BIG CITY RADIO INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR FISCAL YEAR ENDED DECEMBER 31, 1997

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

Commission File Number 001-13715
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BIG CITY RADIO, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 13-3790661
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
11 SKYLINE DRIVE, HAWTHORNE, N.Y. 10532 07073-2137
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (914) 592-1071

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON
- ------------------------- WHICH REGISTERED:
-------------------------
Class A Common Stock, par American Stock Exchange
value $.01 per share

Securities registered pursuant to Section 12(g) of the Act: NONE
------------------------

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

On March 24, 1998 the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant, using the closing price
of the Registrant's Class A Common Stock, as reported by the American Stock
Exchange on such date, was $99,228,043.75. For purposes of this calculation, the
value of each share of Class B Common Stock of the Registrant held by
non-affiliates was determined based on the value of one share of Class A Common
Stock as there is no established market for the Class B Common Stock and as each
share of Class B Common Stock is convertible into one share of Class A Common
Stock.

The number of shares of the Registrant's Class A Common Stock and Class B
Common Stock outstanding as of March 24, 1998 was 5,725,062 and 8,250,458,
respectively.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's Annual Meeting of Stockholders to be held on May 12, 1998 are
incorporated by reference into Part III of this report.

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BIG CITY RADIO, INC.

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

ITEM NO. DESCRIPTION PAGE
- ------------ -------------------------------------------------------------------------------------------- ---------

PART I

Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 13
Item 3. Legal Proceedings........................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......................................... 14

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 17
Item 6. Selected Financial Data..................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation........ 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 25
Item 8. Financial Statements and Supplementary Data................................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 48

PART III

Item 10. Directors and Executive Officers of the Registrant.......................................... 48
Item 11. Executive Compensation...................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 48
Item 13. Certain Relationships and Related Transactions.............................................. 48

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 49

PART I

ITEM 1. BUSINESS

GENERAL

Big City Radio, Inc. ("Big City Radio" or the "Company") was formed in 1994
to acquire radio broadcast properties in or adjacent to major metropolitan
markets and utilize innovative engineering techniques and low-cost,
ratings-driven operating strategies to develop these properties into successful
metropolitan radio stations. In order to accomplish this objective, the Company
applies a variety of innovative broadcast engineering techniques to the radio
broadcast properties it acquires, including Synchronized Total Market
Coverage-TM- ("STMC-TM-"). STMC-TM- consists of acquiring two or more stations
which broadcast on the same frequency and simulcasting their signals to achieve
broad coverage of a targeted metropolitan market. In addition to STMC-TM-, the
Company intends to employ other broadcast engineering techniques to enter major
metropolitan markets at attractive valuations. These engineering techniques
include acquiring suburban radio stations and moving the station's broadcast
antenna closer to the metropolitan market ("move-ins") and acquiring high-power
stations adjacent to major metropolitan markets and focusing such stations'
broadcast signal into the metropolitan area.

The Company's acquisition/engineering strategies enable it to provide near
seamless coverage of major metropolitan markets at a significantly lower
acquisition cost than is typically required to acquire a major market Class B
station. Class B radio stations are defined by the Federal Communications
Commission (the "FCC") as those facilities whose signal is predicted to cover a
regional urban area. The Company currently owns and operates STMC-TM- station
combinations in New York, Los Angeles and Chicago, the three largest radio
markets in the United States in terms of aggregate advertising revenues.

The Company's first targeted market was Los Angeles where the Company
operates a three-station combination, which broadcasts as Y-107 ("Y-107 LA"),
featuring a modern rock format on the 107.1-FM frequency. Y-107 LA covered
approximately 75% of the Arbitron diaries in the Los Angeles Arbitron Metro
Survey Area ("MSA") and as a result of an increase in its transmission power
pursuant to the FCC Power Increase (as defined herein) which the Company is
implementing in the first quarter of 1998, Y-107 will increase its coverage to
approximately 90%. The Company has demonstrated the success of its strategy in
Los Angeles where Y-107 LA has consistently ranked as one of the top five most
listened to modern rock radio stations in America over the past year and has
achieved a significant share of 1.0% in the 12+ category as of the Fall 1997
Arbitron book. The Company has successfully translated its strong listenership
into significant revenues as exemplified by the increase in its power ratio
(defined as a station's share of the aggregate radio market revenues divided by
its Arbitron listenership share) from 0.8 in the six-month period ended March
1997 to 1.4 in the six-month period ended September 1997. The Company's three
Los Angeles stations (the "Los Angeles Stations") were acquired in May 1996 for
a combined purchase price significantly lower than the reported purchase prices
of Class B stations in the Los Angeles MSA, as evidenced by reported
transactions consummated since the deregulation initiated by the passage of the
Telecom Act (as defined herein) in 1996. See "Business Strategy" below.

The Company's three stations in the New York collectively broadcast as Y-107
("Y-107 NY") on the 107.1-FM frequency. Y-107 NY commenced operations in
December 1996 as the only country music station covering the New York City
market. Y-107 NY earned a 0.9% share in the 12+category as of the Fall 1997
Arbitron book. Y-107 NY currently covers approximately 75% of the Arbitron
diaries in the New York MSA and will increase its coverage to approximately 90%
as a result of an increase in its transmission power pursuant to the FCC Power
Increase and implementation of other technical improvements, which the Company
plans to implement during the second quarter of 1998 pending receipt of final
approval from the FCC. The Company's three New York stations (the "New York
Stations") were acquired by the Company for a combined purchase price
significantly lower than the reported purchase prices of Class B stations in the
New York MSA, as evidenced by reported transactions consummated since the
passage of the Telecom Act. See "Business Strategy" below.

1

The Company's two stations in the Chicago MSA collectively broadcast as
FM-103.1("FM-103.1") on the 103.1-FM frequency. FM-103.1 commenced operations in
February 1998, broadcasting an adult contemporary format. FM-103.1 currently
covers approximately 70% of the Arbitron diaries in the Chicago MSA and will
increase its coverage to approximately 90% as a result of the planned increase
in its transmission power pursuant to the FCC Power Increase and other technical
improvements, which the Company plans to implement in 1998 pending receipt of
FCC approval. The Company's two Chicago stations (the "Chicago Stations") were
acquired for a combined purchase price which is significantly less than the
reported purchase prices of Class B stations in the Chicago MSA, as evidenced by
transactions consummated since the passage of the Telecom Act. See "Business
Strategy" below.

The Company is controlled by Stuart Subotnick, a general partner of
Metromedia Company ("Metromedia") who owns approximately 59% of the Company's
common stock, representing 94% of the voting power of the Company's common stock
(without giving effect to the exercise of any options to acquire shares of the
Company's Class A Common Stock).

MANAGEMENT

The Company was formed by its chairman, Stuart Subotnick and its president
and chief executive officer, Michael Kakoyiannis. Mr. Subotnick contributes his
financial, strategic and operational expertise gained through the development
and operation of the numerous media and communications businesses that he and
longtime partner John W. Kluge have controlled through Metromedia and its
predecessor. Mr. Kakoyiannis, the Company's president and chief executive
officer, has been involved in the radio broadcasting industry for over 25 years
in various functions including sales, marketing and general management. In
addition to Mr. Subotnick and Mr. Kakoyiannis, the Company has numerous
experienced radio executives involved in all aspects of its operations,
including engineering, sales, marketing, programming and finance. The Company
believes that its quality management team will be instrumental in successfully
implementing its business strategy.

RECENT DEVELOPMENTS

INITIAL PUBLIC OFFERING

The Company successfully completed the initial public offering (the "Initial
Public Offering" or "IPO") of 4,600,000 shares of Class A Common Stock on
December 24, 1997 at an offering price of $7.00 per share, generating $28.5
million of net proceeds for the Company which were used by the Company to repay
outstanding indebtedness under the Old Credit Facility (as defined). In
connection with the consummation of the Initial Public Offering, the Company
changed its fiscal year-end from September 30 to December 31. In addition,
simultaneously with the consummation of the Initial Public Offering, Stuart and
Anita Subotnick (the "Principal Stockholders") contributed approximately $13.3
million of stockholder loans to the Company (the "Equity Contribution"), the
Company reclassified each share of its then-existing common stock (the "Old
Common Stock") into 7,610 shares of Class A Common Stock, and the Principal
Stockholders exchanged their shares of Class A Common Stock for shares of Class
B Common Stock, par value $.01 per share (the "Class B Common Stock")
(collectively, the "Reclassification"). The rights of holders of Class A Common
Stock and Class B Common Stock are identical, except that each share of Class A
Common Stock entitles its holder to one vote per share on all matters voted upon
by the Company's stockholders, whereas each share of Class B Common Stock
entitles its holder to ten votes per share on all matters voted upon by the
Company's stockholders. In addition, holders of Class B Common Stock vote as a
separate class to elect up to 75% of the members of the Company's Board of
Directors. Each share of Class B Common Stock is convertible at any time into
one share of Class A Common Stock. The Principal Stockholders own all of the
outstanding shares of Class B Common Stock.

2

OFFERING OF SENIOR DISCOUNT NOTES

The Company completed a private placement of $174.0 million aggregate
principal amount 11 1/4% Senior Discount Notes due 2005 (the "Notes") on March
17, 1998 (the "Notes Offering"), generating approximately $125.4 million of
gross proceeds for the Company of which the Company used approximately $32.8
million to repay outstanding indebtedness under its Old Credit Facility. The
Company intends to use the remaining proceeds of the Notes Offering to finance
the acquisition costs of radio station properties and for general working
capital purposes.

The principal executive offices of the Company are located at 11 Skyline
Drive, Hawthorne, New York 10532. Its telephone number is (914) 592-1071.

STATIONS OPERATIONS

The Company currently owns station groups in Los Angeles, New York, and
Chicago, the three largest markets in the United States in terms of aggregate
radio revenues. Y-107 LA and Y-107 NY have each exhibited significant increases
in Arbitron ratings and net revenue since their respective launches. FM-103.1
began broadcasting an adult contemporary format in the Chicago MSA in February
1998.

LOS ANGELES

The Los Angeles market is the second largest Arbitron market in terms of
population and the largest in terms of aggregate radio market revenues in the
United States, with 1996 revenues of $540.0 million. From 1991 to 1996, radio
advertising revenue in the Los Angeles MSA grew from $440.0 million to $540.0
million, a compound annual growth rate of 4.2%. Los Angeles is the first market
in which the Company implemented STMC-TM-, with its acquisitions of three radio
stations for an aggregate purchase price of $26.8 million. Y-107 LA initially
covered approximately 75% of the Arbitron diaries in the Los Angeles MSA and, as
a result of an increase in its transmission power, which the Company is
implementing in the first quarter of 1998, Y-107 LA will increase its coverage
to approximately 90%. The Company believes that this coverage is substantially
similar to the Arbitron diary coverage of many of the highest-ranked Los Angeles
Class B stations. In addition to its coverage of the Los Angeles market, Y-107
LA covers parts of the Ventura, Orange, Riverside-San Bernardino and San Diego
markets.

