STEAKHOUSE PARTNERS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

------------------------
FORM 10 -K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 25, 2001

Commission File Number: 000-23739

STEAKHOUSE PARTNERS, INC.
(Exact name of registrant as specified in its charter)

Delaware 94-3248672
(State of Incorporation) (I.R.S. Employer I.D. Number)

10200 Willow Creek Road, San Diego, California 92131
(Address of principal executive offices and Zip Code)

(858) 689-2333
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock.

Indicate by check mark whether the Registrant (1) has 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

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and no disclosure will 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-K
or any amendment to this Form 10-K: /X/

Registrant's revenues for its most recent fiscal year (ended December 25, 2001):
$114,491,013.

Aggregate market value of voting stock held by non-affiliates: $692,177.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
3,356,564 common shares were outstanding as of August 27, 2002.

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

Documents Incorporated by Reference:
Part III -- Proxy Statement to be issued in conjunction with Registrant's Annual
Stockholders' Meeting.

The index to exhibits is located on page 22.

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STEAKHOUSE PARTNERS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 25, 2001

TABLE OF CONTENTS

Item PAGE
PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 9
Item 3. Legal Proceedings................................. 10
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 10

PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..................... 11
Item 6. Selected Financial Data........................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 13
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk..................................... 18
Item 8. Financial Statements and Supplementary Data....... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 18

PART III
Item 10. Directors, Executive Officers of the Registrant... 19
Item 11. Executive Compensation............................ 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 19
Item 13. Certain Relationships and Related Transactions.... 19

PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 19

Signatures.................................................. 21

Section 302 Certification................................... 22

(i)

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

This Annual Report on Form 10-K and the documents incorporated herein by
reference contain 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
Annual Report on Form 10-K are forward looking. In particular, the statements
herein regarding industry prospects and future results of operations or
financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations.

BACKGROUND

Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us" and
"our"), currently operates 63 full-service steakhouse restaurants located in
eleven 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 $23.00 (including alcoholic
beverages) and it currently serves over 6.8 million meals annually. The Company
operates principally under the brand names of Hungry Hunter's, Hunter's
Steakhouse, Mountain Jack's and Carvers. Company 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 (see Notes 8 and 10 to the accompanying Consolidated Financial
Statements). Pacific Basin Foods, the other wholly owned subsidiary of
Steakhouse Partners, has not filed and remains outside of the bankruptcy code.

Steakhouse Partners and Paragon have and will continue to manage their
properties and operate their business 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 the bankruptcy plan in October 2002, and the
reorganization will be complete by the end of 2002.

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

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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 accompanying Consolidated Financial Statements have been prepared on a going
concern basis, which contemplates the continuation of operations, realization of
assets, and liquidation of liabilities in the ordinary course of business.
However, as a result of the bankruptcy filings, such realization of certain of
the Company's assets and liquidation of certain of the Company's liabilities are
subject to significant uncertainty. Furthermore, a plan of reorganization could
materially change the amounts and classifications reported in the Consolidated
Financial Statements, which do not give effect to any adjustments to the
carrying value or classification of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. See Note 3 to the
Consolidated Financial Statements included in this report.

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. See Note 2 to the accompanying Consolidated Financial Statements.

OUR BUSINESS BACKGROUND

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 step-up steakhouses, Carvers.

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 18.0% 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

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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 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.

MARKETING

We rely principally on our commitment to customer service and excellent
price-value relationship to attract and retain customers. Accordingly, we focus
our resources on seeking to provide customers with high-quality and attentive
service, value and an exciting and vibrant atmosphere.

Our marketing efforts consist of local media advertising and couponing. Local
advertising and couponing consists of bulk mailers, freestanding newspaper
inserts and targeted direct mailers. We have also successfully offered discounts
to encourage more people to try our restaurants, as well as to

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increase weekday customer counts. We also evaluate local image advertising
opportunities and are utilizing spot radio strategies in affordable markets.

To promote local community awareness, each restaurant manager is encouraged to
become a part of the local community. Many restaurants host meetings with
community leaders to solicit local input about the restaurants' potential
community participation.

Once we begin to grow, our plan for each new restaurant will be to conduct a
pre-opening awareness program beginning approximately two to three weeks prior
to, and ending four to six weeks after, the opening of a restaurant. A given
program typically would include special promotions, site signs, sponsorship of a
fund-raising event for a local charity to establish ties to local community
leaders and increase awareness of the new restaurant, and pre-opening trial
operations, to which the family and friends of new employees would be invited.

RESTAURANT OPERATIONS AND MANAGEMENT

We maintain quality and consistency in our restaurants through the careful
hiring, training and supervision of personnel and the establishment of standards
relating to food and beverage preparation, maintenance of facilities and conduct
of personnel. To achieve our service goals, each service employee completes a
training program, which teaches employees to provide the level of quality
service that encourages guests to return and request the same server on
subsequent visits.

We maintain financial and accounting controls for each of our restaurants
through the use of centralized accounting and management information systems.
All levels of our management participate in the ongoing process of strategic and
financial planning and our systems are continuously refined to allow management
to compare actual results with budgets and projections.

We also utilize management information systems to allow timely information
analysis and response. Our computerized point-of-sale (POS) data management
system and related telecommunication equipment permits daily polling of
restaurant operations and rapid collection of sales data and cash management
information. Transaction level data is electronically transferred from each
restaurant location via POS systems on a daily basis. By consolidating
individual restaurant's sales, purchasing, payroll, operating expenses, guest
related statistics and other data, we can regularly monitor restaurant
operations. Management uses real-time information and control systems to reduce
labor costs, to maintain constant surveillance of inventory usage and to analyze
various aspects of restaurant operations including ideal food costs, sales mix,
labor minutes per meal, promotional programs, restaurant costs and general
marketing data.

