarantors except Odyssey TravelingBillboards, Inc. (the “Station Subsidiaries”), were created inDecember 1997 as special purpose Delaware limited liability companiesformed for the sole purpose of holding the Company’s FCC radio licenses.  The operating agreements for the StationSubsidiaries limit the activities of these companies to owning the FCC radiolicenses.  Odyssey Traveling Billboards,Inc. owned and operated certain vehicles used to advertise the Company’s radiostations.  Because the StationSubsidiaries have entered into assignment and use agreements with the Companywhereby the Company manages and directs the day-to-day operations of the radiostations, pays all expenses and capital costs incurred in operating the radiostations, and retains all advertising and other receipts collected in operatingthe radio stations, the Station Subsidiaries have no income or expenses otherthan the amortization of the FCC licenses. Odyssey Traveling Billboards, Inc.is similarly a special purpose corporation with no income and only expenses.

 

The covenants in the Notes and the Indenture do not restrict theability of the Station Subsidiaries to make cash distributions to the Company.

 

Accordingly, set forth below is certain condensed consolidating andconsolidated financial information for the parent company, Big City Radio, Inc.and for the Subsidiary Guarantors, with consolidation adjustments, as ofJune 30, 2003 and for the six months ended June 30, 2002 and 2003.

 

11

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**Consolidating Balance Sheet**

**As of June 30, 2003**

 
|                                                          |   | **Parent** |       | **Subsidiary  Guarantors** |   | **Sub-total** |   | **Consolidation  Adjustments** |       | **Consolidated** |   |
|---------------------------------------------------------------|--------|------------|------------|----------------------------|--------|---------------|--------|--------------------------------|------------|------------------|--------|
| Assets                                                        |   |       |       |                       |   |          |   |                           |       |             |   |
| Current Assets                                                |   |       |       |                       |   |          |   |                           |       |             |   |
| Cash and cash equivalents                                     |   | $          | 541,000    |                       | $      | —        |   | $                              | 541,000    |             | $      | — |   | $ | 541,000 |   |
| Marketable securities                                         |   | 43,275,000 |       | —                     |   | 43,275,000    |   | —                         |       | 43,275,000       |   |
| Accounts receivable, net of allowance                         |   | 68,000     |       | —                     |   | 68,000        |   | —                         |       | 68,000           |   |
| Interest receivable                                           |   | 1,000      |       | —                     |   | 1,000         |   | —                         |       | 1,000            |   |
| Assets held for sale                                          |   | 75,000     |       | 435,000                    |   | 510,000       |   | —                         |       | 510,000          |   |
| Prepaid expenses and other current assets                     |   | 3,490,000  |       | —                     |   | 3,490,000     |   | —                         |       | 3,490,000        |   |
| Total current assets                                          |   | 47,450,000 |       | 435,000                    |   | 47,885,000    |   | —                         |       | 47,885,000       |   |
| Property and equipment, net                                   |   | 14,000     |       | —                     |   | 14,000        |   | —                         |       | 14,000           |   |
| Investment in, and advances to subsidiaries                   |   | 435,000    |       | —                     |   | 435,000       |   | (435,000                       | )          | —           |   |
| Other assets                                                  |   | 16,000     |       | —                     |   | 16,000        |   | —                         |       | 16,000           |   |
| Total assets                                                  |   | $          | 47,915,000 |                       | $      | 435,000       |   | $                              | 48,350,000 |             | $      | (435,000 | ) | $ | 47,915,000 |   |
|                                                          |   |       |       |                       |   |          |   |                           |       |             |   |
| Liabilities and stockholders’ equity (deficiency)        |   |       |       |                       |   |          |   |                           |       |             |   |
| Accounts payable                                              |   | $          | 948,000    |                       | $      | —        |   | $                              | 948,000    |             | $      | — |   | $ | 948,000 |   |
| Accrued expenses                                              |   | 3,951,000  |       | —                     |   | 3,951,000     |   | —                         |       | 3,951,000        |   |
| Interest payable                                              |   | 5,530,000  |       | —                     |   | 5,530,000     |   | —                         |       | 5,530,000        |   |
| Deferred income tax                                           |   | 9,967,000  |       | —                     |   | 9,967,000     |   | —                         |       | 9,967,000        |   |
| Total current liabilities                                     |   | 20,396,000 |       | —                     |   | 20,396,000    |   | —                         |       | 20,396,000       |   |
|                                                          |   |       |       |                       |   |          |   |                           |       |             |   |
| Long-term liabilities                                         |   |       |       |                       |   |          |   |                           |       |             |   |
| Deferred income tax liabilities and                           |   |       |       |                       |   |          |   |                           |       |             |   |
| Other long-term liabilities                                   |   | 6,000      |       | —                     |   | 6,000         |   | —                         |       | 6,000            |   |
| Intercompany balances                                         |   | —     |       | 542,000                    |   | 542,000       |   | (542,000                       | )          | —           |   |
| Total long-term liabilities                                   |   | 6,000      |       | 542,000                    |   | 548,000       |   | (542,000                       | )          | 6,000            |   |
| Stockholders’ equity (deficiency)                        |   |       |       |                       |   |          |   |                           |       |             |   |
| Preferred and common stock, and additional paid-in  capital   |   | 29,637,000 |       | —                     |   | 29,637,000    |   | —                         |       | 29,637,000       |   |
| Accumulated deficit                                           |   | (2,124,000 | )          | (107,000                   | )      | (2,231,000    | )      | 107,000                        |       | (2,124,000       | )      |
| Total liabilities and stockholders’ equity  (deficiency) |   | $          | 47,915,000 |                       | $      | 435,000       |   | $                              | 48,350,000 |             | $      | (435,000 | ) | $ | 47,915,000 |   |

 

12

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**Consolidating Statement of Operations for the six monthsended June 30, 2002**

 
|                                                                           |   | **Parent**  |        | **Subsidiary  Guarantors** |       | **Sub-total** |       | **Consolidation  Adjustments** |        | **Consolidated** |       |
|--------------------------------------------------------------------------------|--------|-------------|-------------|----------------------------|------------|---------------|------------|--------------------------------|-------------|------------------|------------|
|                                                                           |   |        | ** **  |                       | ** ** |          | ** ** |                           | ** **  |             | ** ** |
| Net revenues                                                                   |   | $           | —      |                       | $          | —        |       | $                              | —      |             | $          | — |   | $ | — |   |
| Operating expenses:                                                            |   |        |        |                       |       |          |       |                           |        |             |       |
| Corporate, general and administrative expenses                                 |   | 1,916,000   |        | —                     |       | 1,916,000     |       | —                         |        | 1,916,000        |       |
| Depreciation and amortization                                                  |   | 60,000      |        | —                     |       | 60,000        |       | —                         |        | 60,000           |       |
| Total operating expenses                                                       |   | 1,976,000   |        | —                     |       | 1,976,000     |       | —                         |        | 1,976,000        |       |
| Operating loss                                                                 |   | (1,976,000  | )           | —                     |       | (1,976,000    | )          | —                         |        | (1,976,000       | )          |
| Other income (expenses)                                                        |   |        |        |                       |       |          |       |                           |        |             |       |
| Interest income/(expense)                                                      |   | 105,000     |        | —                     |       | 105,000       |       | —                         |        | 105,000          |       |
| Other, net                                                                     |   | 15,000      |        | —                     |       | 15,000        |       | —                         |        | 15,000           |       |
| Total other income                                                             |   | 120,000     |        | —                     |       | 120,000       |       | —                         |        | 120,000          |       |
| Loss before income tax benefit, and equity in  losses of Subsidiary Guarantors |   | (1,856,000  | )           | —                     |       | (1,856,000    | )          | —                         |        | (1,856,000       | )          |
| Income tax expense, net                                                        |   | (8,631,000  | )           | —                     |       | (8,631,000    | )          | —                         |        | (8,631,000       | )          |
| Loss before equity in losses of Subsidiary  Guarantors                         |   | (10,487,000 | )           | —                     |       | (10,487,000   | )          | —                         |        | (10,487,000      | )          |
| Equity in net losses of Subsidiary Guarantors                                  |   | —      |        | —                     |       | —        |       | —                         |        | —           |       |
| Loss on discontinued operations                                                |   | (13,637,000 | )           | —                     |       | (13,637,000   | )          | —                         |        | (13,637,000      | )          |
| Net loss                                                                       |   | $           | (24,124,000 | )                          | $          | —        |       | $                              | (24,124,000 | )                | $          | — |   | $ | (24,124,000 | ) |

 

**Consolidating Statement of Operations for the six monthsended June 30, 2003**

 
|                                                                             |   | **Parent**  |        | **Subsidiary  Guarantors** |       | **Sub-total** |       | **Consolidation  Adjustments** |        | **Consolidated** |       |
|----------------------------------------------------------------------------------|--------|-------------|-------------|----------------------------|------------|---------------|------------|--------------------------------|-------------|------------------|------------|
|                                                                             |   |        | ** **  |                       | ** ** |          | ** ** |                           | ** **  |             | ** ** |
| Net revenues                                                                     |   | $           | —      |                       | $          | —        |       | $                              | —      |             | $          | — |   | $ | — |   |
| Operating expenses:                                                              |   |        |        |                       |       |          |       |                           |        |             |       |
| Corporate, general and administrative expenses                                   |   | 4,688,000   |        | —                     |       | 4,688,000     |       | —                         |        | 4,688,000        |       |
| Depreciation and amortization                                                    |   | 50,000      |        | —                     |       | 50,000        |       | —                         |        | 50,000           |       |
| Total operating expenses                                                         |   | 4,738,000   |        | —                     |       | 4,738,000     |       | —                         |        | 4,738,000        |       |
| Operating loss                                                                   |   | (4,738,000  | )           | —                     |       | (4,738,000    | )          | —                         |        | (4,738,000       | )          |
| Other income (expenses)                                                          |   |        |        |                       |       |          |       |                           |        |             |       |
| Interest income/                                                                 |   | 8,000       |        | —                     |       | 8,000         |       | —                         |        | 8,000            |       |
| Loss on disposal of fixed assets                                                 |   | (245,000    | )           | —                     |       | (245,000      | )          | —                         |        | (245,000         | )          |
| Gain on sales of marketable securities                                           |   | 665,000     |        | —                     |       | 665,000       |       | —                         |        | 665,000          |       |
| Unrealized gain on marketable securities                                         |   | 17,544,000  |        | —                     |       | 17,544,000    |       | —                         |        | 17,544,000       |       |
| Other, net                                                                       |   | 61,000      |        | —                     |       | 61,000        |       | —                         |        | 61,000           |       |
| Total other income                                                               |   | 18,033,000  |        | —                     |       | 18,033,000    |       | —                         |        | 18,033,000       |       |
| Income before income tax benefit, and equity in  losses of Subsidiary Guarantors |   | 13,295,000  |        | —                     |       | 13,295,000    |       | —                         |        | 13,663,000       |       |
| Income tax expense, net                                                          |   | (5,588,000  | )           | —                     |       | (5,588,000    | )          | —                         |        | (5,588,000       | )          |
| Income before equity in income of Subsidiary  Guarantors                         |   | 7,707,000   |        | —                     |       | 7,707,000     |       | —                         |        | 7,707,000        |       |
| Equity in net income of Subsidiary Guarantors                                    |   | —      |        | —                     |       | —        |       | —                         |        | —           |       |
| Income from discontinued operations                                              |   | 125,155,000 |        |                       |       | 125,155,000   |       |                           |        | 125,155,000      |       |
| Net income                                                                       |   | $           | 132,862,000 |                       | $          | —        |       | $                              | 132,862,000 |             | $          | — |   | $ | 132,862,000 |   |

 

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**Consolidating Statement of Cash Flows for the sixmonths ended June 30, 2002**

 
|                                           |   | **Parent**  |       | **Subsidiary  Guarantors** |   | **Sub-total** |   | **Consolidation****Adjustments** |       | **Consolidated** |   |
|------------------------------------------------|--------|-------------|------------|----------------------------|--------|---------------|--------|----------------------------------|------------|------------------|--------|
| Net cash used in operating activities          |   | $           | (2,314,000 | )                          | $      | —        |   | $                                | (2,314,000 | )                | $      | — |   | $ | (2,314,000 | ) |
| Cash flows from investing activities:          |   |        |       |                       |   |          |   |                             |       |             |   |
| Sales of marketable securities                 |   | 10,567,000  |       | —                     |   | 10,567,000    |   | —                           |       | 10,567,000       |   |
| Decrease in cash held in restricted investment |   | 24,000      |       | —                     |   | 24,000        |   | —                           |       | 24,000           |   |
| Net cash provided by investing activities      |   | 10,591,000  |       | —                     |   | 10,591,000    |   | —                           |       | 10,591,000       |   |
| Net cash provided by financing activities      |   | —      |       | —                     |   | —        |   | —                           |       | —           |   |
| Cash flows used in discontinuing operations    |   | (11,167,000 | )          | —                     |   | (11,167,000   | )      | —                           |       | (11,167,000      | )      |
| Change in cash and cash equivalents            |   | (2,890,000  | )          | —                     |   | (2,890,000    | )      | —                           |       | (2,890,000       | )      |
| Cash and cash equivalents at beginning of year |   | 3,194,000   |       | —                     |   | 3,194,000     |   | —                           |       | 3,194,000        |   |
| Cash and cash equivalents at end of period     |   | $           | 304,000    |                       | $      | —        |   | $                                | 304,000    |             | $      | — |   | $ | 304,000 |   |

 

