American Retirement Will Restate Its Financial Results to Reflect Changes in Accounting Guidance

Business Wire, June 8, 2005

NASHVILLE, Tenn. -- American Retirement Corporation (NYSE: ACR), a leading national provider of senior living housing and care, announced today it will restate its financial statements for 2002 through 2004. After consultation with KPMG LLP and the staff of the SEC regarding new interpretations of accounting guidance for entrance fee refunds, the Company concluded that it should reclassify certain of its entrance fee refund liabilities from long-term liabilities to current liabilities on its balance sheet. In connection with the reclassification of those entrance fee refund liabilities, the Company has determined to make certain additional adjustments to its financial statements for these periods. Each of these reclassifications and adjustments is discussed in detail below and in the Form 10-K/A to be filed today.

The Company does not believe that any of these items will have an adverse effect upon the Company or its operations, or represents an adverse change to the Company's financial condition or results of operations. The reclassifications and adjustments will not impact the Company's total cash flow in any period. The Company reduced its lease expense and, correspondingly, decreased its net loss by $1.2 million in 2004 and 2003, and $.4 million in 2002. Furthermore, none of these items will result in a violation of any covenants or other provisions of the Company's loans or leases.

Commenting on the impact of the restatement, Chairman, President and CEO Bill Sheriff said, "Although this new interpretation of the application of generally accepted accounting principles requires our restatement, it is frustrating that we find ourselves in a position where the balance sheet presentation of entry fee accounts has to be changed from what have been the long-standing practices of our industry. All of these adjustments and reclassifications are highly technical in nature and nearly all of them are not the result of the discovery of new facts or information, but merely a change in the accounting guidance we had previously received. None of these adjustments or reclassifications reflects a change in the underlying economics of the Company's business or our future prospects."

Reclassification of Certain Entrance Fee Refund Liabilities

The Company filed a Form 8-K with the Securities and Exchange Commission on May 5, 2005, indicating that it was re-examining, among other things, its accounting policies regarding the classification of certain entrance fee refund obligations on its balance sheet. Historically, the Company has recorded the refundable amount of entrance fees on its balance sheet as a long-term liability in accordance with prevailing and long-standing industry practice and industry-specific accounting guidance and literature.

The Company's entrance fee agreements may be terminated by residents upon thirty days' notice. In addition, many of these agreements require the Company to refund a portion of the original entrance fee amount within a specified number of days (less than one year) after the agreement is terminated. Because of these provisions, KPMG LLP, the Company's independent registered public accounting firm, recently questioned whether certain of these refund obligations should be considered "callable" under SFAS No. 78, Classification of Obligations That Are Callable by the Creditor, and therefore whether they should be classified as a current liability. After consultation with KPMG LLP and the staff of the SEC, the Company has determined that SFAS No. 78 is the controlling accounting literature and, accordingly, has restated its balance sheet to reclassify certain entrance fee refund liabilities from long-term liabilities to current liabilities. For 2004, approximately $113 million was reclassified to current liabilities.

Other Changes

In connection with its review of the classification of entrance fee refund liabilities, the Company initiated a review of certain of its other accounting policies as required by KPMG under KPMG's standard review procedures. As a result of that review, the Company has determined to make the following additional reclassifications and adjustments:

(1) The Company adjusted its lease expense for 2002, 2003 and 2004. The Company recognizes rental expense on operating leases using straight-line lease accounting, which averages its lease payments over the base term of the lease, including certain lease escalators. These adjustments relate to accounting for certain prepaid rent and certain lease escalation provisions and are due to a reexamination of existing leases and the application of complex accounting rules. The net impact of these adjustments is a reduction to lease expense for 2002, 2003 and 2004, of approximately $.4 million, $1.2 million and $1.2 million, respectively.

(2) The Company reclassified certain tenant deposits (consisting of security deposits, wait list and other deposits) from long-term liabilities to current liabilities on its balance sheet. This reclassification is consistent with the treatment of entrance fee refund obligations as current liabilities. For 2004, approximately $5 million of tenant deposits was reclassified to current liabilities.