CINEMASTAR LUXURY THEATERS INC, 10KSB, 1999-06-10

CINEMASTAR LUXURY THEATERS INC
10KSB, 1999-06-10
MOTION PICTURE THEATERS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999

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

COMMISSION FILE NUMBER 0-25252

CINEMASTAR LUXURY THEATERS, INC.
(Name of Small Business Issuer in its charter)

DELAWARE 33-0451054
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class Name of each exchange on which registered
None None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par $0.01
Redeemable Warrants
Class B Redeemable Warrants

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on May 14,
1999 as reported on the NASDAQ Small Capital Market, was approximately
$5,691,221. Shares of common stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

The Issuer's revenues for the year ended March 31, 1999 totaled $27,736,337.

As of May 14, 1999 Registrant had outstanding 3,864,986 shares of common stock,
$0.01 par value.

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DOCUMENTS INCORPORATED BY REFERENCE

The following documents of CinemaStar Luxury Theaters, Inc. are incorporated by
reference within this filing.

(1) Registration Statement No. 33-86716.

(2) Form 10-KSB for the year ended March 31, 1995.

(3) Form 8-K for June 6, 1996.

(4) Form 10-KSB for the year ended March 31, 1996.

(5) Form 10-Q for the period ended June 30, 1996.

(6) Form 10-Q for the period ended December 31, 1996.

(7) Form 8-K filed July 1, 1997

(8) Form 10-KSB for the year ended March 31, 1997.

(9) Proxy Statement filed November 17, 1997.

(10) Form 10-KSB for the year ended March 31, 1998.

(11) Form 10-QSB for the period ended June 30, 1998.

(12) Form 10-QSB for the period ended September 30, 1998.

(13) Proxy Statement filed October 23, 1998.

(14) Form 10-QSB for the period ended December 31, 1998

Transitional Small Business Disclosure Format Yes [ ] No [X]

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EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM 10-KSB 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-KSB
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS FORM 10-KSB. 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 THE ABILITY TO SECURE ADEQUATE
FINANCING ON ACCEPTABLE TERMS TO SUPPORT GROWTH.

PART I

ITEM 1 - DESCRIPTION OF THE BUSINESS

GENERAL

CinemaStar Luxury Theaters, Inc. (the "Company") develops, leases, owns and
operates multi-screen, primarily first-run movie theater locations in Southern
California and Northern Mexico. Approximately 29% of the Company's revenues are
derived from concession sales, approximately 2% are derived from the operation
of video games and other revenues and the remainder is derived from theater
admissions. To date, the Company has incurred net losses during each fiscal year
in which it has been in operation. The Company currently operates theaters
having a total of 79 screens in San Diego and Riverside Counties in Southern
California and in Tijuana, B.C., Mexico. Construction of the Company's first
theater, an eight-screen leased theater complex at the Mission Marketplace
Shopping Mall in Oceanside, California, was completed in November 1991. In July
1997 the Company added five more screens to this theater. In May 1992 the
Company opened Galaxy Six Cinemas, a six-screen leased theater complex in
Bonsall, California. In May 1993 the Company opened Chula Vista 10, a ten-screen
leased theater complex in Chula Vista, California. The Company acquired Chula
Vista 6, a six-screen owned complex in Chula Vista, California in August 1995
that was significantly refurbished in March 1998. In March 1996 the Company
opened a leased 14-screen theater in Riverside, California, in August 1996 a
ten-screen leased theater in Perris, California and in November 1996 a
ten-screen leased theater in Riverside, California. In November 1997, the
Company's 75%-owned subsidiary in Mexico opened Plaza Americana 10, a leased
ten-screen theater in Tijuana, B.C., Mexico. The Company acquired the remaining
25% equity in this subsidiary in December 1998.

The Company has pursued a strategy of selectively developing and leasing
multi-screen theaters, except for Chula Vista 6, which it owns. In evaluating
theaters, the Company attempts to locate sites in which it believes it can
achieve a leading market position as the sole or leading exhibitor in the
targeted film licensing zone, a geographic area established by film distributors
in which a given film is allocated to only one theater. The Company believes
that 59 of its 69 screens located in the United States are located in film zones
in which it is the only exhibitor, although there are not significant barriers
to entry for the Company's competition in these film zones. By developing
theaters in film zones in which there are a limited number of theaters, the
Company believes it is able to negotiate more effectively with motion picture
distributors to supply the Company's theaters with the most desirable films.
Film zones are designated in the sole discretion of film distributors and may be
changed at any time for a variety of reasons, most of which are outside the
control of the Company. While the Company believes it can favorably compete with
respect to the licensing of films, poor relationships with film distributors, a
disruption in the production of motion pictures or poor commercial success of
motion pictures booked by the Company would have a material adverse effect upon
the Company's business, results of operations and/or liquidity.

The Company believes that the locations of its theaters, its high-quality sound
systems and projection equipment, its luxurious appointments, such as
comfortable seats and spacious seating configurations, and its carefully
selected and trained staff allows it to attract patrons and provide them with an
enjoyable movie-going experience. The Company's theater complexes typically
contain multiple auditoriums each having 120 to 500 seats, allowing the Company
the flexibility to adjust screening schedules by shifting films amongst the
larger and smaller auditoriums within the same complex in response to audience
demand. The

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Company expects that its future growth will be dependent upon its ability to
develop new theaters in desirable locations, although it may consider strategic
acquisitions of existing theaters or theater chains.

The motion picture exhibition industry is highly competitive, particularly with
respect to licensing films, attracting patrons and locating new theater sites.
Many of the Company's competitors, including Regal Theaters, Pacific Theaters,
Edwards Theaters and Mann Theaters, have been in existence longer than the
Company, are better established in the markets in which the Company's theaters
are or may be located and are better capitalized than the Company. Competition
also can come from other sources such as cable television and video cassette
tapes.

The Company was incorporated in California in April 1989 under the name
Nickelodeon Theater Co., Inc. and adopted its current name in August 1995. The
Company reincorporated in Delaware in December 1998. The Company's corporate
offices are located at 12230 El Camino Real, Suite 320, San Diego, CA 92130 and
its telephone number is (619) 509-2777. Additionally, the Company maintains
executive offices in Austin, Texas.

OVERVIEW OF MOVIE EXHIBITION INDUSTRY

Participants in the domestic motion picture exhibition industry vary
substantially in size, from small independent operators of single screen
theaters to large national chains of multi-screen theaters, many of which are
affiliated with entertainment conglomerates. In an effort to achieve greater
operating efficiencies, many theater operators have emphasized the development
of multi-screen theater complexes over the past decade, as evidenced by an
increase in the total number of screens in the United States, as well as an
increase in the average number of screens per location.

Theatrical motion picture exhibition is typically the initial release vehicle
for filmed entertainment. In recent years, however, alternative delivery systems
have been developed for the exhibition of filmed entertainment, including cable
television, video cassette tapes and pay-per-view. Management believes that the
emergence of these and other new forms of home entertainment has not adversely
effected theater admissions, as evidenced by the relatively stable motion
picture attendance patterns over the past ten years, approximately 1.0 billion
to 1.2 billion per year during this 10-year period. There can be no assurance,
however, that new or alternative forms of entertainment or motion picture
delivery systems will not adversely impact motion picture attendance in general
or at the Company's theaters in particular in the future.

Historically, the motion picture industry's largest producers and distributors
have been the major studios (Paramount, Disney/Miramax/Touchstone, Warner Bros.,
Columbia/Tri-Star, Universal, 20th Century Fox MGM/UA and Dreamworks), with no
single studio dominating the film distribution market. Since 1989, films
distributed by these companies have accounted for between approximately 84% and
96% of annual U.S. admissions revenues.

The motion picture exhibition industry tends to be seasonal, as major film
distributors generally release the films expected to have the greatest
commercial appeal during the summer and the Thanksgiving through year-end
holiday season. The Company believes, however, that this seasonality has been
reduced in recent years as studios have begun to release major motion pictures
somewhat more evenly throughout the year.

BUSINESS STRATEGY

To attain substantial profitability, the Company believes it must develop new
theaters in new or existing markets, and/or add screens at already developed
locations. Expanding into markets in which it believes it can achieve a market
position as a leading motion picture exhibitor is one of the Company's key
operating strategies. In choosing potential development sites, the Company's
primary concerns are to identify potential theater sites in which it believes it
will be the sole or leading exhibitor in the target film zone and to lease or
acquire such sites at a reasonable cost. In the selection of a potential theater
site, the Company also considers whether the size and demographics of the
surrounding population, the accessibility and visibility of the theater site and
economic trends in the surrounding community are favorable to increased motion
picture attendance. The Company determines whether or not it will own or lease
the theater based upon the consideration of numerous factors including, but not
limited to, the ability to finance the site, the expected performance of the
theater and the required involvement of developers. The Company may develop
theaters on a stand-alone basis or as part of an overall retail, entertainment
and/or shopping mall development. Once sites are identified, a lease is
negotiated. There are significant lead times (typically ranging from nine to 12
months) from lease negotiation to completion and opening of a theater.

The pursuit of multi-screen theaters is another key element of the Company's
strategy. The Company believes multi-screen theaters reduce its dependence on
any single film, allow it to more effectively respond to demand by adjusting its
screening

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schedules during the release life of a given film and provide it with operating
efficiencies through staggered film starts that enable the Company to reduce the
amount of total staffing required to show its films and to maximize its
concession sales. The Company also attempts to develop and operate conveniently
located, high quality facilities that offer a wide variety of films. To enhance
the movie going experience and attract new and/or repeat patronage, the Company
tends to invest in high-quality sound and projection equipment, luxurious
appointments and a carefully selected staff trained to emphasize customer
service.

DEVELOPMENT OF THEATERS

Once a potential theater site has been leased or acquired, the Company
formulates a plan to finance and construct the theater. While the Company
generally oversees the design, development and construction of its theaters, it
also utilizes independent architects, building and governmental compliance
consultants and construction project managers. In the case of a newly developed
theater that will be leased by the Company, the landlord or developer typically
provides a construction allowance, with the Company responsible for the cost of
completing construction of the theater. Thus, in the event that the ultimate
cost of the theater is greater than the allowance, the Company is required to
fund any excess.

While the Company believes that its direct oversight of the design and
construction of its theaters provides a certain degree of control over the
quality, cost and timing of construction, the Company remains subject to many of
the risks inherent in the development of real estate, including the risk of
construction cost overruns and delays. Other risks associated with the
development and construction of theaters include the impact of changes in
federal, state or local laws or regulations, labor strikes, adverse weather,
earthquakes and other natural disasters, material shortages and increases in the
costs of labor and materials. There can be no assurance that the Company will be
able to successfully complete any pending or proposed theater development in a
timely manner or within the proposed cost allowance.

REVENUES

In addition to revenues from box office admissions, the Company receives
revenues from concession sales. These sales historically have constituted
approximately 27% to 32% of the Company's revenues for a given fiscal year.
During the Company's 1999 and 1998 fiscal years, concession sales constituted
28.8% and 29.0% of the Company's total revenues respectively. During fiscal
1998, the Company had long-term concession lease agreements with Pacific
Concessions, Inc. ("PCI") for all of its theaters in operation in the United
States. Pursuant to the terms of these agreements, PCI installed and supplied
counters, equipment, paper and food items in a given theater, while the Company
provided the concession space and employees to operate the concession stands.
The concession lease agreements with PCI provided that the Company received a
percentage of the gross concession revenues generated at a given theater and PCI
received the balance of concession revenues. In accordance with the provisions
of these concession lease agreements (which had terms ranging from two to ten
years), the Company issued notice of termination to PCI on December 15, 1997,
paying early termination fees of $1,859,352 and taking direct control of its
concession operations upon expiration of the applicable notice periods (either
five or six months depending upon the theater). These notice periods expired
during the first quarter of fiscal 1999.

The Company also operates video games and skill games at each of its locations.
Video games do not constitute a significant portion of the Company's revenues.
During fiscal 1999 and 1998, revenues from video games were $445,956 (1.6% of
total revenues) and $376,441 (1.4% of total revenues), respectively. During
fiscal 1999, the Company entered into a screen-advertising contract and a
contract for the provision of automated teller machines at selected theaters.
The Company does not anticipate that revenues from these activities will be
material.

ADVERTISING AND MARKETING

The Company principally relies upon advertisements and movie schedules published
in newspapers to inform its patrons of film selections and show times. Primary
television, radio and print advertising campaigns for major film releases are
carried out and paid for by film distributors. The Company also participates in
national "co-op" advertising with all major film distributors whereby the
Company and a film distributor share the cost of advertising for a feature,
including in the advertisements that the film is showing at one or more of the
Company's theaters. The Company's theaters also show previews of coming
attractions and films already playing at the Company's other theaters in the
same market area. In connection with the opening of a new theater, the Company
utilizes a variety of promotional programs to create public awareness of the
theater. Such promotional programs include free movies, discounted tickets,
community charity activities and concession programs, as well as more
traditional printed advertising.

FILM LICENSING

The Company licenses films from distributors on a film-by-film and
theater-by-theater basis. Prior to negotiating for a film

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license, representatives of the Company generally have the option to preview and
evaluate upcoming films. The Company's success in choosing a given film to
license depends to a large extent on its knowledge of trends and historical film
preferences of the residents in markets served by its theaters, as well as on
the extent of the availability of commercially attractive motion pictures from
which to choose.

Films are licensed from both major film distributors and independent film
distributors that generally distribute films for smaller production companies.
Film distributors typically establish geographic film licensing zones, generally
encompassing a radius from three to six miles in metropolitan and suburban
markets (depending primarily on population density), and allocate each available
film to one theater within that zone. The Company generally attempts to locate
its theaters in film zones in which it is the sole exhibitor or one of a few
exhibitors, thereby permitting the Company to exhibit many of the most
commercially successful films in these zones. The Company believes that 59 of
its 69 screens in the United States are located in film zones in which it is the
sole exhibitor and that the University Village 10 is the leading theater in its
film zone, although there are no significant barriers to entry in these film
zones for the Company's competitors.

In film zones where the Company is the sole exhibitor, film licenses are
generally obtained by the Company by selecting a film from among those offered
and negotiating directly with the distributor. In film zones where there are
multiple exhibitors, a distributor will either require the exhibitors in the
zone to bid for a film or will allocate films among the exhibitors in the film
zone. When films are licensed under the allocation process, a distributor will
choose which exhibitor is offered which movies and then that exhibitor will
negotiate film rental terms directly with that distributor. At present, the
Company does not bid for films in any of its markets, although it may be
required to do so in the future.

Film licenses entered into under a negotiated process typically specify rental
fees based on the higher of a gross-receipts formula or theater admissions
revenue formula. Under a gross-receipts formula, the distributor receives a
specified percentage of box office receipts from the licensed film with the
percentage declining over the term of the film run. First run film rental fees
usually begin at approximately 70% of box office receipts for the licensed film
and gradually decline, over a period of four to seven weeks, to as low as 30% of
box office receipts. Under a theater admissions revenue formula (commonly known
as a "90/10" clause), the distributor receives a specified percentage (i.e.,
90%) of the excess of box office receipts for a given film over a negotiated
allowance for theater expenses. In addition, if the distributor deems a film to
be extremely promising, or if the distributor believes the Company's financial
position is not strong enough to warrant an extension of credit, it may require
the Company to make advance payments of film rental fees in order to obtain a
license for a film. To date, the Company has not been required to make any such
advance payments, but there is no assurance that such payments will not be
required in the future. Although not specifically contemplated by the provisions
of film licenses, the terms of film licenses often are adjusted or renegotiated
by distributors subsequent to the initial release of the film.

The Company's business is dependent upon the availability of marketable motion
pictures and its relationships with distributors. While many "independent"
distributors provide first-run movies to the motion picture exhibition industry,
distribution historically has been dominated by the major distributors (Warner
Brother, Paramount, 20th Century Fox, Universal, Disney/Miramax/Touchstone,
MGM/UA, Columbia/Tri-Star and Dreamworks) that have accounted for between
approximately 84% and 96% of domestic admission revenues since 1989, and
virtually every one of the top grossing films in a given year, since 1989. No
single one of these major distributors dominates the market. Disruption in the
production of motion pictures by the major studios and/or independent producers,
poor commercial appeal of motion pictures or poor relationships with
distributors would have a material adverse effect upon the Company's business
and results of operations.

COMPETITION

The motion picture exhibition industry is highly competitive, particularly with
respect to film licensing, the terms of which can depend on the seating
capacity, location and prestige of an exhibitor's theaters, the quality of
projection and sound equipment at the theaters and the exhibitor's ability and
willingness to promote the films. Competition for patrons is dependent upon
factors such as the availability of popular films, the location of theaters, the
comfort and quality of theaters and ticket prices. The Company believes that it
competes favorably with respect to each of these factors. Many of the Company's
competitors, however, are constructing new theaters utilizing stadium seating in
which each row is a step higher than the one in front of it. Such stadium
theaters are more expensive to construct than traditional theaters. The Company
believes that stadium theaters constructed by competitors in the vicinity of
certain of its current theaters, which do not have stadium seating, may have a
detrimental effect on the competitiveness and profitability of its theaters. In
addition, this trend towards stadium seating increases the cost per screen for a
new theater complex. If this increased cost cannot be passed onto the landlords
or developers in the construction allowance for the Company's future projects,
the Company could be required to contribute a greater amount of the overall
development costs with respect to these projects.

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Participants in the domestic motion picture exhibition industry vary
substantially in size, from small independent operators of a single screen
theater to large national chains of multi-screen theaters affiliated with
entertainment conglomerates. Many of the Company's competitors, including Regal
Theaters, Pacific Theaters, Edwards Theaters and Mann Theaters, have been in
existence significantly longer than the Company, are better established in the
markets where the Company's theaters are or may be located and are better
capitalized than the Company. Such competitors also compete with the Company for
potential sites.

Many of the Company's competitors have established long-term relationships with
the major motion picture distributors, who distribute a large percentage of the
commercially successful films. Although the Company attempts to identify film
licensing zones in which there is no substantial competition, there are no real
barriers to entry with respect to a given film zone for the Company's
competitors and there can be no assurance that the Company's competition will
not develop theaters in the same film zones or otherwise in the same geographic
vicinity as the Company's theaters.

The Company believes that there is a growing trend in the motion picture
exhibition industry toward larger, multi-screen theater complexes having 16 to
24 screens, which are part of larger family entertainment centers offering both
traditional motion picture entertainment and other forms of family entertainment
for its patrons. As a result, certain of the Company's competitors have sought
to significantly increase their number of theaters and screens in operation.
Continued increases may cause certain markets to become over-screened, resulting
in a negative impact on the earnings of the theaters located in such markets,
including the Company's theaters. This trend also could have a negative impact
on the Company's ability to identify attractive sites for development.