The Company believes that identifying the appropriate format in a particular
market is crucial to the station's ability to achieve meaningful penetration of
the market's listening audience and aggregate advertising revenues. After
extensive research of the Los Angeles market, the Company launched a modern rock
format, as it believed that there was no comparable station that offered a
lively mix of modern rock music that primarily targets the important 25-54
demographic. The Company has demonstrated the success of its strategy in Los
Angeles where Y-107 LA has consistently ranked as one of the top 5 most
listened-to modern rock radio stations in America over the past year and has
achieved a significant share of 1.0% in the 12+ category as of the fall 1997
Arbitron book. The Company has successfully translated its strong listenership
into significant revenues as exemplified by the increase in its power ratio from
0.8 in the six-month period ended March 1997 to 1.4 in the six-month period
ended September 1997. Y-107 LA's cume (the estimated number of different persons
who listened to a station for a minimum of five minutes in a quarter-hour of a
reported daypart) grew from 50,000 to 574,500 in its first six months of
operation.

The Company believes that to achieve Class B station equivalent Arbitron
coverage and broadcast quality requires extensive engineering expertise. In Los
Angeles, the Company uses several advanced techniques to achieve what the
Company believes to be substantially full coverage. In addition to the three
stations, the Company uses a booster located in the San Fernando Valley to
enhance its coverage of the market. The Company believes these engineering
solutions have resulted in significantly broader coverage than traditional
simulcasting.

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NEW YORK

The New York MSA is the largest Arbitron market in terms of population and
the second largest in terms of aggregate radio market revenues in the United
States, with 1996 revenues of $507.2 million. From 1991 to 1996, radio
advertising revenue in the New York MSA grew from $349.0 million to $507.2
million, a compound annual growth rate of 7.8%. New York is the second market
which the Company entered with its acquisitions of three radio stations for an
aggregate purchase price of approximately $19.5 million. The Company has
implemented STMC-TM- in New York as well and believes that it has created the
equivalent of a New York Class B station. Subsequent to the implementation of
the planned power increase of the New York Stations and implementation of other
technical improvements, which the Company expects to complete by the end of the
second quarter of 1998, the Arbitron diary coverage of Y-107 NY will increase to
approximately 90%. The Company believes that this coverage is substantially
similar to the Arbitron diary coverage of many of the highest-ranked New York
Class B stations.

Y-107 NY has an exclusive format presence in New York, as the Company
believes there are no other country music stations covering substantially all of
the New York MSA. Country music is traditionally a very strong 25-54 demographic
format, which routinely generates high power ratios relative to other formats.
As the only country music station covering substantially all of the New York
market, Y-107 NY's recognition and popularity was significantly enhanced
recently when the station broadcasted live the Garth Brooks concert in Central
Park in New York City. Y-107 NY commenced operations on January 1, 1997 and has
already earned a share of 0.9% in the 12+category as of the Fall 1997 Arbitron
book.

CHICAGO

The Chicago market is the third largest Arbitron market in terms of
population and aggregate radio market revenues in the United States with 1996
revenues of $343.0 million. From 1991 to 1996, radio advertising revenue in the
Chicago MSA grew from $252.0 million to $343.0 million, a compound annual growth
rate of 6.4%. The Company has to date acquired two radio stations in the Chicago
MSA for an aggregate purchase price of $10.6 million and FM-103.1 began
broadcasting an adult contemporary format in February, 1998. FM-103.1 currently
cover approximately 70% of the Arbitron diaries in the Chicago MSA. Subsequent
to the implementation of the planned power increase of the Chicago Stations and
other technical improvements, which the Company expects to complete during 1998,
FM-103.1 will cover approximately 90% of the Arbitron diaries in the Chicago
MSA.

ADVERTISING SALES

The rates a station can charge are in large part dictated by the station's
ability to attract audiences in the demographic groups targeted by its
advertisers, as measured principally by Arbitron Radio Market Reports. The
Company believes that identifying the appropriate format in a particular market
is crucial to the station's ability to achieve meaningful penetration of the
listening audience of the market. In each market entered by the Company, an
extensive competitive analysis is performed to select the format with the
greatest audience and revenue potential.

Virtually all of the Company's revenues are generated from the sale of local
and national advertising for broadcast on its radio stations. The Company
believes that radio is one of the most efficient and cost-effective means for
advertisers to reach specific demographic groups. Advertising rates charged by
radio stations are based primarily on (i) a station's share of the audience in
the demographic groups targeted by advertisers, (ii) the number of stations in
the market competing for the same demographic groups, and (iii) the supply of
and demand for radio advertising time. Rates are generally highest during
morning and afternoon commuting hours.

The number of advertisements that can be broadcast without jeopardizing
listening levels (and the resulting ratings) is limited in part by the format of
a particular station. The Company's stations strive to maximize revenue by
constantly managing the number of commercials available for sale and adjusting

4

prices based upon local market conditions. In the broadcasting industry, radio
stations often utilize trade (or barter) agreements to generate advertising time
sales in exchange for goods or services (such as travel and lodging) instead of
for cash. The Company minimizes its use of trade agreements. The Company
determines the number of advertisements broadcast hourly, which maximizes
available revenue dollars without jeopardizing listening levels. Although the
number of advertisements broadcast during a given time period varies, the total
number of advertisements broadcast on a particular station generally does not
vary significantly from year to year. As is typical of the radio broadcasting
industry, the Company's stations respond to changing demand for advertising
inventory by varying prices rather than by varying the target inventory level
for a particular station.

Most advertising contracts are short-term and run only for a few weeks.
Ninety percent of the Company's gross revenue is generated from local
advertising, which is sold primarily by a station's sales staff. To achieve
greater control over advertising dollars, the Company's sales force focuses on
establishing direct relationships with local advertisers. To generate national
advertising sales, the Company has recruited in-house staff to represent it in
the largest national sales markets of New York City, Boston, Philadelphia,
Chicago, Atlanta, Dallas, Detroit and San Francisco. This also helps to contain
commission costs as large national representative firms tend to have higher
commission rates than an in-house national sales representative.

COMPETITION

Radio broadcasting is a highly competitive business. Within their respective
markets, each of the Company's radio stations competes for audience share and
advertising revenue directly with other radio stations, as well as with other
media such as television, print media, billboards, compact discs and music
videos. There are a number of other better-capitalized companies competing in
the same geographic markets as the Company, many of which have greater financial
resources. In addition, recently the radio industry has experienced significant
consolidation which has resulted in several radio station groups that have a
large number of radio stations throughout the United States and vastly greater
financial resources and access to capital than the Company.

The financial success of each of the Company's radio stations is dependent
principally upon its share of the overall radio advertising revenue within its
geographic market, its promotion and other expenses incurred to obtain that
revenue and the economic health of the geographic market. Radio advertising
revenues are, in turn, highly dependent upon audience share. Radio station
operators are subject to the possibility of another station changing programming
formats to compete directly for listeners and advertisers or launching an
aggressive promotional campaign in support of an already existing competitive
format. If a competitor, particularly one with substantial financial resources,
were to attempt to compete in either of these fashions, the broadcast cash flow
of the Company's affected station could decrease due to increased promotional
and other expenses and/or lower advertising revenues resulting from lower
ratings. There can be no assurance that any one of the Company's radio stations
will be able to maintain or increase its current audience ratings and radio
advertising revenue market share.

The Company will also face competition from other radio stations that
attempt to replicate the engineering techniques of the Company to cover a
metropolitan area and from stations that simply simulcast on the same or first
adjacent frequencies. While simulcasting has been employed by other broadcast
radio operators in the past, the primary purpose has been to reduce programming
costs for the individual stations. The Company believes that most broadcast
radio operators that have employed simulcasting have done so on different
frequencies. The Company believes that few operators have successfully used
simulcasting to effectively cover an entire MSA.

Radio broadcasting is also subject to competition from new media
technologies that are being developed or introduced, such as the delivery of
audio programming by cable television systems or the introduction of a new
technology known as DAB. DAB may deliver by satellite or terrestrial means
multi-

5

channel, multi-format digital radio services with sound quality equivalent to
compact discs to nationwide and regional audiences. The Company cannot predict
the effect, if any, that any such new technologies may have on the radio
broadcasting industry.

ACQUISITIONS

Since its incorporation in August 1994, the Company has acquired the assets
of ten radio stations and has disposed of one station. The following is a
summary of the acquisitions and dispositions of radio stations which the Company
has consummated since its incorporation and other planned acquisitions. All of
these transactions were with non-affiliated persons.

NEW YORK

In December 1994, the Company acquired the assets of radio station WRGX-FM
(now WWXY-FM), Briarcliff Manor, New York, from West-Land Communicators, Inc.
("West-Land") for a purchase price of $2.5 million and the issuance of a
promissory note in the amount of $1.0 million to West-Land. In April 1997, the
Company acquired the assets of radio station WWHB-FM (now WWVY-FM), Hampton
Bays, New York, from South Fork Broadcasting Corporation ("South Fork") for a
purchase price of $4.0 million. In June 1997, the Company acquired the assets of
radio station WZVU-FM (now WWZY-FM), Long Branch, New Jersey, including a radio
tower, a radio antenna and a building, from K&K Radio Broadcasting L.L.C. and
K&K Tower, L.L.C. for an aggregate purchase price of $12.0 million and certain
payments under existing leases of the building facilities. K&K Radio
Broadcasting, L.L.C., K&K Tower, L.L.C. and each of their controlling members
and the general manager of WZVU-FM entered into a covenant not to compete with
the Company for a period of three years. Also, in December 1994, the Company
acquired the assets of radio station WRKL-AM, Pomona, New York, from Rockland
Communicators, Inc. for a purchase price of $1.0 million. The Company intends to
dispose of this station.

LOS ANGELES

In May 1996, the Company acquired four radio stations in the Los Angeles
area from Douglas Broadcasting, Inc. ("Douglas"). The Company acquired the
assets of radio station KMAX-FM (now KLYY-FM), Arcadia, California, KAXX-FM (now
KVYY-FM), Ventura, California, KBAX-FM (now KSYY-FM) Fallbrook, California, and
KWIZ-FM, Santa Ana, California, for an aggregate purchase price of $38.0
million. The Company also acquired FM Translator station K252BF, Temecula,
California, which rebroadcasts on 98.3 MHz the signal of KSYY-FM, and FM Booster
station KLYY-FM, Burbank, California, which boosts on 107.1 MHz the broadcast of
the signal of KLYY-FM. In December 1996, the Company sold radio station KWIZ-FM
to Liberman Broadcasting, Inc. for a price of $11.2 million.

