Item 1  — Business

General

      Reading International, Inc., a Nevada corporation (“RII” and collectively with its consolidated subsidiaries and corporate predecessors, the “Company” or “Reading”), is the corporate successor to the Reading Railroad, initially organized in Pennsylvania in 1833. RII was incorporated in 1999 and, following the consummation of a consolidation transaction on December 31, 2001 (the “Consolidation”), is now the owner of the consolidated businesses and assets of Reading Entertainment, Inc., Craig Corporation, and Citadel Holding Corporation. These businesses consist primarily of:

	•	the development, ownership and operation of multiplex cinemas in the United States, Australia, New Zealand and Puerto Rico;
	•	the development, ownership and operation of cinema based entertainment-themed retail centers in Australia and New Zealand;
	•	the ownership and operation of “Off Broadway” style live theaters in Manhattan and Chicago; and
	•	as a business ancillary to its ownership and operation of cinemas, cinema based entertainment-themed retail centers and live theaters, the development, ownership and operation of commercial real estate in Australia, New Zealand and the United States.

      Reading considers itself to be essentially a cinema and theater operating company with a hard asset emphasis. At December 31, 2002, Reading had assets of approximately $182,772,000 and stockholders’ equity of approximately $91,265,000. Approximately 71% of these assets, or $129,664,000, consists of real estate, improvements to real estate and equipment. Approximately 59% of these assets, or $107,458,000, is represented by assets located in Australia and New Zealand, including undeveloped land carried on the Company’s books at approximately $19,745,000.

      Reading currently operates (directly or indirectly through consolidated entities or majority owned unincorporated joint ventures) 208 screens in 30 cinema complexes. In addition, it has a 50% unincorporated joint venture interests in an additional 13 screens in three cinema complexes in New Zealand and has agreed to acquire a 33% unincorporated joint venture interest in a 16-screen cinema complex in Australia. Reading’s real estate holdings include approximately 277,020 square feet of developed retail and office space in Australia, New Zealand and the United States and approximately 2,562,197 square feet of developable land located in various urban and suburban areas of Australia and New Zealand.

      A major focus of the Company’s efforts in 2003 is anticipated to be the development of an approximate 82,000 square foot shopping center on the Company’s 176,528-square foot parcel in Newmarket (a suburb of Brisbane), the development of an approximately 150,000 square foot retail and art cinema development as phase two of its entertainment-themed retail center in Wellington, New Zealand, and master planning for the development of the Company’s 50-acre site in Burwood (a suburb of Melbourne) as a mixed use residential, commercial and retail development.

      Reading’s Class A common stock and Class B common stock are listed for trading on the American Stock Exchange under the symbols RDI.A and RDI.B. Reading’s principal executive offices are located a 550 South Hope Street, Suite 1825, Los Angeles, California 90071. Its general telephone number is (213) 235-2240.

Background of the Company and Recent Material Transactions

General

      Reading International, Inc. is the product of the consolidation of three companies, Reading Entertainment, Craig Corporation and Citadel Holding Corporation. Prior to the Consolidation, each of these companies was a separate publicly traded company, but the three companies had substantial overlapping stock

1

Table of Contents

      While Citadel Holding Corporation is technically the surviving company, it changed its name to Reading International, Inc. incident to the Consolidation. This name change reflects the fact that the great bulk of the operating assets of the consolidated Company initially belonged to Reading Entertainment, Inc. and the fact that the Company’s current operations are predominantly international. Since, from a business point of view, the surviving business is principally that of Reading Entertainment, the following description of the history and background of the business of the newly consolidated Company draws principally from the history and background of Reading Entertainment, rather than Citadel Holding Corporation.

      Citadel Holding Corporation was originally incorporated in 1999 as a Nevada corporation. This Nevada corporation was itself the successor of Citadel Holding Corporation, a Delaware corporation (“CHC Delaware”) which in January 2000 reincorporated under the Laws of Nevada and, incident to that reincorporation, reclassified its common stock into 5,335,939 shares of Class A Non-Voting Common Stock, par value $0.01 per share (the “Class A Stock”) and 1,333,985 shares of Class B Voting Common Stock, par value $0.01 per share (the “Class B Stock”). On September 20, 2000, Citadel Holding Corporation issued 2,622,466 shares of its Class A Stock and 655,616 shares of its Class B Stock to acquire, through a subsidiary merger, the assets and business of Off Broadway Investments, Inc., which thereafter changed its name to Liberty Theaters, Inc. Liberty Theaters was, at that time, the operator of the three Manhattan live theaters now owned by the Company, and the owner of the fee interests in two of those theaters.

      As previously mentioned, on December 31, 2001, Citadel Holding Corporation consolidated with Craig Corporation (“CRG” and collectively with its consolidated subsidiaries “Craig”) and Reading Entertainment, Inc. (“REI and collectively with its consolidated subsidiaries “Old Reading”), and changed its name to Reading International, Inc. the name by which it is known today. Citadel Holding Corporation, as it existed prior to the Consolidation, is referred to herein as “Citadel.” The Consolidation was structured as a taxable merger of CRG and REI with newly formed subsidiaries of RII in which the holders of CRG common stock, CRG common preference stock and REI common stock received 15,094,432 shares of RII Class A common stock, increasing the total amount of Class A common stock outstanding to 20,484,993 shares. In the Consolidation, each holder of REI common stock received 1.25 shares of RII Class A common stock, and each holder of Craig common stock and Craig common preference stock received 1.17 shares of RII Class A common stock.

Historic Citadel Activities

      Citadel Holding Corporation, prior to the sale of substantially all of its interest in Fidelity Federal Bank in 1994, was originally formed as a savings and loan holding company. Following the sale of its interest in Fidelity, Citadel was principally in the real estate business, owning and operating commercial real estate, and providing real estate advisory services to its affiliate, Old Reading. During this period, Citadel also acquired in 1997 an interest in a California citrus farm known as the Big 4 Ranch, and in 1998 an interest in a Southern California based medical device manufacturer, Gish Biomedical, Inc.

      In 2000, Citadel entered the cinema exhibition and live theater business, principally taking advantage of opportunities for investment in these industries in the United States that, though attractive, were not practically available to Old Reading due to capital restraints. Since the Consolidation, the Company has been principally engaged in the business of owing and operating cinemas and live theaters in the United States, Australia, New Zealand and Puerto Rico, and in ancillary real estate development and management activities. In 2002, Reading divested its interest in the Big 4 Ranch and is currently in the process of liquidating its interest in Gish. These historic Citadel operations are discussed in greater detail below under the heading Certain Historic Investments and Businesses.

2

Table of Contents

Development of Reading’s Cinema and Entertainment-Themed Retail Center Development Activities

      Prior to 1976, Old Reading was principally in the transportation business, owning and operating the Reading Railroad. Following the disposition of substantially all of its rolling stock and active rail lines in 1976, Reading pursued a number of endeavors including the development of One Reading Center, a 600,000 square foot office complex located in Philadelphia, and initiated the activities which led to the development of the Pennsylvania Convention Center on land originally utilized by the Company for railroad purposes. Since 1976, the Company has steadily reduced its railroad real estate holdings.

      In 1993, following the sale of its last major railroad real estate asset — the historic Reading Terminal Headhouse in downtown Philadelphia — Old Reading entered the real estate based segment of the entertainment industry. Since that date, Reading has:

	(1) developed a chain of multiplex cinemas in Australia and New Zealand currently comprising 116 screens in seventeen cinemas operating under the “Reading” or “Berkeley” names and featuring principally conventional film product (“Reading International Cinemas”);
	(2) developed a chain of principally art and urban cinemas including the Angelika Film Center & Café complexes in Manhattan, Dallas and Houston (the “Reading Domestic Cinemas”), currently comprised of 54 screens in nine cinemas;
	(3) acquired and expanded a chain of multiplex cinemas in Puerto Rico currently comprising 52 screens in seven cinemas and featuring conventional film product (“CineVista”); and
	(4) acquired seven “off Broadway” style live theaters, located in four fee owned complexes, three in Manhattan and one in Chicago.

      In Australia and New Zealand, Reading is also in the business of developing entertainment-themed retail centers, typically consisting of a multiplex cinema, complementary restaurant and retail uses, and convenient parking, all located on land owned or controlled by the Company. Reading opened the cinema portion of its first entertainment-themed retail center in Perth in December 1999, and the cinema portion of a second and substantially larger entertainment-themed retail center in Auburn, a suburb of Sydney, in September 2000. A third complex was opened in Wellington, the Capital of New Zealand, in March 2002. These three entertainment-themed retail centers have, in the aggregate, approximately 121,933 square feet of restaurant and retail space (in addition to their cinema components), approximately 75% or 91,590 square feet of which is currently under lease or agreement to lease. The Wellington entertainment-themed retail center also includes a nine level, 1,086 space parking garage, which serves as an independent source of revenue providing parking to neighboring businesses and the Te Papa Museum.

