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HomeMy WebLinkAbout2012 $2,355,000 Unlimited Tax Refunding Bonds, Series 2012TAB 1 CERTIFICATE FOR ORDER THE STATE OF TEXAS COUNTIES OF DENTON AND TARRANT TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 We, the undersigned officers of the Board of Directors of said District, hereby certify as follows: 1. The Board of Directors of said District convened in REGULAR MEETING ON DECEMBER 20, 2011, at the designated meeting place, and the roll was called of the duly constituted officers and members of said Board, to wit: Jim Moss, President Nick Sanders, Vice President Kevin Carr, Secretary/Treasurer Bill Armstrong, Director Jim Thomas, Director and all of said persons were present, except the following absentees: None , thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written ORDER AUTHORIZING THE ISSUANCE OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS; LEVYING AN AD VALOREM TAX IN SUPPORT OF THE BONDS; APPROVING AN OFFICIAL STATEMENT; AUTHORIZING THE EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND AN ESCROW AGREEMENT; ESTABLISHING PROCEDURES FOR SELLING AND DELIVERING THE BONDS; AND AUTHORIZING OTHER MATTERS RELATED TO THE ISSUANCE OF THE BONDS was duly introduced for the consideration of said Board and read in full. It was then duly moved and seconded that said Order be passed; and, after due discussion, said motion, carrying with it the passage of said Order, prevailed and carried with all members present voting "AYE" except the following: NAY: 0 ABSTAIN: 0 2. That a true, full, and correct copy of the aforesaid Order passed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Order has been duly recorded in said Board's minutes of said Meeting; that the above and foregoing paragraph is a true, full, and correct excerpt from said Board's minutes of said Meeting pertaining to the passage of said Order; that the persons named in the above and foregoing paragraph are the duly chosen, qualified, and acting officers and members of said Board as indicated therein; that each of the officers and members of said Board was duly and sufficiently notified officially and personally, in advance, of the time, place, and purpose of the aforesaid Meeting, and that said Order would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose; and that said Meeting was open to the public, and public notice of the time, place, and purpose of said Meeting was given all as required by the Texas Government Code, Chapter 551. 3. The President of the Board of Directors has approved and hereby approves the aforesaid Order; and the President and the Secretary/Treasurer of the Board of Directors hereby declare that their signing of this certificate shall constitute the signing of the attached and following copy of said Order for all purposes. SIGNED AND SEALED the 20th day of December, 2011. ORDER ORDER AUTHORIZING THE ISSUANCE OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS; LEVYING AN AD VALOREM TAX IN SUPPORT OF THE BONDS; APPROVING AN OFFICIAL STATEMENT; AUTHORIZING THE EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND AN ESCROW AGREEMENT; ESTABLISHING PROCEDURES FOR SELLING AND DELIVERING THE BONDS; AND AUTHORIZING OTHER MATTERS RELATED TO THE ISSUANCE OF THE BONDS TABLE OF CONTENTS ARTICLE ONE 2 PREAMBLE 2 SECTION 1.01 INCORPORATION OF PREAMBLE 2 ARTICLE TWO 2 DEFINITIONS AND INTERPRETATIONS 2 SECTION 2.01. DEFINITIONS 2 SECTION 2.02. INTERPRETATIONS 6 ARTICLE THREE 6 AUTHORIZATION, REGISTRATION, EXECUTION, 6 AND AUTHENTICATION OF BONDS 6 SECTION 3.01. AMOUNT, NAME, PURPOSE, AND AUTHORIZATION 6 SECTION 3.02. DATE, DENOMINATIONS, NUMBERS, DELEGATION TO PRICING OFFICER. 