**Consolidating Statement of Cash Flows for the sixmonths ended June 30, 2003**

 
|                                           |   | **Parent** |       | **Subsidiary  Guarantors** |   | **Sub-total** |   | **Consolidation  Adjustments** |       | **Consolidated** |   |
|------------------------------------------------|--------|------------|------------|----------------------------|--------|---------------|--------|--------------------------------|------------|------------------|--------|
| Net cash used in operating activities          |   | $          | (1,337,000 | )                          | $      | —        |   | $                              | (1,337,000 | )                | $      | — |   | $ | (1,337,000 | ) |
| Cash flows from investing activities:          |   |       |       |                       |   |          |   |                           |       |             |   |
| Sales of marketable securities                 |   | 1,240,000  |       | —                     |   | 1,240,000     |   | —                         |       | 1,240,000        |   |
| Decrease in cash held in restricted investment |   | 1,085,000  |       | —                     |   | 1,085,000     |   | —                         |       | 1,085,000        |   |
| Net cash provided by investing activities      |   | 2,325,000  |       | —                     |   | 2,325,000     |   | —                         |       | 2,325,000        |   |
| Net cash provided by financing activities      |   | —     |       | —                     |   | —        |   | —                         |       | —           |   |
| Cash flows used in discontinuing operations    |   | (1,179,000 | )          | —                     |   | (1,179,000    | )      | —                         |       | (1,179,000       | )      |
| Change in cash and cash equivalents            |   | (191,000   | )          | —                     |   | (191,000      | )      | —                         |       | (191,000         | )      |
| Cash and cash equivalents at beginning of year |   | 732,000    |       | —                     |   | 732,000       |   | —                         |       | 732,000          |   |
| Cash and cash equivalents at end of period     |   | $          | 541,000    |                       | $      | —        |   | $                              | 541,000    |             | $      | — |   | $ | 541,000 |   |

 

Thissummarized financial information for the Subsidiary Guarantors has beenprepared from the books and records maintained by the Subsidiary Guarantors andthe Company.  The summarized financialinformation may not necessarily be indicative of the results of operations orfinancial position had the Subsidiary Guarantors operated as independententities.

 

**6. DiscontinuedOperations**

 

As described more fully in Note 7, on November 4, 2002, Big CityRadio announced its intention to undertake an auction sale of all of its radiostations. This auction process has, to date, resulted in the asset dispositiontransactions detailed below, which have resulted in the sale of eleven of thetwelve FCC licenses owned by the Company. Its radio station operations havebeen presented as discontinued operations. The Company’s consolidated financialstatements for 

 

14

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all periods presented have beenadjusted to reflect the radio station operations as discontinued operations inaccordance with SFAS No.144.

 

Summarized financial information for the discontinued radio operationsis as follows:

 

**Radiooperations**

 
|                                       |   | **June 30,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
| Property and equipment, net                |   | $                       | 75,000  |                        | $      | 3,246,000 |   |
| Intangibles, net                           |   | 435,000                 |    | 76,325,000                  |   |
| Net assets - discontinued radio operations |   | $                       | 510,000 |                        | $      | 79,571,000 |   |

 

At June 30, 2003 and December 31, 2002, the Company’sproperty and equipment and intangible assets from the discontinued operationswere reported as assets held for sale.

 
|                                                                  |   | **For the three months  ended June 30,** |        | **For the six months  ended June 30,** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------------------|-------------|---------------------------------------------|--------|
|                                                                  |   | **2003**                                      |        | **2002**                                    |   | **2003** |   | **2002** |   |
| Gross revenues                                                        |   | $                                             | 96,000      |                                        | $      | 3,817,000 |   | $ | 1,267,000 |   | $ | 7,437,000 |   |
| Less commissions and fees                                             |   | —                                        |        | 382,000                                     |   | 28,000 |   | 673,000 |   |
| Net revenues                                                          |   | 96,000                                        |        | 3,435,000                                   |   | 1,239,000 |   | 6,764,000 |   |
| Operating expenses:                                                   |   |                                          |        |                                        |   |   |   |   |   |
| Stations operating expenses, excluding  depreciation and amortization |   | 3,923,000                                     |        | 3,832,000                                   |   | 6,198,000 |   | 8,037,000 |   |
| Depreciation and amortization                                         |   | 4,000                                         |        | 335,000                                     |   | 10,000 |   | 702,000 |   |
| Total operating expenses                                              |   | 3,927,000                                     |        | 4,167,000                                   |   | 6,208,000 |   | 8,739,000 |   |
| Operating loss from discontinued operations                           |   | (3,831,000                                    | )           | (732,000                                    | )      | (4,969,000 | ) | (1,975,000 | ) |
| Other income (expenses):                                              |   |                                          |        |                                        |   |   |   |   |   |
| Gain on sale of radio stations                                        |   | 141,310,000                                   |        | —                                      |   | 141,310,000 |   | — |   |
| Loss on disposal of fixed assets                                      |   | (57,000                                       | )           | —                                      |   | (57,000 | ) | — |   |
| Interest expense                                                      |   | (656,000                                      | )           | (5,045,000                                  | )      | (6,892,000 | ) | (10,037,000 | ) |
| Other, net                                                            |   | 17,000                                        |        | 41,000                                      |   | 142,000 |   | (30,000 | ) |
| Total other income/(expenses)                                         |   | 140,614,000                                   |        | (5,004,000                                  | )      | 134,503,000 |   | (10,067,000 | ) |
| Income/(loss) before income tax                                       |   | 136,783,000                                   |        | (5,736,000                                  | )      | 129,534,000 |   | (12,042,000 | ) |
| Income tax expense                                                    |   | 4,379,000                                     |        | 500,000                                     |   | 4,379,000 |   | 1,000,000 |   |
| Income/(loss) from discontinued operations....                        |   | $                                             | 132,404,000 |                                        | $      | (6,236,000 | ) | $ | 125,155,000 |   | $ | (13,042,000 | ) |

 

On December 23, 2002, the Company entered into an asset purchaseagreement to sell its radio stations KLYY-FM Arcadia, California, KSYY-FMFallbrook, California and KVYY-FM Ventura, California to EntravisionCommunications Corporation (Entravision or EVC) for a combined purchaseconsideration of $100 million in cash and 3,766,478 shares of Entravision’sClass A Common Stock. This sale was completed on April 16, 2003. OnJanuary 15, 2003, Entravision and Big City Radio entered into a timebrokerage agreement following clearance of the asset sale under federalantitrust law. Under the agreement, Entravision provided programming andrelated services to the stations it purchased from Big City Radio through thedate of completion of the asset sale. In addition Entravision was entitled torevenue and responsible for certain operating expenses. The Company hasrecorded the fee received related to the time brokerage agreement as revenue.

 

On December 30, 2002, the Company entered into an asset purchaseagreement to sell its radio stations WYNY-FM Briarcliff Manor, New York,WWXY-FM Hampton Bays, New York, WWYY-FM Belvidere, New Jersey and 

 

15

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WWZY-FM Long Branch, New Jerseyto Nassau Broadcasting Holdings, Inc. for a total consideration of $43 millionin cash. This sale was completed on April 2, 2003.

 

On December 31, 2002, the Company entered into an asset purchaseagreement to sell its radio stations WDEK-FM DeKalb, Illinois, WKIE-FMArlington Heights, Illinois and WKIF-FM Kankakee, Illinois to SpanishBroadcasting Systems, Inc. (SBS) for a total consideration of $22 million incash. This sale was completed on April 4, 2003. On December 31, 2002,SBS and Big City Radio entered into a time brokerage agreement. Under theagreement, SBS provided programming and related services to the stations itpurchased from Big City Radio through the date of completion of the asset sale.In addition SBS was entitled to revenue and responsible for certain operatingexpenses. The Company has recorded the fee received related to the timebrokerage agreement as revenue.

 

On January 2, 2003, the Company entered into an asset purchaseagreement to sell its radio station WXXY-FM Highland Park, Illinois to HBC fora total consideration of $32.875 million in cash. On January 10, 2003, HBCand Big City Radio entered into a time brokerage agreement. Under theagreement, HBC provided programming and related services to the stations it waspurchasing from Big City Radio until the asset sale was completed. In additionHBC was entitled to revenue and was responsible for certain operating expenses.The Company recorded the fee received related to the time brokerage agreementas revenue. On May 2, 2003, the Company and HBC amended these agreementsresulting in the transfer, on that date, of certain non-license assets used inthe operation of the radio station. HBC paid $29.875 million of the $32.875million purchase price to Big City Radio and the remaining $3 million was dueat the earlier of 18 months from May 2, 2003 or  the transfer of the FCC licenses, which took place onJuly 18, 2003. As the $3 million was not contingent on the transfer of thelicense, the Company included such amount in the gain on sale of the station

 

During June 2002, the Company discontinued the operation of UPF(which was comprised solely of publishing operations), and wrote-off theremaining $108,000 of goodwill associated with its acquisition. The decision toterminate publishing operations was made in response to the continued downturnin the music industry advertising marketplace. As UPF’s publishing operationrepresented the only publishing operations of Big City Radio, Inc., theCompany’s consolidated financial statements for all periods presented have beenadjusted to reflect the publishing operations as discontinued operations inaccordance with SFAS No.144.

 

Summarized financial information for the discontinued publishingoperations is as follows:

 

**Publishing operations**

 
|                              |   | **For the three months  ended June 30,** |   | **For the six months  ended June 30,** |   |
|-----------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------|--------|
|                              |   | **2003**                                      |   | **2002**                                    |   | **2003** |   | **2002** |   |
| Net revenues                      |   | $                                             | — |                                        | $      | 41,000 |   | $ | — |   | $ | 127,000 |   |
| Operating expenses                |   | —                                        |   | 423,000                                     |   | — |   | 722,000 |   |
| Loss from discontinued operations |   | $                                             | — |                                        | $      | (382,000 | ) | $ | — |   | $ | (595,000 | ) |

 

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The following table summarizes the cash flow information from thediscontinued radio and publishing operations:

 

**Discontinued operations**

 
|                                                                         |   | **For the  six months  ended June 30,** |        |
|------------------------------------------------------------------------------|--------|----------------------------------------------|-------------|
|                                                                         |   | **2003**                                     |        | **2002** |   |
| Cash flows from operating activities:                                        |   |                                         |        |   |   |
| Net income/(loss) from discontinued operations                               |   | $                                            | 125,155,000 |   | $ | (13,637,000 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                                         |        |   |   |
| Depreciation and amortization                                                |   | 10,000                                       |        | 340,000 |   |
| Deferred income tax expense                                                  |   | 4,379,000                                    |        | 1,000,000 |   |
| Non cash interest                                                            |   | 1,441,000                                    |        | 326,000 |   |
| Loss on disposal of fixed assets                                             |   | 57,000                                       |        | 28,000 |   |
| Impairment loss on intangible assets                                         |   | —                                       |        | 108,000 |   |
| Gain on sale of stations                                                     |   | (141,310,000                                 | )           | — |   |
| Changes in operating assets and liabilities, net  of acquisitions:           |   |                                         |        |   |   |
| (Increase) decrease in assets:                                               |   |                                         |        |   |   |
| Accounts receivable                                                          |   | 1,926,000                                    |        | 1,091,000 |   |
| Other receivable, holdback on sale of Chicago  Stations                      |   | (3,000,000                                   | )           | — |   |
| Prepaid expenses and other current assets                                    |   | 125,000                                      |        | (39,000 | ) |
| Other assets                                                                 |   | 149,000                                      |        | (59,000 | ) |
| Increase (decrease) in liabilities:                                          |   |                                         |        |   |   |
| Accounts payable                                                             |   | (121,000                                     | )           | (557,000 | ) |
| Accrued expenses                                                             |   | (429,000                                     | )           | (165,000 | ) |
| Interest payable                                                             |   | (10,453,000                                  | )           | (81,000 | ) |
| Other liabilities                                                            |   | (369,000                                     | )           | (16,000 | ) |
| Net cash used in operating activities                                        |   | (22,440,000                                  | )           | (11,661,000 | ) |
| Cash flows from investing activities:                                        |   |                                         |        |   |   |
| Purchase of property and equipment                                           |   | —                                       |        | (174,000 | ) |
| Cash received for radio stations sold                                        |   | 195,261,000                                  |        | — |   |
| Cash received for disposal of fixed assets                                   |   | —                                       |        | 295,000 |   |
| Net cash provided by investing activities                                    |   | 195,261,000                                  |        | 121,000 |   |
| Cash flow from financing activities                                          |   |                                         |        |   |   |
| Repayment of senior discount notes                                           |   | (174,000,000                                 | )           | — |   |
| Net cash used in financing activities                                        |   | (174,000,000                                 | )           | — |   |
|                                                                         |   |                                         |        |   |   |
| Cash used in discontinued operations.                                        |   | $                                            | (1,179,000  | ) | $ | (11,540,000 | ) |

 

**7.****              Liquidityand Going Concern**

 

As is described more fully below, events ofdefault exist under the Indenture governing Big City Radio’s Notes and Big CityRadio entered into a Forbearance Agreement with the holders of approximately$128 million principal amount at maturity of the Notes, although theForbearance Agreement did not prevent the trustee under the Indenture or 

 

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note-holders that were notparties to the Forbearance Agreement from pursuing remedies under theIndenture, as provided therein.

