UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of the earliest event reported): March 26, 1996
June 10, 1996
STERLING HOUSE CORPORATION
(Exact name of Registrant as specified in its charter)
1-14022
(Commission File Number)
Kansas 48-1097141
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
453 S. Webb Road, Suite 500
Wichita, Kansas 67207
(Address of principal executive offices, including zip code)
316-684-8300
(Registrant's telephone number, including area code)
<PAGE>
Sterling House Corporation
Index to Current Report 8-K/A
Item 2: Acquisition or Disposition of Assets 3
Item 7: Financial Statements, Pro Forma Financial 3
Information and Exhibits
Signatures 4
Sterling Franchise Acquisition Group Audit Report F-1
Sterling House Corporation Pro Forma Financial Information F-14
Exhibits F-19
2
<PAGE>
Item 2. Acquisition or Disposition of Assets
On April 8, 1996, Sterling House Corporation (the "Company") filed a Form
8-K to announce that Assisted Living Properties, Inc. ("ALP"), a wholly
owned subsidiary of the Company entered into an agreement on March 26,
1996, with Meditrust to lease three assisted living residences previously
owned by franchisees of the Company, as well as entering into sale/leaseback
transactions for two Company-owned properties located in Wichita, Kansas, and
Bethany, Oklahoma. Concurrently with this transaction the franchisees, Masters
Associates, L.L.C., the owner of the Derby, Kansas residence, Wellington
Partners, L.L.C., the owner of the Wellington, Kansas residence and Hays
Assisted Living, L.L.C., the owner of the Hays, Kansas residence, ("Sterling
Franchise Acquisition Group") contemporaneously sold all their assets
(principly consisting of their real property, building, improvements, furniture
and equipment) to Meditrust.
The required financial statements of Sterling Franchise Acquisition Group
and pro forma financial information are included in Item 7 of this amended
Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(a) Financial Statements of Business Acquired
1. Financial Statements of Sterling Franchise Acquisition
Group as of December 31, 1995 and 1994.
(b) Pro Forma Financial Information
1. Pro Forma Consolidated Financial Statements (Unaudited)
of Sterling House Corporation taking into consideration
the Acquisition by Sterling House Corporation of the
business and operations of residences previously owned by
Sterling Franchise Acquisition Group, through entering
into certain operating leases with Meditrust.
(c) Exhibits
Exhibit Exhibit
Number Description
23 Consent of Ernst & Young, LLP
3
<PAGE>
SIGNATURE
_________
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 hereunto duly authorized.
Sterling House Corporation
By: /s/Timothy J. Buchanan
---------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Dated: June 10, 1996
4
<PAGE>
Item 7(a)1
Sterling Franchise Acquisition Group
Financial Statements
Years ended December 31, 1995 and 1994
Contents
Report of Independent Auditors F-2
Audited Financial Statements
Combined Balance Sheets F-3,F-4
Combined Statements of Operations F-5
Combined Statements of Members' Equity F-6
Combined Statements of Cash Flows F-7
Notes to Combined Financial Statements F-8 through F-13
F-1
<PAGE>
Report of Independent Auditors
The Members
Sterling Franchise Acquisition Group
We have audited the accompanying combined balance sheets of Sterling
Franchise Acquisition Group as of December 31, 1995 and 1994, and the
related combined statements of operations, cash flows and members' equity
for each of the two years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Sterling
Franchise Acquisition Group at December 31, 1995 and 1994, and the combined
results of their operations and their cash flows for each of the two years
in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
June 5, 1996
Wichita, Kansas
F-2
<PAGE>
Sterling Franchise Acquisition Group
Combined Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1995 1994
Assets ______________________________
Current assets:
Cash $ 95,289 $ 173,796
Accounts receivable 9,733 1,470
Prepaid expenses and other 11,110 7,743
Prerental costs 17,985 32,674