      Reading, where feasible, prefers to own the land underlying its cinemas and live theaters. This means that many of Reading’s projects

	•	are more capital intensive,
	•	during the development phase, have longer lead times and entail greater development risks, and
	•	have, at least initially, lower cash returns

than those of companies focusing on the development of cinemas in leased facilities in established or newly developed malls. Reading believes that these risks are reasonably offset by the greater control and flexibility that the ownership of such sites provides to the Company and by the opportunity given to the Company to participate in the enhancement to the value of such land anticipated to result from the consumer traffic generated by a successful cinema operation and/or the passage of time.

      However, as Reading’s cinema exhibition operations have expanded, a larger and larger majority of its screens are being located in leased facilities. Currently 170 of the screens operated directly by the Company or through consolidated or unconsolidated joint ventures are located in twenty-five leased facilities, while 38 screens are located in five owned facilities. In addition, there are 13 screens in three cinemas owned

3

Table of Contents

      In addition to its entertainment-themed retail centers at Perth, Auburn and Wellington, currently in the leasing phase of their development, the Company owns a 124,754 square foot property in a Moonee Ponds, a suburb of Melbourne, which it continues to hold for potential development as an entertainment-themed retail center. The Company also owns a 176,528 square foot site in Newmarket (a suburb of Brisbane) and a 50-acre parcel in Burwood (a suburb of Melbourne), which were originally purchased as possible entertainment-themed retail center sites, but which are currently being held for non-cinema related development. The Brisbane site is currently being developed as a retail shopping center and it is currently anticipated that the Melbourne site will be development as a mixed use residential, commercial and retail project. No assurances can be given that any additional entertainment-themed retail centers will be built by the Company. The Company also owns a 95,530 square foot property adjacent to its Auburn center and a 37,674 square foot property adjacent to its Wellington center which are slated for development complimentary to those centers.

Reading’s Decision to Move out of Puerto Rico

      Reading has determined to focus its future cinema exhibition activities on Australia, New Zealand and the United States. This decision was made in large part due to the adverse competitive situation in Puerto Rico, where one competitor has acquired a greater than 82% market share and continues to build in an already overbuilt cinema market. While Reading has sought relief in the Puerto Rican courts, alleging violation of applicable antitrust laws, it is unlikely, given the pace of antitrust litigation in Puerto Rico, that assistance will be forthcoming within a time frame that would justify continued investment in Puerto Rico by Reading. Accordingly, Reading intends to exit the Puerto Rican market, when feasible. In 1999, Reading wrote down its investment in Puerto Rico from approximately $34,000,000 to approximately $3,000,000. Reading is currently in discussions with a potential buyer for these assets. However, no assurances can be given that these discussions will result in a sale of such assets. Reading intends, even if it is successful in disposing of its Puerto Rico assets, to continue its antitrust litigation in an attempt to recoup some portion of its losses in Puerto Rico. Again, no assurances can be given as to the ultimate outcome of that litigation.

Certain Historic Investments and Businesses

      In addition to its principal cinema and entertainment-themed retail center development activities, Reading continues to wind up its historic railroad related activities, including the sale or other exploitation of its residual real estate interests. Reading currently owns approximately 458 acres of land previously used in connection with its railroad related activities, most of which is located in Delaware and Pennsylvania.

      Reading also owns a 95,752 square foot office building with an associated 378 space parking garage and 50 space parking lot in Glendale, California, which is fully leased. The Glendale building was originally owned by Citadel and served as the executive headquarters for Fidelity Federal Bank, FSB, at the time Fidelity was owned by Citadel.

      In 1997, Citadel acquired a 40% general partnership interest in three agricultural partnerships (the “Agricultural Partnerships”), and an 80% membership interest in the farming company, Big 4 Farming, LLC (“Big 4 Farming”), which managed and farmed the properties owned by the Agricultural Partnerships. The Agricultural Partnerships owned approximately 1,600 acres of property in Kern County California, approximately 1,100 acres of which were improved with citrus orchards (“Big 4 Ranch”). Following the Consolidation, Reading determined to dispose of its interest in the Big 4 Ranch and to focus on its cinema, live theater and ancillary real estate businesses and in July 2002, the Agricultural Partnerships reconveyed their interests in the Big 4 Ranch to the original owner of the ranch in consideration of the satisfaction of all liabilities under the purchase money mortgage encumbering the ranch.

      In 1998, Citadel acquired 398,850 shares representing approximately 11.6% of the outstanding shares of Gish Biomedical, Inc. (“Gish”). From time to time Citadel purchased additional Gish shares, and the Company at December 31, 2002 held 583,900 shares representing approximately 16.3% of the outstanding shares of Gish. The initial purchase transaction was brought to Citadel by Value Asset Fund Limited

4

Table of Contents

Reading’s Focus Moving Forward

      Reading sees itself principally as a cinema and live theater exhibition company, but with a focus on real estate oriented assets. Currently, Reading, either directly or through joint venture interests, owns, or has the option to acquire at a fixed price, the fee interest in eight of its cinemas. Reading holds another three cinemas under long-term leases that permit a change of use of the property. In addition, Reading owns:

	•	the fee interest in all of its live theater complexes (three of which are located in Manhattan and one of which is located in Chicago);
	•	three in-fill suburban development sites in Australia (including a 50 acre parcel in suburban Melbourne);
	•	additional developable land contiguous to its Auburn and Wellington entertainment-themed retail centers (95,530 and 37,674 square feet, respectively);
	•	a 95,752 square foot office building in Glendale, California; and
	•	various miscellaneous land holdings related to its historic railroad activities.

      Accordingly, while it considers itself to be primarily in the cinema and live theater operating businesses, Reading also looks to build shareholder value through the appreciation of its real estate holdings and the opportunistic sale or development of these properties as dictated by their highest and best use from time to time.

      A significant focus of the Company in 2003 is anticipated to be the development of an approximately 82,000 square foot shopping center on its Newmarket property, the development of an approximately 150,000 square foot shopping center and art cinema complex as phase two of its Wellington entertainment-themed retail center, and master planning the development of its Burwood property as a multi-use project featuring residential, commercial and retail uses.

Financing Structure and Sources

      Reading currently uses a combination of fixed rate first mortgage finance and lines of credit to finance its assets and operations. Typically, Reading has used local currency financings with respect to its international activities. At the present time Reading’s borrowings may be summarized as follows:

	1.     Domestic Based Borrowings:

	•	$11 million non-recourse fixed rate first mortgage loan secured by its Glendale office building.
	•	$3.5 million non-recourse fixed rate first mortgage loan secured by its Union Square property, located at 100 E. 17th Street, New York, New York.
	•	$2.5 million LIBOR based first mortgage loan secured by its Royal George Theater property, located at 1633 N. Halsted, Chicago, Illinois.

5

Table of Contents

	2.     Australian Based Borrowings:

	•	AUS$30 million revolving bank line of credit loan to Reading Entertainment Australia Pty., Limited (“REA”) secured by a fixed and floating lien on all of the assets of REA and of its wholly owned subsidiaries (currently comprising substantially all of Reading’s assets in Australia). REA currently holds, directly or indirectly, all of Reading’s real estate and operating interests in Australia. The loan is without recourse to Reading’s assets outside of Australia.

	3.     New Zealand Based Borrowings:

	•	NZ$34.5 million bank credit facility to Reading New Zealand Limited (collectively with its consolidated subsidiaries “Reading New Zealand”) used to fund the construction of Reading’s Wellington entertainment-themed retail center, and secured by a fixed and floating charge against the center. The loan is without recourse to Reading’s assets outside of New Zealand.
	•	NZ$7 million bank credit facility secured by the three cinemas owned and operated by Berkeley Cinemas (in which Reading New Zealand holds a 50% joint venture interest). Two of these properties are owned in fee. The loan is guaranteed by Reading New Zealand to the extent of its interest in the joint venture. The loan is without recourse to Reading’s assets other than its interest in Berkeley Cinemas.

