CINEMASTAR LUXURY THEATERS INC
10QSB, 1999-01-25
MOTION PICTURE THEATERS
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<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

(MARK ONE)

          [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934.

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

          [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

             For the Transition Period from __________ to __________

                         Commission File Number 0-25252


                        CINEMASTAR LUXURY THEATERS, INC.
             (Exact Name of Registrant as specified in its charter)


               DELAWARE                                    33-0451054
    (State or other jurisdiction of            (IRS Employer Identification No.)
    incorporation or organization)

12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA               92130
(Address of principal executive offices)                   (Zip Code)


                                 (619) 509-2777
              (Registrant's telephone number, including area code)


Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

                                YES [X]   NO [ ]

Common stock, $0.01 par value: 3,864,986 shares outstanding as of January 22,
1999.

Transitional Small Business Disclosure Format. (check one):

                                YES [ ]   NO [X]


<PAGE>   2

                        CINEMASTAR LUXURY THEATERS, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                    PAGE NO.
                                                                                                    --------
<C>         <S>                                                                                     <C>
                          PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements                                                                     

            Condensed Consolidated Balance Sheet as of December 31, 1998 (Unaudited)                    3

            Condensed Consolidated Statements of Operations for the three                            
            and nine months ended December 31, 1998 and 1997 (Unaudited)                                4

            Condensed Consolidated Statements of Cash Flows for the                                  
            nine months ended December 31, 1998 and 1997 (Unaudited)                                    5

            Notes to Condensed Consolidated Financial Statements (Unaudited)                            6

Item 2.     Management's Discussion and Analysis of Financial Condition                              
            and Results of Operations                                                                   7

                           PART II. OTHER INFORMATION

Item 1.     Legal Proceedings                                                                          12

Item 2.     Changes in Securities                                                                      12

Item 3.     Defaults in Senior Securities                                                              13

Item 4.     Submission of Matters to a Vote of Securities Holders                                      13

Item 5.     Other Information                                                                          14

Item 6.     Exhibits and Reports on Form 8-K                                                           14

            Signatures                                                                                 15
</TABLE>


                                       2

<PAGE>   3

                                PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                          1998
                                                                      ------------
<S>                                                                   <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                             $  2,746,470
Prepaid expenses                                                           300,299
Other current assets                                                       273,281
                                                                      ------------

TOTAL CURRENT ASSETS                                                     3,320,050

Property and equipment, net                                             11,750,604
Other assets                                                               964,476
                                                                      ------------
TOTAL ASSETS                                                          $ 16,035,130
                                                                      ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
  obligations                                                         $    232,441
Accounts payable                                                         1,208,124
Accrued expenses                                                           800,834
Deferred revenue                                                           528,436
                                                                      ------------

TOTAL CURRENT LIABILITIES                                                2,769,835

Long-term debt and capital lease obligations,
  net of current portion                                                 1,819,490
Deferred rent liability                                                  3,734,839
                                                                      ------------

TOTAL LIABILITIES                                                        8,324,164
                                                                      ------------

STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; authorized shares -
  60,000,000; issued and outstanding shares - 3,864,986                 22,628,670
Additional paid-in capital                                               3,626,152
Accumulated deficit                                                    (18,543,856)
                                                                      ------------

TOTAL STOCKHOLDERS' EQUITY                                               7,710,966
                                                                      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $ 16,035,130
                                                                      ============
</TABLE>


SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       3

<PAGE>   4

                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                            DECEMBER 31,                         DECEMBER 31,
                                                            ------------                         -------------
                                                      1998               1997               1998               1997
                                                  ------------       ------------       ------------       ------------
<S>                                               <C>                <C>                <C>                <C>         

REVENUES:

Admissions                                        $  4,663,484       $  4,512,741       $ 15,252,824       $ 13,104,417

Concessions                                          1,955,625          1,668,318          6,408,881          5,457,313
Other operating revenues                               168,000            121,471            503,181            379,487
                                                  ------------       ------------       ------------       ------------

TOTAL REVENUES                                       6,787,109          6,302,530         22,164,886         18,941,217

COSTS AND EXPENSES:

Film rental and booking costs                        2,474,677          2,495,583          8,153,080          7,432,200
Cost of concession supplies                            328,958            639,889          1,382,174          1,975,661
Theater operating expenses                           3,050,919          2,887,241          9,260,200          7,850,350
Termination fees - concession
   lease agreement                                          --          1,859,352                 --          1,859,352
Selling, general and administrative expenses           897,366          1,395,909          2,382,818          3,182,021
Depreciation and amortization                          613,969            473,750          1,727,724          1,460,105
                                                  ------------       ------------       ------------       ------------

TOTAL COSTS AND EXPENSES                             7,365,889          9,751,724         22,905,996         23,759,689
                                                  ------------       ------------       ------------       ------------

OPERATING LOSS                                        (578,780)        (3,449,194)          (741,110)        (4,818,472)

OTHER INCOME (EXPENSE):

Interest expense                                       (91,442)          (324,803)          (246,574)          (693,451)
Non-cash interest expense                                   --           (221,750)                --           (328,750)
Interest income                                         30,292             14,098            108,712             23,580
                                                  ------------       ------------       ------------       ------------

TOTAL OTHER EXPENSE                                    (61,150)          (532,455)          (137,862)          (998,621)
                                                  ------------       ------------       ------------       ------------
LOSS BEFORE PROVISION FOR
INCOME TAXES                                          (639,930)        (3,981,649)          (878,972)        (5,817,093)

PROVISION FOR INCOME TAXES                                  --                 --             (1,600)            (1,600)
                                                  ------------       ------------       ------------       ------------

NET LOSS                                          $   (639,930)      $ (3,981,649)      $   (880,572)      $ (5,818,693)
                                                  ============       ============       ============       ============

BASIC AND DILUTED NET LOSS PER SHARE              $      (0.17)      $      (2.51)      $      (0.24)      $      (4.54)

WEIGHTED AVERAGE SHARES                              3,864,986          1,584,963          3,737,725          1,280,384
</TABLE>


SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       4

<PAGE>   5

                CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                  1998               1997
                                                              ------------       -------------
<S>                                                           <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                      $   (880,572)      $ (5,818,693)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
Depreciation and amortization                                    1,727,724          1,460,105
Deferred rent expense                                              557,081            635,980
Non-cash interest expense                                               --            328,750
Changes in operating assets and liabilities:
Prepaid expenses and other current assets                          (54,573)            16,014
Deposits and other assets                                           (8,273)           (19,301)
Accounts payable                                                  (464,557)          (822,284)
Accrued expenses and other liabilities                             (22,349)           831,683
                                                              ------------       ------------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                854,481         (3,387,746)
                                                              ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of minority interest in consolidated subsidiary          (337,146)                --
Purchases of property and equipment                               (575,668)        (4,167,753)
                                                              ------------       ------------

NET CASH USED IN INVESTING ACTIVITIES                             (912,814)        (4,167,753)
                                                              ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt                                --          5,637,104
Principal payments on long-term debt and capital
  lease obligations                                               (300,769)        (7,935,080)
Proceeds from issuance of common stock, net                             --         13,154,053
Proceeds from issuance of common stock warrants, net                    --            738,375
Payment of debt issuance costs                                    (376,406)                --
Advances from stockholder, net                                          --             57,010
                                                              ------------       ------------

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES               (677,175)        11,651,461
                                                              ------------       ------------

NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS             (735,508)         4,095,962

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                   3,481,978            601,646
                                                              ------------       ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                      $  2,746,470       $  4,697,608
                                                              ============       ============


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest                                                      $    232,878       $    693,451
                                                              ============       ============

Income taxes                                                  $      1,600       $      1,600
                                                              ============       ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:

Common stock issued upon conversion of debentures             $         --       $    339,300
                                                              ============       ============
</TABLE>


SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       5


<PAGE>   6

                        CINEMASTAR LUXURY THEATERS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                   (UNAUDITED)

NOTE 1

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. For further
information, refer to the audited consolidated financial statements for the year
ended March 31, 1998 and footnotes thereto, included in the Company's Annual
Report on Form 10-KSB/A which was filed with the Securities and Exchange
Commission. Operating results for the three and nine month periods ended
December 31, 1998 are not necessarily indicative of the results of operations
that may be expected for the year ending March 31, 1999.

NOTE 2

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the Financial Accounting Standards Board
("FASB") is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted SFAS No. 130 effective April 1, 1998
and the adoption had no effect on the Company's financial statements.

Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
will adopt SFAS No. 131 during its fiscal year ended March 31, 1999.

In April of 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up
Activities. SOP 98-5 requires costs of start-up activities to be expensed when
incurred. The Company has adopted this practice, which has not had a material
impact on its results of operations.

NOTE 3

Certain reclassifications have been made to the December, 1997 financial
statements to conform to the December, 1998 presentation.

NOTE 4

The Company completed a one-for-seven reverse stock split, effective December 2,
1998. Basic and diluted loss per share and weighted average shares outstanding
have been adjusted to reflect the impact of such reverse stock split for all
periods presented.

NOTE 5

On September 23, 1997, the Company entered into a definitive agreement (the "CAP
Agreement") with CinemaStar Acquisition Partners, L.L.C. ("CAP") and Reel
Partners L.L.P. ("Reel") whereby Reel provided $3,000,000 of interim debt
financing (the "Bridge Loan") and CAP provided $15,000,000 of equity financing
(the "Equity Financing").

Pursuant to the terms of the CAP Agreement, the Company was and continues to be
obligated to issue additional shares of Common Stock (the "Adjustment Shares")
to CAP. The number of Adjustment Shares to be issued is based upon (i) the
recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain
expenses incurred and paid by the Company in connection with the contemplated
transactions, (iii) any negative cash flow incurred by the Company during the
period commencing August 31, 1997 and ending December 15, 1997, and (iv)
operating losses experienced by, or costs of closing, the Company's Plaza
Americana 10 facility in Tijuana (now in full operation and achieving operating
profits) and San Bernardino Facility (still in development). The


                                       6


<PAGE>   7

measurement of the operating losses and/or closing costs for the two facilities
is cumulative, calculated in the aggregate and will take place on the earlier to
occur of the closing of each such facility or December 15, 2000. The Company
issued 1,351,256 Adjustment Shares (193,037 Adjustment Shares taking account of
the one-for-seven reverse stock split which became effective December 2, 1998)
to CAP pursuant to the terms of the CAP Agreement, in September 1998. To the
extent there are (a) operating losses at the Company's Tijuana and San
Bernardino facilities, calculated in the aggregate, for the three-year period
ended December 15, 2000, and (b) expenditures in connection with the discovery
of liabilities, or defense and/or settlement of claims, in either case relating
to periods prior to August 31, 1997, the Company will be obligated to issue
additional Adjustment Shares.

NOTE 6

The Company signed on October 19, 1998, a $15 million Seven Year Revolving
Credit Agreement with a senior, secured lender. This facility will be used
primarily to finance the Company's future developments in accordance with the
terms and conditions of the Revolving Credit Facility. The Company has not to
date borrowed against this facility but has used the facility to secure two
standby letters of credit, with initial terms of one year, totaling $2,275,000,
issued in accordance with the terms of its lease (as amended) on the San
Bernardino 20-screen facility, currently under construction. Commitment and
other fees associated with the Revolving Credit Agreement and the standby
letters of credit, totaling approximately $380,000, are included in Other Assets
will be amortized over their respective terms.

NOTE 7

The Company purchased on November 23, 1998 the remaining 25% minority interest
in the Company's Mexican subsidiary, CinemaStar Luxury Theaters, S.A. de C.V.,
for approximately $340,000. This amount is included in Other Assets and will be
amortized over a seven year period.

ITEM 2.

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

GENERAL

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB.
Where possible, the Company uses words like "believes", "anticipates",
"expects", "plans" and similar expressions to identify such forward looking
statements. The Company's actual results could differ materially from those
discussed here. Factors, risks and uncertainties that could cause or contribute
to such differences include the availability of marketable motion pictures, the
increase of revenues to meet long-term lease obligations and rent increases,
risks inherent in the construction of new theaters, the ability to secure new
locations on favorable terms, intense competition in the industry, dependence on
concession sales and suppliers, earthquakes and other natural disasters and
costs associated with potential changes in management and disputes related
thereto.

At April 1, 1998 and at December 31, 1998 the Company had eight theater
locations with a total of 79 screens. In July 1997, the Company added five
screens to an existing theater. In November 1997, the Company added a new ten
screen theater complex. These additions resulted in an increase in revenues and
expenses for the three and nine months ended December 31, 1998 compared to
December 31, 1997.

The Company has entered into agreements, negotiations and/or discussions
pertaining to the development of a 20 screen Ultraplex theater in San
Bernardino, California, a 4 screen expansion of an existing theater in
Riverside, California and an 8 screen expansion of an existing theater in Chula
Vista, California. Additionally, the Company has entered into negotiations
regarding the development of other theater complexes in the United States and
the Republic of Mexico. The building of these and other new theater complexes is
subject to many contingencies, many of which are beyond the Company's control,
including consummation of site purchases or leases, receipt of necessary
government approvals, negotiation of acceptable construction agreements, the
availability of financing to the developer and/or the Company and timely
completion of construction. No assurances can be given either that the developer
will


                                       7


<PAGE>   8

perform or that the Company will be able to successfully build, finance or
operate any of the new theaters presently contemplated or otherwise.

THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997.

Total revenues for the three months ended December 31, 1998 increased 7.7% to
$6,787,109 from $6,302,530 for the three months ended December 31, 1997. The
increase resulted from a 3.3% increase in admissions revenues to $4,663,484 and
an 18.7% increase in concession and other operating revenues to $2,123,625. The
increases in admission revenue and concession and other operating revenue were
due primarily to the increase in the number of theaters, screens and average
ticket prices. Average revenues per screen for theaters in operation during both
periods decreased slightly, in part due to the absence of equivalent movie
offerings compared with the prior year for the important Christmas season and
increased competition in selected markets. The increase in concession and other
operating revenues resulted, in part, from the introduction of screen
advertising programs and ATM machines at the Company's theaters.

Film rental and booking costs for the three months ended December 31, 1998
decreased 0.8% to $2,474,677 from $2,495,583 for the three months ended December
31, 1997. As a percentage of admissions revenues, film rental and booking costs
decreased to 53.1% from 55.3% in the three months ended December 31, 1998
compared to the same period of the prior year, in part due to lower film rental
cost in the Company's new location in Tijuana, Mexico.

Cost of concession supplies for the three months ended December 31, 1998
decreased 48.6% to $328,958 from $639,889 for the three months ended December
31, 1997. As a percentage of concession revenues, cost of concession supplies
decreased to 16.8% from 38.4% in the three months ended December 31, 1998
compared to the comparable prior year period, due to the termination, during the
first quarter of fiscal 1999, of concession lease agreements with its former
primary concession vendor, Pacific Concessions, Inc. ("PCI"). As of June 15,
1998, the Company ceased the purchase of concessions supplies and services from
PCI and began purchasing concessions supplies on a competitive basis.

Theater operating expenses for the three months ended December 31, 1998
increased 5.7% to $3,050,919 from $2,887,241 for the three months ended December
31, 1997. The increase in theater operating costs was primarily due to the
increased costs attributable to the addition of a new theater and increases due
to federally mandated increases in minimum wages. As a percentage of total
revenues, theater operating expenses decreased to 45.0% from 45.8% during the
applicable periods.

Termination fees -- concession lease agreement of $1,859,352 for the three
months ended December 31, 1997 comprised penalty payments for notice of early
termination of agreements with respect to concession supplies at the Company's
seven domestic locations. Such penalty payments were made in December 1997.

Selling, general and administrative expenses for the three months ended December
31, 1998 decreased 35.7% to $897,366 from $1,395,909 for the three months ended
December 31, 1997. As a percentage of total revenues, selling, general and
administrative expenses decreased to 13.2% from 22.1% for the three months ended
December 31, 1998 compared with the prior comparable period. The decrease is the
result of cost reduction initiatives and of lower international expenses.

Depreciation and amortization for the three months ended December 31, 1998
increased 29.6% to $613,969 from $473,750 for the three months ended December
31, 1997. The increase was primarily the result of increased depreciation on
additional equipment associated with the opening of a new theater.

Interest expense for the three months ended December 31, 1998 decreased to
$91,442 from $324,803 for the three months ended December 31, 1997. This
decrease was primarily a result of the majority of the Company's debt having
been repaid from the proceeds of the Equity Financing transaction consummated in
December 1997.

Non-cash interest expense for the three months ended December 31, 1997, totaling
$221,750, resulted from the issuance of debt with detachable warrants and
represents the value of the detachable warrants. This debt was repaid in full in
December 1997.

Interest income for the three months ended December 31, 1998 increased to
$30,292 from $14,098 for the three months ended December 31, 1997. This increase
is attributable to the increase in cash balances, due to the completion of the
Equity Financing transaction in December 1997.

As a result of the factors discussed above, the net loss for the three months
ended December 31, 1998 was $639,930 or $0.17 per common share, compared to a
net loss of $3,981,649, or $2.51 per common share, for the three months ended
December 31, 1997.


                                       8


<PAGE>   9

NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1997.