Principal and interest funds in trust 126,107 63,230
---------- ---------
Total current assets 260,224 278,913
Property and equipment (Notes 2,3 and 4):
Land 236,164 236,164
Land improvements 234,555 220,134
Buildings 3,002,769 1,704,698
Furniture, fixtures and equipment 313,401 218,492
Construction in progress --- 158,677
--------- ----------
3,786,889 2,538,165
Less accumulated depreciation (174,480) (51,024)
--------- ---------
Net property and equipment 3,612,409 2,487,141
Other assets:
Organizational costs, net of
amortization of $3,336 ($1,247 in 1994) 7,254 8,312
Financing costs, net of accumulated amortization
of $58,884 ($11,175 in 1994) 227,072 124,194
Initial franchise fees, net of accumulated amortization
of $8,472 ($2,500 in 1994) 66,528 47,500
Project funds in trust 35,870 49,087
Bond reserve funds in trust 280,110 ---
---------- ----------
Total other assets 616,834 229,093
Total assets $4,489,467 $2,995,147
========== ==========
</TABLE>
F-3
<PAGE>
Sterling Franchise Acquisition Group
Combined Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1995 1994
____________________________
Liabilities and members' equity
Current liabilities:
Due to affiliate $ 68,500 $ 35,000
Advances from affiliates 126,850 105,528
Short-term borrowings (Note 2) 77,788 904,753
Accounts payable 18,309 157,394
Prepaid rent and refundable deposits 45,598 13,625
Accrued expenses:
Payroll and benefits 32,354 12,977
Interest 212,894 82,538
Other 36,588 6,631
Current maturities of bonds payable (Note 3) 197,500 62,500
--------- ---------
Total current liabilities 816,381 1,380,946
Bonds payable (Note 3) 3,395,000 1,104,250
Members' equity 278,086 509,951
--------- --------
Total liabilities and members' equity $4,489,467 $2,995,147
========== ===========
See accompanying notes.
</TABLE>
F-4
<PAGE>
Sterling Franchise Acquisition Group
Combined Statements of Operations
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
1995 1994
____________________________
Revenue:
Residence rental $1,077,817 $ 215,374
Service 40,151 5,232
----------- ---------
1,117,968 220,606
Operating expenses:
Residence operating expenses 790,834 277,455
Management fees 59,409 18,750
Royalty fees 33,385 6,479
Depreciation and amortization 236,094 103,063
---------- ---------
1,119,722 405,747
Operating loss (1,754) (185,141)
Other (income) expenses:
Interest expense (net of interest capitalized
during 1995 and 1994 of $77,717 and $49,041) 338,723 102,684
Interest income (19,384) (1,463)
Other 10,772 3,687
---------- -----------
Net loss $ (331,865) $ (290,049)
========== ===========
See accompanying notes.
</TABLE>
F-5
<PAGE>
Sterling Franchise Acquisition Group
Combined Statements of Members' Equity
<TABLE>
<CAPTION>
<S> <C>
Members'
Equity
Balance at December 31, 1993 $ 300,000
Capital contributions 500,000
Net loss (290,049)
---------
Balance at December 31, 1994 509,951
Capital contributions 100,000
Net loss (331,865)
---------
Balance at December 31, 1995 $ 278,086
=========
</TABLE>
F-6
<PAGE>
Sterling Franchise Acquisition Group
Combined Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
1995 1994
_____________________________
Operating activities:
Net loss $ (331,865) $ (290,049)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 236,094 103,063
Loss on sale of assets 477 ---
Net change in operating assets and liabilities:
Accounts receivable (8,263) (1,470)
Prepaid expenses and other (3,367) (7,743)
Prerental costs (42,127) (67,530)
Advances from affiliates 21,322 105,528
Accounts payable (20,104) 38,413
Prepaid rent and refundable deposits 31,973 13,625
Accrued expenses 179,690 102,146
--------- ----------
Net cash provided by (used in) operating activities 63,830 (4,017)
Investing activities:
Purchases of property and equipment (1,338,874) (2,258,881)
Proceeds from sale of property and equipment 4,140 ---
Payment of initial franchise fees (25,000) (25,000)
Expenditures for organization costs (1,032) (5,938)
---------- -----------
Net cash used in investing activities (1,360,766) (2,289,819)
---------- ----------
Financing activities:
Proceeds from issuance of bonds payable 2,521,250 1,176,750
