STEAKHOUSE PARTNERS INC - 10-Q Quarterly Report

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

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FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 3, 2002

/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _________________ to _________________

000-23739
(Commission file number)

STEAKHOUSE PARTNERS, INC.
(Exact name of small business issuer as specified in its charter)

Delaware 94-3248672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10200 Willow Creek Road, San Diego, CA 92131
(Address of principal executive offices)

(858) 689-2333
(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes / X/ No / /

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity. As of October 17, 2002 -- 3,356,522 shares of Common Stock

Transitional Small Business Disclosure Format (check one): Yes / / No /X/

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FORM 10-Q
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
INDEX

PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 3,
2002 and December 25, 2001.................... 2-3
Condensed Consolidated Statements of Operations for
the twelve weeks ended September 3, 2002
and September 4, 2001......................... 4
Condensed Consolidated Statements of Operations for
the thirty-six weeks ended September 3, 2002
and September 4, 2001......................... 5
Condensed Consolidated Statements of Cash Flows for
the thirty-six weeks ended September 3, 2002
and September 4, 2001......................... 6
Notes to Condensed Consolidated Financial
Statements.................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 16
Item 4. Controls and Procedures............................. 16-17

PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 17
Item 2. Change in Securities and Use of Proceeds............ 17
Item 3. Defaults Upon Senior Securities..................... 17
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 17
Item 5. Other Information................................... 17
Item 6. Exhibits and Reports on Form 8-K.................... 17

SIGNATURES.................................................. 18

SECTION 302 CERTIFICATION................................... 19

1

STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 3, 2002

ASSETS

The accompanying notes are an integral part of these financial statements.

2

STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 3, 2002
(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these financial statements.

3

STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements.

4

STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements.

5

STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements.

6

STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. The results of the
thirty-six week period ended September 3, 2002 are not necessarily indicative of
the results to be expected for the full year ending December 24, 2002. The
Company reports results quarterly with the three quarters having 12 weeks and
the remaining quarter having 16 weeks. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and related footnotes included in the Company's Annual Report on Form
10-K for the year ended December 25, 2001.

GOING CONCERN

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the twelve weeks ended September 3, 2002 the Company
maintained a current ratio of 0.57-to-1, which arose from a working capital
deficit of $4,984,557. In addition the Company is currently in default of
certain debt as the Company did not make payments as the notes came due, and the
Company failed to meet certain financial covenants required by its lenders. The
total amount of debt that is currently in default is $3,234,285 which is
included in liabilities subject to compromise. If the Company is unable to
generate profits and unable to obtain financing for its working capital
requirements, it may have to curtail its business sharply or cease business
altogether.

The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to restructure its current
financing, to obtain additional financing, and ultimately to attain
profitability.

Management has evaluated its current operations, and it has focused the
Company's efforts and developed plans to generate operating income to continue
the Company's operations through the year ended December 31, 2002.

Management's plans include the following:

1. Restructuring its long-term debt position.

2. Improving the Company's financial performance through cost-reduction and
restructuring of administrative overhead.

3. Raising money through equity or the selective sale of non-strategic
restaurants.

BANKRUPTCY FILING

On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon
Steakhouse Restaurants, a wholly owned subsidiary of Steakhouse Partners, and
three subsidiaries of Paragon Steakhouse Restaurants also filed for relief under
Chapter 11 of the Bankruptcy Code. The filing was made in connection with the
Company's inability to timely

7

STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
pay certain notes aggregating $1,734,285. On October 11, 2002 Pacific Basin
Foods, the other wholly owned subsidiary of Steakhouse Partners, filed a
petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California.

Steakhouse Partners and Paragon have and will continue to manage their
properties and operate their businesses as "debtors-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code. Pacific Basin Foods ceased operating as of
its bankruptcy filing.

