Document:

<PAGE>

                                                                    EXHIBIT 10.1

                        AGREEMENT OF PURCHASE AND SALE

                            OF MEMBERSHIP INTEREST

                                     among

                             CITADEL CINEMAS, INC.

                                    Buyer,

                                      and

                                James J. Cotter

                                      and

                              Michael R. Forman,

                                    Sellers

                           Dated as of July 28, 2000
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                                                                <C>
ARTICLE I    DEFINITIONS.........................................................................................    1
     Section 1.1  Definition of Certain Terms....................................................................    1
     Section 1.2  Construction...................................................................................    3

ARTICLE II   SALE AND PURCHASE OF THE MEMBERSHIP INTEREST........................................................    4
     Section 2.1  Place and Date.................................................................................    4
     Section 2.2  Purchase Price.................................................................................    4

ARTICLE III  REPRESENTATIONS AND WARRANTIES OF SELLER............................................................    4
     Section 3.1  Authorization, etc.............................................................................    4
     Section 3.2  Ownership of Membership Interest...............................................................    4
     Section 3.3  No Conflicts, etc..............................................................................    4
     Section 3.4  Litigation.....................................................................................    5
     Section 3.5  Brokers, Finders, etc..........................................................................    5

ARTICLE IV   REPRESENTATIONS AND WARRANTIES OF BUYER.............................................................    5
     Section 4.1  Corporate Status...............................................................................    5
     Section 4.2  Authorization, etc.............................................................................    5
     Section 4.3  No Conflicts, etc..............................................................................    5
     Section 4.4  Litigation.....................................................................................    6
     Section 4.5  Brokers, Finders, etc..........................................................................    6

ARTICLE V    COVENANTS...........................................................................................    6
     Section 5.1  Covenants of Sellers...........................................................................    6
     Section 5.2  Covenants of Buyer.............................................................................    7

ARTICLE VI   CLOSING CONDITIONS AND DELIVERIES...................................................................    8
     Section 6.1  Conditions to Obligations of Each Party........................................................    8
     Section 6.2  Conditions to Seller's Obligations.............................................................    8
     Section 6.3  Conditions to Buyer's Obligations..............................................................    8
     Section 6.4  Buyer's Closing Documents......................................................................    9
     Section 6.5  Seller's Closing Documents.....................................................................    9
     Section 6.6  Conditions Generally...........................................................................   10

ARTICLE VII  INDEMNIFICATION.....................................................................................   10
     Section 7.1  By Sellers.....................................................................................   10
     Section 7.2  By Buyer.......................................................................................   10
     Section 7.3  Indemnification Procedures.....................................................................   11
     Section 7.4  Expiration of Representations and Warranties, etc..............................................   12
     Section 7.5  Exclusive Remedy; Certain Limitations on Indemnification.......................................   12

ARTICLE VIII MISCELLANEOUS.......................................................................................   12
     Section 8.1  Severability...................................................................................   12
     Section 8.2  Notices........................................................................................   12
     Section 8.3  Attorneys' Fees................................................................................   14
     Section 8.4  Headings.......................................................................................   14
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                                                               <C>
     Section 8.5   Entire Agreement..............................................................................   14
     Section 8.6   Counterparts..................................................................................   14
     Section 8.7   Governing Law, etc............................................................................   14
     Section 8.8   Binding Effect................................................................................   14
     Section 8.9   Assignment....................................................................................   15
     Section 8.10  No Third Party Beneficiaries..................................................................   15
     Section 8.11  Amendment; Waivers, etc.......................................................................   15
     Section 8.12  Transaction Costs.............................................................................   15
</TABLE>

                                      ii
<PAGE>

EXHIBITS

Exhibit A - Form of Note
Exhibit B - Form of Buyer's Counsels' Opinions
Exhibit C - Form of Sellers' Counsel's Opinion
Exhibit D - Assignment of Membership Interest

                                      iii
<PAGE>

                       AGREEMENT OF PURCHASE AND SALE OF
                              MEMBERSHIP INTEREST

     THIS AGREEMENT OF PURCHASE AND SALE OF MEMBERSHIP INTEREST, dated as of
July 28, 2000, among Citadel Cinemas, Inc., a Nevada corporation ("Buyer"), and
James J. Cotter and Michael R. Forman (each, a "Seller", and collectively,
"Sellers").

                                R E C I T A L S
                                ---------------

          1.   Each Seller owns a membership interest (each, a "Membership
Interest") in Angelika Film Centers, L.L.C., a New York limited liability
company (the "Company"), representing approximately 8.33% of the aggregate
membership interests in the Company, which Membership Interests were formerly
owned by Sutton Hill Associates;

          2.   Buyer wishes to purchase the Membership Interests owned by
Sellers and Sellers wish to sell the Membership Interests to Buyer upon the
terms and conditions hereinafter set forth; and

     C.   Capitalized terms used herein without separate definition have the
meanings given to such terms in Section 1.1;

     NOW, THEREFORE, in consideration of the mutual covenants, representations
and warranties made herein and other good and valuable consideration, the
receipt and sufficiency of which hereby are acknowledged, the parties hereto
agree as follows:

                                   ARTICLE I

                                  DEFINITIONS

     Section 1.1  Definition of Certain Terms.  The terms defined in this
                  ---------------------------
Section 1.1, whenever used in this Agreement, shall have the respective meanings
indicated below for all purposes of this Agreement.

     "Affiliate" of any Person means any other Person controlling, controlled by
      ---------
or under direct or indirect common control with such Person. For the purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have the meanings
correlative to the foregoing. Notwithstanding the foregoing: (a) Sellers and
their Affiliates (the "Sellers' Affiliates") shall not include Guarantor and its
Subsidiaries; and (b) Guarantor and its Subsidiaries (including Buyer), on the
one hand, and Sellers and Sellers' Affiliates, on the other hand, shall not be
considered Affiliates of each other.
<PAGE>

     "Agreement" means this Agreement of Purchase and Sale of Membership
      ---------
Interest (including the Exhibits), as the same may from time to time be amended,
supplemented or waived.