Proceeds from issuance of short-term borrowings 1,254,687 1,838,091
Principal payments on short-term borrowings (2,081,652) (933,338)
Principal payments on bonds payable (95,500) (10,000)
Net change in bond reserve funds in trust (280,110) ---
Net change in project funds in trust 13,217 (49,087)
Net change in principal and interest funds in trust (62,877) (63,230)
Expenditures for financing costs (150,586) (114,559)
Proceeds from issuance of equity 100,000 500,000
--------- ---------
Net cash provided by financing activities 1,218,429 2,344,627
Net increase (decrease) in cash (78,507) 50,791
Cash at beginning of period 173,796 123,005
---------- ----------
Cash at end of period $ 95,289 $ 173,796
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest 208,367 20,146
Supplemental schedule of noncash investing and financing activities:
During 1995 and 1994 the Company purchased $33,500 and $153,981 in property and
equipment through increases in accounts payable and due to affiliate balances (Note 4),
respectively.
</TABLE>
F-7
<PAGE>
Sterling Franchise Acquisition Group
Notes to Combined Financial Statements
December 31, 1995 and 1994
1. Significant Accounting Policies
Basis of Presentation
The accompanying combined financial statements include the historic assets,
liabilities and operations associated with the entities listed below. The
combined entities are collectively referred to as Sterling Franchise
Acquisition Group (SFAG), and all such entities have ownership and
management interests in common. On March 26, 1996, Assisted Living
Properties, Inc., a wholly owned subsidiary of Sterling House Corporation
acquired, through certain operating lease transactions, the operations of
SFAG.
Information relative to the entities included in the combined financial
statements is as follows as of December 31, 1995:
Entity Legal Form of Entity
_____________________________________________________________________
Masters Associates, L.L.C. (Derby) Limited liability company
Hays Assisted Living, L.L.C. (Hays) Limited liability company
Wellington Partners, L.L.C. (Wellington) Limited liability company
F-8
<PAGE>
Sterling Franchise Acquisition Group
Notes to Combined Financial Statements (continued)
1. Significant Accounting Policies (continued)
All significant intercompany accounts and transactions have been eliminated
in the combined financial statements.
Operations
The entities comprising SFAG were formed to develop and operate Sterling
House assisted living facilities (the Residences) for senior citizens
utilizing the Sterling House concept. SFAG was formed in October 1993 and
opened the initial assisted living facility in April 1994.
The Manager of the SFAG entities is Sterling House Corporation (SHC). SHC
is responsible for managing and controlling the affairs of SFAG. SHC is
also the franchisor of the Sterling House concept.
As of December 31, 1995 and 1994, SFAG had three and two Residences
operating consisting of 85 and 52 aggregate residential rental units,
respectively.
Cash
For purposes of the statement of cash flows, SFAG considers cash to include
currency on hand, demand deposits and short-term investments with maturities
of three months or less.
Principal and Interest Funds in Trust
Principal and interest funds in trust consist of funds held in escrow by a
Trustee to pay future principal and interest payments due under the assisted
living residence revenue bonds.
Property and Equipment
Property assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Useful lives are as follows:
Land improvements 15 years
Buildings 40 years
Furniture, fixtures and equipment 5-10 years
F-9
<PAGE>
Sterling Franchise Acquisition Group
Notes to Combined Financial Statements (continued)
1. Significant Accounting Policies (continued)
Property and equipment include interest costs and property taxes incurred
during the construction period, as well as development fees and other costs
directly related to the development and construction of the Residences.
Maintenance and repairs are charged to income as incurred and significant
renewals and betterments are capitalized. Deductions are made for
retirements resulting from renewals or betterments.