Future advancements in motion picture exhibition technology and equipment may
result in the development of state-of-the-art theaters by the Company's
competitors that could make the Company's current theaters obsolete. There can
be no assurance that the Company will be able to incorporate such new technology
or equipment, if any, into its existing or future theaters.

In recent years, alternative motion picture exhibition delivery systems have
been developed for the exhibition of filmed entertainment, including cable
television, video cassette tapes and pay-per-view. While the impact of such
delivery systems on movie theaters is difficult to determine, there can be no
assurance that they will not adversely impact attendance at the Company's
theaters. Movie theaters also face competition from other forms of entertainment
competing for the public's leisure time and disposable income.

GOVERNMENT REGULATION

The distribution of motion pictures is in large part regulated by federal and
state antitrust laws and has been the subject of numerous antitrust cases. The
Company has never been a party to any such cases but its licensing operations
are subject to decrees issued in connection with such cases. Consent decrees
resulting from these cases, which predate the formation of the Company, bind
certain major film distributors and require the films of such distributors to be
offered and licensed to exhibitors, including the Company, on a film-by-film and
theater-by-theater basis. Consequently, exhibitors cannot assure themselves of a
supply of films by entering into long-term arrangements with the major
distributors, but must negotiate for licenses on a film-by-film and
theater-by-theater basis.

The federal Americans with Disabilities Act (the "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. The ADA
became effective as to public accommodations in January 1992 and as to
employment in July 1992. The Company designs its theaters in development so that
they are in conformity with the ADA and it believes that its existing theaters
are in substantial compliance with all currently applicable regulations relating
to accommodations for the disabled. The Company intends to comply with future
regulations relating to accommodating the needs of the disabled and the Company
does not currently anticipate that such compliance will have a material adverse
effect on the Company.

The Company's theater operations are also subject to federal, state and local
laws governing such matters as wages, working conditions, citizenship, health
and sanitation requirements and licensing. A significant portion of the
Company's employees is paid at the federal minimum wage and, accordingly,
further increases in the minimum wage would increase the Company's labor costs.

In connection with the construction of its theaters, the Company, its
contractors or landlords will be subject to the building permit and other
requirements of local zoning and other laws and regulations. The Company does
not anticipate that compliance with such laws and regulations will have a
material adverse effect on its business.

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EMPLOYEES

As of May 14, 1999, the Company employed 439 persons, of which 62 were full-time
and 377 were part-time employees. Of the Company's employees, 26 are corporate
personnel, 36 are theater management personnel and the remainder are hourly
personnel. The Company is not subject to any union or collective bargaining
agreements, except in Mexico for 65 employees under an annually renewable
contract, and considers its employee relations to be good.

ITEM 2 - DESCRIPTION OF PROPERTY

PROPERTY

The Company currently operates eight theaters with an aggregate of 79 screens in
San Diego and Riverside Counties, in California and Tijuana, Mexico. Of the
eight theaters, the Company owns the land and building for Chula Vista 6 and the
remaining seven are operated pursuant to lease agreements. There is a mortgage
on the owned theater of approximately $1,600,000.

The Company's leased theaters are subject to lease agreements with original
terms ranging from 15 to 25 years and renewal options for an additional 10 to 15
years. The leases provide for minimum annual rentals and generally require
additional rental payments based on a percentage of revenues over a base amount.
All of the Company's leases are triple net leases, which require the Company to
pay, in addition to rent, the cost of insurance, taxes and a portion of the
lessor's operating expenses. The following is a summary of the theater
specifications as of May 14, 1999:

<TABLE>
<CAPTION>
# of
Theater Name Location Sq. Ft. Screens # of Seats Leased/Owned
- ------------ -------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Chula Vista 10(1) Chula Vista, CA 34,000 10 2,178 Leased
(South San Diego County)

Chula Vista 6 Chula Vista, CA 22,500 6 1,424 Owned
(South San Diego County)

Mission Marketplace Oceanside, CA 43,000 13 2,168 Leased
(North San Diego County)

Galaxy Six Cinemas Bonsall, California 22,780 6 1,340 Leased
(North San Diego County)

Ultraplex 14 at Mission Grove Riverside, CA 46,000 14 2,743 Leased
(Mission Grove Plaza,
Riverside County)

Perris 10 Perris, CA 35,000 10 1,822 Leased
(Perris Plaza Retail
Shopping Center)

University Village 10 Riverside, CA 42,000 10 2,099 Leased
(adjacent to University of
California in Riverside,
CA)

Plaza Americana 10(2) Tijuana, B.C., Mexico 40,000 10 1,853 Leased
(Plaza Americana Shopping
Mall)
</TABLE>

- ----------

(1) Leased by the Company's wholly-owned U.S. subsidiary, CinemaStar Luxury
Cinemas, Inc.

(2) Leased by the Company's wholly-owned Mexican subsidiary, CinemaStar Luxury
Theaters, S.A. de C.V.

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In December 1996, the Company signed a long-term lease agreement for the
development of a new 20-screen theater in San Bernardino, California (the "San
Bernardino Facility"). Pursuant to the terms of the lease, as amended, lease
payments do not begin until the Company's acceptance of the completed building,
which is not expected until the third quarter of fiscal 2000. Costs to the
Company to complete and equip this facility are estimated at approximately
$3,500,000.

In February 1999, the Company entered into an amendment of its lease for its
Ultraplex 14 theater complex at Mission Grove, Riverside, California. Under the
terms of this amendment, four additional screens will be added to this theater
facility, bringing the total screens at the facility to 18. Costs to the Company
to complete and equip this expansion are estimated at approximately $1,250,000
and the Company anticipates that the expansion will be completed during the
third quarter of fiscal 2000.

On June 29, 1998, the Company's corporate office was re-located to 12230 El
Camino Real, Suite 320, San Diego, California 92130 pursuant to a five year
lease (with one option to renew for an additional five years) for approximately
4,000 square feet at an annual rent commencing at $110,400 and increasing to
$120,000 by year five.

ITEM 3 - 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 and seeks damages of $1.25 million. The Company intends to vigorously
defend this action. Management believes the Company's termination of the lease
in question was in accordance with its terms, however, there is no assurance
that the Company ultimately will prevail in this action. The landlord has
already leased the property to another tenant which the Company believes would
mitigate all or a portion of the claimed damages.

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. There was no material financial
impact to the Company of such resolution.

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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of fiscal 1999 to a vote of
security holders.

9
<PAGE> 10
PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock and Class B Redeemable Warrants are traded on the
NASDAQ Small Cap Market (Symbols: LUXY and LUXYZ). The table below shows the
high and low bid prices as reported by the NASDAQ. The bid prices represent
inter-dealer quotations, without adjustments for retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions. The prices
for the Company's common stock have been adjusted to reflect the impact of a
one-for-seven reverse stock split, effective December 2, 1998. Due to the
absence of two market makers for the securities, the Company has been informed
that NASDAQ has delisted the Redeemable Warrants (LUXYW) as of December 14,
1998. These securities may now trade on the over-the-counter ("OTC") market,
upon application by market makers.

<TABLE>
<CAPTION>
CLASS B
COMMON REDEEMABLE REDEEMABLE
STOCK WARRANTS WARRANTS
(LUXY) (LUXYW) (LUXYZ)
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31,

1998
First Quarter $11.83 $3.92 $0.63 $0.13 $1.00 $0.06
Second Quarter 9.66 5.25 0.41 0.13 0.19 0.16
Third Quarter 8.75 3.50 0.50 0.06 0.88 0.17
Fourth Quarter 11.41 7.00 0.47 0.16 0.81 0.56

1999
First Quarter 10.29 6.13 0.13 0.01 0.56 0.31
Second Quarter 9.63 5.91 0.10 0.01 0.38 0.03
Third Quarter 7.00 4.38 0.13 0.01 0.03 0.03
Fourth Quarter 6.88 3.53 0.13 0.00 0.88 0.03
</TABLE>

As of May 14, 1999, the Company had approximately 140 shareholders of record.

The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in the foreseeable future. Earnings, if any, of
the Company are expected to be retained for use in expanding the Company's
business. The payment of dividends is within the discretion of the Board of
Directors of the Company and will depend upon the Company's earnings, if any,
capital requirements, financial condition and such other factors as the Board of
Directors may consider relevant.

ONE-FOR-SEVEN REVERSE STOCK SPLIT AND DELAWARE REINCORPORATION

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. All references to shares in this form 10-KSB have been
restated to reflect the one-for-seven reverse stock split. The Company
reincorporated in Delaware effective December 1, 1998. As a result, the
Company's common stock now has a par value of $0.01. Previously the Company's
common stock had no par value.

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 approximately 1,568,704. The number
of shares of Common Stock exercisable per each warrant is 0.33746 shares per
warrant. The price per share upon exercise of the warrants is $17.78.

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," is 226,438. The total number of shares of Common Stock for which such
warrants will be exercisable is approximately 76,183. The number of shares of
Common Stock exercisable per each Class B

10
<PAGE> 11
warrant is 0.33644 shares per warrant. The price per share upon exercise of the
warrants is $19.32.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included elsewhere
in this Form 10-KSB. Except for the historical information contained herein, the
discussion in this Form 10-KSB 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-KSB should be read as being applicable to all related forward-looking
statements wherever they appear in this Form 10-KSB. 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 the ability to secure
adequate financing on acceptable terms to support growth.

RESULTS OF OPERATIONS

As of March 31, 1998 and March 31, 1999 the Company had eight theater locations
with a total of 79 screens. During the year ended March 31, 1998, the Company
added five additional screens to an existing location and a new ten-screen
location, increasing the Company's theaters from seven locations and 64 screens
at March 31, 1997 to eight locations and 79 screens. These additions resulted in
an increase in revenues and expenses for the year ended March 31, 1999 compared
to March 31, 1998.

The Company has had significant net losses in each fiscal year of its
operations, including net losses of $7,932,011 and $1,586,372 in the fiscal
years ended March 31, 1998 and 1999, respectively. There can be no assurance as
to whether or when the Company will achieve profitability. While the Company
believes it could attain profitability with its current operations, such
profitability is contingent on many factors such as the availability of
marketable motion pictures and the continued success of management's on-going
cost reduction efforts. Any substantial profitability will depend, among other
things, on the Company's ability to continue to grow its operations through the
addition of new screens.

The Company has entered into agreements, negotiations and/or discussions
pertaining to the development of a 20-screen theater complex and a four-screen
expansion to an existing theater complex in San Bernardino, California and
Riverside, California, respectively. 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 and timely completion of construction.
No assurances can be given that the Company will be able to successfully build,
finance or operate any of the new theaters presently contemplated or otherwise.

FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998.

Total revenues for the year ended March 31, 1999 increased 6.5% to $27,736,337
compared to $26,050,143 for the previous fiscal year. Admission revenues
increased by $1,091,824, or 6.1%, and concession sales and other operating
revenues increased by $594,370, or 7.4%. The increase in admissions revenues is
attributable to an increase in international admissions revenues of $1,753,893,
offset by a reduction of $662,069 in domestic admissions revenues. Domestic
admission revenues declined 4.0% compared to the same period of the prior year.
Management primarily attributed this decline, which was consistent with the
results of the other major U.S. theater operators, to a decline in the volume
and quality of film product distributed in the third and fourth quarters of
fiscal 1999 and to a lesser extent on increased competition in selected markets.
Domestic average ticket price for the fiscal year ended March 31, 1999 increased
by 4.7% to $4.81, compared to the prior year. International average ticket price
for the fiscal year 1999 was $2.52. Domestic per capita concession revenues for
the fiscal year ended March 31, 1999 increased 1.2% to $1.85. International per
capita concession revenue for the year ended March 31, 1999 was $1.38.

11
<PAGE> 12

Film rental and booking costs for the year ended March 31, 1999 increased 0.5%
to $9,989,353 compared to $9,943,669 for the previous fiscal year. The increase
in film rental and booking costs, usually paid as a percentage of admission
revenues, resulted from the increase in number of screens discussed above,
offset in part by a reduction in the cost of film as a percentage of admission
revenues. As a percentage of admission revenues, film rental and booking costs
declined from fiscal 1998 to fiscal 1999, decreasing from 55.3% to 52.4%, in
part as a result of lower film costs at the Company's Tijuana, Mexico theater.

Cost of concession supplies for the year ended March 31, 1999 decreased 40.5% to
$1,669,388 from $2,807,020 for the previous fiscal year. As a percentage of
concession revenues, cost of concession supplies decreased to 20.9% from 37.2%
in the year ended March 31, 1999 compared to the previous fiscal year, due to
the termination of concession lease agreements with PCI, the Company's former
primary concession vendor. As of June 15, 1998, the Company ceased the purchase
of concession supplies and services from PCI and began purchasing concessions
supplies on a competitive basis.

Theater operating expenses for the year ended March 31, 1999 increased 8.8% to
$11,844,008 compared to $10,882,570 for the previous fiscal year. This increase
was due, in part, to the increase in the average number of screens and theaters
in operation for the year ended March 31, 1999 compared to the previous fiscal
year and increases in federally mandated minimum wages. As a percentage of total
revenues, theater operating expenses increased 0.9%, from 41.8% in fiscal 1998
to 42.7% in fiscal 1999.

Selling, general and administrative expenses for the year ended March 31, 1999
decreased 20.4% to $3,295,739 compared to $4,140,810 for the previous fiscal
year. As a percentage of total revenues, selling, general and administrative
costs decreased to 11.9% from 15.9%. The decrease results, in part, from a
variety of cost reduction efforts during the year. Additionally, costs related
to international start-up and terminated projects have reduced significantly in
the year fiscal year ended March 31, 1999 compared to the prior fiscal year.

The Company incurred in fiscal 1998 a one-time charge in the amount of
$1,859,352 resulting from the termination of concession lease agreements with
PCI. In accordance with the provisions of these concession lease agreements
(which had terms ranging from two to ten years), the Company issued notice of
termination to PCI on December 15, 1997, paid the full amount of the termination
fee and took direct control of its concession operations upon expiration of the
applicable notice periods (either five or six months, depending upon the
theater). The Company now purchases all concessions supplies on a competitive
basis.

The Company incurred in fiscal 1998 a one-time expense of $1,056,224 in
connection with the settlement of certain management contracts previously
entered into with four former officers and directors of the Company and the
settlement of certain other matters amongst the parties. The Company effected
the settlement by making aggregate cash payments of $875,000, forgiving
outstanding loans and remaining as guarantor on a personal loan. The settlement
agreement also contains mutual general releases of the parties with respect to
all prior known and unknown claims.

Depreciation and amortization for the year ended March 31, 1999 increased 3.4%
to $2,331,503 compared to $2,255,251 for the previous fiscal year, due to the
impact of a full year of depreciation in fiscal 1999 of furniture, fixtures and
equipment, purchased for theaters opened or expanded in fiscal 1998, offset, in
part, by a charge in fiscal 1998 of $250,000 to write-down certain assets.

Non-cash interest expense for fiscal 1998, totaling $328,750, resulted from the
issuance of debt with detachable warrants and represents the value of the
detachable warrants. This debt was paid in full with interest prior to March
1998.

Interest expense for the fiscal year ended March 31, 1999 decreased 57.4% to
$331,348 compared to $777,655 for the previous fiscal year. 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.

Interest income for the year ended March 31, 1999 increased to $140,230 from
$70,747 for the year ended March 31, 1998. This increase is attributable to
changes in cash balances resulting from the various bridge loan proceeds and the
completion of the equity financing transaction on December 15, 1997. See
"Liquidity and Capital Resources."

As a result of the above factors, the net loss for the year ended March 31, 1999
decreased 80.0% to $1,586,372 from $7,932,011 for the fiscal year ended March
31, 1998.

12
<PAGE> 13
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 been financed with internally generated cash flow, long-term debt
financing or leasing arrangements of facilities and equipment, the offering to
the public of equity securities and the private placement of convertible
debentures. During fiscal 1998, however, the Company determined that it lacked
the resources necessary to finance its current capital obligations through
traditional sources and sought additional capital through alternative financing
sources. 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 2,526,352 shares of Common Stock
for a purchase price of $5.94 per share. CAP also received, at closing, warrants
to purchase 232,947 shares of Common Stock at an exercise price of $5.94 per
share. 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 193,037 Adjustment Shares 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 March 31,1999, the aggregate future minimum
lease payments due under non-cancelable operating leases was approximately
$87,000,000. In addition, the Company has signed a lease agreement for a
20-screen Ultraplex theater in San Bernardino, California and for the expansion
by 4 screens of an existing theater in Riverside, 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. The
lease for the Riverside expansion will require expected minimum rental payments
aggregating approximately $9,300,000 over the 22-year life of the lease.
Accordingly, existing minimum lease commitments as of March 31, 1999 plus those
expected minimum commitments for the proposed theater location and theater
expansion, would aggregate minimum lease commitments of approximately
$137,000,000. Under the terms of the San Bernardino 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. Under the terms of
the Riverside expansion lease amendment, the Company's obligation with respect
to constructing and equipping the theater is estimated at approximately
$1,250,000.

13
<PAGE> 14

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.

The ability of the Company to expand through the development of new theaters,
the expansion of existing theaters or the acquisition of established 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. The terms of the facility were amended in March 1999.
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, are
being amortized over their respective terms. The Revolving Credit Facility is
subject to various positive and negative covenants. The Company is in compliance
with these covenants as of March 31, 1999.

During the year ended March 31, 1999, the Company generated cash of $765,447
from operating activities, as compared to using cash in operating activities of
$4,656,211 for the year ended March 31, 1998. This difference is due to factors
discussed in "Results of Operations" above including decreased costs of
concessions, decreased selling, general and administrative expenses, the opening
of a new theater and the expansion and renovation of existing theaters, costs
associated with a bridge loan in fiscal 1998, cost incurred in connection with
other financing efforts, costs of settlement of management contracts and costs
of penalties related to notice of early termination of concession lease
agreements, all in fiscal 1998.

During the year ended March 31, 1999, the Company used cash in investing
activities of $1,264,309 as compared to $4,112,950 for the year ended March 31,
1998. The decrease is due to lower purchases of fixed assets during the fiscal
year ended March 31, 1999 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 year ended March 31, 1999, the Company used net cash of $762,720 in
financing activities, as compared to providing net cash of $11,649,493 for the
year ended March 31, 1998. The cash used in the year ended March 31, 1999
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 year ended March
31, 1998 related to the proceeds of the issuance of Common Stock and warrants,
partially offset by principal repayment of debt and capital lease obligations.

At March 31, 1999, the Company held cash, cash equivalents and working capital
in the amounts of $2,220,396 and $281,857, respectively. Management believes
that cash and cash equivalents, working capital and the $15 million Revolving
Credit Facility will be adequate to fund the existing operations and capital
requirements of the Company during the next twelve months.