 

Since its inception, Big City Radio incurredsubstantial net operating losses primarily due to broadcast cash flow deficitsassociated with the start up of its radio station operations. During thequarter ended June 30, 2003, the Company completed three of four plannedasset sale transactions, and also amended the fourth transaction to sellcertain non-license assets (see notes 6 and 8). As a result of thesetransactions, the Company has sold the majority of its operating assets and nowowns only WYXX-FM in Morris, Illinois. The Company remains a party to somecontracts formerly used in the operations of the sold radio stations which werenot assumed by the purchasers of its radio properties. The Company does notexpect to incur material obligations under these contracts. As a further resultof the completed asset sales and the realized and unrealized gains in theEntravision Class A common stock since April 16, 2003, the date theEntravision transaction was completed, the Company has reported a totalestimated tax provision for Federal and State taxes  of  approximately $10million. This total provision was estimated assuming the liquidation of theEntravision Class A common stock at its closing price on June 30, 2003.The Company has contractual liabilities to management under employmentarrangements estimated as approximately $2.2 million. As a result, Big Cityexpects to generate net operating losses for the foreseeable future.

 

Prior to completion of the asset salesdescribed above, Big City Radio met its working capital needs primarily throughborrowings, including loans from Big City Radio’s principal stockholders,Stuart and Anita Subotnick, loans under credit facilities, and proceeds fromthe issuance of the senior notes in March 1998. From October 31, 2001to the completion of the asset sales, Big City Radio has met its workingcapital needs primarily from the proceeds of the sale of Big City Radio’sPhoenix radio stations which it completed on that date.

 

Big City Radio completed a sale of $174million aggregate principal amount at maturity of senior notes onMarch 17, 1998, generating approximately $125.4 million of gross proceeds.Big City Radio used approximately $32.6 million of these proceeds to repayoutstanding indebtedness under a credit facility with The Chase Manhattan Bankentered into in 1996. Big City Radio used the proceeds of the senior notesoffering to finance the acquisition costs of radio station properties and forgeneral working capital purpose.

 

Cash interest commenced accruing on thesenior notes on March 15, 2001 and semi-annual cash interest payments of$9,800,000 commenced on September 15, 2001. Big City Radio failed to makethe initial semi-annual interest payment when due on September 15, 2001.In order to obtain the funds to make this payment within the 30-day graceperiod provided under the indenture, Big City Radio obtained a bridge loan inthe amount of $15,000,000 by the assignment of Big City Radio’s revolvingcredit facility from the lender thereunder to a new lender. The bridge loan wassecured to the same extent as the revolving credit facility and bore interestat the rate of LIBOR plus 3.0%, or a base rate plus 2.0%, at the option of BigCity Radio. Big City Radio used the net proceeds of the bridge loan to pay thesemi-annual interest on the senior notes due on September 15, 2001,together with applicable additional interest thereon, and to repay $2,235,000of principal indebtedness and $51,000 of interest incurred under the promissorynote issued to Mr. Subotnick in May 2001. Big City Radio repaid the bridgeloan on October 31, 2001 with a portion of the proceeds from the sale ofthe Phoenix radio station properties, as discussed below. Big City Radiocurrently does not have a credit facility.

 

On October 31, 2001, the Companycompleted the sale of its four Phoenix radio stations to Hispanic BroadcastingCorporation for a cash purchase price of $34,000,000. The indenture governingthe senior notes permited Big City Radio to reinvest the approximately$18,000,000 of proceeds which remained from the sale of the Phoenix stationsafter the repayment of the bridge loan in broadcast assets for a period up toone year from the date of these asset sales. Thereafter, any net proceeds thatwere not timely reinvested in broadcast assets were required to be used to makean offer to repurchase senior notes. As described above, Big City Radio used aportion of the proceeds to repay indebtedness under the bridge loan and to fundthe semi-annual interest payment due on the senior notes on March 15,2002. Big City Radio used the remaining proceeds to fund its ongoingoperations, and did not reinvest such proceeds in broadcast assets. Big CityRadio did not make the required offer to repurchase senior notes, because itdid not have sufficient cash resources to consummate such an offer. Its failureto make an offer to repurchase constitutes an event of default under the indenture.

 

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The Company failed to make the semi-annual interest payment of$9,800,000 due on the senior notes on September 15, 2002. Big City Radio’scash resources were insufficient to enable Big City Radio to make thesemi-annual interest payment within the 30-day grace period provided under theindenture. The grace period expired on October 15, 2002, thereby resultingin an additional event of default under the indenture. On October 17,2002, pursuant to the indenture, holders of the senior notes delivered anacceleration notice to Big City Radio declaring the principal and interest onall of the senior notes to be immediately due and payable.

 

In light of these developments, the Company evaluated its strategicalternatives and the most efficient use of its capital. On November 4,2002, Big City Radio announced it had retained Jorgenson Broadcast Brokerage tomarket and conduct an auction sale of all of Big City Radio’s radio stations.

 

On November 13, 2002, Big City Radio, and the holders ofapproximately $128,000,000 in principal amount of the senior notes actingthrough an ad hoc committee of noteholders, entered into a forbearanceagreement. Under the forbearance agreement, the signatory noteholders agreed toforebear, through January 31, 2003 (later extended to March 31, 2003and subsequently to April 30, 2003), from taking, initiating or continuingany action to enforce the Company’s payment obligations under the senior notes,including, without limitation, any involuntary bankruptcy filing against theCompany, or against any property, officers, directors, employees or agents ofthe Company to collect on or enforce payment of any indebtedness orobligations, or to otherwise assert  anyclaims or causes of action seeking payment under the senior notes, in each casearising under or relating to the payment default or the default arising fromthe failure to make the required offer to repurchase senior notes or otherexisting defaults known to the signatory noteholders as of November 13,2002. Under the forbearance agreement, the Company agreed to conduct theauction of its radio stations in a good faith manner designed to sell theassets as soon as practicable for net cash consideration in an amount at least sufficientto pay all principal of, and accrued and unpaid interest on, the senior notes.If the signatory noteholders reasonably believed that the Company was notconducting the auction process in good faith or was not operating or managingthe business and financial affairs of the Company in good faith in the ordinarycourse and consistent with past practices, they could have notified the Companyin writing and could have elected to terminate the forbearance agreement. TheCompany further agreed not to pay, discharge or satisfy any liability orobligation except for obligations reflected on the Company’s balance sheet asof December 31, 2001 or incurred in the ordinary course since that datewhich were paid, discharged or satisfied for fair and equivalent valued in theordinary course of business and consistent with past practices. The forbearanceagreement did not prevent the trustee under the indenture or noteholders thatare not parties to the forbearance agreement from pursuing remedies under theindenture.

 

Big City Radio and the noteholders executed an amendment to theforbearance agreement as of January 14, 2003, in which the expiration dateof the forbearance period was extended from January 31, 2003 through andincluding March 31, 2003. The forbearance agreement was further amended toprovide that:

 

•                  BigCity Radio would pay the noteholders the net cash proceeds of any asset salewithin five business days after the completion of such asset sale, until suchtime as the noteholders had received cash in an amount equal to all principalof, and accrued and unpaid interest on, the senior notes;

 

•                  theforbearance agreement could be terminated by either Big City Radio or the adhoc committee upon written notice if:

 

•                  anyparty to the forbearance agreement failed to perform any of its obligations, orbreached any of its representations, covenants or warranties, under theforbearance agreement,

 

•                  BigCity Radio or any party to any asset purchase agreement for any asset salewhich Big City Radio had publicly announced on or before January 6, 2003breached any representation, warranty or covenant in such asset purchaseagreement, and did not cure such breach within ten days, or

 

•                  oneor more of the asset purchase agreements was terminated or modified in any materialrespect; and

 

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•                  BigCity Radio was required to immediately notify the ad hoc committee by writtennotice of:

 

•                  anybreach by Big City Radio of the forbearance agreement,

 

•                  anybreach by Big City Radio or any other party of any of the foregoing assetpurchase agreements, whether or not such breach was curable, and

 

•                  anytermination by Big City Radio or any other party thereto of any such assetpurchase agreements.

 

In addition, the forbearance agreementprovided that it would automatically terminate upon the filing of a voluntaryor involuntary petition under the insolvency or bankruptcy laws of the UnitedStates or any state with respect to Big City Radio, except that, upon thefiling of an involuntary bankruptcy petition by unaffiliated, arm’s lengthcreditors, Big City Radio would have a period of ten days to obtain thedismissal or withdrawal of such a petition before the forbearance agreementterminated as a result of the filing. In March 2003, a second amendment tothe forbearance agreement was signed extending the forbearance period throughand including April 30, 2003. Although Big City Radio and the signatorynoteholders discussed a further extension of the forbearance period, no suchextension was executed.  Accordingly, ifany amounts remain to be paid under the Indenture governing the Notes, thesignatory noteholders are presently able to exercise any and all remedies underthe Indenture governing the Notes.

 

Between December 23, 2002 andJanuary 2, 2003, Big City Radio signed asset purchase agreements to selleleven of the twelve FCC radio stations that it owned. In May 2003, theparties amended the HBC asset purchase agreement permitting the transfer ofnon-license assets in exchange for an initial payment of $29.875 million with asecond and final payment of $3.0 million to be made upon the transfer of theFCC license, which transfer was effected and which payment was received onJuly 18, 2003. Following the completion of these four asset purchaseagreements, the Company has received gross cash proceeds of approximately$197.9 million and 3,766,478 shares of Entravision’s Class A Common Stock.Under the senior notes forbearance agreement described above, Big City Radio isobligated to apply the net proceeds of the asset sales first to pay theprincipal amount of the senior notes and all accrued and unpaid interestthereon through the date of such payment. The Company has paid the trustee forthe bondholders approximately $195.4 million. The Company is holdingdiscussions with bondholders and the trustee to determine what additionalamounts, if any, are required to be paid by the Company to the Trustee for thebenefit of the bondholders. These discussions concern whether interest on interestwas due and payable and whether interest ceased to accrue on the dates on whichpayments were made by the Company to the Trustee, or whether interest continuedto accrue until such subsequent dates on which the Trustee made distributionsto the bondholders. Depending on the outcome of these discussions, the Companycould be liable to the bondholders in an additional amount of up to $1.28million.  As of June 30, 2003, theCompany has recorded its interest payable consistent with its assessment of themost likely outcome of this contingency.

 

Big City Radio will apply the net proceedsfrom the sale of its sole remaining radio station asset, together with itsother liquidity sources, to pay any remaining principal and interest due on theNotes and to pay expenses relating to the asset sales, including employeeseverance, contractual liabilities to management under employment arrangements,tax liabilities and expenses associated with termination of contracts notassumed by the buyers, as well as trade payables and other operating expenses.

 

If Big City Radio sells its sole remainingradio station, it will have disposed of all of its operating properties. Itsprincipal sources of liquidity will then consist of cash on hand, amountsearned on the investment of such cash and the shares of Entravision Stockreceived in the sale of the Los Angeles radio stations to Entravision. Duringthe quarter ended June 30, 2003, Big City Radio commenced a program ofselling some of the shares of Entravision Stock. As of August 1, 2003, BigCity Radio had sold an aggregate of 620,700 shares of Entravision Stock fortotal proceeds of $6,815,000. Big City Radio will continue to seek additionalliquidity by selling shares of the Entravision Stock, although any such saleswill be subject to numerous factors including market conditions and the timingof the Company’s future cash obligations. Big City Radio believes that theseliquidity sources will be sufficient to meet its short-term cash needs.

 

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The amount and nature of BigCity Radio’s long-term liquidity needs will depend on, among other things, adecision by the board of directors regarding future operations, if any, of BigCity Radio.

 

**8. Subsequent Events**

 

On May 2, 2003, the Company and HBCsigned (i) a Second Amendment to the Asset Purchase Agreement datedJanuary 2, 2003 (as amended by the First Amendment to Asset PurchaseAgreement dated as of January 10, 2003), and (ii) an Amended and RestatedTime Brokerage Agreement. On this date, Big City Radio transferred non-licenseassets used in the operation of the radio station to HBC in return for aninitial payment of $29.875 million, which the Company used to pay $29.4 millionto the trustee for the bondholders to pay down principal and interest on thesenior notes. Under the terms of the Second Amendment, the remaining $3 millionwas be paid on the earlier of (i) the date of receipt of initial FCC approvalof the transfer of the FCC station license to HBC, or (ii) if HBC had not assignedthe Agreement to an unaffiliated third party prior to the eighteen monthanniversary date of the Second Amendment, then the eighteenth month date. OnJuly 18, 2003 following receipt of the initial FCC approval for thetransfer of the FCC license to HBC, the Company received the remaining $3million from HBC and transferred the FCC license to HBC. This amount was paidto the trustee for the bondholders.

 

On July 21, 2003, the Company paid anadditional $2.5 million to the trustee for the bondholders bringing the totalpaid by the Company to the trustees for the bondholders to approximately $195.4million. The Company is holding discussions with bondholders and the trustee todetermine what additional amounts, if any, are required to be paid by the Companyto the Trustee for the benefit of the bondholders. These discussions concernwhether interest on interest was due and payable and whether interest ceased toaccrue on the dates on which payments were made by the Company to the Trustee,or whether interest continued to accrue until such subsequent dates on whichthe Trustee made distributions to the bondholders. Depending on the outcome ofthese discussions, the Company could be liable to the bondholders in anadditional amount of up to $1.28 million. As of June 30, 2003, the Company has recorded its interest payableconsistent with its assessment of the most likely outcome of this contingency.

 

The Company is in the final stages ofconducting an auction for its sole remaining radio station, WYXX-FM in Morris,Illinois, and is endeavoring to enter into a definitive agreement for thestation in the near-term. It is anticipated that the purchase price for thestation will be approximately $500,000.