     "Applicable Law" means all applicable provisions of all (i) constitutions,
      --------------
treaties, statutes, laws (including the common law), rules, regulations,
ordinances, codes or orders of any Governmental Authority, (ii) Governmental
Approvals, and (iii) orders, decisions, injunctions, judgments, awards and
decrees of or agreements with any Governmental Authority.

     "Buyer" has the meaning set forth in the first paragraph of this Agreement.
      -----

     "Buyer Indemnitees" has the meaning set forth in Section 7.1.
      -----------------

     "Buyer's Closing Documents" has the meaning set forth in Section 6.4.
      -------------------------

     "Citadel Guarantee" means the guarantees of the obligations of Buyer under
      -----------------
this Agreement and the Notes, dated as of the date hereof, by Guarantor in favor
of each Seller and his successors and assigns, as the same may be amended,
restated, modified or supplemented from time to time.

     "Closing" has the meaning set forth in Section 2.1.
      -------

     "Closing Date" has the meaning set forth in Section 2.1.
      ------------

     "Company" has the meaning set forth in Recital A of this Agreement.
      -------

     "Consent" means any consent, approval, authorization, stipulation, waiver,
      -------
permit, grant, franchise, concession, agreement, license, exemption or order of,
registration, certificate, declaration or filing with, or report or notice to,
any Person, including any Governmental Authority.

     "$" or "dollars" means lawful money of the United States of America.
      -      -------

     "Governmental Approval" means any Consent of, with or to any Governmental
      ---------------------
Authority.

     "Governmental Authority" means any nation or government, any state or other
      ----------------------
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
including any government authority, agency, department, board, commission or
instrumentality of the United States, any State of the United States or any
political subdivision thereof, and any tribunal or arbitrator(s) of competent
jurisdiction, and any self-regulatory organization.

     "Guarantor" means Citadel Holding Corporation, a Nevada corporation (an
      ---------
Affiliate of Buyer), and its successors and assigns.
<PAGE>

     "include", "includes", "included" and "including" shall be construed as if
      -------    --------    --------       ---------
followed by the phrase "without being limited to" or "without limitation."
<PAGE>

     "Indemnified Party" has the meaning set forth in Section 7.3.
      -----------------

     "Indemnifying Party" has the meaning set forth in Section 7.3.
      ------------------

     "Lien" means any security interest, mortgage, pledge, hypothecation,
      ----
assignment, encumbrance, lien (statutory or other), or other security agreement
of any kind or nature whatsoever (including, without limitation, any conditional
sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).

     "Losses" has the meaning set forth in Section 7.1.
      ------

     "Membership Interests" has the meaning set forth in Recital A of this
      --------------------
Agreement.

     "Notes" has the meaning set forth in Section 2.2.
      -----

     "Notice" has the meaning set forth in Section 8.2.
      ------

     "Person" means any natural person, firm, partnership, association,
      ------
corporation, company, limited liability company, trust, business trust,
Governmental Authority or other entity.

     "Purchase Price" has the meaning set forth in Section 2.2.
      --------------

     "Seller" has the meaning set forth in the first paragraph of this
      ------
Agreement.

     "Sellers" has the meaning set forth in the first paragraph of this
      -------
Agreement.

     "Seller Indemnitees" has the meaning set forth in Section 7.2.
      ------------------

     "Sellers' Closing Documents" has the meaning set forth in Section 6.5.
      --------------------------

     Section 1.2  Construction.  All references herein to a Section, Article
                  ------------
or Exhibit are to a Section, Article or Exhibit of or to this Agreement, unless
otherwise indicated.

                                  ARTICLE II

                 SALE AND PURCHASE OF THE MEMBERSHIP INTERESTS

     Section 2.1  Place and Date.  Subject to the terms and conditions set forth
                  --------------
in this Agreement, on the Closing Date, each Seller will sell his Membership
Interest to Buyer without recourse except as hereinafter provided, and Buyer
will purchase the Membership Interests from Sellers. The closing of the sale and
purchase of the Membership Interests (the "Closing") shall take place at 10:00
A.M. local time on the date hereof or, if later, the third business day after
the
<PAGE>

satisfaction of the conditions set forth in Article VI, at the offices of Duane,
Morris & Heckscher LLP, 380 Lexington Avenue, New York, New York 10168, or such
other time and place upon which the parties may agree. The day on which the
Closing actually occurs is the "Closing Date."

     Section 2.2  Purchase Price.  On the terms and subject to the conditions
                  --------------
set forth in this Agreement, Buyer agrees to pay to each Seller at the Closing
for such Seller's Membership Interest the sum of $2,250,000, for an aggregate
purchase price of $4,500,000 (the "Purchase Price"). The Purchase Price shall be
paid by Buyer to each Seller by the making and delivery by Buyer on the Closing
Date of a promissory note in the aggregate principal amount of the Purchase
Price payable to such Seller in the form of Exhibit A attached hereto (such
notes and any promissory note or notes of Buyer issued in substitution thereof
hereinafter referred to as the "Notes").

                                 ARTICLE III

                   REPRESENTATIONS AND WARRANTIES OF SELLERS

     Each Seller, as to himself severally, represents and warrants to Buyer as
of the date hereof as follows:

     Section 3.1  Authorization, etc.  Such Seller is competent to execute and
                  ------------------
deliver this Agreement, to perform his obligations hereunder and to consummate
the transactions contemplated hereby.  Each Seller has duly executed and
delivered this Agreement.  This Agreement is a legal, valid and binding
obligation of such Seller, enforceable against him in accordance with its terms.