	4.     Off-Balance Sheet Financing Sources:

	•	In September 2000, Reading acquired from Sutton Hill Capital LLC (“Sutton Hill”) the Manhattan based City Cinemas circuit in a transaction structured as a 10 year operating lease (the “City Cinemas Operating Lease”) with options both to extend the lease for an additional 10 year term or, in the alternative, to purchase the improvements and certain of the land assets underlying that lease (the “City Cinemas Purchase Option”). The aggregate exercise price of the City Cinemas Purchase Option was $48 million. Incident to that transaction, Reading paid an option fee of $5 million (to be applied against the option exercise price, if exercised) and agreed to lend to Sutton Hill (the “City Cinemas Standby Credit Facility”) up to $28 million, beginning in July 2007 (the principal balance and accrued interest on any such loan also to be applied against the option exercise price, if exercised). Generally speaking, the interest rate on the City Cinemas Standby Credit Facility equates to the yield rate used to calculate the rent under the operating lease, using an underlying asset value of $48 million for the assets subject to the operating lease adjusted for the $5 million option fee. Included among the City Cinema assets was the Murray Hill cinema. Reading has no legal obligation to exercise either the option to extend the City Cinemas Operating lease or the City Cinemas Purchase Option. If Reading elects not to exercise the City Cinemas Purchase Option, then the City Cinemas Standby Credit Facility will be entirely due and payable on December 1, 2010. Recourse is limited to the assets of Sutton Hill which consist entirely of the assets subject to the City Cinemas Purchase Option.
	•	In February 2002, Sutton Hill, with Reading’s consent, sold its interest in the Murray Hill cinema for $10 million. The City Cinemas Operating Lease has been modified to reduce the rent payable there under by approximately $825,000 per year. The City Cinemas Purchase Option has been amended to remove the Murray Hill assets and to reduce the option exercise price to $38 million, and the City Cinemas Credit Facility has been reduced to $18 million.

      At December 31, 2002, Reading had assets valued for balance sheet purposes at approximately $182,772,000 and no indebtedness for borrowed money other than that discussed in the preceding paragraphs, all of which, other than the obligation to pay rent under the City Cinemas Operating Lease and to make the loan under the related City Cinema Standby Credit Facility, is tied to specific assets or to specific groups of assets. Included within this book value at December 31, 2002, were (a)  property and equipment with an aggregate book value of approximately $101,481,000 and (b)  property held for development with an aggregate

6

Table of Contents

Description of Business

      Reading is primarily engaged in

	•	the development, ownership and operation in Australia, New Zealand, the United States and Puerto Rico of multiplex cinemas;
	•	the development, ownership and operation in Australia and New Zealand of cinema based entertainment-themed retail centers;
	•	the ownership and operating of “Off Broadway” style live theaters; and
	•	as a business ancillary to its cinema and theater businesses, the development, ownership and operation of real property.

      While exceptions may be made from time to time with respect to certain well-situated cinemas with proven or projected draw, it is Reading’s general intention to develop or acquire principally state-of-the-art multiplex venues. With respect to new cinema construction, it is the Company’s intention to concentrate primarily upon a stadium-seating format, and to feature wall-to-wall screens with state-of-the-art projection and sound. Where possible, Reading prefers to own rather than to lease properties. However, as the Company’s cinema circuit has grown, leasehold interest have become predominant.

      In the future, the Company intends to focus on cinema exhibition, entertainment-themed retail center development and management, and commercial real estate development and management in Australia and New Zealand and, to a lesser extent, on cinema exhibition and live theater exhibition in the United States. Reading intends to move out of the Puerto Rican cinema market, to the extent feasible.

      Reading anticipates that it will also be engaged from time to time, directly or indirectly, in the development of properties initially acquired in connection with its cinema and live theater businesses, but which have greater value applied to alternative uses. To date, Reading has developed three cinema based entertainment-themed retail centers, located in Perth and Auburn (a suburb of Sydney) in Australia and in Wellington, the capital of New Zealand.

      Reading currently holds three additional properties, in suburbs of Melbourne and Brisbane, each of which was initially acquired as, and one of which is still under consideration as, a possible cinema based entertainment site. It is currently anticipated that Reading’s 50 acre parcel in Burwood (a suburb of Melbourne), will be joint ventured for mixed use (residential, office and retail) with one or more Australian based developers. Reading’s 176,528 square foot parcel in Newmarket (a suburb of Brisbane) is currently being developed as a shopping center. Reading’s 124,754 square foot property in Moonee Ponds (a suburb of Melbourne) is still under consideration for development as a cinema based entertainment site. However, it may ultimately be developed for other purposes or sold.

      In connection with the release of its interest in the approximately 15,700 square foot Murray Hill cinema property on 34th Street in Manhattan, Reading has received an option to either (a) receive a payment from the purchaser of $500,000 for its interest in the property, or (b) to acquire at developer’s cost a 25% interest in the combined development of the approximately 118,000 square foot development currently being constructed on that property and the adjacent 3,703 square foot property. No determination has yet been made whether or not to exercise this option.

Reading Cinemas (Australia and New Zealand)

      Reading currently owns or operates thirteen cinemas, consisting of 93 screens, in Australia, and one cinema with 10 screens in Wellington, New Zealand, owns a 50% unincorporated joint venture interest in

7

Table of Contents

      Reading commenced activities in Australia in mid-1995, and conducts business in Australia through its wholly owned subsidiary, Reading Entertainment Australia Pty. Limited (“REA” and, collectively with its consolidated subsidiaries, “Reading Australia”). Reading Australia is currently engaged in the development and operation of multiplex cinemas featuring conventional film product and the development of entertainment-themed retail centers in Australia. Reading Australia’s 93 screens are located in nine leased, and four owned locations. The Brisbane joint venture interest described above will be in a leased cinema complex.

      Reading commenced operations in New Zealand in 1997 and conducts operations in New Zealand through its wholly owned affiliate, Reading New Zealand Limited (“RNZ” and collectively with its consolidated subsidiaries, “Reading New Zealand”). At the present time, all of Reading’s cinema interests in the Auckland area are held through a 50/50 unincorporated joint venture with an experienced cinema operator (“Berkeley Cinemas”). The joint venture currently operates three cinemas representing 13 screens at two owned and one leased facility. The 10-screen cinema opened at Reading New Zealand’s Wellington entertainment-themed retail center is owned by Reading New Zealand and managed by Reading Australia.

      Reading’s Australian and New Zealand cinemas derive approximately 70% and 54% of their revenues from box office receipts, respectively. Ticket prices vary by location, and provide for reduced rates for senior citizens and children. Box office receipts are reported net of state and local sales or service taxes. Show times and features are placed in advertisements in local newspapers with the costs of such advertisements paid by the exhibitor. Film distributors may supplementally advertise certain feature films with the costs generally paid by distributors. Film rental averages approximately 45% of box office.

      Concession sales account for approximately 21% of total revenues. Concession products primarily include popcorn, candy and soda, although certain of Reading’s Australia and New Zealand cinemas have areas licensed for the sale and consumption of alcoholic beverages. During 2002, Reading realized a gross margin of approximately 74% on concession sales.

      Screen advertising revenues contributed approximately 4% of total revenues in 2002. However, there is some uncertainty as to whether screen advertising revenues will continue at historical rates following the near bankruptcy in 2002 of the largest purveyor of screen advertising in Australia and the acquisition of this company, Val Morgan, by Reading Australia’s competitors. See Competition below. Other sources of revenue include revenues from theater rentals for meetings, conferences, special film exhibitions and vending machine receipts or rentals.

      Reading Australia and Reading New Zealand are also engaged in the development of entertainment-themed retail centers that typically consist of a multiplex cinema, complementary restaurant and retail facilities, and convenient parking, all on land owned or controlled by Reading. In December 1999, Reading opened the cinema portion of its first entertainment-themed retail center in Australia. Located in Perth, the entertainment-themed retail center includes a 10-screen cinema and approximately 19,138 square feet of restaurant and retail space. Reading opened the multiplex cinema component of its second entertainment-themed retail center in September 2000. That entertainment-themed retail center, located in the Sydney suburb of Auburn, near the site of the Sydney Olympic Village, includes a 10-screen cinema and approximately 59,169 square feet of retail space, and approximately 287,730 square feet of subterranean parking garage. In March 2002, Reading opened its Wellington entertainment-themed retail center, comprised of a 10 screen cinema, approximately 43,626 square feet of restaurant and retail space, and 1,086 parking spaces located in an adjacent nine level parking garage.