Total revenues for the nine months ended December 31, 1998 increased 17.0% to
$22,164,886 from $18,941,217 for the nine months ended December 31, 1997. The
increase resulted from a 16.4% increase in admissions revenues to $15,252,824
and an 18.4% increase in concession and other operating revenues to $6,912,062.
The increases in admission revenue and concession and other operating revenue
were due primarily to the increase in the number of theaters and screens.
Average revenues per screen for theaters in operation during both periods
declined slightly, in part due to the closure, for remodeling, of a six screen
facility for part of fiscal 1999's first quarter and also, in part due to the
absence of equivalent movie offerings compared with the prior year for the
important Christmas season. The increase in concession and other operating
revenues resulted, in part, from the introduction of screen advertising programs
and ATM machines at the Company's theaters.

Film rental and booking costs for the nine months ended December 31, 1998
increased 9.7% to $8,153,080 from $7,432,200 for the nine months ended December
31, 1997. The increase was due to the greater revenue generated from more
screens. As a percentage of admissions revenues, film rental and booking costs
decreased to 53.5% from 56.7% in the nine months ended December 31, 1998
compared to the comparable prior year period, in part due to lower film rental
cost in the Company's new location in Tijuana, Mexico.

Cost of concession supplies for the nine months ended December 31, 1998
decreased 30.0% to $1,382,174 from $1,975,661 for the nine months ended December
31, 1997. As a percentage of concession revenues, cost of concession supplies
decreased to 21.6% from 36.2% in the nine months ended December 31, 1998
compared to the comparable prior year period, due to the termination of
concession lease agreements with PCI, its former primary concession vendor. As
of June 15, 1998, the Company ceased the purchase of concessions supplies and
services from PCI and began purchasing concessions supplies on a competitive
basis.

Theater operating expenses for the nine months ended December 31, 1998 increased
18.0% to $9,260,200 from $7,850,350 for the nine months ended December 31, 1997.
As a percentage of total revenues, theater operating expenses increased to 41.8%
from 41.4% during the applicable periods. The increase in theater operating
costs was primarily due to the increased costs attributable to the addition of
new theaters, increases due to federally mandated increases in minimum wages and
increased maintenance and repair expenses associated with certain upgrades and
remodels.

Termination fees -- concession lease agreement of $1,859,352 for the three
months ended December 31, 1997 comprised penalty payments for notice of early
termination of agreements with respect to concession supplies at the Company's
seven domestic locations. Such penalty payments were made in December 1997.

Selling, general and administrative expenses for the nine months ended December
31, 1998 decreased 25.1% to $2,382,818 from $3,182,021 for the nine months ended
December 31, 1997. As a percentage of total revenues, selling, general and
administrative expenses decreased to 10.8% from 16.8% for the nine months ended
December 31, 1998 compared with the prior comparable period. The decrease is the
result of cost reduction initiatives and of lower international expenses.

Depreciation and amortization for the nine months ended December 31, 1998
increased 18.3% to $1,727,724 from $1,460,105 for the nine months ended December
31, 1997. The increase was primarily the result of increased depreciation on
additional equipment associated with the addition of screens at an existing
theater and the opening of a new theater.

Interest expense for the nine months ended December 31, 1998 decreased to
$246,574 from $693,451 for the nine months ended December 31, 1997. This
decrease was primarily a result of the majority of the Company's debt having
been repaid from the proceeds of the Equity Financing transaction consummated in
December 1997.

Non-cash interest expense for nine months ended December 31, 1997, totaling
$328,750, resulted from the issuance of debt with detachable warrants and
represents the value of the detachable warrants. This debt was repaid in full in
December, 1997.

Interest income for the nine months ended December 31, 1998 increased to
$108,712 from $23,580 for the nine months ended December 31, 1997. This increase
is attributable to the increase in cash balances, due to the completion of the
Equity Financing transaction in December 1997.

As a result of the factors discussed above, the net loss for the nine months
ended December 31, 1998 was $880,572 or $0.24 per common share, compared to a
net loss of $5,818,693 or $4.54 per common share, for the nine months ended
December 31, 1997.


                                       9

<PAGE>   10

LIQUIDITY AND CAPITAL RESOURCES

The Company's revenues are collected in cash, principally through box office
admissions and concession sales. Because its revenues are received in cash prior
to the payment of related expenses, the Company has an operating "float" which
partially finances its operations.

The Company's capital requirements arise principally in connection with new
theater openings and acquisitions of existing theaters. In the past, new theater
openings have typically been financed with internally generated cash flow and
long-term debt financing arrangements for facilities and equipment. During
fiscal 1998, the Company discovered that it lacked the ability to finance its
current capital obligations through internally generated funds and sought
additional capital. On September 23, 1997, the Company signed the CAP Agreement
for CAP to acquire a majority equity interest in the Company through a $15
million purchase of newly issued shares of the Company's Common Stock. Following
stockholder approval, the Equity Financing transaction was completed on December
15, 1997.

Pursuant to the CAP Agreement, CAP purchased 17,684,464 shares of Common Stock
for a purchase price of $0.848202 per share (2,526,352 shares for a purchase
price of $5.94 per share taking into consideration the one-for-seven reverse
stock split which became effective December 2, 1998). CAP also received, at
closing, warrants to purchase 1,630,624 shares of Common Stock at an exercise
price equal to $0.848202 per share (warrants to purchase 232,947 shares of
Common Stock at an exercise price of $5.94 per share taking account of the
one-for-seven reverse stock split which became effective December 2, 1998).
Pursuant to the terms of the CAP Agreement, the Company has and continues to be
obligated to issue Adjustment Shares to CAP. The number of Adjustment Shares to
be issued is based upon (i) the recognition of any liabilities not disclosed as
of August 31, 1997, (ii) certain expenses incurred and paid by the Company in
connection with the contemplated transactions, (iii) any negative cash flow
incurred by the Company during the period commencing August 31, 1997 and ending
December 15, 1997, and (iv) operating losses experienced by, or costs of
closing, the Company's Plaza Americana 10 facility in Tijuana (now in full
operation and achieving operating profits) and San Bernardino Facility (still in
development). The measurement of the operating losses and/or closing costs for
the two facilities is cumulative, calculated in the aggregate and will take
place on the earlier to occur of the closing of each such facility or December
15, 2000. The Company issued 1,351,256 Adjustment Shares (193,037 Adjustment
Shares taking into consideration the one-for-seven reverse stock split which
became effective December 2, 1998) to CAP pursuant to the terms of the CAP
Agreement, in September 1998. To the extent there are (a) operating losses at
the Company's Tijuana and San Bernardino facilities, calculated in the
aggregate, for the three-year period ended December 15, 2000, and (b)
expenditures in connection with the discovery of liabilities, or defense and/or
settlement of claims, in either case relating to periods prior to August 31,
1997, the Company will be obligated to issue additional Adjustment Shares.

The Company leases seven theater properties and various equipment under
non-cancelable operating lease agreements which expire through 2021 and require
various minimum annual rentals. At December 31, 1998, the aggregate future
minimum lease payments due under non-cancelable operating leases was
approximately $88,300,000. In addition, the Company has signed a lease agreement
for a 20 screen Ultraplex theater in San Bernardino, California. The lease for
the San Bernardino Ultraplex will require expected minimum rental payments
aggregating approximately $40,700,000 over the 25-year life of the lease.
Accordingly, existing minimum lease commitments as of December 31, 1998 plus
those expected minimum commitments for the proposed theater locations would
aggregate minimum lease commitments of approximately $129,000,000. Under the
terms of the lease, the Company is obligated to construct and equip the theater
building. Costs to the Company to complete and equip the San Bernardino Facility
are estimated at approximately $3,500,000. All necessary zoning and similar
approvals have been obtained from the City of San Bernardino, and the landlord
has committed under the lease to make available a tenant allowance of
approximately $9,200,000 to reimburse the Company for a portion of the cost of
constructing and equipping the complex. While the landlord has financing
commitments in place to fund its tenant improvement allowance to the Company,
its ability to fund the tenant improvement allowance is dependant upon its
lender adhering to the terms of their financing commitments. Therefore, there
can be no assurance that the Company will be able to receive adequate funds from
the landlord to complete the construction of the project. The Company has
executed a fixed-price construction contract with a general contractor, for the
construction of the theater project. The Company is obligated to pay the
contractor the full amount due under the contract whether or not the Company
receives reimbursement from the landlord. In addition, the Company's lease
obligations with respect to the San Bernardino Facility are contingent upon the
completion and acceptance of the theater.

The Company experienced significant net losses in each fiscal year of its
operations, including net losses of $4,304,370 and $7,932,011 in the fiscal
years ended March 31, 1997 and 1998, respectively and also experienced a net
loss of $880,572 in the nine months ended December 31, 1998. There can be no
assurance as to whether or when the Company will achieve consistent
profitability. While the Company believes it could attain profitability with its
current operations, any substantial profitability will depend upon numerous
factors including the Company's ability to continue reducing costs and expand
through the addition of new screens and theaters.


                                       10


<PAGE>   11

The ability of the Company to expand through the development of new theaters,
the expansion of existing theaters or the acquisition of existing theaters is
contingent upon numerous factors including the Company's ability to secure new,
third party financing. In this regard, the Company signed on October 19, 1998, a
$15 million Revolving Credit Agreement (the "Revolving Credit Facility") with a
senior, secured lender. This facility will be used primarily to finance the
Company's future developments in accordance with the terms and conditions of the
Revolving Credit Facility. The Company has not to date borrowed against this
facility but has used the facility to secure two standby letters of credit, with
initial terms of one year, totaling $2,275,000, issued in accordance with the
terms of its lease (as amended) on the San Bernardino 20-screen facility,
currently under construction. Commitment and other fees associated with the
Revolving Credit Facility and the standby letters of credit, totaling
approximately $380,000, will be amortized over their respective terms.

During the nine months ended December 31, 1998, the Company generated $854,481
from operating activities, as compared to using $3,387,746 cash in operating
activities for the nine months ended December 31, 1997. The increase is
primarily due to lower costs of concession supplies as a percentage of
concession revenues and lower selling, general and administrative expenses in
the nine months ended December 31, 1998 compared with the nine months ended
December 31, 1997, partially offset by higher theater operating expenses, in
addition to the use of cash in the nine months ended December 31, 1997 to pay
early termination fees on certain concession lease agreements.

During the nine months ended December 31, 1998, the Company used cash in
investing activities of $912,814, as compared to $4,167,753 for the nine months
ended December 31, 1997. The decrease is due to lower purchases of fixed assets
during the nine months ended December 31, 1998 compared with the prior
comparable period, partially offset by the purchase of the remaining 25%
minority interest in the Company's Mexican subsidiary for approximately
$340,000.

During the nine months ended December 31, 1998, the Company used net cash of
$677,175 in financing activities, as compared to providing $11,651,461 for the
nine months ended December 31, 1997. The cash used in the nine months ended
December 31, 1998 related to principal repayment of debt and capital lease
obligations and the payment of debt issuance costs of approximately $380,000
with respect to the Company's Revolving Credit Facility. The cash provided in
the nine months ended December 31, 1997 related to the proceeds of the issuance
of Common Stock and warrants, partially offset by principal repayment of debt
and capital lease obligations.

At December 31, 1998, the Company held cash and cash equivalents and working
capital in the amounts of $2,746,470 and $550,215, respectively. Management
believes that cash and cash equivalents, working capital and the $15 million
Revolving Credit Facility are adequate to fund the existing operations and
capital requirements of the Company during the next twelve months.

As of March 31, 1998, the Company had net operating loss carryforwards ("NOLs")
of approximately $11,000,000 and $5,500,000 for Federal and California income
tax purposes, respectively. The Federal NOLs are available to offset future
years taxable income, and they expire in 2006 through 2013 if not utilized prior
to that time. The California NOLs are available to offset future years taxable
income, and they expire in 1999 through 2003 if not utilized prior to that time.
The annual utilization of NOLs will be limited in accordance with restrictions
imposed under the Federal and state laws as a result of changes in ownership.
The Company's initial public offering and certain other equity transactions
resulted in an "ownership change" as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a result, the Company's use of
its net operating loss carryforwards to offset taxable income in any post-change
period will be subject to certain specified annual limitations.

At March 31, 1998, the Company has total net deferred income tax assets in
excess of $4,900,000. Such potential income tax benefits, a significant portion
of which relates to the NOLs discussed above, have been subjected to a 100%
valuation allowance since realization of such assets is not "more likely than
not" in light of the Company's recurring losses from operations.

Due to the absence of two market makers for its Class B Redeemable Warrants, the
Company has been notified by NASDAQ that these warrants were delisted effective
December 14, 1998. These warrants may trade on the Over-The-Counter Market, upon
application by a market maker.

SEASONALITY

The Company's revenues have been seasonal, coinciding with the timing of major
releases of motion pictures by the major distributors. Generally, the most
marketable motion pictures are released during the summer and the Thanksgiving
through year-end holiday season. The unexpected emergence of a hit film during
other periods can alter this trend. The timing of such releases can have a
significant effect on the Company's results of operations, and the results of
one quarter are not necessarily indicative of results for subsequent quarters.


                                       11


<PAGE>   12

YEAR 2000

The Company has performed a review of its computer applications related to their
continuing functionality for the year 2000 and beyond. Based on this review, the
Company does not believe that it has material exposure with respect to the year
2000 issue in regards to its computer applications. The Company is in the
process of implementing new ticketing systems and concessions systems at each of
its locations (an initiative unrelated to year 2000). Such implementation will
be completed by March 31, 1999. These systems are certified as fully year 2000
compliant. The Company is communicating via questionnaire with third parties
with whom it has a material relationship to assess its risk with respect to year
2000 issues. This assessment is not complete, in particular because the Company
has not completed its inquiries of its primary film distributors. However, the
Company is not aware at this time of any material year 2000 issues with respect
to its dealings with such third parties. The Company anticipates that its
assessment will be complete by March 31, 1999. The historical costs to the
Company for its year 2000 preparations have been nominal and the future costs
are not yet known due to the Company's ongoing assessments. The Company believes
that its worst case scenario for the change to year 2000 would be a disruption
of film distribution to the Company. Such a disruption could have a material
impact on the Company and its results of operations. The Company does not yet
have a contingency plan to address any year 2000 issues such as disruption in
film distribution. Upon completion of the Company's assessment of its year 2000
readiness, in particular the completion of its assessment of third party issues,
the Company will implement a contingency plan if the assessment indicates that
significant year 2000 risks exist.

CURRENCY FLUCTUATIONS

The Company is subject to the risks of fluctuations in the Mexican Peso with
respect to the U.S. dollar. These risks are heightened because revenues in
Mexico are generally collected in Mexican Pesos, but the theater lease payments
are denominated in U.S. dollars. While the Company does not believe it has been
materially adversely effected by currency fluctuations to date, there can be no
assurance it will not be so affected in the future and it has taken no steps to
guard against these risks.

                          PART II -- OTHER INFORMATION

ITEM 1 -- LEGAL PROCEEDINGS

On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San
Diego Superior Court, Case No. N07870, alleging that the Company breached a
50-year lease relating to commercial real property located in the Rancho Del Rey
Business Center consisting of approximately 35,000 square feet. The complaint
alleges that the lease was terminated as a result of the Company's failure to
perform. The complaint also alleges first year minimum rent of $174,240.
Management believes the complaint is without merit and the Company will
vigorously defend against this action. Management believes the termination of
the lease in question was in accordance with its terms, but there is no
assurance that the Company ultimately will prevail in this action, for which
arbitration is currently being scheduled. The Company believes that the landlord
has already leased the property to another tenant, which would significantly
mitigate the damages that could be claimed by the landlord.

With respect to the Company's previous dispute with MDA-San Bernardino
Associates, LLC, the parties have executed a First Amendment to Multi-Plex
Theater Lease that resolves the disputed issues.

In addition, from time to time the Company is involved in routine litigation and
proceedings in the ordinary course of its business. The Company is not currently
involved in any other pending litigation matters, which the Company believes
would have a material adverse effect on the Company.

ITEM 2 -- CHANGES IN SECURITIES

ONE-FOR-SEVEN REVERSE STOCK SPLIT

The Company completed a one-for-seven reverse stock split of its Common Stock,
effective December 2, 1998. The reverse stock split affects the Company's Common
Stock and all options and warrants that are convertible into the Company's
Common Stock. The number of shares of the Company's Common Stock outstanding
prior to the reverse stock split was 27,054,902 and after the reverse stock
split is 3,864,986.


                                       12


<PAGE>   13

The reverse stock split also amends the terms of the Company's Redeemable
Warrants and Class B Redeemable Warrants. After giving effect to the reverse
stock split, the number of outstanding and issuable Redeemable Warrants for
Common Stock, with a maturity date of February 6, 2000 under the trading symbol
"LUXYW," remains at 4,648,562. The total number of shares of Common Stock for
which such warrants will be exercisable is reduced, however, to approximately
1,568,704 shares from 10,980,833 shares prior to the reverse stock split. The
number of shares of Common Stock exercisable per each warrant is reduced to
0.33746 shares per warrant from 2.36220 shares per warrant prior to the reverse
stock split. The price per share upon exercise of the warrants increases to
$17.78, compared to $2.54 prior to the reverse stock split.

After giving effect to the reverse stock split, the number of outstanding and
issuable Class B Redeemable Warrants for Common Stock, with a maturity date of
September 15, 2001 under the trading symbol "LUXYZ," remain at 226,438
outstanding. The total number of shares of Common Stock for which such warrants
will be exercisable is reduced to approximately 76,183 shares from 533,278
shares prior to the reverse stock split. The number of shares of Common Stock
exercisable per each Class B warrant is reduced to 0.33644 shares per warrant
from 2.35507 shares per warrant prior to the stock split. The price per share
upon exercise of the warrants increases to $19.32, compared to $2.76 prior to
the reverse stock split.