By filing under Chapter 11, the Company is seeking to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets. Management believes that the Official Creditors'
Committee will approve a bankruptcy plan in 2002, and the reorganization will be
complete by the beginning of 2003. It is the Company's intention to address all
of its pending and future pre-petition claims in a plan of reorganization.
However, it is currently impossible to predict with any degree of certainty how
the plan will treat pre-petition claims and the impact the bankruptcy filings
and any reorganization plan may have on the shares of preferred or common stock
of the Company. Generally, under the provisions of the Bankruptcy Code, holders
of equity interests may not participate under a plan of reorganization unless
the claims of creditors are satisfied in full under the plan or unless creditors
accept a reorganization plan that permits holders of equity interests to
participate. While the Company believes the reorganization will be completed by
the end of 2002, the formulation and implementation of a plan of reorganization
could take significantly longer, or may not be successfully completed.

The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including claims of landlords for
lease payments and employee wages and benefits in the ordinary course of
business.

Accounting Impact

As of the first quarter of 2002, the Company is required to follow Statement of
Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code." Pursuant to SOP 90-7, the Company's pre-petition
liabilities that are subject to compromise will be reported separately on the
balance sheet at an estimate of the amount that will ultimately be approved by
the Bankruptcy Court. Obligations of Pacific Basin Foods not covered by the
bankruptcy filing will remain classified on the consolidated balance sheet based
upon maturity dates and actual costs incurred. SOP 90-7 also requires separate
reporting of certain expenses, realized gains and losses, and provisions for
losses related to the bankruptcy filing as reorganization items.

To date, the United States Bankruptcy Court in accordance with the applicable
provisions of the Bankruptcy Code, has approved the rejection of eight leases
and the termination after compromise of seven leases. Eleven additional leases
were renegotiated to improve unit profitability. Of the fifteen leases that were
rejected or terminated, ten were under performing operating units and five were
units previously closed but still carrying lease obligations.

NOTE 2 -- EARNINGS PER SHARE

In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted average number of common shares outstanding
during the period. Common equivalent shares are

8

STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
excluded from the computation if their effect is anti-dilutive. Net loss per
share amounts for all periods have been restated to conform to SFAS No. 128
requirements.

NOTE 3 -- CONTINGENCIES

The Company is periodically a defendant in cases involving personal injury and
other matters that arise in the normal course of business. While any pending or
threatened litigation has an element of uncertainty, the Company believes that
the outcome of any pending lawsuits or claims, individually or combined, will
not materially affect the financial condition or results of operations.

On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon
Steakhouse Restaurants, a wholly owned subsidiary of Steakhouse Partners, and
three subsidiaries of Paragon Steakhouse Restaurants also filed for relief under
Chapter 11 of the Bankruptcy Code. On October 11, 2002 Pacific Basin Foods, a
wholly owned subsidiary of Steakhouse Partners, filed a petition under Chapter 7
of the Bankruptcy Code in the United States Bankruptcy Court for the Central
District of California. As a consequence to the bankruptcy filings, all pending
litigation and claims against Steakhouse Partners, Paragon Steakhouse
Restaurants and Pacific Basin Foods are stayed, and no party may take action to
realize its pre-petition claims, except pursuant to an order of the Bankruptcy
Court.

NOTE 4 -- SUBSEQUENT EVENTS

As of October 2002, the Company has negotiated the sale of two restaurant leases
and related property, plant, and equipment for gross proceeds of $878,000. The
property, plant, and equipment associated with such leases had a net book value
of approximately $476,000 and future minimum lease commitments of $1,896,000 as
of October 2002. The Company expects to record a net gain during the year ended
December 31, 2002 of approximately $400,000 in connection with such sales.

As previously reported on Form 8-K filed on October 16, 2002, the Company
announced that its wholly owned subsidiary, Pacific Basin Foods, Inc. filed for
protection under Chapter 7 of the United States Bankruptcy Code in the Central
District of California located in Riverside. The subsidiary ceased operations
effective as of the filing.