8

Table of Contents

      Reading has, to date, entered into lease agreements with respect to 43% of the restaurant and retail space in its Perth center, 78% of its restaurant and retail space in its Auburn center and 85% of its restaurant and retail space in its Wellington center. Reading also owns two parcels of developable land (95,530 square feet and 37,674 square feet, respectively) contiguous to its Auburn and Wellington entertainment-themed retail centers.

      Reading is currently working on the second phase of its Wellington entertainment-themed retail center, anticipated to consist of approximately 110,000 square feet of retail space and a multi-screen art and specialty cinema.

      Reading initially contemplated four more entertainment-themed retail centers to be located at Whitehorse Shopping Center, Burwood and, Moonee Ponds in the Melbourne area and at Newmarket in the Brisbane area, and acquired either directly, or in the case of Whitehorse, through a joint venture, interests in each of these properties. However, as discussed in greater detail below, the Whitehorse project has been abandoned and the property sold. The cinema components of the projects at Burwood and Newmarket have been dropped, although the Company still intends to retain and develop these properties. In the case of Burwood, it is anticipated that this development activity will take place through a development joint venture with one or more experienced Australia based developers. In the case of Newmarket, the Company has retained a construction manager, and is in the process of directly developing the property as a retail center. Accordingly, only Moonee Ponds is still under active consideration as an entertainment-themed retail center site. However, no assurances can be given that the entertainment component of this location will not also be dropped in favor of a mixed-use retail and residential development or other disposition of the property.

      Whitehorse Shopping Center. In November 2001, Reading sold its interest in the Whitehorse shopping center, a retail shopping center located on leased land in the Melbourne suburb of Whitehorse (the “Whitehorse Center”). The Whitehorse Center was initially owned by Reading Australia in a 50/50 joint venture with a local developer. Unfortunately, Reading’s plans for the redevelopment of the Whitehorse Center encountered substantial opposition from competing cinema and real estate interests, resulting in substantial delays for the project. In addition, Reading’s joint venture partner did not prove to be the source of financial strength that was anticipated by Reading at the time it entered into the joint venture, and ultimately Reading was compelled to take over the Whitehorse Center incident to the satisfaction of the first mortgage loan held on the center by an institutional lender. During the development process, significant additional cinema competition developed and anticipated returns from both the cinemas and the shopping center declined, making the project unattractive for Reading to pursue on its own. Accordingly, Reading ultimately elected to sell the Whitehorse Center to liquidate the first mortgage debt. The property was sold in November 2001.

      Burwood. In 1995, Reading entered into a contract to acquire approximately 50 acres of land in the Burwood suburb of Melbourne and ultimately purchased the site in 1996. Due to a change in government land use policy, this site cannot currently be used for cinema exhibition. Reading is now in negotiations with several potential joint venture partners to develop a mixed residential, retail, and commercial development on the site. As the Company’s Australian bank lender has agreed to release this property from the collateral package securing REA’s line of credit, it is currently anticipated that the project will be financed in stages using the Company’s equity in the land.

      Newmarket. In 1997, Reading acquired an approximately 176,528 square foot parcel in Newmarket, a suburb of Brisbane, as a potential entertainment-themed retail center site. The property is currently improved with retail space, including a facility licensed for limited gambling and liquor sales. Upon review, Reading has determined to redevelop the property as a retail center and not as an entertainment-themed retail center, but in a manner that preserves the sites’ licensing for gambling and liquor sales. The Company has entered into a construction management contract with respect to the project, and is in negotiations with potential anchor tenants. As the Company’s Australian bank lender has agreed to release this property from the collateral package securing REA’s line of credit, it is currently anticipated that the project will be financed on a stand

9

Table of Contents

      Reading is currently reviewing its one remaining entertainment-themed retail center project at Moonee Ponds in Victoria, and may ultimately determine not to proceed with that project. Where a decision not to proceed is made with respect to land held by Reading for entertainment-themed retail center development purposes, Reading intends to either sell that land or apply it to other purpose.

      Summarized below are the properties held by the Company as entertainment-themed retail centers (Auburn, Perth and Wellington), or which are currently under review for development as entertainment-themed retail centers (Moonee Ponds). No assurance can be given that any of the properties held for development entertainment-themed retail center locations will ever be developed:

	(1) The Company is currently working on the development of phase two of its Wellington entertainment-themed retail center, anticipated to consist of approximately 110,000 square feet of retail space, a multi-screen art and specialty cinemas. The figures set out in the chart do not reflect the construction of this phase two development.

      Two of the Company’s cinemas, consisting of 11 screens and located in country towns, are owned by Australia Country Cinemas Pty, Limited (“ACC”), a company owned 75% by Reading Australia and 25% by a company owned by an individual familiar with the market for cinemas in country towns. ACC has a limited right of first refusal to develop any cinema sites identified by Reading Australia or such individual that are located in country towns.

      One of the Company’s cinemas, a 5-screen facility in Melbourne, is owned by an unincorporated joint venture in which the Company has a 66.6% unincorporated joint venture interest with the original owner.

      Reading New Zealand has a 50% unincorporated joint venture interest in a 5 screen multiplex cinema located in Whangaparoa, a 4 screen multiplex cinema located in Mission Bay, and a 4 screen cinema located in Takapuna, all of which are operated under the Berkeley Cinemas name. All of these communities are in the greater Auckland metropolitan area. Reading New Zealand’s partner in these ventures is an experienced cinema owner and operator. Two of the joint venture cinemas are fee properties and the third is leased. Since Berkeley Cinemas is an unincorporated joint venture, Reading owns direct undivided interests in the fees and the lease, equipment and business comprising the joint venture’s assets. The joint venture has also entered into an agreement fore lease with respect to an 8-screen cinema currently under construction in Christchurch.

      Reading Australia has also agreed to acquire a 33.3% unincorporated joint venture interest in a 16 screen multiplex cinema located in a suburb of Brisbane, and operated under the Birch Caroll & Coyle name. Since this is an unincorporated joint venture, Reading will hold its 33% interest directly as an undivided interest in the lease, equipment and business comprising this cinema asset.

10

Table of Contents

      At the present time, Reading’s activities in Australia and New Zealand are in material part speculative real estate development activities. While, in each case other than the 50 acre Burwood site and the 176,528 square foot Newmarket site, Reading is, or is anticipated to be, its own anchor tenant, the success of the real estate aspects of Reading’s business will depend upon a number of variables and are subject to a number of risks, some of which are outside of Reading’s control. These variables and risks include, without limitation:

	•	construction risks, such as weather, unknown and unknowable site conditions, and the availability and cost of materials and labor;
	•	leasing risk with respect to ancillary space being constructed in connection with the entertainment-themed retail centers — in certain cases such ancillary space constitutes a substantial portion of the net leasable area of a particular entertainment-themed retail center;
	•	political risk, such as the possible change in midstream of existing zoning or development laws to accommodate competitive interests at Burwood; and
	•	financing risks, such as the risk of investing U.S. dollars in Australia during times of currency exchange rate instability, and the difficulties of acquiring construction financing.

      In light of these risks, no assurances can be given that the Reading will be able to accomplish its real estate business objectives in Australia and/or New Zealand. Furthermore, even if those objectives are eventually achieved, the realization of these objectives may require a longer period of time and a greater level of developmental costs than currently anticipated by Reading.

      Reading Australia’s cinemas and Reading New Zealand’s Wellington cinema are managed by employees of Reading. Reading New Zealand’s cinemas, other than the Wellington cinema, are operated by Berkeley Cinemas, in which Reading New Zealand is a 50% joint venture partner. Reading’s employees are actively involved in the management of Berkeley Cinemas. The 16-screen joint venture cinema located in a suburb of Brisbane will be operated under a management committee over which each of the joint venturers will hold veto power, and will be managed by Birch Caroll & Coyle.

      Australia is a self-governing and fully independent member of the Commonwealth of Nations. The constitution resembles that of the United States in that it creates a federal form of government, under which the powers of the central government are specified and all residual powers are left to the states. The country is organized into five mainland states (New South Wales, Queensland, South Australia, Victoria and Western Australia), one island state (Tasmania) and two territories (Australian Capital Territory and the Northern Territory).

      The ceremonial supreme executive is the British monarch, represented by the governor-general and in each of the six states by a governor. These officials are appointed by the British monarch, but appointments are nearly always recommended by the Australian government. True executive power rests with the prime minister, the leader of the majority party in the House of Representatives. The legislature is bicameral, with a Senate and a House of Representatives, and the ministers are appointed by the prime minister from the membership of the House and the Senate. The organization of the state government is similar to that of the central government. Each state has an appointed governor, an elected premier and a legislature.