ITEM 3 -- DEFAULTS IN SENIOR SECURITIES

        None

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

        The Annual Meeting of the Shareholders of the Company took place on
November 17, 1998. The following proposals were voted on by holders of Common
Stock and the results of voting are set out below:

        1. To elect directors to serve for the ensuing year and until their
           successors are elected and qualified;

           The following directors were elected: 

                                                      For         Withhold

              Jack R. Crosby                       23,690,402    1,245,330
              Frank J. Moreno                      23,675,402    1,260,330
              Jack S. Gray, Jr.                    23,691,252    1,244,480
              Thomas G. Rebar                      23,691,252    1,244,480
              Wayne B. Weisman                     23,690,402    1,245,330
              Winston J. Churchill                 23,690,402    1,245,330


        2. To approve the 1997 Stock Option Plan of the Company;

           The Company's 1997 Stock Option Plan was approved as follows:

              For                                  20,171,252
              Against                               1,383,620
              Abstain                                  41,465


        3. To approve a change in the Company's state of incorporation from
           California to Delaware by means of a merger of the Company with and 
           into a wholly-owned Delaware subsidiary of the Company;

           This proposal was approved as follows:

              For                                  20,370,731
              Against                               1,210,236
              Abstain                                  15,370

        4. To approve a one-for-seven reverse split of the Common Stock of the
           Company and thus to exchange outstanding shares for new share
           certificates on a one-for-seven basis;


                                       13


<PAGE>   14

        This proposal was approved as follows:

              For                                  23,564,731
              Against                               1,356,446
              Abstain                                  14,555

        5. To ratify the appointment of Arthur Andersen LLP as the Company's
           independent public accountants for the fiscal year ending March 31, 
           1999;

               This proposal was approved as follows:

              For                                  23,780,316
              Against                               1,129,560
              Abstain                                  25,856


ITEM 5 -- OTHER INFORMATION

        None

ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K

(a)    EXHIBITS

       Item 10.1    Form of First Amendment to Multi-Plex Theater Lease between
                    MDA-San Bernardino Associates, L.L.C, a Delaware limited
                    liability company, and CinemaStar Luxury Theaters, Inc., a
                    Delaware corporation, dated December 10, 1998

       Item 10.2    Form of Agreement Regarding Letters of Credit by and among
                    MDA-San Bernardino Associates, L.L.C., a Delaware limited
                    liability company, GMAC Commercial Mortgage Company, a
                    California corporation, and CinemaStar Luxury Theaters,
                    Inc., a Delaware corporation, dated December 10, 1998

       Item 10.3    Stock Purchase Agreement of CinemaStar Luxury Theaters, S.A.
                    de C.V., between CinemaStar Luxury Theaters, Inc. and
                    Atlantico & Ass., S.A. de C.V.

       Item 27.     Financial Data Schedule

(b)     REPORTS ON FORM 8-K
         None


                                       14

<PAGE>   15

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: January 22, 1999

                                  CinemaStar Luxury Theaters, Inc.

                                  by: /s/ Jack R. Crosby
                                      ------------------------------------------
                                      Jack R. Crosby
                                      Chairman and Chief Executive Officer
                                      (principal executive officer)

                                  by: /s/ Norman Dowling
                                      ------------------------------------------
                                      Norman Dowling
                                      Vice President and Chief Financial Officer
                                      (principal financial officer and
                                      principal accounting officer)



                                       15

<PAGE>   1
                                                                    EXHIBIT 10.1



                   FIRST AMENDMENT TO MULTI-PLEX THEATER LEASE



        1.     Parties.

        This First Amendment ("First Amendment") to the Multi-Plex Theater
Lease, dated for identification purposes December 10, 1998 is made by and
between MDA-SAN BERNARDINO ASSOCIATES, L.L.C., a Delaware limited liability
company ("Landlord"), and CINEMASTAR LUXURY THEATERS, INC., a Delaware
corporation ("Tenant"), with reference to that certain Multi-Plex Theater Lease
(the "Lease"), dated December 20, 1996, between Landlord and Tenant. Unless
otherwise defined herein, all capitalized terms used herein shall have the same
meaning as in the Lease.

        2.     Recitals.

               2.1. In order to provide Landlord with assurances that Tenant is
financially able to commence and complete Tenant's obligations under the Lease
with respect to construction of the Building and installation of FF&E, Section
2.3 of the Lease required that Tenant provide to Landlord, among other things, a
FF&E Commitment, a First LC and a Second LC (collectively, "Tenant's Work
Assurances"). Landlord and Tenant desire to amend Section 2.3 of the Lease by
substituting for Tenant's Work Assurances the requirement that Tenant deliver
one unconditional and irrevocable letter of credit in the amount of Two Million
Dollars ($2,000,000), on the terms and conditions contained herein.

               2.2. Exhibit "C" of the Lease (the "Construction Provisions
Agreement") sets forth, among other things, the procedures for disbursement of
the Tenant Improvement Allowance relating to Tenant's Work. Section 2.2.5 of the
Construction Provisions Agreement provides that in the event that any
construction or other Mortgagee of Landlord requires any further or different
procedures, Tenant agrees to comply with same, so long as the general timing and
terms for payment are reasonably consistent with Section 2.2.2.1 of the
Construction Provisions Agreement. Landlord's Mortgagees have required certain
other procedures. Therefore, Landlord and Tenant desire to amend Section 2.2.2
of the Construction Provisions Agreement, on the terms and conditions contained
herein.

               2.3. At the time Landlord and Tenant executed the Lease, certain
exhibits were not available for incorporation into the Lease. The exhibits are
now available, and Landlord and Tenant desire to also amend the Lease to add and
incorporate such exhibits.


                                       1
<PAGE>   2

               2.4. On December 1, 1998, Tenant re-incorporated as a Delaware
corporation pursuant to a merger agreement, dated as of December 1, 1998, which
included ratification of existing obligations. Tenant hereby confirms that such
ratification extends to the Lease.

        3.     Amendment.

        For valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Landlord and Tenant hereby amend the Lease as follows:

               3.1. Section 1.1(b) of the Lease is deleted and the following
provision is substituted in its place:

               "(b) Rental Commencement Date: Two Hundred Fifty-Four (254) days
               after the "Delivery Date" (as defined in Section 3.1)."

               3.2. Section 2.3 of the Lease is deleted and the following is
substituted in its place:

               "2.3 Tenant covenants that it shall contribute not less than
               $1,000,000 in cash towards payment of Tenant's Work (provided,
               however, Tenant may encumber the FF&E purchased with such funds
               by a loan ("FF&E Loan") made by an institutional lender ("FF&E
               Lender"), in a principal amount not to exceed $1 Million, the
               proceeds of which are used solely to purchase and install a
               portion of the FF&E, subject to the terms of Section 13.2 below).
               In order to provide Landlord with assurances that Tenant shall be
               financially able to commence and complete Tenant's obligations
               with respect to construction of the Building and installation of
               FF&E, Tenant shall do each of the following as and when required
               below:

               (a) Concurrently with execution of this First Amendment, Tenant
               shall deliver to Landlord, at Tenant's sole cost and expense, an
               unconditional and irrevocable letter of credit in the amount of
               Two Million Dollars ($2,000,000) (the "$2 Million LC") in the
               form attached hereto as Exhibit "1", issued by a national banking
               association approved by Landlord, with an expiration date not
               sooner than one (1) year from issuance, automatically renewable
               for successive one-year periods unless notice is given by the
               issuer to Landlord at least sixty (60) days prior to expiration
               (with any non-renewal entitling Landlord to draw down on the $2
               Million LC if no substitute letter of credit has been delivered
               to Landlord on or before at least thirty (30) days prior to the
               expiration date), made payable to Landlord or Landlord's
               transferee. Landlord shall not


                                       2
<PAGE>   3
               draw down funds under such letter of credit unless and until: (i)
               Tenant is in default of Tenant's obligations under the Lease; and
               (ii) Tenant has failed to cure such default within the applicable
               grace period provided under the Lease. Further, Landlord
               covenants that the proceeds drawn under the $2 Million LC shall
               be applied only as follows: Up to the $2 Million of sums drawn
               under the $2 Million LC may be used by Landlord to pay or to
               reimburse Landlord for all or any portion of the costs incurred
               and to be incurred by Landlord as a result of Tenant's breach of
               Tenant's obligations under this Lease solely with respect to
               acquisition and installation of the FF&E, and not more than $1
               Million, in the aggregate, of the sums drawn under $2 Million LC
               shall be used to pay or reimburse Landlord for costs and expenses
               incurred and to be incurred by Landlord as a result of any breach
               by Tenant of Tenant's obligations under this Lease( including,
               but not limited to, a breach with respect to FF&E obligations).
               Landlord acknowledges and agrees that funds drawn by Landlord
               from the $2 Million LC shall be used only for the purposes
               described in the preceding sentence, and the remainder, if any,
               shall be refunded to Tenant. If Landlord draws down sums under
               the $2 Million LC to pay or to reimburse Landlord with respect to
               Tenant's breach of Tenant's obligations with respect to FF&E,
               Landlord shall not be obligated to use the proceeds of the $2
               Million LC to install the exact items of FF&E as described on
               Exhibit "7" of this Lease, but rather, may use the proceeds to
               acquire and install reasonably equivalent furniture, fixtures and
               equipment in order to fixturize the Premises in a manner so as to
               be used by a theater operator for the purposes intended under
               this Lease.

               (b) Landlord hereby advises Tenant that Landlord intends to
               assign its right, title and interest in the $2 Million LC to
               Landlord's Mortgagee(s), and requests Tenant to cause such letter
               of credit to be issued for the benefit of Landlord's Mortgagee.
               Concurrently with such assignment of the $2 Million LC to
               Landlord's Mortgagee, Landlord shall deliver to Tenant such
               mortgagee's agreement, in writing, that (i) such mortgagee shall
               not draw funds under such letter of credit except as and when
               Landlord would be entitled to make such draw under Section 2.3(a)
               above; (ii) such draw is subject to the conditions described in
               section 2.3(a) above; and (iii) mortgagee shall use Annex A to
               the $2 Million LC in order to transfer mortgagee's interest in
               the $2 Million LC and shall deliver a copy of such mortgagee's
               written agreement with Tenant and Landlord with respect to such
               letter of credit and advise any


                                       3
<PAGE>   4

               transferee of the conditions imposed under Section 2.3(a) above
               with respect to such draw. Landlord hereby instructs Tenant to
               cause the $2 Million LC to be issued for the benefit of "GMAC
               Commercial Mortgage Corporation,650 Dresher Road, Post Office Box
               1015, Horsham, PA 19044-8015, Attention: Michael C. Sperger,
               Treasurer". Upon Landlord's Mortgagee's release of its interest
               in the $2 million LC, Tenant shall, at Landlord's request, cause
               the $2 million LC to be reissued in Landlord's name, as
               beneficiary, provided Landlord concurrently surrenders the
               original $2 million LC to Tenant.

               (c) Provided that Tenant is not then in default under the Lease,
               the $2 Million LC shall be surrendered to Tenant upon Landlord's
               receipt of reasonably satisfactory evidence from Tenant
               (including invoices and lien waivers) verifying that all FF&E
               required under the Lease to be purchased with funds contributed
               by Tenant (i.e., FF&E not purchased with Tenant Improvement
               Allowance funds) has been installed in the Premises, and at least
               $1 Million of the cost of such FF&E installed at the Premises has
               been paid for by Tenant, in cash, and that the proceeds of the
               FF&E Loan, if any, were used solely to purchase and install
               FF&E."

               3.3. Section 3.3 of the Lease is hereby deleted in its entirety
and the following provision is substituted in its place:

               "Landlord hereby approves Tenant's Final Plans described on
               Exhibit "2" attached hereto. Tenant has provided Landlord with
               reasonable evidence that portion of Tenant's Final Plans
               identified as "Submitted Plans" on Exhibit "2" have been
               submitted to all applicable governmental agencies and there are
               no conditions to the issuance of building permit(s) with respect
               to such Submitted Plans other than Tenant's payment of
               governmental fees required as a condition to the issuance of such
               permit(s). Tenant shall pay for and obtain all required permits
               for Tenant's Work with respect to the Submitted Plans on or
               before fourteen (14) days after the Delivery Date. Tenant shall
               submit to all applicable governmental agencies for approval that
               portion of Tenant's Final Plans identified as the "Remaining
               Plans" on Exhibit "2" on or before January 15, 1999. Tenant shall
               make such revisions to the Remaining Plans as may be required by
               governmental agencies and approved by Landlord in order to obtain
               all required permits to construct and complete Tenant's Work and
               occupy the Building. Tenant shall use commercially reasonable
               efforts and due diligence to obtain all


                                       4
<PAGE>   5

               required building permits for the Remaining Plans on or before
               thirty (30) days after the Delivery Date. The issuance of
               governmental permits for Tenant's Work shall not be a condition
               precedent to Tenant's obligations under this Lease. Tenant shall
               construct Tenant's Work in accordance with Tenant's Work Schedule
               attached hereto as Exhibit "3".

               3.4. Article Six of the Lease is amended to delete the words "[TO
BE INSERTED]" and substitute the following in their place:

               "The Parking Agreement is attached to the Lease as Exhibit "I".
               Landlord shall have the right to modify the Parking Agreement
               from time to time without the consent of Tenant so long as such
               modification does not decrease the number of parking spaces
               available for use by Tenant, its customers and employees (on a
               non-exclusive basis) during peak and non-peak hours from the
               minimum number of parking spaces provided in Exhibit "I," impose
               additional parking charges, costs or expenses which are payable
               by Tenant, its customer or employees, substitute parking in areas
               outside of the 1600' radius required by the Parking Agreement
               (except as and when required under the Parking Agreement), or
               materially interfere with ingress and egress to and from the
               Parking Areas.

               3.5. Section 13.1 is amended by deleting the words "First LC and
Second LC" on the first line of Page 33 and substituting "$2 Million LC" in
their place.

               3.6. Section 13.2 of the Lease is amended to add the following
provision at the end of the second sentence:

               "provided that the FF&E Lender shall have entered into an
               agreement with Landlord providing Landlord with notice of
               Tenant's default and opportunity to cure, access to the proceeds
               of such loan notwithstanding Tenant's default, and otherwise is
               on terms reasonably acceptable to Landlord and Landlord's
               Mortgagee, and Landlord also agrees to execute, if required by
               the FF&E Lender, a landlord's consent, in a form reasonably
               acceptable to Landlord and such lender, which would allow the
               FF&E Lender, inter alia, to have access to the Premises to
               realize upon the collateral for the FF&E Loan (excluding such
               items as Tenant may be required to leave in the Premises at the
               end of the Lease term, including but not limited to those items
               which have been paid for by the proceeds of "Cost Savings" (as
               defined in Section 2.2.2.3 of


                                       5
<PAGE>   6

               Exhibit "C," which items shall be specifically described in such
               landlord's consent)."

               3.7. Section 18.2 of the Lease is amended to delete the words
"[TO BE INSERTED]" and substitute the following provisions in its place:

               "The areas designated by the Redevelopment Agency of the City in
               the Parking Agreement as the parking spaces available for
               "Permittee's" non-exclusive use from time to time shall be deemed
               the "Parking Areas" under this Lease. Tenant acknowledges that
               Tenant's right to use the Parking Areas shall in no event exceed
               Landlord's right to use such areas under the Parking Agreement
               and that the Parking Areas are not Common Area under this Lease."

               3.8.   Section 19.2 of the Lease is amended by deleting the words
"First LC and Second LC" and substituting the words "$2 Million LC" in their
place.

               3.9    Section 29.16 of the Lease is modified as follows:

                      a)      In Section 29.16 (a), insert the word "material" 
after the words "At all times and in all" in the 7th line of page 67 and add the
words "shareholders, members, officers and directors" after the words
"contractors" in line 10 of such section.

                      b)      In Section 29.16 (b), insert the words "Materials 
to be" after the words "Tenant shall not cause any and all".

                      c)      Add the following provisions after Section 29.16 
(d):

               "(e)   Landlord's Covenant to Remediate.

                      If (i) Hazardous Materials are discovered to be located
               at, to, in, on, under, or about the Premises during the term of
               this Lease in violation of applicable Hazardous Materials Laws,
               (ii) such Hazardous Materials were used, generated, treated,
               stored, transported, disposed, handled, released, spilled,
               discharged or present at the Premises prior to the Delivery Date
               ("Existing Hazardous Materials"), and (iii) the remediation
               and/or removal of such materials is required under Environmental
               Laws, Landlord agrees to perform such testing, investigation, and
               remediation and removal work, in compliance with and to the
               extent required under applicable Hazardous Materials Laws, at
               Landlord's sole cost , in a diligent manner and use commercially
               reasonable efforts to minimize any material interference with
               construction of Tenant's Work or


                                       6
<PAGE>   7

               Tenant's business operations in its performance of such work
               ("Required Environmental Work"); provided, however, such covenant
               shall not apply to any testing, investigations, or remediation or
               removal work caused by, or necessitated due to the negligence or
               willful misconduct of, Tenant or any Tenant Party (but only after
               Tenant or a Tenant Party has knowledge of the presence of such
               Hazardous Materials).

               (f) Landlord's Representation and Warranty.

                       Landlord represents and warrants to Tenant that Landlord
               has no knowledge of the existence of any Hazardous Materials in
               violation of Hazardous Materials Laws at, to, in, on, under, or
               about the Premises as of December 14, 1998.