Prerental Costs
Costs incurred in connection with pre-opening marketing, employee
recruitment and training, and other start-up expenditures necessary to
prepare the Residences for rent have been capitalized. These Prerental
costs are amortized over 12 months beginning when the residences are
available for occupancy. Accumulated amortization at December 31, 1995 and
1994 was $52,983 and $37,116, respectively.
Organization Costs
Cost incurred in connection with the organization of the individual
entities of SFAG have been capitalized and are amortized over five years on
a straight-line basis.
Financing Costs
Costs incurred in connection with obtaining permanent financing for the
Residences have been capitalized and are amortized over the term of the
financing using the effective interest method.
Initial Franchise Fees
Initial franchise fees consist of amounts paid to SHC under a franchise
agreement for the rights to use the formats, trade name and methods of each
Sterling House residence for an initial period of 15 years. The franchise
agreements can be extended for up to three additional five-year periods.
SFAG amortizes these fees over a period of 15 years beginning with the date
the Residence opens.
F-10
<PAGE>
Sterling Franchise Acquisition Group
Notes to Combined Financial Statements (continued)
1. Significant Accounting Policies (continued)
Project Funds in Trust
Project funds in trust consist of proceeds received from assisted living
residence revenue bonds held in escrow by a trustee. Funds will be
disbursed to build, equip and furnish the various Residences for which the
bonds were issued.
Bond Reserve Funds in Trust
Bond reserve funds in trust consist of funds held by a Trustee to pay
assisted living residence revenue bond holders in the event of default by
SFAG in paying the required principal and interest payments on the bonds.
Revenues
Revenues are recorded when services are rendered and consist of resident
fees for basic housing and support services and fees associated with
additional services, such as routine nursing and personalized assistance on
a fee-for-service basis.
Income Taxes Status
SFAG is comprised of limited liability companies, (LLC's), which are hybrid
entities created and authorized under various states' statutes. LLC's are
structured to be taxed as partnerships, which provide limited liability
protection for all their members. For federal tax purposes, the companies
comprising of SFAG are treated as pass-through entities; thus income and
losses are taxed only at the member level. Accordingly, the accompanying
financial statements do not include a provision for income taxes. While the
Internal Revenue Code does not specifically address the tax treatment of an
LLC, the Internal Revenue Service has sanctioned partnership taxation for the
LLC's in several states.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
F-11
<PAGE>
Fair Value of Financial Instruments
The following methods and assumptions were used by SFAG in estimating its
fair value disclosures for financial instruments:
Cash - The carrying amount reported in the balance sheet for cash and cash
equivalents approximate their fair value.
Short-term borrowings - The carrying amounts of SFAG's borrowings under its
short-term debt agreements approximate their fair value.
Bonds payable - The carrying amount of SFAG's borrowings under its long-term
debt agreements approximate their fair value. Such fair values are
estimated using discounted cash flow analyses, based on SFAG's current
incremental borrowing rates for similar types of borrowing arrangements.
2. Short-Term Borrowings
At December 31, 1995 and 1994, short-term borrowings consist of construction
loans used to fund the construction, equipment and furnishings of the
Residences. Interest on such borrowings is payable monthly at rates ranging
from 7.75% to 11%. The weighted average interest rate at December 31, 1995
and 1994 was 7.75% and 10.7%, respectively. Such short-term borrowings are
principally secured by all tangible assets of the Residences and certain
personal guaranties of the managing member of SFAG. As each Residence is
completed, the short-term borrowings are retired with proceeds received from
the sale of bonds (Note 3).
3. Bonds Payable
Bonds payable consist of various serial and term revenue bonds with
maturities occurring through 2002. Interest rates on the bonds range
from 5.5% to 9.75% with overall effective rates ranging from 9.8% to
9.6%. The principal and interest on the bonds are serviced by payments
made by SFAG to trustees. In addition, certain of the proceeds from the
bonds have been deposited with trustees and, to the extent that these funds
will be used for payment of principal and interest in the next year, such
funds are reflected as current assets in the accompanying combined balance
sheets. The bonds are secured by substantially all assets of the
Residences.