      Although Australia is the sixth largest country in the world in landmass, it only has a population of approximately 19.8 million people. This population is concentrated in a few coastal urban areas, with approximately 4 million in the greater Sydney area, 3.4 million in the greater Melbourne area, 1.6 million in the Brisbane area, 1.4 million in Perth and 1.1 million in Adelaide. Australia is one of the richest countries in the world in terms of natural resources per capita and one of the most economically developed countries in the world, although vast areas of the interior, known as “the Outback,” remain all but uninhabited. The principal

11

Table of Contents

      Internal trade is dominated by the two most populous states, New South Wales (mainly Sydney) and Victoria (mainly Melbourne). Together these two states account for a majority of all wholesale trade and approximately 70% of all retail sales. At the present time, Australia’s principal trading partners are the United States and Japan.

      Australia does not restrict the flow of currency into the country from the U.S. or out of Australia to the United States. Also, subject to certain review procedures, U.S. companies are typically permitted to operate businesses and to own real estate. On July 1, 2000, Australia implemented a goods and services tax (“GST”) on all goods and services at a consistent rate of 10%. The Company does not believe that the GST has had a significant impact on the Company business.

      New Zealand is also a self-governing member of the Commonwealth of Nations. It is comprised of two large islands, and numerous small islands, with a total land area of approximately 104,500 square miles. The country has a population of approximately 4 million people, most of who are of European descent and the principal language is English. Wellington, with a population of approximately 420,000, is the capital and Auckland, with a population of approximately 1.2 million, is the largest city. Most of the population lives in urban areas.

      New Zealand is a prosperous country with a high standard of social services. The national economy is largely dependent upon the export of raw and processed foods, timber and wool. Principally a trading nation, New Zealand exports about 30% of its gross national product. In the past (particularly before the United Kingdom entered the Common Market in 1973), New Zealand’s marketing focused on a small number of countries, principally the United Kingdom. Currently, only approximately 10% of New Zealand’s trade is with the United Kingdom, with Japan and Australia being its principal trading partners. While no country currently accounts for more than 20% of its exports, its economy remains sensitive to fluctuations and demand for its principal exports.

      Like Australia, New Zealand has a largely ceremonial governor-general, appointed by the Queen of England. However, the executive branch is run by a prime minister — typically the leader of the majority party in Parliament — and appointed ministers (typically chosen from the members of Parliament). The Parliament is elected by universal adult suffrage using a mixed member proportional system. Under this system, each voter casts two votes at the federal level, one for a local representative and one for a party. Fifty percent of the 120 seats in Parliament are determined by the direct election of local representatives, and the remaining fifty percent are elected based upon the number of votes garnered by the parties. The Prime Minister and his cabinet serve so long as they retain the confidence of the Parliament.

      With the exception of special excise taxes on tobacco, liquor, petroleum products and motor vehicles the only general sales tax is a GST imposed on all such services at the consistent rate of 12.5%. In effect, by a series of refunds, GST is only paid by the end-user of the goods or services in question. Resident companies pay income tax at a rate of 33%, however, dividend imputation credits generally prevent double taxation of company profits. There are no restrictions on repatriation of capital or profits, but some payments to overseas parties are subject to withholding tax. There is no capital gains tax, and there are tax treaties with many countries, including the United States.

      The laws for monitoring and approving significant overseas investment into New Zealand reflect the country’s generally receptive attitude towards such investment and the generally facilitating nature of the country’s foreign investment policies. One hundred percent overseas ownership can be approved in nearly all industry sectors, including motion picture exhibition and distribution. A review process is also applicable to certain land transactions and the purchase of businesses or assets having a value of NZ$10,000 or more.

12

Table of Contents

      Films are licensed under agreements with major film distributors and several local distributors who distribute specialized films. Film exhibitors are provided with an opportunity to view films prior to negotiating with the film distributor the commercial terms applicable to its release. Films are licensed on a film-by-film, theater-by-theater basis. Reading Australia and Reading New Zealand license films from all film distributors as appropriate to each location. Generally, film payment terms are based upon various formulas that provide for payments based upon a specified percentage of box office receipts.

Competition

      The film exhibition market in Australia and New Zealand is highly concentrated and, in certain cases, vertically integrated. The principal exhibitors in Australia and New Zealand include Village Roadshow Limited (“Village”) with approximately 587 screens in Australia and 76 screens in New Zealand, Greater Union/ Birch Carroll & Coyle with approximately 460 screens in Australia and Hoyts Cinemas (“Hoyts”) with approximately 500 screens in Australia and 70 screens in New Zealand. These figures, however, understate in certain respects the degree of concentration in Australia and New Zealand. Typically, the Major Exhibitors (Village, Greater Union and Hoyts) own the newer multiplex and megaplex cinemas, while the independent exhibitors typically have older and smaller cinemas. Accordingly, Reading believes it likely that the Major Exhibitors may control upwards of 60% of the total cinema box office in Australia and New Zealand.

      The Major Exhibitors have in recent periods built a number of new multiplexes as joint venture partners or under shared facility arrangements, and have historically not engaged in head-to-head competition, except in the downtown areas of Sydney and Melbourne. However, in Sydney, the Major Exhibitors have entered into an agreement under which they share a recently redeveloped 17-screen cinema in the George Street entertainment district. In other markets, two or more of the Major Exhibitors have formed joint ventures to own and operate new multiplex cinemas. More recently, Hoyts Greater Union and Village formed a joint venture to acquire the largest screen advertising company in Australia. Accordingly, there are significant business interrelations between Australia’s three principal film exhibition companies.

      Recently, Reading has agreed to acquire a 33% unincorporated joint venture interest in an existing 16 screen cinema located in suburban Brisbane which is currently owned in principal part by Village and Birch Carroll & Coyle. This marks Reading’s first joint venture arrangement with any of the Major Exhibitors.

      Greater Union is the owner of Birch Carroll & Coyle. Generally speaking, all new multiplex cinema projects announced by Village are being jointly developed by a joint venture comprised of Greater Union, Village, and Warner Bros., but recently Village and Greater Union have announced a deal to buyout Warner Bros.’ interest on a 50/ 50 basis. These companies have substantial capital resources. Village had a publicly reported consolidated net worth of approximately AUS$830.7 million at June 30, 2002. The Greater Union organization does not separately publish financial reports, but its parent, Amalgamated Holdings, had a publicly reported consolidated net worth of approximately AUS$413.5 million at June 30, 2002. Hoyts Cinemas does not separately publish financial reports as it has been acquired by a major Australian media and entertainment company, Consolidated Press Holdings, which is controlled by Kerry Packer. Mr. Packer is considered one of the wealthiest men in Australia with a net worth estimated at AUS$5.9 billion.

      The industry is also somewhat vertically integrated in that Roadshow Film Distributors which serves as a distributor of film in Australia and New Zealand for Warner Bros. and New Line. Films produced or distributed by the majority of the local international independent producers are also distributed by Roadshow Film Distributors.

      In the view of Reading, the principal competitive restraint on the development of its business in Australia and New Zealand is the limited availability of good sites, as Reading now receives access to substantially all first run film on competitive terms at all of its cinemas. Reading’s competitors and certain major commercial real estate interests have historically used land use development laws and regulations in Australia to prevent or

13

Table of Contents

      In December 2002, the Major Exhibitors acquired Val Morgan, the principle lessor of screen advertising space in Australia and New Zealand. During 2002 and 2001, Reading received approximately $1,254,000 (AUS$1,942,433 and NZ$308,155) and $902,000 (AUS$1,762,925) respectively from Val Morgan for screen advertising. Reading’s contract with Val Morgan expires on July 1, 2003. Notwithstanding concerns expressed by Reading and other Independent Exhibitors to the Australian Consumer and Competition Commission (the “ACCC”) that such an arrangement would give the Major Exhibitors an unfair competitive advantage in the area of screen advertising, the ACCC ultimately approved the acquisition due to concerns that but for the intervention of the Major Exhibitors Val Morgan would fail. Under the terms approved by the ACCC, net revenues are to be split 50/ 50 between Val Morgan and Reading from the advertising shown at Reading’s cinemas. However, Reading has no control over Val Morgan’s costs and in light of the fact that Val Morgan was unable to operate profitably under its prior contracts with exhibitors, it is likely that future revenues from screen advertising will be less, and may be materially less, than those realized in 2001 and 2002.