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Quarterly Report on Form 10-Q are forward looking. In particular, the
statements herein regarding the Company's ability to successfully emerge from
the Chapter 11 reorganization process, improve the Company's financial
performance through cost-reduction and restructuring of administrative overhead,
and raise money through equity or the selective sale of non-strategic
restaurants, industry prospects, growth opportunities and future results of
operations or financial position are forward-looking statements. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. See the risk factors detailed in the Company's Form
10-K for the fiscal year ended December 25, 2001 as well as other reports filed
by the Company with the Securities Exchange Commission.

The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes for the twelve
weeks and thirty-six weeks ended September 3, 2002 included in this Report, and
the 2001 consolidated financial statements and related notes. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.

Overview

BACKGROUND

Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us" and
"our"), currently operates 53 full-service steakhouse restaurants located in ten
states. The Company's restaurants specialize in complete steak and prime rib
meals, and also offer fresh fish and other lunch and dinner dishes. The
Company's average dinner check is approximately $24.52 (including alcoholic
beverages) and it currently serves approximately 6.0 million meals annually. The
Company operates principally under the brand names of Hungry Hunter's, Hunter's
Steakhouse, Mountain Jack's and Carvers. The Company's management believes that
its emphasis on quality service and the limited menu of its restaurants, with
its concentration on high quality USDA choice-graded steaks and prime ribs,
distinguishes the Company's restaurants and presents an opportunity for
significant growth after it has completed the reorganization process described
below under "Bankruptcy Filing".

On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon"), which owned 78 steakhouse restaurants
and Pacific Basin Foods Inc., ("Pacific Basin") a restaurant food distribution
company. Paragon and Pacific Basin are now wholly owned subsidiaries of the
Company.

BANKRUPTCY FILING

On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon
Steakhouse Restaurants, a wholly owned subsidiary of Steakhouse Partners, also
filed for relief under Chapter 11 of the Bankruptcy Code. The filing was made in
connection with the Company's inability to timely pay certain notes aggregating
$1,734,285. On October 11, 2002, our subsidiary Pacific Basin Foods filed a
petition under Chapter 7 of the Bankruptcy Code, as discussed further below.

10

Steakhouse Partners and Paragon have and will continue to manage their
properties and operate their businesses as "debtors-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code.

By filing under Chapter 11, the Company is seeking to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets. Management believes that the Official Creditors'
Committee will approve a bankruptcy plan by the end of 2002 and the
reorganization will be complete by the end of first quarter of 2003.

It is the Company's intention to address all of its pending and future
pre-petition claims in a plan of reorganization. However, it is currently
impossible to predict with any degree of certainty how the plan will treat
pre-petition claims and the impact the bankruptcy filings and any reorganization
plan may have on the shares of preferred or common stock of the Company.
Generally, under the provisions of the Bankruptcy Code, holders of equity
interests may not participate under a plan of reorganization unless the claims
of creditors are satisfied in full under the plan or unless creditors accept a
reorganization plan that permits holders of equity interest to participate.
While the Company believes the reorganization will be completed by the end of
2002, the formulation and implementation of a plan of reorganization could take
significantly longer, or may not be successfully completed. The Company has
received approval from the Bankruptcy Court to pay or otherwise honor certain of
their pre-petition obligations, including claims of landlords for lease payments
and employee wages and benefits in the ordinary course of business.

To date, the United States Bankruptcy Court in accordance with the applicable
provisions of the Bankruptcy Code, has approved the rejection of eight leases
and the termination after compromise of seven leases. Eleven additional leases
were renegotiated to improve unit profitability. Of the fifteen leases that were
rejected or terminated, ten were under-performing operating units and five were
units previously closed but still carrying lease obligations.