 

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**Item 2. MANAGEMENT’S****DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Certain statements set forth below under this caption constitute“Forward-Looking Statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”) and Section 21E ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”).  See “Special Note Regarding Forward-LookingStatements” for a discussion of considerations relating to such statements.

 

**Recent Developments**

 

Since its inception, Big City Radio has incurred substantial netoperating losses primarily due to broadcast cash flow deficits associated withthe start up of its radio station operations. As of March 31, 2003, BigCity Radio had incurred a cumulative cash flow deficit of approximately $165million and a cumulative net loss of approximately $144 million. During thequarter ended June 30, 2003, Big City Radio sold eleven of its twelveradio stations in transactions resulting from an auction process that itannounced on November 4, 2002. Between December 24, 2002 and January 2, 2003, Big City Radiosigned four separate definitive asset purchase agreements to sell eleven of itstwelve FCC FM licenses. Big City Radio entered into these agreement to raise thefunds necessary to pay all principal of, and accrued and unpaid interest on,its 111⁄4% Senior Discount Notes (“the Notes” or “senior notes”) due 2005.Noteholders had accelerated payment of the senior notes as a result of defaultsby Big City Radio under the Notes. None of these transactions was conditionedon the completion of any other transaction. In April 2003, the Companycompleted the sale of all of the stations that were the subject of theseagreements, other than radio station WVIV-FM (formerly WXXY-FM) Highland Park,Illinois, which was sold to HBC for a total consideration of $32.875 million incash. In May 2003, the Company amended its agreement with HBC, as a resultof which it received $29.875 million for the non-FCC license assets. OnJuly 18, 2003, HBC paid the remaining $3 million and the Companytransferred the FCC license.

 

Big City Radio’s board of directors unanimously approved the assetsales and determined that the sales were in the best interests of Big CityRadio and its stockholders and creditors. Big City Radio also obtainedstockholder approval of the asset sales by the written consent of the holdersof a majority of the voting power of Big City Radio common stock in accordancewith the requirements of Delaware law and Big City Radio’s certificate ofincorporation. As is described more fully below, events of default exist underthe Indenture governing the Company’s Notes and the Company entered into aForbearance Agreement with the holders of approximately $128 million principal amountat maturity of the Notes, although the Forbearance Agreement did not preventthe trustee under the Indenture or note-holders that were not parties to theForbearance Agreement from pursuing remedies under the Indenture, as providedtherein, including an involuntary bankruptcy filing. Big City Radio and thenoteholders executed an amendment to the forbearance agreement as ofJanuary 14, 2003, in which the parties extended the expiration date of theforbearance period from January 31, 2003 through and includingMarch 31, 2003. The parties executed a second amendment to the forbearanceagreement extending the forbearance period through and including April 30,2003. Although Big City Radio and the signatory noteholders discussed a furtherextension of the forbearance period, no such extension was executed and theCompany cannot provide any assurances that a further extension will beforthcoming. Accordingly, if any amounts remain to be paid under the Indenturegoverning the Notes, the signatory noteholders are presently able to exerciseany and all remedies under the Indenture governing the Notes, including aninvoluntary bankruptcy filing.

 

No assurances can be provided that the Company will be successful inselling its remaining station. While the Company has some sources of liquidity,namely cash on hand of approximately $690,000, and marketable securities with avalue of approximately $38,453,000 as of July 30, 2003, it has future cashobligations including a possible final payment to the bondholders which iscurrently the subject of discussions with bondholders and the trustee, unpaidexpenses relating to the asset sales including professional fees, employeeseverance and contractual payments to management under employment arrangements,Federal and State tax liabilities resulting from the sale of the radio stationsand the realized and unrealized gains on the Entravision Class A common stockreceived in one of the asset sales, expenses associated with the termination ofsome contracts not assumed by buyers of the radio station assets and tradepayables. Although the Company believes it will have sufficient resources,there can be no assurances that the sale 

 

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of the remaining station andfuture sales of the marketable securities will enable the Company to meet theseobligations. In the absence of sufficient resources, the Company will considerother strategic alternatives including filing for protection under the UnitedStates bankruptcy code. In addition, because an event of default exists underthe Company’s Indenture, the Company could also be subject to an involuntaryfiling under the bankruptcy code.

 

Commencing in 2002, Big City Radio’s Class A Common Stock, which islisted on the American Stock Exchange, was subject to a listing review andrelated proceedings by the Exchange. nder the Exchange’s requirements ascommunicated to Big City Radio in connection with these proceedings, Big CityRadio’s Class A common stock remains subject to delisting due to the fact thatafter the completion of the auction sale of its radio station properties, BigCity Radio would not retain any of its existing assets and, for a period oftime, may not continue to be an operating company. If the Exchange delists BigCity Radio’s Class A Common Stock, the liquidity and the market price of itsClass A Common Stock would be adversely affected. In light of the number andcomplexity of the issues facing the Company noted above, the Company cannotgive any assurance that the Class A Common Stock will not be delisted.

 

**General**

 

Throughout the periods presented in this quarterly report on Form 10-Q,Big City Radio owned and operated radio stations in three of the largest radiomarkets in the United States. During the quarter ended June 30, 2003, theCompany sold eleven of its twelve FCC licenses. Big City Radio’s radiobroadcast properties were located in or adjacent to major metropolitan marketsand utilized innovative engineering techniques and low-cost, ratings-drivenoperating strategies to develop these properties into metropolitan radiostations. The remaining FCC radio station license is held for sale.

 

Big City Radio’s financial results were dependent on a number offactors, including the general strength of the local and national economies,local market competition, the relative efficiency and effectiveness of radiobroadcasting compared to other advertising media, governmental regulation andpolicies, and Big City Radio’s ability to provide popular programming.

 

Big City Radio’s primary source of revenue was the sale of advertising.Each station’s total revenue was determined by the number of advertisementsaired by the station and the advertising rates that the station is able tocharge. Until it discontinued its publishing operations in June 2002, BigCity Radio derived publishing revenues principally from the sale of advertisingannouncements and from contract graphic design projects.

 

Because Big City Radio’s strategy involved developing brand newmetropolitan area radio stations, the initial revenue base was zero and subjectto factors other than ratings and radio broadcasting seasonality. After astation start-up period, as is typical in the radio broadcasting industry, BigCity Radio’s first calendar quarter generally would produce the lowest revenuesfor the year, and the fourth quarter generally would produce the highestrevenues for the year. Big City Radio’s operating results in any period wereaffected by the incurrence of advertising and promotional expenses that do notproduce commensurate revenues in the period in which the expenses wereincurred.

 

In each of its markets, Big City Radio sought to maximize the operatingresults of its broadcast properties by selecting the most competitively viableformats, engaging experienced and talented management, and optimizing thesignal coverage of its transmitting facilities.

 

The independent auditor’s reports on Big City Radio’s financialstatements for each of the last three fiscal years have stated that Big CityRadio’s recurring losses from operations, negative cash flows from operations,stockholders’ deficiency and default under the terms of its senior notes raisesubstantial doubt about Big City Radio’s ability to continue as a goingconcern. Because of the severe constraints on its liquidity, defaults aroseunder the Indenture governing the Company’s $174,000,000 principal amount ofsenior notes. As a result, holders of the requisite amount of the notes havedeclared the principal and interest on the senior notes to be due and payable,and Big City Radio agreed with the holders of approximately 75% of the notes toconduct an auction sale of substantially all of its operating properties assoon as practicable for net cash consideration in an amount at least sufficientto pay all principal of, and accrued and 

 

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unpaid interest on, the seniornotes. In the quarter ended June 30, 2003, Big City Radio reported itspreviously announced asset sales. Big City Radio had collected approximately$197.9 million in cash and 3,766,478 shares of Entravision Stock from thesesales. As of that date, the Company has paid the trustee for the bondholdersapproximately $195.4 million. The Company is holding discussions withbondholders and the trustee to determine what additional amounts, if any, arerequired to be paid by the Company to the Trustee for the benefit of thebondholders. These discussions concern whether interest on interest was due andpayable and whether interest ceased to accrue on the dates on which paymentswere made by the Company to the Trustee, or whether interest continued toaccrue until such subsequent dates on which the Trustee made distributions tothe bondholders. Depending on the outcome of these discussions, the Companycould be liable to the bondholders in an additional amount of up to $1.28million.  As of June 30, 2003, theCompany has recorded its interest payable consistent with its assessment of themost likely outcome of this contingency.

 

The majority of Big City Radio’s broadcast properties were in variousstages of development, either as a result of recently granted or pendingrequests to the FCC for enhancements or upgrades or as a result of havingrecently changed formats. As a result, since its inception, Big City Radioincurred substantial net operating losses primarily due to broadcast cash flowdeficits associated with the start up of its radio station operations. Big CityRadio’s original business plan envisioned that Big City Radio would generatesufficient cash flows from operations to fund its operating requirements andcapital needs and to service interest payments on the senior notes when thoseinterest payments first became due. Although Big City Radio sold the seniornotes in March 1998, the senior notes were issued at an original issuediscount, and no note interest was payable in cash until September 15,2001. Big City Radio’s inability to generate sufficient cash flows fromoperations to meet all of its cash needs was attributable to a number of factors,including an adverse competitive environment, a downturn in the demand formusic industry advertising, which resulted in discontinuation of the internetand publishing businesses, and the reduction in listening levels and resultingratings for some of Big City Radio’s original station formats. Although achange in station formats produced an improvement in net revenues, the enhancedrevenues were not sufficient in most markets to offset station operatingexpenses and other costs.

 

Big City Radio’s liquidity crisis was precipitated by its lack ofability to generate operating income and its obligation to make semi-annualinterest payments of $9.8 million on its senior notes beginning onSeptember 15, 2001. Although it was able to make the first two suchinterest payments, Big City Radio had to fund those payments from the proceedsof additional borrowings and the sale of its four Phoenix stations inOctober 2001. To address its liquidity problems, Big City Radio has soughtto reduce expenses by decreasing capital expenditures and expenditures forpromotional and programming activities and by reducing corporate, general andadministrative expenses through employee terminations. These measures todecrease operating expenses further limited Big City Radio’s ability to competeeffectively during a time of industry-wide consolidation and the exposure ofsmaller, less well-capitalized companies to continued deterioration in thenational and regional advertising markets.

 

As noted elsewhere in this report, the results of all radio station andpublishing operations discontinued in 2002 have been classified as *l**osses from discontinued operations*.

 

**Three Months Ended June 30, 2003Compared with Three Months Ended June 30, 2002**

 

*Corporate, general and administrative expenses*for the three months ended June 30, 2003 were $2,509,000 compared with$1,000,000 for the three months ended June 30, 2002, an increase of$1,509,000, or 150.9%. The increase was primarily attributable to the followingfactors:

 

•                  higher legal andprofessional fees expense related to the sale of stations;

 

•                  higheraccounting and filing fees expense related to the sale of stations;

 

•                  higher insurancecosts, and

 

•                  fees incurredrelated to the termination of the Miami facility lease agreement duringMay 2003.

 

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*Depreciation and amortization expenses* for thethree months ended June 30, 2003 were $21,000 compared with $30,000 forthe three months ended June 30, 2002, a decrease of $9,000, or 30.0%. Thedecrease was primarily attributable to the disposal of $245,000 of fixed assetsrelated to the Miami facility.

 

*Interest income*for the three months endedJune 30, 2003 was $3,000 compared to $31,000 for the three months endedJune 30, 2002, which represented a decrease of $28,000 or 90.3%. Thisdecrease was primarily attributable to lower average balance of investments inthe Company’s marketable securities excluding Entravision Class A common stock.

 

*Loss on Disposal of fixed asset*forthe three months ended June 30, 2003 was $245,000. In May 2003, theCompany terminated its Miami facility lease agreement and abandoned theleasehold improvements related to this facility. The loss on this disposal was$245,000 for the three months ended June 30, 2003.

 

*Gain on sales of marketable securities*for the three months ended June 30, 2003 was $665,000. During the quarterended June 30, 2003, the Company sold 156,600 shares of Entravision ClassA common stock to generate cash to pay interest on its Senior Discount Notes.The realized gain on these sales was $665,000. There was no such gain for thethree months ended June 30, 2002.

 

*Unrealized gain on marketable securities*for the three months ended June 30, 2003 was $17,544,000. OnApril 16, 2003, the Company sold its LA stations to Entravision andreceived $100 million in cash and 3,766,478 shares of Entravision Class Acommon stock.  The Company hasclassified these securities as trading securities. As of June 30, 2003,the Company has 3,609,878 shares of Entravision Class A common stock, and atsuch date, the unrealized gain on these securities was $17,544,000.

 

*Income tax expense*forthe three months ended June 30, 2003 was $5,588,000, compared to $0 forthe three months ended June 30, 2002. The deferred tax expense for thethree months ended June 30, 2003, relates to the gain on sales ofmarketable securities, and a tax provision for the unrealized gain of$17,544,000 on the remaining 3,609,878 shares of Entravision Class A commonstock which are treated as trading securities and reported at fair value.