CHICAGO

In August 1997, the Company acquired the assets of radio station WVVX-FM
(now WXXY-FM), Highland Park, Illinois, from WVVX License, Inc., for a purchase
price of $9.5 million. Douglas, WVVX, Inc. and WVVX License, Inc. agreed not to
compete for a period of eighteen months. In August 1997, the Company acquired
the assets of radio station WJDK-FM (now WYXX-FM), Morris, Illinois, from DMR
Media, Inc., for a purchase price of $1.1 million. In addition, the Company
agreed not to compete with DMR Media, Inc.'s operations of radio station
WCSJ-AM, Morris, Illinois, for a period of five years.

OTHER PLANNED ACQUISITIONS

The Company's principal business strategy is to add radio station properties
to its existing station groups in order to augment signal strength and Arbitron
diary coverage in these MSAs and to acquire additional station groups to which
the Company may deploy its STMC-TM- concept in existing markets (Los Angeles,
New York and Chicago) and in other top-20 markets throughout the U.S. The
Company is

6

currently actively seeking out such acquisition opportunities and is in the
process of negotiating several transactions. Presently, the Company is a party
to two non-binding letters of intent for the acquisition of substantially all of
the assets of certain radio stations in top-20 markets for a purchase price of
$4.5 million and $5.0 million, respectively, subject to adjustments.
Consummation of the acquisition of the assets of these stations remains subject
to a number of significant conditions to closing, including negotiation and
execution of definitive documentation, the consent of the FCC to the assignment
of these stations' licenses to the Company and completion of a satisfactory due
diligence review. No assurance can be made that the Company will consummate such
acquisitions on the terms outlined above or at all. In addition to these
acquisitions, the Company is actively negotiating other radio station
acquisitions in its existing markets and in other markets.

PROPOSED RADIO STATION DISPOSITION

The Company intends to dispose of the assets of radio station WRKL-AM,
Pomona, New York during 1998. The Company and Polnet Communications, Ltd.
("Polnet") have executed a non-binding letter of intent for the sale by Big City
Radio of the assets of WRKL-AM to Polnet, for a sale price of $1.625 million,
subject to certain adjustments. Consummation of this proposed sale remains
subject to a number of conditions to closing including, but not limited to,
execution of definitive documentation, consent of the FCC to the assignment of
the WRKL-AM license to Polnet and certain other conditions to closing including,
but not limited to, conveyance of good title to the assets, free and clear of
all liens, claims, mortgages, security interests and encumbrances except those
assumed by Polnet.

EMPLOYEES

At December 31, 1997, the Company had approximately 109 full-time employees
and 83 part-time employees. Nine full-time employees of radio station WRKL-AM
are represented by a union. The Company believes that its relations with its
employees are good.

The Company employs several on-air personalities and generally enters into
employment agreements with certain of these personalities to protect its
interests in those relationships that it believes to be valuable. The loss of
certain of these personalities could result in a short term loss of audience
share but the Company does not believe that any such loss would have a material
adverse effect on the Company.

PATENTS AND TRADEMARKS

The Company owns registered trademark rights for STMC-TM- and domestic
trademark registrations related to the business of the Company and does not own
any patents or patent applications. The Company does not believe that any of its
trademarks are material to its business or operations.

FEDERAL REGULATION OF RADIO BROADCASTING

The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"). Among other
things, the FCC assigns frequency bands for broadcasting; determines the
particular frequencies, locations and power of stations; issues, renews, revokes
and modifies station licenses; determines whether to approve changes in
ownership or control of station licenses; regulates equipment used by stations;
imposes regulations and takes other action to prevent harmful interference
between stations; adopts and implements regulations and policies that directly
or indirectly affect the ownership, management, programming, operation and
employment practices of stations; and has the power to impose penalties for
violations of its rules or the Communications Act. In February 1996, Congress
enacted the Telecommunications Act of 1996 (the "Telecom Act") to amend the
Communications Act. The Telecom Act, among other measures, directed the FCC,
which has since conformed its rules, to (a) eliminate the national radio
ownership limits; (b) liberalize the local radio ownership limits as specified
in the Telecom

7

Act; (c) issue broadcast licenses for periods of up to eight years; and (d)
eliminate the opportunity for the filing of competing applications against
broadcast license renewal applications.

Congress, via the Balanced Budget Act of 1997, authorized the FCC for the
first time to conduct auctions for the awarding of initial broadcast licenses or
construction permits for commercial radio and television stations. To facilitate
the settlement without auctions of already pending mutually exclusive
applications, Congress directed the FCC to waive existing rules as necessary.
The FCC has initiated a rulemaking proceeding to implement these provisions.
While the Company is not a participant in any such proceeding, this recent
action should result in the awarding of construction permits for additional
radio stations, some of which might have the potential to compete with the
Company's radio stations.

LICENSE GRANTS AND RENEWALS

The Communications Act provides that a broadcast license may be granted to
an applicant if the grant would serve the public interest, convenience and
necessity, subject to certain limitations referred to below. In making licensing
determinations, the FCC considers the legal, technical, financial and other
qualifications of the applicant, including compliance with the Communications
Act's limitations on alien ownership, compliance with various rules limiting
common ownership of broadcast, cable and newspaper properties, and the
"character" of the licensee and those persons holding "attributable" interests
in the licensee. Broadcast licenses are granted for specific periods of time
and, upon application, are renewable for additional terms. The Telecom Act
amended the Communications Act to provide that broadcast licenses be granted,
and thereafter renewed, for a term not to exceed eight years, if the FCC finds
that the public interest, convenience, and necessity would be served.

Generally, the FCC renews broadcast licenses without a hearing. The Telecom
Act amended the Communications Act to require the FCC to grant an application
for renewal of a broadcast license if: (1) the station has served the public
interest, convenience and necessity; (2) there have been no serious violations
by the licensee of the Communications Act or the rules and regulations of the
FCC; and (3) there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC which, taken
together, would constitute a pattern of abuse. Competing applications against
broadcast license renewal applications are therefore not entertained. The
Telecom Act provided that if the FCC, after notice and an opportunity for a
hearing, decides that the requirements for renewal have not been met and that no
mitigating factors warrant lesser sanctions, it may deny a renewal application.
Only thereafter may the FCC accept applications by third parties to operate on
the frequency of the former licensee. The Communications Act continues to
authorize the filing of petitions to deny against broadcast license renewal
applications during particular periods of time following the filing of renewal
applications. Petitions to deny can be used by interested parties, including
members of the public, to raise issues concerning the qualifications of the
renewal applicant.

The Company's Chicago Stations' broadcast licenses were renewed in 1996 and
will expire in 2003. The Los Angeles Stations' broadcast licenses were renewed
on November 25, 1997 and will expire on December 31, 2005. The New York
Stations' and WRKL-AM's broadcast licenses will expire on June 1, 1998. Renewal
applications were due on February 2 for the Company's New York Stations and
WRKL-AM, and were timely filed. The Company does not anticipate any material
difficulty in obtaining license renewals for full terms in the future.

The action of the FCC or its staff granting a renewal application may be
reconsidered during specified time periods by the FCC or its staff on their own
motion or by request of the petitioner, and the petitioner may also appeal
within a certain period actions by the FCC to the U.S. Court of Appeals. If the
FCC does not, on its own motion, or upon a request by an interested party for
reconsideration or review, review a staff grant or its own action within the
applicable time periods, and if no further reconsideration, review or appeals
are sought within the applicable time periods, an action by the FCC or its staff
becomes a "Final Order."

8

LICENSE ASSIGNMENTS AND TRANSFERS OF CONTROL

The Communications Act prohibits the assignment of an FCC license or the
transfer of control of a corporation holding such a license without the prior
approval of the FCC. Applications to the FCC for such assignments or transfers
are subject to petitions to deny by interested parties and must satisfy
requirements similar to those for renewal and new station applicants. Many
transactions involving radio stations provide, as a waivable pre-condition to
closing, that the FCC consent to the transaction has become a "Final Order."

In connection with the Company's acquisition of the broadcast licenses of
several radio stations, the Company has recently requested that the FCC issue to
the Company authorizations for auxiliary stations of use to the Company's radio
stations. The Company expects to receive such authorization in early 1998.

OWNERSHIP RULES

Rules of the FCC limit the number and location of broadcast stations in
which one licensee (or any party with a control position or attributable
ownership interest therein) may have an attributable interest. The FCC, pursuant
to the Telecom Act, eliminated the previously existing "national radio ownership
rule." Consequently, there now is no limit imposed by the FCC to the number of
radio stations one party may own nationally.

The "local radio ownership rule" limits the number of stations in a radio
market in which any one individual or entity may have a control position or
attributable ownership interest. Pursuant to the Telecom Act, the FCC revised
its rules to set the local radio ownership limits as follows: (a) in markets
with 45 or more commercial radio stations, a party may own up to eight
commercial radio stations, no more than five of which are in the same service
(AM or FM); (b) in markets with 30-44 commercial radio stations, a party may own
up to seven commercial radio stations, no more than four of which are in the
same service; (c) in markets with 15-29 commercial radio stations, a party may
own up to six commercial radio stations, no more than four of which are in the
same service; and (d) in markets with 14 or fewer commercial radio stations, a
party may own up to five commercial radio stations, no more than three of which
are in the same service, provided that no party may own more than 50% of the
commercial stations in the market. FCC cross-ownership rules also prohibit one
party from having attributable interests in a radio station as well as in a
local television station or daily newspaper, although such limits are waived by
the FCC under certain circumstances. In addition, the FCC has a "cross interest"
policy that may prohibit a party with an attributable interest in one station in
a market from also holding either a "meaningful" non-attributable equity
interest (e.g., non-voting stock, voting stock, limited partnership interests)
or key management position in another station in the same market, or which may
prohibit local stations from combining to build or acquire another local
station. The FCC is presently evaluating its radio/television, radio/newspaper
and cross-interest rules and policies as well as policies governing attributable
ownership interests. The Company cannot predict whether the FCC will adopt any
changes in these policies or, if so, what the new policies will be or how they
might affect the Company.