     Section 3.2  Ownership of Membership Interest.  Such Seller is the sole
                  --------------------------------
owner, beneficially and of record, of his Membership Interest and has good and
valid title to such Membership Interest, free and clear of all Liens of any
kind, other than those arising from acts of Buyer.
<PAGE>

     Section 3.3  No Conflicts, etc.  The execution, delivery and performance
                  -----------------
by such Seller of this Agreement, and the consummation of the transactions
contemplated hereby, do not and will not conflict with or result in a violation
of or under (with or without the giving of notice or the lapse of time or both)
(a) any Applicable Law applicable to such Seller or any of his  properties or
assets, or (b) any contract, agreement or other instrument applicable to such
Seller or to which such Seller or his Membership Interest is subject, except for
violations and defaults that, individually and in the aggregate, have not and
shall not materially impair the ability of such Seller to perform his
obligations under this Agreement.  No Governmental Approval or other Consent is
required to be obtained or made by such Seller in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.

     Section 3.4  Litigation.  There is no action, claim, suit or proceeding
                  ----------
pending, or to such Seller's knowledge threatened in writing, by or against or
affecting such Seller or the Membership Interest in connection with or relating
to the transactions contemplated by this Agreement or of any action taken or to
be taken in connection herewith or the consummation of the transactions
contemplated hereby.

     Section 3.5  Brokers, Finders, etc.  All negotiations relating to this
                  ---------------------
Agreement, and the transactions contemplated hereby, have been carried on
without the participation of any Person acting on behalf of such Seller or its
Affiliates in such manner as to give rise to any valid claim against Buyer for
any brokerage or finder's commission, fee or similar compensation.

                                  ARTICLE IV

                    REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer represents and warrants to Sellers as of the date hereof as follows:

     Section 4.1  Corporate Status.  Buyer is a corporation duly organized,
                  ----------------
validly existing and in good standing under the laws of the State of Nevada.

     Section 4.2  Authorization, etc.  Buyer has the corporate power and
                  ------------------
authority to execute and deliver this Agreement, to perform fully its
obligations hereunder, and to consummate the transactions contemplated hereby.
The execution and delivery by Buyer of this Agreement, and the consummation of
the transactions contemplated hereby, have been duly authorized by all requisite
corporate action of Buyer.  Buyer has duly executed and delivered this
Agreement.  This Agreement is a legal, valid and binding obligation of Buyer,
enforceable against it in accordance with its terms.

     Section 4.3  No Conflicts, etc.  The execution, delivery and performance
                  -----------------
by Buyer of this Agreement, and the consummation of the transactions
contemplated hereby, do not and will not conflict with or result in a violation
of or under (with or without the giving of notice or the lapse of time or both)
(a) the certificate of incorporation or bylaws of Buyer, (b) any Applicable
<PAGE>

Law applicable to Buyer or to which Buyer or any material portion of its assets
is subject, or (c) any contract, agreement or other instrument applicable to
Buyer or any of its properties or assets, except for violations and defaults
that, individually and in the aggregate, have not and shall not materially
impair the ability of Buyer to perform its obligations under this Agreement. No
Governmental Approval or other Consent is required to be obtained or made by
Buyer in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.

     Section 4.4  Litigation.  There is no action, claim, suit or proceeding
                  ----------
pending, or to Buyer's knowledge threatened in writing, by or against or
affecting Buyer in connection with or relating to the transactions contemplated
by this Agreement or of any action taken or to be taken in connection herewith
or the consummation of the transactions contemplated hereby.

     Section 4.5  Brokers, Finders, etc.  All negotiations relating to this
                  ---------------------
Agreement and the transactions contemplated hereby have been carried on without
the participation of any Person acting on behalf of Buyer or its Affiliates in
such manner as to give rise to any valid claim against either Seller for any
brokerage or finder's commission, fee or similar compensation.

                                   ARTICLE V

                                   COVENANTS

     Section 5.1  Covenants of Sellers.  (a)  Public Announcements.  Except
                  --------------------        --------------------
as required by Applicable Law (in which case the nature of the announcement
shall be described to Buyer (and Buyer shall be allowed reasonable time to
comment) prior to dissemination to the public), each Seller shall not, and shall
not permit his Affiliates to, make any public announcement in respect of this
Agreement or the transactions contemplated hereby without the prior written
consent of Buyer; provided, however, that a Seller need not consult with Buyer
with respect to any public disclosure which is substantially similar to a prior
public disclosure either heretofore made or hereafter made in conformance with
the terms hereof, and provided, further, that a Seller shall promptly provide to
Buyer a copy of any such disclosure permitted to be made by such Seller without
prior consultation with Buyer.

     (b)  Pre-Closing Actions.  As promptly as practicable, each Seller will:
          -------------------
(i) use commercially reasonable efforts to take all actions and to do all things
reasonably necessary, proper or advisable to consummate the transactions
contemplated hereby; (ii) file or supply, or cause to be filed or supplied, all
applications, notifications and information required to be filed or supplied by
such Seller pursuant to Applicable Law in connection with this Agreement and the
sale and transfer of his Membership Interest pursuant hereto; (iii) use all
reasonable efforts to obtain, or cause to be obtained, all Consents (including
all Governmental Approvals and any Consents) necessary to be obtained by him in
order to consummate the transactions contemplated pursuant to this Agreement;
and (iv) coordinate and cooperate with Buyer in exchanging such information and
supplying such assistance as may be reasonably requested by Buyer in connection
with any filings and other actions contemplated by Section 5.2(b) hereof.
<PAGE>

     (c)  Further Assurances.  Following the Closing, each Seller shall, from
          ------------------
time to time, execute and deliver such additional instruments, documents,
conveyances or assurances and take such other actions as shall be necessary, or
otherwise reasonably requested by Buyer, to confirm and assure the rights and
obligations provided for in this Agreement and render effective the consummation
of the transactions contemplated hereby.