 

*Income from discontinued operations*for thethree months ended June 30, 2003 was $132,404,000 compared with a loss of$6,618,000 for the three months ended June 30, 2002.   This change was primarily attributable to(i) gain on sale of stations of $141,310,000 during the second quarter of 2003,and (ii) decreased interest expense resulting from the repayment of the seniornotes during the second quarter of 2003. Partially offsetting these items, wasan increased income tax expense of $3,879,000 related to the sale of the radiostations during the quarter ended June 30, 2003, and costs associated withthe radio station sales of $3,400,000 related to lease termination and employeecosts during the three months ended June 30, 2003. It should be noted thatunder the time brokerage agreements, which were in place during the quarterended June 30, 2003 up to the date of sale of the Los Angeles and Chicagoradio stations, the Company recorded fees received as revenue. In addition,station revenues were generated by third parties and such parties wereresponsible for some operating expenses. These third party station revenues andexpenses have been excluded from the Company’s results.

 

*Net Income* for the three months ended June 30,2003 was $142,268,000 compared with a net loss of $7,618,000 for the threemonths ended June 30, 2002. This change was primarily attributable to thegain on sale of stations, lower interest expense, the gain on sale ofmarketable securities and an unrealized gain on marketable securities for thethree months ended June 30, 2003, partially offset by increased corporate,general and administrative expenses, a loss on disposal of fixed assets, andincreased income tax expense in the three months ended June 30, 2003, whencompared to the three months ended June 30, 2002.

 

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**Six Months Ended June 30, 2003compared  with Six Months EndedJune 30, 2002**

 

*Corporate, general and administrativeexpenses* for the six months ended June 30, 2003were $4,688,000 compared with $1,916,000 for the six months ended June 30,2002, an increase of $2,772,000, or 144.7%. The increase was primarilyattributable to the following factors:

 

•                  higher legal andprofessional fees expense related to the sale of stations;

 

•                  higheraccounting and filing fees expense related to the sale of stations;

 

•                  higher insurancecosts, and

 

•                  fees incurredrelated to the termination of the Miami facility lease agreement duringMay 2003.

 

*Depreciation and amortization expenses* for thesix months ended June 30, 2003 were $50,000 compared with $60,000 for thesix months ended June 30, 2002, a decrease of $10,000, or 16.7%. Thedecrease was primarily attributable to the disposal of $245,000 of fixed assetsrelated to the Miami facility.

 

*Interest income*for the six months ended  June 30, 2003 was $8,000 compared to$105,000 for the six months ended June 30, 2002, which represented adecrease of $97,000 or 92.4%. This decrease was primarily attributable to loweraverage balance of investments in marketable securities.

 

*Loss on Disposal of fixed asset*forthe six months ended June 30, 2003 was $245,000. In May 2003, theCompany terminated its Miami facility lease agreement and abandoned theleasehold improvements related to this facility. The loss on this disposal was$245,000 for the six months ended June 30, 2003.

 

*Gain on sales of marketable securities*for the six months ended June 30, 2003 was $665,000. During the quarterended June 30, 2003, the Company sold 156,600 shares of Entravision ClassA common stock to generate cash to pay interest on its senior discount notes.The realized gain on these sales was $665,000. There was no such gain for thesix months ended June 30, 2002.

 

*Unrealized gain on marketable securities*for the six months ended June 30, 2003 was $17,544,000. On April 16,2003, the Company sold its LA stations to Entravision and received $100 millionin cash and 3,766,478 shares of Entravision Class A common stock.  The Company has classified these securitiesas trading securities. As of June 30, 2003, the Company has 3,609,878shares of Entravision Class A common stock, and at such date, the unrealizedgain on these securities was $17,544,000.

 

*Income tax expense* for the six months endedJune 30, 2003 was $5,588,000, compared to $8,631,000 for the six monthsended June 30, 2002, which represented a decrease of $3,043,000 or 35.3%.The deferred tax expense for the six months ended June 30, 2003, relatesto the gain on sale of marketable securities and a tax provision for theunrealized gain of $17,544,000 on the remaining 3,609,878 shares of EntravisionClass A common stock which are treated as trading securities and reported atfair value. On January 1, 2002, the Company adopted provision of SFAS 142and stopped amortizing its FCC broadcast license as these intangible assetswere determined to have an indefinite useful life. Accordingly, deferred taxliabilities related to these intangible assets could no longer be utilized tosupport the realization of deferred tax benefits. The Company has restated itsquarterly results to record an additional deferred tax valuation allowance ofapproximately $8.6 million during the quarter ended March 31, 2002 andadditional tax expense relating to the increase in the deferred tax liabilityof approximately $1.0 million for the six months ended June 30, 2003.

 

*Income from discontinued operations*for thesix months ended June 30, 2003 was $125,155,000 compared with a lossof  $13,637,000 for the six months endedJune 30, 2002 This change was primarily attributable to (i) gain on saleof stations of $141,310,000 during the second quarter of 2003, and (ii)

 

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decreased interest expenseresulting from the repayment of the senior notes during the second quarter of2003. Partially offsetting these items was an increased income tax expense of$3,379,000 related to the sale of the stations during quarter endedJune 30, 2003, and costs associated with the radio station sales of$3,400,000 mainly related to lease termination and employee costs during thesix months ended June 30, 2003. It should be noted that under the timebrokerage agreements, which were in place during the six months endedJune 30, 2003 up to the date of sale of the Los Angeles and Chicago radiostations, the Company recorded fees received as revenue. In addition, stationrevenues were generated by third parties and such parties were responsible forsome operating expenses. These third party station revenues and expenses havebeen excluded from the Company’s results.

 

*Net income* for the six months endedJune 30, 2003 was $132,862,000 compared with a loss of $24,124,000 for thesix months ended June 30, 2002. This change  was primarily attributable to the gain on sale of stations, lowerinterest expense, the gain on sale of marketable securities and the unrealizedgain on marketable securities of $17,544,000 for the six months endedJune 30, 2003, partially offset by increased corporate, general and administrativeexpenses, a loss  on disposal of fixedassets, and increased income tax expense in the six months ended June 30,2003 when compared to the six months ended June 30, 2002.

 

**Liquidity and CapitalResources**

 

As of June 30, 2003, Big City Radio hadavailable approximately $43.8 million of cash, cash equivalents and marketablesecurities. This amount included 3,609,878 shares of Entravision Class A commonstock with a closing market valuation of $40,972,000 at that date. Theindependent auditors’ report on Big City Radio’s financial statements for theyear ended December 31, 2002 notes that recurring losses from operationsand negative cash flows from operations raise substantial doubt about Big CityRadio’s ability to continue as a going concern. As discussed below, because ofthe severe constraints on its liquidity, Big City Radio failed to make paymentsdue on the senior notes. As a result, holders of the requisite amount of thenotes declared the principal and interest on the senior notes to be due andpayable, and Big City Radio agreed with the holders of approximately 75% of thenotes to conduct an auction sale of its radio stations as soon as practicablefor net cash consideration in an amount at least sufficient to pay allprincipal of, and accrued and unpaid interest on, the senior notes. During thequarter ended June 30, 2003, Big City Radio reported the completion of itspreviously announced sales of eleven of its twelve FCC radio licenses. Duringthe quarter, Big City Radio received $194.9 million in cash and 3,766,478shares of Entravision Class A common stock in respect of these asset sales. OnJuly 18, 2003, the Company received the final payment of $3 million on thesale of the Chicago station to HBC. The Company has paid the trustee for thebondholders approximately $195.4 million.

 

Since its inception, Big City Radio incurredsubstantial net operating losses primarily due to broadcast cash flow deficitsassociated with the start up of its radio station operations. As ofMarch 31, 2003, Big City Radio had incurred a cumulative cash flow deficitof approximately $165 million and a cumulative net loss of approximately $144million. During the quarter ended June 30, 2003, the Company completedthree of four planned asset sale transactions, and also amended the fourthtransaction to sell certain non-license assets (see note 8). The fourthtransaction was completed on July 18, 2003. As a result of thesetransactions, the Company has sold the great majority of its operating assets.The Company continues to own one radio station in Morris, Illinois. The Companyremains a party to some vendor contracts formerly used in the operations of thesold radio stations, which were not assumed by the purchasers of its radioproperties. The Company does not expect to incur material obligations underthese contracts. As a further result of the completed asset sales and therealized and unrealized gains in the Entravision Class A common stock sinceApril 16, 2003, the date the Entravision transaction was completed, theCompany has reported a total estimated tax provision for Federal and Statetaxes  of  approximately $10 million. This total provision was estimatedassuming the liquidation of the Entravision Class A common stock at its closingprice on June 30, 2003. Big City Radio also has obligations for employeeseverance and contractual liabilities to management under employmentarrangements. As a result, Big City Radio expects to generate significant netlosses for the foreseeable future.

 

Prior to the completion of the asset salesdescribed above, the Company met its working capital needs primarily throughborrowings, including loans from the Company’s principal stockholders, Stuartand Anita Subotnick, loans under credit facilities, and proceeds from the issuanceof the senior notes in March 1998. From October 31, 2001 to the 

 

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completion of the asset sales,the Company has met its working capital needs primarily from the proceeds ofthe sale of the Company’s Phoenix radio stations, which it completed on thatdate.

 

The Company has entered into an employmentcontract with an officer. The minimum payment as of June 30, 2003 underthis contract is $175,000.****

 

The Company has never paid cash or stock dividends. Although the Boardof Directors of the Company has not yet made any determination, it is possiblethat the Board could determine to make one or more liquidating ornon-liquidating distributions. See *Application of Asset Sale Proceeds; Future Operations of BigCity Radio* below.

 

*Cash Flows From Operating Activities*

 

In the six months ended June 30, 2003 and 2002, respectively, theCompany used cash in its operations.  Inthe six months ended June 30, 2003, cash used in operations relatedprimarily to corporate, general and administrative activities, and an increasedinsurance prepayment. This increase was partially offset by reduced payments tocreditors. In the six months ended June 30, 2002, cash used in operationsrelated primarily to corporate, general and administrative activities.Furthermore, the increase was due to payments to creditors net of collection ofreceivables related to the Phoenix radio stations which the Company sold inOctober 2001.

 

*Cash Flows From Investing Activities*

 

In the six months ended June 30, 2003, the Company sold $1,240,000of marketable securities to generate cash for general working capital purposes.In the six months ended June 30, 2002, the Company sold $10,567,000 ofmarketable securities to generate cash for general working capital purposes andpayments on its Notes.

 

*Cash Flows From Financing Activities*

 

Big City Radio completed a sale of $174,000,000 aggregate principalamount at maturity of 11 1/4% senior discount notes due 2005 on March 17,1998, generating approximately $125,400,000 of gross proceeds. Big City Radioused approximately $32,600,000 of these proceeds to repay outstandingindebtedness under a credit facility with The Chase Manhattan Bank entered intoin 1996. Big City Radio used the proceeds of the senior notes offering tofinance the acquisition costs of radio station properties and for generalworking capital purposes.

 

The seniornotes were issued at an original issue discount and accreted in value untilMarch 15, 2001 at a rate of 11 1/4% per annum, compoundedsemi-annually to an aggregate principal amount of $174,000,000. Cash interestbegan accruing on the senior notes on March 15, 2001 at a rate of 11 1/4%per annum and was payable in cash semi-annually, each March 15 andSeptember 15, commencing with September 15, 2001 and through andincluding March 15, 2005. The senior notes were due to mature onMarch 15, 2005, but could be redeemed at the option of Big City Radio, inwhole or in part, at a redemption price of 105.625%, 102.813% or 100.000% ifredeemed during the 12-month period commencing on March 15, 2002,March 15, 2003 and on and after March 15, 2004, respectively. As ofJuly 21, 2003, the Company has paid the trustee for the bondholdersapproximately $195.4 million. The Company is holding discussions withbondholders and the trustee to determine what additional amounts, if any, arerequired to be paid by the Company to the Trustee for the benefit of thebondholders. These discussions concern whether interest on interest was due andpayable and whether interest ceased to accrue on the dates on which paymentswere made by the Company to the Trustee, or whether interest continued toaccrue until such subsequent dates on which the Trustee made distributions tothe bondholders. Depending on the outcome of these discussions, the Companycould be liable to the bondholders in an additional amount of up to $1.28million.  As of June 30, 2003, theCompany has recorded its interest payable consistent with its assessment of themost likely outcome of this contingency.

 

Holders of the senior notes had the right to require Big City Radio torepurchase their senior notes upon a “change of control” of Big City Radio, asdefined in the indenture governing the senior notes, at a price equal to 101%of the principal amount of such notes. A “change of control” for purposes ofthe senior notes was deemed to occur:

 

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•                  when any personother than Stuart and Anita Subotnick, officers and members of Big City Radio’smanagement as of March 17, 1998 and their respective family members,relatives and trusts becomes the beneficial owner of more than 35% of the totalvoting power of Big City Radio’s capital stock and the foregoing permittedholders own in the aggregate a lesser percentage of such voting power and donot have the right or ability to designate for election a majority of the boardof directors; 

 

•                  upon specifiedchanges in the composition of the board of directors; 

 

•                  upon theoccurrence of a sale, lease, transfer, conveyance or other disposition to anyperson of all or substantially all of the assets of Big City Radio taken as awhole; or 

 

•                  upon theadoption by the stockholders of a plan for the liquidation or dissolution ofBig City Radio. 