9

ATTRIBUTION RULES

All holders of attributable interests must comply with, or obtain waivers
of, the FCC's multiple and cross-ownership rules. Under the current FCC rules,
an individual or other entity owning or having voting control of 5% or more of a
corporation's voting stock is considered to have an attributable interest in the
corporation and its stations, except that banks holding such stock in their
trust accounts, investment companies, and certain other passive interests are
not considered to have an attributable interest unless they own or have voting
control over 10% or more of such stock. The FCC is currently evaluating whether
to raise the foregoing benchmarks to 10% and 20%, respectively. An officer or
director of a corporation or any general partner of a partnership also is deemed
to hold an attributable interest in the media license. At present, when a single
shareholder holds a majority of the voting stock of a corporate licensee, the
FCC considers other shareholders, unless they are also officers or directors,
exempt from attribution. The FCC has asked for comments as to whether it should
continue the single majority shareholder exemption. Holders of non-voting stock
generally will not be attributed an interest in the issuing entity, and holders
of debt and instruments such as warrants, convertible debentures, options, or
other non-voting interests with rights of conversion to voting interests
generally will not be attributed such an interest unless and until such
conversion is effected. The FCC is currently considering whether it should
expand its attribution rules to reach certain of these interests in certain
circumstances. The Company cannot predict whether the FCC will adopt these or
any other proposals to change its attribution policies.

Under current FCC rules, any stockholder of the Company with 5% or more of
the outstanding votes (except for qualified institutional investors, for which
the 10% benchmark is applicable), will be considered to hold attributable
interests in the Company. Such holders of attributable interests must comply
with or obtain waivers of the FCC's multiple and cross-ownership rules. At
present, none of the attributable stockholders, officers and directors of the
Company have any other media interests besides those of the Company that
implicate the FCC's multiple ownership limits. In the event that the Company
learns of a new attributable stockholder and if such stockholder holds interests
that exceed the FCC limits on media ownership, under the Company's Amended and
Restated Certificate of Incorporation (as defined herein), the Board of
Directors of the Company has the corporate power to redeem stock of the
Company's stockholders to the extent necessary to be in compliance with FCC and
Communications Act requirements, including limits on media ownership by
attributable parties.

The FCC will consider a radio station providing programming and sales on
another local radio station pursuant to a LMA (as defined herein) to have an
attributable ownership interest in the other station for purposes of the FCC's
radio multiple ownership rules. In particular, a radio station is not permitted
to enter into a LMA giving it the right to program more than 15% of the
broadcast time, on a weekly basis, of another local radio station which it could
not own under the FCC's local radio ownership rules.

ALIEN OWNERSHIP LIMITS

Under the Communications Act, broadcast licenses may not be granted,
transferred or assigned to any corporation of which more than one-fifth of the
capital stock is owned of record or voted by non-U.S. citizens or foreign
governments or their representatives or by foreign corporations. Where the
corporation owning the license is controlled by another corporation, the parent
corporation cannot have more than one-fourth of the capital stock owned of
record or voted by Aliens, unless the FCC finds it in the public interest to
allow otherwise. The FCC has issued interpretations of existing law under which
the Alien ownership restrictions in slightly modified form apply to other forms
of business organizations, including general and limited partnerships. Recently,
the FCC decided that it is in the public interest to allow up to 100% indirect
Alien ownership by citizens of or corporations organized under the laws of WTO
member nations. The FCC also prohibits a licensee from continuing to control
broadcast licenses if the licensee otherwise falls under Alien influence or
control in a manner determined by the FCC to be in violation of the
Communications Act or contrary to the public interest. At present, one of the
Company's officers is known by the Company to be an Alien and no other officers,
directors or stockholders are known to be

10

Aliens. In the event that the Company learns that Aliens own, control or vote
stock in the Company in excess of the limits set in the Communications Act and
the FCC's rules, under the Amended and Restated Certificate of Incorporation,
the Board of Directors of the Company has the corporate power to redeem stock of
the Company's stockholders to the extent necessary to be in compliance with FCC
and Communications Act requirements on alien ownership.

PROGRAMMING REQUIREMENTS

While the FCC has relaxed or eliminated many of its regulatory requirements
related to programming and content, radio stations are still required to
broadcast programming responsive to the problems, needs and interests of the
stations' service areas and must comply with various rules promulgated under the
Communications Act that regulate political broadcasts and advertisements,
sponsorship identifications, indecent programming and other matters. Affirmative
action requirements also exist. Failure to observe these or other FCC rules can
result in the imposition of monetary forfeitures, in the grant of a "short"
(less than full term) license term or, where there have been serious or a
pattern of violations, license revocation.

TECHNICAL AND INTERFERENCE RULES

FCC rules specify technical and interference requirements and parameters
that govern the signal strength and coverage area of radio stations, and which,
unless waived, must be complied with in order to obtain FCC consent to modify a
station's service area or other technical operations. The FCC allots specific FM
radio frequencies and class designations to particular communities of license.
The FM class designations, which vary by geographic location, include (in order
of increasing potential coverage area) Class A, B1, C3, B, C2, C1 and C. (The C
Class designations are generally not allocated to communities in the more
densely-populated regions of the United States, such as the Northeast and
California.) Each FM class has minimum and maximum power specifications and must
not cause interference to the protected service areas of other radio stations,
domestic or international, operating on the same or adjacent frequencies. Under
FCC rules, a radio station must transmit a minimum predicted signal strength to
its allocated community of license, and therefore must locate its transmitting
antenna at a site providing such coverage while also being within a specified
power and height range for that station's class designation, and at specified
minimum distances from the transmitting sites of nearby radio stations operating
on the same or adjacent frequencies. The Company must also comply with certain
technical, reporting, and notification requirements imposed by the FAA with
respect to the installation, location, lighting, and painting of the transmitter
antennas used by the Company's radio stations. The combination of these
requirements sets limits on the ability of a particular radio station to
relocate in certain directions and to increase signal coverage. Stations may
petition the FCC to change a particular station's community of license and/or
class, which changes are granted by the FCC when its service priorities are met
and conflicting reallotment proposals, if any, are resolved. As to minimum
distance separation requirements designed to afford interference protection to
other FM stations, the FCC rarely waives such specifications. However, the FCC
permits radio stations in certain circumstances to relocate to a site not
meeting the minimum distance separation rule when the station demonstrates that
the service contours of neighboring radio stations will be protected from
interference. Because STMC-TM-uses radio stations that operate on the same or
adjacent frequencies, the STMC-TM- stations' transmitting sites must be
sufficiently distant from each other to comply with the FCC's interference
protection guidelines, unless such stations are exempt from compliance by their
grand fathered status.

FCC POWER INCREASE

In most instances, changes to the technical specifications of radio
stations, such as increases in the power (effective radiated power, or "ERP")
and subsequent increased coverage area, may be made only after application to
the FCC, and grant by the FCC of a construction permit for the modification of
the station. The Company has received approval for its application to the FCC
and the grant by the FCC of a

11

construction permit for the modifications of WRKL-AM, Pomona, New York. The FCC
has initially granted applications for modifications of WWXY-FM, Briarcliff
Manor, New York, WWVY-FM, Hampton Bays, New York, and WWZY-FM, Long Branch, New
Jersey. The WWXY-FM, the WWVY-FM and the WWZY-FM modification applications
requested increases in the authorized power of the stations from the current
equivalent three kilowatt to maximum six kilowatt level permitted for the
stations' FCC classification. The Company withheld filing these applications
while the FCC was considering changes to its policy relating to modifications of
"grandfathered short-spaced" FM stations, such as WWXY-FM, WWVY-FM and WWZY-FM.
Grandfathered short-spaced stations are those that do not meet the current FCC's
requirements for distance separation of FM radio stations operating on the same
or adjacent frequencies as the stations were authorized before the adoption of
the current rules. In the past, power increases or relocations of such
grandfathered stations often did not comply with the FCC's current technical
rules, and would be authorized by the FCC only in limited circumstances. In
August 1997, the FCC adopted a new policy, which the Company believes will
permit it to increase the power of its radio stations to the maximum six
kilowatt level (the "FCC Power Increase"). Until the grant of the subject
modification applications, the Company cannot be certain that the new policy
will serve to permit the increases in the Company's coverage areas. There can be
no assurance that the FCC will approve the Company's modification applications.
In January 1998, KLYY-FM, Arcadia, California implemented its increase in ERP
from three kilowatts to the maximum six kilowatts level permitted for the
station's FCC classification, and an application for issuance of a license
reflecting this change is pending before the FCC.

AGREEMENTS WITH OTHER BROADCASTERS

Over the past several years a significant number of broadcast licensees,
including the Company, have entered into cooperative agreements with other
stations in their markets. One typical example is a local marketing agreement
("LMA") between two separately or co-owned stations, whereby the licensee of one
station programs substantial portions or all of the broadcast day on the other
licensee's station, subject to ultimate editorial and other controls being
exercised by the latter licensee, and sells advertising time during such program
segments for its own account. The FCC has held that LMAs do not per se
constitute a transfer of control and are not contrary to the Communications Act
provided that the licensee of the station maintains ultimate responsibility for
and control over operations of its broadcast station. As is the case of the
Company, typically the LMA is entered into in anticipation of the sale of the
station, with the proposed acquiror providing programming for the station while
the parties are awaiting the necessary regulatory approvals to the transaction.

The FCC's rules also prohibit a radio licensee from simulcasting more than
25% of its programming on other radio stations in the same broadcast service
(i.e., AM-AM or FM-FM), whether it owns both stations or operates one or both
through a LMA, where such stations serve substantially the same geographic area
as defined by the stations' principal community contours. The Company's stations
are not subject to this limitation.

PROPOSED REGULATORY CHANGES

The FCC has not yet formally implemented certain of the changes to its rules
necessitated by the Telecom Act. Moreover, the Congress and the FCC have under
consideration, and may in the future consider and adopt, new laws, regulations
and policies regarding a wide variety of matters that could, directly or
indirectly, (i) affect the operation, programming, technical requirements,
ownership and profitability of the Company and its radio broadcast stations,
(ii) result in the loss of audience share and advertising revenues of the
Company's radio broadcast stations, (iii) affect the ability of the Company to
acquire additional radio broadcast stations or finance such acquisitions, (iv)
affect cooperative agreements and/or financing arrangements with other radio
broadcast licensees, (v) affect the Company's competitive position in
relationship to other advertising media in its markets, or (vi) affect the
Company's ability to exploit its unique technical capabilities and innovative
approach to acquiring and using radio broadcast

12

stations. Such matters include, for example, changes to the license,
authorization, and renewal process; proposals to revise the FCC's equal
employment opportunity rules and other matters relating to minority and female
involvement in broadcasting; proposals to alter the benchmarks or thresholds for
attributing ownership interest in broadcast media; proposals to change rules or
policies relating to political broadcasting; changes to technical and frequency
allocation matters, including those relative to the implementation of digital
audio broadcasting on both a satellite and terrestrial basis; proposals to
restrict or prohibit the advertising of beer, wine and other alcoholic beverages
on radio; changes in the FCC's cross-interest, multiple ownership, Alien
ownership and cross-ownership policies; and proposals to limit the tax
deductibility of advertising expenses by advertisers.