The management team for a typical steakhouse restaurant generally consists of
one general manager, one or two assistant managers and a kitchen manager. Each
restaurant also employs a staff consisting of approximately 40 to 70 hourly
employees, many of whom work part-time. Typically, each general manager reports
directly to a District Leader, who each supervise eight to 12 restaurants, and
who, in turn, reports to our vice president of operations. Restaurant managers
complete an extensive training program during which they are instructed in areas
including food quality and preparation, customer satisfaction, alcoholic
beverage service, governmental regulations compliance, liquor liability
management and employee relations. Restaurant managers are also provided with an
operations manual relating to food and beverage preparation, all areas of
restaurant management and compliance with governmental regulations. Working in
concert with the individual restaurant managers, our senior management defines
operations and performance objectives for each restaurant and monitor
implementation. Senior management regularly visits various of our restaurants
and meet with the respective management teams to ensure compliance with our
strategies and standards of quality in all respects of restaurant operations and
personnel development.

Each of our new restaurant employees participates in a training program during
which the employee works under the close supervision of a restaurant manager, or
an experienced key employee. Management continuously solicits employee feedback
concerning restaurant operations and strives to be responsive to the employees'
concerns.

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PURCHASING

We purchase a portion of our food and beverage products from our wholly owned
subsidiary, Pacific Basin Foods, at below market rates. Food and supplies are
shipped directly to the restaurants, although invoices for purchases are sent to
us for payment. Our emphasis on high-quality food requires frequent deliveries
of fresh food supplies.

PACIFIC BASIN FOODS

Our Pacific Basin Foods subsidiary is a wholesale food distributor serving the
restaurant industry. Its principal clients are Paragon and several small
regional chains. Pacific Basin Foods has a warehouse in San Diego, California,
from which it services its west coast customers. In addition to the sale and
distribution of food supplies to restaurants, Pacific Basin Foods provides
furniture, fixtures and equipment to restaurants.

COMPETITION

Competition in the restaurant industry is increasingly intense. We compete with
other mid-priced, full service restaurants, which are not necessarily steakhouse
restaurants, primarily on the basis of quality of food and service, ambiance,
location and price-value relationship. We also compete with a number of other
steakhouse restaurants within our markets, including both locally owned
restaurants and regional or national chains. We believe that the quality of our
service, our well-regarded brands, attractive price-value relationship and
quality of food will enable us to differentiate ourselves from our competitors.
We also compete with other restaurants and retail establishments for sites. Many
of our competitors are well established in the mid-priced dining segment and
certain competitors have substantially greater financial, marketing and other
resources than us. We believe that our ability to compete effectively will
continue to depend upon our ability to offer high-quality, mid-priced food in a
full service, distinctive dining environment.

GOVERNMENT REGULATION

Our restaurants are subject to numerous federal, state and local laws affecting
health, sanitation and safety standards, as well as to state and local licensing
regulation of the sale of alcoholic beverages. Each restaurant currently has
appropriate licenses from regulatory authorities allowing it to sell liquor,
beer and wine, and each restaurant has food service licenses from local health
authorities. We are required to renew these licenses annually. In addition,
these licenses may be suspended or revoked at any time for cause, including
violation by us or our employees of any law or regulation pertaining to
alcoholic beverage control, such as those regulating the minimum age of patrons
or employees, advertising, wholesale purchasing and inventory control. Our
failure to obtain or retain liquor or food service licenses would likely have a
material adverse effect on our operations. In order to reduce this risk, each of
our restaurants is expected to be operated in accordance with standardized
procedures designed to assure compliance with all applicable codes and
regulations. Difficulties in obtaining or failures to obtain the required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area. In certain states, there are a set number of alcoholic
beverage licenses available, but there is an active market through which new
licenses can be obtained at the then-applicable market price. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect our ability to obtain such a license elsewhere.

We are subject in certain states to "dram-shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of our
comprehensive general liability insurance.

Our restaurant operations are also subject to federal and state minimum wage
laws governing such matters as working conditions, overtime and tip credits and
other employee matters. Significant numbers of our food service and preparation
personnel are paid at rates related to the federal minimum wage.
Government-imposed increases in minimum wages, paid leaves of absence and

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mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of our restaurants.

The development and construction of additional restaurants will be subject to
compliance with applicable zoning, land use and environmental regulations.
Management is not aware of any environmental regulations that have had a
material effect on us or our restaurants to date.

The Federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. We intend to ensure
that our restaurants will be in full compliance with the Disabilities Act, and
we review plans and specifications and make periodic inspections to ensure
continued compliance. We believe that we are in substantial compliance with all
current applicable regulations relating to restaurant accommodations for the
disabled. We do not anticipate that such compliance will require us to expend
substantial funds.

EMPLOYEES

At December 25, 2001, we employed approximately 2,945 individuals, of which 295
occupy executive, managerial or clerical positions, and 2,650 hold
non-managerial restaurant-related positions. None of our employees is covered by
a collective bargaining agreement. We consider our relations with our employees
to be good and have not experienced any interruption of operations due to labor
disputes.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

The following risk factors and other information included in this Annual Report
should be carefully considered. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.

IF WE ARE NOT SUCCESSFUL IN OUR REORGANIZATION PLANS, OUR BUSINESS OPERATIONS
COULD BE MATERIALLY ADVERSELY AFFECTED.

On February 15, 2002 Steakhouse Partners, Inc and on February 19, 2002 its
wholly owned subsidiary Paragon Steakhouse Restaurants, Inc. filed for federal
reorganization protection under Chapter 11. Our reorganization plan intends to
reject or sell under performing units, marginal units or units that
geographically are isolated. The proceeds generated from the sales of those
units are intended to provide the down payment to our creditors. The balance due
our creditors will be paid over time from the cash flow of the core units.

If we are not successful in selling certain units and generating the proceeds
required to satisfy our creditors or our plan of reorganization is not approved,
this will seriously affect our ability to emerge from bankruptcy with our core
restaurants intact or at all.

IF WE ARE NOT SUCCESSFUL IN OUR EXPANSION PLANS, OUR BUSINESS OPERATIONS AND OUR
ABILITY TO CONTINUE AS A GOING CONCERN COULD BE MATERIALLY ADVERSELY AFFECTED.