 

Payments underthe senior notes were guaranteed on a senior unsecured basis by Big CityRadio’s “restricted subsidiaries,” as defined in the indenture governing thesenior notes. As of June 30, 2003, all of Big City Radio’s subsidiarieswere restricted subsidiaries. The senior notes contained financial andoperational covenants with which Big City Radio and its restricted subsidiarieshad to comply, including covenants restricting the incurrence of additionalindebtedness, investments, payment of dividends on and redemption of capitalstock, redemption of specified subordinated obligations, sales of assets andthe use of proceeds therefrom, transactions with affiliates, creation andexistence of liens, the types of businesses in which Big City Radio couldoperate, asset swaps, distributions from restricted subsidiaries, sales ofcapital stock of restricted subsidiaries, and consolidations, mergers andtransfers of all or substantially all of Big City Radio’s assets. The seniornotes contained customary events of default, including payment defaults anddefault in the performance of other covenants, specified bankruptcy defaults,cross defaults to other indebtedness and to judgments, and failure of asubsidiary guarantee to be in full force and effect.

 

In connectionwith the consummation of the senior notes offering, Big City Radio entered intoa revolving credit facility with The Chase Manhattan Bank providing for up to$15,000,000 of borrowings based upon a multiple of the positive rollingfour-quarter broadcast cash flow of Big City Radio’s stations and subject tocompliance with specified financial and operational covenants. The revolvingcredit facility was to mature on March 17, 2003. At December 31,2000, Big City Radio was in compliance with all material covenants and restrictionsunder the revolving credit facility, with the exception that, in violation ofone such covenant, because the independent auditors’ report on Big City Radio’sfinancial statements for the year ended December 31, 2000 included a“going concern” paragraph. In April 2001, the lender declined to permitBig City Radio to draw under the revolving credit facility due to Big CityRadio’s violation of the foregoing covenant. As a result of its inability todraw under the revolving credit facility, Big City Radio issued a promissorynote in May 2001 to borrow up to $5,000,000 from Stuart Subotnick, aprincipal stockholder, in order to meet its short-term working capital needs.The amount outstanding under this note, which was payable on demand, boreinterest equal to JP Morgan Chase Bank’s prime rate plus 2.0%.

 

Cash interestcommenced accruing on the senior notes on March 15, 2001 and semi-annualcash interest payments of $9,800,000 commenced on September 15, 2001. BigCity Radio failed to make the initial semi-annual interest payment when due onSeptember 15, 2001. In order to obtain the funds to make this paymentwithin the 30-day grace period provided under the indenture, Big City Radioobtained a bridge loan in the amount of $15,000,000 by the assignment of BigCity Radio’s revolving credit facility from the lender thereunder to a newlender. The bridge loan was secured to the same extent as the revolving creditfacility and bore interest at the rate of LIBOR plus 3.0%, or a base rate plus2.0%, at the option of Big City Radio. Big City Radio used the net proceeds ofthe bridge loan to pay the semi-annual interest on the senior notes due onSeptember 15, 2001, together with applicable additional interest thereon,and to repay $2,235,000 of principal indebtedness and $51,000 of interestincurred under the promissory note issued to Mr. Subotnick in May 2001.Big City Radio repaid the bridge loan on October 31, 2001 with a portionof the proceeds from the sale of the Phoenix radio station properties, as discussedbelow. Big City Radio currently does not have a credit facility.

 

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OnOctober 31, 2001, Big City Radio completed the sale of its four Phoenixradio properties to Hispanic Broadcasting Corporation for a cash price of$34,000,000. The indenture governing the senior notes permits the Company toreinvest the approximately $18,000,000 of proceeds which remained from the saleof the Phoenix stations, after the repayment of the bridge loan, in broadcastassets for a period of up to one year from the date of these asset sales.Thereafter, any net proceeds that were not timely reinvested in broadcastassets, were required to be used to make an offer to repurchase senior notes.As described above, Big City Radio used a portion of the proceeds to repayindebtedness under the bridge loan and to fund the semi-annual interest paymentdue on the senior notes on March 15, 2002. Big City Radio used theremaining proceeds to fund its ongoing operations, and did not reinvest suchproceeds in broadcast assets. Big City Radio did not make the required offer torepurchase senior notes, because it did not have sufficient cash resources toconsummate such an offer. Its failure to make an offer to repurchaseconstituted an event of default under the indenture.

 

The Companyfailed to make the semi-annual interest payment of $9,800,000 due on the seniornotes on September 15, 2002. Big City Radio’s cash resources wereinsufficient to enable it to make the semi-annual interest payment within the30-day grace period provided under the indenture. The grace period expired onOctober 15, 2002, thereby resulting in an additional event of defaultunder the indenture. On October 17, 2002, pursuant to the indenture,holders of the senior notes delivered an acceleration notice to the Companydeclaring the principal and interest on all of the senior notes to beimmediately due and payable.

 

The Companyevaluated its strategic alternatives and the most efficient use of its capital.These alternatives included the sale of its broadcast assets and, depending onmarket conditions, debt and/or equity financing, and purchasing, restructuring,recapitalizing, refinancing or otherwise retiring some of its securities in theopen market or by other means. In each case, these strategic alternatives weresubject to the restrictions contained in the indenture governing the seniornotes. On November 4, 2002, Big City Radio announced it had retainedJorgenson Broadcast Brokerage to market and conduct an auction sale of all ofits radio stations. As discussed below, proceeds from the sales of the stationshave been and will be applied first to repay the senior notes.

 

Big CityRadio, the Subsidiary Guarantors of the senior notes, and the holders ofapproximately $128,000,000 in principal amount of the senior notes actingthrough an ad hoc committee of noteholders, entered into a forbearanceagreement on November 13, 2002. Under the forbearance agreement, thesignatory noteholders agreed to forbear, through January 31, 2003 (laterextended to March 31, 2003 and again subsequently to through and includingApril 30, 2003), from taking, initiating or continuing any action toenforce Big City Radio’s payment obligations under the senior notes, including,without limitation, any involuntary bankruptcy filing against Big City Radio,or against any property, officers, directors, employees or agents of Big CityRadio to collect on or enforce payment of any indebtedness or obligations, orto otherwise assert any claims or causes of action seeking payment under thesenior notes, in each case arising under or relating to the payment default orthe default arising from the failure to make the required offer to repurchasesenior notes or other existing defaults known to the signatory noteholders asof November 13, 2002. Under the forbearance agreement, Big City Radioagreed to conduct the auction of its radio stations in a good faith mannerdesigned to sell the assets as soon as practicable for net cash considerationin an amount at least sufficient to pay all principal of, and accrued andunpaid interest on, the senior notes. If the signatory noteholders reasonablybelieved that Big City Radio was not conducting the auction process in goodfaith or was not operating or managing the business and financial affairs ofBig City Radio in good faith in the ordinary course and consistent with pastpractices, they could notify Big City Radio in writing and could have electedto terminate the forbearance agreement. Big City Radio further agreed not topay, discharge or satisfy any liability or obligation except for obligationsreflected on Big City Radio’s balance sheet as of December 31, 2001 orincurred in the ordinary course since that date which were paid, discharged orsatisfied for fair and equivalent value in the ordinary course of business andconsistent with past practices. The forbearance agreement did not prevent thetrustee under the indenture or noteholders that were not parties to theforbearance agreement from pursuing remedies under the indenture.

 

Big City Radioand the noteholders executed an amendment to the forbearance agreement as ofJanuary 14, 2003, in which the expiration date of the forbearance periodwas extended from January 31, 2003 through and including March 31,2003. The forbearance agreement was further amended to provide that:

 

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•                  Big City Radiowould pay the noteholders the net cash proceeds of any asset sale within fivebusiness days after the completion of such asset sale, until such time as thenoteholders have received cash in an amount equal to all principal of, andaccrued and unpaid interest on, the senior notes; 

 

•                  the forbearanceagreement could be terminated by either Big City Radio or the ad hoc committee uponwritten notice if: 

 

•                  any party to theforbearance agreement failed to perform any of its obligations, or breached anyof its representations, covenants or warranties, under the forbearanceagreement, 

 

•                  Big City Radioor any party to any asset purchase agreement for any asset sale which Big CityRadio had publicly announced on or before January 6, 2003, breached anyrepresentation, warranty or covenant in such asset purchase agreement, and didnot cure such breach within ten days, or 

 

•                  one or more ofthe asset purchase agreements was terminated or modified in any materialrespect; and 

 

•                  Big City Radiohad to immediately notify the ad hoc committee by written notice of 

 

•                  any breach byBig City Radio of the forbearance agreement, 

 

•                  any breach byBig City Radio or any other party of any of the foregoing asset purchaseagreements, whether or not such breach was curable, and 

 

•                  any terminationby Big City Radio or any other party thereto of any of such asset purchaseagreements. 

 

In addition,the forbearance agreement provided that it would automatically terminate uponthe filing of a voluntary or involuntary petition under the insolvency orbankruptcy laws of the United States or any state with respect to Big CityRadio, except that, upon the filing of an involuntary bankruptcy petition byunaffiliated, arm’s length creditors, Big City Radio would have a period of tendays to obtain the dismissal or withdrawal of such a petition before theforbearance agreement terminated as a result of the filing.  In March 2003, a second amendment tothe forbearance agreement was signed extending the forbearance period throughand including April 30, 2003. Although Big City Radio and the signatorynoteholders discussed a further extension of the forbearance period, no suchextension was executed. Accordingly, if any amounts remain to be paid under theIndenture governing the Notes, the signatory noteholders are presently able toexercise any and all remedies under the Indenture governing the Notes.

 

During the quarterended June 30, 2003, Big City Radio completed three of the four assetpurchase agreements and amended the fourth asset purchase agreement resultingin an initial payment to Big City from the purchaser in that agreement of$29.875 million. On July 18, 2003, Big City Radio completed the fourthasset purchase agreement and received the remaining $3 million due thereunder.Under the senior notes forbearance agreement described above, Big City Radiowas obligated to apply the net proceeds of the asset sales first to pay theprincipal amount of the senior notes and all accrued and unpaid interestthereon through the date of such payment. Following completion of the fourasset purchase transactions, Big City Radio has paid a total of approximately$195.4 million to the trustee for the bondholders. The Company is holdingdiscussions with bondholders and the trustee to determine what additionalamounts, if any, are required to be paid by the Company to the Trustee for thebenefit of the bondholders. These discussions concern whether interest oninterest was due and payable and whether interest ceased to accrue on the dateson which payments were made by the Company to the Trustee, or whether interestcontinued to accrue until such subsequent dates on which the Trustee madedistributions to the bondholders. Depending on the outcome of thesediscussions, the Company could be liable to the bondholders in an additionalamount of up to $1.28 million.  As ofJune 30, 2003, the Company has recorded its interest payable consistent withits assessment of the most likely outcome of this contingency.

 

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Big City Radiowill apply the net proceeds from the final radio station sale, together withits other liquidity sources, to make any additional principal or interestpayment that may be due the bondholders, as well as pay expenses relating tothe asset sales, including employee severance and contractual liabilities duemanagement under employment arrangements, tax liabilities and expensesassociated with termination of contracts not assumed by the buyers, and tradepayables and other operating expenses.

 

If Big CityRadio sells the sole station that was not subject to a binding purchaseagreement as of the date of this quarterly report on form 10-Q, it will havedisposed of all of its operating properties. Its principal sources of liquiditywill then consist of cash on hand, amounts earned on its investment of suchcash and the shares of the Entravision Class A common stock it received uponcompletion of one of its assets sales. Big City Radio will also seek to obtainadditional liquidity by selling shares of the Entravision Class A common stock.Big City Radio believes that these liquidity sources will be sufficient to meetits short-term cash needs. The amount and nature of Big City Radio’s long-termliquidity needs will depend on, among other things, a decision by the board ofdirectors regarding future operations, if any, of Big City Radio. As of thedate of this quarterly report on form 10-Q, the board of directors has notdetermined the uses to which Big City Radio will apply any cash or other assetsremaining after it has paid its liabilities. This determination will depend onvarious factors.

 

*Cash used in discontinued operations*

 

In the six months ended June 30, 2003 and 2002, respectively, theCompany used cash in its discontinued operations.  In the six months ended June 30, 2003, cash generated fromthe sale of the discontinued radio operations was primarily used to repay theprincipal and interest on the senior notes and accelerated payments tocreditors due to the sale of its stations. In the six months endedJune 30, 2002, the Company used cash in its discontinued operationsprimarily to make the semi-annual interest payment on the senior notes and tofund operating cash deficits in the New York and Chicago station operations.

 

**Applicationof Asset Sale Proceeds; Future Operations of Big City Radio**

 

Under its purchase agreements with Entravision, Nassau, SpanishBroadcasting and Hispanic Broadcasting, pursuant to which Big City Radio sold11 of its 12 radio stations, Big City Radio has received gross cash proceeds ofapproximately $197.9 million. In addition, Entravision issued 3,766,478 sharesof Entravision’s Class A common stock to Big City Radio in connection with theasset sale to Entravision. Commencing during the quarter ended June 30,2003, through August 1, 2003, the Company has sold a total of 620,700shares of Entravision Class A common stock, realizing cash proceeds ofapproximately $6.8 million, representing an average selling price of $11.02 pershare. Based upon the closing price of the Entravision Class A common stock onAugust 4, 2003, the remaining 3,145,778 shares of Entravision Class Acommon stock are worth an aggregate of $33.9 million. The aggregate value ofthe shares of Entravision Class A common stock at the date of their receipt bythe Company, April 16, 2003, was approximately $24.4 million. Big CityRadio may have to sell at least a portion of its Entravision Class A commonstock to generate  sufficient cash tosatisfy its remaining liabilities and obligations. If and when Big City Radioseeks to sell its shares of Entravision’s Class A common stock, it may not beable to do so for proceeds that approximate the value on the date of thisQuarterly Report on Form 10-Q, or that are sufficient to meet its cash needs.