Although the Company believes the foregoing discussion is sufficient to
provide the reader with a general understanding of all material aspects of FCC
regulations that affect the Company, it does not purport to be a complete
summary of all provisions of the Communications Act or FCC rules and policies.
Reference is made to the Communications Act, FCC rules, and the public notices
and rulings of the FCC for further information.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including those utilizing the phrases
"will," "expects," "intends," "estimates," "contemplates," and similar phrases,
are "forward-looking" statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including
statements regarding, among other items, (i) the Company's growth strategy, (ii)
the Company's intention to acquire additional radio stations and to enter
additional markets, including its ability to do so at attractive valuations,
(iii) the Company's expectation of improving the coverage areas of its radio
stations, and (iv) the Company's ability to successfully implement its business
strategy. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance and achievements of the Company and its
subsidiaries to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, the following: (i) changes in the
competitive market place, including the introduction of new technologies or
formatting changes by the Company's competitors, (ii) changes in the regulatory
framework, (iii) changes in audience tastes, and (iv) changes in the economic
conditions of local markets. Other factors which may materially affect actual
results include, among others, the following: general economic and business
conditions, industry capacity, demographic changes, changes in political, social
and economic conditions and various other factors beyond the Company's control.
The Company does not undertake and specifically declines any obligation to
publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

ITEM 2. PROPERTIES

The Company leases approximately 3,200 square feet in Hawthorne, New York,
where its corporate offices are located.

The type of properties required to support each of the Company's radio
stations includes offices, studios, transmitter sites, booster sites, translator
sites and antenna sites. The Company owns, leases or licenses the properties
required to operate its radio stations. The Company owns facilities for the New
York Stations in Long Branch (approximately 6,500 square feet) and for WRKL-AM
in Pomona (approximately 5,100 square feet). The Company leases or licenses
facilities for the Los Angeles Stations in

13

Arcadia, Fallbrook (approximately 355 square feet), Los Angeles, Pasadena
(approximately 4,896 square feet), Ventura (approximately 758 square feet),
Temecula and Burbank. The Company leases facilities for the New York Stations in
Hampton Bays (approximately 1,260 square feet), Hawthorne, East Quoque and
Westchester. The Company leases facilities for the Chicago Stations in Highland
Park (approximately 2,120 square feet) and Morris. The Company considers its
facilities to be suitable and of adequate sizes for its current and intended
purposes and does not anticipate any difficulties in renewing those leases or
licenses or in leasing or licensing additional space, if required.

The Company owns substantially all of its other equipment, consisting
principally of transmitting antennae, transmitters, studio equipment and general
office equipment. The Company owns towers in Long Branch, NJ, Highland Park, IL,
and Morris, IL. The towers, antennae and other transmission equipment used in
the Company's stations are generally in good condition.

The following table sets forth the location of the Company's principal
properties:

LOCATION FACILITY
- -------------------------------------------------------- --------------------------------------------------------

Y-107 LOS ANGELES
Arcadia, CA............................................. FM tower(4)
Fallbrook, CA........................................... FM tower, studio, transmitter site(1)
Pasadena, CA............................................ Studio, business offices(1)
Ventura, CA............................................. FM tower(4), studio, transmitter site(1)
Temecula, CA............................................ Translator site(1)
Burbank, CA............................................. Booster site(1)
Los Angeles, CA......................................... Transmitter site(1)
Y-107 NEW YORK
Hampton Bays, NY........................................ Business offices(1)
Hawthorne, NY........................................... Studio, corporate offices(1)
Long Branch, NJ......................................... FM tower, studio(2)
Westchester, NY......................................... FM tower(1)
East Quoque, NY......................................... FM tower, transmitter site(1)
FM-103.1 CHICAGO
Highland Park, IL....................................... FM tower(4), studio(1)
Morris, IL.............................................. Studio(1), FM tower, transmitter site(2)
WRKL-AM
Pomona, NY.............................................. Tower, studio(3)

- ------------------------
(1) Leased.

(2) Owned.

(3) Held for sale--See "Proposed Radio Station Disposition."

(4) Tower owned by the Company while the property is leased.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in litigation from time to time in the ordinary
course of its business. In management's opinion, the outcome of all pending
legal proceedings, individually and in the aggregate, will not have a material
adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On December 1, 1997, the shareholders of the Company unanimously consented
in writing pursuant to Section 228(a) of the General Corporation Law of the
State of Delaware (the "DGCL") to the adoption of the following resolutions:

(a) Approval of an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Odyssey Communications,
Inc. to Big City Radio, Inc.;

14

(b) Approval of the Big City Radio, Inc. 1997 Incentive Stock Plan (the
"Plan");

(c) Approval of the exchange of each share of Old Common Stock of the
Company that may be issued upon exercise of options granted under the Plan
for 7,610 shares of Class A Common Stock, effective upon the consummation of
the Company's IPO; and

(d) Approval of an amendment to the certificate of formation of the
Company's limited liability companies subsidiaries' to change their name,
following the change of name of the Company.

On December 18, 1997, the shareholders of the Company unanimously consented
in writing pursuant to Section 228(a) of the DCGL to the adoption of the
following resolutions, effective immediately prior to the consummation of the
Company's IPO:

(a) Appointment of Ms. Silvia Kessel, Mr. Arnold L. Wadler and Mr.
Leonard White as directors of the Company. The Principal Stockholders and
Mr. Michael Kakoyiannis continued as directors of the Company;

(b) Approval of the Company's Amended and Restated Certificate of
Incorporation and Bylaws;

(c) Approval of the exchange of each share of Old Common Stock for 7,610
shares of Class A Common Stock;

(d) Amendment to the employment agreements of Mr. Michael Kakoyiannis,
Mr. Paul R. Thomson, Mr. Steven G. Blatter and Mr. Alan D. Kirschner; and

(e) Revocation of the Company's election to be taxed as an S corporation
under the Internal Revenue Code of 1986, as amended.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the executive
officers of the Company as of the date of this report.

NAME AGE OFFICE OR POSITION HELD
- ------------------------------------ --- ---------------------------------------------------------------------

Michael Kakoyiannis................. 55 Chief Executive Officer and President
Steven G. Blatter................... 31 Vice President--Programming
Alan D. Kirschner................... 46 Vice President--Engineering
Bryan Subotnick..................... 34 Executive Vice President--Corporate Development
Paul R. Thomson..................... 41 Vice President, Chief Financial Officer and Treasurer
Silvia Kessel....................... 47 Executive Vice President
Arnold L. Wadler.................... 54 Executive Vice President, General Counsel, Secretary and Director

Officers, subject to the terms of their respective employment agreements,
serve at the pleasure of the Board of Directors.

Set forth below is the background of each of the Company's executive
officers, certain of whom also act as directors, as indicated.

MICHAEL KAKOYIANNIS founded the Company in 1994 and has served as Chief
Executive Officer, President and a Director of the Company since its inception.
Mr. Kakoyiannis has over 25 years of experience in the radio broadcasting
business in major metropolitan markets. Prior to joining the Company, Mr.
Kakoyiannis was Executive Vice President of the Westwood One Stations Group
("Westwood One"), which operated three stations in Los Angeles and New York:
WNEW-AM and WYNY-FM in New York and KQLZ-FM, known as "Pirate Radio," in Los
Angeles. Additionally, Mr. Kakoyiannis was Vice President and General Manager of
all three stations. Prior to his tenure at Westwood One, Mr. Kakoyiannis was an
Executive Vice President from 1986 to 1989 at Metropolitan Broadcasting, a

15

company that was owned by Metromedia and its predecessor, and controlled nine
stations that were generally located in major metropolitan markets.

STEVEN G. BLATTER has been serving as Vice President in charge of
Programming for the Company since 1995. Mr. Blatter served as Program Director
for the radio station WRGX-FM, which is owned by the Company, from 1993 to 1995
and as Director of Programming for MJI Broadcasting from 1991 to 1993. Mr.
Blatter served as Music Director for the radio station WYNY-FM owned by Westwood
One Stations Group, from 1988 to 1991.

ALAN D. KIRSCHNER has been a Vice President of the Company since September
1997 and a Director of Engineering since July 1995. Mr. Kirschner has been
serving as radio technical consultant for AM and FM radio stations since 1972.
Mr. Kirschner served as Chief Engineer responsible for technical operations of
radio station WYNY owned by Broadcasting Partners, Inc. and Evergreen Media, in
New York from 1993 to 1995 and a Director of Engineering for Westwood One
Stations Group in New York from 1988 to 1993.

BRYAN SUBOTNICK has served as Executive Vice President--Corporate
Development of the Company since September 1997. Mr. Subotnick served as Vice
President of the Company from January 1997, and Director of Operations from May
1995 to December 1996. Prior to joining the Company, Mr. Subotnick was Vice
President and General Counsel of Papamarkou & Company, an international finance
and investment company, in 1995, and as a General Partner in the law firm of
Shanker & Subotnick, which specialized in entertainment law, from 1992 to 1994.
Mr. Subotnick is the son of Stuart Subotnick, the Chairman of the Board of
Directors of the Company, and of Anita Subotnick, a director of the Company.

PAUL R. THOMSON has served as Vice President of the Company since September
1997 and as Chief Financial Officer of the Company since January 1996. Prior to
joining the Company, Mr. Thomson served as Corporate Controller of Herbalife
International, Inc. from 1993 to 1996, as Chief Financial Officer of Bernard
Salick Companies from 1992 to 1993 and as Controller--Radio Stations Group of
Westwood One, Inc. from 1989 to 1992. Prior to 1992, Mr. Thomson worked with
Price Waterhouse LLP for 12 years in London, Caracas and Los Angeles. He is a
certified public accountant and a member of the Institute of Chartered
Accountants in England and Wales.

SILVIA KESSEL has served as a Director of the Company since December 1997
and has served as Executive Vice President of the Company since September 1997.
Ms. Kessel has served as Executive Vice President of Metromedia Fiber Network,
Inc. ("Metromedia Fiber"), a provider of high bandwidth, fiber optic
transmission capacity, since October 1997, Chief Financial Officer and Treasurer
of Metromedia International Group, Inc. ("MMG"), an international media and
communications company that owns radio stations in Eastern Europe and Russia,
since 1995 and Executive Vice President of MMG since 1996. In addition, Ms.
Kessel served as Executive Vice President of Orion Pictures Corporation
("Orion") from January 1993 through July 1997, and has served as Senior Vice
President of Metromedia since 1994 and President of Kluge & Company since
January 1994. Prior to that time, Ms. Kessel served as Senior Vice President and
a Director of Orion from June 1991 to November 1992 and Managing Director of
Kluge & Company from April 1990 to January 1994. Ms. Kessel is a member of the
Board of Directors of MMG and Metromedia Fiber.