               (g) Landlord's Indemnification.

                       (i) Landlord shall indemnify, defend, protect and hold
               Tenant and the Tenant Parties, and each of them, free and
               harmless from and against any claims, actions, causes of action,
               proceedings, suits, defenses, judgments, demands, orders,
               damages, punitive damages, penalties, fines, costs, obligations,
               liabilities, interest, and losses, together with all other costs
               and expenses of any kind or nature (excluding consequential
               damages or lost profits) (an "Environmental Claim") arising out
               of or resulting from (A) Landlord's failure to commence and
               diligently pursue to completion all Required Environmental Work
               after receipt of notice from Tenant and a reasonable opportunity
               to investigate whether or not such Hazardous Materials are
               Existing Hazardous Materials and require testing, investigations,
               remediation and/or removal under applicable Environmental Laws,
               or (B) the use, generation, treatment, storage, transportation,
               disposal, handling , release, spill, presence or discharge of
               Hazardous Materials by Landlord or Landlord's employees, agents,
               contractors or representatives at, in, under or about the
               Premises prior to or during the term of this Lease; provided,
               however, that such indemnity shall not include Environmental
               Claims arising out of or resulting from Tenant's or any Tenant
               Party's negligence or willful misconduct, including without
               limitation, the negligence or willful misconduct of Tenant or any
               Tenant Party with respect to a release, use, generation,
               treatment, storage, transportation, disposal, handling , spill,
               or discharge of such Existing Hazardous Materials in violation of


                                       7
<PAGE>   8

               Environmental Laws (but only after Tenant or a Tenant Party has
               knowledge of the presence of such Hazardous Materials).

                      (ii) Further, Landlord shall indemnify, defend, protect
               and hold Tenant and the Tenant Parties, and each of them, free
               and harmless from and against any claims, actions, causes of
               action, proceedings, suits, defenses, judgments, demands, orders,
               damages, punitive damages, penalties, fines, costs, obligations,
               liabilities, interest, and losses, together with all other costs
               and expenses of any kind or nature (excluding consequential
               damages or lost profits)arising out of or resulting from claims
               made by third parties against Tenant or any Tenant Party,
               including, without limitation, claims made by employees of any
               Tenant or any Tenant Party (a "Third Party Claim") as a result of
               the the use, generation, treatment, storage, transportation,
               disposal, handling , release, spill, presence or discharge of
               Existing Hazardous Materials, provided, however, that such
               indemnity shall not include any Third Party Claim(s) arising out
               of or resulting from the negligence or willful misconduct of
               Tenant or any Tenant Party, including without limitation, the
               negligence or willful misconduct of Tenant or any Tenant Party
               with respect to a release, use, generation, treatment, storage,
               transportation, disposal, handling , spill, or discharge of such
               Existing Hazardous Materials in violation of Environmental
               Laws(but only after Tenant or a Tenant Party has knowledge of the
               presence of such Hazardous Materials).

               (h) Landlord's Release.

                      Landlord hereby releases and forever discharges Tenant and
               the Tenant Parties, and each of them, from and against any and
               all Environmental Claims and Third Party Claims relating to any
               Existing Hazardous Materials, provided, however, that such
               release shall not include any Environmental Claims or Third Party
               Claims arising out of or resulting from the negligence or willful
               misconduct of Tenant or any Tenant Party, including without
               limitation, the negligence or willful misconduct of Tenant or any
               Tenant Party with respect to a release, use, generation,
               treatment, storage, transportation, disposal, handling , spill,
               or discharge of such Existing Hazardous Materials in violation of
               Environmental Laws(but only after Tenant or a Tenant Party has
               knowledge of the presence of such Hazardous Materials).


                                       8
<PAGE>   9

               (i)  Force Majeure

                      Notwithstanding anything to the contrary in this Lease,
        (A) each of the following shall be considered a Force Majeure event: the
        discovery, investigation, characterization, or negotiation with
        governmental agencies with respect to Existing Hazardous Materials, and
        Required Environmental Work to remediate any Existing Hazardous
        Materials if, and only to the extent that, such events cause delay,
        prevention or stoppage of Tenant's Work that cannot be avoided by Tenant
        without incurring material additional cost or expense, and (B) the Rent
        Commencement Date shall be postponed by one (1) day for each day of such
        prevention, delay or stoppage of Tenant's Work. Tenant shall promptly
        give notice to Landlord upon the commencement of any such Force Majeure
        delay."


               3.10. The Construction Provisions Agreement attached as Exhibit
"C" to the Lease ("Exhibit "C") is amended in the following respects:

                      a.     Section 1.2.1 of Exhibit "C" is amended to add the 
word "site" after the words "required on-site" in line one.

                      b.     The following provision is added at the end of 
Section 1.2 of Exhibit "C":

               "Landlord shall Substantially Complete Landlord's Work described
               in Sections 1.2.1 and 1.2.2 of this Exhibit "C" on or before the
               Delivery Date and shall Substantially Complete the remaining
               Landlord's Work on or before the date specified in Exhibit "3" of
               the Lease ("Landlord's Work Schedule"). Landlord shall construct
               Landlord's Work substantially in accordance with the plans and
               specifications for Landlord's Work described on Exhibit "5" of
               the Lease ("Landlord's Work Plans"), subject to such
               modifications as Landlord may require, provided that no such
               modification shall materially affect or delay Tenant's Work or
               increase the cost of Landlord's Work (unless Landlord provides
               Tenant with reasonable evidence of the source of funding of such
               cost increases and that such cost increases shall not result in a
               decrease of funds available to pay the remaining balance of the
               Tenant Improvement Allowance under that certain Fiscal Agent
               Agreement ("Fiscal Agent Agreement") dated December 10, 1998, by
               and among Landlord, Agency, and Landlord's Mortgagee ("GMACCM")
               and First American Title Company ("Fiscal Agent"). A copy of the
               Fiscal Agent Agreement is attached to the Lease as Exhibit "6".
               If Landlord fails to Substantially Complete Landlord's Work on or


                                       9
<PAGE>   10

               before the later of the date set forth in Landlord's Work
               Schedule or the date of Tenant's completion of Tenant's Work,
               Tenant shall have the right, after written notice to Landlord and
               Landlord's failure to commence cure within ten (10) days after
               receipt of such notice, and thereafter diligently pursue cure to
               completion, and provided Landlord has not given Tenant written
               notice that Landlord disputes Tenant's claim that such work is
               not Substantially Complete, to complete Landlord's Work and, upon
               presentation of invoices and unconditional lien waivers for such
               work and Landlord's failure to reimburse Tenant within 10 days
               thereafter, to deduct the reasonable costs incurred by Tenant in
               performing such Landlord's Work from the rent next coming due
               under the Lease."

                      c.     The following provision is added to the end of 
Section 1.3 of Exhibit "C":

               "Landlord shall submit any request for a Change received from
               Tenant to the Agency and GMACCM (if required under their
               respective loan documents) as soon as reasonably feasible, but in
               no event later than three (3) business days of receipt of
               Tenant's plans for the proposed Change. Notwithstanding any
               provision of this Lease to the contrary, Landlord agrees to
               respond to any request by Tenant for a Change on or before the
               earlier of twenty-four (24) hours after Landlord's receipt of
               Landlord's Mortgagee's approval or disapproval of such requested
               Change or four (4) business days after Tenant's submission of a
               request for a Change to Landlord. Landlord's failure to respond
               to Tenant within such time period shall be deemed a disapproval
               of the Change. Landlord may condition its approval of any
               requested Change, among other conditions, upon Tenant's deposit
               of funds with Landlord in an amount equal to the amount of the
               increase in the total cost to complete Tenant's Work resulting
               from such Change. Landlord shall use commercially reasonable
               efforts to provide Tenant with a response to a request for any
               Change which would cost less than $10,000 and which does not
               materially affect the Building structure, exterior walls, or
               mechanical systems or roof, within one (1) business day of
               Tenant's request."

                      d.     Section 2.1 of Exhibit "C" is amended to delete the
second to the last sentence and insert the following provision in its place:


                                       10
<PAGE>   11

               "While the design, acquisition and installation of FF&E is
               included in the definition of Tenant's Work, the Tenant
               Improvement Allowance shall not be applied to reimburse Tenant
               for the cost of FF&E, and Tenant shall bear all costs and
               expenses related to FF&E except as provided in Section 2.2.2.3 of
               this Exhibit "C" with respect to Cost Savings. Tenant shall
               install at the Premises all FF&E described on Exhibit "7" to the
               Lease, subject to such changes and substitutions as Landlord may
               approve, which approval shall not be unreasonably withheld."

                      e.     Section 2.1 of Exhibit "C" is further revised to 
add the following sentence at the end of Section 2.1:

               "Tenant represents that the FF&E described on Exhibit "7",
               together with such furniture, fixtures and equipment shown as to
               be installed by Tenant's contractor on the plans described in
               Exhibit "2", constitute all furniture, fixtures, and equipment
               necessary for Tenant to fully fixturize the Building for
               operation as a multiplex theater required under this Lease and
               that such FF&E is consistent with the type, quantity and
               standards for fixturization in other first class theaters in
               California owned or operated by Tenant. Landlord acknowledges
               that if Tenant constructs Tenant's Work in a good and workmanlike
               manner and substantially and materially in accordance with the
               Tenant Final Plans described in Exhibit "2", subject to any
               approved Changes, and installs the FF&E described in Exhibit "7"
               together with such furniture, fixtures and equipment shown as to
               be installed by Tenant's Contractor on the plans described in
               Exhibit "2", in the Premises in a good and workmanlike manner,
               subject to any approved substitutions, deletions or additions to
               such FF&E, Tenant shall have satisfied the requirement that the
               Building be a "first class, state of the art" motion picture
               building, including interior finish and FF&E, and that such
               Building shall be deemed to conform to the architectural plan and
               standards for the Development Site." Notwithstanding the
               foregoing, nothing contained in this Section shall reduce or
               limit the conditions which must be satisfied by Tenant in order
               to receive disbursements of the Tenant Improvement Allowance.

                      f.     Sections 2.2.1.1 through 2.2.1.6, inclusive, of 
Exhibit "C" are deleted and the following provision inserted in their place:

               "Only those costs and expenses identified on the Schedule of
               Values for Tenant's Work attached to the Lease as Exhibit "8"."


                                       11
<PAGE>   12

                      g.     Section 2.2.2.1 of Exhibit "C" is amended to add 
the following at the end of subsection (iv):

               ", including but not limited to, the information and
               certifications with respect to Tenant's Work which may be
               required to be delivered by Landlord, as "Borrower" to Fiscal
               Agent and Landlord's Mortgagees under the Fiscal Agent Agreement
               as a condition to Agency and/or GMACCM funding Payment Requests
               under such agreement."

                      h.     Section 2.2.2.1 of Exhibit "C" is further amended 
to delete the second and third sentence of such section and substitute the
following provision in their place:

               "As soon as reasonably feasible, but in no event later than five
               (5) business days after submission of a Payment Request, Tenant
               and Tenant's Architect and Contractor shall meet with Landlord
               (and/or its Project Manager) and Leviene-Rich, Inc., or another
               representative of Landlord's Mortgagees (the "Disbursement
               Control Agent"), to review each Payment Request. As soon as
               reasonably feasible, but in no event later than twenty (20) days
               of the Disbursement Control Agent's certification of the amount
               approved under such Payment Request, and provided that Tenant has
               submitted (A) all items required under such Sections (i) through
               (iv), inclusive, above, (B) unconditional lien waivers for all
               work included in prior Payment Requests (to the extent not
               previously delivered), and (C) any amounts required under Section
               2.2.2.6 below, Landlord shall make a payment to Tenant in the
               amount certified by the Disbursement Control Agent, less a ten
               percent (10%) retention (the aggregate amount of such retentions
               herein referred to as the "Final Retention"), provided that
               Landlord does not dispute any Payment Request based upon
               non-compliance with Tenant's Final Plans (as amended by approved
               Changes) or due to substandard work, or other reasons permitted
               under this Lease. Landlord's payment to Tenant shall not be
               deemed an approval or acceptance by Landlord of any work
               furnished or materials supplied as set forth in such Payment
               Request."

                      i.     Section 2.2.2.2 of Exhibit "C" is deleted in its 
entirety and, in lieu of a Draw Multiplier, if Landlord determines at any time
prior to disbursement of the Final Retention that the cost to complete
construction of Tenant Improvement Cost Items ("Tenant's Work Costs") exceeds
the then remaining balance of the Tenant Improvement Allowance, the provisions
of Section 2.2.2.6 of Exhibit "C" shall apply.


                                       12
<PAGE>   13

                      j.     Section 2.2.2.3 of Exhibit "C" is amended to add 
the following at the end of subsection (ii):

               "provided, however, that such determination shall be made in
               conjunction with Project Manager's review and approval of the
               Payment Request for the Final Retention."

                      k.     Section 2.2.2.3 of Exhibit "C" is further amended 
to add the following at the end of subsection (ix):

               "and such other items as may be requested by Landlord's
               Mortgagees with respect to the Lease and Tenant's Work. Tenant
               also shall deliver to Landlord all certifications required with
               respect to the Construction Contract and Tenant's Work which
               constitute conditions to funding Payment Requests, including but
               not limited to delivery of a certified copy of all plans and
               specifications for FF&E, Tenant's certification that Tenant has
               obtained all required governmental permits to install and use all
               FF&E, and such other certifications as Landlord's Mortgagees may
               reasonably request."

                      l.      Section 2.2 of Exhibit "C" is further amended by 
adding the following as a new Section 2.2.2.6:

                      "2.2.2.6 Additional Terms. Notwithstanding the foregoing,
               if at any time Landlord reasonably determines that the unpaid
               balance of Tenant Work Costs exceeds or will exceed the remaining
               balance of the Tenant Improvement Allowance, Tenant shall, within
               three (3) business days of Landlord's request, deposit with
               Landlord an amount equal to such deficiency, in immediately
               available funds, which amount shall be deposited by Landlord with
               the Fiscal Agent under the Fiscal Agent Agreement (or, if
               required by Landlord's Mortgagee, with such mortgagee) and
               disbursed to pay approved Payment Request(s) next coming due, in
               accordance with this Section 2.2 above. If Tenant shall fail to
               timely make such deposit, then, in addition to Landlord's other
               rights and remedies hereunder, Landlord shall have the right to
               draw on the "Contingency LC" (defined below), deposit all funds
               drawn with respect to such letter of credit with Fiscal Agent
               (or, if required by Landlord's Mortgagee, with such mortgagee),
               and use such funds to pay approved Payment Request(s) next coming
               due. Concurrently herewith, Tenant shall pay to Landlord the
               amount of $ 52,548 in reimbursement of certain Tenant Improvement
               Costs previously paid by Landlord which are in excess of the
               Tenant Improvement


                                       13
<PAGE>   14

               Allowance and are identified on Exhibit "8." Concurrently
               herewith, Tenant also shall deposit with Landlord a letter of
               credit in the amount of $ 275,000, in the form attached hereto as
               Exhibit "9" ("Contingency LC"), which letter of credit shall
               secure Tenant's obligation to pay Tenant's Work Costs exceeding
               the Tenant Improvement Allowance. The Contingency LC shall be
               issued by a national banking association approved by Landlord,
               with an expiration date not sooner than one (1) year from
               issuance, automatically renewable for successive one-year periods
               unless notice is given by the issuer to Landlord at least sixty
               (60) days prior to expiration (with any non-renewal entitling
               Landlord to draw down on the Contingency LC upon certification
               that no substitute letter of credit has been delivered to
               Landlord on or before at least thirty (30) days prior to the
               expiration date), made payable to Landlord or Landlord's
               transferee, upon delivery to the issuer of the original
               Contingency LC. Landlord shall not draw down funds under such
               letter of credit unless and until (A) Tenant is in default of
               Tenant's obligations under the Lease with respect to Tenant's
               obligation to deliver to Landlord immediately available funds to
               pay for Tenant Work Costs in excess of the remaining balance of
               the Tenant Improvement Allowance; and (B) Tenant has failed to
               cure such default within the applicable grace period provided
               under the Lease. Landlord acknowledges and agrees that any funds
               drawn by Landlord shall be used only to pay or to reimburse
               Landlord for Tenant's Work Costs in excess of the Tenant
               Improvement Allowance, and the remainder, if any, shall be
               refunded to Tenant. Landlord hereby advises Tenant that Landlord
               intends to assign its right, title and interest in the
               Contingency LC to Landlord's Mortgagee(s), and requests Tenant to
               cause such letter of credit to be issued for the benefit of
               Landlord's Mortgagee. Concurrently with such assignment of the
               Contingency LC to Landlord's Mortgagee, Landlord shall deliver to
               Tenant such mortgagee's agreement, in writing, that (i) such
               mortgagee shall not draw funds under such letter of credit except
               as and when Landlord would be entitled to make such draw under
               this Section above; (ii) such draw is subject to the conditions
               described in this Section above; and (iii) mortgagee shall use
               Annex A to the Contingency LC in order to transfer mortgagee's
               interest in the Contingency LC and shall deliver to such
               transferee a copy of mortgagee's written agreement with Landlord
               and Tenant with respect to such letter of credit and advise any
               such transferee of the conditions imposed under this Section
               above with respect to such draw. Landlord hereby instructs Tenant
               to cause the Contingency LC to be issued for the benefit of