As of March 31, 1999, the Company had net operating loss carryforwards ("NOLs")
of approximately $13,250,000 and $6,500,000 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 2019 if not utilized prior
to that time. The California NOLs are available to offset future years taxable
income, and they expire in 1999 through 2004 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, 1999, the Company has total net deferred income tax assets in
excess of $5,900,000. 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 Redeemable Warrants (LUXYW), 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.

14
<PAGE> 15

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.

YEAR 2000

The Company has performed a review of its computer applications, including
software and hardware, 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 has implemented new ticketing systems and concessions
systems at each of its locations (an initiative unrelated to year 2000). These
systems are certified as year 2000 compliant. Management believes that the
Company is not dependent on any other internal computer applications for its day
to day operations. 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 completed by June 30, 1999. The historical costs to
the Company for its year 2000 preparations have been nominal, future costs are
not yet known due to the Company's ongoing assessments and the Company has not
deferred or delayed any projects or expenditures in anticipation of any year
2000 issues. 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 is in the process of developing and testing 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 finalize its contingency plan. The Company believes that its
contingency plan will be finalized and tested prior to September 30, 1999.

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 collected in Mexican Pesos, but the lease is 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.

ITEM 7 - FINANCIAL STATEMENTS

The Company's audited consolidated financial statements for the years ended
March 31, 1999 and 1998 are presented immediately following on pages F-1 to
F-18.

ITEM 8 - CHANGE IN CERTIFYING ACCOUNTANT.

On April 16, 1998, the Company dismissed BDO Seidman, LLP as its independent
public accountants. Such dismissal was approved by the Company's Audit
Committee. In connection with the audits for the fiscal years 1996 and 1997 and
through April 16, 1998, there have been no disagreements with BDO Seidman, LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of BDO Seidman, LLP would have caused them to make reference
thereto in their report on the consolidated financial statements for such years.
The Company engaged Arthur Andersen LLP as its new independent public
accountants as of April 16, 1998. The audits for the fiscal years ended March
31, 1998 and 1999 have been completed by Arthur Andersen LLP.

15
<PAGE> 16
PART III

ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The following table sets forth certain information concerning the Company's
current directors and executive officers:

<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AGE
- ---- -------------------- ---
<S> <C> <C>
Jack R. Crosby Director; Chairman of the Board of Directors and Chief 72
Executive Officer
Frank J. Moreno Director; President and Chief Operating Officer 59
Jack S. Gray, Jr. Director; Vice Chairman of the Board of Directors 42
Thomas G. Rebar Director and Member of the Compensation and Audit Committees 36
Wayne B. Weisman Director and Member of the Compensation and Audit Committees 43
Winston J. Churchill Director and Member of the Compensation Committee 58
Norman Dowling Chief Financial Officer, Vice President and Secretary 36
Neil R. Austrian, Jr. Executive Vice President 34
</TABLE>

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

JACK R. CROSBY has been Chairman of the Board of Directors of the Company since
December 1997 and Chief Executive Officer of the Company since February 1998.
Mr. Crosby was Chairman of Board of Directors of Tescorp, Inc., a publicly
traded company which owns and operates cable television systems in Argentina
("Tescorp"), since its inception in 1980, and was Chief Executive Officer from
1991 until it was sold in February 1998. Mr. Crosby is the General Partner of
Rust Group, L.P., a Texas limited partnership holding certain of Mr. Crosby's
business assets, and he is the president of Rust Investment Corp., the general
partner of Rust Capital, Ltd. ("Rust Capital"), an investment limited
partnership with its headquarters in Austin, Texas. Mr. Crosby presently serves
as a director of Prime Venture I, a cable television enterprise. Mr. Crosby also
serves as a director of two other publicly traded companies: National Dentex
Corporation, a manufacturer of dental appliances, and DSI Toys, Inc., a toy
manufacturer and distributor. From 1982 through early 1985, he served as a
director of Orion Pictures. As a principal of Rust Group, L.P., Mr. Crosby
participated in the purchase of selected motion picture theaters from Wometco
Theaters, Inc. in 1990 before selling them in 1994.

FRANK J. MORENO has been a Director of the Company since April 1998 and
President and Chief Operating Officer of the Company since February 1998, and
served as a consultant to the Company in December 1997 through February 1998.
Prior to joining the Company, Mr. Moreno was the President and Chief Executive
Officer of Theater Acquisitions L.P., a privately-owned company formed by Jack
Crosby and Mr. Moreno in 1990 to purchase selected movie theaters in Florida and
Puerto Rico from Wometco Enterprises Inc. Under Moreno's leadership, Theater
Acquisitions L.P. expanded the circuit and significantly increased its operating
performance before being sold in 1994. Mr. Moreno has significant experience in
the movie exhibition industry.

JACK S. GRAY, JR. has been a Director and Vice Chairman of the Board of
Directors of the Company since April 1998. Prior to that, he served as President
and Chief Operating Officer of Tescorp, Inc., a NASDAQ traded company, from
March 1991 until February 1998. Mr. Gray has acted as partner, officer and/or
director of Rust Group, L.P. and/or its affiliates since 1985.

THOMAS G. REBAR has been a Director and Member of the Compensation and Audit
Committees of the Company since December 1997 and served as Secretary of the
Company from April 1998 to November 1998. Mr. Rebar is a Partner of SCP Private
Equity Management, L.P., the general partner of SCP Private Equity Partners,
L.P., a private equity investment fund ("SCP"), which position he has held since
June 1996. From 1989 until joining SCP in 1996, Mr. Rebar served as Senior Vice
President of Charterhouse, Inc., an investment banking firm. Prior to joining
Charterhouse, Inc., Mr. Rebar was a member of the corporate finance department
at Bankers Trust Company.

16
<PAGE> 17

WAYNE B. WEISMAN has been a Director and Member of the Compensation and Audit
Committees of the Company since December 1997. Mr. Weisman has been a Partner of
SCP Private Equity Management, L.P., the general partner of SCP, since the
inception of SCP in 1996. Since 1991, Mr. Weisman has served as Vice President
of CIP Capital Management, Inc., the general partner of CIP Capital, L.P., a
small business investment company, or in a similar capacity in the predecessors
to such entities. From 1992 to 1994, he served as a director and Executive Vice
President of Affinity Biotech. Inc., and Vice President and General Counsel of
its successor, IBAH, Inc. From 1987 to 1990, Mr. Weisman ran an independent
investment management and advisory firm. He formerly practiced law with the
Philadelphia firm of Saul, Ewing, Remick & Saul.

WINSTON J. CHURCHILL has been a Director and Member of the Compensation
Committee of the Company since December 1997. Mr. Churchill has been a Managing
General Partner of SCP Private Equity Management, L.P., the general partner of
SCP, since SCP's inception in 1996. Mr. Churchill founded Churchill Investment
Partners, Inc. in 1989 and CIP Capital, Inc. in 1990, each of which is an
investment and venture capital fund, and continues to be a principal of each.
From 1989 to 1993 he served as Chairman of the Finance Committee of the $24
billion Pennsylvania Public School Employees' Retirement System. From 1984 to
1989, Mr. Churchill was a general partner of Bradford Associates, a private
investment firm in Princeton, New Jersey. Prior to that time, he practiced law
at the Philadelphia firm of Saul, Ewing, Remick & Saul for 16 years and was a
member of its executive committee. Mr. Churchill is a member of the Board of
Directors of Central Sprinkler Corporation, a manufacturer and distributor of
automatic fire sprinkler systems and components, Freedom Securities Corp., a
brokerage and investment banking firm and Amkor Technology, Inc.

NORMAN DOWLING has served as Vice President of the Company since December 1997
and as Chief Financial Officer since November 1997. Mr. Dowling served as
Assistant Secretary of the Company from November 1997 until November 1998 and
has served as Secretary of the Company since November 1998. Prior to that, Mr.
Dowling served as Director of Finance of Advanced Marketing Services, Inc., a
publicly traded distributor of books and media products, from October 1993 until
November 1997, and as Controller and then Director of Development and
Acquisitions of Medical Imaging Centers of America, Inc. from May 1990 until
October 1993. Mr. Dowling's professional experience also includes six years with
the public accounting firm, Ernst & Young.

NEIL R. AUSTRIAN, JR. has served as Executive Vice President of the Company
since April 1998. He has been a partner of the Rust Group, L.P. since March
1998. Prior to that, he served as Chief Financial Officer and Senior Vice
President of Tescorp from August 1997 until February 1998, and as Vice President
of Tescorp from October 1994 until August 1997. Mr. Austrian was also an
associate of Rust Capital, Ltd. from October 1988 until October 1994.

The Board of Directors held a total of three meetings during the fiscal year
ended March 31, 1999. The Board of Directors has an Audit Committee and a
Compensation Committee. It does not have a nominating committee or a committee
performing the functions of a nominating committee.

The Audit Committee of the Board of Directors currently consists of directors
Rebar and Weisman. The Audit Committee met three times during the fiscal year
ended March 31, 1999. The Audit Committee recommends engagement of the Company's
independent auditors, and is primarily responsible for approving the services
performed by the Company's independent auditors and for reviewing and evaluating
the Company's accounting principles and its system of internal accounting
controls.

The Compensation Committee of the Board of Directors currently consists of
directors Churchill, Rebar and Weisman. The Compensation Committee met three
times during the fiscal year ended March 31, 1999. The Compensation Committee
establishes the compensation for the Company's executive officers, including the
Company's Chief Executive Officer.

No director attended fewer than 75% of the aggregate number of meetings of the
Board of Directors and meetings of the committees of the Board of Directors that
he was eligible to attend.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and persons who own more than 10% of
a registered class of the Company's equity securities to file various reports
with the Securities Exchange Commission and the National Association of
Securities Dealers concerning their holdings of, and transactions in, securities
of the Company. Copies of these filings must be furnished to the Company.

17
<PAGE> 18

ITEM 10 - EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation of the chief
executive officer and all other executive officers of the Company whose salary
and bonus exceeded an annual rate of $100,000 during the fiscal year ended March
31, 1999 or is expected to exceed $100,000 in fiscal 2000.

SUMMARY COMPENSATION TABLE

Long Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Securities
Name and Fiscal Year All Other Annual Underlying
Principal Position Ended Salary Bonus Compensation(3) Options/SARs
- ------------------ ----------- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS:

Jack R. Crosby............... 1999 $161,538(2) $ 0(1) 0
Chairman of the Board of 1998 $0 $ 0 71,429(1)
Directors and Chief 1997 $0 $ 0 0
Executive Officer

Frank J. Moreno.............. 1999 $254,806(4) $20,000(1)(5) $32,988(3) 0
President and Chief 1998 $ 57,531(4) $ 0 71,429(1)
Operating Officer 1997 $ 0 $ 0 0

Norman Dowling............... 1999 $109,326(6) $12,500(1)(5) 7,143(1)
Chief Financial Officer, 1998 $ 36,345 $ 0 14,286(1)
Vice President and Secretary 1997 $ 0 $ 0 0

Jack S. Gray, Jr............. 1999 $92,308(2) $ 0(1) 42,857(1)
Vice Chairman of the Board 1998 $ 0 $ 0 0
of Directors 1997 $ 0 $ 0 0

Neil R. Austrian, Jr......... 1999 $92,308(2) $ 0(1) 28,571(1)
Executive Vice President 1998 $ 0 $ 0 0
1997 $ 0 $ 0 0
</TABLE>

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

(1) Pursuant to their stock option agreements, each of the current executive
officers is entitled to a bonus, payable when the applicable tax payment
is due, equal to the difference in the amount of federal income tax the
executive officer is required to pay upon exercising his options if, and
to the extent, such options had been considered incentive stock options
for federal income tax purposes.

(2) Pursuant to Compensation Committee and Board of Directors consents, each
dated April 29, 1998, Jack R. Crosby is to receive an annual salary of
$175,000, Jack S. Gray, Jr. is to receive an annual salary of $100,000
and Neil R. Austrian, Jr. is to receive an annual salary of $100,000.

(3) Perquisites and other personal benefits did not in the aggregate reach
the lesser of $50,000 or 10% of the total of annual salary and bonus
reported in this table for any named executive officer, except Frank J.
Moreno for whom relocation expenses of $32,988 were paid or reimbursed
by the Company, pursuant to the terms of his employment contract.

(4) Includes salary and consulting fees paid. Pursuant to the Employment
Agreement by and between the Company and Frank J. Moreno, dated April
29, 1998, Mr. Moreno is to receive an annual salary of $250,000.

(5) Pursuant to the Employment Agreement by and between the Company and
Frank J. Moreno, dated April 29, 1998, and the Employment Agreement by
and between Norman Dowling and the Company dated June 18, 1998 (and
amended effective February 19, 1999), Mr. Moreno and Mr. Dowling may be
awarded bonus compensation at the discretion of the Board of Directors.

18
<PAGE> 19

(6) Pursuant to the Employment Agreement by and between the Company and
Norman Dowling dated June 18, 1998 (and amended effective February 19,
1999), Mr. Dowling's annual salary increased to $120,000 from $105,000.

OPTION GRANTS DURING FISCAL 1999

The following table sets out the stock options that were granted to the
executive officers identified in the Summary Compensation Table during the
fiscal year ended March 31, 1999:

OPTION GRANTS DURING FISCAL 1999

<TABLE>
<CAPTION>
Number of Securities % of Total Options Granted Exercise or
Underlying Options to Employees in Fiscal Base Price Expiration
Name Granted Year ($/Sh) Date
- ---- --------------------- -------------------------- ----------- ----------
<S> <C> <C> <C> <C>
Jack S. Gray, Jr. 42,857 51.7% $5.75-$6.13 12/15/07-3/6/09

Neil R. Austrian, Jr. 28,571 34.5% $5.75-$6.13 12/15/07-3/6/09

Norman Dowling 7,143 8.6% $5.75 3/6/09
</TABLE>

OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES

The following table sets forth information concerning stock options which were
exercised during, or held at the end of, fiscal 1999 by the executive officers
named in the Summary Compensation Table:

OPTION EXERCISES AND YEAR-END VALUE TABLE(1)

<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year at Fiscal Year
End End(2)
Shares -------------------------- ---------------------------
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack R. Crosby(3) 0 $0 14,286 28,572 $0 $0
Frank J. Moreno 0 $0 23,810 47,619 $0 $0
Jack S. Gray, Jr. 0 $0 7,143 35,714 $0 $0
Neil R. Austrian, Jr. 0 $0 7,143 21,428 $0 $0
Norman Dowling 0 $0 4,762 16,667 $0 $0
</TABLE>

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

(1) There were no option exercises during fiscal 1999.

(2) Valued based on an assumed price of $5.00 per share of common stock.

(3) Of Mr. Crosby's options, 28,572 were cancelled during the fiscal year
and are not reflected in the above table.

STOCK OPTIONS

In December 1997, the Company adopted the CinemaStar Luxury Theaters, Inc. Stock
Option Plan (the "1997 Option Plan") under which a maximum of 412,280 shares of
Common Stock may be issued pursuant to incentive and non-qualified stock options
grants

19
<PAGE> 20

to officers, key employees or consultants of the Company. As of March 31,
1999, there were 211,643 options issued and outstanding under the 1997 Option
Plan.

The 1997 Option Plan is administered by a committee comprised of three (3)
members of the Board of Directors (or such other number as determined by the
Board of Directors) and shall be comprised of such number of "disinterested
persons" as is necessary to meet the requirements of Rule 16b-3 of the Exchange
Act and such number of "outside directors" as is necessary to meet the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended.
This committee has authority to determine employees to whom options will be
granted, the timing and manner of grants of options, the exercise price, the
number of shares covered by and all of the terms of options, and all other
determinations necessary or advisable for administration of the 1997 Option
Plan. The 1997 Option Plan was approved by a vote of shareholders at the annual
meeting of shareholders on November 17, 1998.

The exercise price for the shares subject to any incentive stock option granted
under the 1997 Option Plan shall not be less than 100% of the fair market value
of the shares of common stock of the Company on the date the option is granted.
No option shall be exercisable after the earliest of the following: the
expiration of 10 years after the date the option is granted; three months after
the date the optionee's employment with the Company terminates, if termination
is by the Company for any reason without cause, immediately upon the voluntary
termination by the optionee of the optionee's employment with the Company or the
termination of the optionee's employment with the Company by the Company for
cause; or one year after the date the optionee's employment terminates, if
termination is a result of death or permanent disability. The vesting schedule
for options issued under the 1997 Option Plan is determined by the committee.
All options granted to date under this Plan vest over a three-year period
beginning December 16, 1997, with full acceleration on a change in control.

In July 1994, the Company adopted the CinemaStar Luxury Theaters, Inc. Stock
Option Plan (the "1994 Option Plan") under which a maximum of 83,929 shares of
Common Stock of the Company could be issued pursuant to incentive and
non-qualified stock options granted to officers, key employees or consultants of
the Company. Most of the options granted under this 1994 Option Plan have
expired or been terminated. Pursuant to a Board of Directors consent, any
outstanding options under the 1994 Option Plan have been transferred to the 1997
Option Plan.

COMPENSATION OF DIRECTORS

Prior to June 3, 1995, directors received no cash compensation for serving on
the Board of Directors. In June 1995, the Board of Directors approved payment of
$1,000 per director for each meeting attended. On April 29, 1998, the Board of
Directors approved payment of $1,000 per director for each meeting, or committee
meeting, attended; provided such director does not draw a salary from the
Company in his or her capacity as an employee of the Company.

In fiscal 1999, there were three meetings of the Board of Directors.

In the fiscal year ended March 31, 1998, Russell Seheult received $52,000 in
consulting fees. In August 1994, the Company entered into a five year consulting
agreement with Mr. Seheult which was extended in December 1996 for five years
from December 1996. Mr. Seheult was granted options to purchase 25,179 shares of
Common Stock at an exercise price of $17.85 per share in July 1994. On December
16, 1997, Mr. Seheult resigned as a director and ceased providing consulting
services. As a result, all of Mr. Seheult's options have expired and the Company
has stopped making payments under the consulting agreement. Mr. Seheult remains
as a guarantor on certain of the Company's long-term theater leases.

EMPLOYMENT AND CONSULTING AGREEMENTS

Effective April 29, 1998, the Company entered into a three-year employment
agreement with Frank J. Moreno, pursuant to which Mr. Moreno's annual base
salary of $250,000 is subject to increase at the discretion of the Board of
Directors. In addition, Mr. Moreno may receive an annual bonus at the discretion
of the Board of Directors. Mr. Moreno also receives an automobile allowance of
$650 per month. The employment agreement also gives Mr. Moreno the right to
participate in any and all group medical and other benefit plans generally
available to employees of the Company. Under the employment agreement, Mr.
Moreno was compensated for his out-of-pocket relocation costs and received
$20,000 in connection with the sale of his home. The employment agreement also
acknowledges that the Company granted Mr. Moreno options to acquire 71,429
shares of the Company's Common Stock on December 16, 1997. In the event Mr.
Moreno is terminated by the Company without cause, he is entitled to his base
salary for the remainder of the three-year period.