ARNOLD L. WADLER has served as a Director and General Counsel of the Company
since December 1997 and has served as Executive Vice President and Secretary of
the Company since September 1997. Mr. Wadler has served as Director of
Metromedia Fiber since July 1997, General Counsel of Metromedia Fiber since
August 1997, Secretary of Metromedia Fiber since October 1997, Executive Vice
President, General Counsel and Secretary of MMG since August 29, 1996 and, from
November 1, 1995 until that date, as Senior Vice President, General Counsel and
Secretary of MMG. In addition, Mr. Wadler serves as a director of MMG and has
served as a Director of Orion from 1991 until July 1997 and as Senior Vice
President, Secretary and General Counsel of Metromedia for over five years.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Class A Common Stock is listed and traded on the American
Stock Exchange (the "AMEX") under the symbol "YFM" since December 19, 1997.
There is no established public trading market for the Company's Class B Common
Stock. The following table sets forth the high and low sales prices per share of
the Class A Common Stock as reported by the AMEX since December 19, 1997:

HIGH LOW
--------- ---------

First Quarter................................................................ N/A N/A
Second Quarter............................................................... N/A N/A
Third Quarter................................................................ N/A N/A
Fourth Quarter............................................................... 7 31/32 7 11/32

On March 24, 1998, the last reported sales price for the Company's Class A
Common Stock by the AMEX was $10.625 per share. As of March 24, 1998, there were
approximately nine registered holders of record of Class A Common Stock, which
number includes nominees for an undeterminable number of beneficial owners, and
two holders of Class B Common Stock.

The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained to finance the expansion and continued development of its business. Any
future determination with respect to the payment of dividends will be within the
sole discretion of the Company's Board of Directors and will depend upon, among
other things, the Company's earnings, capital requirements, the terms of then
existing indebtedness, applicable requirements of the DGCL, general economic
conditions and such other factors considered relevant by the Company's Board of
Directors. The Revolving Credit Facility and the Company's Notes also contain
certain restrictions on the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

On December 24, 1997, the Company successfully completed an underwritten
Initial Public Offering lead managed by Donaldson, Lufkin & Jenrette Securities
Corporation and Furman Selz LLC of 4,600,000 shares of Class A Common Stock at
an offering price of $7.00 per share, generating $29.0 million of net proceeds.
In connection with its IPO, the Company filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (file no.
333-36449) for the registration of shares of Class A Common Stock for an
aggregate offering price of $46,000,000, which registration statement was
declared effective by the Commission on December 18, 1997. The Company paid
$1,960,000 ($0.49 per share) in underwriting discounts and commissions and
approximately $1,400,000 in registration fees, NASD filing fees, AMEX listing
fees, printing, engraving, legal, accounting, Blue Sky and other fees and
expenses for the offering. The net proceeds of $28.5 million after deducting
underwriting discounts and commissions and offering expenses were used to repay
outstanding indebtedness of the Company under its Old Credit Facility.

On December 19, 1997, the Company's Old Common Stock was reclassified into
Class A Common Stock and Class B Common Stock and the Principal Stockholders
exchanged all their shares of Class A Common Stock for a similar number of
shares of Class B Common Stock. These transactions were effected without
registration under the Securities Act in reliance on the exemption from
registration provided pursuant to Section 3(a)(9) or Section 4(2) and Regulation
D promulgated thereunder.

17

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data and should be read in
conjunction with the Company's financial statements and the related notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. The selected balance sheet
data as of December 31, 1995 and 1994, and September 30, 1993 and 1994 and
statement of operations data for the year ended December 31, 1995, the three
months ended December 31, 1994 and the years ended September 30, 1993 and 1994
are derived from the Company's financial statements which have been audited by
Holtz Rubenstein & Co., LLP, Certified Public Accountants. The selected balance
sheet data as of December 31, 1996 and 1997 and statement of operations data for
the year ended December 31, 1996 and 1997 are derived from the Company's
financial statements which have been audited by KPMG Peat Marwick LLP,
Independent Certified Public Accountants. The historical financial results of
the Company are not comparable from period to period because of the acquisition
and sale of various broadcasting properties by the Company during the periods
covered.

THREE MONTHS
YEARS ENDED ENDED
SEPTEMBER 30, DECEMBER 31, YEARS ENDED DECEMBER 31,
-------------------- --------------- ------------------------
1993 1994 1994(1) 1995(1)(2) 1996(3)(4)
--------- --------- --------------- ----------- -----------

(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Gross revenues............................................ $ 1,511 $ 2,267 $ 654 $ 5,655 $ 8,567
Net revenues.............................................. 1,383 2,074 604 5,225 7,944
Station operating expenses................................ 2,325 2,326 687 7,185 12,253
Corporate, general and administrative expenses............ -- -- -- 425 1,201
Employment incentives..................................... -- -- -- -- --
Depreciation and amortization............................. 622 524 113 798 1,388
Operating loss............................................ (1,563) (776) (196) (3,183) (6,898)
Gain on sale.............................................. -- -- -- -- (6,608)
Interest expense.......................................... 258 439 120 842 2,827
Income tax benefit........................................ -- -- -- -- --
Deferred income taxes resulting from conversion to C
corporation status...................................... -- -- -- -- --
Extraordinary loss on extinguishment of debt, net of
income taxes............................................ -- -- -- -- --
Net (loss)................................................ (1,807) (1,163) (298) (4,005) (3,098)

BASIC INCOME (LOSS) PER COMMON SHARE:..................... (0.30) (0.19) (0.05) (0.66) (0.39)

1997(5)
----------

STATEMENT OF OPERATIONS DATA:
Gross revenues............................................ $ 11,731
Net revenues.............................................. 10,460
Station operating expenses................................ 12,466
Corporate, general and administrative expenses............ 1,745
Employment incentives..................................... 3,863
Depreciation and amortization............................. 2,444
Operating loss............................................ (10,058)
Gain on sale.............................................. --
Interest expense.......................................... 4,348
Income tax benefit........................................ 1,050,000
Deferred income taxes resulting from conversion to C
corporation status...................................... (3,350,000)
Extraordinary loss on extinguishment of debt, net of
income taxes............................................ (313,000)
Net (loss)................................................ (16,918)
BASIC INCOME (LOSS) PER COMMON SHARE:..................... (1.77)

AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- ------------------------------------------
1993 1994 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------

BALANCE SHEET DATA:
Cash..................................................... $ 20 $ 56 $ -- $ 1,066 $ 234 $ 80
Intangibles, net......................................... 2,942 2,666 2,600 6,040 29,230 54,115
Total assets............................................. 4,037 4,044 3,863 9,433 38,963 60,108
Notes payable to stockholders............................ 4,923 6,028 6,219 13,477 12,544 --
Long-term debt, including current portion................ -- -- -- -- 28,200 30,100
Stockholder's equity (deficit)........................... (1,022) (2,185) (3,484) (5,821) (3,800) 25,032

- ------------------------

(1) The financial statements for the 12 months ended December 31, 1995 include
three months (October, November and December 1994) of operations of Q
Broadcasting, Inc. that were included in the three months ended December 31,
1994 financial statements. Revenues and net income for the duplicate period
are $604,000 and $298,000, respectively.

(2) The Company acquired substantially all of the assets of WRGX-FM and WRKL-AM
effective December 31, 1994 and commenced operations on January 1, 1995. The
financial statements include the operations of these stations since January
1, 1995.

18

(3) The Company acquired substantially all of the assets of the Los Angeles
Stations and KWIZ-FM on May 30, 1996 and commenced operations of these
stations under a LMA on March 26, 1996. The financial statements include the
operations of these stations from commencement of the LMA period. KWIZ-FM
was sold on December 20, 1996. No gain or loss was recognized on the sale of
KWIZ-FM.

(4) The Company acquired WSTC-AM and WKHL-FM during 1992. The financial
statements include the operations of these stations from their date of
acquisition to May 30, 1996, the date on which they were sold. For the year
ended December 31, 1996, the gain on sale of stations represents the gain on
sale of WSTC-AM and WKHL-FM.

(5) The Company acquired substantially all of the assets of WWHB-FM on April 1,
1997 and WZVU-FM on June 5, 1997 and commenced operations of these stations
under a LMA during December 1996. WWHB-FM and WZVU-FM together with WRGX-FM
form Y-107 NY. The financial statements include the operations of Y-107 NY
since December 1996.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

The following discussion should be read in conjunction with "Selected
Financial Data" and the other financial data appearing elsewhere in this report.
Certain information included herein contains statements that constitute
"forward-looking statements" containing certain risks and uncertainties. See
"Business-- Special Note Regarding Forward-Looking Statements."

GENERAL

The Company was incorporated in August 1994 and commenced operations on
January 1, 1995, having acquired WRGX-FM, Briarcliff Manor, New York, and
WRKL-AM, Pomona, New York (together, the "Original New York Stations"), on
December 31, 1994. On May 30, 1996 the Company merged with Q Broadcasting, Inc.
("Q") in a transaction accounted for as a combination of entities under common
control. As a result of this merger the two entities are deemed to be combined
since inception (see notes to the financial statements included elsewhere in
this report). Q owned and operated the Q stations in Stamford, Connecticut, from
July 1992 up to the date of the combination with the Company. The Company
reports on the basis of a December 31 year-end and Q reported on the basis of a
September 30 year-end. As a result, the December 31, 1996 and 1995 financial
statements reflect the operations of Q on the basis of the eight month period
ended May 30, 1996 (the date of sale of the Q stations) and the 12 months ended
September 30, 1995, respectively.

The Q stations were operated in one facility, with one sales and support
staff. Their financial performance is combined for purposes of the discussions
that follow. Y-107 LA, Y-107 NY, WRKL-AM, and the stand-alone operations of
WRGX-FM were operated with separate staffs and facilities, therefore their
performance is separately identified.

Between March 26, 1996 and May 30, 1996, when the stations were acquired,
the Company operated the Los Angeles Stations and KWIZ-FM under a LMA. On March
26, all of the existing operations of the Los Angeles Stations were terminated,
and the Company debuted Y-107 LA under a modern rock format with new staffing
and no existing advertiser base. Although commencing with no revenues, Y-107 LA
revenues had surpassed all other Company revenues combined by November 1996.
During the LMA period, station operating expenses include significant LMA fees
and other reimbursed expenses to the seller. KWIZ-FM was sold on December 20,
1996.