Long term we intend to expand our operations through the construction of new
restaurant properties. Our ability to open additional restaurants will depend
upon our ability to identify and acquire available new construction sites or
restaurant conversions at favorable prices. We must also have sufficient
available funds from operations or otherwise to support this expansion.

If we cannot successfully construct new restaurant properties or convert
acquired restaurant properties to our established brands within projected
budgets or time periods, our business and our ability to continue as a going
concern will be adversely affected. If the Company is unable to restructure its
debt under Chapter 11 of the Bankruptcy Code, it will be unable to finance its
expansion plans or continue to operate its business. Even with a successful
reorganization and sufficient funds, plans to expand the Company's business may
fail due to construction delays or cost overruns, which could be caused by
numerous factors, such as shortages of materials and skilled labor, labor
disputes, weather interference, environmental problems, and construction or
zoning problems.

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Our growth strategy may also strain our management and other resources. To
manage our growth, we must:

* maintain a high level of quality and service at our existing and future
restaurants;

* enhance our operational, financial and management expertise; and

* hire and train experienced and dedicated operating personnel.

WE HAVE INCURRED LOSSES FROM INCEPTION AND MAY NEVER GENERATE SUBSTANTIAL
PROFITS.

We were organized in May 1996 and have incurred losses from inception. We may
never generate profits. We incurred a net loss of approximately $621,000 for the
fiscal year ended December 26, 2000; a net loss of approximately $3.9 million
for the fiscal year ended December 26, 1999 and a net loss of approximately $3.0
million for the fiscal year ended December 29, 1998. As of December 25, 2001 we
had an accumulated deficit of approximately $14,373,109 million.

In order to operate profitably, we must:

* further improve operating margins at our existing restaurants while
investing in the units' infrastructure;

* successfully drive top line sales at each of our units; and

* capitalize on the general and administrative cost savings implemented during
the last fiscal year.

THE COMPANY RECEIVED A NOTICE FROM THE NASDAQ SMALL CAP MARKET STATING THAT IT
HAS BEEN DELISTED FROM THE NASDAQ SMALL CAP MARKET.

In October 2001, we received a notice from The Nasdaq Small Cap Market
indicating that we failed to meet Nasdaq's $2.5 million in net tangible assets
standard for continued listing on The Nasdaq Small Cap Market. A written hearing
was scheduled with Nasdaq to review that determination. At the hearing a plan
was presented demonstrating how the Company intended to regain and sustain
compliance with the $2.5 million net tangible asset standard. On December 18,
2001 the Company received notice that the Panel decided not to continue to list
the Company on Nasdaq Small Cap Market. Subject to this decision the Company was
delisted on December 19, 2001.

FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
OPERATING PERFORMANCE.

Our restaurant operations are subject to certain federal and state laws and
government regulations:

* National and local health and sanitation laws and regulations;

* National and local employment and safety laws and regulations; and

* Local zoning, building code and land-use regulations.

We cannot assure you that we will be able to fully comply with all such laws and
regulations. Failure to comply with any of these laws or regulations, or the
loss of our liquor licenses, would have a material adverse effect on our
business. In addition, each of our restaurants must obtain licenses from
regulatory authorities allowing it to sell liquor, beer and wine, and each
restaurant must obtain a food service license from local health authorities.
Each restaurant's liquor license must be renewed annually and may be revoked at
any time for cause. Liquor accounts for a large percentage of our sales and the
loss of this traffic would materially adversely impact our revenues.

We may be subject to "dram-shop" liability, which generally provides a person
injured by an intoxicated person with the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.

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ADVERSE ECONOMIC CONDITIONS IN A LIMITED NUMBER OF STATES COULD HAVE A NEGATIVE
EFFECT ON OUR BUSINESS.

Our restaurants are located in 11 states, predominantly on the West Coast and in
the Great Lakes region. Adverse economic conditions in these regions could have
an adverse effect on our financial results. Each of our restaurants represents a
significant investment and long-term commitment, which limits our ability to
respond quickly or effectively to changes in local competitive conditions or
other changes that could affect our operations.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS WE WILL NOT BE ABLE
TO INCREASE REVENUES OR GENERATE PROFITS.

Our ability to increase revenues and operate profitably is directly related to
our ability to compete effectively with our competitors. Many of our competitors
have been in existence longer than us, have a more established market presence
and have substantially greater financial, marketing and other resources than us.

Key competitive factors include:

* the quality and value of the food products offered;

* the quality of service;

* the price of the food products offered;

* the restaurant locations; and

* the ambiance of facilities.

We compete with other steakhouse restaurants specifically and with all other
restaurants in general. We compete with national and regional chains, as well as
individually owned restaurants. The restaurant industry has few non-economic
barriers to entry. As our competitors expand operations, competition from
steakhouse restaurants with concepts similar to ours can be expected to
intensify. We cannot assure you that third parties will not be able to
successfully imitate and implement our concepts. Such increased competition
could adversely affect our revenues.

UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR POTENTIAL PROFITABILITY.

Our potential profitability is highly sensitive to increases in food, labor and
other operating costs, as well as the costs of the reorganization process. Our
dependence on frequent deliveries of fresh food supplies means that shortages or
interruptions in supply could materially and adversely affect our operations. In
addition, unfavorable trends or developments concerning the following factors
could adversely affect our results:

* inflation, food, labor and employee benefit costs; and

* rent increases resulting from rent escalation provisions in our leases.

We may be unable to anticipate or react to changing prices. If we cannot modify
our purchase practices or quickly or readily pass on increased costs to
customers, our business could be materially affected.

BECAUSE IT MAY BE DIFFICULT TO EFFECT A CHANGE IN CONTROL WITHOUT CURRENT
MANAGEMENT'S CONSENT, A POTENTIAL SUITOR WHO OTHERWISE MIGHT BE WILLING TO PAY A
PREMIUM FOR ACQUIRING US MAY DECIDE NOT TO ATTEMPT AN ACQUISITION OF STEAKHOUSE
PARTNERS.