     Section 5.2  Covenants of Buyer.  (a)  Public Announcements.  Except as
                  ------------------        --------------------
required by Applicable Law (in which case the nature of the announcement shall
be described to Sellers (and Sellers shall be allowed reasonable time to
comment) prior to dissemination to the public), Buyer shall not, and shall not
permit its Affiliates to, make any public announcement in respect of this
Agreement or the transactions contemplated hereby without the prior written
consent of Sellers; provided, however, that Buyer need not consult with Sellers
with respect to any public disclosure which is substantially similar to a prior
public disclosure either heretofore made or hereafter made in conformance with
the terms hereof.

     (b)  Pre-Closing Actions.  As promptly as practicable, Buyer will: (i)
          -------------------
use commercially reasonable efforts to take all actions and to do all things
reasonably necessary, proper or advisable to consummate the transactions
contemplated hereby; (ii) file or supply, or cause to be filed or supplied, all
applications, notifications and information required to be filed or supplied by
Buyer pursuant to Applicable Law in connection with this Agreement and the sale
and transfer of the Membership Interests pursuant hereto; (iii) use all
reasonable efforts to obtain, or cause to be obtained, all Consents (including
all Governmental Approvals and any Consents) necessary to be obtained by it in
order to consummate the transactions contemplated pursuant to this Agreement;
and (iv) coordinate and cooperate with Sellers in exchanging such information
and supplying such assistance as may be reasonably requested by Sellers in
connection with any filings and other actions contemplated by Section 5.1(b)
hereof.

     (c)  Further Assurances.  Following the Closing, Buyer shall, from time
          ------------------
to time, execute and deliver such additional instruments, documents, conveyances
or assurances and take such other actions as shall be necessary, or otherwise
reasonably requested by Sellers, to confirm and assure the rights and
obligations provided for in this Agreement and render effective the consummation
of the transactions contemplated hereby (including, without limitation,
execution and delivery of such documents as Buyer may reasonably request to
constitute the Buyer as a member of the Company, under Section III.5.3 of the
operating agreement of the Company or otherwise).
<PAGE>

                                  ARTICLE VI

                       CLOSING CONDITIONS AND DELIVERIES

     Section 6.1  Conditions to Obligations of Each Party.  The obligations of
                  ---------------------------------------
the parties to consummate the transactions contemplated hereby at the Closing
shall be subject to the fulfillment on or prior to the Closing Date of the
following conditions:

            (a)   No Injunction, etc.  Consummation of the transactions
                  -------------------
     contemplated hereby shall not have been restrained, enjoined or otherwise
     prohibited by any Applicable Law, including any order, injunction, decree
     or judgment of any court or other Governmental Authority. No court or other
     Governmental Authority shall have determined that any Applicable Law makes
     illegal the consummation of the transactions contemplated hereby.

     Section 6.2  Conditions to Sellers' Obligations.  The obligations of
                  ----------------------------------
Sellers to transfer the Membership Interests to Buyer in accordance with this
Agreement and to otherwise consummate the transactions contemplated hereby at
the Closing shall be subject to the satisfaction of the following conditions
precedent on or prior to the Closing Date:

            (a)   all representations and warranties of Buyer contained in this
     Agreement shall have been true when made and shall be true in all material
     respects at and as of the Closing Date as if such representations and
     warranties were made at and as of the Closing Date, and Buyer shall have
     performed and complied in all material respects with all covenants,
     agreements and conditions required by this Agreement to be performed or
     complied with by Buyer prior to or at the Closing; and

            (b)   Buyer shall have tendered to Sellers Buyer's Closing
     Documents.

     Section 6.3  Conditions to Buyer's Obligations. The obligation of Buyer to
                  ---------------------------------
pay the Purchase Price by delivering the Notes, to purchase the Membership
Interests and otherwise to consummate the transactions contemplated hereby at
the Closing shall be subject to the satisfaction of the following conditions
precedent on or prior to the Closing Date:

          (a)     all representations and warranties of Sellers contained in
     this Agreement shall have been true in all material respects when made and
     shall be true in all material respects at and as of the Closing Date as if
     such representations and warranties were made at and as of the Closing
     Date, and Sellers shall have performed and complied in all material
     respects with all covenants, agreements and conditions required by this
     Agreement to be performed or complied with by Sellers prior to or at the
     Closing Date;

          (b)     Sellers shall have obtained releases of all financing
     statements, if any, filed against Sellers or their predecessor as a debtor
     under the Uniform Commercial Code of any jurisdiction with respect to the
     Membership Interests; and
<PAGE>

          (c)     Buyer shall have received Sellers' Closing Documents.

     Section 6.4  Buyer's Closing Documents.   At the Closing, Buyer shall
                  -------------------------
deliver to Sellers the following documents duly executed and, where applicable,
acknowledged by Buyer (the documents described in this Section 6.4 being
collectively referred to herein as "Buyer's Closing Documents"):

          (a)     the Notes;

          (b)     the Citadel Guarantee;

          (c)     a certificate of the secretary of Buyer with respect to (i)
     the approval by the board of directors of Buyer approving the transaction
     contemplated hereby and (ii) the authority of the person(s) executing this
     Agreement and the Buyer's Closing Documents on behalf of Buyer;

          (d)     a certificate of Buyer, dated as of the Closing Date,
     certifying that the representations and warranties of Buyer contained in
     this Agreement are true in all material respects at and as of the Closing
     Date; and

          (e)     legal opinions addressed to Sellers from Duane, Morris &
     Heckscher LLP and Kummer Kaempfer Bonner & Renshaw, counsel to Buyer, in
     the forms set forth in Exhibit B hereto, which opinions Buyer hereby
     instructs its counsel to deliver to Sellers for their benefit.