                                       14
<PAGE>   15

               "GMAC Commercial Mortgage Corporation,650 Dresher Road, Post
               Office Box 1015, Horsham, PA 19044-8015, Attention: Michael C.
               Sperger, Treasurer". Upon Landlord's Mortgagee's release of its
               interest in the Contingency LC, Tenant shall, at Landlord's
               request, cause the Contingency LC to be reissued in Landlord's
               name, as beneficiary, provided Landlord concurrently surrenders
               the original Contingency LC to Tenant. Provided that Tenant is
               not then in default under the Lease, the Contingency LC shall be
               surrendered to Tenant concurrently with the Final Retention,
               subject to satisfaction of all conditions to Tenant's receipt of
               the Final Retention.

                      m.     Section 4.2.2.3 of Exhibit "C" is amended to 
provide that Tenant shall, concurrently with execution of this First Amendment,
execute and deliver to Landlord security assignments of Tenant's interest in all
architectural, engineering and construction contracts, and plans and
specifications for Tenant's Work, including but not limited to the consents of
Contractor and Architect to such assignments, which assignments shall be in the
form attached hereto as Exhibit "10" ("Landlord Assignments").

                      n.     Section 5.1 of Exhibit "C" is amended to delete 
"Alan Grossberg" as Tenant's representative and substitute "Dana Carter" in his
place.

                      o.     With respect to Section 3.1 of Exhibit "C", 
Landlord hereby approves (i) Stoutenbourgh, Inc. as Tenant's Architect and (ii)
that certain Architect Agreement, between Stoutenbourgh, Inc. and Tenant,
referenced in the Landlord Assignments. Concurrently with each Payment Request,
Tenant shall cause Tenant's Architect to provide all certifications and other
information which may be required to be submitted by Landlord under the Fiscal
Agent Agreement with respect to Tenant's Work.

                      p.     With respect to Section 3.1 of Exhibit "C", 
Landlord confirms that Landlord has approved (i) the plans and specifications
for Tenant's Work identified on Exhibit "2" hereto, and (ii) the time schedule
for performance of Tenant's Work set forth on Exhibit "3" hereto.

                      q.     With respect to Sections 3.2, 3.3 and 3.4 of 
Exhibit "C", Landlord confirms that it has approved Tenant's Final Plans as
described on Exhibit "2".

                      r.     With respect to Section 3.5 of Exhibit "C", 
Landlord confirms that, as of the date of the First Amendment, Landlord has not
incurred any review costs under such section.

                      s.     With respect to Section 4.1.1 of Exhibit "C", 
Landlord confirms Landlord has approved (i) Joe E. Woods Construction as
Tenant's Contractor and (ii) that certain


                                       15
<PAGE>   16

Standard Form of Agreement between Owner and Contractor, between Tenant, as
owner, and Joe E. Woods, Inc. as contractor, referenced in the Landlord
Assignments ("Construction Contract"). Tenant shall cause Tenant's Contractor to
provide all certifications and other


                                       16
<PAGE>   17

information as may be required to be submitted by Landlord under the Fiscal
Agent Agreement with respect to Tenant's Work. Tenant confirms that the
Construction Contract requires Tenant's Contractor to abide by the requirements
of Section 5.7 of Exhibit "C" and the Additional Covenants attached as Exhibit
"L" to the Lease.

                      t.     With respect to Section 4.2. of Exhibit "C", 
Landlord and Tenant hereby confirm that Landlord and Tenant have approved the
respective Work Schedules attached to the First Amendment as Exhibits "3" and
"5," respectively.



                      u.     With respect to Section 5.2 of Exhibit "C", Tenant 
acknowledges that David Gaulton of Pacific Development Company shall be
Landlord's Project Manager; provided, however, any Changes must be approved, in
writing, by either Rex Swanson or Jason Kamm on behalf of Landlord.



                      v.     With respect to Section 5.7 of Exhibit "C", add the
following provision at the end of such Section:

        "Notwithstanding anything to the contrary in this Lease, if and to the
        extent that Tenant is not required under applicable laws to otherwise
        comply with the Davis-Bacon Act, as amended, and such compliance is not
        required under the DDA, Landlord shall not require Tenant to comply with
        such Act respecting wages paid in connection with the installation of
        all FF&E that is not funded out of the Tenant Improvement Allowance."



               3.11   The Subordination, Nondisturbance, and Attornment 
Agreement attached as Exhibit "H" to the Lease is deleted in its entirety and
Exhibit "H" attached to this First Amendment is substituted in its place.




        3.12 The Short Form of Lease attached as Exhibit "K" to the Lease is
deleted in its entirety and Exhibit "K" attached to this First Amendment is
substituted in its place. Concurrently herewith, Landlord and Tenant shall
execute and deliver the Short Form of Lease for recording purposes in the form
of Exhibit "K" to the First Amendment.


                                       17
<PAGE>   18

        3.13 The Lease is hereby amended to incorporate all exhibits attached to
this First Amendment, as follows:

                      (a)    Legal Description of the Theater Parcel is attached
                             hereto as "Exhibit A-1";

                      (b)    Final Site Plan for the Project is attached hereto
                             as "Exhibit A-2";

                      (c)    Legal Description of the Development Parcels is
                             attached hereto as "Exhibit A-3";

                      (d)    Elevation Drawings of the Premises are attached
                             hereto as "Exhibit B";

                      (e)    Tenant's Sign Criteria is attached hereto as
                             "Exhibit F";

                      (f)    Rules and Regulations are attached hereto as
                             "Exhibit G";

                      (g)    Subordination, Nondisturbance and Attornment
                             Agreement Forms are attached hereto as "Exhibit H";

                      (h)    Parking Agreement is attached hereto as "Exhibit
                             I";

                      (i)    Permitted Title Exceptions are attached hereto as
                             "Exhibit J";

                      (j)    Short Form of Lease is attached hereto as Exhibit
                             "K";

                      (k)    Additional Covenants are attached hereto as
                             "Exhibit L";

                      (l)    Form of $2 Million LC is attached hereto as
                             "Exhibit 1";

                      (m)    Description of Tenant's Final Plans (including
                             Submitted Plans and Remaining Plans) is attached
                             hereto as "Exhibit 2";

                      (n)    Tenant's Work Schedule and Landlord's Work Schedule
                             are attached hereto as Exhibit "3";

                      (o)    Intentionally Deleted;

                      (p)    A description of Landlord's Work Plans is attached
                             hereto as Exhibit "5";


                                       18
<PAGE>   19

                      (q)    The Fiscal Agent Agreement is attached hereto as
                             Exhibit "6";

                      (r)    A description of FF&E is attached hereto as Exhibit
                             "7";

                      (s)    Tenant Improvement Allowance Items, Schedule of
                             Values, and Prepaid Costs subject to Reimbursement
                             to Landlord is attached hereto as Exhibit "8";

                      (t)    Form of Contingency LC is attached as Exhibit "9";
                             and

                      (u)    Landlord Assignments are attached hereto as
                             "Exhibit "10".

        4.     No Further Modification.

        Except as expressly modified herein, the Lease remains unmodified and in
full force and effect.

        5.     No Release of Guarantors.

        The execution and delivery of this First Amendment, and the Lease
modifications hereunder, shall not be deemed to release or relieve any Guarantor
of the Lease, each of whom Tenant represents and warrants shall continue to be
bound by the Lease, as modified by this First Amendment, in accordance with the
terms of the Guaranty.

        6.     Satisfaction/Waiver.

        Landlord and Tenant acknowledge and agree that all conditions set forth
in Article 4 of the Lease have been satisfied and/or waived and that neither
party has any further right to terminate the Lease based upon a failure of any
of such conditions.

        7.     Counterparts. This First Amendment may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which,
taken together, shall constitute one document.

        8.     Notices.  Tenant's address for notice purposes under this Lease 
is

               CinemaStar Luxury Theaters, Inc.
               12230 El Camino Real, Suite 320
               San Diego, CA 92130
               Attention: Mr. Norman Dowling


                                       19
<PAGE>   20

        The parties have executed this First Amendment as of the date set forth
opposite such parties' signature below.

                             LANDLORD
                             MDA - San Bernardino Associates, L.L.C.,
                             a Delaware limited liability company

                             By:    MDA Investors No. 1, L.L.C.,
                                    a Delaware limited liability company,
                                    its Managing Member

                                    By:     MJL Associates,
                                            a California Limited Partnership,
                                            its Managing Member

                                            By:    MJL Investments, Inc.,
                                                   a California corporation,
                                                   its General Partner
Date: _________________
                                                   By:__________________________
                                                   Name: _______________________
                                                   Title: ______________________

                             TENANT

                             CINEMASTAR LUXURY THEATERS, INC.,
                             a Delaware Corporation


Date: _________________      By:_________________________________
                             Print Name:_________________________
                             Its:________________________________



                                       20
<PAGE>   21

                                 EXHIBIT " A-1 "

                       LEGAL DESCRIPTION OF THEATER PARCEL



                                       21
<PAGE>   22

                                   EXHIBIT A-2

                                 FINAL SITE PLAN




                                       22
<PAGE>   23

                                 EXHIBIT " A-3 "

                    LEGAL DESCRIPTION OF DEVELOPMENT PARCELS



                                       23
<PAGE>   24

                                    EXHIBIT B

                         ELEVATION DRAWINGS OF PREMISES





                                       24
<PAGE>   25

                                   EXHIBIT "F"

                                  SIGNAGE PLAN


        Tenant shall submit to Landlord, for Landlord's reasonable review and
approval, a Signage Plan for Tenant's Building within thirty (30) days after
execution of this First Amendment. The provisions of Sections 3.2 and 3.3 of
Exhibit "C" to the Lease shall apply with respect to the timing and procedures
for review, revision and approval of such Signage Plan. Upon Landlord's approval
of the Signage Plan, such Plan shall be initialed by the parties and annexed
hereto as Exhibit "F."






                                       25
<PAGE>   26

                        EXHIBIT G- RULES AND REGULATIONS

(NONE AT THIS TIME. LANDLORD WILL SUBMIT THIS EXHIBIT PRIOR TO OPENING THE
RETAIL BUSINESSES ON THE DEVELOPMENT PARCELS)



                                       26
<PAGE>   27

                                   EXHIBIT "L"

                              ADDITIONAL COVENANTS


        I.  At the time of the opening of the Theater, Tenant anticipates
creating at least 105 full and part time jobs; provided, however, Tenant shall
have the right to modify its employment pattern from time to time in a manner
consistent with its normal operations.

        II. Tenant acknowledges that a portion of the funds for the Tenant
Improvement Allowance shall be obtained from HUD, and that Tenant shall be
prohibited under 24 CFR Part 570.601 (24 CFR Part 87) from using federally
appropriated funds for the purpose of influencing or attempting to influence an
officer or employee of any agency, a member of Congress, an officer or employee
of Congress, or an employee of a member of Congress, in connection with the
awarding of any Federal contract, the making of any Federal grant, loan or
cooperative agreement, and any extension, continuation, renewal, amendment or
modification of said documents with respect to the Theater Project. Tenant
covenants that Tenant and all of Tenant's contractors (and subcontractors) with
respect to Tenant's Work shall comply with the Federal Lobbyist Requirements at
all times prior to the Theater Project Completion Date.

        III. Tenant agrees that no person shall, on the grounds of race, sex,
creed, color, religion, national origin, or age be excluded from participation
in, be refused the benefits of, or otherwise be subjected to discrimination in
any activities, programs, or employment with respect to the Theater Project.
Tenant shall comply with all applicable regulations set forth in 24 CFR
570.600-602, including without limitation, the requirement that Tenant comply
with Title VI of the Civil Rights Act of 1964 (Public Law 88-352) and the
regulations set forth at 24 CFR Part 1 and the Age Discrimination Act of 1975
(42 U.S.C. 6101-07) and Executive Order 11245 and the regulations issued
pursuant thereto (41 CFR Part 60), if applicable; and the requirements of the
Americans With Disabilities Act, as amended (42 U.S.C. 12101-12213). Tenant
shall take affirmative action to ensure that the Theater Project shall provide
equal employment and career advancement opportunities for minorities and women
and, to the greatest extent feasible, to provide opportunities for training and
employment of lower income persons residing within the area of the Theater
Project. In furtherance of the foregoing Tenant shall, prior to the commencement
of Landlord's Work, deliver to Landlord a list, reasonably acceptable to
Landlord setting forth affirmative steps taken by Tenant, or to be taken by
Tenant, to assure that minority business and women's business enterprises are
offered an equal opportunity to obtain or compete for contracts and subcontracts
as sources of supplies, equipment, construction and services. Such affirmative
steps may include, but are not limited to, technical assistance open to all
businesses but designed to enhance opportunities for these enterprises and
special outreach efforts to inform them of contract opportunities. Such steps
shall not include preferring any business in the award of any contract or
subcontract solely or in part on the basis of race or gender. Tenant shall
deliver to Landlord semiannually, prior to April 15 and October 15 of each
fiscal year, a report summarizing the nature of the businesses with which Tenant
has entered into contracts and



                                       27
<PAGE>   28

subcontracts in connection with the Theater Project during the preceding six (6)
month period ending March 31 or September 30, as applicable. The obligation of
Tenant to deliver the reports specified in this Section shall expire upon
delivery of the report summarizing the last contracts and subcontracts entered
into by Tenant in connection with the Theater Project prior to the Theater
Project Completion Date.

        IV.  Tenant shall, during regular business hours, allow authorized
personnel of Landlord and Landlord's Mortgagees to inspect and monitor its
facilities and program operations as they relate to the Theater Project,
including the interview of Tenant's Staff and program participants, in order to
verify compliance with the covenants in this Exhibit "L".



                                       28
<PAGE>   29

                                   EXHIBIT "K"

RECORDING REQUESTED BY AND
WHEN RECORDED, MAIL TO:

GREENBERG GLUSKER FIELDS
 CLAMAN & MACHTINGER LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, CA 90067-4590
Attn:  Debby R. Zurzolo, Esq.

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


                               SHORT FORM OF LEASE


1.      Parties.

        This Short Form of Lease ("Short Form"), dated for identification
purposes only December 10, 1998, is entered into by and between MDA-SAN
BERNARDINO ASSOCIATES, L.L.C., a Delaware limited liability company
("Landlord"), and CINEMASTAR LUXURY THEATERS, INC., a California corporation
("Tenant").

2.      Recitals.

        a. Landlord is the fee owner of that certain real property more
particularly described on Exhibit "A" attached hereto ("Theater Parcel").

        b. The Theater Parcel is part of a larger project which may be developed
by Landlord on adjacent real property (collectively with the Theater Parcel, the
"Development Site"), described on Exhibit "B" attached hereto.

        c. Pursuant to the Lease, Tenant shall design and construct an
approximately 80,000- foot building on the Theater Parcel for use as a
first-class, state of the art, movie theater.

        d. In order to accommodate Tenant's parking requirements, Landlord has
or will enter into certain parking agreements more particularly described in the
Lease.

        e. In consideration of the Recitals contained herein and for other
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Landlord and Tenant agree as follows:



                                       29
<PAGE>   30

3.      Grant of Leases.

        Landlord leases to Tenant, and Tenant leases from Landlord the Theater
Parcel, together with all improvements constructed thereon, subject to the
provisions of that certain unrecorded Lease dated December 20, 1996, as amended
by a First Amendment to Lease, dated December 10, 1998 between Landlord and
Tenant (collectively, "Lease").

4.      Term of Lease.

        The initial term of the Lease commences on the "Rent Commencement Date"
as defined in Section 1.1(b) of the Lease, and, unless sooner terminated
pursuant to the terms thereof, shall expire twenty-five (25) years from the date
thereof, unless extended as provided therein.

5.      Option to Renew.

        Section 3.7 of the Lease provides that Tenant shall have the option to
extend the initial term of the Lease for two (2) additional periods of five (5)
years each, subject to the terms and conditions set forth therein.

6.      Tenant's Exclusive Use.

        Section 7.3 of the Lease provides as follows:

        "So long as Tenant continuously operates the Premises for the use
        specified in Section 1.1(l), Landlord shall not lease space within the
        Development to anyone for the purpose of operating within the
        Development a movie theater, or conducting a business requiring the use
        of auditoriums exceeding 10,000 square feet for meetings and conventions
        at the Development, without Tenant's prior written approval. This
        restriction shall not apply to the operation of restaurant or banquet
        facilities."

7.      Purpose of Short Form of Lease.

        This Short Form is prepared for the purpose of recordation only, and in
no way modifies the terms and provisions of the Lease. In the event of any
inconsistency between the terms and provisions of this Short Form and the terms
and provisions of the Lease, the terms and provisions of the Lease shall
prevail.

8.      Successors and Assigns.

        This Short Form shall be binding upon and inured to the benefits of the
parties hereto and their respective permitted successors and assigns.



                                       30
<PAGE>   31

9.      Exhibits.

        All exhibits attached hereto are incorporated herein by this reference.

        The parties have executed this Memorandum as of the date first set forth
opposite their signatures below.