Our executive officers, directors, and their affiliates beneficially own 914,462
shares of our common stock. This represents approximately 27.0% of the common
stock issued and outstanding. Our executive officers also collectively own
1,000,000 shares of Series B Preferred Stock and 1,750,000 shares of Series C
Preferred Stock, each of which carries voting rights with our common stock on a
one vote per share basis. Such concentration of ownership and voting power may
have the effect of delaying, deferring or preventing a change in control of
Steakhouse Partners.

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In addition, the board of directors has the authority to issue up to 2,250,000
additional shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of such stock
without further shareholder approval. The rights of the holders of common stock
will be subjected to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. Issuance of
additional shares of preferred stock could have the effect of delaying,
deferring or preventing a change in control of Steakhouse Partners.

SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEIR STOCK OR MAY HAVE TO SELL AT PRICES
SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.

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. The
formulation and implementation of a plan of reorganization could take a
significant period of time, or may be unsuccessful.

The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to our filing for
reorganization, variations in our quarterly operating results, general
conditions in the restaurant industry or the general economy, and other factors.
In addition, the stock market is subject to price and volume fluctuations
affecting the market price for public companies generally, or within broad
industry groups, which fluctuations may be unrelated to the operating results or
other circumstances of a particular company. Such fluctuations may adversely
affect the liquidity of our common stock, as well as the price that holders may
achieve for their shares upon any future sale. Furthermore, as a result of the
delisting of the Company from The Nasdaq Small Cap Market, the trading market
for the Company's stock has been materially adversely affected.

IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS IN A TIMELY MANNER OR ON ACCEPTABLE
TERMS OR ARE UNABLE TO CONFIRM A PLAN OF REORGANIZATION, WE MAY HAVE TO CURTAIL
OR SUSPEND CERTAIN OR ALL OF OUR OPERATIONS, WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS.

We currently do not have any firm commitments for additional financing. We
cannot be certain that additional financing will be available when and to the
extent required or that, if available, it will be on acceptable terms. If we are
unable to obtain additional funds in a timely manner or on acceptable terms to
fund a plan of reorganization, we may have to curtail or suspend the expansion
of our operations and possibly terminate existing operations, which could lead
to overall lower revenues and adversely affect our financial results and
prospects. If adequate funds are not available on acceptable terms, we may not
be able to fund our expansion or respond to competitive pressures which could
lead to the Company's inability to continue as a going concern.

ITEM 2. DESCRIPTION OF PROPERTY.

As of December 25, 2001, the Company leased all of its restaurant locations.
Lease terms are generally 10 to 35 years, with renewal options. All of the
Company's leases provide for a minimum annual rent and some leases provide for
additional rent based on sales volume at the particular location over specified
minimum levels. Generally, the leases are net leases that require the Company to
pay the costs of insurance, taxes and maintenance. The Company intends to
continue to purchase restaurant locations where cost-effective. On July 19,
2000, the Company completed a sale and leaseback transaction with PS Realty
Partners, LP with respect to 19 of its properties, yielding net proceeds of
approximately $22 million. The Company utilized a majority of these net proceeds
to pay down a $20 million mortgage debt.

RESTAURANT LOCATIONS AS OF AUGUST 28, 2002

The following table sets forth the location of our existing Hungry Hunter's,
Hunter's Steakhouse, Mountain Jack's, Carvers restaurants and our unique formal
restaurants:

9

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

ARIZONA Oakland INDIANA NORTH CAROLINA
Phoenix Oceanside Indianapolis Raleigh
Tempe Pleasanton Lafayette
Yuma S. San Francisco OHIO
S. San Jose MICHIGAN Canton
CALIFORNIA Sacramento Auburn Hills Elyria
Anaheim San Diego Clinton Township Independence
Bakersfield Santa Rosa Dearborn Heights North Olmstead
Concord Temecula Grandville
Fairfield Thousand Oaks Kentwood WISCONSIN
Fremont Ventura Lansing Madison
Milpitas Taylor
Modesto ILLINOIS Troy
Springfield Portage
Traverse City

CARVERS LOCATIONS: Farmington Hills, Michigan UNIQUE FORMAL LOCATIONS:
Glendale, Arizona Beachwood, Ohio Folson, California
Rancho Bernardo, California Centerville, Ohio Rancho Cordova, California
Roseville, California Sandy, Utah Riverside, California
Greenwood, Indiana South Bend, Indiana
Williamsburg, Virginia

The leases for the above locations have initial terms generally ranging from 10
to 35 years and, in certain instances, provide for renewal options ranging from
five to 25 years. Certain of these leases require additional contingent rental
payments by us if sales volumes at the related restaurants exceed specified
levels. Most of these lease agreements require payments of taxes, insurance and
maintenance costs by us.

The Company's wholly owned subsidiary, Pacific Basin Foods, Inc., has a
warehouse located at 9586 Distribution Ave., San Diego, CA 92131. The Company's
executive offices are located at 10200 Willow Creek Road, San Diego, California
92131. The telephone number is (858) 689-2333. The Company believes that there
is sufficient office space available at favorable leasing terms in the San
Diego, California metropolitan area to satisfy the additional needs of the
Company that may result from future expansion.

ITEM 3. LEGAL PROCEEDINGS

During June 2002, Mr. Richard Lee, the Company's former Chief Executive Officer,
filed a claim with the Bankruptcy Court against the Company for approximately
$2,000,000, alleging, among other things, unpaid consulting fees and wrongful
termination. The Company believes this claim does not have merit and will
vigorously defend such position.

In the opinion of management, other than the 2 bankruptcy filings described
above, there are no legal proceedings, which will have a material adverse effect
on the financial position or operating results of the Company. See Part I Item
1. Description of Business--Bankruptcy Filing.

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

No matters were submitted for shareholder approval during the fourth quarter of
the fiscal year covered by this Report.

10

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

MARKET INFORMATION

The Common Stock of the Company has been trading on the NASDAQ Small Cap Market
under the symbol "SIZL" since February 27, 1998, the date of the Company's
initial public offering to December 19, 2001 the day it was delisted. It is
currently traded over-the-counter on the Pink Sheets under the symbol
"SIZLQ.PK".

The following table sets forth the range of high and low closing prices for the
Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:

HOLDERS

As of February 15, 2002 there were approximately 660 record holders of the
Company's Common Stock.