The amount of bonds outstanding at December 31, 1995 and 1994, was
$3,592,500 and $1,166,750, respectively. The aggregate annual maturities
of the bonds at December 31, 1995, are $197,500, $272,000 $299,250,
$318,250 and $340,750 for years 1996 through 2000, respectively.
F-12
<PAGE>
4. Related Party Transactions
Management and Development Fees
SFAG paid development fees to the managing member for oversight of the
construction and development of the Residences. Such oversight included
primary responsibility for land acquisition, zoning and licensing, obtaining
financing, general contractor selection, residence Manager selection, and
general business activities. The aggregate amount recognized by SFAG for such
fees was $215,000. Such fees were capitalized as building cost.
Other
Due to affiliate consists of development fees payable to the managing member
of SFAG.
Advances from affiliate at December 31, 1994 consisted of costs incurred by
the managing member to acquire land for one of the Residences. The advance
was paid in July 1995 and bore interest at 8%. Advances from affiliate at
December 31, 1995 consist of working capital advances from entities controlled
by the managing member which are due on demand and bear no interest.
5. Subsequent Event
On March 26, 1996, SFAG sold all of its Residences to Meditrust for an
aggregate sales price of $5,333,750. Contemporaneously with the sale of such
residences, SHC, through its wholly owned subsidiary, Assisted Living
Properties, Inc. succeeded to the business and operations of SFAG by entering
into certain operating leases with Meditrust.
F-13
<PAGE>
Item 7(b) 1
STERLING HOUSE CORPORATION
PROFORMA CONSOLIDATED BALANCE SHEET
December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sterling Pro forma
House Acquired Adjustments Pro forma
Corporation Companies Incr/(Decr) Combined
Assets
Current Assets:
Cash and cash equivalents $17,396,355 $ 0 $(857,042)(A)(B) $16,539,313
Advances to affiliates 0 0
Accounts receivable
Trade 157,616 157,616
Affiliates 90,785 90,785
Other 309,652 309,652
Prerental costs 242,285 242,285
Deferred income taxes 161,713 161,713
Principal and interest funds
in trust 299,671 299,671
Other 283,274 283,274
---------- ------- --------- -----------
Total current assets 18,941,351 0 (857,042) 18,084,309
Property and equipment:
Land and improvements 3,714,642 3,714,642
Buildings 14,977,356 14,977,356
Leasehold rights and
improvements 511,996 511,996
Vehicles and equipment 393,599 393,599
Furniture, fixtures and
office equipment 1,273,480 1,273,480
Deferred lease cost 902,640(B) 902,640
Construction in progress 3,102,364 3,102,364
----------- ------- -------- -----------
23,973,437 0 902,640 24,876,077
Less accumulated depreciation (406,353) (406,353)
---------- ------- -------- ----------
Net property and equipment 23,567,084 0 902,640 24,469,724
Other assets:
Deferred income taxes 447,901 447,901
Intangible assets, net 142,707 142,707
Bond reserve fund in trust 153,125 153,125
Other 312,272 312,272
----------- ------- -------- -----------
Total other assets 1,056,005 0 0 1,056,005
----------- ------- -------- -----------
Total assets $43,564,440 0 $45,598 $43,610,038
=========== ======= ======== ===========
</TABLE>
F-14
<PAGE>
STERLING HOUSE CORPORATION
PROFORMA CONSOLIDATED BALANCE SHEET
December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sterling Pro forma
House Acquired Adjustments Pro forma
Corporation Companies Incr/(Decr) Combined
Liabilities and stockholders' equity
Current liabilities:
Note payable
Due to affiliates $ 0 $ 0 $ $ 0
Short-term borrowings 6,726,428 6,726,428
Accounts payable 1,832,100 1,832,100
Accrued expenses
Salaries and benefits 255,316 255,316
Other 418,204 418,204
Deferred income taxes 23,475 23,475
Deferred rent and refundable deposits 189,509 45,598(A) 235,107
Current maturities of long-term debt 4,217 4,217
Current maturities of bonds payable 251,000 251,000
Current maturities of
capital lease obligations 22,749 22,749
---------- ------ ------- -----------