On December 5, 1996, the Company commenced operation of WWZY-FM (formerly,
WZVU-FM), Long Branch, New Jersey, under a LMA, changing its format to country
music. On that date, WWXY-FM (formerly, WRGX-FM), Briarcliff Manor, New York,
which the Company had operated as a stand-alone FM station since its acquisition
on January 1, 1995, changed format to broadcast Y-107 NY as a new country music
station with WWZY-FM. Furthermore, on December 30, 1996 the Company began
operating WWVY-FM (formerly, WWHB-FM), Hampton Bays, New York, under a LMA.
Since that date, the New York Stations have operated as Y-107 NY. Y-107 NY
retained certain advertisers and staff from all three of the previously
stand-alone stations. WWVY-FM and WWZY-FM were subsequently acquired on April 1,
1997 and June 5, 1997, respectively.

19

On August 8, 1997 the Company acquired WVVX-FM, Highland Park, Illinois, and
WJDK-FM, Morris, Illinois. Since February 1998, the Chicago Stations have
operated as FM-103.1, broadcasting an adult contemporary format.

RESULTS OF OPERATIONS

The Company's financial results are dependent on a number of factors,
including the general strength of the local and national economies, local market
competition, the relative efficiency and effectiveness of radio broadcasting
compared to other advertising media, government regulation and policies and the
Company's ability to provide popular programming. The performance of a radio
station group is customarily measured by its ability to generate broadcast cash
flow, calculated as station operating income or loss excluding depreciation and
amortization and corporate overhead. This measure, although widely used in the
broadcast industry as a measure of operating performance, is not calculated in
accordance with generally accepted accounting principles. Broadcast cash flow
should not be considered in isolation or as a substitute for operating income,
net income, cash flows from operating activities, or any other measure for
determining the Company's operating performance or liquidity calculated in
accordance with generally accepted accounting principles.

The Company's primary source of revenue is the sale of advertising. Total
revenue is determined by the number of advertisements aired by the station and
the advertising rates that the stations are able to charge. See
"Business--Advertising Sales."

Given the fact that the Company's strategy involves developing a brand new
metropolitan area radio station, the initial revenue base is zero and subject to
factors other than ratings and radio broadcasting seasonality. After the
start-up period, as is typical in the radio broadcasting industry, the Company's
first calendar quarter generally will produce the lowest revenues for the year,
and the fourth quarter generally will produce the highest revenues for the year.
The Company's operating results in any period may be affected by the incurrence
of advertising and promotion expenses that do not produce commensurate revenues
in the period in which the expenses are incurred.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR END DECEMBER 31, 1996

NET REVENUES in the year ended December 31, 1997 were $10,460,000 as
compared to $7,944,000 for the year ended December 31, 1996, an increase of
$2,516,000, or 32%. This increase was due primarily to an increase of $4,647,000
in the net revenues of Y-107 LA compared to the prior year and an increase of
the Y-107 NY net revenues in the year ended December 31, 1997 of $1,120,000, or
67%, compared to the net revenues of the stand-alone WWXY-FM in 1996. These
increases in net revenues were partially offset by (a) the absence of net
revenues for the Q stations and KWIZ-FM in the year ended December 31, 1997
compared to $2,050,000 and $1,106,000 net revenues, respectively, for the year
ended December 31, 1996, and (b) the fact that WRKL-AM net revenues in the year
ended December 31, 1997 were down $249,000, or 16%, when compared to 1996. The
Y-107 LA increase was principally due to the fact that (a) the 1997 net revenues
include twelve months of Y-107 LA operations, whereas the 1996 net revenues
include only nine months of Y-107 LA operations, and (b) the 1996 period net
revenues were the first nine months of operation of the Los Angeles Stations
which was commenced with no existing business. The Y-107 NY increase reflects
growth resulting from the commencement of the initial broadcast of Y-107 NY in
January 1997.

STATION OPERATING expenses excluding depreciation and amortization in the
year ended December 31, 1997 were $12,466,000, as compared to $12,253,000 in the
year ended December 31, 1996, an increase of $213,000, or 2%. This increase was
due to the inclusion of the expenses of Y-107 LA and Y-107 NY offset by the
absence of operating expenses of the Q Stations. The increase in Y-107 LA
operating expenses reflects the fact that (a) the 1997 station operating
expenses represent twelve months of operations as compared to nine months
operations reported in 1996, and (b) the nine month operations in 1996 were the

20

first nine months of operation of the station, reflecting incomplete staffing
and the absence of significant marketing initiatives, offset by the expense of
LMA fees and expenses of $593,000 incurred in 1996. The increase in the Y-107 NY
operating expenses when compared to the prior year operating expenses of the
stand-alone WWXY-FM were due to (a) $540,000 of non-recurring LMA fees and
expenses for WWZY-FM and WWVY-FM, (b) significantly increased advertising and
promotional expenditures incurred to launch Y-107 NY and (c) increased selling
and general and administrative expenses in developing the Y-107 NY
infrastructure.

DEPRECIATION AND AMORTIZATION EXPENSES for the year ended December 31, 1997
were $2,444,000, as compared to $1,388,000 for the prior year, an increase of
$1,056,000, or 76%. This increase was due primarily to the amortization of
intangibles and depreciation of capital assets related to the acquired stations.

CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December
31, 1997 were $1,745,000, as compared to $1,201,000 for the prior year, an
increase of $544,000, or 45%. This increase was primarily due to increases in
administrative staff to support the growth of the Company.

INTEREST EXPENSE for the year ended December 31, 1997 was $4,348,000 as
compared to $2,827,000 for the prior year, an increase of $1,521,000, or 54%.
This increase reflects borrowings under the Old Credit Facility made to fund the
Company's acquisitions, and (b) increased stockholders' loans throughout 1997
compared to 1996. In the years ended December 31, 1997 and 1996, the average
outstanding total debt for the Company was $56,898,000 and $37,026,000,
respectively. The average rate of interest on the outstanding debt was 7.6% and
7.6%, respectively.

NET LOSSES for the year ended December 31, 1997 were $16,918,000, as
compared to $3,098,000 for the prior year. The increase in the net loss of
$13,820,000 was primarily attributable to (a) 1996 period gain of $6,608,000 on
the sale of the Q stations, (b) higher interest expense and depreciation and
amortization expenses incurred as part of the radio station acquisitions of the
Company, (c) a charge of $3,863,000 in 1997 relating to awards under the
employment incentive arrangements, and (d) a one-time income tax charge of
$3,350,000 relating to the change in taxable status of the Company from an S
corporation to a C corporation, offset by the absence of the Q stations
operations in 1997 and improvement in the Y-107 LA performance.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

NET REVENUES in the year ended December 31, 1996 were $7,944,000 as compared
to $5,225,000 for the year ended December 31, 1995, an increase of $2,719,000,
or 52%. This increase was primarily due to (a) net revenues of $1,567,000 and
$1,106,000 from the Company's LMA operation and acquisition of the Los Angeles
Stations and KWIZ-FM, respectively, and (b) an increase in net revenues of
WRKL-AM of $320,000 for the year ended December 31, 1996 compared to the prior
year. This increase was partially offset by decreases in net revenues of the Q
stations of $237,000 due to their shorter period of operation and a small
decrease in net revenues of $36,000 at WRGX-FM.

STATION OPERATING EXPENSES excluding depreciation and amortization for the
year ended December 31, 1996 were $12,253,000, as compared to $7,185,000 in the
year ended December 31, 1995, an increase of $5,068,000, or 71%. This increase
was primarily due to (a) station operating expenses of $3,870,000 and $359,000
from the Company's LMA operation and acquisition of Y-107 LA and KWIZ-FM,
respectively, (b) an increase in WRKL-AM station operating expenses of $412,000
for the year ended December 31, 1996 compared to the prior year and (c) an
increase of $476,000 in the Q stations operating expenses. The 1996 Y-107 LA
operating costs of $3,870,000 include $593,000 of non-recurring LMA expenses
incurred during the two-month period ended May 30, 1996. The increased WRKL-AM
and Q stations operating costs in 1996 when compared to 1995 reflect significant
investments in sales, marketing, programming and administrative support to grow
the stations' ratings.

21

DEPRECIATION AND AMORTIZATION EXPENSES for the year ended December 31, 1996
were $1,388,000, as compared to $798,000 for the year ended December 31, 1995,
an increase of $590,000, or 74%. This increase was due primarily to the
amortization of intangibles and the depreciation of capital assets acquired
related to the Y-107 LA and KWIZ-FM acquisitions.

CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December
31, 1996 were $1,201,000, as compared to $425,000 for the year ended December
31, 1995, an increase of $776,000, or 182%. This increase is due to the
establishment of a corporate staff during 1995 and early 1996 to support
implementation of the Company's business plan.

INTEREST EXPENSE for the year ended December 31, 1996 was $2,827,000, as
compared to $842,000 for the year ended December 31, 1995, an increase of
$1,985,000, or 236%. This increase reflects (a) the initial borrowings of $31
million under the Old Credit Facility made to fund, in part, the acquisition of
Y-107 LA and KWIZ-FM on May 30, 1996, and (b) increased stockholders' loans
throughout 1996 compared to 1995. In the year ended December 31, 1996 and 1995,
the average outstanding total debt for the Company was $37,026,000 and
$11,390,000, respectively. The average rate of interest on the outstanding debt
was 7.6% and 7.4%, respectively.

NET LOSSES for the year ended December 31, 1996 were $3,098,000, as compared
to $4,005,000 for the year ended December 31, 1995, a decrease of $907,000, or
23%. The net decrease is primarily attributable to the gain on the sale by the Q
stations of $6,608,000 and increased net revenue, offset by (a) higher interest
expense and depreciation and amortization expenses incurred as part of the radio
station acquisitions of the Company, and (b) an increase in station operating
expenses as the Company reconfigured and developed the Los Angeles Stations.

LIQUIDITY AND CAPITAL RESOURCES

The Company has reported net losses since inception primarily due to
broadcast cash flow deficits characteristic of the start up of Y-107 LA and
Y-107 NY, and depreciation and amortization charges relating to the Company's
acquisition of radio stations, as well as interest charges on its outstanding
debt. In addition, because its broadcast properties are in the early stages of
development, the Company expects to generate significant net losses as it
continues to expand its presence in major markets. Accordingly, the Company
expects to generate consolidated net losses for the foreseeable future. As a
result, working capital needs have been met by borrowings, including loans from
the Principal Stockholders (which borrowings were contributed to the capital of
the Company immediately prior to the consummation of the Initial Public
Offering) and borrowings under the Old Credit Facility. The Company has entered
into various employment contracts with thirteen individuals comprised of mainly
officers and senior management that provide for minimum salaries and incentives
based upon specified levels of performance. The minimum payments under these
contracts are $1,725,000 in 1998, $470,000 in 1999 and $300,000 in 2000.

The Company has never paid cash or stock dividends on shares of its common
stock. The Company will continue to report net losses throughout the start up
period for the Chicago Stations. Furthermore, it intends to retain future
earnings for use in its business and does not anticipate paying dividends on
shares of its Common Stock in the foreseeable future.