     Section 6.5  Sellers' Closing Documents.  At the Closing, Sellers shall
                  --------------------------
deliver to Buyer the following documents duly executed and, where applicable,
acknowledged by Sellers (the documents described in this Section 6.5 being
collectively referred to as "Sellers' Closing Documents"):

          (a)     a certificate of each Seller, dated as of the Closing Date,
     certifying that the representations and warranties of such Seller contained
     in this Agreement are true in all material respects at and as of the
     Closing Date, subject, however, to the provisions of Section 7.4 hereof;

          (b)     a legal opinion addressed to Buyer from Whitman Breed Abbott &
     Morgan LLP, counsel to Sellers, in the form set forth in Exhibit C hereto,
     which opinion Sellers hereby instruct their counsel to deliver to Buyer for
     its benefit; and

          (c)     an assignment from each Seller of his Membership Interest in
the form of Exhibit D hereto.
<PAGE>

     Section 6.6  Conditions Generally.  The foregoing conditions are for the
                  --------------------
benefit only of the party for whom they are specified to be conditions precedent
and Buyer, in its discretion, or Sellers may, in their sole discretion, waive
any or all such conditions.

                                  ARTICLE VII

                                INDEMNIFICATION

     Section 7.1  By Sellers.  Subject to the terms and conditions of this
                  ----------
Article VII, each Seller covenants and agrees to defend, indemnify and hold
harmless Buyer, its officers, directors, employees, agents, advisers,
representatives and Affiliates (including, after the Closing, the Company)
(collectively, the "Buyer Indemnitees") from and against, and pay or reimburse
Buyer Indemnitees for, any and all claims, liabilities, obligations, losses,
fines, penalties, costs, proceedings, judgments, deficiencies or damages
(whether absolute, accrued, conditional or otherwise and whether or not
resulting from third party claims), including out-of-pocket expenses, court
costs, expert witness fees and reasonable attorneys' fees incurred in the
investigation or defense of any of the same or in asserting any of their
respective rights hereunder (collectively, the "Losses"), resulting from or
arising out of:

          (a)  any misrepresentation or breach of any warranty of such Seller
          contained in this Agreement; provided, however, that, for purposes of
     this Article VII, any claim for indemnification by a Buyer Indemnitee under
     this clause (a) may be made no later than six months from and after the
     Closing Date, excepting only that any claim for misrepresentation or breach
     of warranty under Section 3.2 may be made at any time; or

          (b) any failure of such Seller to perform any covenant or agreement
          made or contained in this Agreement or fulfill any obligation in
     respect thereof.

     Section 7.2  By Buyer.  Subject to the terms and conditions of this
                  --------
Article VII, Buyer covenants and agrees to defend, indemnify and hold harmless
each Seller and his heirs, executors, administrators, distributees, legal
representatives and Affiliates (collectively, the "Seller Indemnitees") from and
against any and all Losses resulting from or arising out of:

          (a)  any misrepresentation or breach of any warranty of Buyer
     contained in this Agreement; provided, however, that, for purposes of this
     Article VII, any claim for indemnification by a Seller Indemnitee under
     this clause (a) may be made no later than six months from and after the
     Closing Date;

          (b)  any failure of Buyer to perform any covenant or agreement made or
          contained in this Agreement or fulfill any other obligation in respect
     thereof; or

          (c)  to the extent arising from or relating to this Agreement or the
          other elements of the transactions entered into between Sellers or any
     of their Affiliates, on the one hand, and Buyer or any of its Affiliates,
     on the other hand, on or as of the date
<PAGE>

     hereof: (i) insufficient or inadequate disclosure by Buyer or any of its
     Affiliates under any Applicable Law relating to proxies, (ii) failure by
     Buyer or any of its Affiliates to follow proper procedures and other
     matters relating to the fact that Buyer is owned by a Person the shares of
     which are traded publicly or (iii) alleged breaches of fiduciary duty by
     Buyer or any of its Affiliates or the existence of conflict of interest;
     provided, however, that, with respect to claims or liability arising under
     clause (iii), Buyer shall not be obligated to indemnify a Seller to the
     extent the claimant has been successful in such claim on the merits;
     provided, further, that the Buyer shall have no obligations for indemnity
     to a Seller or persons claiming through him with respect to actual losses
     or damages ultimately and finally determined and adjudged to be payable to
     the extent based on a breach by such Seller of his obligations hereunder or
     for which Sellers are obligated to indemnify Citadel pursuant to Section
     8.12 of a certain Merger Agreement, dated the date hereof, among Citadel,
     Citadel Broadway, Inc., a wholly-owned subsidiary of Citadel, Off Broadway
     Investments, Inc., and Sellers.

     Section 7. 3 Indemnification Procedures. In the case of any claim asserted
                  --------------------------
by a third party against a party entitled to indemnification under this
Agreement (the "Indemnified Party"), written notice shall be given by the
Indemnified Party to the party required to provide indemnification (the
"Indemnifying Party") as soon as practicable after such Indemnified Party has
actual knowledge of any claim as to which indemnity may be sought, and the
Indemnified Party shall permit the Indemnifying Party (at the expense of such
Indemnifying Party) to assume, and the Indemnifying Party shall assume, the
defense of any third party claim or any litigation with a third party resulting
therefrom; provided, however, that (i) the counsel for the Indemnifying Party
who shall conduct the defense of such claim or litigation shall be subject to
the approval of the Indemnified Party (which approval shall not be unreasonably
withheld or delayed), (b) the Indemnified Party may participate in such defense
at such Indemnified Party's expense, and (c) the omission by any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its indemnification obligation under this Agreement except and only to the
extent that such Indemnifying Party is actually and materially damaged as a
result of such failure to give notice. Except with the prior consent of the
Indemnified Party, no Indemnifying Party, in the defense of any such claim or
litigation, shall consent to entry of any judgment or enter into any settlement
that provides for injunctive or other nonmonetary relief affecting the
Indemnified Party that does not include as an unconditional term thereof the
giving by each claimant or plaintiff to such Indemnified Party of a general
release from all liability with respect to such claim or litigation. If the
Indemnified Party shall in good faith determine that the conduct of the defense
of any claim subject to indemnification hereunder or any proposed settlement of
any such claim by the Indemnifying Party might be expected to affect adversely
the Indemnified Party's tax liability or the ability of the Indemnified Party to
conduct its business, or that the Indemnified Party may have available to it one
or more defenses or counterclaims that are inconsistent with one or more of
those that may be available to the Indemnifying Party in respect of such claim
or any litigation relating thereto, the Indemnified Party shall have the right
at all times to take over and assume control over the defense, settlement,
negotiations or litigation relating to any such claim at the sole cost of the
Indemnifying Party; provided, however, that, if the Indemnified Party does so
take over and assume control, the Indemnified Party shall not settle such claim
or litigation without the consent of the Indemnifying Party, such
<PAGE>