Executed this ____ day            "LANDLORD"
of _________________, 1998,
at _______________________.       MDA-San Bernardino Associates,
                                    L.L.C., a Delaware limited
                                    liability company

                                    By: MDA Investors No. 1, L.L.C., a Delaware
                                        limited liability company, its Managing
                                        Member

                                        By: MJL Associates, a California Limited
                                            Partnership,
                                            its Managing Member

                                            By: MJL Investments, Inc., a
                                                California corporation, its
                                                General Partner


                                                By:____________________________
                                                Its:___________________________
                                                Print Name_____________________



Executed this ____ day                     "TENANT"
of _________________, 1998,
at _______________________.                CINEMASTAR LUXURY THEATERS, INC.,
                                           a Delaware Corporation


                                           By:___________________________
                                           Its___________________________
                                           Print Name____________________



                                       31
<PAGE>   32

STATE OF CALIFORNIA    )
                       )SS.
COUNTY OF ____________ ) 

          On _____________________, 1998, before me, ______________________, a
Notary Public, personally appeared ______________________________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.

          WITNESS my hand and official seal.

                                   Signature ___________________________
                                                        (Seal)


STATE OF CALIFORNIA    )
                       )SS.
COUNTY OF ____________ ) 

          On _____________________, 1998, before me, ______________________, a
Notary Public, personally appeared ______________________________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.

          WITNESS my hand and official seal.

                                     Signature ___________________________
                                                          (Seal)





                                       32
<PAGE>   33

                                   EXHIBIT "A"

                       LEGAL DESCRIPTION OF THEATER PARCEL





                                       33
<PAGE>   34

                                   EXHIBIT "B"

                      LEGAL DESCRIPTION OF DEVELOPMENT SITE




                                       34
<PAGE>   35

                                   EXHIBIT "1"

                                   UNION BANK
                             C/O SOUTHERN CALIFORNIA
                         INTERNATIONAL OPERATIONS CENTER
                           1980 Saturn Street, VO1-519
                          Monterey Park, CA 91755-7417
                   Attention: Standby Letter of Credit Section



Date: December __, 1998            IRREVOCABLE LETTER OF CREDIT NO.___________


BENEFICIARY:
                                        APPLICANT:


                                  Cinema Star Luxury Theaters, Inc.
                                  12230 El Camino Real, Suite 320
                                  San Diego, CA 92130

Currency:             USD
Amount:               2,000,000.00 (Two Million and no/100 U.S. Dollars)
Available by:         Payment at this office

Ladies and Gentlemen:

For the account of_____________________("Beneficiary"), we hereby open in your
favor our Irrevocable Letter of Credit No.________________ ("Credit") for an
amount not to exceed a total of U.S. $2,000,000, effective immediately and
expiring on December ___, 1999, or any automatically extended date or any
alterative date as herein set forth at the close of business of this office in
Monterey Park, California.

Funds under this Credit are available to you for all or any part of this Credit
upon presentation of the following documentation:

Your sight draft drawn on us marked "Drawn under Union Bank of California, N.A.
Irrevocable Standby Letter of Credit No. _____________, dated ________________."

This Credit shall be deemed automatically extended without an amendment for a
one year period beginning on the present expiration date hereof December ___,
1999, and upon each anniversary of such date, unless at least sixty (60) days
prior to any such expiration date we have sent you written notice by courier
service or overnight mail that we elect not to permit this Credit to be so
extended beyond its then current expiration date. This Credit shall finally
expire on December___, 2000, if it has not previously expired in accordance with
the preceding paragraph.

The date this Credit expires in accordance with the preceding paragraph is the
"Final Expiry Date". Upon the occurrence of the Final Expiry Date this Credit
shall fully and finally expire and no presentations made under this Credit after
such date will be honored.



                                       35
<PAGE>   36

Upon receipt by you of our notice that we elect not to renew, or at any time
thirty (30) days or less prior to the Final Expiry Date, you may draw against
the Credit upon presentation of the following documentation:

        Your sight draft drawn on us marked: "Drawn under Union Bank of
California, N.A., Irrevocable Standby Letter of Credit No. _____________, dated
__________________."

We will promptly honor all drafts drawn in compliance with the terms of this
Credit if received on or before the Final Expiry Date at the address above.
Documents are to be sent in one lot by courier service, overnight mail or hand
delivery.

Drafts presented at our office at the address set forth above no later than
10:00 a.m. shall be honored on the date of presentation, by payment in
accordance with your payment instructions that accompany each such draft. If
requested by you, payment under this Credit may be made by wire transfer of
immediately available funds to your account as specified in your payment
instructions, or by deposit of same funds in your designated account that you
maintain with us.

The Credit is transferable. Transfer of this Letter of Credit shall be effected
by the presentation to us of a certificate signed by Beneficiary in
substantially the form of Annex A attached hereto, with a copy delivered to the
Applicant. Upon presentation to us of such a certificate, the transferee named
in such certificate will thereupon become the Beneficiary hereof and will be
entitled to draw hereunder as though said transferee were the Beneficiary
originally named in this Letter of Credit.

This Credit shall be governed by and subject to the Uniform Customs and Practice
for Documentary Credits 91993 revision), International Chamber of Commerce
Publication No. 500 ("UCP"), and to the extent not inconsistent with UCP, the
laws of the State of California.

This Credit sets forth in full the terms of our undertaking, and such terms
shall not be modified, amended or amplified by any document, instrument or
agreement referred to in this Credit, in which this Credit is referred to or to
which this Credit relates.

SPECIAL INSTRUCTIONS:

The original of this Credit must be presented together with the above documents
in order to endorse the amount of each drawing on the reverse side.

All banking charges imposed by us under this Credit are for the account of the
Applicant.


Sincerely,

Union Bank of California, N.A.


By______________________________
Print Name:______________________
Its:_____________________________





                                       36
<PAGE>   37

                                     ANNEX A
                             INSTRUCTION TO TRANSFER

UNION BANK
c/o SOUTHERN CALIFORNIA
INTERNATIONAL OPERATIONS CENTER
1980 Saturn Street, VO1-519
Monterey Park, CA 91755-7417
Attention:  Standby Letter of Credit Section
                                                        -------------------, ---

Re:  Irrevocable Letter of Credit No. ____________ dated December____, 1998.

Gentlemen:

               For value received, the undersigned beneficiary hereby
irrevocably transfers to:

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

all rights of the undersigned beneficiary to draw under the above-captioned
Letter of Credit (the "Letter of Credit). Transferee, by acceptance of the
Letter of Credit, acknowledges that it is aware of the conditions on draws under
the letter of credit as set forth in Section 3.1 of that certain Lease, Dated
December 20, 1996, as amended December 10, 1998, between Applicant, as tenant,
and MDA-San Bernardino Associates, LLC, as landlord, and that certain Letters of
Credit Agreement, dated December __, 1998, among Applicant, MDA-San Bernardino
Associates, LLC and the undersigned beneficiary, and agrees not to draw on the
Letter of Credit unless and until all conditions for draw under such Lease and
such Agreement have been satisfied.

               By this transfer, all rights of the undersigned beneficiary in
the Letter of Credit are transferred to the transferee and transferee shall
hereafter have the sole rights as beneficiary thereof as though such transferee
were the beneficiary originally named in the Letter of Credit.

               Please acknowledge receipt of this Instruction to Transfer by
signing in the space provided below and returning such signed copy to the
transferee named above.

                                        Very truly yours,

                                        [Name of Beneficiary]

                                        By:______________________
                                        Title:____________________

Receipt of Instruction to               Transferee hereby accepts the Letter of
Transfer acknowledged as of             Credit as of:_____________________,____
___________________, 19____:            _____________________________________


[Name of Letter of Credit Issuer]       [Name of Transferee]

By:________________________             By:________________________
Title:_____________________             Title:______________________



                                       37
<PAGE>   38

                                  EXHIBIT " 9"


                                   UNION BANK
                             C/O SOUTHERN CALIFORNIA
                         INTERNATIONAL OPERATIONS CENTER
                           1980 Saturn Street, VO1-519
                          Monterey Park, CA 91755-7417
                   Attention: Standby Letter of Credit Section


Date: December __, 1998              IRREVOCABLE LETTER OF CREDIT NO.___________


BENEFICIARY:                       APPLICANT:

                                   Cinema Star Luxury Theaters, Inc.
                                   12230 El Camino Real, Suite 320
                                   San Diego, CA 92130

Currency:      USD
Amount:        $275,000 (Two Hundred Seventy-Five Thousand and no/100 U.S. 
               Dollars)
Available by:  Payment at this office

Ladies and Gentlemen:

For the account of_____________________("Beneficiary"), we hereby open in your
favor our Irrevocable Letter of Credit No.________________ ("Credit") for an
amount not to exceed a total of U.S. $275,000, effective immediately and
expiring on December ___, 1999, or any automatically extended date or any
alterative date as herein set forth at the close of business of this office in
Monterey Park, California.

Funds under this Credit are available to you for all or any part of this Credit
upon presentation of the following documentation:

        Your sight draft drawn on us marked "Drawn under Union Bank of
California, N.A. Irrevocable Standby Letter of Credit No. _____________, dated
________________."

This Credit shall be deemed automatically extended without an amendment for a
one year period beginning on the present expiration date hereof December ___,
1999, and upon each anniversary of such date, unless at least sixty (60) days
prior to any such expiration date we have sent you written notice by courier
service or overnight mail that we elect not to permit this Credit to be so
extended beyond its then current expiration date. This Credit shall finally
expire on December___, 2000, if it has not previously expired in accordance with
the preceding paragraph.

The date this Credit expires in accordance with the preceding paragraph is the
"Final Expiry Date". Upon the occurrence of the Final Expiry Date this Credit
shall fully and finally expire and no presentations made under this Credit after
such date will be honored.

Upon receipt by you of our notice that we elect not to renew, or at any time
thirty (30) days or less prior to the Final Expiry Date, you may draw against
the Credit upon presentation of the following documentation:

        Your sight draft drawn on us marked: "Drawn under Union Bank of
California, N.A., Irrevocable Standby Letter of Credit No. _____________, dated
__________________."



                                       38
<PAGE>   39

We will promptly honor all drafts drawn in compliance with the terms of this
Credit if received on or before the Final Expiry Date at the address above.
Documents are to be sent in one lot by courier service, overnight mail or hand
delivery.

Drafts presented at our office at the address set forth above no later than
10:00 a.m. shall be honored on the date of presentation, by payment in
accordance with your payment instructions that accompany each such draft. If
requested by you, payment under this Credit may be made by wire transfer of
immediately available funds to your account as specified in your payment
instructions, or by deposit of same funds in your designated account that you
maintain with us.

The Credit is transferable. Transfer of this Letter of Credit shall be effected
by the presentation to us of a certificate signed by Beneficiary in
substantially the form of Annex A attached hereto, with a copy delivered to the
Applicant. Upon presentation to us of such a certificate, the transferee named
in such certificate will thereupon become the Beneficiary hereof and will be
entitled to draw hereunder as though said transferee were the Beneficiary
originally named in this Letter of Credit.

This Credit shall be governed by and subject to the Uniform Customs and Practice
for Documentary Credits 91993 revision), International Chamber of Commerce
Publication No. 500 ("UCP"), and to the extent not inconsistent with UCP, the
laws of the State of California.

This Credit sets forth in full the terms of our undertaking, and such terms
shall not be modified, amended or amplified by any document, instrument or
agreement referred to in this Credit, in which this Credit is referred to or to
which this Credit relates.

SPECIAL INSTRUCTIONS:

The original of this Credit must be presented together with the above documents
in order to endorse the amount of each drawing on the reverse side.

All banking charges imposed by us under this Credit are for the account of the
Applicant.


Sincerely,

Union Bank of California, N.A.


By______________________________
Print Name:______________________
Its:_____________________________



                                       39
<PAGE>   40

                                     ANNEX A
                             INSTRUCTION TO TRANSFER

UNION BANK
c/o SOUTHERN CALIFORNIA
INTERNATIONAL OPERATIONS CENTER
1980 Saturn Street, VO1-519
Monterey Park, CA 91755-7417
Attention:  Standby Letter of Credit Section
                                                        -------------------, ---

Re:  Irrevocable Letter of Credit No. ____________ dated December _____, 1998.

Gentlemen:

               For value received, the undersigned beneficiary hereby
irrevocably transfers to:

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

all rights of the undersigned beneficiary to draw under the above-captioned
Letter of Credit (the "Letter of Credit). Transferee, by acceptance of the
Letter of Credit, acknowledges that it is aware of the conditions on draws under
the letter of credit as set forth in Section 2.2.2..6 of Exhibit "C" that
certain Lease, Dated December 20, 1996, as amended December 10, 1998, between
Applicant, as tenant, and MDA-San Bernardino Associates, LLC, as landlord, and
that certain Letters of Credit Agreement, dated December __, 1998, among
Applicant, MDA-San Bernardino Associates, LLC and the undersigned beneficiary,
and agrees not to draw on the Letter of Credit unless and until all conditions
for draw under such Lease and such Agreement have been satisfied.

        By this transfer, all rights of the undersigned beneficiary in the
Letter of Credit are transferred to the transferee and transferee shall
hereafter have the sole rights as beneficiary thereof as though such transferee
were the beneficiary originally named in the Letter of Credit.

        Please acknowledge receipt of this Instruction to Transfer by signing in
the space provided below and returning such signed copy to the transferee named
above.

                                       Very truly yours,

                                       [Name of Beneficiary]

                                       By:______________________
                                       Title:____________________

Receipt of Instruction to              Transferee hereby accepts the Letter of
Transfer acknowledged as of            Credit as of:_____________________,____
___________________, 19____:           _____________________________________


[Name of Letter of Credit Issuer]      [Name of Transferee]

By:________________________            By:________________________
Title:_____________________            Title:______________________


                                       40

<PAGE>   1
                                                                    EXHIBIT 10.2
                      AGREEMENT REGARDING LETTERS OF CREDIT


               This AGREEMENT REGARDING LETTERS OF CREDIT ("Agreement") is
executed as of December 10, 1998, by and among MDA-SAN BERNARDINO ASSOCIATES,
LLC, a Delaware limited liability company ("Borrower"), GMAC COMMERCIAL MORTGAGE
CORPORATION, a California corporation ("Lender"), and CINEMASTAR LUXURY
THEATERS, INC., a Delaware corporation ("Tenant").


                                R E C I T A L S :


               A.   Lender and Borrower have entered into that certain
Construction Loan Agreement of even date herewith (the "Loan Agreement")
pursuant to which Lender has agreed to make a construction loan to Borrower (the
"Loan") in the maximum principal amount of Three Million Six Hundred Thousand
Dollars ($3,600,000). The Loan is evidenced by a Promissory Note Secured By
Construction Deed of Trust of even date herewith ("Note") in the amount of
$3,600,000. The Note is secured by, among other things, (i) a Construction Deed
of Trust, Security Agreement, Agreement of Rents, and Fixture Filing of even
date herewith (the "Deed of Trust") encumbering certain real property located in
the City of San Bernardino, County of San Bernardino, California, and more
particularly described in the Deed of Trust (the "Property") and (ii) an
Assignment of Leases and Rents ("Lease Assignment") of even date herewith
executed by Borrower in favor of Lender. Pursuant to the Loan Agreement,
Borrower, Lender, the Redevelopment Agency of the City of San Bernardino
("Agency") and First American Title Insurance Company ("Fiscal Agent") have also
entered into a Fiscal Agent Construction Loan Disbursement Agreement
("Disbursement Agreement"). Unless otherwise expressly defined herein all
capitalized terms used herein shall have the meanings ascribed to them in the
Theater Lease (defined below).

               B.   Pursuant to that certain Multi-Plex Theater Lease dated
December 20, 1996, by and between Borrower and Tenant, as amended by a First
Amendment to Multi-Plex Lease ("First Amendment"), dated December 10, 1998 for
identification purposes (collectively, the "Theater Lease"), Tenant is required
to obtain the following letters of credit ("Letters of Credit") in order to
provide assurances that Tenant will be financially able to commence and complete
Tenant's obligations with respect to construction of the Building (as Theater
defined in the Theater Lease) and installation of the FF&E (as defined in the
Theater Lease).

                    1. An unconditional and irrevocable standby letter of credit
        ("$2 Million LC") issued to and in a form approved by Lender and which
        may be drawn upon from time to time upon a default by Tenant under the
        Theater Lease which is not cured within the applicable grace period
        provided under the Theater Lease ("Tenant Default") as provided in
        Section 2.3(a) of the Theater Lease, as amended by the First Amendment
        ("$2 Million LC Draw Event") .

<PAGE>   2

                    2. An unconditional and irrevocable standby letter of credit
        in the amount of $275,000 ("Contingency LC") issued to and in a form
        approved by Lender which may be drawn upon from time to time upon
        Tenant's failure to deposit with the Fiscal Agent or Lender (as
        hereinafter provided below) an amount equal to the Tenant Work Cost
        Deficiency Amount as provided in Section 2.2.2.6 of the Theater Lease,
        as amended by the First Amendment ("Contingency LC Draw Event"). As used
        herein, the term "Tenant Work Cost Deficiency Amount" means the amount
        by which the unpaid balance of the Tenant Work Costs exceed or will
        exceed the remaining balance of the Tenant Improvement Allowance, as
        reasonably determined by Landlord (or Lender upon the occurrence of an
        Event of Default (as defined in the Deed of Trust) ).

A fully executed copy of the First Amendment is attached hereto as Exhibit A.

               C.   Lender is not willing to make the Loan, or otherwise extend
credit, to Borrower unless Borrower assigns and pledges all of its right, title
and interest in and to the Letters of Credit and the Letter of Credit Funds
(defined below) upon the terms and subject to the limitations provided herein.