Effective February 19, 1999, the one-year employment agreement with Norman
Dowling dated as of June 18, 1998 was amended to extend the contract period for
an additional year. The contract amendment provides for an annual base salary of
$120,000 and an annual bonus at the discretion of the Board of Directors. Mr.
Dowling also receives an automobile allowance of $450 per month.

20
<PAGE> 21
The employment agreement also gives Mr. Dowling the right to participate in any
and all group medical and other benefit plans generally available to employees
of the Company. The employment agreement also acknowledges that the Company
granted Mr. Dowling options to acquire 14,286 shares of the Company's Common
Stock on December 16, 1997. In the event Mr. Dowling is terminated by the
Company without cause, as defined in the employment agreement, he is entitled to
his base salary for the remainder of the contract period. On March 6, 1999, Mr.
Dowling was granted additional options to acquire 7,143 shares of the Company's
Common Stock.

Alan Grossberg, John Ellison, Jr., Jon Meloan and Jerry Willits resigned from
their management and/or Board of Directors positions of the Company and the
Company's entities on March 25, 1998. Effective March 26, 1998, the Company
entered into a settlement agreement with John Ellison, Jr., Alan Grossberg,
Jerry Willits and Jon Meloan (the "Settlement Agreement"). Pursuant to this
Settlement Agreement, the employment agreements between the Company and each of
Messrs. Ellison, Grossberg, Willits and Meloan (the "Former Management"), which
agreements provided for extensive severance and other payments upon the
termination thereof, were terminated and the Company agreed to pay to the Former
Management a settlement payment in the gross amount of $875,000 cash. The
Company also agreed to forgive indebtedness and to assume responsibility for the
repayment of sums owed personally, in amounts aggregating $172,679 plus
interest. The Settlement Agreement also (i) obligates the Company to use its
best reasonable efforts to release the Former Management from their obligations
under any personal guarantees made for the benefit of the Company or its
entities and (ii) has the parties release each other with respect to all known
or unknown prior claims.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
PRINCIPAL SHAREHOLDERS

The Company has outstanding voting securities consisting of only common stock,
of which 3,864,986 shares were outstanding as of the close of business day on
May 14, 1999. The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of the close of business
day on May 14, 1999 as to (a) each director, (b) each executive officer
identified in the Summary Compensation Table above, (c) all executive officers
and directors of the Company as a group, and (d) each person known to the
Company to beneficially own five percent or more of the outstanding shares of
Company's common stock.

<TABLE>
<CAPTION>
As of May 14, 1999
----------------------------
Number of Percent of
Title of Class Beneficial Owner(1) Shares(2) Class(2)
- -------------- ------------------- --------- --------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Common Jack R. Crosby 25,000(3)(4) *
Common Frank J. Moreno 31,310(5) *
Common Jack S. Gray, Jr. 141,069(6)(7) 3.5%
Common Thomas G. Rebar -0- -0-
Common Wayne B. Weisman -0- -0-
Common Winston J. Churchill 3,375,218(8) 74.7%
Common Norman Dowling 4,762(9) *
Common Neil R. Austrian, Jr. 22,784(10) *

ALL CURRENT DIRECTORS AND 3,600,142(11) 76.2%
EXECUTIVE OFFICERS AS A GROUP
(8 PERSONS)

FIVE PERCENT SHAREHOLDERS:
Common CinemaStar Acquisition Partners, L.L.C. 3,107,164(12) 73.1%
Common SCP Private Equity Partners, L.P. 3,375,218(13) 74.7%
</TABLE>

* Items marked with an asterisk comprise less than 1% of the total outstanding
common stock of the Company.

21
<PAGE> 22

(1) The address of each of Messrs. Moreno and Dowling is c/o the Company at
12230 El Camino Real, Suite 320, San Diego, California 92130. The
address of each of Messrs. Crosby, Gray and Austrian is c/o Rust
Capital, Ltd., 327 Congress Avenue, Suite 350, Austin, Texas 78701. The
address of each of Messrs. Churchill, Rebar and Weisman and SCP Private
Equity Partners, L.P. and CinemaStar Acquisition Partners, L.L.C. is c/o
SCP Private Equity Partners, L.P., 435 Devon Park Drive, Building 300,
Wayne, Pennsylvania 19087.

(2) Shares of common stock which a person has the right to acquire within 60
days are deemed outstanding in calculating the percentage ownership of
such person, but are not deemed outstanding as to any other person.
Percentages are calculated based on 3,864,986 shares of common stock
issued and outstanding as of May 14, 1999.

(3) Includes 10,714 Reel Shares.

(4) Includes 14,286 options, granted under the 1997 Option Plan, to acquire
the Company's common stock, exercisable within sixty days from May 14,
1999.

(5) Includes 23,810 options, granted under the 1997 Option Plan, to acquire
the Company's common stock, exercisable within sixty days from May 14,
1999.

(6) Includes 7,143 options, granted under the 1997 Option Plan, to acquire
the Company's common stock, exercisable within sixty days from May 14,
1999.

(7) Includes warrants to purchase 103,184 shares of the Company's common
stock and 14,572 shares of common stock held by Sharp Irrevocable
Intervivos Trust, with respect to which Mr. Gray is a trustee and
warrants to purchase 14,741 shares of common stock held by the wife of
Mr. Gray.

(8) Includes 2,719,389 shares owned by CAP, the CAP Warrants to purchase
387,776 shares, Reel Warrants to purchase 147,408 shares (held by SCP as
transferee thereof) Watley Warrants to purchase 120,646 shares (held by
SCP as transferee thereof), each with respect to which Mr. Churchill has
voting and investment control.

(9) Includes 4,762 options, granted under the 1997 Option Plan, to acquire
the Company's common stock, exercisable within sixty days from May 14,
1999.

(10) Includes Reel Warrants to purchase 14,741 shares of common stock (held
by Mr. Austrian as transferee). Includes 7,143 options, granted under
the 1997 Option Plan, to acquire the Company's common stock, exercisable
within sixty days from May 14, 1999.

(11) Includes 2,719,389 shares owned by CAP, the CAP Warrants to purchase
387,776 shares, Reel Warrants to purchase 147,408 shares(held by SCP as
transferee thereof), Watley Warrants to purchase 120,646 shares (held by
SCP as transferee thereof), each with respect to which Mr. Churchill has
voting and investment control. Includes Reel Warrants to purchase 14,741
shares of common stock (held by Mr. Austrian as transferee). Includes
warrants to purchase 103,184 shares of the Company's common stock and
14,572 shares of common stock held by Sharp Irrevocable Intervivos
Trust, with respect to which Mr. Gray is a trustee and warrants to
purchase 14,741 shares of common stock held by the wife of Mr. Gray.

(12) Includes the CAP Warrants to purchase 387,776 shares.

(13) Includes 2,719,389 shares owned by CAP, the CAP Warrants to purchase
387,776 shares, Reel Warrants to purchase 147,408 shares (held by SCP as
transferee thereof), Watley Warrants to purchase 120,646 shares (held by
SCP as transferee thereof), each with respect to which SCP has voting and
investment control.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with
respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife
of Russell Seheult, with respect to certain lease and bank obligations incurred
or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally
guaranteed, on a joint and several basis, all significant obligations of the
Company pursuant to its theater leases and certain loans. Certain of these
obligations of the Company are secured by real or personal property pledged by
such individuals. The Company, pursuant to the Settlement Agreement described
above, has agreed to use its reasonable best efforts to obtain the releases of
Mr. Ellison, Mr. Willits and Mr. Grossberg from their obligations under any
personal guarantees made for the benefit of the Company or its entities. To
date, no such releases have been obtained. See

22
<PAGE> 23

"Executive Compensation -- Employment and Consulting Agreements." As of March
31, 1999, such guaranteed obligations involved aggregate future payments by the
Company of $118,000,000.

CinemaStar Luxury Theaters, S.A. de C. V. ("CinemaStar International"),
incorporated in Mexico in July 1994, was a 75%-owned subsidiary until December
1998. The remaining 25% ownership interest in CinemaStar International was held
by Atlantico y Asociados S.A. de C.V., a Mexican corporation until December,
1998 when the Company acquired the remaining 25% ownership. CinemaStar
International leases and operates the Plaza Americana 10 facility in Tijuana.
CinemaStar International leases equipment and obtains technical services and
support from the Company, in each case for payment that the Company believes is
fair value.

The Company incurred in fiscal 1998 an expense of $1,056,224 in connection with
the settlement of certain management contracts previously entered into with four
former officers and directors of the Company and the settlement of certain other
matters amongst the parties. The Company effected the settlement by making
aggregate cash payments of $875,000, forgiving outstanding loans and remaining
as guarantor on a personal loan. The settlement agreement also contains mutual
general releases of the parties with respect to all prior known and unknown
claims.

In April 1996, John Ellison, Jr. and Russell Seheult jointly obtained a personal
line of credit with Union Bank of California. From April 1996 until June 1997,
Mr. Seheult and Mr. Ellison borrowed funds under the line of credit and advanced
certain of the funds to the Company. Pursuant to an arrangement between the
Company and Union Bank, payments on the loan were made directly to Union Bank by
the Company. In early June 1997, such line of credit was not renewed by Mr.
Ellison and Mr. Seheult and, as a result, Union Bank withdrew from the Company's
account approximately $99,000, the outstanding principal balance of the line of
credit as of the date of termination. On June 19, 1997, Messrs. Ellison and
Seheult entered into a Business Note with Union Bank in the aggregate principal
amount of $99,043 the proceeds of which were remitted to the Company. Such note
bore interest at a rate of 10.25% per annum and called for 60 equal payments of
interest and principal of approximately $2,100 per month. Pursuant to the
Settlement Agreement described above, the Company agreed to assume Mr. Ellison's
obligations under such note. See "Executive Compensation -- Employment and
Consulting Agreements." This loan has been paid in full with interest by the
Company.

Pursuant to the terms of a loan agreement, dated April 1 1996, between the
Company and John Ellison, Jr., the Company agreed to loan the sum of $1,000 per
week to Mr. Ellison commencing on Friday, April 5, 1996. As of January 2, 1998,
the outstanding balance of principal on such loan was $92,000, plus interest.
Pursuant to the Settlement Agreement described above, the Company agreed to
release Mr. Ellison's obligations with respect to these loans. See "Executive
Compensation - Employment and Consulting Agreements."

The Company made loans in the principal amount of $19,500 to Jon Meloan from
July 1996 through February 1997. As of March 31, 1997, Mr. Meloan executed a
promissory note, dated March 31, 1997, in the principal amount of $21,095, which
represents the total principal amount of such loans with accrued interest at a
rate of 8% per annum through the date of such note. Such note was due and
payable in full on August 15, 1998. As of March 26, 1998, the outstanding
balance of principal and interest on such note was $21,095, from which the
Company agreed to release Mr. Meloan pursuant to the Settlement Agreement
described above. In addition, the Company also agreed, pursuant to the
Settlement Agreement, to assume the obligations of Mr. Meloan with respect to a
loan in the aggregate principal amount of $22,600 made by a bank to Mr. Meloan.
See "Executive Compensation -- Employment and Consulting Agreements." This loan
has been paid in full with interest by the Company.

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See "Index to Exhibits" for a listing of those exhibits included in this filing.

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended (9)

3.2 Amended and Restated Bylaws of the Company (8)

3.3 Agreement and Plan of Merger of CinemaStar Luxury Theaters, Inc. (a
Delaware corporation) and CinemaStar Luxury Theaters, Inc. (a California
corporation) (13)

3.4 Certificate of Incorporation of the Company (13)

3.5 Bylaws of the Company (13)

3.6 Specimen Stock Certificate of the Company (15)

4.1 Form of Redeemable Warrant Agreement (with form of certificate attached)
(1)

4.2 Form of Underwriter's Warrant Agreement (with form of certificate
attached) (1)

4.3 Form of Bridge Warrant (1)
</TABLE>

23
<PAGE> 24

<TABLE>
<S> <C>
4.4 Form of Acknowledgment and Agreement of Warrant Holder (1)

4.5 Form of Class B Warrant Agreement (with form of certificate attached)
(3)

4.6 Offshore Warrant Agreement between the Company and Swan Alley (Nominees)
Limited, nominee of Wales Securities Limited (3)

4.7 Offshore Warrant Agreement between the Company and Swan Alley (Nominees)
Limited, nominee of Villandry Investments Ltd. (3)

4.8 First Bridge Warrant from Company to Reel Partners, L.L.C., dated
September 23, 1997.(9)

4.9 400,000 Warrant Issued to The Boston Group, L.P., dated February 12,
1996 (4)

10.11 Form of Indemnification Agreement with officers and directors (1)

10.12 Placement Agent Agreement between the Company and A.S. Goldmen & Co.,
Inc. as amended (1)

10.13 Equipment Purchase and Ride Film Rental Agreement, dated August 8, 1994,
between the Company and Cinema Ride, Inc., as amended (1)

10.14 Form of Promissory Note of the Company issued in connection with a
private placement of Promissory Notes and Bridge Warrants in August 1994
and September 1994 (1)

10.15 Lease Agreement, dated April 30, 1991, between Nickelodeon Cinemas, Inc.
and Homart Development Co. (1)

10.16 Real Property Lease Agreement between the Company and Gary E. Elam,
Receiver (1)

10.17 Equipment Purchase Agreement between the Company and Gary E. Elam, Receiver (1)

10.18 Modification and Supplement of Lease and Equipment Purchase Agreement,
dated March 1, 1994, between the Company and River Village, William
Buster and Harold Alles, as successor in interest to Gary E. Elam,
Receiver (1)

10.19 Purchase Agreement with United Artists (2)

10.20 Agreements with Pacific Concessions (1)

10.21 Lease Agreement, dated August 1, 1995 between the Company and Mission
Grove Plaza, L.P. (1)

10.22 Fourth Amendment to Lease Agreement between the Company and Mission
Grove Plaza, L.P. (15)

10.23 Lease Agreement, dated July 14, 1995 between the Company and University
Village, LLC (1)

10.24 Ground Lease, dated August 5, 1995 between the Company and Craig W.
Clark (1)

10.25 Lease Agreement, dated February 15, 1996 with the Coudures Family
Limited Partnership (4)

10.26 Adjustable Rate Note, dated January 23, 1996 (1)

10.27 Lease Agreement, dated June 14, 1996, between the Company and
Inmobiliaria Lunar, S.C. (4)

10.28 Pacific Oceanside Holdings, L.P. Lease Agreement (6)

10.29 MDA-San Bernardino Associates, L.L.C. Lease Agreement (6)

10.30 First Amendment to MDA-San Bernardino Associates, L.L.C. Lease
Agreement(14)

10.31 Form of Agreement Regarding Letters of Credit by and among MDA-San
Bernardino Associates, GMAC Commercial Mortgage Company and the Company
(14)

10.32 Amendment to Concession Lease Agreement, dated April 23, 1997, between
the Company and Pacific Concessions, Inc. (Portions have been omitted
pursuant to a request for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934). (8)

10.33 First Amendment to Lease, dated May 5, 1997, between Pacific Oceanside
Holdings, L.P. and the Company (8)

10.34 Amendment to Loan Agreement, dated as of April 23, 1997, between the
Company and Pacific Concessions, Inc. (8)

10.35 Letter of Intent, dated June 24, 1997, by and between Rust Capital Ltd.
and CinemaStar Luxury Theaters, Inc. (7)

10.36 Stock Purchase Agreement by and among the Company, Reel Partners, L.L.C.
and CinemaStar Acquisition Partners, L.L.C., dated September 23, 1997.
(9)

10.37 CinemaStar Luxury Theaters, Inc. Stock Option Plan, dated December 16,
1997 (10)

10.38 Form of Stock Option Agreement, as of December 16, 1997 (10)

10.39 Employment Agreement by and between the Company and Frank Moreno, dated
April 29, 1998 (10)

10.40 Employment Agreement by and between the Company and Norman Dowling,
dated June 18, 1998 (10)

10.41 First Amendment (dated February 19, 1999) to Employment Agreement by and
between the Company and Norman Dowling, dated June 18, 1998 (15)

10.42 Lease Agreement by and between the Company and Landgrant Corporation
dated as of April 15, 1998 (Ocean View Plaza) (10)

10.43 $15 Million Revolving Credit Agreement between the Company and Union
Bank of California, N.A. (12)

10.44 First Amendment to $15 Million Revolving Credit Agreement between the
Company and Union Bank of California, N.A. (15)

10.45 Second Amendment to $15 Million Revolving Credit Agreement between the
Company and Union Bank of California, N.A. (15)

10.46 Stock Purchase and Sale Agreement between the Company and Atlantico &
Ass. S.A. de C.V. dated November 23, 1998. (14)
</TABLE>

24
<PAGE> 25

<TABLE>
<S> <C>
21 Subsidiaries of the Company (15)

27 Financial Data Schedule (15)
</TABLE>

- ----------

(1) Incorporated by reference to the exhibits filed with Registration
Statement No. 33-86716.

(2) Incorporated by reference to Form 10-KSB for the year ended March 31,
1995.

(3) Incorporated by reference to Form 8-K for June 6, 1996.

(4) Incorporated by reference to Form 10-KSB for the year ended March 31,
1996.

(5) Incorporated by reference to Form 10-Q for the period ended June 30,
1996.

(6) Incorporated by reference to Form 10-Q for the period ended December 31,
1996.

(7) Incorporated by reference to Form 8-K filed July 1, 1997

(8) Incorporated by reference to Form 10-KSB for the year ended March 31,
1997.

(9) Incorporated by reference to the Proxy Statement filed November 17,
1997.

(10) Incorporated by reference to Form 10-KSB for the year ended March 31,
1998.

(11) Incorporated by reference to Form 10-QSB for the period ended June 30,
1998.

(12) Incorporated by reference to Form 10-QSB for the period ended September
30, 1998.

(13) Incorporated by reference to the Proxy Statement filed October 23, 1998.

(14) Incorporated by reference to Form 10-QSB for the period ended December
31, 1998

(15) Filed concurrently herewith

(b) Reports on Form 8-K

The following report on Form 8-K was filed during the last quarter of the period
covered by this report:

None

25
<PAGE> 26
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CINEMASTAR LUXURY THEATERS, INC.