OUR BUSINESS BACKGROUND

Our overall steakhouse operations tend to experience seasonal fluctuations, with
the fourth quarter and first quarter of each year being our strongest quarters,
reflecting both the Christmas season and the colder weather at our Mid-west
operations, and the third quarter being the slowest, as people tend to eat less
steak in restaurants in the summer months. This seasonality, however, is less
pronounced at our California locations, which do not experience the same
seasonal changes in weather that occur at our Mid-west locations.

We have three business units, which have separate management and reporting
infrastructures and offer different products and services. The business units
have been aggregated into two reportable segments, restaurant services and food
service distribution, since the long-term financial performance of these
reportable segments are affected by similar economic conditions. The restaurant
services segment consists of two business units, Paragon Steakhouse Restaurants,
Inc. and Galveston Steakhouse Restaurants, that operate specialty restaurants
around the country. Our food service distribution segment, which operates as
Pacific Basin Foods, performs distribution of restaurant foods and
restaurant-related products for internal operations, as well as customers
outside our internal operations.

Since our Pacific Basin Foods subsidiary is in the wholesale business of
providing food supplies to restaurants, its profit margin on sale of food
products to restaurants is significantly less than the margin that can be
obtained through restaurant sales. In addition, since Pacific Basin Foods
maintains a large inventory of food supplies to service its wholesale customers,
its business is more susceptible to the risk of inventory obsolescence than our
other business operations.

On June 17, 2002 the Pacific Basin Foods subsidiary closed its unprofitable
Mid-west distribution center in Rantoul, Illinois and converted all Mid-west
Paragon restaurants to two members of the UniPro Foodservice Network; Abbott
Foods, Inc and EG Forrest Company. There was no interruption of service to the
Paragon restaurant units. On October 11, 2002 the Pacific Basin Food

11

subsidiary filed a petition under Chapter 7 of the Bankruptcy Code. The
subsidiary ceased operations as of the filing. A contract was signed with a
UniPro Distributor, Southwest Traders, Inc., to service the West Coast
Restaurants.

RESTAURANT CONCEPTS

All of our restaurants are positioned as destination restaurants that attract
loyal clientele. By our use of the term destination restaurants, we mean that we
seek to establish our restaurants as the primary destination of our clientele,
rather than a destination or activity ancillary to another activity, such as
shopping or sight seeing. Our restaurants are full-service steakhouses (with two
exceptions). We hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is our "signature product" and is the
basis for our distinctive merchandising commitment to "The Best Prime Rib in
Town". Our prime rib, which is served in a herb crust, is slow roasted for seven
hours to enhance its flavor and tenderness. Portions are deliberately generous.
Prime Rib and Steaks account for approximately 65.0% of our food revenue. Full
liquor, wine and bar service are available. Alcoholic beverage sales account for
approximately 18.7% of our net sales.

Most of our restaurants are open daily from 4:30 p.m. to 9:30 p.m. on weekdays
and from 4:00 p.m. to 10:00 p.m. on weekends. Some restaurants are open for
lunch beginning at 11:00 a.m. on weekdays; most of these restaurants are closed
for lunch on weekends.

We currently operate in three distinctive steakhouse markets.

HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S

We have 40 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is in
the under $25.00 per guest range. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and have the
"look and feel" of a classic special occasion restaurant. For this reason, we
have been able to position our Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's steakhouses as a step-above the lower ticket Outback and Lone Star
restaurant chains.

Our menu also features fresh fish, seafood, lamb and chicken in addition to
prime rib and steaks. A complete meal includes salad and a choice of side dishes
including choice of potato, and steamed vegetables. The menu also includes
appetizers and desserts. The Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's recently completed a menu revision designed to increase variety and
emotional value. The change included the addition of new appetizers, seafood,
specialty steaks, prime rib combinations and revisions to all plate
presentations.

Our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's restaurants are
typically free-standing buildings with dinner seating capacities ranging from
150 to 220 seats and an average seating capacity of approximately 180 seats.
Unlike an Outback or Lone Star, our restaurants typically have one or more
banquet rooms to accommodate private parties and corporate events. The bar in
each restaurant is generally located adjacent to the dining room primarily to
accommodate customers waiting for dining tables and up to approximately 30
additional diners.