CASH FLOWS FROM OPERATING ACTIVITIES

In each of the years ended December 31, 1995, 1996 and 1997, the Company
reported cash used in operations. In the year ended December 31, 1996 these
negative cash flow were predominantly due to the funding of start-up operations
at Y-107 LA, together with an increase in interest expense in both periods, as
borrowings under the Old Credit Facility were used to fund the Y-107 LA radio
station acquisition. In the year ended December 31, 1997, the deficit was
predominantly due to the start-up operating losses of Y-107 NY and increased
interest expense for borrowings under the Old Credit Facility to finance the
Y-107 NY and Chicago radio station acquisitions.

22

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures (excluding acquisitions of radio stations) were
$333,000, $653,000 and $488,000 in the years ended December 31, 1995, 1996 and
1997, respectively. These expenditures primarily reflect costs associated with
the FCC Power Increases and other technical improvements at the Company's
stations, the upgrade and expansion of the studio and broadcast facilities,
computer support equipment, and the purchase of promotional vehicles for the
newly formed trimulcast stations. The Company has to date spent less than
$250,000 per station group for the upgrades and other technical improvements
associated with the implementation of its STMC-TM- concept for power increases
at such station groups.

CASH FLOWS FROM FINANCING ACTIVITIES

Under the terms of the Old Credit Facility, the Company had a $35.0 million
reducing revolving loan facility, of which amount Mr. Subotnick had guaranteed
the payment of up to $6.0 million. At December 31, 1997, the Company had $30.1
million outstanding under the Old Credit Facility. The amounts outstanding under
the Old Credit Facility were repaid with the proceeds of the Notes Offering on
March 17, 1998.

The Company completed a private placement of $174.0 million aggregate
principal amount of Notes on March 17, 1998, generating approximately $125.4
million of gross proceeds for the Company of which the Company used
approximately $32.8 million to repay outstanding indebtedness under its Old
Credit Facility. The Company intends to use the remaining proceeds of the Notes
Offering to finance the acquisition costs of radio station properties and for
general working capital purposes.

The Notes were issued at an original issue discount and will accrete in
value until March 15, 2001 at a rate of 11 1/4% per annum, compounded
semi-annually to an aggregate principal amount of $174.0 million. Cash interest
will not accrue on the Notes prior to March 15, 2001. Thereafter, interest on
the Notes will accrue at a rate of 11 1/4% per annum and will be payable in cash
semi-annually, commencing September 15, 2001. The Notes will mature on March 15,
2005 but may be redeemed after March 15, 2001 at the option of the Company, in
whole or in part at a redemption price of 105.625%, 102.813% or 100.000% if
redeemed during the 12-month period commencing on March 15 of 2002, 2003 and on
and after 2004, respectively. In addition, up to 33 1/3% of the original
principal amount of the Notes may be redeemed at the option of the Company prior
to March 15, 2001 at a redemption price equal to 111.25% of the accreted value
of the Notes with net cash proceeds of one or more equity offerings of the
Company so long as there is a public market for the Class A Common Stock at the
time of such redemption and provided that at least 66 2/3% of the original
principal amount of the Notes remains outstanding.

Holders of the Notes have the right to require the Company to repurchase
their Notes upon a "change of control" of the Company, at a price equal to 101%
of the accreted value of the Notes if such repurchase occurs prior to March 15,
2001 or of the principal amount of such Notes if such repurchase occurs
thereafter. A "change of control" for purposes of the Notes is deemed to occur
(i) when any person other than the Principal Stockholders, the management and
their affiliates (the "Permitted Holders"), becomes the owner of more than 35%
of the total voting power of the Company's stock and the Permitted Holders own
in the aggregate a lesser percentage of such voting power and do not have the
right or ability to elect a majority of the Board of Directors, (ii) when the
Board of Directors does not consist of a majority of continuing directors, (iii)
upon the occurrence of a sale or transfer of all or substantially all of the
assets of the Company taken as a whole, or (iv) upon the adoption by the
stockholders of a plan for the liquidation or dissolution of the Company.

Payments under the Notes are guaranteed on a senior unsecured basis by the
Company's restricted subsidiaries. The Notes contain certain financial and
operational covenants and other restrictions with which the Company and its
restricted subsidiaries must comply, including restrictions on the incurrence of
additional indebtedness, investments, payment of dividends on and redemption of
capital stock and the redemption of certain subordinated obligations, sales of
assets and the use of proceeds therefrom,

23

transactions with affiliates, creation and existence of liens, the types of
businesses in which the Company may operate, asset swaps, distributions from
restricted subsidiaries, sales of capital stock of restricted subsidiaries and
consolidations, mergers and transfers of all or substantially all of the
Company's assets. The Company is currently in compliance with all covenants and
other restrictions under the Notes and anticipates that it will continue to meet
the requirements of the Notes.

The Notes contain customary events of default including payment defaults and
default in the performance of other covenants, certain bankruptcy defaults,
judgment and cross defaults, and failure of a subsidiary guarantee to be in full
force and effect.

In connection with the consummation of the Notes Offering, the Company
entered into the Revolving Credit Facility with The Chase Manhattan Bank
("Chase") providing for up to $15.0 million of availability, based upon a
multiple of the Company's Los Angeles Stations' cash flow. The Revolving Credit
Facility will mature on the fifth anniversary of the Issue Date and amounts
outstanding under the Revolving Credit Facility will bear interest at an
applicable margin plus, at the Company's option, Chase's prime rate (in which
case the applicable margin will initially be 2.00% subject to reduction upon
obtaining performance criteria based on the Company's leverage ratio) or the
London Interbank Borrowing Rate (in which case the applicable margin will
initially be 3.00% subject to reduction upon obtaining performance criteria
based on the Company's leverage ratio). The Company's obligations under the
Revolving Credit Facility are secured by a pledge of substantially all of the
Company's and its restricted subsidiaries' assets. The Company will pay fees of
0.5 percent per annum, on the aggregate unused portion of the facility.

The Revolving Credit Facility contains certain financial and operational
covenants and other restrictions with which the Company must comply, including,
among others, limitations on capital expenditures, the incurrence of additional
indebtedness, restrictions on sales of assets, restrictions on the use of
borrowings, limitations on paying cash dividends and redeeming or repurchasing
capital stock of the Company or the Notes, and requirements to maintain certain
minimum interest coverage ratios. The Company is currently in material
compliance with all covenants and other restrictions under the Revolving Credit
Facility and anticipates that it will continue to meet the requirements of the
Revolving Credit Facility.

The Revolving Credit Facility contains customary events of default,
including material misrepresentations, payment defaults and default in the
performance of other covenants, certain bankruptcy and ERISA defaults, judgment
and cross defaults, revocation of any of the Company's broadcast licenses and
change in control. The Revolving Credit Facility also provides that an event of
default will occur upon the occurrence of a "change of control" as defined in
the Revolving Credit Facility. For purposes of the Revolving Credit Facility, a
change of control will occur when (i) any person or group other than the
Principal Stockholders and their affiliates obtains the power to elect a
majority of the Board of Directors, (ii) the Company fails to own 100% of the
capital stock of its subsidiaries owning any of the FCC broadcast licenses, or
when (iii) the Board of Directors does not consist of a majority of continuing
directors.

The Company is actively reviewing potential STMC-TM-, and other station
acquisition candidates. As of the date of this report, the Company has no
binding commitments for any such acquisitions. See "Business--Acquisitions."
After giving effect to the Notes Offering and application of the net proceeds
therefrom, the Company has available approximately $88.5 million of cash on hand
and up to $15.0 million of borrowing capacity under the Revolving Credit
Facility, which can be used for working capital purposes, including financing
these acquisitions. Cash on hand and amounts available under the Revolving
Credit Facility may not be sufficient to support the Company's growth strategy
and as a result the Company may require additional debt or equity financing in
order to acquire additional radio stations and accomplish its long-term business
strategies. There can be no assurance that any such financing will be available
or available on acceptable terms. In addition, because of the Company's
substantial indebtedness, a significant portion of the Company's broadcast cash
flow will be required for debt service.

24

The Company anticipates that the net proceeds of the Notes Offering, its
available borrowing capacity and its broadcast cash flow from operations will be
sufficient to finance its capital expenditure programs, as well as existing
operational and debt service requirements, through December 31, 1998. Management
believes that its long term liquidity needs will be satisfied through a
combination of (i) the Company's successful implementation and execution of its
growth strategy to acquire and build a major market broadcast group; and (ii)
the Company's properties achieving positive operating results and cash flows
through revenue growth and control of operating expenses. If the Company is
unable successfully to implement its strategy, the Company may be required to
obtain additional financing through public or private sale of debt or equity
securities of the Company or otherwise restructure its capitalization.

YEAR 2000

Some of the Company's older computer programs were written using two digits
rather than four to define the application year. As a result, those computer
programs each have time-sensitive softwares that recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause system failure or
miscalculations causing disruptions of operations, including, among other
things, temporary inability to process transactions, send invoices, or engage in
similar normal business activities.

The Company has completed the review of its systems and has initiated formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remedy their own year 2000 issues. All of the
systems tested and a majority of the third parties reviewed to date are year
2000 compliant. Year 2000 costs are not expected to have a material impact on
the Company's ongoing results of operations. There is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BIG CITY RADIO, INC.
INDEX TO FINANCIAL STATEMENTS

PAGE
---------

BIG CITY RADIO, INC.

Report of KPMG Peat Marwick LLP, Independent Auditors...................................................... 27

Report of Holtz Rubenstein & Co., LLP, Independent Auditors................................................ 28

Balance Sheets as of December 31, 1996 and 1997............................................................ 29

Statements of Operations for the years ended December 31, 1995, 1996 and 1997.............................. 30

Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.............................. 31

Statement of Stockholders' Deficit......................................................................... 32

Notes to Financial Statements.............................................................................. 33

26

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Big City Radio, Inc.:

We have audited the accompanying consolidated balance sheets of Big City
Radio, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited Schedule II, Combined Financial
Statement Schedules Valuation and Qualifying Accounts for the years ended
December 31, 1997 and 1996. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Big City
Radio, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Los Angeles, California
March 20, 1998

27

INDEPENDENT AUDITORS' REPORT

Board of Directors
Big City Radio, Inc.:

We have audited the accompanying statements of operations, stockholders'
deficit and cash flows for the year ended December 31, 1995 of Big City Radio,
Inc. (formerly Odyssey Communications, Inc.) These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Big City
Radio, Inc. for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.

Melville, New York
September 19, 1997

- -------------------

Holtz Rubenstein & Co., LLP
Certified Public Accountants

28

BIG CITY