 

As a result of the completed asset sales and the realized andunrealized gains in the Entravision Class A common stock since April 16,2003, the date the Entravision transaction was completed, the Company hasreported a total estimated tax provision for Federal and State taxes  of approximately $10 million. This total provision was estimated assumingthe liquidation of the Entravision Class A common stock at its closing price onJune 30, 2003.  Big City Radio haspaid to date brokerage, legal and accounting fees relating to the transactionsand lease termination expenses of approximately $4.34 million. Big City Radiowill incur other transaction costs, including payments to its executiveofficers and directors, severance and other contractual obligations tomanagement under employment arrangements, and other similar expenses associatedwith the termination of contracts which are not being assumed by the buyers ofthe radio stations.

 

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Under its forbearance agreement with holders of its senior notes, BigCity Radio was obligated to apply the aggregate net cash proceeds of the assetsales first to pay the principal amount of the senior notes and all accrued andunpaid interest thereon through the date of such payment. The Company has paidthe trustee for the bondholders approximately $195.4 million. The Company isholding discussions with bondholders and the trustee to determine whatadditional amounts, if any, are required to be paid by the Company to theTrustee for the benefit of the bondholders. These discussions concern whetherinterest on interest was due and payable and whether interest ceased to accrueon the dates on which payments were made by the Company to the Trustee, orwhether interest continued to accrue until such subsequent dates on which theTrustee made distributions to the bondholders. Depending on the outcome ofthese discussions, the Company could be liable to the bondholders in anadditional amount of up to $1.28 million. As of June 30, 2003, the Company has recorded its interest payableconsistent with its assessment of the most likely outcome of this contingency.

 

Big City Radio has completed its proposed asset sales, and has oneremaining radio station that it is actively marketing. Big City Radio’s boardof directors is currently considering whether it is in the best interests ofBig City Radio and its stockholders for Big City Radio to distribute anyavailable proceeds to the stockholders, whether under a plan of dissolution orotherwise. These considerations take into account various factors, a number ofwhich are not within Big City Radio’s control, including the following:

 

 

•                  whether,in the judgment of Big City Radio’s board of directors, it is in the bestinterests of Big City Radio and its stockholders to distribute any remainingassets to stockholders or seek to deploy those assets into new operations; 

 

•                  thedate on which the remaining radio station asset is sold; 

 

•                  theprices at which Big City Radio is able to sell the remaining shares ofEntravision’s Class A common stock it has received in the asset sale;

 

•                  theamount of Big City Radio’s liabilities and other obligations to be paid in thefuture; 

 

•                  theresolution of pending litigation and other contingent liabilities; 

 

•                  theoutcome of pending or proposed tax legislation; and 

 

•                  generalbusiness and economic conditions. 

 

Onealternative Big City Radio’s board of directors is considering followingcompletion of the proposed asset sales and as the last radio station asset ismarketed, is adoption of a plan for the dissolution of Big City Radio. A planof dissolution would require approval by Big City Radio’s stockholders holdinga majority of votes under Delaware law and Big City Radio’s certificate ofincorporation. Stuart and Anita Subotnick, the principal stockholders of theCompany hold a majority of votes. If it were to adopt a plan of dissolution, theBig City Radio board of directors would determine the terms of such a plan atthe time of adoption consistent with the requirements of Delaware law. Big CityRadio expects that such a plan generally would provide that Big City Radiowould sell or otherwise dispose of all of its remaining property and assets,with such exceptions as its board of directors may approve at the time, such asretention of property and assets that the board of directors may deem necessaryor advisable to enable Big City Radio to pursue any claims and causes ofaction. Following the liquidation of its remaining assets, Big City Radio wouldpay, or provide for the payment of, its remaining liabilities and obligationsto the extent possible, as required by Delaware law. Subject to the payment, orthe provision for payment, of Big City Radio’s liabilities and obligations, anyremaining assets would be available for distribution from time to time on a prorata basis to stockholders. Big City Radio may not be able to determine for a significantperiod following adoption of a plan of dissolution whether any assets would beavailable for distribution to its stockholders. Such a determination would bemade only after Big City Radiohas made adequate provision for contingent as well as known liabilities. Big CityRadio cannot provide any assurance that there would ultimately be sufficientproceeds from the asset sales to provide for Big City Radio’s liabilities andobligations or to make distributions to Big City Radio’s stockholders under a planof dissolution. *See Factors thatMay Affect Future Results and Financial Condition.*

 

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Even if BigCity Radio is able to repay its liabilities and has additional proceeds fromthe asset sales, its board of directors may determine not to approve a plan ofdissolution or otherwise authorize a distribution of such proceeds to itsstockholders, but instead may approve use of the proceeds for investment inopportunities for new operations for Big City Radio. Big City Radio does notknow whether, if it does have available assets and determines to seek newopportunities, it will have any success in establishing any new operations. Inaddition, Big City Radio expects that for some period following completion ofthe auction sale of all of its radio station properties, during which it mayseek to identify new opportunities, it would not be engaged in operatingactivities.

 

Whether or notBig City Radio’s board of directors adopts a plan of dissolution, Big City Radiowill be obligated to continue to comply with the applicable reportingrequirements of the Securities Exchange Act of 1934, as amended, or theExchange Act, even though compliance with such reporting requirements isfinancially burdensome. If the dissolution of Big City Radio pursuant to a planof dissolution is approved, in order to curtail expenses, Big City Radio mayseek relief from the SEC from the reporting requirements under the ExchangeAct.

 

Because of theuncertainties discussed above, Big City Radio cannot provide any assurance thatit will have any assets available for distribution to its stockholders or, ifit does have assets available for distribution, that it will make adistribution of any or all of such assets.

 

**SpecialNote Regarding Forward-Looking Statements**

 

Certain statements in this report, including those utilizing thephrases “will,” “expects,” “intends,” “estimates,” “contemplates,” and similarphrases, are “forward-looking” statements (as such term is defined in Section27A of the Securities Act of 1933, as amended (the “Securities Act”), andSection 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)), including statements regarding, among other items, the Company’sexpectation of consummating the planned sale of the Company’s sole remainingradio station.  Certain, but notnecessarily all, of such forward-looking statements can be identified by theuse of forward-looking terminology such as “believes,” “expects,” “may,”“will,” “should,” or “anticipates” or the negative thereof or other variationsthereon or comparable terminology, or by discussions of strategy that involverisks and uncertainties. Such forward-looking statements involve known andunknown risks, uncertainties and other factors which may cause the actualresults, performance and achievements of the Company and its subsidiaries to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Such factors include,but are not limited to, the following: (i) changes in the competitivemarketplace, including the introduction of new technologies or formattingchanges by the Company’s competitors, (ii) changes in the financialmarkets and in the Company’s ability to sell its remaining radio stations,(iii) changes in the regulatory framework, (iv) changes in audiencetastes, and (v) changes in the economic conditions of local markets. Otherfactors which may materially affect actual results include, among others, the following:general economic and business conditions, industry capacity, demographicchanges, changes in political, social and economic conditions and various otherfactors beyond the Company’s control. The Company does not undertake andspecifically declines any obligation to publicly release the results of anyrevisions which may be made to any forward-looking statements to reflect eventsor circumstances after the date of such statements or to reflect the occurrenceof anticipated or unanticipated events.

 

**Factors thatMay Affect Future Results and Financial Condition**

 

The followingfactors (in addition to others) could have a material and adverse impact on theCompany’s business:

 

Cash on hand is insufficient to meet Big City Radio’s obligations andcommitments. Big City Radio’s debt has been accelerated under the indenturegoverning its senior notes. The Company has paid approximately $195.4 millionof principal and interest to the trustee for the bondholders. The Company isholding discussions with bondholders and the trustee to determine whatadditional amounts, if any, are required to be paid by the Company to theTrustee for the benefit of the bondholders. These discussions concern whetherinterest on interest was due and payable and whether 

 

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interest ceased to accrue onthe dates on which payments were made by the Company to the Trustee, or whetherinterest continued to accrue until such subsequent dates on which the Trusteemade distributions to the bondholders. Depending on the outcome of thesediscussions, the Company could be liable to the bondholders in an additionalamount of up to $1.28 million.  As ofJune 30, 2003, the Company has recorded its interest payable consistent withits assessment of the most likely outcome of this contingency.  Furthermore, Big City Radio has significantother liabilities for taxes, employee severance and management employmentarrangements, and other trade payables. Big City Radio has sold substantiallyall its operating assets and so it is not generating cash flow from operationsto meet its obligations and commitments. Big City radio must rely on itsexisting cash resources and the future sales of its marketable securities,predominantly shares of Entravision Class A common stock received in one of theasset sales, or it must raise additional debt or equity capital, or seekprotection under the bankruptcy laws. These alternative strategies might not beeffected on satisfactory terms, if at all.

 

Big City Radiocurrently does not have a credit agreement. The Company may not be able toobtain a new credit agreement.

 

Big City Radiois a defendant in *A.L., a minor by herguardian ad litem, Antonio L.; C.V., a minor by her guardian ad litem, SophiaA. v. Big City Radio, Inc., Firmo Martin Rosetti, aka Hector Rocksetti, akaHector Rosetti; KSYY-FM; KVYY-FM; VIVA 107.1*,no.               .The plaintiffs commenced the case in Superior Court for the County of LosAngeles on August 15, 2002 and it was subsequently removed to the United StatesDistrict Court for the Central District of California. The complaint allegesclaims for negligence, sexual assault, battery, negligent infliction ofemotional distress and intentional infliction of emotional distress arisingfrom actions alleged to have been perpetrated by Hector Rosetti, a formeremployee of Big City Radio. Mr. Rosetti is currently incarcerated in aCalifornia state prison for the actions that are the subject to this lawsuit.The plaintiff’s complaint does not specify the damages they seek, except thatthey have stated that they seek damages in excess of the $75,000 jurisdictionalamount for the federal district courts. In addition, the plaintiffs haverecently demanded aggregate damages of $5.0 million, and have indicated thatthey could seek damages that would exceed the Company’s assets as ofJune 30, 2003. Big City Radio is vigorously contesting its liability basedupon its contentions that Mr. Rosetti’s conduct, if any, was outside the scopeof his employment, done without the knowledge of Big City Radio or its officersand contrary to its policies and procedures.

 

Big City Radio and its chairman, Stuart Subotnick, are defendants in *O’Neill v. Big City Radio, Inc. et al.*,no. 03-1957 WMB(SHx), an action initiated in United States District Court forthe Central District Of California on [date] by Sean O’Neill, a former employeeof the Company’s Los Angeles radio station. While the plaintiff’s statements ofhis damages have not been consistent, the plaintiff alleges that he is owed asmuch as $2.1 million under an oral employment agreement and written change ofcontrol agreements, and related claims of breach of implied covenant of goodfaith and fair dealing and fraud and deceit. Big City Radio is vigorouslycontesting its liability based upon its contention that no oral employmentagreement existed, that its obligations under change of control agreementsended when it terminated the plaintiff, and that the plaintiff does not havevalid claims for breach of implied covenant of good faith and fair dealing orfraud and deceit.

 

Even if Big City Radio is able to repay itsliabilities and has additional proceeds from the asset sales, its board ofdirectors may determine not to approve a plan of dissolution or otherwiseauthorize a distribution of such proceeds to its stockholders, but instead mayapprove use of the proceeds for investment in opportunities for new operationsfor Big City Radio. Big City Radio does not know whether, if it does haveavailable assets and determines to seek new opportunities, it will have anysuccess in establishing any new operations. In addition, Big City Radio expectsthat for some period following completion of the auction sale of all of itsradio station properties, during which it may seek to identify new opportunities,it would not be engaged in operating activities.

 

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**Critical Accounting Policies and MaterialEstimates**

 

Big CityRadio’s discussion and analysis of its financial condition and results of operationsare based upon its consolidated financial statements, which have been preparedin accordance with the accounting principles generally accepted in the UnitedStates. The preparation of these financial statements requires Big City Radioto make estimates and judgments that affected the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, Big City Radio evaluates its estimates,including those to broadcast rights, bad debts, intangible assets, incometaxes, and contingencies and litigation. Big City Radio bases its estimates onhistorical experience and on various other assumptions that it believes to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. Big City Radio believes thefollowing critical accounting policies affect its more significant judgment andestimates used in the preparation of its consolidated financial statements.

 

***Revenue Recognition****.*BigCity Radio records revenue from the sale of airtime related to advertising andcontracted time at the time of broadcast. Big City Radio maintains allowancesfor doubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. Big City Radio utilizes informationavailable to Big City Radio, including the timing of payments and the financialcondition of its customers to estimate the allowance for doubtful accounts. Ifthe financial condition of Big City Radio’s customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required. Big City Radio does not have a significantconcentration of accounts receivable from one customer or industry segment.

 

***BusinessCombinations and Goodwill and other Intangible Assets.***    InJuly 2001, the Financial Accounting Standards Board, or FASB, issued SFASNo. 141, Business Combinations, and SFAS No. 142, Goodwill and Other IntangibleAssets. SFAS No. 141 requires that the purchase method of accounting be usedfor all business combinations initiated after June 30, 2001 as well as allpurchase method business combinations completed after June 30, 2001. SFASNo. 141 also specifies criteria that intangible assets acquired in a purchasemethod business combination must meet to be recognized and reported apart fromgoodwill, noting that any purchase price allocable to an assembled workforcemay not be accounted for separately. SFAS No. 142 requires that goodwill andintangible assets with indefinite useful lives no longer be amortized, butinstead be tested for impairment at least annually in accordance with theprovisions of SFAS No. 142. SFAS No. 142 requires that intangible assets withdefinite useful lives be amortized over their respective estimated useful livesto their estimated residual values, and reviewed for impairment in accordancewith SFAS No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets.