CARVERS

We have 8 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average check per guest of slightly less than
$35.00. Carvers is a sophisticated, upper tier yet mid-priced restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers
are divided into distinctive dining areas to provide greater intimacy. Prices at
the Carvers restaurants are slightly higher than those of our other restaurants,
but are substantially lower than high-end steakhouses such as Morton's and
Ruth's Chris.

Our Carvers restaurants are also typically housed in freestanding buildings with
dinner seating capacities ranging from 180 to 240 seats and an average seating
capacity of approximately 220 seats. The Carvers restaurants also have one or
more banquet rooms to accommodate private parties and

12

corporate events. We are currently developing the next generation lunch and
dinner menus for Carvers.

UNIQUE CONCEPTS

We have 5 unique formal restaurants housed in landmark buildings in prime
locations near or at tourist sites, which also serve as the destination or
special occasion restaurant in their respective communities. The menu at these
restaurants are also unique with the average dinner check per guest between
$28.00 and $35.00. These restaurants typically have one or more banquet rooms.

We will continue our efforts to differentiate our restaurants by emphasizing
personal and attentive service, consistent high-quality, fresh products and
position in the mid-priced, full service steakhouse segment of the restaurant
industry.

REORGANIZATION STRATEGY

Management plans to restructure the Company's debt through the Chapter 11
reorganization process, improve the Company's financial performance through
cost-reduction and restructuring of administrative overhead, and raise money
through equity or the selective sale of non-strategic restaurants. In the short
term, we will reduce our organization in size as part of the reorganization
process. Assuming the Company is able to successfully reorganize under Chapter
11 of the United States Bankruptcy Code, our goal for the future is to enhance
our position in the steakhouse restaurant industry by building through internal
growth (Carvers) and licensing a network of steakhouse restaurants. Key
components of our strategy include leveraging established brands, achieving
operating efficiencies and cost savings through volume discounts on purchases,
and efficiently penetrating new markets. The steakhouse restaurant industry is
expected to continue to expand over the next several years. We believe that this
industry is highly fragmented and, assuming a successful reorganization under
Chapter 11 of the United States Bankruptcy Code, presents an excellent
opportunity for us to grow our business by expanding one of Paragon's brand-name
steakhouses, Carvers.

RESULTS OF OPERATIONS

Twelve Weeks Ended September 3, 2002 Compared to Twelve Weeks Ended September 4,
2001

Revenues for the twelve-week period ended September 3, 2002 decreased $2,742,629
or 11.8% from $23,242,341 for the twelve-week period ended September 4, 2001 to
$20,499,712 for the same period in 2002. Paragon Steakhouse revenues for the
twelve-week period end September 3, 2002 decreased $2,607,168, or 11.3%, from
$23,009,481 for the twelve-week period ending September 4, 2001 to$20,402,313
for the same period in 2002. The main factors for the decline in revenue were
the soft economy and the sale or closing of ten units that were in operation
during the twelve-week period ending September 4,2001. Also revenue from the
Company's one original restaurant (Texas Loosey's) decreased $135,521 or 58.2%
from $232,860 for the twelve-week period ended September 3, 2002 to $97,399 for
the same period in 2002. The decrease is chiefly attributable to a five week
closure for the landlord provided remodeling to an updated concept (Iguana
Joe's).

Food and beverage costs for the twelve-week period ended September 3, 2002
decreased $898,041 or 11.2% from $8,031,552 for the twelve-week period ended
September 4, 2001 to $7,133,511 for the same period in 2002. Food and beverage
costs for the restaurants only as a percentage of restaurant revenues was 34.6%
for the twelve-week period ended September 4, 2001 compared to 34.8% for the
same period in 2002. In spite of the revenues declines, bankruptcy related
supply issues and conversion to UniPro Distributors the company maintained the
food and beverage cost relatively consistent year to year as a percentage of
revenue. Immediately after the bankruptcy filing many vendors changed their
terms and conditions in order to continue to do business with Paragon. This
included deposits, loss of discounts, and higher prices.