                              A G R E E M E N T :


               NOW, THEREFORE, as an inducement to Lender to make the Loan to
Borrower, and to extend such additional credit as Lender may from time to time
agree to extend under the Loan Documents, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties do hereby agree as follows:

               1.   Creation of Security Interest. This Agreement is intended to
create, and Borrower does hereby grant, assign and set-over to Lender, a
first-lien security interest in all of Borrower's right, title and interest now
or hereafter acquired in and to (a) the Letters of Credit and Borrower's rights
under the Theater Lease with respect to the Letters of Credit, and (b) any funds
comprising the Letters of Credit which may hereafter be drawn upon and deposited
with the Fiscal Agent or with Lender ("Letter of Credit Funds"). In order to
perfect Lender's security interest in the Letters of Credit and the Letter of
Credit Funds, Borrower has concurrently herewith delivered to Lender the
original Letters of Credit issued to and approved by Lender. Lender hereby
approves the forms of Letters of Credit attached to the First Amendment as
Exhibit "1" and "9", respectively.

               2.     Letters of Credit.

                      (a)     Until the occurrence of an Event of Default (as
        defined in and pursuant to the Deed of Trust) but subject to the
        limitations contained in this Agreement and in the consent agreement
        attached hereto signed by Fiscal Agent, Borrower shall have all rights
        under the Theater Lease to draw upon the Letters of Credit as otherwise
        permitted under the Theater Lease. If prior to an Event of Default under
        the Deed of Trust, Borrower has the right under the Theater Lease to
        draw upon one or more of the 


                                      -2-
<PAGE>   3

        Letters of Credit, Borrower shall deliver to Lender a written request
        ("Letter of Credit Draw Request"), certifying to Lender that Borrower
        has the right to draw on such Letter of Credit and specifying in detail
        the nature of the Draw Event (defined below) and the amount of the
        requested draw amount ("Draw Amount"). Each Letter of Credit Draw
        Request shall be accompanied by evidence reasonably satisfactory to
        Lender that a Draw Event has occurred and that Borrower has a right
        under the Theater Lease to draw upon such Letter of Credit. Within five
        (5) days of Lender's receipt of a Letter of Credit Draw Request, Lender
        shall draw down upon the applicable Letter of Credit in accordance with
        the Letter of Credit Draw Request and will apply the Letter of Credit
        funds so drawn as provided in Subsection (d) below. Tenant irrevocably
        authorizes Lender, without notice to Tenant, to comply with any Letter
        of Credit Draw Request received by Lender from Borrower. Borrower agrees
        not to deliver such Letter of Credit Draw Request unless and until the
        conditions precedent to such draw under the Theater Lease have been
        satisfied.

                      (b)     From and after the occurrence and during the
        continuance of an Event of Default under the Deed of Trust, Lender (or
        its nominee) shall have the automatic and immediate right, but not the
        obligation, in its sole and absolute discretion, to exercise any and all
        rights of Borrower under the Theater Lease with respect to the Letters
        of Credit and/or the Letter of Credit Funds. Lender shall also have the
        right, but not the obligation, to take in its name or in the name of the
        Borrower such action as Lender may at any time (whether or not an Event
        of Default has occurred) reasonably determine to be necessary or
        advisable to protect the rights of Borrower or Lender with respect to
        the Letters of Credit and/or the Letter of Credit Funds; provided
        however, that so long as no Event of Default has occurred, Lender shall
        not take any such action until it has given Borrower ten (10) prior days
        written notice thereof and Borrower has failed to take such action
        within such ten (10) day period, unless in Lender's reasonable judgment,
        immediate action is necessary to protect the security provided hereby,
        in which case no prior notice shall be required (provided, however,
        Lender shall notify Borrower and Tenant of the actions taken by Lender
        within five (5) days) after such action is taken). Lender shall incur no
        liability if any action so taken by it, or on its behalf shall prove to
        be inadequate or invalid, provided, however, Lender shall draw upon the
        Letters of Credit only as and when Borrower would be entitled to do so
        under the Theater Lease.

                      (c)     Borrower shall at all times (i) provide Lender 
        with copies of all notices, requests and other communications concerning
        any default by Tenant under the Theater Lease, the Letters of Credit,
        and/or Borrower's request that a Tenant Work Cost Deficiency Amount be
        deposited by Tenant concurrently if delivered to Tenant by Borrower or
        within five (5) days if received by Borrower from Tenant; (ii)
        immediately notify Lender in writing upon the occurrence of each and
        every Tenant Default, and each and every $2 Million Draw Event and
        Contingency Draw Event (collectively, a "Draw Event") (each defined
        below).

                      (d)     Notwithstanding anything contained in the Theater
        Lease, any amounts drawn on either of the Letters of Credits shall be
        deposited as follows:


                                      -3-
<PAGE>   4

                              (i)  Any amounts drawn on the Contingency LC
               ("Contingency Funds") shall not be delivered to Borrower but
               shall be deposited: (a) so long as none of the Loan proceeds have
               been disbursed, with the Fiscal Agent to be held and disbursed in
               payment of Tenant Work Costs in accordance with the terms of the
               Loan Agreement and the Disbursement Agreement, and (b) from and
               after the initial advance of Loan proceeds, with Lender to be
               held and disbursed in payment of Tenant Work Costs in accordance
               with the terms of the Loan Agreement and the Disbursement
               Agreement . The Contingency Funds so deposited with the Fiscal
               Agent or Lender will be disbursed before any further Loan
               proceeds in payment of Tenant Work Costs will be disbursed.

                             (ii)  Any amounts drawn on the $2 Million LC ("$2
               Million Funds") shall not be delivered to Borrower but shall be
               deposited with Lender and applied as follows:

                                   (A) to the extent any portion of the $2
                      Million Funds are drawn upon due to a Tenant Default with
                      respect to the cost of the acquisition and installation of
                      Theater Tenant FF&E (as defined in the Loan Agreement)
                      ("FF&E Costs"), then such Letter of Credit funds shall be
                      deposited with Lender to be disbursed towards the payment
                      of FF&E Costs in accordance with the terms of the Loan
                      Agreement;

                                   (B) to the extent any portion of the $2
                      Million Funds are drawn upon due to a Tenant Default with
                      respect to the failure to pay Tenant Work Costs or
                      complete the Building as required under the Theater Lease,
                      then such Letter of Credit Funds shall be deposited with
                      Lender to be disbursed in payment of Tenant Work Costs in
                      accordance with the terms of the Loan Agreement and the
                      Disbursement Agreement and before any further loan
                      proceeds in payment of Tenant Work Costs will be
                      disbursed;

                                   (C) to the extent the $2 Million Funds are
                      drawn upon due to a Tenant Default other than with respect
                      to FF&E Costs or Tenant Work Costs ("Non-Construction
                      Default Funds"), then Lender shall apply up to $1,000,000
                      in the aggregate of the Non-Construction Default Funds to
                      cure or partially cure such Tenant Default in accordance
                      with the terms of the Theater Lease to be disbursed or
                      applied or as the case may be, in accordance with the
                      terms of the Loan Agreement.

                                   (D) At such time as the earlier of (i) the
                      Loan is repaid, in full and all obligations of the
                      Borrower under the Loan Documents are fully satisfied, or
                      (ii) upon Borrower's notice to Lender that Tenant has
                      satisfied the conditions for the return of the Letters of
                      Credit set forth in the First Amendment, Lender shall
                      return the Letters of Credit, and any remaining Letter of
                      Credit Funds not previously disbursed pursuant to this

                                      -4-
<PAGE>   5

                      Agreement to Borrower. Borrower agrees to give Lender such
                      notice promptly upon Tenant's satisfaction of such
                      conditions. Borrower agrees to return such Letters of
                      Credit and any remaining Letter of Credit Funds not
                      previously disbursed to the Tenant in accordance with the
                      terms of the Lease. Lender will execute such assignment
                      documents, including without limitation Annex A to the
                      Letters of Credit as Borrower may reasonably request to
                      transfer the Letters of Credit to Borrower.

                      (e)     Neither this Agreement nor any action taken or not
        taken by Lender hereunder shall constitute an assumption by Lender of
        any obligations under the Theater Lease and Borrower and Tenant shall
        continue to be liable for their respective obligations under the Theater
        Lease. Borrower agrees to indemnify, defend (with counsel of Lender's
        choice), protect and hold Lender free and harmless from and against any
        loss, cost, liability or expense (including but not limited to
        attorney's fees and costs) (collectively, "Losses") incurred by Lender
        in connection with Lender's exercise of any of its rights under this
        Agreement and/or in connection with any draw upon either of the Letters
        of Credit made by Lender under this Agreement and/or in connection with
        the disbursement of the Letter of Credit Funds, excluding any Losses
        resulting solely from the gross negligence or willful misconduct of
        Lender. Borrower and Tenant hereby agree to release and hold harmless
        Lender, for any action (or inaction) taken by Lender with respect to the
        Letters of Credit and/or the Letter of Credit Funds under this
        Agreement, excluding any Losses resulting solely from the gross
        negligence or willful misconduct of Lender.

                      (f)     If Tenant fails to deposit renewal Letter(s) of 
        Credit as and when required under the Letters of Credit, Lender shall
        immediately and without any notice to Borrower or Tenant have the right
        to draw down the Letters of Credit and hold all Letter of Credit Funds
        until replacement letters of credit issued to Lender from the same
        issuing bank and in the same form as the Letters of Credit ("Replacement
        Letters of Credit") are delivered to Lender. Until such time as
        Replacement Letters of Credit are delivered to Lender, Lender shall hold
        and disburse the Letter of Credit Funds in accordance with the terms of
        this Agreement.

               3.     No Amendments to Lease. Neither Borrower nor Tenant will 
agree to or enter into any amendment, restatement modification or termination of
the Theater Lease including without limitation with respect to the Letters of
Credit, without the prior written consent of Lender, which consent may be
withheld in Lender's sole and absolute discretion.

               4.     No Waiver of Rights. Borrower shall not waive, forgo or
otherwise diminish any rights with respect to the Letters of Credit or the
Letter of Credit Funds. Borrower shall enforce, at its sole cost and expense,
Tenant's obligations under the Theater Lease.

               5.     Transfer of Collateral. In addition to the restrictions
contained in the other Loan Documents, Borrower shall not sell, transfer,
convey, assign, or further hypothecate or encumber, either voluntarily or
involuntarily, all or any portion of its interests in and to the 


                                      -5-
<PAGE>   6

Theater Lease (including, without limitation, the Letters of Credit or the
Letter of Credit Funds), without the prior written consent of Lender which
consent may be withheld in Lender's sole and absolute discretion, excluding
assignments to the Agency pursuant to the Agency Second Loan Documents and
Agency Third Loan Documents (as defined in the Loan Documents) and approved by
Lender.

               6.   Notices. Borrower agrees to deliver to Lender a copy of any
notice, demand or other writing delivered to or received from Tenant under the
Theater Lease promptly following the giving or receiving of same.

               7.   Payment of Expenses. In the event that Borrower should 
breach or fail to timely perform any provisions of this Agreement, Borrower
shall, immediately upon demand by Lender, pay Lender all costs and expenses
(including court costs and attorneys' fees) incurred by Lender in the
enforcement hereof or the preservation of Lender's rights hereunder, and
including attorneys' fees and costs incurred in connection with any and all
bankruptcy proceedings such as, for example and without limitation, relief from
stay proceedings brought by Lender. The covenant contained in this section shall
survive the payment of the Loan and performance of the Borrower's obligations
under the Loan Documents.

               8.   Waiver. No failure to exercise, and no delay in exercising, 
on the part of Lender, any right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right. The rights of Lender
hereunder shall be in addition to all other rights provided by law. No
modification or waiver of any provision of this Agreement, nor consent to
departure therefrom, shall be effective unless in writing and no such consent or
waiver shall extend beyond the particular case and purpose involved. No notice
or demand given in any case shall constitute a waiver of the right to take other
action in the same, similar or other instances without such notice or demand.

               9.   Notice. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered or sent, as the
case may be, by any of the following methods: (i) personal delivery; (ii)
nationally recognized overnight commercial carrier or delivery service; (iii)
registered or certified mail (with postage prepaid and return receipt requested)
or (iv) by facsimile transmission with a "hard" copy delivered within the next
two (2) business days addressed as follows:

               "Lender"          GMAC Commercial Mortgage Corporation
                                 100 South Wacker Drive, Suite 400
                                 Chicago, Illinois 60606
                                 Attention:  Phillip J. Keel
                                 Telecopier No.: (312) 845-8623


                                      -6-
<PAGE>   7

               "Borrower"        MDA-San Bernardino Associates, LLC
                                 300 Continental Boulevard, Suite 360
                                 El Segundo, California  90245
                                 Attention:  Jason Kamm
                                 Telecopier No.:  (310) 416-8741

               "Tenant"          CinemaStar Luxury Theaters, Inc.
                                 12230 El Camino Real, Suite 320
                                 San Diego, California  92130
                                 Attention:  Frank Moreno, President

               Notices shall be deemed given upon receipt at the address set
forth above. Notice of any change of address or of the person to whom notices
are to be sent shall be given in the manner set forth in this Section 10.

               10.  Governing Law; Jurisdiction. This Agreement shall be 
governed by and construed in accordance with the laws of the State of
California. Borrower hereby irrevocably submits to the jurisdiction of any court
of competent jurisdiction located in the State of California in connection with
any proceeding out of or relating to this Agreement.

               11.  Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid, or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable and this Agreement shall be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part of this Agreement,
and the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance from this Agreement, unless such continued
effectiveness of this Agreement, as modified, would be contrary to the basic
understandings and intentions of the parties as expressed herein.

               12.  Amendments. This Agreement may be amended only by an
instrument in writing executed by the party or an authorized representative of
the party against whom such amendment is sought to be enforced.

               13.  Parties Bound; Agreement. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, assigns and legal representatives; provided, however, that Borrower
may not, without the prior written consent of Lender, assign any of its rights,
powers, duties or obligations hereunder. In the event Lender assigns its
interest in either or both of the Letters of Credit and/or to any Letter of
Credit Funds to a third party, Lender will provide any such third party with a
copy of this Agreement.

               14.  Headings. Section headings are for convenience of reference
only and shall in no way affect the interpretation of this Agreement.

               15.  Recitals. The recital and introductory paragraphs hereof are
a part hereof, form a basis for this Agreement and shall be considered prima
facie evidence of the facts and documents referred to therein.


                                      -7-
<PAGE>   8

               16.  WAIVER OF RIGHT TO TRIAL BY JURY. BORROWER AND TENANT HEREBY
AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND
WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL
NOW OR HEREAFTER EXIST WITH REGARD TO THIS AGREEMENT, THE DEED OF TRUST, OR THE
OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN
CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY
AND VOLUNTARILY BY BORROWER AND TENANT, AND IS INTENDED TO ENCOMPASS
INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY
JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS
PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.

               17.  Exhibits Incorporated; Number and Gender. Any Exhibits
attached hereto are incorporated herein by reference and expressly made a part
of this Agreement for all purposes. References to any Exhibit in this Agreement
shall be deemed to include this reference and incorporation. As used in this
Agreement, the masculine gender shall include the feminine and neuter, and
singular number shall include the plural, and vice versa. Time is of the essence
of this Agreement. Each party hereto acknowledges, represents, and warrants that
(i) each party hereto is of equal bargaining strength; (ii) each such party has
actively participated in the drafting, preparation, and negotiation of this
Agreement; (iii) each such party hereto has had the opportunity to have such
party's independent counsel review this Agreement; and (iv) any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not apply in the interpretation of this Agreement, any
portion hereof, any amendments hereto, or any Exhibits attached hereto.

               18.  Remedies Cumulative. All rights and remedies of Lender
provided for herein and in any other Loan Document are cumulative and shall be
in addition to all other rights and remedies provided by law.

               19.  Third Party Transfers. Lender agrees that concurrently with
any transfer or assignment of either or both of the Letters of Credit and/or any
Letter of Credit Funds to a third party, Lender shall advise such transferee of
the conditions or draw set forth in the Lease and as an additional condition to
drawing upon the Letters of Credit, such third party shall give Tenant at least
five (5) days prior notice of intent to draw.



                                      -8-
<PAGE>   9

               EXECUTED as of the day and year first above written.


        "Borrower"              MDA-SAN BERNARDINO ASSOCIATES, 
                                L.L.C., a Delaware limited liability company

                                By:  MDA Investors No. 1, L.L.C.,
                                     a Delaware limited liability Company
                                     Its:  Managing Member

                                     By:  MJL Associates,
                                          a California limited partnership
                                          Its:  Managing Member

                                          By:   MJL Investments, Inc.,
                                                a California corporation
                                                Its:  General Partner


                                                By:___________________________
                                                Name:_________________________
                                                Title:________________________








[SIGNATURES CONTINUED]




                                      -9-
<PAGE>   10

        "Tenant"              CINEMASTAR LUXURY THEATERS, INC., a Delaware
                              corporation


                              By:_________________________________
                                  Name:___________________________
                                  Title:__________________________








[SIGNATURES CONTINUED]


                                      -10-
<PAGE>   11

        "Lender"                    GMAC COMMERCIAL MORTGAGE CORPORATION, a
                                    California corporation


                                    By:________________________________
                                        Name:__________________________
                                        Title:_________________________






                                      -11-
<PAGE>   12

                CONSENT TO AGREEMENT REGARDING LETTERS OF CREDIT


               FIRST AMERICAN TITLE INSURANCE COMPANY ("Fiscal Agent") hereby
acknowledges and agrees that it has received a copy of the foregoing Agreement
Regarding Letters of Credit dated of even date herewith and Fiscal Agent and
Tenant each acknowledges and agrees further as follows:


               1. Consent to Assignment. To the extent that the grant of the
security interest and assignment by Borrower of its right, title and interest in
and to the Letters of Credit and the Letter of Credit Funds and the enforcement
of the terms hereof with respect thereto require the consent, approval or action
of Fiscal Agent or Tenant, Fiscal Agent and Tenant hereby grant such consent and
approval.


