SEARS METHODIST RETIREMENT SYSTEMOBLIGATED GROUP

Bondholder PresentationMay 21, 2012

Call in number: (866) 305-0232Passcode: 271546#

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Presentation Agenda

Historical Trends

Days Cash Reconciliation for 2011

Sears Tyler Project Funding

Sale of Nursing Centers

2011 Audit Overview

Addressing Payment Default

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SMRS-Obligated GroupHistorical Trends

SMRS Available Revenue has declined since 2008

Overall Census declines due to SNF census

Overall Medicare Census has impacted therapy company

SMRS CAPEX needs have increased since 2008

SMRS G&A levels have increased and are being reduced

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SMRS-Obligated GroupAvailable Revenue by Group

2008 2009 2010 2011CCRC Operations 6,101 6,854 6,224 5,671Entry Fees 428 562 806 ( 27) SWTA (150) (233) 20 ( 674) SMRS 278 ( 4) 1,217 1,516 Sears Foundation 680 1,242 1,143 1,158Continuing Operations 7,337 8,421 9,410 7,644

Discontinued OperationsSears Methodist Center 531 268 (107) - sold July 2009Nursing Centers 1,520 1,574 1,188 826 sold Nov 2011Community Services 125 484 155 ( 300) divested Feb 2012Gain/(Loss)/Other ( 764) 721 98 120Available Revenue 8,749 11,468 10,744 8,290

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SMRS Obligated GroupCampus Ownership ComparisonJanuary 2009 to December 2011

Jan 2009 Dec 2011

IL/AL 518 423 SNF 597 240 Total Units 1,115 663

Medicaid Payor % 21.7% 12.8%

Census Jan 2009 Jan 2011

CCRCs 93.1% 89.4% Nursing Centers 90.0% 84.5% sold November 2011SMC 78.4% N/A sold July 2009

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SMRS-Obligated GroupCCRCs-Overall Census Trends

618.2

609.8

591.5

599.4

602.5

580

590

600

610

620

2008 2009 2010 2011 Q1 12

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Total Units: 663Note: Does not include sold Nursing Centers

SMRS-Obligated GroupCCRCs IL/AL Trend

394.8

386.7

377.5

396.3

404.6

370

380

390

400

410

2008 2009 2010 2011 Q1 12

7Total Units: 423

SMRS Obligated GroupCCRC SNF Trend

223.4 223.2

214.0 

203.1

197.9

190

200

210

220

230

2008 2009 2010 2011 Q1 12

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Total Units: 240Note: Does not include sold Nursing Centers

SMRS-Obligated Group Medicare Census Impact on Therapy Company

2008 2009 2010 2011 Q1 12Obligated Group 44.1 43.1 36.3 34.3 31.6Garrison 23.3 28.8 30.0 21.9 22.0Mesa Springs 11.4 13.5 15.8 11.6 8.4Total 78.8 85.4 82.1 67.8 62.0

SWTA Available Revenue ($000s) (150) (232) 20 (674) (143)

Southwest Therapy Associates is a wholly-owned subsidiary of SMRSFixed cost of operations high due to 3 disciplines: PT, OT, STNearly 50% of 2011 loss attributed to Nursing Centers and Home HealthLow census and Therapy rules changes responsible for lower Q1 2012Garrison and Mesa Springs part of SWTA operationsEvaluating Outsourcing to an outside Therapy company

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SMRS-Obligated Group CAPEX Spending (in $000s)

2008 2009 2010 2011CAPEX 518 560 1,466 2,350Less: Parks Donations - - ( 617) ( 885)Adjusted Capex 518 560 849 1,465 Campus Revenue (in $000s) 35,763 36,809 37,662 36,238CAPEX % 1.4% 1.5% 2.3% 4.0%

Parks spent $1.5m in 2010 and 2011 combined; $450K required for HVACParks raised nearly $2.0m of capital contributions from 2009 to 2011Standard CAPEX levels typically 4% of revenuePrimary focus on areas of declining census: Craig IL, Parks campus

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SMRS-Obligated GroupCorporate G&A % of Revenue

Forecast2008 2009 2010 2011 2012

SMRS G&A Expense 5,360 5,549 5,217 6,101 5,115Consolidated Revenue 84,660 86,329 81,960 83,040 75,000 G&A % of Revenue 6.3% 6.4% 6.4% 7.3% 6.8%

Expense increase over 2010 from $750K in staffing cost and $100K in legalReduction of $300,000 made since Q1 12 and an additional $350,000 to comeForecast for 2012 includes higher cost in Q1 and Q2 2012Annualized level targeted to at or below 6.5% by Q4 2012

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SMRS-Obligated GroupDays Cash Recon-FY 2011

Days Cash-Dec 31, 2010 $ 9.6m 76 Days

Changes:Sears Tyler ( 3.2 ) ( 26) Capex ( 2.4 ) ( 19)Operational Cash Flow ( 1.6 ) ( 12)Investment in SWAC ( .7 ) ( 5)Account Receivable ( .8) ( 6)Changes before sale ( 8.5m) ( 68)

Cash before Sale of Campuses $ .9m 8 DaysSale of Nursing Centers 4.8m 36 Days Cash-Dec 31, 2011 $ 5.7m 44 Days

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Sears TylerProject Funding

Cost overruns were $2.0m; result in claim against architect of $1.5m

Funds from SMRS line of credit and Tyler Executive Home sales were $5.0m below initial forecast

Additional bonds issued for Sears Tyler of $5.3m before transaction cost

Bond issuance amount was limited by Sears Tyler MTI

Completion funding of $7.0m was $4.5m from bonds and $2.5m from SMRS

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SMRS Obligated GroupSale of Nursing Centers

2011

Gross Proceeds $14.2m

Escrows released 1.1

Debt Repaid ( 8.7)

Advanced Refunding ( .7)

Costs related to sale ( 1.1)

Net Proceeds $ 4.8m

Decision based on census decline (90% to 84%) and Medicaid rate reductionsStrategic planning sessions in 2010 indicated declining margins Available revenue declined from $1.574m in 2009 to $1.188m in 2010Sale price range was initially $16.0m to $17.0m from offers in early 2011Final Sale price was impacted by Medicare and Medicaid issues in 2011

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SMRS Consolidated AuditFor the year ending December 31, 2011

Audit was posted to EMMA on May 11, 2012

CLA issued a Going Concern opinion on SMRS

Sears failed to meet various covenants for the SMRS Obligated Group and Sears Tyler

These covenant violations include defaults on financial covenants for FY2011 and bond payments due in May 2012

Obligated Group missed Days Cash and Debt Coverage test

Bank Line of Credit not to be extended in July 2012

Debt Reserve draw of $1.2m was made to cover full $3.4m payment due for May 2012

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SMRS-Obligated GroupPreliminary Timeline of Events

Clifton Larson Allen working on Management Consultant Report

July 2012: Management Consultant Report completion

August 2012: Preliminary Restructuring Plan to debt holders

August 2012: Evaluation and Analysis of Plan

Sept 2012: Prepare Final Restructuring Plan

Sept 2012: SMRS Board Approval

Oct 2012: Debt holder and Trustee Approval

Oct 2012: Close Restructuring

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