Total current liabilities 9,722,998 0 45,598 9,768,596
Non-current liabilities
Long-term debt 59,189 59,189
Bonds payable 6,466,500 6,466,500
Capital lease obligation 36,119 36,119
Deferred income taxes 1,662,471 1,662,471
Deferred initial franchise revenue 0 0
Deferred revenue-affiliates 0 0
Accrued stock option compensation 412,550 412,550
Investment in unconsolidated affiliates 0 0
Minority interest in subs 0 0
--------- ----- ------ -----------
Total non -current liabilities 8,636,829 0 0 8,636,829
Total liabilities 18,359,827 0 45,598 18,405,425
Stockholders' equity
Preferred stock 0 0
Common stock 28,184,228 0 28,184,228
Accumulated deficit (2,979,615) 0 (2,979,615)
----------- ----- ------ ------------
Total stockholders' equity 25,204,613 0 0 25,204,613
Total liabilities and stockholders'
equity $43,564,440 $ 0 $45,598 $43,610,038
=========== ======= ======== ============
</TABLE> F-15
<PAGE>
STERLING HOUSE CORPORATION
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sterling Pro forma
House Acquired Adjustments Pro forma
Corporation Companies Incr/(Decr) Combined
Revenue:
Residence rental $ 2,296,994 $1,117,968 $ 3,414,962
Development fees 302,871 302,871
Initial franchise and royalty fees 290,963 (58,385)(D)(E) 232,578
Management and service fees 489,683 (87,159)(F)(G)(H) 402,524
Construction services 1,217,124 (64,658)(C) 1,152,466
----------- ---------- -------- ------------
Total revenue 4,597,635 1,117,968 (210,202) 5,505,401
Operating expenses:
Residence operating expenses 1,553,309 883,628 (100,544)(E)(G)(H) 2,336,393
General and administrative 1,766,476 1,766,476
Stock compensation expense 412,550 412,550
Cost of construction services 1,069,270 1,069,270
Building rental 55,147 575,904 (I) 631,051
Depreciation and amortization 460,074 236,094 (236,094)(J) 460,074
Equity in net loss from
unconsolidated affiliates 278,636 278,636
--------- --------- ------- -----------
Total operating expenses 5,595,462 1,119,722 239,266 6,954,450
Loss from operations (997,827) (1,754) (449,468) (1,449,049)
Other income (expenses):
Interest income 204,476 19,384 (19,384)(K) 204,476
Interest expense (375,165) (338,723) 338,723 (K) (375,165)
Minority interest 47,757 47,757
Other 38,833 (10,772) 28,061
--------- --------- ------- ----------
Total other income/(loss) (84,099) (330,111) 319,339 (94,871)
--------- --------- -------- -----------
Loss before income taxes and
extraordinary item (1,081,926) (331,865) (130,129) (1,543,920)
Benefit (provision) for income item 74,512 --- 33,800(L) 108,312
---------- -------- -------- ---------
Loss before extraordinary item (1,007,414) (331,865) (96,329) (1,435,608)
---------- -------- ------ ----------
Extraordinary item:
Loss from early retirement of
financing agreements, net of
tax benefit of $747,098 (1,175,933) --- 0 (1,175,933)
----------- --------- ------- -----------
Net loss $(2,183,347) $(331,865) $(96,329) $(2,611,541)
=========== ========== ======= ============
Net loss per common share:
Loss before extraordinary item $ (0.36) $ (0.52)
Extraordinary item (0.42) --- (0.42)
----------- --------- ------- ------------
Net loss $ (0.78) $ (0.94)
=========== ========= ======= ============
Average number of common shares
outstanding 2,786,868 2,786,868
=========== ========= ======= ===========
</TABLE>
F-16
<PAGE>
STERLING HOUSE CORPORATION
Notes to Pro Forma Consolidated Financial Statements (Unaudited)
December 31, 1995
1) Basis For Financial Statement Presentation
On March 26, 1996, ALP entered into an agreement with Meditrust to lease
three assisted living residences previously owned by SFAG, as well as
entering into sale/leaseback transactions for two Company-owned properties
located in Wichita, Kansas and Bethany, Oklahoma. The total amount
financed with Meditrust for the five residences was approximately $7.5
million. Concurrently with this transaction, SFAG contemporaneously sold
all of their assets (principly consisting of their real property, building,
improvements, furniture and equipment) to Meditrust.