      Generally speaking, Reading does not engage in currency hedging. Reading presently intends, to the fullest extent possible, to operate its Australian and New Zealand operations on a self-funding basis. The book value, stated in U.S. dollars, of Reading’s net assets in Australia and New Zealand, (assets less third party liabilities, but without deduction for intercompany debt), at December 31, 2002 are as follows (dollars in thousands):

      Reading believes that its asset bases in Australia and New Zealand should provide a sufficient capital base to support its current borrowing needs in those markets.

      Virtually all of the operating costs of Reading Australia and Reading New Zealand are denominated in the respective currencies of these two companies. Concessions are purchased locally, and film rental is calculated as a percentage of box office. Reading has also attempted to keep its general and administrative costs localized.

14

Table of Contents

      At the present time, the Australian and New Zealand dollars are trading at the lower third of their historic 25-year range vis-à-vis the U.S. dollar. Set forth below is a chart of the exchange ratios between these three currencies over the past ten years.

Exchange Rates

Exchange Rates Graph

      Major films are generally released to coincide with the school holiday trading periods, particularly the summer holidays. Accordingly, Reading Australia and Reading New Zealand record greater revenues and earnings during the first half of the calendar year.

      Reading Australia has 26 full time executive and administrative employees and approximately 550 cinema level employees. Reading New Zealand currently has approximately 100 employees at its Wellington entertainment-themed retail center, which is managed by Reading Australia. Berkeley Cinemas has 5 full time executive and administrative employees and approximately 95 cinema employees. The Company believes its relations with its employees to be good.

Reading Domestic Cinemas

      General

      Reading currently operates 54 screens in ten cinemas in the United States (including two managed cinemas with 5 screens) and has entered into an agreement to operate an additional five screens in a new art and specialty cinema currently under construction in Plano, Texas. Reading’s domestic cinema operations focus on the exhibition of mainstream general release film in its conventional cinemas, such as the Cinemas 1, 2 & 3 and 86th Street Playhouse in Manhattan and the Manville 12 in Manville, New Jersey, and on the exhibition of art and specialty film at its art cinemas such as the Angelika Film Centers in Manhattan, Dallas and Houston. Reading does not currently have any plans to develop new cinemas in the United States, but will likely consider adding to its cinema chain through the acquisition of existing cinemas being divested by other

15

Table of Contents

      All the Company’s domestic cinemas are leased, other than the 86th Street Playhouse and Paris in Manhattan which are operated under management agreements. The Angelika cinema in Manhattan is owned by a limited liability company owned 50/50 by Reading and a subsidiary of National Auto Credit but managed by the Company. The Company has the option to purchase the fee interest underlying its Sutton Cinema in Manhattan. The Manville 12 is leased pursuant to a ground lease through April 2024, which allows the property to be used, at Reading’s discretion, for other retail uses.

      The cinema exhibition industry is in the midst of a major retrenchment and consolidation, creating considerable uncertainty as to the direction of the domestic film exhibition industry, and Reading’s role in that industry. Several major cinema exhibition companies have gone through bankruptcy over the past few years, or are being otherwise financially restructured. Regal Cinemas has emerged from bankruptcy and combined with Edwards and United Artists (which also went through bankruptcy) to create a 5,663-screen, 524 cinema circuit. In addition, Regal has announced an agreement to acquire 554 screens in 52 cinemas currently owned by Hoyts. Loews has likewise emerged from bankruptcy and now has approximately 2,451 screens in 264 cinemas located largely in principal urban markets in the US, Canada, and Europe. Landmark Theaters, the largest art and specialty film exhibitor in the United States, has also emerged from bankruptcy and is now owned by a large investment fund, that also has, directly or through its affiliates, material ownership interests in Loews and Regal. These companies, having used bankruptcy to restructure their debt and to rid themselves of burdensome leases and in some cases to consolidate, are now much stronger competitors than they were just a few years ago.

      A significant number of older conventional screens have, as a result of this consolidation process, been taken out of the market. It is estimated that the total domestic screen count has decreased from 36,110 in 2001 to 35,289 in 2002. Industry analysts project further consolidation in the industry, as players such as Cablevision seek to divest their domestic cinema exhibition assets. However, some issues have risen as to potential anti-trust limitations on such consolidation. For example, a recently announced plan to sell Landmark to the controlling stockholder of Loews was called off due, according to the parties, to regulatory issues. Accordingly, while recent developments have, in the view of management, in some ways aided the overall health of the domestic cinema exhibition industry, there remains considerable uncertainty as to the impact of this consolidation trend on Reading and its domestic cinema exhibition business, as it is forced to compete with these stronger and reinvigorated competitors and their significant market share commanded by these competitors.

      There is also considerable uncertainty as to the future of digital exhibition and in-the-home entertainment alternatives. In the case of digital exhibition, there is currently considerable discussion within the industry as to the benefits and detriments of moving from conventional film projection to digital projection technology. There are issues (i) as to when it will be available on an economically attractive bases, (ii) as to who will pay for the conversion from conventional to digital technology between exhibitors and distributors, (iii) as to what the impact will be on film licensing expense, and (iv) as to how to deal with security and potential pirating issues if film is distributed in a digital format. In the case of in-the-home entertainment alternatives, the industry is faced with the significant leaps achieved in recent periods in both the quality and affordability of in-the-home entertainment systems and in the accessibility to entertainment programming through cable, satellite and DVD distribution channels. These are issues common to both Reading’s domestic and international cinema operations.

      While no assurances can be given, it may be that the reorganization and restructuring of the domestic cinema exhibition market will produce opportunities for Reading to grow its art and specialty circuit by acquiring, on favorable terms, rights to operate cinemas no longer seen as suitable or competitive as conventional first run film venues, or for other reasons no longer attractive to other exhibitors. Reading does not, however, intend to aggressively pursue such opportunities, and if they do not become available, Reading

16

Table of Contents

      Reading’s domestic cinemas derive approximately 75% of their revenues from box office receipts. Ticket prices vary by location, and provide for reduced rates for senior citizens and children. Box office receipts are reported net of state and local sales or service taxes. Show times and features are placed in advertisements in local newspapers with the costs of such advertisements paid by Reading. Film distributors may supplementally advertise certain feature films with the costs generally paid by distributors. Film rental represented approximately 40% of box office for 2002.

      Concession sales account for approximately 19% of total revenues. Concession products primarily include popcorn, candy and soda, but Reading’s art cinemas typically offer a wider variety of concession offerings. Reading’s Angelika cinemas in Manhattan, Dallas and Houston include café facilities, and the operations in Dallas and Houston are licensed to sell alcoholic beverages. Reading’s domestic cinemas achieved a gross margin on concession sales of approximately 83% for 2002.

      Screen advertising revenues contribute approximately 4% of total revenues. Other sources of revenue include revenues from theater rentals for meetings, conferences, special film exhibitions and vending machine receipts or rentals.

     Licensing/ Pricing

      Film product is available from a variety of sources ranging from the major film distributors such as Columbia, Disney, Buena Vista, MGM, Warner Bros and Universal, and from a variety of smaller independent film distributors such as Miramax. The market for mainstream conventional film is principally dominated by the major distributors. Similarly, most art and specialty film today comes from the art and specialty divisions of these major distributors, such as Fox’ Searchlight and Disney’s Miramax. Generally speaking, film payment terms are based upon an agreed upon percentage of box office receipts. Recent periods have seen an unusually high percentage of films with truncated exhibition runs, which has adversely impacted the margins available to exhibitors. At least in recent periods, with the surplus of screens currently available to distributors, bargaining power has been on the side of the distributors and not on the side of the exhibitors. While there is uncertainty as to whether this will continue, given the recent development of mega circuits such as Royal and Loews, no assurance can be given that Reading’s domestic cinemas would benefit from the exercise of the market power by circuits such as Regal and Loews. Indeed, as discussed below, in certain situations, Reading believes that its access to first-run film has been adversely affected by the market power exhibitors such as Regal and Loews.

     Competition

      The principal factor in the success or failure of a particular cinema is access to popular film products. If a particular film is only offered at one cinema in a given market, then customers wishing to see that film will, of necessity, go to that cinema. If two or more cinemas in the same market offer the same film, then customers will typically take into account factors such as the relative convenience and quality of the various cinemas. In many markets, the number of prints in distribution is less than the number of exhibitors seeking that film for that market, and distributors typically take the position that they are free to provide or not provide their films to particular exhibitors, at their complete and absolute discretion.