DIVIDENDS

The Company has not paid any cash or other dividends on its Common Stock since
its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the reorganization plan.

RECENT SALES OF UNREGISTERED SECURITIES

The Company did not issue within the period covered by this Report any
securities which were not registered pursuant to the Securities Act of 1933, as
amended.

11

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for the five years ended December 25,
2001 has been derived from the Company's Consolidated Financial Statements. This
data should be read in conjunction with Consolidated Financial Statements and
related Notes for the year ended December 25, 2001, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:

- ------------------
* Steakhouse Partners, Inc. (aka Galveston Steakhouse Restuarants) acquired
Paragon Steakhouse Restuarants in December, 1998.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K are forward looking. In particular, the
statements herein regarding industry prospects, future results of operations,
financial position or reorganization plans 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. The following discussion and the section entitled
"Business -- Additional Factors That May Affect Future Results" describes some,
but not all, of the factors that could cause these differences.

The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the year
ended December 25, 2001 included in this Annual Report. 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

As of December 25, 2001 the Company operated 63 full-service steakhouse
restaurants located in 11 states. The Company operates under the brand names of
Carvers, Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's, Mountain
Jack's Steakhouse, Red Oak, Texas Loosey's and Galveston's. On December 21,
1998, the Company acquired Paragon Steakhouse Restaurants, Inc. ("Paragon"),
which owned 78 steakhouses, of which five were closed, and Pacific Basin Foods,
Inc., a restaurant food distribution company. Prior to the acquisition of
Paragon, the Company owned and operated four restaurants. On February 28, 2002
the Company rejected nine (9) leases as part of the bankruptcy process and the
reorganization plan. As of June 2002, the Company had rejected or sold thirteen
(13) units. See notes 2 and 13 to the accompanying Consolidated Financial
Statements.

The Company believes that its restaurants are well positioned in a high quality,
moderately priced segment of the restaurant industry. With the acquisition of
Paragon's Carvers restaurants, the Company has entered the upscale restaurant
market specializing in complete steak, chop, prime rib and seafood meals. Our
growth strategy is based on internal growth and growth through acquisition.
Internal growth focuses on improvement in same store sales and construction of
new restaurant properties. Acquisition growth focuses on conversion of acquired
restaurant properties to our steakhouse brand names and the targeted acquisition
of one or more large steakhouse chains. The Company plans to emerge from its
reorganization prior to focusing on any acquisitions.

To the extent we build steakhouses in new locations there is likely to be a time
lag between when the expenses of the startup are incurred and when the newly
constructed steakhouses are opened and begin to generate revenues, which time
lag could affect quarter-to-quarter comparisons and results.

Since acquiring Paragon in December 1998, one of the areas the Company has
focused on is reducing the operational, general and administrative expenses.
Prior to the acquisition, the general and administrative (including divisional)
expenses related to the restaurants operated by Paragon were approximately $9
million annually. During the first fiscal quarter of 1999, the Company
identified areas in which general and administrative expenses could be reduced
and the Company began immediately making the necessary changes to reduce these
expenses. During the second fiscal quarter of 1999, the Company began making the
necessary operational changes to improve quality, customer satisfaction and
reduce cost. The Company realized the full effect of the operational
improvements in the fourth fiscal quarter of 1999. The results of the Company
continued to improve until beginning second quarter 2001 when the economic
recession began to take affect on all of the units top line revenue. The decline

13

in revenue continued through the third period 2001 and was dramatically
accelerated with the events of September 11th.

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 weakest, 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 (3) business units, which have separate management and reporting
infrastructures that offer different products and services. The business units
were aggregated into two reportable segments, restaurant services and food
service distribution, since the long-term financial performance of these
reportable segments is affected by similar economic conditions. The restaurant
services segment consists of two business units -- Paragon Steakhouse
Restaurants, Inc. and Steakhouse Partners, Inc. -- 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.

RESULTS OF OPERATIONS

52 Weeks Ended December 25, 2001 Compared to the 52 Weeks Ended December 26,
2000

Revenues for the year 52 weeks ended December 25, 2001 decreased $17,144,791 or
13.0% from $131,635,804 for the year ended December 26, 2000 to $114,491,013 for
the same period in 2001. Net revenue for Paragon Steakhouse Restaurants
decreased $12,979,327 or 10.6% from $122,710,445 for the fifty-two week period
ended December 26, 2000 to $109,731,118 for the same period in 2001. The
decrease is substantially attributable to the economic recession compounded by
the events of September 11th. Pacific Basin Foods revenues for the fifty-two
week period ended December 25, 2001 decreased $4,211,001 or 52.5% from
$8,017,605 for the fifty-two week period ended December 26, 2000 to $3,806,604
for the same period in 2001. The decrease is substantially attributable to the
loss of outside customers due to economic conditions and cash constraints.
Revenue from the Company's only remaining original restaurant (Galveston)
increased $45,537 or 5.0% from $907,754 for the fifty-two week period ended
December 26, 2000 to $953,291 for the same period in 2001.

Food and beverage costs for the fifty-two week period ended December 25, 2001
decreased $8,225,256 or 16.4% from $50,030,402 for the fifty-two week period
ended December 26, 2000 to $41,805,146 for the same period in 2001. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 34.8% for the fifty-two week period ended December 25, 2001 compared to
34.9% for the same period in 2000. Even with the reduced volume at the unit
level the Company was able to hold food costs consistent with the previous year
without sacrificing quality or quantity. The food and beverage costs of
Paragon's food distribution subsidiary, Pacific Basin Foods, Inc., were 87.3% of
the food distribution revenue for the fifty-two week period ended December 25,
2001 compared to 86.2% for the same period in 2000. The total food and beverage
cost which includes the restaurants and the food distribution subsidiaries as a
percentage of total revenue was 36.5% for the fifty-two week period ended
December 25, 2001 compared to 38.6% for the same period in 2000. The major
reason for this decrease is the reduction of Pacific Basin Foods outside
customers, which previously absorbed a larger percentage of the cost.