The Company previously managed the Derby, Hays and Wellington residences
for SFAG. On March 26, 1996, the Management and Franchise Agreements with
SFAG were terminated and ALP assumed all the operations and resident's
lease agreements.
The pro forma financial information have been prepared giving effect to the
acquisition of the operations of the SFAG by the Company through entering
into certain operating leases with Meditrust, as if the operating leases had
taken place December 31, 1995 for the pro forma consolidated balance sheet
(unaudited),and January 1, 1995 for the pro forma statement of operations
(unaudited) for the year ended December 31, 1995.
The unaudited pro forma consolidated balance sheet and statement of
operations for the year ended December 31, 1995, is not necessarily
indicative of the results of operations or the financial position which
would have been attained had the operating leases been consummated at the
date presented. The unaudited pro forma consolidated balance sheet and
statement of operations should be read in conjunction with the historical
consolidated financial statement of SFAG.
2) Pro Forma Adjustments
(A) The Company did not acquire any of the assets or assume any of the
liabilities of SFAG in this acquisition. However, the Company did assume
the liabilities associated with the refundable deposits paid by the
residents and received cash from SFAG equal to that liability.
The refundable deposits balance at December 31, 1995 was $45,598.
F-17
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STERLING HOUSE CORPORATION
Notes to Pro Forma Consolidated Financial Statements (Unaudited) (continued)
December 31, 1995
(B) Deferred lease costs represent the costs incurred by the Company relating
to obtaining the leases of the land, building and furniture and equipment
of the three Residences previously owned by SFAG. The deferred lease
costs at the date of acquisition were $902,640 and will be amortized over
the initial term of the lease.
(C) Represents the elimination of construction profit recognized by the
Company for the Hays, Kansas residence completed and opened in 1995.
(D) Represents elimination of the initial franchise fee of $25,000 from
SFAG which was recognized by the Company in 1995.
(E) Represents the elimination of the franchise royalty fees of $33,385,
paid by SFAG to the Company in 1995.
(F) The elimination of the marketing fees of $20,000 paid by the
Group to the Company for the Hays, Kansas location in 1995 for per-
opening marketing services.
(G) Represents the elimination of management fees of $59,409, paid by
SFAG to the Company for management services performed
during 1995.
(H) Represents the elimination of bookkeeping fees of $7,750, paid by
SFAG to the Company for bookkeeping services performed during 1995.
(I) Represents the lease expense, including $69,444 of amortized deferred
lease costs, incurred with the lease of the three residences previously
owned by SFAG.
(J) Depreciation and Amortization are being eliminated due to the Company
not acquiring any of the assets of SFAG.
(K) Interest income and expense is eliminated as the Company did not assume
any of the debt or cash or cash equivalents of SFAG.
(L) Represents increase in income tax benefits resulting from the acquired
operations of SFAG.
F-18
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Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 333-03687) pertaining to the 1995 Stock Option Plan and
Director's Stock Option Agreements of Sterling House Corporation of our report
dated June 5, 1996, with respect to the combined financial statements of
Sterling Franchise Acquisition Group included in Sterling House Corporation's
Current Report on Form 8-K/A dated June 10, 1996, filed with the Securities and
Exchange Commission.
ERNST & YOUNG LLP
Wichita, Kansas
June 5, 1996
F-19
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