 

Big City Radioadopted SFAS No. 141 and SFAS No. 142 effective January 1, 2002. Anygoodwill and any intangible asset determined to have an indefinite useful lifethat was acquired in a purchase business combination completed afterJune 30, 2001 will not be amortized, but will continue to be evaluated forimpairment in accordance with the appropriate pre-SFAS No. 142 accounting literature.Goodwill and intangible assets acquired in business combinations completedbefore July 1, 2001 have been amortized through December 31, 2001.

 

SFAS No. 141requires that upon adoption of SFAS No. 142, Big City Radio evaluate itsexisting intangible assets and goodwill that was acquired in a prior purchasebusiness combination, and make any necessary reclassifications in order toconform with the new criteria in SFAS No. 141 for recognition apart fromgoodwill. Upon adoption of SFAS No. 142, Big City Radio reassessed the usefullives and residual values of all intangible assets acquired in businesscombinations accounted for using the purchase method. In addition, to theextent Big City Radio identified an intangible asset as having an indefinite usefullife, Big City Radio was required to test the intangible asset for impairmentin accordance with the provisions of SFAS No. 142 within the first interimperiod. Any impairment loss would have been measured as of the date of adoptionand recognized as the cumulative effect of a change in accounting principle. Nosignificant adjustments or impairment losses resulted from the adoption of SFASNo. 141 and SFAS No. 142.

 

In connectionwith the transitional goodwill impairment evaluation, SFAS No. 142 required BigCity Radio to perform an assessment of whether there was an indication thatgoodwill was impaired as of the date of adoption. To accomplish this, Big CityRadio identified its reporting units and determined the carrying value of eachreporting unit by assigning the assets and liabilities, including the existinggoodwill and intangible assets, to those reporting units as of 

 

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the date of adoption. As eachreporting unit’s carrying amount did not exceed its fair value, there was noindication that the reporting unit’s goodwill may be impaired and Big CityRadio was not required to perform the second step of the transitionalimpairment test. In the second step, Big City Radio would compare the implied fairvalue of the reporting unit’s goodwill, determined by allocating the reportingunit’s fair value to all of its assets, recognized and unrecognized, andliabilities in a manner similar to a purchase price allocation in accordancewith SFAS No. 141, to its carrying amount, both of which would be measured asof the date of adoption. Any transitional impairment loss was required to berecognized as the cumulative effect of a change in accounting principle in BigCity Radio’s statement of earnings. No such loss resulted from Big City Radio’sadoption of SFAS No. 142.

 

In accordancewith SFAS No. 142, Big City Radio discontinued the amortization of goodwill andintangible assets, consisting of a broadcast license (intangible asset with anindefinite useful life), effective January 1, 2002. During the quarterended March 31, 2002, Big City Radio completed the transitional impairmenttest, which did not result in impairment of recorded intangible assets. InJune 2002, Big City Radio ceased the operation of its publishingoperations, and wrote off the remaining $108,000 of goodwill associated withsuch operations. During the fourth quarter of 2002, the Company made thedecision to sell its broadcast licenses. In accordance with SFAS No.144, theselicenses are reported as assets held for sale. The Company compared thelicenses’ carrying value to their fair value, less the estimated cost to sellthem. The fair value of the stations were based on asset sale agreements for 11of the 12 stations, and an estimate for the remaining station based on offersreceived during the auction process. This review of the carrying value of itsintangible assets resulted in a charge of $630,000 relating to the impairmentin value of some of its FCC broadcast licenses. As of June 30, 2003, BigCity Radio has no remaining un-amortized goodwill, and has un-amortizedbroadcast licenses in the amount of $435,000.

 

***Accounting forImpairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.***   InAugust 2001, the FASB issued SFAS No. 144, Accounting for the Impairmentor Disposal of Long-Lived Assets (“SFAS No. 144”), which supersedes both SFASNo. 121, Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of (“SFAS No. 121”), and the accounting and reportingprovisions of APB Opinion No. 30, Reporting the Results of Operations—Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions (“Opinion 30”), for thedisposal of a segment of a business (as previously defined in that Opinion).SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizingand measuring impairment losses on long-lived assets held for use andlong-lived assets to be disposed of by sale, while also resolving significantimplementation issues associated with SFAS No. 121. For example, SFAS No. 144provides guidance on how a long-lived asset that is used as part of a groupshould be evaluated for impairment, establishes criteria for when a long-livedasset is held for sale, and prescribes the accounting for a long-lived assetthat will be disposed of other than by sale. SFAS No. 144 retains the basicprovisions of Opinion 30 on how to present discontinued operations in theincome statement but broadens that presentation to include a component of anentity, rather than a segment of a business. Unlike SFAS No. 121, an impairmentassessment under SFAS No. 144 will never result in a write-down of goodwill.Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill andOther Intangible Assets.

 

Big City Radioadopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 didnot have a material impact on the financial position, cash flows, or results ofoperations of Big City Radio. Big City Radio discontinued its publishingoperations during June 2002. This was treated as a discontinued operationunder SFAS No. 144. In December 2002, the Company announced sales ofeleven of its twelve radio stations in Los Angeles, New York, and Chicago. TheCompany also intends to sell its remaining station. Big City Radio’sconsolidated financial statements for all periods presented have been adjustedto reflect the radio station sales and ceased publishing operations asdiscontinued operations in accordance with SFAS No. 144.

 

***Accounting for CostAssociated with Exit or Disposal Activities****.*In June 2002, the Financial Accounting Standards Board issued FASBStatement No. 146, Accounting for Costs Associated with Exit or DisposalActivities (“SFAS No. 146”), which nullifies Emerging Issues Task Force (EITF)Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring) (“Issue 94-3”).

 

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The principaldifference between SFAS No. 146 and Issue 94-3 relates to its requirements forrecognition of a liability for a cost associated with an exit or disposalactivity. SFAS No. 146 requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability is incurred. UnderIssue 94-3, a liability for an exit cost as defined in Issue 94-3 wasrecognized at the date of an entity’s commitment to an exit plan. Under SFASNo. 146, a commitment to a plan, by itself, does not create a presentobligation to others that meets the definition of a liability. SFAS No. 146also establishes that fair value is the objective for initial measurement ofthe liability.

 

Big City Radiois required to adopt SFAS No. 146 on exit and disposal activities that areinitiated after December 31, 2002, with early application encouraged. BigCity Radio has adopted SFAS No. 146 in relation to exit and disposal activitiesinitiated after September 30, 2002. During the quarter ended June 30, 2003, the Company recorded leasetermination costs of $1.41 million.

 

**Off Balance SheetTransactions**

 

The Companydid not have any off-balance sheet transaction as of June 30, 2003.

 

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**ITEM 3****.Quantitative and Qualitative Disclosures About Market Risk**

 

The Company isexposed to the impact of interest rate changes and the change in the marketvalues of its investments.

 

The Company’s exposure to market rate risk for changes in interestrates relates primarily to the Company’s investment portfolio. The Company hasnot used derivative financial instruments in its investment portfolio. TheCompany invests its excess cash in debt instruments of the U.S. Government andits agencies and, by policy, limits the amount of credit exposure to any oneissuer. The Company protects and preserves its invested funds by limitingdefault, market and reinvestment risk.

 

Investments in fixed rate interest earning instruments carry a degreeof interest rate risk. Fixed rate securities may have their fair market valueadversely impacted due to a rise in interest rates. The Company may sufferlosses in principal if forced to sell securities which have declined in marketvalue due to changes in interest rates.

 

**ITEM 4****. Controlsand Procedures**

 

(a)  Evaluation of DisclosureControls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer haveevaluated the effectiveness of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the SecuritiesExchange Act of 1934, as amended, or the Exchange Act) as of a date within 90days prior to the filing date of this quarterly report, or the Evaluation Date.Based on such evaluation, such officers have concluded that as of theEvaluation Date, the Company’s disclosure controls and procedures are effectivein alerting them on a timely basis to material information relating to theCompany, including its consolidated subsidiaries, that is required to beincluded in its reports filed or submitted under the Exchange Act.

 

(b)  Changes in Internal Controls

 

Since the Evaluation Date, there have not been any significant changesin the Company’s internal controls or in other factors that could significantlyaffect such controls.

 

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**Part II – Other Information**

 

**Item1 – Legal Proceedings**

 

Big City Radiois a defendant in *A.L., a minor by herguardian ad litem, Antonio L.; C.V., a minor by her guardian ad litem, SophiaA. v. Big City Radio, Inc., Firmo Martin Rosetti, aka Hector Rocksetti, akaHector Rosetti; KSYY-FM; KVYY-FM; VIVA 107.1*,no.               .The plaintiffs commenced the case in Superior Court for the County of LosAngeles on August 15, 2002 and it was subsequently removed to the UnitedStates District Court for the Central District of California. The complaintalleges claims for negligence, sexual assault, battery, negligent infliction ofemotional distress and intentional infliction of emotional distress arisingfrom actions alleged to have been perpetrated by Hector Rosetti, a formeremployee of Big City Radio. Mr. Rosetti is currently incarcerated in aCalifornia state prison for the actions that are the subject to this lawsuit.The plaintiff’s complaint does not specify the damages they seek, except thatthey have stated that they seek damages in excess of the $75,000 jurisdictionalamount for the federal district courts. In addition, the plaintiffs have recentlydemanded aggregate damages of $5.0 million, and have indicated that they couldseek damages that would exceed the Company’s assets as of June 30, 2003.Big City Radio is vigorously contesting its liability based upon itscontentions that Mr. Rosetti’s conduct, if any, was outside the scope of hisemployment, done without the knowledge of Big City Radio or its officers andcontrary to its policies and procedures.

 

Big City Radioand its chairman, Stuart Subotnick, are defendants in *O’Neill v. Big City Radio, Inc. et al.*,no. 03-1957 WMB(SHx), an action initiated in United States District Court forthe Central District Of California on [date] by Sean O’Neill, a former employeeof the Company’s Los Angeles radio station. While the plaintiff’s statements ofhis damages have not been consistent, the plaintiff alleges that he is owed asmuch as $2.1 million under an oral employment agreement and written change ofcontrol agreements, and related claims of breach of implied covenant of goodfaith and fair dealing and fraud and deceit. Big City Radio is vigorouslycontesting its liability based upon its contention that no oral employmentagreement existed, that its obligations under change of control agreementsended when it terminated the plaintiff, and that the plaintiff does not havevalid claims for breach of implied covenant of good faith and fair dealing orfraud and deceit.

 

The Company isinvolved in litigation from time to time in the ordinary course of itsbusiness.   In management’s opinion, theoutcome of all pending legal proceedings, individually and in the aggregate,will not have a material adverse effect on the Company.

 

**Item 2 – Changes in Securities and Use ofProceeds**

 

None.

 

**Item 3 – Defaults Upon Senior Securities**

 

An event ofdefault has occurred under the Indenture governing the Company’s 11.25% SeniorDiscount Notes due 2005 (the “Notes”) as a result of the Company’s failure tomake payment of a semi-annual interest payment due under the Notes onSeptember 15, 2002 or during the applicable grace period, and an event ofdefault has occurred under section 3.7 of the Indenture concerning theCompany’s failure to make an offer to repurchase Notes using a portion of thecash proceeds from the October 31, 2001 sale of the Company’s four Phoenixradio stations to Hispanic Broadcasting Corporation. On October 17, 2002,pursuant to the indenture, holders of the senior notes delivered anacceleration notice to Big City Radio declaring notice to Big City Radiodeclaring the principal and interest on all of the senior notes to beimmediately due and payable.

 

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The Companyhas paid approximately $195.4 million of principal and interest to the trusteefor the bondholders. The Company is holding discussions with bondholders andthe trustee to determine what additional amounts, if any, are required to bepaid by the Company to the Trustee for the benefit of the bondholders. Thesediscussions concern whether interest on interest was due and payable andwhether interest ceased to accrue on the dates on which payments were made bythe Company to the Trustee, or whether interest continued to accrue until suchsubsequent dates on which the Trustee made distributions to the bondholders.Depending on the outcome of these discussions, the Company could be liable tothe bondholders in an additional amount of up to $1.28 million.  As of June 30, 2003, the Company hasrecorded its interest payable consistent with its assessment of the most likelyoutcome of this contingency.

 

**Item 4 – Submission of Matters to a Vote ofSecurity Holders**

 

On March 5, 2003, Stuart Subotnick, Anita Subotnick and SubotnickPartners, L.P. executed and delivered to Big City Radio a written consentapproving the sale of the Company’s assets.

 

**Item 5 – Other Information**

 

None.

 

**Item 6 – Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits

 

Exhibit 32  Certifications Pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reports on Form 8-K

 

The registrant filed a Current Report on Form 8-K on April 2,2003, reporting its Chief Executive Officers and Chief Financial Officerscertification pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

The registrant filed a Current Report on Form 8-K on April 21,2003, reporting the sale of stations properties.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities and Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                        | BIG CITY RADIO, INC. |
|-----------------------------|----------------------|
|                        |                 |
|                        |                 |
|                        | By:                  | /s/ PAUL R. THOMSON |   |
|                        |                 | Paul R. Thomson |
|                        |                 | *Vice President,  Chief Financial Officer  and Treasurer* |
|                        |                 |
|                        |                 |
| Dated: August 14, 2003 |                 |

 

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