/s/Jack R. Crosby
Jack R. Crosby, Chairman Dated June 3, 1999
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
Chairman of the Board of Directors
/s/Jack R. Crosby and Chief Executive Officer June 3, 1999
- ------------------------- (principal executive officer)
Jack R. Crosby

Vice President, Chief Financial
/s/Norman Dowling Officer and Secretary June 3, 1999
- ------------------------- (principal financial officer and
Norman Dowling principal accounting officer)

President, Chief Operating Officer
/s/Frank J. Moreno and Director June 3, 1999
- -------------------------
Frank J. Moreno

/s/Winston J. Churchill Director June 9, 1999
- -------------------------
Winston J. Churchill

/s/Wayne B. Weisman Director June 9, 1999
- -------------------------
Wayne B. Weisman

/s/Thomas G. Rebar Director June 9, 1999
- -------------------------
Thomas G. Rebar

/s/Jack S. Gray, Jr. Vice Chairman of the Board
- ------------------------- of Directors June 3, 1999
Jack S. Gray, Jr.
</TABLE>

26
<PAGE> 27
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2

Consolidated Balance Sheets as of March 31, 1999 and 1998 F-3

Consolidated Statements of Operations for the years ended
March 31, 1999 and 1998 F-4

Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1999 and 1998 F-5

Consolidated Statements of Cash Flows for the years ended
March 31, 1999 and 1998 F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

F-1
<PAGE> 28

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CinemaStar Luxury Theaters, Inc.:

We have audited the accompanying consolidated balance sheets of CinemaStar
Luxury Theaters, Inc. (a Delaware corporation) and subsidiaries as of March 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CinemaStar Luxury
Theaters, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

Arthur Andersen LLP

San Diego, California
May 18, 1999

F-2
<PAGE> 29
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
March 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 2,220,396 $ 3,481,978
Prepaid expenses 210,412 153,504
Other current assets (Note 9) 327,308 324,897
------------ ------------

TOTAL CURRENT ASSETS 2,758,116 3,960,379

Property and equipment, net (Note 3) 11,510,495 12,897,891
Deposits and other assets (Note 10) 870,608 288,026
------------ ------------

TOTAL ASSETS $ 15,139,219 $ 17,146,296
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations (Note 4) $ 207,082 $ 483,258
Accounts payable 970,979 1,672,682
Accrued liabilities (Note 11) 842,913 1,129,846
Deferred revenue 455,284 221,772
------------ ------------

TOTAL CURRENT LIABILITIES 2,476,258 3,507,558

Long-term debt and capital lease obligations,
net of current portion (Note 4) 1,759,304 1,869,442
Deferred rent liability (Note 6) 3,898,491 3,177,758
------------ ------------

TOTAL LIABILITIES 8,134,053 8,554,758
------------ ------------

COMMITMENTS AND CONTINGENCIES (NOTE 6)

STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value in 1999, no par value in 1998;
authorized shares 60,000,000; issued and outstanding
shares 3,864,986 in 1999 and 3,671,949 in 1998 (Note 8) 38,650 22,628,670
Additional paid-in capital 26,216,172 3,626,152
Accumulated deficit (19,249,656) (17,663,284)
------------ ------------

TOTAL STOCKHOLDERS' EQUITY 7,005,166 8,591,538
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,139,219 $ 17,146,296
============ ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3
<PAGE> 30

CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:

Admissions $ 19,074,303 $ 17,982,479
Concessions 7,991,692 7,556,529
Other operating revenues 670,342 511,135
------------ ------------

TOTAL REVENUES 27,736,337 26,050,143
------------ ------------

COSTS AND EXPENSES:

Film rental and booking costs 9,989,353 9,943,669
Cost of concession supplies 1,669,388 2,807,020
Theater operating expenses 11,844,008 10,882,570
Selling, general and administrative expenses 3,295,739 4,140,810
Termination fee - concession lease agreement (Note 6) -- 1,859,352
Settlement costs - management contracts (Notes 6 and 7) -- 1,056,224
Depreciation and amortization 2,331,503 2,255,251
------------ ------------

TOTAL COSTS AND EXPENSES 29,129,991 32,944,896
------------ ------------

OPERATING LOSS (1,393,654) (6,894,753)

OTHER INCOME (EXPENSE):

Non-cash interest expense -- (328,750)
Interest expense (331,348) (777,655)
Interest income 140,230 70,747
------------ ------------

TOTAL OTHER EXPENSE (191,118) (1,035,658)
------------ ------------

LOSS BEFORE PROVISION FOR INCOME TAXES (1,584,772) (7,930,411)

PROVISION FOR INCOME TAXES (NOTE 5) (1,600) (1,600)
------------ ------------

NET LOSS $ (1,586,372) $ (7,932,011)
============ ============

BASIC AND DILUTED NET LOSS PER SHARE $ (0.42) $ (4.24)
============ ============

WEIGHTED AVERAGE SHARES 3,770,848 1,870,085
============ ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE> 31
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED MARCH 31, 1998 AND 1999

<TABLE>
<CAPTION>
Common Stock Additional
------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997
as previously reported 7,362,406 $ 9,085,317 $ 2,559,027 $ (9,731,273) $ 1,913,071

One-for-Seven Reverse
Common Stock Split (6,310,634) -- -- -- --
(Note 8)
------------ ------------ ------------ ------------ ------------

Balance, March 31, 1997 1,051,772 9,085,317 2,559,027 (9,731,273) 1,913,071

Issuance of common stock
upon conversion of
convertible debentures 83,111 339,300 -- -- 339,300

Additional paid-in
capital related to
warrant embedded -- -- 328,750 -- 328,750
interest

Additional paid-in
capital related to -- -- 738,375 -- 738,375
issuance of warrants

Issuance of common stock 10,714 50,000 -- -- 50,000
for services rendered

Issuance of common stock,
net of related 2,526,352 13,154,053 -- -- 13,154,053
transaction costs
-- -- -- (7,932,011) (7,932,011)
Net loss
------------ ------------ ------------ ------------ ------------

Balance, March 31, 1998 3,671,949 22,628,670 3,626,152 (17,663,284) 8,591,538

Issuance of common stock
pursuant to terms of
equity financing 193,037 -- -- -- --
agreement (Note 8)

Reincorporation (Note 8) -- (22,590,020) 22,590,020 -- --

Net loss -- -- -- (1,586,372) (1,586,372)
------------ ------------ ------------ ------------ ------------

Balance, March 31, 1999 3,864,986 $ 38,650 $ 26,216,172 $(19,249,656) $ 7,005,166
============ ============ ============ ============ ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5
<PAGE> 32
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,586,372) $ (7,932,011)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,331,503 2,255,251
Non-cash interest expense -- 328,750
Deferred rent expense 720,732 891,413
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (20,256) (31,774)
Deposits and other assets 74,963 (57,309)
Accounts payable (701,703) (1,057,129)
Accrued and other liabilities (53,420) 946,598
------------ ------------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 765,447 (4,656,211)
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (925,666) (4,112,950)
Purchase of minority interest in Mexican subsidiary (338,643) --
------------ ------------

NET CASH USED IN INVESTING ACTIVITIES (1,264,309) (4,112,950)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 5,724,655
Principal payments on long-term debt and capital
lease obligations (386,314) (8,082,118)
Advances from stockholder, net -- 114,528
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) --
------------ ------------

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (762,720) 11,649,493
------------ ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,261,582) 2,880,332
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,481,978 601,646
------------ ------------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,220,396 $ 3,481,978
============ ============

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the year for:

Interest $ 306,700 $ 775,655
============ ============

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 CONSOLIDATED FINANCIAL STATEMENTS.

F-6
<PAGE> 33

CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND COMPANY OPERATIONS

NATURE OF BUSINESS

CinemaStar Luxury Theaters, Inc. ("Theaters, Inc.") and CinemaStar Luxury
Cinemas, Inc. ("Cinemas, Inc."), a wholly-owned subsidiary of Theaters, Inc.,
were incorporated in California in 1989 and 1992, respectively, for the purpose
of establishing multi-screen, first-run theater locations in the Western United
States, with an initial focus on Southern California. These Companies currently
operate seven theaters having a total of 69 screens in San Diego County and
Riverside County, California. Theaters, Inc. was reincorporated in Delaware in
December 1998.

CinemaStar Luxury Theaters, S.A. de C.V. ("CinemaStar International") was
incorporated in Mexico in July 1994 for the purpose of establishing
multi-screen, first-run theater locations in Mexico. As of March 31, 1999,
CinemaStar International had one theater having 10 screens in operation in
Tijuana, B.C., Mexico. CinemaStar International was a 60%-owned subsidiary of
Theaters, Inc. through June 1995 at which time Theaters, Inc. acquired an
additional 15% interest. The remaining 25% equity interest was acquired by
Theaters, Inc. in December 1998.

COMPANY OPERATIONS AND RISK FACTORS

The Company has had significant net losses in each fiscal year of its
operations, including net losses of $7,932,011 and $1,586,372 in the fiscal
years ended March 31, 1998 and 1999, respectively. While the Company believes it
could attain profitability with its current operations, such profitability is
contingent on many factors such as the availability of marketable motion
pictures and the continued success of management's on-going cost reduction
efforts. Any substantial profitability will depend, among other things, on the
Company's ability to continue to grow its operations through the addition of new
screens. There can be no assurance as to whether or when the Company will
achieve profitability.

The Company has entered into agreements pertaining to the development of a
20-screen theater complex and four-screen theater expansion in San Bernardino,
California and Riverside, California, respectively. 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 and timely completion of
construction. No assurances can be made that the Company will be able to
successfully build, finance or operate any of the new theaters presently
contemplated or otherwise.

In the case of a newly developed theater that will be leased by the Company, the
landlord or developer typically provides a construction allowance, with the
Company responsible for the cost of completing construction of the theater.
Thus, in the event that the ultimate cost of the theater is greater than the
allowance, the Company is required to fund any excess. While the Company
believes that its direct oversight of the design and construction of its
theaters provides a certain degree of control over the quality, cost and timing
of construction, the Company remains subject to many of the risks inherent in
the development of real estate, including the risk of construction cost overruns
and delays. Other risks associated with the development and construction of
theaters include the impact of changes in federal, state or local laws or
regulations, strikes, adverse weather, earthquakes and other natural disasters,
material shortages and increases in the costs of labor and materials. There can
be no assurance that the Company will be able to successfully complete any
pending or proposed theater development in a timely manner or within the
proposed cost allowance.

The ability of the Company to operate depends on the availability of marketable
motion pictures. The Company currently obtains the motion pictures for its
theaters from approximately 10 to 12 distributors. Poor relationships with
distributors or a disruption in the production of motion pictures could limit
the Company's ability to obtain films for its theaters. Further, the motion
picture exhibition industry is highly competitive, particularly with respect to
film licensing, the terms of which can depend on seating capacity, location and
configuration of the exhibitor's theaters, the quality of projection and sound
equipment, the comfort and quality of theaters and ticket prices. Many of the
Company's competitors have been in existence significantly longer than the
Company and are better established in the markets where the Company's theaters
are or may be located and are better capitalized than the Company. These and
other factors, including the poor commercial success of motion pictures or the
Company's inability to attract and retain key management personnel, could have a
material adverse effect on the Company's business and results of its operations.
At this time, however, the Company believes that it has good working
relationships with its distributors and competes favorably with respect to these
factors.

The Company operates a leased 10-screen theater in Tijuana, Mexico through its
wholly-owned subsidiary, CinemaStar International. The operation of this theater
in Mexico subjects the Company to the attendant risks of doing business
internationally, including fluctuations in foreign currency, changes in foreign
laws and regulations, political turmoil and uncertain and volatile economic
conditions.

F-7
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Theaters, Inc. and its wholly-owned subsidiaries Cinemas, Inc., and CinemaStar
International, hereafter collectively referred to as the "Company." All material
intercompany transactions and balances have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less to be a cash equivalent. At March 31, 1999, cash
equivalents consisted of money market funds at a bank and, at March 31, 1998, of
a certificate of deposit at a bank.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets, which range from 3 to 27 years. Leasehold improvements and
equipment held under capital leases are amortized over the lesser of the related
lease terms or the estimated useful lives of the related asset. Repairs and
maintenance are charged to expense as incurred.

LONG LIVED ASSETS

On a regular basis, the Company evaluates and assesses its assets for impairment
under the guidelines of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The criteria used for these evaluations include management's
estimate of the assets' continuing ability to generate income from operations
and positive cash flows in future periods, as well as the strategic significance
of the assets to the Company's business activities.

In December 1998 the Company acquired the remaining 25% interest in CinemaStar
International. The entire purchase price of approximately $339,000 has been
recorded as goodwill and is being amortized over a seven-year period.

DEFERRED RENT LIABILITY

Substantially all of the Company's leases include a rental escalation provision
over the term of the lease. Deferred rent liability represents the difference
between base rentals paid under the Company's operating lease agreements and the
expense recorded in the consolidated statement of operations on a straight-line
basis over the life of the leases. In the early years of such leases, rent
expense recorded in the consolidated statement of operations exceeds cash
payments.

PRE-OPENING COSTS

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. In fiscal 1998, the Company expensed all
such unamortized costs that previously had been capitalized and current
pre-opening costs related to new theaters are expensed as incurred.

INCOME TAXES

The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
For Income Taxes." Deferred income taxes are recognized based on the temporary
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.

F-8
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

REVENUE RECOGNITION

The Company recognizes revenues from ticket and concessions sales at the time of
sale. The Company has a group ticket sales program under which corporations and
large groups can purchase tickets, in advance, for discount prices. Group
tickets must be used within twelve months of issuance. Revenues from group
ticket and gift certificate sales are recorded as deferred revenue and are
recognized when group tickets or gift certificates are used or expire.

NET LOSS PER SHARE

Basic and diluted net loss per share are computed by dividing net loss by the
weighted average number of common shares outstanding during the years.
Potentially dilutive securities consist of outstanding stock options and
warrants, and are not included in the computation as their inclusion would be
anti-dilutive. All per share information and references to the number of shares
outstanding included herein have been adjusted to reflect the one-for-seven
reverse stock split of the Company's common stock, effected on December 2, 1998.

COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the Financial Accounting Standards Board
("FASB") established 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 on April 1, 1998 and the adoption had no effect on
the Company's financial statements.

STOCK-BASED COMPENSATION

The Company elected to adopt the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly the Company will continue to account for its stock
based compensation plans under the provisions of APB No. 25.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of the Company's financial instruments, consisting of
accounts payable and debt, approximates their fair value.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, revenues and expenses,
and disclosure of contingent assets and liabilities at the date of the financial
statements and during the reporting periods. Actual amounts could differ from
those estimates.

GEOGRAPHIC SEGMENT DISCLOSURE

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
has adopted SFAS No. 131 during its fiscal year ended March 31, 1999.

The Company operates one business segment. Such segment has operations in two
geographic regions, California and Northern Mexico. Fiscal 1999 total revenues
were $22,906,264 in California and $4,830,073 in Mexico. Total assets for the
California region as at March 31, 1999 was $14,665,956 and $473,263 for the
Mexico region. Operations in Mexico were not material in the prior fiscal year.

F-9
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") issued by the Financial
Accounting Standards Board ("FASB") establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company currently expects to adopt the provisions of SFAS No. 133 on April 1,
2001.

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land $ 960,000 $ 960,000
Furniture, fixtures and equipment 10,636,766 9,834,646
Building 2,169,798 2,169,798
Leasehold improvements 3,213,314 3,106,099
Equipment held under capital lease obligations 1,951,327 1,951,327
------------ ------------

18,931,205 18,021,870
Accumulated depreciation and amortization (7,420,710) (5,123,979)
------------ ------------
$ 11,510,495 $ 12,897,891
============ ============
</TABLE>

Included in accumulated depreciation and amortization is approximately
$1,506,000 and $1,236,000 of amortization related to equipment held under
capital lease obligations at March 31, 1999 and 1998, respectively.

F-10
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND LINE OF CREDIT

Obligations under long-term debt and capital lease arrangements are as follows:

<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Mortgage note payable to bank; interest at LIBOR plus 5.4% (10.375% at March 31,
1999). Monthly payments of principal and interest are $14,494 at March 31,
1999. The note matures in February 2026 and is collateralized by a deed of
trust and is guaranteed by certain former officers/directors/stockholders
of the Company $ 1,572,425 $ 1,581,389

Capitalized lease obligation discounted at 18.9%, payable in
monthly installments of $25,101, including interest. Lease
paid off in February 1999 -- 215,895

Capitalized lease obligation resulting from refinancing of
other obligations; discounted at 22.3%, payable in monthly
installments of $11,293, including interest. Lease matures
March 2000 111,433 202,462

Capitalized lease obligation discounted at 5.25%, payable in
monthly installments of $2,060, including interest. Lease
matures March 2009 190,815 205,112

Other 91,713 147,842
----------- -----------

Total long-term debt and capital lease obligations 1,966,386 2,352,700
Current portion (207,082) (483,258)
----------- -----------
Total long-term debt and capital lease obligations,
net of current portion $ 1,759,304 $ 1,869,442
=========== ===========
</TABLE>

Aggregate principal maturities of long-term debt and capital lease obligations
are as follows:

<TABLE>
<CAPTION>
Year Ending Long-term Capital
March 31, Debt Leases Total
- --------- ---------- ------- -----
<S> <C> <C> <C>
2000 $ 78,746 $140,266 $ 219,012
2001 28,451 27,339 55,790
2002 11,551 24,720 36,271
2003 12,888 24,720 37,608
2004 14,388 24,720 39,108
Thereafter 1,513,966 119,480 1,633,446
---------- -------- ----------

Total minimum payments 1,659,990 361,245 2,021,235
Amount representing interest on leases -- (54,849) (54,849)
---------- -------- ----------

Total long-term debt and present value
of minimum lease payments $1,659,990 $306,396 $1,966,386
========== ======== ==========
</TABLE>

The Company signed on October 19, 1998, a $15 million Revolving Credit Agreement
(the "Revolving Credit Facility") with a senior, secured lender. The Revolving
Credit Facility was amended effective March 31, 1999. This facility will be used
primarily to finance the Company's future theater development in accordance with
the terms and conditions of the Revolving Credit Facility. Through March 31,
1999, the Company has not 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 $340,000 and $40,000
respectively, have been capitalized and are being amortized over their
respective terms, seven years and one year respectively.

F-11
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

4. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND LINE OF CREDIT - CONTINUED

The Revolving Credit Facility is subject to various positive and negative
covenants, such as consolidated debt ratio, consolidated fixed charge ratio,
maximum fixed asset expenditures, consolidated interest coverage ratio and
minimum EBITDA, with which the Company was in compliance at March 31, 1999. The
Revolving Credit Facility is collateralized by the Company's tangible and
intangible assets and all the stock of the Company's wholly-owned subsidiaries,
Cinemas, Inc. and CinemaStar International. The Company may elect to borrow
under the Revolving Credit Facility at either (i) the higher of the lender's
reference rate or the federal funds rate plus 0.50% or (ii) the LIBO rate, in
each case plus the applicable margin. The Company is required, under the terms
of the Revolving Credit Facility, to enter into one or more hedge agreements for
purposes of interest rate protection within 90 days of the date upon which the
principal amount of the Revolving Credit Facility first exceeds $5,000,000.