13

Payroll and payroll related costs for the twelve-week period ended September 3,
2002 decreased $418,318 or 5.2% from $8,065,756 for the twelve-week period ended
September 4, 2001 to $7,647,438 for the same period in 2002. Payroll and payroll
related costs as a percentage of revenues were 34.7% for the twelve-week period
ended September 4, 2001 compared to 37.3% for the same period in 2002. The
principal reason for this increase as a percentage of revenue was the need to
retain a certain minimum staffing per unit to maintain guest services and a
positive dining experience despite a decrease in restaurant net revenues.

Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating costs for the
twelve-week period ended September 3, 2002 decreased $711,697 or 12.2% from
$5,830,102 for the twelve-week period ended September 4, 2001 to $5,118,405 for
the same period in 2002. Direct operating costs as a percentage of revenues were
25.1% for the twelve-week period ended September 4, 2001 compared to 25.0% for
the same period in 2002.

Depreciation and amortization for the twelve-week period ended September 3, 2002
decreased $136,042 or 17.3% from $785,882 for the twelve-week period ended
September 4, 2001 to $649,840 for the same period in 2002. The decrease is
principally due to the elimination of fifteen under performing Paragon
Steakhouse Restaurants. Of the fifteen that were sold, rejected, or terminated,
ten were under performing operating units and five were units previously closed
but still carrying lease obligations.

General and administrative expenses for the twelve-week period ended September
3, 2002 decreased $456,833 or 30.3% from $1,510,084 for the twelve-week period
ended September 4, 2001 to $1,053,251 for the same period in 2002. General and
administrative expenses as a percentage of revenues was 6.5% for the twelve-week
period ended September 4, 2001 compared to 5.1% for the same period in 2002. The
decrease in both absolute dollars and percentage relationship to revenue is
chiefly the result of the combination of a reduction-in-force and senior
management attrition prior to the Chapter 11 filing. The reduction in senior
management without significant severance expense included: Chief Executive
Officer, Vice-President of Operations, three district leaders, a mid-west
operations consultant, IS support, and a number of staff positions.

Interest expense and financing costs, net for the twelve-week period ended
September 3, 2002 decreased $56,794 or 9.8% from $579,588 for the twelve-week
period ended September 4, 2001 to $522,794 for the same period in 2002.

The net gain on reorganization related items is the result of the removal of
assets and accumulated depreciation and capital lease obligations due to the
first day rejection of closed or poorly performing units and the sale of a
liquor license, partially offset by legal fees directly attributable to the
bankruptcy process.

Net loss before discontinued operations net for the twelve-week period ended
September 3, 2002 decreased $383,496 or 24.2% from $1,583,691 for the
twelve-week period ended September 4, 2001 to $1,120,195 for the same period in
2002. This decrease is principally due to the elimination of fifteen under
performing assets and the reduction in general and administrative staffing,
partially offset by high cost of the bankruptcy process.

Thirty-six Weeks Ended September 3, 2002 Compared to Thirty-six Weeks Ended
September 4, 2001

Revenues for the thirty-six week period ended September 3, 2002 decreased
$9,431,767 or 12.2% from $77,433,638 for the thirty-six week period ended
September 4, 2001 to $68,001,871 for the same period in 2002. The main factors
for the decline in revenue were the soft economy and that ten units in operation
during the thirty-six week period ending September 4, 2001 were sold, rejected,
or terminated prior to September 3, 2002. Paragon Steakhouse revenue decreased
12.1% for the thirty-six week period ended September 3, 2002 compared to the
gross revenue for the same thirty-six period ended September 4, 2001. Revenue
from the Company's one original restaurant (Texas

14

Loosey's) decreased $147,120 or 22.1% from $665,643 for the thirty-six period
ended September 4, 2001 to $518,526 for the same period in 2002. The decrease is
chiefly attributable to a five week closure for the landlord provided remodeling
to an updated concept (Iguana Joe's).