consent not to be unreasonably withheld or delayed. If the Indemnifying Party
does not accept the defense of any matter as above provided, the Indemnified
Party shall have the full right to defend against any such claim or demand at
the sole cost of the Indemnifying Party and shall be entitled to settle or agree
to pay in full such claim or demand. In any event, the Indemnifying Party and
the Indemnified Party shall reasonably cooperate in the defense of any claim or
litigation subject to this Article VII and the records of each shall be
reasonably available to the other with respect to such defense.

     Section 7.4  Expiration of Representations and Warranties, etc.  All
                  -------------------------------------------------
representations and warranties contained in this Agreement shall survive the
Closing for a period of six (6) months; provided, however, that the
representations and warranties stated in Section 3.2 shall survive indefinitely.

     Section 7.5  Exclusive Remedy; Certain Limitations on Indemnification.
                  --------------------------------------------------------
Absent fraud or criminal activity, the indemnifications provided for in this
Article VII shall be the sole and exclusive post-Closing remedies available to
any party against any other party for any claims under or based upon this
Agreement.  In no event shall the aggregate liability of any Indemnifying Party
hereunder exceed the amount of the Purchase Price and in no event shall any
Indemnifying Party be liable to any Indemnified Party for special, indirect or
consequential damages or loss of profits.

                                 ARTICLE VIII

                                 MISCELLANEOUS

     Section 8.1  Severability.  If any provision of this Agreement, including
                  ------------
any phrase, sentence, clause, Section or subsection, is inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering the provision in question inoperative or unenforceable in any other
case or circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.
<PAGE>

     Section 8.2  Notices.  All notices, requests, demands, approvals, consents,
                  -------
waivers and other communications required or permitted to be given under this
Agreement (each, a "Notice") shall be in writing and shall be (a) delivered
personally, (b) mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, (c) sent by next-day or overnight mail or
delivery, or (d) sent by facsimile transmission, provided that the original copy
thereof also is sent by prepaid, first-class certified or registered mail.

                  (i)    if to Buyer, to:

                         Citadel Cinemas, Inc.
                         550 South Hope Street
                         Suite 1825
                         Los Angeles, CA 90071
                         Facsimile: (213) 239-0548
                         Attention: President

                         with a copy to:

                         Duane, Morris & Heckscher LLP
                         380 Lexington Avenue
                         New York, NY 10168
                         Facsimile: (212) 692-1020
                         Attention: Michael H. Margulis, Esq.

                  (ii)   if to either Seller, to him at:

                         120 North Robertson Boulevard
                         Los Angeles, CA 90048
                         Facsimile: (310) 652-6490

                         with a copy to:

                         Whitman Breed Abbott & Morgan LLP
                         200 Park Avenue
                         New York, NY 10166
                         Facsimile: (212) 351-3131
                         Attention: Howard E. Peskoe, Esq.

                         and

                         120 North Robertson Boulevard
                         Los Angeles, CA 90048
                         Facsimile: (310) 652-6490
                         Attention: Ira Levin
<PAGE>

or, in each case, at such other address as may be specified in a Notice to the
other party hereto.  All Notices shall be deemed effective and given upon
receipt or refusal of receipt.

     Section 8.3  Attorneys' Fees.  If any party hereto initiates any legal
                  ---------------
action arising out of or in connection with this Agreement, the prevailing party
shall be entitled to recover from the other party all reasonable attorneys'
fees, expert witness fees and expenses incurred by the prevailing party in
connection therewith.

     Section 8.4  Headings.  The headings contained in this Agreement are for
                  --------
purposes of convenience only and shall not affect the meaning or interpretation
of this Agreement.

     Section 8.5  Entire Agreement.  This Agreement (including the Exhibits
                  ----------------
hereto) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.

     Section 8.6  Counterparts.  This Agreement may be executed (including by
                  -------------
facsimile transmission) with counterpart signature pages or in several
counterparts, each of which shall be deemed an original and all of which shall
together constitute one and the same instrument.