5. INCOME TAXES

For the years ended March 31, 1999 and 1998, the Company incurred only the
minimum state income taxes due to the losses resulting from operations. A
summary of the significant items comprising the Company's deferred income tax
assets and liabilities as of March 31 is as follows:

<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 904,000 $ 612,000
Net operating loss carryforwards 3,773,000 3,311,000
Deferred rent expense 1,247,000 1,016,000
Accrued expenses and other 35,000 28,000
----------- -----------

Total deferred income tax assets 5,959,000 4,967,000
Valuation allowance (5,959,000) (4,967,000)
----------- -----------

Net deferred income taxes $ -- $ --
=========== ===========
</TABLE>

A reconciliation of the federal statutory rate to the Company's effective income
tax rate is as follows:

<TABLE>
<CAPTION>
Years Ended March 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Federal statutory rate (34.00)% (34.00)%
State income taxes, net of federal benefit 0.03 0.02
Non-deductible expenses 12.47 5.51
Net operating loss carryforward with
no tax benefit realized 21.53 28.49
------- -------

Effective income tax rate 0.03% 0.02%
======= =======
</TABLE>

A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's continued losses and uncertainties surrounding the realization of
the net operating loss carryforward and other deferred tax assets, management
has determined that the realization of the deferred tax assets is not "more
likely than not." Accordingly, a 100% valuation allowance has been recorded
against the net deferred income tax assets.

At March 31, 1999, the Company has net operating loss carryforwards ("NOLs") of
approximately $13,250,000 and $6,500,000 for federal and state purposes,
respectively. The NOLs are available to offset future taxable income. The
federal NOLs expire in 2006 through 2019, while the state NOLs expire in 1999
through 2004.

The utilization of these NOLs is limited due to restrictions imposed under the
federal and state laws resulting from a change in ownership.

F-12
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

6. COMMITMENTS AND CONTINGENCIES

LITIGATION

On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San
Diego Superior Court, 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
and seeks damages of $1.25 million. The Company intends to vigorously defend
this action. Management believes the Company's termination of the lease in
question was in accordance with its terms, however, there is no assurance that
the Company ultimately will prevail in this action. The Company also understands
that the landlord has already leased the property to another tenant which the
Company believes would mitigate all or a portion of the claimed damages.
Therefore, based on the aforementioned assumptions, management believes that the
ultimate outcome of this matter will not have a material adverse impact on the
Company's financial position or results of operations.

SIGNIFICANT CONTRACTS AND AGREEMENTS

The Company incurred in fiscal 1998 a one-time charge in the amount of
$1,859,352 resulting from the termination of concession lease agreements with
Pacific Concessions, Inc. ("PCI"). In accordance with the provisions of these
concession lease agreements (which had terms ranging from two to ten years), the
Company issued notice of termination to PCI on December 15, 1997, paid the full
amount of the termination fee and took direct control of its concession
operations upon expiration of the applicable notice periods (either five or six
months, depending upon the theater).

OPERATING LEASES

The Company leases seven theater properties and various equipment under
non-cancelable operating lease agreements which expire between the years 2000
and 2021 and require various minimum annual rentals. Several of the theater
leases provide for renewal options to extend the leases for additional
five-to-ten year periods. Certain theater leases also require the payment of
property taxes, normal maintenance and insurance on the properties and
additional rents based on percentages of gross theater and concession revenues
in excess of various specified revenue levels. Certain of the theater operating
leases are also personally guaranteed by certain of the Company's former
officers/directors and stockholders.

During the years ended March 31, 1999 and 1998, the Company incurred rent
expense under operating leases of approximately $4,107,000 and $3,735,000
respectively. The Company did not incur any significant percentage rental
expense above the base rental charges during either of the years ended March 31,
1999 and 1998.

F-13
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

6. COMMITMENTS AND CONTINGENCIES - OPERATING LEASES - CONTINUED

At March 31, 1999, the aggregate future minimum lease payments due under these
non-cancelable operating leases are as follows:

<TABLE>
<CAPTION>
Year Ending Theater Equipment
March 31, Leases Leases Total
- --------- ---------- --------- ----------
<S> <C> <C> <C>
2000 $ 3,614,075 $26,988 $ 3,641,063
2001 3,787,138 10,970 3,798,108
2002 3,923,574 -- 3,923,574
2003 4,066,647 -- 4,066,647
2004 4,074,518 -- 4,074,518
Thereafter 67,563,917 -- 67,563,917
----------- ------- -----------
Total minimum lease payments $87,029,869 $37,958 $87,067,827
=========== ======= ===========
</TABLE>

The commitments in the table above represent the minimum cash payments required
under the leases. For financial statement purposes, rent expense is recorded on
a straight-line basis over the life of the lease. As such, because of lower
lease payments in the early years of the lease terms, financial statement
expense is greater than cash payments. For the years ended March 31, 1999 and
1998, rent expense charged to operations exceeded cash payment requirements by
approximately $721,000 and $890,000 and resulted in an increase to the deferred
rent liability by the same amount.

As of March 31, 1999, the Company has signed a lease agreement for a 20-screen
Ultraplex theater in San Bernardino, California and for the expansion by 4
screens of an existing theater in Riverside, 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. The lease for the
Riverside expansion will require expected minimum rental payments aggregating
approximately $9,300,000 over the 22-year life of the lease. Accordingly,
existing minimum lease commitments as of March 31, 1999 plus those expected
minimum commitments for the proposed theater location and expansion would
increase the minimum lease commitments to approximately $137,000,000. Under the
terms of the lease for the San Bernardino Ultraplex, the Company is committed to
capital expenditures of approximately $3,500,000 after a tenant allowance of
$9,200,000 and under the terms of the lease amendment for the Riverside
expansion, the Company is committed to capital expenditures of approximately
$1,250,000 after a tenant allowance of $1,700,000.

SEASONALITY

7. RELATED PARTY TRANSACTIONS

The Company had the following related party transactions during the 1999 and
1998 fiscal years:

John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with
respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife
of Russell Seheult, with respect to certain lease and bank obligations incurred
or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally
guaranteed, on a joint and several basis, substantially all significant
obligations of the Company pursuant to its theater leases and certain loans.
Certain of these obligations of the Company are secured by real or personal
property pledged by such individuals. The Company, pursuant to the settlement
agreement described below, has agreed to use its reasonable best efforts to
obtain the releases of Mr. Ellison, Mr. Willits and Mr. Grossberg from their
obligations under any personal guarantees made for the benefit of the Company or
its entities. To date, no such releases have been obtained. As of March 31,
1999, such guaranteed obligations involved aggregate future payments by the
Company of approximately $118,000,000.

F-14
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

7. RELATED PARTY TRANSACTIONS - CONTINUED

In April 1996, John Ellison, Jr. and Russell Seheult jointly obtained a personal
line of credit with Union Bank of California. From April 1996 until June 1997,
Mr. Seheult and Mr. Ellison borrowed funds under the line of credit and advanced
certain of the funds to the Company. Pursuant to an arrangement between the
Company and Union Bank, payments on the loan were made directly to Union Bank by
the Company. In early June 1997, such line of credit was not renewed by Mr.
Ellison and Mr. Seheult and, as a result, Union Bank withdrew approximately
$99,000 from the Company's bank account, the outstanding principal balance of
the line of credit as of the date of termination. On June 19, 1997, Messrs.
Ellison and Seheult entered into a Business Note with Union Bank in the
aggregate principal amount of $99,043, the proceeds of which were remitted to
the Company. Such note bears interest at a rate of 10.25% per annum and calls
for 60 equal payments of interest and principal of approximately $2,100 per
month. Pursuant to the settlement agreement described above, the Company agreed
to assume Mr. Ellison's obligations under such note. The outstanding balance of
principal and interest on such note was paid in full by the Company in April
1998.

Pursuant to the terms of a loan agreement dated April 1 1996, between the
Company and John Ellison, Jr., the Company agreed to loan the sum of $1,000 per
week to Mr. Ellison commencing on Friday, April 5, 1996. As of January 2, 1998,
the outstanding balance of principal on such loan was $92,000, plus interest.
Pursuant to the settlement agreement described above, the Company agreed to
release Mr. Ellison's obligations with respect to these loans.

The Company made loans in the principal amount of $19,500 to Jon Meloan from
July 1996 through February 1997. As of March 31, 1997, Mr. Meloan executed a
promissory note, dated March 31, 1997, in the principal amount of $21,095, which
represents the total principal amount of such loans with accrued interest at a
rate of 8% per annum through the date of such note. Such note was due and
payable in full on August 15, 1998. As of March 26, 1998, the outstanding
balance of principal and interest on such note was $21,095, from which the
Company agreed to release Mr. Meloan pursuant to the settlement agreement
described above. In addition, the Company agreed, pursuant to the settlement
agreement, to assume the obligations of Mr. Meloan with respect to a loan in the
aggregate principal amount of $22,600 made by a bank to Mr. Meloan. This loan
was paid in full with interest by the Company in April 1998.

8. STOCKHOLDERS' EQUITY

COMMON STOCK AND COMMON STOCK WARRANTS

The Company completed a one-for-seven reverse stock split of its Common Stock,
effective December 2, 1998 (See Note 1). 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 as of March 31, 1999 is 3,864,986. All references to shares included
in the financial statements have been restated to reflect the one-for-seven
reverse stock split. The Company reincorporated in Delaware effective December
1, 1998. As a result, the Company assigned a par value of $0.01 per share to its
common stock. Previously the Company's common stock had no par value.

The reverse stock split also amends the terms of the Company's Redeemable
Warrants and Class B Redeemable Warrants. The number of outstanding and issuable
Redeemable Warrants for Common Stock, with a maturity date of February 6, 2000
remains at 4,648,562. The total number of shares of Common Stock for which such
warrants will be exercisable is approximately 1,568,704. The number of shares of
Common Stock exercisable per each warrant is 0.33746 shares per warrant. The
price per share upon exercise of the warrants is $17.78.

The number of outstanding and issuable Class B Redeemable Warrants for Common
Stock, with a maturity date of September 15, 2001 is 226,438. The total number
of shares of Common Stock for which such warrants will be exercisable is
approximately 76,183. The number of shares of Common Stock exercisable per each
Class B warrant is 0.33644 shares per warrant. The price per share upon exercise
of the warrants is $19.32

On September 23, 1997, the Company entered into an 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 and CAP acquired a majority equity interest (the "Equity Financing")
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.

F-15
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

8. STOCKHOLDERS' EQUITY - COMMON STOCK AND COMMON STOCK WARRANTS - CONTINUED

The Watley Group, LLC ("Watley") was engaged by the Company to facilitate the
transactions contemplated in the CAP Agreement. In connection with this
engagement, the Company paid to Watley on December 15, 1997 a cash fee in the
amount of $962,250. Concurrently, Watley acquired from the Company for $212,250
warrants to purchase 252,635 shares of the Company's common stock at an exercise
price of $5.94 per share (the "Watley Warrants"). Prior to execution of the CAP
Agreement, the Company issued 10,714 shares of common stock (the "Reel Shares")
to affiliates of Reel for the purpose of reimbursing that entity for legal and
other costs incurred in connection with the transaction and as inducement for
the continuation of negotiations with respect to the Bridge Loan.

The Bridge Loan provided the Company with the funds necessary to meet certain of
its current obligations and to repay certain indebtedness. In connection with
the Bridge Loan, the Company issued to Reel detachable warrants to purchase
642,857 shares of common stock at an exercise price of $5.94. Pursuant to the
terms of the CAP Agreement, 214,286 of such warrants were canceled upon the
successful consummation of the Equity Financing. Therefore, warrants to purchase
an aggregate of 428,571 shares of common stock at an exercise price of $5.94
(the "Bridge Warrants") were issued to Reel in connection with the Bridge Loan.
The Bridge Loan was paid in full with interest on December 15, 1997 from
proceeds of the Equity Financing. Non-cash interest expense of $328,750 was
recorded in fiscal 1998 with respect to the issuance of the Bridge Warrants and
the PCI Warrants discussed below.

Concurrent with the execution of the CAP Agreement, the Company issued to CAP a
warrant to purchase 142,857 shares of common stock at an exercise price of $5.94
(the "Signing Warrants").

On April 23, 1997, PCI provided the Company with a $2,000,000 loan (the "Initial
PCI Loan") in exchange for the Company amending the concession lease agreements
with PCI. In connection with the Initial PCI Loan, the Company issued warrants
to PCI to purchase 14,286 shares of common stock at an exercise price per share
equal to $5.94. As a result of the amendments to the concession lease
agreements, PCI assumed direct responsibility for the concession operations at
each of the Company's domestic theaters, and PCI paid to the Company a
commission on concession sales generated. On December 15, 1997, the Initial PCI
Loan was paid in full with interest and the concession lease agreements were
terminated in accordance with the provisions thereof.

On August 29, 1997, PCI loaned to the Company an additional $500,000 (the
"Second PCI Loan"). In connection with the Second PCI Loan, the Company issued
warrants to PCI to purchase 57,143 shares of common stock at an exercise price
per share equal to $5.94.The Second PCI Loan was paid in full with interest on
September 24, 1997.

As of March 31, 1999, the Company had reserved for issuance upon exercise of
outstanding or issuable warrants an aggregate of 2,837,976 shares of common
stock. Issuance of equity securities for consideration below the applicable
exercise price triggers certain anti-dilution provisions in the Company's
Redeemable Warrants, the Company's Class B Redeemable Warrants and the Reel
Warrants, the CAP Warrants and the Watley Warrants.

In fiscal year 1998, the following events triggered the anti-dilution provisions
of the Redeemable Warrants and the Class B Redeemable Warrants (1) the issuance
of 157,143 stock options each having an exercise price of $6.13, (2) the
issuance of 2,526,352 shares of common stock in the Equity Financing for a price
per share equal to $5.94, (3) the issuance of the PCI Warrants to purchase
71,429 shares of Common Stock having an exercise price of $5.94, (4) the
issuance of the 10,714 Reel Shares at a price per share of $4.66, and (5) the
issuance of the Watley Warrants, the CAP Warrants and the Reel Warrants, to
purchase shares of Common Stock totaling 1,057,010 and each having an exercise
price of $5.94 per share.

F-16
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

8. STOCKHOLDERS' EQUITY - COMMON STOCK AND COMMON STOCK WARRANTS - CONTINUED

After giving effect to these events, other events occurring prior to the 1998
fiscal year, the issuance of an additional 47,143 stock options at an exercise
price of $6.13 per share in April 1998 and the issuance of 193,037 Adjustment
Shares for no additional consideration, the shares of common stock issuable upon
exercise of each Redeemable Warrant as of March 31, 1999 was 0.33746 and the
shares of common stock issuable upon the exercise of each Class B Redeemable
Warrant as of March 31, 1999 was 0.33644. Consequently, as of March 31, 1999, an
aggregate of 1,568,704 shares of common stock are issuable upon exercise of the
outstanding Redeemable Warrants at an exercise price of $17.78 per share and an
aggregate of 76,183 shares of common stock are issuable upon exercise of the
outstanding Class B Redeemable Warrants at an exercise price of $19.32 per
share.

In fiscal year 1998, the following event triggered the anti-dilution provisions
of the Reel Warrants, the CAP Warrants and the Watley Warrants: the issuance of
157,143 stock options each having an exercise price of $6.13. After giving
effect to this event, the issuance of an additional 47,143 stock options at an
exercise price of $6.13 per share in April 1998 and the issuance of 193,037
Adjustment Shares for no additional consideration, the aggregate number of
shares of common stock issuable pursuant to these warrants as of March 31, 1999
increased by 33,674 shares to 1,090,684 and the exercise price per share with
respect thereto decreased to $5.75.

In October 1998, the Company issued 100,000 Warrants to purchase a total of
14,286 shares of Common Stock at an average price per share of $7.88 to The
Equity Group, its public relations firm.

The following table sets forth the number of issuable or outstanding warrants as
of March 31, 1999:

<TABLE>
<CAPTION>
Common Exercise Fully Diluted
Number of Shares per Price per Common Stock
Warrant Warrants Warrant Share Issuable
- ------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Redeemable Warrants 4,648,562 0.33746 $ 17.78 1,568,704
(Outstanding and Issuable)
Class B
Redeemable Warrants 226,438 0.33644 $ 19.32 76,183
PCI Warrants 500,000 0.14286 $ 5.94 71,429
CAP Warrants,
Reel Warrants and
Watley Warrants 7,399,070 0.14741 $ 5.75 1,090,684
$ 5.91 to
Other 316,928 0.14286 $ 52.50 45,275
</TABLE>

9. OTHER CURRENT ASSETS

Included in other current assets at March 31, 1999 was approximately $189,000,
representing inventory of concession supplies. Included in other current assets
at March 31, 1998 was approximately $247,000, representing a receivable with
respect to a construction allowance from a landlord. Such amount was paid to the
Company subsequent to March 31, 1998.

10. DEPOSITS AND OTHER ASSETS

Included in deposits and other assets at March 31, 1999 was approximately
$312,000, representing the unamortized portion of a loan origination fee paid
with respect to a seven year revolving reducing credit facility entered into by
the Company on October 19, 1998 and approximately $328,000, representing
unamortized goodwill on the acquisition of the remaining 25% equity in the
Company's Mexican subsidiary.

11. ACCRUED LIABILITIES

Included in accrued liabilities at March 31, 1999 was approximately $159,000,
representing accrued payroll and approximately $128,000, representing accrued
property taxes.

F-17
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

12. STOCK OPTIONS

In December 1997 the Board of Directors approved the formation of the CinemaStar
Luxury Theaters, Inc. Stock Option Plan, which provides for the granting of
incentive stock options and non-qualified stock options. The Board of Directors
reserved 412,280 shares of common stock for the granting of incentive stock
options and non-qualified stock options. Options generally vest over a period of
three years, at an exercise price determined by the compensation committee, and
must be exercised within ten years from the date of grant.