Food and beverage costs for the thirty-six week period ended September 3, 2002
decreased $3,332,778 or 12.3% from $27,155,593 for the thirty-six week period
ended September 4, 2001 to $23,822,815 for the same period in 2002. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 35.0% for the thirty-six week period ended September 3, 2002 compared to
35.1% for the same period in 2001. In spite of the revenues declines, bankruptcy
related supply issues and conversion to UniPro Distributors the company
maintained the food and beverage cost relatively consistent year to year as a
percentage of revenue. Immediately after the bankruptcy filing many vendors
changed their terms and conditions in order to continue to do business with
paragon. This included deposits, loss of discounts, and higher prices.
Subsequently, the company has been able to find alternative vendors, renegotiate
cash discounts and adjust purchases for the restaurants to reduce overall costs.

Payroll and payroll related costs for the thirty-six week period ended September
3, 2002 decreased $1,473,915 or 5.8% from $25,342,910 for the thirty-six week
period ended September 4, 2001 to $23,868,995 for the same period in 2002.
Payroll and payroll related costs as a percentage of revenues were 35.1% for the
thirty-six week period ended September 3, 2002 compared to 32.7% for the same
period in 2001. Although in absolute dollars payroll and payroll related costs
decreased the principal reason for this increase as a percentage of revenue was
the need to retain a certain minimum staffing per unit to maintain guest
services and a positive dining experience despite a decrease in restaurant net
revenues.

Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating costs for the
thirty-six week period ended September 3, 2002 decreased $1,242,932 or 7.0% from
$17,845,744 for the thirty-six week period ended September 4, 2001 to
$16,602,812 for the same period in 2002. These costs as a percentage of revenues
were 24.4% for the thirty-six week period ended September 3, 2002 compared to
23.1% for the same period in 2001. Due to the fixed nature of many of these
components, management was not able to decrease all the cost in proportion to
the declining revenue, also contributing to the increase was higher utility
costs especially in the California units and investing more dollars in the
Company's marketing programs.

Depreciation and amortization for the thirty-six week period ended September 3,
2002 decreased $309,798 or 12.9% from $2,399,703 for the thirty-six week period
ended September 4, 2001 to $2,089,905 for the same period in 2002. The decrease
is principally due to the elimination of fifteen under performing Paragon
Steakhouse Restaurants. Of the fifteen that were sold, rejected, or terminated,
ten were under performing operating units and five were units previously closed
but still carrying lease obligations.

General and administrative expenses for the thirty-six week period ended
September 3, 2002 decreased $1,624,751 or 32.8% from $4,954,441 for the
thirty-six week period ended September 4, 2001 to $3,329,690 for the same period
in 2002. General and administrative expenses as a percentage of revenues was
4.9% for the thirty-six week period ended September 3, 2002 compared to 6.4% for
the same period in 2001. The decrease in both absolute dollars and percentage
relationship to revenue is chiefly the result of the combination of a
reduction-in-force and senior management attrition prior to the Chapter 11
filing. The reduction in senior management without significant severance expense
included: Chief executive officer, vice-president of operations, three district
leaders, a mid-west operations consultant, IS support, and a number of staff
positions.

Interest expense and financing costs, net for the thirty-six week period ended
September 3, 2002 decreased $238,636 or 12.8% from $1,866,167 for the thirty-six
week period ended September 4, 2001 to $1,627,531 for the same period in 2002.

15

The net gain on reorganization related items is the result of the removal of
assets and accumulated depreciation and capital lease obligations due to the
first day rejection of closed or poorly performing units and the sale of a
liquor license, partially offset by legal fees directly attributable to the
bankruptcy process.