     Section 8.7  GOVERNING LAW, ETC.  THIS AGREEMENT SHALL BE GOVERNED IN ALL
                  ------------------
RESPECTS, INCLUDING AS TO VALIDITY, INTERPRETATION AND EFFECT, BY THE INTERNAL
LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
RULES THEREOF. EACH OF BUYER AND EACH SELLER HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, AND THE FEDERAL COURTS OF
THE UNITED STATES OF AMERICA LOCATED IN THE SOUTHERN DISTRICT OF NEW YORK SOLELY
IN RESPECT OF THE INTERPRETATION AND ENFORCEMENT OF THE PROVISIONS OF THIS
AGREEMENT AND OF THE DOCUMENTS REFERRED TO IN THIS AGREEMENT, AND HEREBY WAIVE,
AND AGREE NOT TO ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE
INTERPRETATION OR ENFORCEMENT HEREOF OR OF ANY SUCH DOCUMENT, THAT IT IS NOT
SUBJECT THERETO OR THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS
NOT MAINTAINABLE IN SAID COURTS OR THAT THE VENUE THEREOF MAY NOT BE APPROPRIATE
OR THAT THIS AGREEMENT OR ANY OF SUCH DOCUMENT MAY NOT BE ENFORCED IN OR BY SAID
COURTS, AND THE PARTIES HERETO IRREVOCABLY AGREE THAT ALL CLAIMS WITH RESPECT TO
SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH A NEW YORK STATE
OR FEDERAL COURT. EACH OF BUYER AND EACH SELLER HEREBY CONSENTS TO AND GRANTS
ANY SUCH COURT JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT
MATTER OF ANY SUCH DISPUTE AND AGREES THAT MAILING OF PROCESS OR OTHER PAPERS IN
CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION
8.2, OR IN SUCH OTHER MANNER AS MAY BE PERMITTED BY LAW, SHALL BE VALID AND
SUFFICIENT SERVICE THEREOF.
<PAGE>

     Section 8.8   Binding Effect.  This Agreement shall be binding upon and
                   --------------
inure to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.

     Section 8.9   Assignment.  This Agreement shall not be assignable or
                   ----------
otherwise transferable by Buyer or either Seller without the prior written
consent of the Sellers or Buyer, respectively, which consent shall not be
unreasonably withheld or denied; provided, however, that Buyer may assign this
Agreement to any of its Affiliates (it being understood and agreed that no such
assignment by Buyer pursuant to this proviso shall relieve Buyer of any of its
obligations hereunder).

     Section 8.10  No Third Party Beneficiaries.  Except as provided in
                   -----------------------------
Article VII with respect to indemnification of Indemnified Parties hereunder,
nothing in this Agreement shall confer any rights upon any Person other than the
parties hereto and their respective heirs, legal representatives, successors and
permitted assigns.

     Section 8.11  Amendment; Waivers, etc.  No discharge of this Agreement,
                   -----------------------
and no waiver hereunder, shall be valid or binding unless set forth in writing
and duly executed by the party against whom enforcement of the discharge or
waiver is sought.  Any such waiver shall constitute a waiver only with respect
to the specific matter described in such writing and shall in no way impair the
rights of the party granting such waiver in any other respect or at any other
time.  Neither the waiver by any of the parties hereto of a breach of or a
default under any of the provisions of this Agreement, nor the failure by any of
the parties, on one or more occasions, to enforce any of the provisions of this
Agreement or to exercise any right or privilege hereunder, shall be construed as
a waiver of any other breach or default of a similar nature, or as a waiver of
any of such provisions, rights or privileges hereunder.  No amendment to this
Agreement shall be valid or binding unless set forth in writing and duly
executed by all the parties hereto.

     Section 8.12  Transaction Costs   Except to the extent as may otherwise
                   -----------------
expressly be provided hereby, Buyer, on the one hand, and Sellers, on the other
hand, shall bear their respective expenses, costs and fees (including attorney's
fees) in connection with the transactions contemplated hereby, including the
preparation, execution and delivery of this Agreement and compliance herewith.
If any real property transfer taxes are payable with respect to the transactions
contemplated hereby, Sellers shall pay the lesser of the amount of such taxes
and one-sixth of the amount of such taxes which would have been paid if all of
the membership interests of the Company were transferred (such amount to be
shared equally between Sellers), and Buyer shall pay any balance thereof.
<PAGE>

     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.

                              CITADEL CINEMAS, INC.

                              By:  /s/ Andrzej Matyczynski
                                 -------------------------
                                 Name:  Andrzej Maytczynski
                                 Title: Chief Financial Officer

                                  /s/  James J. Cotter
                                 ----------------------
                                        James J. Cotter

                                  /s/ Michael R. Forman
                                 ------------------------
                                        Michael R. Forman<PAGE>

                                                                    EXHIBIT 10.2

                                PROMISSORY NOTE

TWO MILLION TWO
HUNDRED FIFTY THOUSAND DOLLARS                              New York, New York

$2,250,000                                                  July 28, 2000

     FOR VALUE RECEIVED, CITADEL CINEMAS, INC., a Nevada corporation (the
"Maker"), hereby promises to pay to JAMES J. COTTER (the "Holder"), at such
place as the Holder may designate in writing, the principal amount of Two
Million Two Hundred Fifty Thousand Dollars ($2,250,000), payable on the second
anniversary of the date of this Note (the "Maturity Date"), together with
interest thereon at the rate of eight and one-quarter percent (8.25%) per annum,
calculated on the basis of a year of 360 days and the actual number of days
elapsed, such interest to be payable in arrears on a quarterly basis on the
first day of September, December, March and June of each year, commencing on
September 1, 2000.

     Capitalized terms used but not otherwise defined herein shall have the
meanings given to them in the Agreement of Purchase and Sale of Membership
Interest, dated as of the date hereof, among the Maker, the Holder, and Michael
R. Forman (the "Other Holder"), as the same may be amended, modified,
supplemented or extended (the "Agreement of Purchase and Sale"). This Note and a
similar note issued to the Other Holder (the "Other Note") are made and
delivered pursuant to the Agreement of Purchase and Sale, representing the
Purchase Price payable in accordance with the terms thereof.

     1.  Payments and Prepayments.  All payments of principal and interest
         ------------------------
hereunder shall be payable in lawful money of the United States and in same day
funds.  If any payment on this Note becomes due and payable on a Saturday,
Sunday or other day on which commercial banks in New York, New York are
authorized or required by law to close, the maturity thereof shall be extended
to the next succeeding business day and, with respect to payments of principal,
interest thereon shall be payable during such extension at the then applicable
rate.