A summary of all stock option activity follows:

<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
---------------------------- -----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 157,357 $6.19 57,258 $19.67
Cancelled (28,571) -- (57,044) --
Granted 82,857 $5.96 157,143 $ 6.13
-------- ----- -------- ------

Outstanding at
end of year 211,643 $6.11 157,357 $ 6.19
======== ===== ======== ======

Options exercisable
at year end 58,786 $6.29 214 $51.66

Weighted-average fair value of
options granted during the year $ 7.08 $ 7.28
</TABLE>

Information relating to stock options at March 31, 1999 summarized by exercise
price are as follows:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------
Exercise Price Weighted Average Weighted Average
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- --------- ------ ----------- --------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$6.13 175,714 8.6 $ 6.13 58,572 $ 6.13
$5.75 35,715 9.9 $ 5.75 -- $ --
$51.66 214 7.3 $51.66 214 $51.66
------- --- ------ ------ ------
$5.75 to $51.66 211,643 8.8 $ 6.11 58,786 $ 6.29
======= === ====== ====== ======
</TABLE>

SFAS No. 123 requires the Company to provide pro forma information regarding net
income and earnings per share as if such compensation cost for the Company's
stock option plan had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimated the fair value of each
stock option at the grant date using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1999 and 1998: 0%
dividend yield; expected volatility of 13% for 1999 and 1998; risk free interest
rates of 6% for 1999 and 1998; and expected lives of 3 years.

Under the accounting provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been substantially the same as that reflected in the
accompanying consolidated statements of operations.

F-18
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

INDEX TO EXHIBITS

DESCRIPTION OF EXHIBITS

3.6 Specimen Stock Certificate of the Company

10.22 Fourth Amendment to Lease Agreement between the Company and Mission
Grove Plaza, L.P

10.41 First Amendment (dated February 19, 1999) to Employment Agreement by and
between the Company and Norman Dowling, dated June 18, 1998

10.44 First Amendment to $15 Million Revolving Credit Agreement between the
Company and Union Bank of California, N.A.

10.45 Second Amendment to $15 Million Revolving Credit Agreement between the
Company and Union Bank of California, N.A.

21 Subsidiaries of the Company

27 Financial Data Schedule

<PAGE> 1

EXHIBIT 3.6

COMMON STOCK COMMON STOCK
NUMBER SHARES
CSL_________

[CINEMASTAR LUXURY THEATERS LOGO]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE STATE OF DELAWARE DEFINITIONS
CUSIP 17244C 20 2

THIS CERTIFIES THAT

SPECIMEN

IS THE RECORD HOLDER OF

FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK $.01 PAR VALUE, OF
CINEMASTAR LUXURY THEATERS, INC.
CERTIFICATE OF STOCK

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

Dated:

SPECIMEN SPECIMEN
/s/ NORMAN DOWLING /s/ FRANK J. MORENO
SECRETARY PRESIDENT

CINEMASTAR LUXURY THEATERS, INC.
CORPORATE SEAL

COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT AND REGISTRAR,

BY
---------------------------
AUTHORIZED OFFICER
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.

<TABLE>
<S> <C> <C>
TEN COMP -- as tenants in common UNIF GIFT MIN ACT -- ...............Custodian................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ...................................
in common (State)
COM PROP -- as community property UNIF TRF MIN ACT -- ...............Custodian(until age.....)
(Cust)
...............under Uniform Transfers
(Minor)
to Minors Act ..........................
(State)
</TABLE>

Additional abbreviations may also be used though not in the above list.

For Value Received, _____________________________________ hereby sell(s),
assign(s) and transfer(s) unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------

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

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

______________________________________________________________________ shares of
the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_______________________________________________________attorney-in-fact to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.

Dated
--------------------------------------

----------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
NOTICE: THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.

Signature Guaranteed

- --------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION. (BANKS STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

<PAGE> 1
EXHIBIT 10.22

LEASE AMENDMENT NO. 4

THIS LEASE AMENDMENT NO. 4 is entered into as of February 12, 1999
by and between MISSION GROVE THEATER PROPERTIES, L.P., a California Limited
Partnership, successor-in-interest to Mission Grove Plaza, L.P., a California
Limited Partnership (as "Landlord") and CINEMASTAR LUXURY THEATERS, INC., a
Delaware corporation formerly known as Nickelodeon Theater Co., Inc. dba
CinemaStar Luxury Theaters (as "Tenant").

R E C I T A L S :

A. Landlord and Tenant are parties to that certain Lease dated
August 1, 1995, as amended by Lease Amendment No. 1 dated August 29, 1995, Lease
Amendment No. 2 dated November 7, 1995 and Lease Amendment No. 3 dated January
29, 1996, all covering premises in Mission Grove Plaza Shopping Center,
Riverside, California ("Demised Premises"). The Lease, as so modified is
referred to herein as the "Lease".

B. Landlord and Tenant desire by this Lease Amendment No. 4 to
further amend the Lease to provide for the expansion of the Demised Premises, as
hereinafter set forth.

T E R M S :

NOW THEREFORE, for valuable consideration, receipt and adequacy of
which is hereby acknowledged, Landlord and Tenant agree as follows:

1. EXPANSION. The Demised Premises shall be expanded by expanding
the Building by approximately 20,000 square feet of Floor Area (plus a
mezzanine), so as to provide four (4) additional auditoriums and approximately
1,200 stadium seats ("Building Addition") in the approximate location as shown
on Exhibit "A" attached hereto.

The expansion of the Building shall be performed in accordance
with the terms of this Lease Amendment No. 4. Upon completion of the Building
Addition, the Building shall consist of

-1-
<PAGE> 2
eighteen (18) auditoriums, approximately 66,400 square feet of Floor Area, and
approximately 4,000 auditorium seats, all as shown on Exhibit "A".

2. PREPARATION OF BUILDING ADDITION PAD.

2.1 Upon the full execution and delivery of this Lease
Amendment No. 4 by Landlord and Tenant, Landlord shall deliver the Building
Addition Pad to Tenant in accordance with the terms and conditions of this Lease
Amendment No. 4, and provided that the Building Addition Pad conforms to
descriptions set forth in Subparagraph 2.2 below, Tenant shall accept the
Building Addition Pad from Landlord in its then existing, as-is condition.

2.2 Landlord, at Landlord's expense (which expense is not
included in, but is in addition to the Building Addition Contribution set forth
in Section 5 below) shall be responsible for "Landlord's Work" which shall be:

(a) Providing electrical, gas, water, sewer and
telephone lines, stubbed to within five feet (5') from the exterior face of the
Building Addition to a point as shown on the mutually approved Construction
Drawings, and

(b) Delivery of a finished, certified, compacted
and appropriately sloped buildable pad on which the Building Addition is to be
constructed, compacted, in any event, to ninety percent (90%) compaction +/-
one-tenth feet (.10') to design grade per the recommendation of Landlord's soils
engineer, and in conformity with all applicable governmental regulations
applicable to the work required to be performed by Landlord ("Building Addition
Pad").

Landlord shall complete Landlord's Work on or before
April 30, 1999, subject to force majeure delays and any delays caused by Tenant.

2.3 Except as expressly set forth in this Section 2 and in
Section 5 below, Landlord shall have no obligation to perform any work or
construct any improvements, or pay any monies in connection with the Building
Addition.

3. DELIVERY OF PAD. The date Landlord's Work is

-2-
<PAGE> 3
completed and the Building Addition Pad is delivered to Tenant as set forth in
Section 2 above shall be the "Pad Delivery Date".

4. CONSTRUCTION OF BUILDING ADDITION.

(i) Preparation of Plans and Specifications. Tenant will,
within ten (10) days after execution hereof, and subject to Landlord's
reasonable approval, select an architect ("Architect") to prepare plans and
specifications, at Tenant's expense, for construction of the Building Addition
improvements. Landlord hereby approves Greg Simonoff as the architect. Within
thirty (30) days following selection and approval of the architect, Tenant shall
cause the Architect to prepare preliminary plans and specifications for the
expansion of the Building by approximately 20,000 square feet of Floor Area
(plus mezzanine) consisting of four (4) additional auditoriums with
approximately 1,200 stadium seats, ready for installation of Tenant's furniture,
fixtures and equipment.

Landlord and Tenant shall have fifteen (15) days
after completion of such preliminary plans, within which to approve such
preliminary plans, or to indicate those matters which are not approved. Tenant
shall, within seven (7) days thereafter, cause the Architect to revise such
plans and prepare final plans and specifications (the "Plans") for approval by
Landlord and Tenant. Landlord and Tenant shall have seven (7) days thereafter
within which to approve the Plans, or to indicate those matters which are not
approved. The parties shall work together in good faith to resolve any
objections and to arrive at a mutually satisfactory set of Plans within sixty
(60) days following approval of the preliminary plans and specifications.

(ii) Governmental Approvals. Not later than thirty (30)
days from the date of execution of this Lease Amendment No. 4, Landlord and
Tenant shall jointly file applications with governmental authorities for
consents, approvals and permits for the development and construction of the
Building Addition. Landlord and Tenant shall thereafter jointly pursue the
progress of such consents, approvals and permits from such governmental
authorities.

(iii) Approval of Plans. The approved Plans shall be
identified in writing by the parties by Job Number and

-3-
<PAGE> 4
date. Upon approval of the Plans by the City of Riverside, the Plans shall be
deemed incorporated into this Lease as though set forth in full.

(iv) Construction of Building Addition. Tenant shall, at
its own cost and expense, subject to Section 5 hereof, construct the Building
Addition as well as all other work required to complete the Building Addition
and all other improvements on the land in connection therewith and prepare same
in order to obtain a Certificate of Occupancy, as well as enable the Building
Addition to open for business.

Tenant shall construct the "shell" of the Building
Addition, all of the Tenant Improvement work and leasehold improvements in the
Building Addition, as well as all improvements located within five feet (5') of
the exterior walls of the Building Addition including, without limitation, (i)
perimeter sidewalks, (ii) paving, (iii) retaining walls, (iv) cantilevering, (v)
utilities, and all other facilities, improvements and landscaping which are
located within a five foot (5') perimeter of the exterior walls of the Building
Addition. Notwithstanding the foregoing, Tenant shall also be obligated to
construct all facilities which are physically connected to, and which
exclusively serve, the Building Addition including, without limitation,
facilities required under ADA Regulations or other governmental requirements,
such as stairs and ramps attached to the Building Addition yet extending beyond
the five foot (5') perimeter of the exterior walls of the Building Addition and
back-flow prevention devices and detection check valves which serve the Building
Addition, but which are installed at a distance greater than five feet (5') from
the exterior of the Building Addition. Except as set forth above, Landlord shall
be responsible for the completion of all improvements adjacent to the Building
Addition, which are located outside such five foot (5') perimeter of the
exterior walls of the Building Addition, including, without limitation, (a) all
paving, (b) perimeter sidewalks, (c) driveways, (d) landscaping, (e) lighting
and (f) utilities, to the extent located outside such five foot (5') perimeter.

All such work shall be in strict compliance with the
Plans and all laws including, without limitation, ADA Regulations.

-4-
<PAGE> 5
Tenant shall submit the approved Plans to such
contractors as have been selected by Tenant and approved by Landlord using its
reasonable discretion ("Approved Contractors"). Landlord and Tenant shall
mutually agree on a list of Approved Contractors. Tenant shall select one of the
Approved Contractors to perform the work set forth in the Plans. All contractors
performing work shall be bondable and shall furnish a bond for completion of the
work.

Tenant shall cause construction to commence on the
Building Addition in accordance with a construction schedule mutually agreed
upon by Landlord and Tenant, but in no event before the occurrence of both (i)
the complete execution and delivery of the construction contract and (ii) the
obtaining of the building permit and other required governmental approvals for
the Building Addition, Tenant agrees that such construction will be diligently
and continuously pursued to completion.

(v) Fixturization/Seating. Tenant shall, at its sole cost
and expense, perform all work necessary to complete interior finishing
improvements for a first-class (consistent in quality with those installed in
similar theaters offering first run motion pictures) exhibition theater
utilizing only stadium seating all within the Building Addition, and in
accordance with all applicable governmental regulations which shall consist of,
without limitation, screens, speakers, projection equipment, concession
equipment, fixturization, installation of stadium seating and installation of
furniture.

5. BUILDING ADDITION CONTRIBUTION. Landlord agrees to contribute a
sum not to exceed One Million Seven Hundred Thousand and No/100 Dollars
($1,700,000.00) to apply towards construction of the Building Addition by
Tenant. Said sum is hereinafter referred to as "Building Addition Contribution".

Landlord shall, within thirty (30) days after execution
hereof, provide to Tenant reasonably satisfactory evidence of the availability
of the funds to Landlord to pay the Building Addition Contribution. Such
evidence may include, without limitation, written confirmation from a financial
institution that such funds are legally available for such purpose.

-5-
<PAGE> 6
All costs and expenses in connection with the design and
construction of the Building Addition and related improvements in excess of the
Building Addition Contribution ("Excess Cost") shall be paid by Tenant. The
Building Addition Contribution shall be applied to the cost of construction of
the Building Addition concurrently with payments by Tenant of the Excess Cost on
a pari passu basis based on the final budget for construction of the Building
Addition. [By way of example only, if the final budget for cost of construction
is Two Million Dollars ($2,000,000.00), then the Excess Cost would be Three
Hundred Thousand Dollars ($300,000.00) and for each payment of Three Dollars
($3.00) made by Tenant in connection with items on the final budget, Landlord
would concurrently be obligated to make a payment of Seventeen Dollars ($17.00)
towards such costs. Landlord's payments of the Building Addition Contribution
shall be disbursed pursuant to the terms set forth below.]

The Building Addition Contribution shall be paid in the form
of progress payments (in the form of joint checks, payable to Tenant and its
general contractor), based on the portion of work performed, and in accordance
with Tenant's "Draw Request" as follows: Tenant shall submit to Landlord, on the
first day of each month, beginning on the first day of the calendar month after
the month in which work is commenced, Tenant's Draw Request consisting of an
"Application and Certificate for Payment", certified by the Architect, which
shall show thereon the percentage of work completed and the amount of the
payment requested by Tenant's contractor, and which shall in addition, show in
sufficient detail the work performed for which payment is sought. All such Draw
Requests shall be accompanied by receipted bills for work already paid for, and
in the case of work not yet paid for, such evidence of payment shall be
submitted within ten (10) days thereafter. Provided Landlord shall approve such
Draw Request by Tenant, Landlord shall within fifteen (15) days thereafter, pay
to Tenant the amount of such Draw Request less a ten percent (10%) retainage to
be paid as set forth below.

With regard to the final Draw Request, Landlord shall pay to
Tenant the amount of such final Draw Request together with the ten percent (10%)
retainage within forty (40) days following Tenant's initial opening for business
in the Building Addition and receipt by Landlord of (i) an architect's
certificate certifying completion of the work in full compliance with the

-6-
<PAGE> 7
approved Plans, (ii) evidence of payment by Tenant of all costs and claims on
account of labor and materials furnished to Tenant by any contractors and/or
subcontractors and/or materialmen, together with mechanics' lien releases and
other lien releases from the general contractor and all subcontractors on
account of all work performed on the Building Addition in an amount at least
equal to the Building Addition Contribution and satisfaction by Landlord that
all contractors have in fact been paid, (iii) the delivery to Landlord of all
other documents required to be furnished to Landlord or to any governmental
authority having jurisdiction, and (iv) delivery to Landlord of (a) a
Certificate of Occupancy for the Building Addition; (b) a conformed copy of a
recorded Notice of Completion, and (c) a copy of "as-built" plans for the
Building Addition.

The Building Addition Contribution may be used for
architectural and engineering fees and for the actual direct cost of
constructing and completing the Building Addition. The Building Addition
Contribution shall not be used for signs, personal property, trade fixtures,
legal and accounting fees, insurance and bond premiums, financing costs and
interest on loans, fees and expenses incurred in connection with zoning or
variance hearings, real estate taxes, special assessments and other incidental
expenses and costs not directly related to the construction and completion of
the Building Addition.

6. PARKING. Landlord shall provide parking within the Shopping
Center for the Building Addition so as to meet all requirements of the City of
Riverside and governmental authority.

7. OPENING. Tenant agrees that it will open the Building Addition
for business to the public within one hundred eighty (180) days following the
later of (i) the Pad Delivery Date; or (ii) date of approval by Landlord and
Tenant of the Plans. Such one hundred eighty (180) days shall be extended one
(1) day for each day of delay resulting from force majeure causes or delays
caused by Landlord.

8. LEASE MODIFICATION. As of the earlier of (i) Tenant's opening for
business in the Building Addition, or (ii) one hundred eighty (180) days
following the later of (a) the Pad Delivery Date or (b) the date of approval by
Landlord and Tenant of the Plans ("Building Addition Commencement Date"),

-7-
<PAGE> 8
subject to force majeure delays as set forth in Section 7 above, the Lease shall
be modified as follows:

(i) Building Addition Minimum Rent. Minimum Rent payable
for the Building Addition shall be equal to One and 50/100 Dollars ($1.50)
multiplied by the number of square feet in the Building Addition ("Building
Addition Minimum Rent").

Within thirty (30) days after completion of the
Building Addition by Tenant, Tenant's Architect shall certify to Landlord and
Tenant the number of square feet in the Building Addition for calculation of
Minimum Rent payable for the Building Addition.

The Floor Area of the original Tenant's Building is
conclusively deemed to be 46,400 square feet. Landlord and Tenant expressly
acknowledge and agree that Building Addition Minimum Rent is in addition to the
Minimum Rent with respect to the original Tenant's Building which shall remain
as set forth in Section 1.9 of the Lease.

In order that the escalations in Minimum Rent and
Building Addition Minimum Rent shall coincide throughout the balance of the Term
of the Lease, Building Addition Minimum Rent shall be increased August 1, 2006
(which is a regularly scheduled increase of Minimum Rent pursuant to Section 1.9
of the Lease) and every sixty (60) months thereafter during the Term of the
Lease, as the Term may be extended pursuant to the terms of the Lease, by twelve
and one-half percent (12 1/2%) of the Building Addition Minimum Rent payable
immediately prior to the adjustment.

(ii) Tenant's Pro Rata Share. "Tenant's Pro Rata Share" as
set forth in Section 3.26 of the Lease shall be calculated using the total Floor
Area of the Building, including the Floor Area of the Building Addition.
Notwithstanding anything to the contrary set forth herein, that portion of the
mezzanine in the Building or Building Addition which is open to the public shall
be included in the square footage of Floor Area used to calculate Tenant's Pro
Rata Share of Common Area Maintenance Expense, but no part of the mezzanine
shall be included in Floor Area for the purpose of calculating Minimum Rent, nor
Building Addition Minimum Rent.

-8-
<PAGE> 9
(iii) Site Plan. Exhibit "A" of the Lease ("Site Plan")
shall be deleted in its entirety and the Exhibit "A" attached hereto shall be
substituted in its place. All references in the Lease to Exhibit "A" shall mean
the Exhibit "A" attached hereto.

(iv) Building. The term "Building" shall include the
Building Addition. The Building shall contain approximately 66,400 square feet
of Floor Area, eighteen (18) auditoriums and approximately 4,000 seats.

(v) Demised Premises. The term "Demised Premises" shall
include the Building and Building Addition.