Payroll and payroll related costs for the fifty-two week period ended December
25, 2001 decreased $3,148,169 or 7.6% from $41,253,070 for the fifty-two week
period ended December 26, 2000 to $38,104,901 for the same period in 2001. The
total payroll and payroll related costs which includes the

14

restaurants and the food distribution subsidiaries as a percentage of revenues
were 33.3% for the fifty-two week period ended December 25, 2001 compared to
31.3% for the same period in 2000. The major reason for this increase as a
percentage relationship to revenue is the decrease in the restaurants net
revenue was slightly greater than the minimum staffing that is required per unit
to maintain guest services and a positive dining experience. The food
distribution subsidiary's payroll and payroll related costs typically were about
7.8% for the fifty-two week period ended December 25, 2001 versus 7.6% for the
same period in 2000. Payroll and payroll related costs for the restaurants only
were 33.2% of restaurant revenues for the fifty-two week period ended December
25, 2001 compared to 32.0% for the fifty-two week period ended December 26,
2000.

Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, rent, insurance and other occupancy costs. A substantial
portion of these expenses is fixed or indirectly variable. Direct operating
costs for the fifty-two week period ended December 25, 2001 increased $1,062,756
or 4.0% from $26,658,092 for the fifty-two week period ended December 26, 2000
to $27,720,848 for the same period in 2001. These costs as a percentage of
restaurant revenues were 25.0% for the fifty-two week period ended December 25,
2001 compared to 21.1% for the same period in 2000. Direct operating costs for
the restaurants were 24.2% of restaurant revenue for the fifty-two week period
ended December 25, 2001 compared to 20.5% for the fifty-two week period ended
December 26, 2000. The difference is primarily due to an increase in insurance
reserves required for current and estimated future liabilities ($464,107),
versus a self-insurance reserve reduction ($1,034,135) in 2000.

Reserve for impairment of property, plant, and equipment: During the year ended
December 31, 2001 events and circumstances in connection with continuing
operating losses of certain under-performing restaurants indicated that an
estimated $6,581,527 of property, plant and equipment of the Company were
impaired. The estimate of undiscounted cash flows indicates that such carrying
amounts are not expected to be recovered. We have recorded the current year's
impairment loss as a reserve as the amount reflects and estimated impairment
loss. We intend to finalize the actual impairment loss during the next fiscal
year as most (if not all) of these properties have/will be addressed in the
bankruptcy process.

Depreciation and amortization for the fifty-two week period ended December 25,
2001 decreased $98,638 or 2.5% from $3,927,687 for the fifty-two week period
ended December 26, 2000 to $3,829,049 for the same period in 2001.

General and administrative expenses for the fifty-two week period ended December
25, 2001 increased $960,967 or 11.6% from $8,257,405 for the fifty-two week
period ended December 26, 2000 to $9,218,372 for the same period in 2001.
General and Administrative expenses as a percentage of restaurant revenues was
8.3% for the fifty-two week period ended December 25, 2001 compared to 6.7% for
the same period in 2000. The principal reasons for this increase in expense are;
a reserve for expenses associated with a consulting agreement ($539,409);
adjusted officer compensation ($156,813); a reserve for consulting fees for
sale-leaseback ($175,000); a reserve for estimated payroll tax liability
relating to Richard M. Lee ($331,895); a reserve for sublease rent (bad debt)
for a unit rejected February 2002 ($93,357) and a reserve for writing-off
Pacific Basin Foods receivables ($228,753). The adjusted General and
administrative expense without these reserves and write-offs is $7,693,145 or
7.0% of restaurant revenues. This number was further reduced by the reduction in
work force implemented in conjunction with the reorganization.

Total other income and interest expense, net for the fifty-two week period ended
December 25, 2001 increased $1,693,822 or 80.4% from $2,105,751 for the
fifty-two week period ended December 26, 2000 to $3,799,573 for the same period
in 2001. The increase is principally due to a reserve for an officers' loan
($616,584) and a provision for an age discrimination settlement ($800,000). This
was partially offset by a reduction in interest expense ($884,854).

Net loss for the fifty-two week period ended December 25, 2001 increased
$16,095,300 from $621,444 for the fifty-two week ended December 26, 2000 to
$16,716,744 for the same period in 2001. The increase is principally due to the
impact on operations from the economic recession and the September 11th tragedy
that significantly decreased revenues at the restaurants and the distributing
company. Also

15

contributing to the increase were non-recurring expenses such as: asset
impairment reserves ($6,972,000) for certain under performing assets and
reserves for loans; fees; insurance; taxes and bad debt ($2,769,157).

Year Ended December 26, 2000 Compared to the Year Ended December 28, 1999

Revenues for the year ended December 26, 2000 decreased $36,164,769 or 21.6%
from $167,800,573 for the year ended December 28, 1999 to $131,635,804 for the
same period in 2000.

The decrease is substantially attributable to the sale or closure of 8 under
performing Paragon and Galveston restaurants and the loss of Pacific Basin
Foods' 2 largest external customers. This was partially offset by a 4.1%
increase in Paragon's same store sales from the comparable fifty-two week period
in 1999. Pacific Basin Foods revenues for the fifty-two week period ended
December 26, 2000 decreased $30,227,647 or 79.0% from $38,245,252 for the
fifty-two week period ended December 28, 1999 to $8,017,605 for the same period
in 2000. Revenue from the Company's original restaurants (Galveston) decreased
$1,585,713 or 63.6% from $2,493,467 for the fifty-two week period ended December
28, 1999 to $907,754 for the same period in 2000. The decrease was the result of
selling one restaurant, subleasing another and closing down a third pending its
sale. Net revenue for Paragon Steakhouse Restaurants increased 4.1% for the
fifty-two week period ended December 26, 2000 compared to the net revenue for
comparable restaurants for the same fifty-two week period ended December 28,
1999.