     2.  Events of Default; Remedies.  (a)  The Maker shall be in default
         ---------------------------
hereunder upon the occurrence of any of the following events:

         (i) Failure of the Maker to pay any installment of principal or
     interest, as and when due and payable, whether by reason of maturity,
     acceleration or otherwise, provided, in the case of interest, that such
     failure continues for ten (10) business days after notice from the Holder;

         (ii) The entry of a decree or order for relief in respect of the Maker
     or Guarantor by a court having jurisdiction in the premises, or the
     appointment of a receiver, liquidator, assignee, custodian, trustee,
     sequestrator (or other similar official) of the Maker or Guarantor or of
     any substantial part of their respective property, or ordering the winding
     up or liquidation of their affairs, in an involuntary case under the
     Federal
<PAGE>

     bankruptcy laws, as now or hereafter constituted, or any other applicable
     Federal or state bankruptcy, insolvency or other similar law; or the
     commencement against the Maker or Guarantor of an involuntary case under
     the Federal bankruptcy laws, as now or hereafter constituted, or any other
     applicable Federal or state bankruptcy, insolvency or other similar law,
     and the continuance of any such case unstayed and in effect for a period of
     sixty (60) consecutive days;

          (iii)  The commencement by the Maker or Guarantor of a voluntary case
     under the Federal bankruptcy laws, as now or hereafter constituted, or any
     other applicable Federal or state bankruptcy, insolvency or other similar
     law, or the consent by either of them to the entry of an order for relief
     in an involuntary case under any such law or the consent by it to the
     appointment of or taking possession by a receiver, liquidator, assignee,
     custodian, trustee, sequestrator (or other similar official) of the Maker
     or Guarantor or of any substantial part of their respective property, or
     the making by either of them of a general assignment for the benefit of
     creditors, or the taking of any action in furtherance of any of the
     foregoing;

          (iv)   A default by the Maker shall have occurred and not been cured
     after the giving of any notice of default required and passage of any time
     for cure permitted under the Other Note or the Lease entered into or
     contemplated to be entered into between the Maker and Sutton Hill Capital,
     L.L.C.

         (v)     A default by the Guarantor under the Citadel Guarantee in favor
     of the Holder past notice and time to cure if required or if the Citadel
     Guarantee ceases to be in full force and effect.

     (b) Upon the occurrence of any event or condition of default hereunder, or
any time thereafter, the Holder at its option may, by notice to the Maker
(except that, in the case of a default described in Section 2(a)(ii) or (iii),
no such notice shall be required), accelerate the maturity of this Note and
declare all of the indebtedness or any portion thereof to be immediately due and
payable together with accrued interest thereon, and payment thereof may be
enforced by suit or other process of law.

     (c) From and after acceleration or upon the maturity hereof (whether at the
Maturity Date or otherwise), this Note shall bear interest, until repaid in
full, at the rate of 9:%.

     3.  Collection Expenses. If the Holder shall institute any proceedings to
         -------------------
enforce payment of all or any part of any sum due the Holder hereunder, or if
this Note is placed in the hands of an attorney for collection, or if it is
collected through any legal proceedings, the Maker agrees to pay all costs,
expenses and fees incurred by the Holder, including reasonable attorney's fees.

     4.  Obligation Absolute.  The obligations under this Note are absolute and
         -------------------
unconditional obligations of the Maker and no modification, release, consent,
waiver,
<PAGE>

rearrangement or amendment shall impair the obligations of the Maker hereunder.

     5.   Governing Law.  THIS NOTE SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING
          -------------
AS TO VALIDITY, INTERPRETATION AND EFFECT, BY THE INTERNAL LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS RULES THEREOF.

     6.   Waivers.  Except as otherwise provided herein or in the Citadel
          -------
Guarantee, the Maker and each surety, guarantor, endorser and other party ever
liable for payment of any sum of money payable on this Note jointly and
severally waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, diligence in collecting, grace, and all
other formalities of any kind, and consent to all extensions without notice for
any period or periods of time and partial payments, before and after maturity,
all without prejudice to the Holder. The Maker waives the right to interpose
counterclaims (other than mandatory counterclaims) of any kind or description in
any litigation between the Maker and the Holder relating to this Note, provided
that the foregoing shall not limit set-off rights any party may have.  THE MAKER
WAIVES THE RIGHT, IN ANY LITIGATION INVOLVING THIS NOTE, TO TRIAL BY JURY.

     The Holder shall similarly have the right to deal in any way, at any time,
with one or more of the foregoing parties without notice to any other party, and
to grant any such party any extensions of time for payment of said indebtedness,
or to release or substitute any such party, or to grant any other indulgences or
forebearances whatsoever, without notice to any party and without in any way
affecting the personal liability of any party hereunder.

     7.   Modification of Note. Any provision of this Note may be modified,
          ---------------------
altered, amended, waived, discharged or terminated if, but only if, such
modification, alteration, amendment, waiver, discharge or termination is in
writing and is signed by the Holder and Maker. Any such modification,
alteration, amendment or waiver shall constitute a modification, alteration,
amendment or waiver only with respect to the specific matter described in such
writing and shall in no way impair the rights of the party granting such
modification, alteration, amendment or waiver in any other respect or at any
other time.

     8.   Successors.  The Holder may not assign, negotiate, pledge, encumber or
          ----------
otherwise transfer or grant a participation in this Note or any interest of the
Holder herein without the written consent of the Maker, which may be withheld in
its sole discretion.  The term "Maker" shall include the Maker's successors and
assigns and the term "Holder" shall include the Holder's permitted successors
and assigns.
<PAGE>

     IN WITNESS WHEREOF, the Maker has hereby caused this Note to be signed on
its behalf, in its corporate name and by its duly authorized officer, as of the
date first written above.

                                          CITADEL CINEMAS, INC.

                                          By: /s/ Andrzej Matyczynski
                                              ----------------------------
                                              Name:  Andrzej Matyczynski
                                              Title: Chief Financial Officer

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