(vi) Term. Landlord and Tenant acknowledge that the Term
of the Lease expires July 31, 2021.

In addition to the two (2) options to extend the Term
for five (5) years each as set forth in Sections 1.7 and 5.3 of the Lease,
Tenant shall have a third (3rd) option to extend the Term for a five (5) year
period ("Third Extended Term") commencing at the expiration of the Second
Extended Term. Tenant may exercise the right to extend the Term for the Third
Extended Term in accordance with the terms of Section 5.4 of the Lease,
provided, however, such exercise shall be void if Tenant is in default at the
time of exercise or on the date the Third Extended Term is to commence.

Minimum Rent payable during the Third Extended Term
with respect to the original Tenant's Building shall be as set forth in Section
7.4 of the Lease.

Sections 1.9, 7.2.3 and 7.4 of the Lease shall not be
applicable to Building Addition Minimum Rent.

(vii) Percentage Rent. Percentage Rent for the Building
Addition shall be calculated and payable together with Percentage Rent for the
original Tenant's Building in accordance with Section 7.3 of the Lease.

9. ADDITIONAL PROVISIONS

(i) Non-Disturbance Agreement. Landlord shall

-9-
<PAGE> 10
use commercially reasonable efforts to obtain a Non-Disturbance and Attornment
Agreement ("SNDA") from all lenders holding a security interest in the Demised
Premises (as expanded) within thirty (30) days following full execution and
delivery of this Lease Amendment No. 4 by both Landlord and Tenant. In the event
Landlord fails or is unable to deliver the SNDA within such thirty (30) day
period, Tenant shall have the right to terminate this Lease Amendment No. 4, and
Landlord shall reimburse Tenant for any costs Tenant has incurred in connection
with the proposed construction of the Building Addition, including any and all
costs payable to third (3rd) parties including, without limitation, Tenant's
contractors and Architect.

(ii) Leasehold Title Policy. Tenant may obtain, at
Tenant's sole cost and expense, a leasehold title policy insuring Tenant's
interest in the Demised Premises pursuant to the Lease and this Lease Amendment
No. 4. Landlord shall cooperate with Tenant, at no expense to Landlord, in
obtaining such leasehold title policy.

(iii) Approvals and Consents. Tenant shall apply for and
use diligent efforts to obtain all permits and approvals from governmental
authorities to construct the Building Addition. If, despite diligent and timely
efforts, Tenant has not secured all such consents and approvals by April 30,
1999, Tenant shall notify Landlord in writing of same and Landlord shall work
with Tenant, at no cost or expense to Landlord, for an additional thirty (30)
days in an effort to obtain all of such approvals and consents. If, despite
diligent efforts by both Landlord and Tenant, all of such consents and approvals
have not been obtained by June 30, 2000, either Landlord or Tenant shall have
the right to terminate this Lease Amendment No. 4 upon written notice to the
other party within ten (10) days thereafter.

10. Except as herein specifically amended, the Lease shall remain in
full force and effect.

11. The provisions contained herein shall bind and inure to the
benefit of the heirs and successors of the parties hereto.

This Lease Amendment No. 4 has been entered into by the parties as
of the date and year first above written.

-10-
<PAGE> 11

"LANDLORD" MISSION GROVE THEATER PROPERTIES, L.P.,
a California Limited Partnership

BY: MISSION GROVE PLAZA, L.P.,

a California Limited Partnership

By: Regional Properties, Inc.,
a California corporation

By:
-----------------------------------
Its:
----------------------------

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

By:
----------------------------------------------
Its:
----------------------------------------

-11-
<PAGE> 12
CONSENT OF TENANT'S LENDER

RUST CAPITAL, L.P. ("Tenant's Lender"), hereby executes this Consent
of Tenant's Lender for the purpose of consenting to the foregoing Lease
Amendment No. 4 by and between Mission Grove Theater Properties, L.P., a
California Limited Partnership (as Landlord), and CinemaStar Luxury Theaters,
Inc. (as Tenant) in accordance with Section 11 of Partial Waiver and Consent To
Hypothecation dated September 3, 1997 executed by Landlord in favor of Tenant's
Lender.

Dated: , 19 RUST CAPITAL, L.P.,
-------------- ---
a Limited Partnership
------------

By:
----------------------------------------------
Its:
----------------------------------------

-12-

<PAGE> 1
EXHIBIT 10.41

FIRST AMENDMENT

EMPLOYMENT AGREEMENT

The Employment Agreement entered into on June 18, 1998, by and between
Norman Dowling (hereinafter the "Employee") and CinemaStar Luxury Theaters,
Inc., a Delaware corporation (the "Company") (the "Employment Agreement"), is
hereby amended (the Employment Agreement as amended, the "First Amendment") as
follows (all capitalized terms not otherwise defined herein are as defined in
the Employment Agreement):

WHEREAS, the Company, by and through its Board of Directors, and Employee
believe it to be in the best interests of the Company and Employee to modify the
Employment Agreement;

NOW THEREFORE, in consideration of those premises and the promises made by
the parties to the Employment Agreement, the sufficiency of which is hereby
acknowledged, the parties agree as follows:

1. The first paragraph of Paragraph 1 of the Employment Agreement shall be
deleted in its entirety and replaced with the following paragraph:

CinemaStar shall employ Employee and Employee agrees to be employed
and perform his exclusive services for CinemaStar or one of its
subsidiaries or related companies upon the terms and conditions
hereinafter set forth. Employee will serve hereunder as Vice
President, Chief Financial Officer and Secretary of CinemaStar. In
his capacity as Vice President, Chief Financial Officer and
Secretary of CinemaStar, Employee shall do and perform all services,
acts or things necessary, advisable or customary to manage and
conduct the business of CinemaStar, and also will perform such
services as requested, from time to time, by the Board of Directors
of CinemaStar (the "Board") or the Chief Operating Officer of
CinemaStar (the "Chief Operating Officer").

2. The Employment Period as set forth in the first paragraph of Paragraph
2 of the Employment Agreement shall be extended for one (1) additional year.

3. Employee's Base Salary pursuant to Paragraph 3.1 of the Employment
Agreement shall be increased from One Hundred Five Thousand Dollars ($105,000)
to One Hundred Twenty Thousand Dollars ($120,000), effective as of February 19,
1999.

4. Paragraph 5 of the Employment Agreement shall be deleted in its
entirety and replaced with the following paragraph:

Subject to Paragraphs 5.2 and 5.4 below, the Employment Period may
be terminated by CinemaStar at any time, with or without cause. No
amounts shall be paid or benefits provided upon any termination of
the Employment Period, whether as liquidated damages, or otherwise,
except as specifically provided in Paragraphs 5.2 and 5.4 below or
under any benefit plan or agreement in which

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<PAGE> 2
Employee participates or to which Employee is a party. Employee
shall not be entitled to participate in any severance plan of
CinemaStar, except as required by law.

5. Paragraph 5.2 of the Employment Agreement shall be deleted in its
entirety and replaced with the following paragraph:

If the Employment Period is terminated by CinemaStar without cause
(as "cause" is defined in Paragraph 5.1 above), CinemaStar shall pay
to Employee the Base Salary for a period of one (1) year. Any
payment to Employee by CinemaStar pursuant to this Paragraph 5.2
shall be as a lump sum payment, payable upon Employee's termination
without cause. Employee will be considered terminated without cause
by CinemaStar if CinemaStar demotes Employee to a position below
that of Chief Financial Officer and Vice President of CinemaStar and
Employee resigns within ninety (90) days thereof.

6. A new Paragraph 5.4, entitled Termination as a Result of Change in
Control, shall be added to the Employment Agreement and shall read as follows:

For purposes of this Agreement, "change in control" shall mean any
event whereby SCP Private Equity Partners, L.P. (indirectly through
CinemaStar Acquisition, L.L.C.) and its affiliates sell more than
fifty percent (50%) of their current holdings of CinemaStar.
Employee shall be obligated to make a reasonable effort to assist
with such change in control and provide for an orderly transition of
management, if any such transition is contemplated, to the extent
such assistance does not interfere with his subsequent employment,
for a period of three (3) months from the effective date of the
change in control (the "Transition Period").

In the event of a change in control of CinemaStar and the occurrence
of either (i) the resignation by Employee within thirty (30) days of
such change in control (including Employee's resignation as a result
of having to relocate outside of the San Diego area), or (ii) the
termination of Employee by CinemaStar, CinemaStar shall pay to
Employee the Base Salary for a period of one (1) year, subject to
the conditions of the following sentence. Any payment to Employee by
CinemaStar pursuant to this Paragraph 5.4 shall be as a lump sum
payment for the equivalent of nine (9) months of the Base Salary,
payable upon the effective date of such change in control, with the
balance to be paid to Employee in equal monthly installments during
the Transition Period, with each installment to be conditioned on
Employee's reasonable assistance to CinemaStar during the Transition
Period. CinemaStar shall have no obligation to pay Employee the Base
Salary for the one (1) year period described in the first sentence
of this paragraph and shall be entitled to a refund of any such
payments made, on a pro rata basis, if Employee enters into any new
employment or consulting agreement with CinemaStar or its affiliates
at any time during the Employment Period.

2
<PAGE> 3

7. Except for the modifications specified in this First Amendment, all
of the remaining terms and conditions of the Employment Agreement,
shall remain in full force and effect for the term of the Employment
Agreement.

8. This First Amendment to the Employment Agreement shall be effective
as of the date written below.

IN WITNESS WHEREOF, the parties have duly executed this First Amendment on
this 18th day of February, 1999.

"Company" "Employee"

CinemaStar Luxury Theaters, Inc.
a Delaware corporation

By:
---------------------------------- ------------------------------------
Jack Crosby Norman Dowling
Chairman of the Board of Directors

<PAGE> 1
EXHIBIT 10.44

FIRST AMENDMENT

FIRST AMENDMENT dated as of December 17, 1998 (this ("Amendment"), to the
Revolving Credit Agreement, dated as of October 19, 1998 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among CINEMASTAR LUXURY THEATERS, INC., a California corporation (the
"Borrower"), the several banks and other financial institutions or entities from
time to time parties thereto (the "Lenders"), and UNION BANK OF CALIFORNIA,
N.A., as administrative agent (in such capacity, the "Administrative Agent").

WHEREAS, the parties hereto wish to amend certain provisions of the Credit
Agreement on the terms set forth herein:

NOW, THEREFORE, in consideration of the premises and of the mutual agreements
herein contained, the parties hereto agree as follows:

1. Amendment to the Credit Agreement

A. Amendment to Defined Terms under Section 1.1

In the definition of "L/C Commitment" in Section 1.1 of the Credit Agreement,
"L/C Commitment" is hereby amended by deleting "$2,000,000" therein and
substituting in lieu thereof "$2,750,000".

IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.

CinemaStar Luxury Theaters, Inc.
By: /s/ Norman Dowling
Title: VP/CFO

Union Bank of California, N.A., as Agent and as a Lender
By: /s/ Jenny Dongo
Title: Assistant Vice President

<PAGE> 1
EXHIBIT 10.45

SECOND AMENDMENT

SECOND AMENDMENT dated as of March 31, 1999 (this ("Amendment"), to the
Revolving Credit Agreement, dated as of October 19, 1998 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among CINEMASTAR LUXURY THEATERS, INC., a Delaware corporation (the "Borrower"),
the several banks and other financial institutions or entities from time to time
parties thereto (the "Lenders"), and UNION BANK OF CALIFORNIA, N.A., as
administrative agent (in such capacity, the "Administrative Agent").

W I T N E S S E T H:

WHEREAS, the Borrower has requested that the Administrative Agent and Lenders
agree to amend certain provisions of the Credit Agreement, and, upon this
Amendment becoming effective, the Agent and Lenders have agreed to such
amendments upon the terms and subject to the conditions set forth herein:

NOW, THEREFORE, in consideration of the premises and mutual agreements contained
herein, and for other valuable consideration the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:

1. Defined Terms. All terms defined in the Credit Agreement shall have such
defined meanings when used herein unless otherwise defined herein.

2. Amendment to Section 1.1. Subsection 1.1. of the Credit Agreement is hereby
amended as follows:

(a) by deleting the definition of "Consolidated EBITDA" in its entirety
and substituting in lieu thereof the following:

"Consolidated EBITDA": for any period, Consolidated Net Income for such period
plus, without duplication and to the extent reflected as a charge in the
statement of such Consolidated Net Income for such period, the sum of (a) income
tax expense, (b) interest expense, amortization or write-off of debt discount
and debt issuance costs and commissions, discounts and other fees and charges
associated with Indebtedness (including the Loans), (c) depreciation and
amortization expense, (d) amortization of intangibles (including, but not
limited to, goodwill) and organization costs, (e) any extraordinary, unusual or
non-recurring non-cash expenses or losses (including, whether or not otherwise
includable as a separate item in the statement of such Consolidated Net Income
for such period, non-cash losses on sales of assets outside of the ordinary
course of business), and (f) any other non-cash charges, including without
limitation, deferred rent accrual, plus Annualized New Theater Cash Flow for
such period, and minus, to the extent included in the statement of such
Consolidated Net Income for such period, the sum of (a) interest income, (b) any
extraordinary, unusual or non-recurring income or gains (including, whether or
not otherwise includable as a separate item in the statement of such
Consolidated Net Income for such period, gains on the sales of assets outside of
the ordinary course of business) and (c) any other non-cash income, all as
determined on a consolidated basis; provided, however, that (i) the contribution
to Consolidated EBITDA for any period from the operations of the Borrower and
its Subsidiaries outside of the United States shall not exceed 10%, (ii) for
purposes of determining Consolidated EBITDA for the fiscal quarters ending
September 30, 1998, December 31, 1998 and March 31, 1999 there shall be added to
actual Consolidated EBITDA for such period $5,838,174, $2,392,338 and $240,209,
respectively, and (iii) for purposes of determining Consolidated EBITDA for any
period, the results of operations of any theater which shall not have been in
operation throughout such period shall be disregarded (except to the extent
provided for in the definition of Annualized New Theater Cash Flow).

1
<PAGE> 2

(a) by inserting therein the following definition in appropriate
alphabetical order:

"Annualized New Theater Cash Flow": for any period, the aggregate of the
amounts, calculated for each theater owned by the Borrower and its Subsidiaries
that shall not have been in operation throughout such period but which shall
have been in operation for at least three complete calendar months included in
such period, equal to the quotient obtained by dividing (a) the aggregate EBITDA
attributable to such theater (calculated in a manner consistent with the
definition of Consolidated EBITDA) for all complete calendar months during such
period during which such theater shall have been in operation by (b) the sum of
the Annualization Factors set forth opposite each such calendar month below.

<TABLE>
<CAPTION> Annualization
Month Factor
<S> <C>
January, February, March 0.0747
April, May, June 0.0777
July, August, September 0.0977
October, November, December 0.0833
</TABLE>

3. Amendment to Section 7.1. Subsection 7.1 of the Credit Agreement is hereby
amended as follows:

(a) by deleting subsection 7.1(a) in its entirety and substituting in lieu
thereof the following:

(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio on
any day during any period set forth below to exceed the ratio set forth
below opposite such period:

<TABLE>
<CAPTION>
Consolidated
Period Leverage Ratio
----- --------------
<S> <C> <C>
March 31, 1999 - March 30, 2000 4.00 to 1.00
March 31, 2000 - March 30, 2002 3.50 to 1.00
March 31, 2002 - thereafter 3.00 to 1.00
</TABLE>

(b) by deleting in subsection 7.1(d) the amounts set forth opposite the fiscal
quarters ending March 31, 1999, June 30, 1999, September 30, 1999 and December
31, 1999 and substituting in lieu of each such amount "$900,000".

4. Effectiveness. This amendment shall be effective as of March 31, 1999 on the
condition that (a) the Borrower shall have delivered to the Administrative Agent
duly executed copies of this Amendment, which shall have been duly acknowledged
and consented to by each Subsidiary Guarantor and (b) the Agent shall have
received duly executed copies of this Amendment from the Required Lenders.

5. Representations and Warranties. The Borrower hereby represents and warrants
that the representations and warranties contained in the Credit Agreement
(except those which expressly speak as of a certain date) will be, after giving
effect to this Amendment, true and correct in all material respects, as if made
on and as of the date hereof.

6. Limited Amendment. Except as expressly amended hereby, the Credit Agreement
and each other Loan Document shall continue to be, and shall remain, in full
force and effect in accordance

2
<PAGE> 3
with the provisions thereof. This Amendment shall not be deemed to be an
amendment of any other term or condition of the Credit Agreement or the other
Loan Documents or to prejudice any other right or rights which the Borrower, the
Subsidiaries, the Administrative Agent or any Lender may now have or may have in
the future under or in connection with the Credit Agreement or any of the
instruments or agreements referred to therein, as the same may be amended from
time to time.

7. Fees, Costs and Expenses. The Borrower agrees to pay or reimburse the
Administrative Agent for any fees that may be payable in connection with this
Amendment and all its reasonable and customary out-of-pocket costs and expenses
incurred in connection with the preparation, negotiation and execution of this
Amendment, including, without limitation, the reasonable fees and disbursements
of its counsel.

8. Counterparts. This Amendment may be executed by one or more of the parties
hereto in any number of separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. Delivery of
an executed signature page of this Amendment by facsimile transmission shall be
effective as delivery of a manually executed counterpart hereof.

9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective proper and duly authorized officers
as of the day and year first above written.

CINEMASTAR LUXURY THEATERS, INC.

By:
-------------------------------------
Title:
-------------------------------------

UNION BANK OF CALIFORNIA, N.A. as
Administrative Agent and a Lender

By:
-------------------------------------
Title:
-------------------------------------

The undersigned does hereby acknowledge
and consent to the terms and conditions
of the foregoing Amendment.

CINEMASTAR LUXURY CINEMAS, INC.

By:
----------------------------
Title:
----------------------------

<PAGE> 1
EXHIBIT 21

SUBSIDIARIES OF CINEMASTAR LUXURY THEATERS, INC.

CinemaStar Luxury Cinemas, Inc., a California corporation, 100% owned

CinemaStar Luxury Theaters, S.A. de C.V., a Mexican corporation, 100% owned

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,220,396
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,758,116
<PP&E> 18,931,205
<DEPRECIATION> 7,420,710
<TOTAL-ASSETS> 15,139,219
<CURRENT-LIABILITIES> 2,479,258
<BONDS> 0
0
0
<COMMON> 38,650
<OTHER-SE> 6,966,516
<TOTAL-LIABILITY-AND-EQUITY> 15,139,219
<SALES> 27,736,337
<TOTAL-REVENUES> 27,736,337
<CGS> 11,658,741
<TOTAL-COSTS> 29,129,991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,348
<INCOME-PRETAX> (1,584,772)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (1,586,372)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,586,372)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)

</TABLE>