Food and beverage costs for the fifty-two week period ended December 26, 2000
decreased $29,897,943 or 37.4% from $79,928,345 for the fifty-two week period
ended December 28, 1999 to $50,030,402 for the same period in 2000. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 38.0% for the fifty-two week period ended December 26, 2000 compared to
47.6% for the same period in 1999. The factors for this improvement were
operating efficiencies, menu simplification and a small price increase partially
offset by higher beef costs. The food and beverage costs of Paragon's food
distribution subsidiary, Pacific Basin Foods, Inc., were 86.2% of the food
distribution revenue for the fifty-two week period ended December 26, 2000,
compared to 90.6% for the same period in 1999. The main reason for this
improvement was the replacement of larger less profitable external customers
with smaller, more profitable ones. The total food and beverage cost which
includes the restaurants and the food distribution subsidiaries as a percentage
of total revenue was 38.0% for the fifty-two week period ended December 26, 2000
compared to 47.6% for the same period in 1999. The major reason for this
reduction is the decrease in the food distribution subsidiary's business and its
proportionate effect on these numbers.

Payroll and payroll related costs for the fifty-two week period ended December
26, 2000 decreased $4,840,016 or 10.5% from $46,093,086 for the fifty-two week
period ended December 28, 1999 to $41,253,070 for the same period in 2000. The
total payroll and payroll related costs which includes the restaurants and the
food distribution subsidiaries as a percentage of revenues were 31.3% for the
fifty-two week period ended December 26, 2000 compared to 27.5% for the same
period in 1999. The major reason for this increase is the decrease in the food
distribution subsidiary's business coupled with the reduction in work force
expense and its proportionate effect on these numbers. The food distribution
subsidiary's payroll and payroll related costs typically ran about 5.4% for the
same period in 1999. Payroll and payroll related costs for the restaurants only
were 32.0% of restaurant revenues for the fifty-two week period ended December
26, 2000 compared to 33.3% for the fifty-two week period ended December 28,
1999. The decrease is principally due to the operational efficiencies and
improvements that management introduced in the second quarter of 1999 partially
offset by an increase in the minimum wage and higher non-recurring training
expenses in 2000.

Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, rent and other occupancy costs. A substantial portion of
these expenses is fixed or indirectly variable. Direct operating costs for the
fifty-two week period ended December 26, 2000 decreased $1,855,571 or 6.5% from
$28,513,663 for the fifty-two week period ended December 28, 1999 to $26,658,092
for the same period in 2000. These costs as a percentage of restaurant revenues
were 21.0% for the fifty-two week period ended December 26, 2000 compared to
22.0% for the same period in 1999. Direct operating costs for the restaurants
only

16

were 19.4% of restaurant revenue for the fifty-two week period ended December
26, 2000 compared to 20.4% for the fifty-two week period ended December 28,
1999. The decrease is primarily due to the cost reduction program and
elimination of excessive coupon usage implemented during the first half of 1999.
This was partially offset by higher utility costs especially in the California
units, the operating lease portion of the sale leaseback and investing more
dollars in the Company's guest relations program in the second half of the
period.

Depreciation and amortization for the fifty-two week period ended December 26,
2000 decreased $286,063 or 6.8% from $4,213,750 for the fifty-two week period
ended December 28, 1999 to $3,927,687 for the same period in 2000. The decrease
is principally due to the sale of one non-performing Texas Loosey's restaurant,
five non-performing Paragon steakhouse restaurants (of which one was already
closed), partially off set by adjusting Paragon's asset base to reflect the
purchase price paid by Steakhouse Partners and new asset life.

General and administrative expenses for the fifty-two week period ended December
26, 2000 decreased $108,137 or 1.3% from $8,365,542 for the fifty-two week
period ended December 28, 1999 to $8,257,405 for the same period in 2000.
General and administrative expenses as a percentage of restaurant revenues was
6.7% for the fifty-two week period ended December 26, 2000 compared to 6.5% for
the same period in 1999. The same percentage relationship to revenues is
principally due to non-recurring expenses associated with the acquisition of
Paragon not being incurred for the same period in 2000, as well as, the
reduction in force and other cost savings measures implemented by management in
the first half of 1999. These savings are partially offset by planned
investments in additional training programs and recruitment to develop and
improve the Company's District Leaders and General Managers, as well as,
additional consulting and management fees incurred for the reorganization of
Pacific Basin Foods and analysis of potential acquisition targets.

Total other income and interest expense, net for the fifty-two week period ended
December 26, 2000 decreased $2,465,088 or 53.9% from $4,570,839 for the
fifty-two week period ended December 28, 1999 to $2,105,751 for the same period
in 2000. The decrease is principally due to the Company's Paragon Subsidiary
selling two previously closed (prior to December, 1998) Mountain Jack's
Steakhouse in Warren and Harper Woods, MI for a gain of $1,274,702 plus the net
gain of selling three other locations. This was partially offset by the
forgiveness of $442,058 of advances to two officers.

Net loss for the fifty-two week period ended December 26, 2000 decreased
$3,273,595 or 84.0% from $3,895,039 for the fifty-two week ended December 28,
1999 to $621,444 for the same period in 2000. The decrease is principally due to
the operational improvements and labor efficiencies that management introduced
in the fifty-two week period ended December 28, 1999. Also contributing to the
decrease was non-recurring expenses associated with the acquisition of Paragon
not being incurred for the same period in 2000, as well as, the gain from
selling two (2) previously closed Mountain Jack's Steakhouse in Warren and
Harper Woods, MI. This was partially offset by an executive bonus accrual, the
major restructuring and non-recurring charges of $684,112 at Pacific Basin Foods
(warehouse consolidation and the reduction of 47% of its workforce) and
additional training and recruitment for Paragon Steakhouse.

LIQUIDITY AND CAPITAL RESOURCES

Our initial public offering was commenced on February 27, 1998. In addition to
the approximately $9.3 million raised by us in 1998 in equity and debt
financing, we raised $1.5 million under a promissory note in March 1999 and $4.0
million in private placement equity offerings in June and July 1999. A
significant portion of the equity and debt financing raised in 1998 was used to
pay the purchase price and related transaction costs associated with the
acquisition of Paragon and to a lesser degree to fund the operating loss.