Net loss before discontinued operations net for the thirty-six week period ended
September 3, 2002 decreased $697,771 from $2,785,003 for the thirty-six week
ended September 4, 2001 to $2,087,232 for the same period in 2002. This decrease
is principally due to the elimination of fifteen under performing assets and the
reduction in general and administrative staffing, partially offset by high cost
of the bankruptcy process.

LIQUIDITY AND CAPITAL RESOURCES

The Company has a cash and cash equivalents balance of $1,281,930 at September
3, 2002. Management of the Company believes that such cash and cash equivalents
together with anticipated cash from operations and the sale of several selected
assets (one currently in escrow) is sufficient to cover the cost of operations
for at least the next twelve months. If existing cash and cash equivalents and
anticipated cash from operations, is insufficient to satisfy the Company's
working capital and capital expenditures requirements, the Company may have to
sell additional equity or debt securities or obtain credit facilities, to the
extent the Company is able.

The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
restructure its current financing, to obtain additional financing, and
ultimately to attain profitability. The reorganization plan is contingent on the
sale of selected assets and the Company may need additional sources of
financing. Any required additional financing may not be available on terms
favorable to us, or at all. If adequate funds are not available on acceptable
terms, we may be unable to fund our reorganization plan and may be required to
sell core assets or dissolve the business. If we raise additional funds by
issuing equity securities, shareholders may experience dilution of their
ownership interest and the newly issued securities may have a rights superior to
those of the common stock. If we issue or incur debt to raise funds, we may be
subject to limitations on our operations.

IMPACT OF INFLATION

The primary inflationary factors affecting the Company's operations include food
and labor costs. The Company's restaurant personnel are paid at the federal and
state established minimum wage levels and accordingly, changes in such wage
level affect the Company' s labor costs. As costs of food and labor have
increased, the Company will be seeking to offset those increases through
economics of scale and/or increases in menu prices, although there is no
assurance that such offsets will continue.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET RISK. The Company's exposure to market risk is principally confined to
cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.

INTEREST RATE SENSITIVITY. As of September 3, 2002, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair market value of these assets.

FOREIGN CURRENCY EXCHANGE RISK. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
required to be filed under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within

16

the time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its President, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on the foregoing, the Company's President, who serves as the Company's principal
executive officer and principal financial and accounting officer concluded that
the Company's disclosure controls and procedures were effective.

There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As a consequence to the bankruptcy filings, all pending litigation and claims
against Steakhouse Partners, Paragon Steakhouse Restaurants and Pacific Basin
Foods are stayed, and no party may take action to realize its pre-petition
claims, except pursuant to an order of the Bankruptcy Court.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The total amount of debt that is in default as of November 6, 2002 is $3,234,285
of which $1,100,000 is convertible debt and $2,134,285 is included in notes
payable.

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

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -- None

(b) Reports on Form 8-K -- None

17

SIGNATURES

Pursuant to the requirements 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.

STEAKHOUSE PARTNERS INC.

BY: /S/ HIRAM WOO
......................................

Hiram Woo
President, Secretary and Director
(Serving as principal executive
officer
and principal financial and
accounting officer)

Date: November 6, 2002

CERTIFICATION*

I, Hiram J. Woo, certify that:

1. I have reviewed this quarterly report Form 10-Q of Steakhouse Partners, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

18

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: November 6, 2002

/s/ HIRAM J. WOO
- ---------------------------------------------
Name: Hiram J. Woo
Title: President, Secretary and Director
(Serving as principal executive officer
and principal financial and
accounting officer)*

* On February 14, 2002, the Board of Directors of Steakhouse Partners, Inc.
eliminated the Chief Executive Officer position. Mr. Hiram J. Woo continues as
President of Steakhouse Partners, Inc. and is responsible for day-to-day
operations. Mr. Woo also serves as the Company's principal financial and
accounting officer; no officer holds the title of Chief Financial Officer.

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