      Competition for films can, accordingly, be intense, depending upon the number of cinemas in a particular market. Reading’s ability to obtain top grossing first run feature films may be adversely impacted by its comparatively small size, and the limited number of screens it can supply to distributors. Moreover, as a result of the dramatic and recent consolidation of screens into the hands of a few very large and powerful exhibitors such as Regal and Loews, these mega exhibition companies are in a position to offer distributors access to many more screens in major markets than can Reading. Accordingly, distributors may decide to give preferences to these mega exhibitors when it comes to licensing top grossing films, rather than to deal with independents such as Reading. The situation is different in Australia and New Zealand where typically every

17

Table of Contents

      On March 18, 2003, Reading and Sutton Hill Capital, LLC filed a complaint against Oaktree Capital management LLC, Onex Corporation, Regal Entertainment Group, United Artists Theatre Company, United Artists Theatre Circuit, Inc., Loews Cineplex Entertainment Corporation, Columbia Pictures Industries, Inc., the Walt Disney Company, Universal Studios, Inc., Paramount Pictures Corporation, Metro-Goldwyn-Mayer Distribution Company, Fox Entertainment Group, Inc., Dreamworks LLC, Stephen Kaplan and Bruce Karsh in the United States District Court for the Southern District of New York. The suit alleges, among other things, violations by the defendants of various sections of the Sherman and Clayton Acts, (commonly referred to as the antitrust laws) and New York state law relating to their concerted efforts to deny first-run industry anticipated top grossing commercial films to plaintiff’s Village East Theatre. The complaint also alleges that defendants Oaktree, Onex, Regal and Loews have violated the antitrust laws in acquiring theatre circuits and that defendant Oaktree has violated the antitrust laws by attempting to monopolize the market for the exhibition of first run industry anticipated top grossing commercial films. The complaint further alleges that defendant Oaktree, through its senior officers, unlawfully serves on the boards of directors of both Loews and Regal. The complaint seeks, among other things, damages, an injunction barring the distributor defendants from refusing to license said films to the Village East Theatre and from granting licenses to said films to defendants Regal and Loews that prevent the Village East Theater from exhibiting said films simultaneously with defendants Regal’s and Loew’s theaters. The complaint also seeks an order requiring defendants Regal and Loews to divest a sufficient number of theaters to restore competition in the affect relevant markets, and that defendant Regal Loews, Oaktree and Onex not acquire any further theaters that exhibit said films. The complaint also seeks an order requiring defendant Oaktree to divest its interest in defendant Loews and that the existing interlocking directorships between Loews and Regal be eliminated. It is expected that the defendants will contest the allegations of the complaint. Although the plaintiffs intend to pursue this action vigorously, there can be assurance that plaintiffs will prevail.

      In reaction to this lawsuit, Fox has advised Reading that Fox and its affiliate, Fox Searchlight, will no longer provide film to Reading’s domestic cinemas after existing commitments have been satisfied.

      In addition, the competitive situation facing Reading is uncertain given the ongoing development of in-the-home entertainment alternatives such as DVD, cable and satellite distribution of films, and the increasing quality and declining cost of in-the-home entertainment-themed retail center components:

     Seasonality

      Traditionally, the exhibition of mainstream commercial films has been somewhat seasonal, with most of the revenues being generated over the summer and Christmas holiday seasons. However, with the increasing number of releases, this seasonality is becoming less of a factor. The exhibition of art and specialty films has historically been less seasonal than the exhibition of mainstream commercial films.

     Management

      All of Reading’s domestic cinemas are managed by officers and employees of Reading. Angelika Film centers, LLC (the owner of the Angelika Film Center & Café in the Soho district of New York), is owned on a 50/50 basis by Reading and a subsidiary of National Auto Credit, Inc. However, Reading manages that theater pursuant to a management contract. Further more, the operating agreement of Angelika Film Centers, LLC provides that, in the event of deadlock between Reading and NAC, the Chairman of the Board of Reading will cast the deciding vote.

     Employees

      At December 31, 2002 approximately 466 individuals were employed to operate Reading’s domestic cinemas. On January 31, 2003, Reading renegotiated its collective bargaining agreement with the projectionist union and this agreement expires on January 31, 2006. Reading believes its relations with these employees to be good.

18

Table of Contents

Reading Live Theaters (Liberty Theaters)

     General

      Liberty Theaters is in the business, through its wholly owned theater operating companies, of leasing theater auditoriums to the producers of “Off Broadway” theatrical productions and providing various box office and concession services. Liberty Theaters generates revenues by (a) leasing its theaters (b) charging various service fees for the use of its box office staff and facilities and (c) selling concessions. While Reading typically does not engage in the producing or financing of productions, Reading may, from time to time, acquire minority interests in the shows using its theaters. Reading’s theaters are booked and managed by a separate management company owned by Margaret Cotter, the daughter of James J. Cotter.

      At the current time, Liberty Theaters has three single auditorium theaters in Manhattan: (1) the Minetta Lane (390 seats), (2) the Orpheum (360 seats) and (3) the Union Square (499 seats). Liberty also owns a four auditorium theater complex in Chicago (main stage 452 seats, cabaret 191 seats, great room 110 seats and gallery 66 seats). Reading owns the fee interest in each of these theaters.

      While Reading offers concessions at each of its live theaters, the concession stand receipts generated by live theaters are typically much less material to operations than in cinemas. In 2002, only approximately 4% of the revenue of the Liberty Theaters was derived from concession sales.

     Competition

      Competition comes from other live theaters as well as other entertainment sources (such as television, videos, movies, concerts and other theatrical presentations). In Manhattan and Chicago, the number of theaters available for Off Broadway type productions is limited. While there are more than twenty Off Broadway venues (theaters with between 99 and 499 seats) in Manhattan, there are only four such theaters that have the same or greater seating capacity than Liberty Theaters’ properties. In Chicago, there are currently four other venues available for commercial Off Broadway type productions, and six venues for Broadway style productions.

      Due to high land values and high construction costs in urban areas, and the parking requirements for such facilities, there are significant barriers to the construction of new theaters in both Manhattan and Chicago. As a result, in addition to a 499-seat theater than opened in the fall of 2002, insofar as we are aware, there are only two Off Broadway style theater complexes currently under development in Manhattan: one complex with two 499-seat theaters and two 299-seat theaters which is expected to open in mid 2004 and the other complex with one 499-seat theater, one 399-seat theater, and one 199-seat theater which is still in the early stages of construction and uncertain as to its opening date. The new Off Broadway theater that opened in 2002 has a rental package of approximately $10,000 more per week than our packages, and has, to date, had only one show which lasted for only approximately 5 weeks before closing. Likewise, the two theaters currently in development are not expected to have a negative impact on our Manhattan theaters as these theaters are located, in our opinion, outside of established theater districts.

      Generally speaking, the difference between “Off Broadway” and “Broadway” venues is the seating size of the auditorium. Typically, Off Broadway theaters have less than 500 seats. Accordingly, as the revenue generating capacity of an Off Broadway theater is limited, the size, scope and cost of the productions making use of such facilities are likewise typically more limited. However, with the current demand for theater space in Manhattan, this line is blurring somewhat, as more expensive productions are now being booked into Off Broadway venues. Also, typical productions making use of Off Broadway style theaters are non-Equity, meaning that they are permitted to make use of production crews and actors who are not members of the union leagues and that they are not required to pay the same wage scale as is applicable to Broadway productions.

     Seasonality

      Generally speaking, there is little or no seasonality in the live theater business. While it may be that a larger selection of plays open in February and in later September/ October, demand for space is relatively

19

Table of Contents

     Employees

      Each of the theater operating companies has its own employees, most of who are employed in connection with the operation of the box offices and concession facilities of the respective theaters. Consequently, the number of employees fluctuates significantly throughout the year, depending on the number of shows booked at the theaters. The individuals responsible for the development and construction of sets and for the staging of the production, as well as all of the individuals appearing in a particular production, are the employees of the production company and not of the Reading. When a particular theater is dark, no employees, other than a theater manager, are needed. When a theater is leased to a show, approximately 5 employees are required to operate the theater and to supply box office services, while an additional 3–6 ushers are needed to seat the theater patrons. Reading believes its relations with these employees to be good.

Puerto Rico (“CineVista”)

     General

      Acquired by Reading in 1994, CineVista currently operates 52 screens in seven leased facilities in Puerto Rico. Reading does not presently anticipate further expansion of this circuit, and would like to exit this market if a suitable buyer can be found. Reading is currently in discussions with certain parties who have expressed interest in acquiring a significant portion of Reading’s assets in Puerto Rico. However, no assurances can be given that any agreement will be reached, or if reached, that all conditions to closing will be satisfied and the transaction closed.