The Company had a cash and cash equivalents balance of $1,109,501 at December
25, 2001. Our investing activities for the year ended December 25, 2001 used
approximately $0.6 million primarily for the capital purchase of furniture and
equipment for the steakhouses and our financing activities used almost $1.3
million for principal payment on debt and capital leases. See Notes 2, 3 and 13
to the accompanying Consolidated Financial Statements.

17

During the year ended December 31, 2001, the Company maintained a current ratio
of 0.30-to-1, which arose from a working capital deficit of $17,258,061. In
addition, as described above, the Company is in default with secured financing
as of December 31, 2001, and on February 15, 2002, the Company filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. In
addition to the sale of selected assets in the reorganization process under
Chapter 11, the Company may need additional sources of financing during the next
12 months to fund our reorganization plan. 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
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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 December 25, 2001, 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 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 8. FINANCIAL STATEMENTS.

The consolidated financial statements of Steakhouse Partners, Inc. and its
subsidiaries, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.

None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by this Item 10 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item 11 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item 12 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.

18

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item 13 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.

PART IV.

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.

The following exhibits are filed as part of this Report:

3.1* Restated Certificate of Incorporation of the Company.
3.2* Certificate of Correction to Restated Certificate of
Incorporation of the Company.
3.3* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.4* By-Laws of the Company.
3.5* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.6* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
10.1* Galveston Steakhouse Corp. Omnibus Stock Plan.
10.2* Richard M. Lee Stock Option Agreement.
10.3* Hiram J. Woo Stock Option Agreement.
10.4** Merger Agreement dated August 31, 1998 by and among the
Company, Tri-Core Steakhouse, Inc., Paragon Steakhouse
Restaurants, Inc. and Kyotaru Co. Ltd.
10.5*** First Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri-Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.6*** Second Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri- Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.7*** Third Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri-Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.8**** Form of Securities Purchase Agreement by and between the
Company and each of JMG Capital Partners, L.P., Triton
Capital Investments Limited, and Barry Lebin.
10.9**** Form of Registration Rights Agreement by and between the
Company and each of JMG Capital Partners, L.P., Triton
Capital Investments Limited, and Barry Lebin.
10.10**** Form of Debenture issued to JMG Capital Partners, L.P.,
Triton Capital Investments Ltd and Barry Lebin.
10.11**** Form of Note Purchase Agreement by and between the Company
and Talisman Capital Opportunity Fund Ltd.
10.12**** Form of Secured Exchangeable Note issued to Talisman Capital
Opportunity Fund Ltd.
10.13**** Form of Warrant issued to Talisman Capital Opportunity Fund
Ltd.
10.14**** Form of Collateral, Pledge and Security Agreement by and
between the Company and Talisman Capital Opportunity Fund
Ltd.
10.15**** Loan and Security Agreement dated December 21, 1998 by and
between Pacific Basin Foods, Inc. and The CIT Group/Credit
Finance, Inc.
10.16**** Security Agreement dated December 21, 1998 by and between
the Company and The CIT Group/Credit Finance, Inc.
10.17**** Secured Continuing Guaranty dated December 21, 1998 executed
by the Company.
10.18**** Security Agreement (Intellectual Property) dated December
21, 1998 by and between the Company and The CIT Group/Credit
Finance, Inc.
10.19**** Grant of Security Interest (Trademarks) dated December 21,
1998 executed by the Company.

19

10.20***** Purchase and Sale Agreement between Paragon Steakhouse
Restaurants, Inc. and HS Realty Partners, LP
21.1****** List of Subsidiaries of Steakhouse Partners, Inc.
23.1****** Consent of Singer Lewak Greenbaum & Goldstein LLP.

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

* Incorporated by reference from Registration Statement on
Form SB-2 (File #333-29093).
** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on September 14, 1998.
*** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on January 4, 1999.
**** Incorporated by reference from Registration Statement on
Form SB-2 (File #333-69137)
***** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on August 3, 2000.
****** Filed herewith

REPORTS ON FORM 8-K

1. Form 8-K dated February 21, 2002 reporting that Steakhouse Partners, Inc
and its wholly owned subsidiary; Paragon Steakhouse Restaurants filed a
voluntary petition for relief under chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy court for the Central
District of California. The 8-K also reported that the Company's Board of
Directors eliminated the Chief Executive Officer position, which had been
held by Mr. Richard M. Lee. Mr. Hiram J. Woo continues as President of the
Company and is responsible for the day-to-day operations. Finally, it was
reported that for personal reasons Mr. Mark K. Goudge resigned as a member
of the Company's Board of Directors.

20

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: September 25, 2002 STEAKHOUSE PARTNERS, INC.

/s/ HIRAM J. WOO
......................................
Hiram J. Woo
President, Secretary, Director
(Principal executive officer and
principal financial and accounting
officer)

In accordance with the requirements of the Exchange Act, this report is signed
below by the following persons on behalf of the Registrant in the capacities and
on the dates indicated.

21

CERTIFICATION*

I, Hiram J. Woo, certify that:

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

2. Based on my knowledge, this annual 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 annual
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.

Dated: September 25, 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.

22

EXHIBIT INDEX

23

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES

CONTENTS

DECEMBER 31, 2001

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of
Steakhouse Partners, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for each
of the three years in the period ended December 31, 2001. 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 auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of 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 Steakhouse Partners, Inc. and subsidiaries as of December 31, 2001
and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. During the
year ended December 31, 2001, the Company maintained a current ratio
of 0.30-to-1, which arose from a working capital deficit of
$17,258,061. In addition, the Company is in default with secured
financing as of December 31, 2001, and on February 15, 2002, the
Company filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code. Recovery of the Company's assets is
dependent upon future events, the outcome of which is indeterminable.
In addition, successful completion of the Company's transition,
ultimately, to the attainment of profitable operations is dependent
upon obtaining adequate financing to fulfill its development
activities and achieving a level of sales adequate to support the
Company's cost structure. These factors, among others, as discussed in
Note 3 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
June 24, 2002

F-1

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

ASSETS

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

F-2

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

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

F-3

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

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

F-4

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

F-5

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

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

F-6

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

F-7

STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999