               2. Notice of Security Interest. Notice is hereby given to Fiscal
Agent under California Commercial Code Section 9302(1)(g)(ii) of Borrower
granting to Lender a first-lien security interest in, among other collateral,
Borrower's right, title and interest in and to the Letters of Credit and the
Letter of Credit Funds some of which may be deposited from time to time with
Fiscal Agent pursuant to the terms of the Agreement to be held and disbursed by
Fiscal Agent pursuant to the terms of the Disbursement Agreement.


               3. Notices. All notices or other communications required or
permitted pursuant to this consent agreement shall be delivered in the same
manner as required under Paragraph 10 of the Agreement. If such notice or
communication is to be delivered to Escrow Holder, it shall be addressed as
follows:


               "Fiscal Agent"         First American Title Insurance Company
                                      323 Court Street
                                      San Bernardino, California  92412
                                      Attention:  Lee Ann Adam





                                      -12-
<PAGE>   13

               IN WITNESS WHEREOF, the parties hereto have executed this Consent
to Agreement Regarding Letters of Credit effective as of the date and year first
written above under the Agreement.

        "Fiscal Agent"                 FIRST AMERICAN TITLE INSURANCE COMPANY


                                       By:________________________________
                                          Print Name:  _________________________
                                          Title:  ______________________________








[SIGNATURES CONTINUED]



                                      -13-
<PAGE>   14

        "Tenant"              CINEMASTAR LUXURY THEATERS, INC., a Delaware
                              corporation


                              By:__________________________________
                                 Name:_____________________________
                                 Title:____________________________



                                      -14-

<PAGE>   1
                                                                    EXHIBIT 10.3

PURCHASE SALE OF STOCK AGREEMENT OF CINEMASTAR LUXURY THEATERS, S.A DE C.V.,
ENTERED INTO BETWEEN ATLANTICO & ASS, S.A. DE C.V., REPRESENTED HEREIN BY MR.
MARCO ANTONIO ALEMAN BONILLA, HEREINAFTER REFERRED TO AS THE "SELLER", AND ON
THE OTHER PART BY CINEMASTAR LUXURY THEATERS, INC. AND CINEMASTAR LUXURY
CINEMAS, INC., COMPANIES DULY INCORPORATED UNDER THE LAWS OF THE UNITED STATES,
HEREINAFTER JOINTLY REFERRED TO AS THE "BUYER", REPRESENTED HEREIN BY MR. FRANK
J. MORENO, PURSUANT TO THE FOLLOWING RECITALS AND CLAUSES:

                                    RECITALS

I.   The SELLER hereby represents:

     a)   That SELLER is the owner of 25% of the capital stock of the company
          Cinemastar Luxury Theaters, S.A de C.V. (henceforth referred to as
          CINEMASTAR) a corporation duly existing and formed in accordance with
          the laws of the Mexican Republic, and they are willing to transfer
          their interests in favor of Cinemastar Luxury Theaters, Inc. and
          Cinemastar Luxury Cinemas, Inc., through the execution of this
          purchase sale of stock agreement (the "Agreement").

     b)   That CINEMASTAR by-laws were duly formalized by means of public
          instrument number 6800, volume 270, passed before the faith of Mr.
          Marco Antonio Mayo Barron, Notary Public number 11, in the city of
          Tijuana, Baja California. The by-laws were recorded at the Public
          Registry of Property and Commerce of the city of Tijuana, State of
          Baja California, under entry number 5067316, Commerce Section, on
          April 23, 1996.

     c)   That the capital stock and shares that SELLER owns are 425 of Series
          "B".

     d)   That SELLER's shares are free and clear of all liens, security
          interests, claims or liabilities with respect to taxes, pledges,
          voting rights, or similar restrictions of any kind whatsoever.

     e)   That his authority to act on behalf of the SELLER is currently in
          force and it has not been revoked nor limited in any manner
          whatsoever.

     f)   That SELLER wishes to transfer its CINEMASTAR interests to the BUYERS
          with the following binding terms and conditions.

II.  THE BUYERS' representative states:

     a)   Cinemastar Luxury Theaters, Inc. and Cinemastar Luxury Cinemas, Inc.
          are companies duly formed and incorporated in accordance with the laws
          of the United States of America.

     b)   That Cinemastar Luxury Theaters, Inc. has a legitimate interest in
          acquiring 424 shares of the stock interest owned by the SELLER,
          providing that all requirements of law have been met to perfect the
          transfer of shares in accordance with the laws of the Mexican
          Republic.


                                      
<PAGE>   2

     c)   That Cinemastar Luxury Cinemas, Inc. has a legitimate interest in
          acquiring 1 share of the stock interest owned by the SELLER, providing
          that all requirements of law have been met to perfect the transfer of
          shares in accordance with the laws of the Mexican Republic.

     d)   That his authority to act on behalf of the BUYERS is currently in
          force and has not been revoked nor limited in any manner whatsoever.

III. The consummation of the purchase and sale of the 425 shares as provided for
     in this Agreement (the "Closing") shall take place at the offices of
     CinemaStar, on November 23, 1998 (the "Closing Date"). The certificates
     representing the 425 shares and appropriately executed stock powers shall
     be delivered to Buyers.

        NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:

                                     CLAUSES

CLAUSE 1.  PURCHASE AND SALE OF STOCK.

     1.1  PURCHASE OF STOCK. In accordance with the terms and subject to the
          conditions specified in this agreement, the SELLER in this act sells,
          assigns, conveys, transfers, and delivers to the BUYERS the
          certificates, as well as the entire rights, title and interest of 425
          shares of CINEMASTAR, and the BUYERS purchase and acquire the entire
          right, title, and interest of said shares, free and clear of all
          liens, security interests, claims, or liabilities with respect to
          taxes, pledges, voting agreements, or similar restrictions of any kind
          whatsoever, with the understanding that Cinemastar Luxury Theaters,
          Inc. acquire 424 shares, and Cinemastar Luxury Cinemas, Inc. acquire 1
          share of the stock interest owned by the SELLER.

CLAUSE 2. PURCHASE PRICE.

     2.1  The BUYERS shall pay as a purchase price to the SELLER the amount of
          US $330,000.00 (three hundred and thirty thousand dollars 00/100) for
          the transfer of SELLER's ownership interest in CINEMASTAR (the
          "Purchase Price").

     2.2  The BUYERS shall receive the full Purchase Price by means of a
          certified check upon execution of this agreement.

CLAUSE 3. WARRANTIES AND REPRESENTATIONS OF THE SELLER.

     3.1  That, to the extent of their knowledge, all recitals and declarations
          made by them are correct and truthful.

     3.2  That CINEMASTAR is currently in strict compliance of all obligations
          regarding environmental, sanitary, labor, social security, and tax
          issues 


                                       2
<PAGE>   3

          applicable by law, and that it has obtained proper authorizations,
          permits, and licenses required by law for its daily course of
          business.

     3.3  That CINEMASTAR does not have any outstanding debts , nor any economic
          or administrative contingency regarding the concepts to which are
          referred in paragraph 3.2 above, arising from of violations or failure
          to comply with the respective laws.

     3.4  That CINEMASTAR is current in the payment of its taxes and other
          contributions, as well as governmental fees and utilities charges,
          whether federal, state or municipal.

     3.5  That CINEMASTAR has no pending lawsuits, trials, proceedings, claims,
          investigations, or any other circumstance of any nature from any
          individual, corporation or governmental agency against it, or of which
          it may be a part, and as a consequence could result in a contingent or
          real liability for CINEMASTAR.

     3.6  That policies for human resources administration, salaries, and other
          labor and fringe benefits, as well as the occupational health and
          safety measures, and training and skill development programs being
          implemented by the company with regard to its employees, are in strict
          observance of the tax, labor, environmental, and social security
          regulations.

     3.7  The Seller is a corporation duly organized, validly existing and in
          good standing under the laws of Mexico, state of Baja California, and
          has full power, corporate or otherwise, legal capacity and authority
          to enter into and perform its obligations under this Agreement.

     3.8  The Seller has taken all action required by law, its Articles of
          Incorporation, and its Bylaws to authorize the execution, delivery and
          performance of this Agreement.

     3.9  This Agreement, upon execution and delivery, shall constitute the
          legal, valid and binding act of the Seller, enforceable against the
          Seller in accordance with its terms (except as enforcement may be
          limited by bankruptcy, insolvency, reorganization, priority, or other
          laws relating to or affecting the enforcement of creditors' rights or
          by laws affecting generally the availability of equitable remedies).

     3.10 The 425 shares shall be issued and delivered to the Buyers free and
          clear of any and all liens, encumbrances, security interests, pledges,
          claims, voting trust agreements and equities of any kind or nature
          except for the interests and encumbrances created by this Agreement.

     3.11 Neither the execution and delivery of this Agreement nor the
          consummation of the transactions contemplated hereby: (A) violate,
          conflict with, result in a breach of, or constitute a default under
          the Articles of Incorporation, Bylaws or other organizational
          documents of the Seller, or any agreement, instrument or obligation to
          which the Seller is a party, or by which its assets 


                                       3
<PAGE>   4

          may be bound or affected; (B) violate any order, writ, injunction,
          decree, statute, rule or regulation applicable to the Seller; or (C)
          require the consent, approval or permission of any third party.

CLAUSE 4. INDEMNITY.

     4.1  In addition to the ability of the BUYERS to conduct all kinds of
          investigations on the subject, the SELLER agrees to defend, indemnify
          and hold harmless the BUYERS, its representatives, shareholders,
          administrators, divisions, departments, affiliate companies, parent
          companies, holdings, employees, agents, successors, assignees, and
          other subordinates, against any and all losses, claims, lawsuits,
          actions, damages, liabilities, expenses, and other costs of any nature
          and amount (including legal fees), demanded or not demanded, known or
          unknown, foreseen or unforeseen, ordinary or extraordinary, that may
          arise on or after the execution of this agreement as a consequence of:

          4.1.1 Inaccuracies, false statements or failures to comply with all
                the recitals, clauses, and warranties granted herein or agreed
                upon by the SELLER in this agreement.

          4.1.2 Default of the SELLER with regard to compliance of any term,
                condition, clause, or obligations contained in or derived from
                the present agreement.

          4.1.3 Debt or accounts payable to third parties, including tax
                credits, based on which any creditor may have a right or
                interest in CINEMASTAR's shares.

          4.1.4 The existence of creditors not previously disclosed to the
                BUYERS.

     It is hereby understood that if the BUYERS have suffered hardship, loss,
     claim, lawsuit, action, damage or the necessity to deal with or make
     themselves responsible for any liability, expenses, or other costs of any
     nature and amount stated in this clause, or paid or received by the BUYERS
     or its parent companies, affiliate companies, or employees, the SELLER
     hereby obligates itself to reimburse and pay in full all such expenses and
     other costs as defined in this clause, within 10 days following the date on
     which SELLER is notified of such expenses or damages suffered by the
     BUYERS. Such notice must be acknowledged by means of a receipt and
     forwarded in writing to the address stated herein for all of the SELLERS.

CLAUSE 5.  NOTICES.

     5.1  All communications, notices, service of process, requests, citations,
          and any other that must be made between the parties relating to this
          agreement, including but not limited to changes of domicile, as stated
          below, must be delivered at the following domiciles:


                                       4
<PAGE>   5

              BUYER                                      SELLERS

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

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

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


CLAUSE 6.  TAXES.

     6.1    The parties agree that each party shall be exclusively responsible
            for payment of the corresponding taxes derived from the transfer of
            the shares. Specifically, the SELLER shall be responsible for
            payment of the corresponding income tax caused as a consequence of
            their transfer of shares in favor of the BUYERS.

CLAUSE 7.  AMENDMENTS TO THIS AGREEMENT.

     7.1    Any amendment or addition to the present agreement shall not produce
            legal effect unless same is made in writing and duly signed by all
            of the parties executing this instrument.

CLAUSE 8.  WAIVER OF RIGHTS.

     8.1    The SELLER represents that CINEMASTAR does not owe it any
            compensation, amount or dividend in the present or future, and thus
            expressly waives any right to claim any amount relating to same.

     8.2    Therefore, the sole consideration to be paid to the SELLER are those
            amounts agreed upon herein.

CLAUSE 9.  INTERPRETATION, COMPLIANCE, JURISDICTION AND VENUE.

     9.1    Any controversy or dispute arising from, related to, or as
            consequence of the interpretation and compliance of this agreement
            will be determined by the laws of the Mexican United States, and
            therefore, parties submit to the venue of a jurisdiction of the
            courts of the city of Tijuana, Baja California, Mexico.

CLAUSE 10. SURVIVAL.

     10.1   The representations and warranties of the parties set forth above
            shall survive the Closing.

CLAUSE 11. BINDING AGREEMENT.

     11.1   This Agreement shall inure to the benefit of and be binding on the
            parties hereto and on each of their respective heirs, executors,
            successors, personal representatives, and assigns.


                                       5
<PAGE>   6

CLAUSE 12. SEVERABILITY.

     12.1   Should any other provision or portion of this Agreement be held
            unenforceable or invalid for any reason, the remaining provisions
            and portions of this Agreement shall be unaffected by such holding,
            unless to do so would alter substantially the intended effect of
            this Agreement.

CLAUSE 13. SPECIFIC PERFORMANCE.

     13.1   The parties acknowledge and agree that the 425 shares cannot be
            readily purchased and sold in the open market, and for that reason,
            among others, the parties agree that failure to perform the
            obligations under this Agreement will result in irreparable damage
            to the other parties in the event that this Agreement is not
            specifically enforced. Should any dispute arise under this
            Agreement, the parties agree that a decree of specific performance
            shall be an appropriate remedy. All remedies shall be cumulative and
            not exclusive and shall be in addition to all other remedies which
            the parties may have.

CLAUSE 14. WAIVER.

     14.1   A waiver by any Party of any provision of this Agreement shall not
            affect its validity or enforceability or constitute a waiver of
            future enforcement of that provision or of any other provision of
            this Agreement.

CLAUSE 15. COUNTERPARTS.

     15.1   This Agreement may be executed in counterparts, each executed copy
            of which shall be deemed an original, but all of which taken
            together shall constitute one and the same instrument.

CLAUSE 16. HEADINGS.

     16.1   The subject headings of articles, paragraphs, and subparagraphs of
            this Agreement are included for purposes of convenience only, and
            shall not affect the construction or interpretation of any of its
            provisions.

CLAUSE 17. SOLE AND ONLY AGREEMENT.

     17.1   This Agreement supersedes all prior oral or written agreements
            between the parties with respect to their subject matter and
            constitute (along with the documents referred to in this Agreement)
            the sole and only agreements of the parties hereto with respect to
            their subject matter.

CLAUSE 18. ATTORNEY'S FEES.

     18.1   If any of the parties hereto commences an action against the others
            to enforce any of the terms hereof, or to obtain damages for any
            alleged breach of any of the terms hereof, or for a declaration of
            rights hereunder, the losing party or parties shall pay to the
            prevailing party or parties the prevailing party's or parties'
            attorneys' fees and costs incurred in connection 


                                       6
<PAGE>   7

            with prosecution of such action, whether or not such action proceeds
            to trial or appeal.

CLAUSE 19. NECESSARY ACTS.

     19.1   All parties to this Agreement shall perform any and all acts as well
            as execute any and all documents that may be reasonably necessary to
            fully carry out the provisions and intent of this Agreement.


     IN WITNESS HEREOF, parties to this agreement execute same with 5 copies on
November 23, 1998 in the city of Tijuana, Baja California, Mexico.


                                   THE SELLER



                      /s/ Mr. Marco Antonio Aleman Bonilla
                  --------------------------------------------
                         ATLANTICO & ASS, S.A. DE C.V.,
                 represented by Mr. Marco Antonio Aleman Bonilla

                                   THE BUYERS






/s/      Mr. Frank J. Moreno              /s/      Mr. Frank J. Moreno
- --------------------------------------    --------------------------------------
CINEMASTAR LUXURY THEATERS, INC.          CINEMASTAR LUXURY CINEMAS, INC. 
represented by Mr. Frank J. Moreno        represented by Mr. Frank J. Moreno



                                       7

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<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          MAR-31-1999
<PERIOD-START>                             APR-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                       2,746,470
<SECURITIES>                                         0
<RECEIVABLES>                                        0
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<INVENTORY>                                          0
<CURRENT-ASSETS>                             3,320,050
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<DEPRECIATION>                               6,859,542
<TOTAL-ASSETS>                              16,035,130
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                                0
                                          0
<COMMON>                                    22,628,670
<OTHER-SE>                                (14,917,704)
<TOTAL-LIABILITY-AND-EQUITY>                16,035,130
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<TOTAL-REVENUES>                            22,164,886
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<TOTAL-COSTS>                               22,905,996
<OTHER-EXPENSES>                                     0
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<INTEREST-EXPENSE>                             246,574
<INCOME-PRETAX>                              (878,972)
<INCOME-TAX>                                     1,600
<INCOME-CONTINUING>                          (880,572)
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