      In Puerto Rico, Reading’s concentration has been on multiplex cinemas located on leasehold properties, and the exhibition of conventional film product. All of CineVista’s theaters are modern multi-screen facilities.

      CineVista derives approximately 68% of its revenues from box office receipts. Ticket prices vary by location, and provide for reduced rates for senior citizens and children. Box office receipts are reported net of a 10% excise tax imposed by Puerto Rico. Show times and features are placed in advertisements in local newspapers with the costs of such advertisements paid by CineVista. Film distributors may supplementally advertise certain feature films with the costs generally paid by distributors. Film rental averaged approximately 44% of box office for 2002.

      Concession sales account for approximately 26% of total revenues. Concession products primarily include popcorn, candy and soda. Screen advertising revenues contribute approximately 6% of total revenues. Other sources of revenue include revenues from theater rentals for meetings, conferences, special film exhibitions and vending machine receipts or rentals.

     Background Information about Puerto Rico and the Puerto Rican Cinema Market

      Puerto Rico is a self-governing Commonwealth of the United States with a population of approximately 3.8 million people. Puerto Rico exercises control over internal affairs similar to states of the United States; however, the relationship with the United States Federal Government is different than that of a state. Residents of Puerto Rico are citizens of the United States, but do not vote in national elections and, with certain exceptions, do not pay federal income taxes. Income taxes are paid instead under a system established by the Commonwealth. The United States mainland is Puerto Rico’s largest trading partner.

      During the last six years, Puerto Rico has undergone significant retail shopping center development. During this period, the number of multiplex theaters has increased substantially. The Company’s principal competitor, Caribbean Cinemas, a privately-owned company, has opened 11 complexes adding approximately 103 screens since the beginning of 1996, and is expected to continue to open theaters competitive with those of CineVista. These new screens have adversely affected the Company’s current operations. Since 1994, this competitor’s share of the Puerto Rico box office has increased from 48% to 82%. Reading believes that the

20

Table of Contents

     Licensing/ Pricing

      Films are licensed under agreements with major film distributors and several local distributors specializing in films of special interest to residents of Puerto Rico. Puerto Rico regulations generally require that film exhibitors be provided with an opportunity to view films prior to submitting bids, that film distributors provide advance notice of films that will be provided to the market, and are generally designed to preclude anticompetitive practices. Films are licensed on a film-by-film, theater-by-theater basis. Generally, film payment terms provide for payment to film distributors under various formulas, which provide for payments based upon a percentage of gross box office receipts. Historically, CineVista has not had major difficulty in obtaining first run film. However, no assurances can be given that this will continue, given the market dominance of Caribbean Cinemas with approximately 82% of the market. Also, while Puerto Rican law prohibits exhibitors from also being in the distribution business, exhibitors such as Caribbean Cinemas could go into the distribution of film, to the extent that no company chooses to distribute a particular film in Puerto Rico. Given the market dominance of Caribbean Cinemas, no assurances can be given that the major distributors will continue to maintain film distribution operations in Puerto Rico.

      CineVista licenses film from substantially all of the major United States studios and is not dependent upon any one film distributor for all of its product. However, in the event the Company was unable to license film from a major studio, such lack of supply could have a material effect upon CineVista’s business. CineVista believes that the popularity of the Puerto Rico exhibition market and Puerto Rico rules governing film licensing make such a situation unlikely. In 2002, films licensed from CineVista’s four largest film suppliers accounted for approximately 76.5% of CineVista’s box office revenues.

     Competition

      Reading believes there are approximately 24 first-run movie theaters in daily operation with approximately 255 screens in Puerto Rico. Based upon number of screens, box office revenues and number of theaters, CineVista is the second largest exhibitor in Puerto Rico, with the two largest exhibitors accounting for over 99% of the box office revenues recorded in 2002, measured by theaters in daily operation. Competition among the theater exhibitors exists not only for theater patrons within certain geographic areas, but also for the licensing of films and the development of new theater sites. The number of sites suitable for multiplex cinemas is limited, but CineVista’s principal competitor is expected to continue to open theaters competitive with those of CineVista. Caribbean Cinemas currently operates 198 screens in Puerto Rico representing approximately 82% of the total box office generated in that county.

      In Puerto Rico, Reading’s strategy has been to build generally higher quality cinemas, with larger seats, more leg room and better sound than those constructed by its principal competitor, and to seek out and build in either well established retail centers with adequate parking on-site or in connection with the development of new retail centers being developed by experienced and well financed developers. Reading’s principal competitor appears to have adopted a strategy of market dominance, building cinemas in areas which, in Reading’s view, are already over-screened, and offering rents which, again in Reading’s view, cannot provide an adequate return on capital for the cinema operator.

      Particularly injurious to Reading’s competitive position in Puerto Rico was the opening in 2000 by Caribbean of a state-of-the-art multiplex cinema in the Plaza Las Americas — the largest shopping center in Puerto Rico. Prior to the opening of this cinema, CineVista’s cinema complex at the Plaza Las Americas was Reading’s top grossing cinema in Puerto Rico. Reading believes that the entering into of the lease with respect to this cinema by the owner of the Plaza Las Americas and Caribbean Cinemas was in violation of agreements reached between CineVista and the owner of the Plaza, and was an exercise of monopoly power by the Plaza and Caribbean Cinemas. Reading has commenced separate litigation against the owner of the Plaza and Caribbean Cinemas for, among other things, breach of contract, tortuous interference and various trade practice violations. However, this litigation is proceeding slowly, in part due to the fact that the number of law

21

Table of Contents

      Most major films are released to coincide with the summer months, when schools are closed or the winter holiday seasons. Accordingly, CineVista has historically recorded greater revenues and earnings during the second half of the calendar year .

      CineVista has approximately 159 employees in Puerto Rico, 13 of whom are employed under the terms of a collective bargaining agreement. The collective bargaining agreement expires in May 2004. The Company believes its relations with its employees in Puerto Rico to be good.

Other Assets and Investments

      Prior to its determination in 2000 to enter the cinema and live theater exhibition businesses, Citadel made investments in 1997 in agriculture and in 1998 in healthcare. Reading disposed of its agricultural assets in July 2002 and is now in the process of liquidating its healthcare interests.

      In December 1997, Citadel acquired a 40% partnership interest in the Agricultural Partnerships, and an 80% membership interest in Big 4 Farming, the limited liability company formed to farm the properties owned by the Agricultural Partnerships. The Agricultural Partnerships owned approximately 1,600 acres of land in the Kern County, California, approximately 1,100 acres of which was improved with citrus orchards. These properties are commonly known in the Kern County area as the Big 4 Ranch.

      In large part due to the lasting effects of a freeze in late 1998, which wiped out most of the citrus crop in Kern County, and to competition from imported fruit, the Agricultural Partnerships did not perform well. In 2000, Citadel wrote down the carrying value of its investment in the Agricultural Partnerships and in Big 4 Farming to $0, and in July 2002 the Agricultural Partnerships reconveyed their interests in the Big 4 Ranch to the original owner of that property in satisfaction of the purchase money mortgage held by that original owner.

      In 1998, Citadel invested approximately $1 million to acquire 398,850 shares representing approximately 11.6% of the outstanding stock of Gish Biomedical, Inc. (“Gish”). Thereafter, the Company increased its holdings to 583,900 shares at December 31, 2002, representing approximately 16.3% of such outstanding stock. Gish is in the business of manufacturing medical devices, focusing principally on devices used in open-heart surgery. All of Gish’s products are single use disposable products or have a disposable component.

      The transaction was brought to the Company by Value Asset Fund Limited Partnership (“VAF”), which currently owns approximately 587,300 shares of Gish, representing approximately 16.4% of such stock. Collectively, the Company and VAF own approximately 32.6% of the outstanding Gish stock. While VAF has taken an active role in the management and strategic direction of Gish, the Company’s investment has been completely passive. Except for James J. Cotter, Jr., (the son of James J. Cotter, the Chairman and Chief Executive Officer of Reading and, since March 2002, a Director of RII) who served on the Board of Directors of Gish until his resignation on March 7, 2002, Reading’s officers and directors are not involved in the management or strategic direction of Gish.

22

Table of Contents

      The Company’s investment in Gish was acquired at a cost of approximately $1,435,000 or $2.46 per share. At March 26, 2003, the closing price for such shares was $1.31. The Company is currently liquidating its investment in open market transactions and at March 26, 2003 had reduced its position to 375,037 shares.

Financial Information Relating to Industry Segments and Foreign and Domestic Operations

      See Note 22 to the Consolidated Financial Statements contained elsewhere herein.