7 SECTION 3.03. PAYMENT OF PRINCIPAL AND INTEREST 8 SECTION 3.04. SUCCESSOR REGISTRARS 9 SECTION 3.05. SPECIAL RECORD DATE 9 SECTION 3.06. REGISTERED OWNERS 9 SECTION 3.07. EXECUTION OF BONDS 9 SECTION 3.08. AUTHENTICATION 10 ARTICLE FOUR 10 REGISTRATION, TRANSFER, AND EXCHANGE 10 SECTION 4.01. REGISTRATION, TRANSFER, AND EXCHANGE 10 SECTION 4.02. MUTILATED, LOST, OR STOLEN BONDS 11 SECTION 4.03. CANCELLATION OF BONDS 12 SECTION 4.04. BOOK-ENTRY-ONLY SYSTEM 12 ARTICLE FIVE 13 REDEMPTION OF BONDS BEFORE MATURITY 13 SECTION 5.01. REDEMPTION OF BONDS 13 ARTICLE SIX 14 FORM OF BOND 14 SECTION 6.01. FORM OF BOND 14 SECTION 6.02. REGISTRATION OF INITIAL BOND BY STATE COMPTROLLER AND CERTIFICATE 24 SECTION 6.03. FORM OF AUTHENTICATION CERTIFICATE 24 SECTION 6.04. FORM OF ASSIGNMENT 25 SECTION 6.05. CUS1P REGISTRATION 26 SECTION 6.06. LEGAL OPINION AND BOND INSURANCE 26 ARTICLE SEVEN 26 SECURITY OF THE BONDS 26 SECTION 7.01. GENERAL 26 SECTION 7.02. LEVY OF TAX 26 SECTION 7.03. PAYMENT OF BONDS AND PERFORMANCE OF OBLIGATIONS... 27 SECTION 7.04. CONSOLIDATION OR DISSOLUTION OF DISTRICT 27 ARTICLE EIGHT 28 TravisCoMUD2\UTRB 1 l\Del: ORDER i FLOW OF FUNDS AND INVESTMENTS 28 SECTION 8.01. FUNDS, FLOW OF FUNDS 28 SECTION 8.02. SECURITY OF FUNDS 28 SECTION 8.03. DEBT SERVICE FUND; TAX LEVY 28 SECTION 8.04. ESCROW FUND 29 SECTION 8.05. INVESTMENTS; EARNINGS 29 ARTICLE NINE 29 APPLICATION OF FUNDS 29 SECTION 9.01. BOND PROCEEDS 29 SECTION 9.02. ACCRUED INTEREST 29 SECTION 9.03. ESCROW FUND 29 ARTICLE TEN 29 PROVISIONS CONCERNING FEDERAL INCOME TAX EXCLUSION 29 SECTION 10.01. COVENANTS REGARDING TAX EXEMPTION OF INTEREST ON THE BONDS 29 ARTICLE ELEVEN 32 ADDITIONAL BONDS AND REFUNDING BONDS 32 SECTION 11.01. ADDITIONAL BONDS 32 SECTION 11.02. OTHER BONDS 32 SECTION 11.03. REFUNDING BONDS 32 ARTICLE TWELVE 33 DEFAULT PROVISIONS 33 SECTION 12.01. REMEDIES IN EVENT OF DEFAULT 33 SECTION 12.02. BOND ORDER IS CONTRACT 34 ARTICLE THIRTEEN 34 DISCHARGE BY DEPOSIT 34 SECTION 13.01. DEFEASANCE OF BONDS 34 ARTICLE FOURTEEN 35 MISCELLANEOUS PROVISIONS 35 SECTION 14.01. DISTRICT'S SUCCESSORS AND ASSIGNS 35 SECTION 14.02. NO RECOURSE AGAINST DISTRICT OFFICERS OR DIRECTORS. 36 SECTION 14.03. REGISTRAR 36 SECTION 14.04. REGISTRAR MAY OWN BONDS 36 SECTION 14.05. BENEFITS OF ORDER PROVISIONS 36 SECTION 14.06. UNAVAILABILITY OF AUTHORIZED PUBLICATION 36 SECTION 14.07. SEVERABILITY CLAUSE 36 SECTION 14.08. ACCOUNTING 36 SECTION 14.09. FURTHER PROCEEDINGS 37 ARTICLE FIFTEEN 37 SALE AND DELIVERY OF BONDS 37 AND APPROVAL OF DOCUMENTS 37 SECTION 15.01. SALE OF BONDS 37 SECTION 15.02. APPROVAL, REGISTRATION, AND DELIVERY 37 SECTION 15 03 APPROVAL OF OFFERING DOCUMENTS, PAYING AGENT/REGISTRAR AGREEMENT AND ESCROW AGREEMENT 37 SECTION 15.04. REFUNDING OF REFUNDED BONDS 38 TravisCoMUD2\UTRB 1 l\Del: ORDER U ARTICLE SIXTEEN 38 OPEN MEETING AND EFFECTIVE DATE 38 SECTION 16.01. OPEN MEETING 38 SECTION 16.02. EFFECTIVE DATE OF BOND ORDER 38 ARTICLE SEVENTEEN 38 AMENDMENTS 38 SECTION 17.01. AMENDMENTS 38 ARTICLE EIGHTEEN 40 OTHER ACTIONS AND MATTERS 40 SECTION 18.01. OTHER ACTIONS 40 SECTION 18.02. ADDITIONAL BOND INSURANCE PROVISIONS 41 SECTION 18.03. PAYMENT OF ATTORNEY GENERAL FEE 41 ARTICLE NINETEEN 41 CONTINUING DISCLOSURE 41 SECTION 19.01. CONTINUING DISCLOSURE UNDERTAKING 41 EXHIBITS Exhibit "A" Paying Agent/Registrar Agreement Exhibit "B" Escrow Agreement Exhibit "C" Form of Notices of Redemption Exhibit "D" Continuing Disclosure Undertaking Exhibit "E" Written Procedures TiavisCoMUD2\UTRBll\Del. ORDER. iii ORDER AUTHORIZING THE ISSUANCE OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS; LEVYING AN AD VALOREM TAX IN SUPPORT OF THE BONDS; APPROVING AN OFFICIAL STATEMENT; AUTHORIZING THE EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND AN ESCROW AGREEMENT; ESTABLISHING PROCEDURES FOR SELLING AND DELIVERING THE BONDS; AND AUTHORIZING OTHER MATTERS RELATED TO THE ISSUANCE OF THE BONDS THE STATE OF TEXAS § COUNTIES OF DENTON AND TARRANT § TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 § WHEREAS, Trophy Club Municipal Utility District No. 1 (the "District") is a conservation and reclamation district, a body corporate and politic and governmental agency of the State of Texas, created as a municipal utility district pursuant to Article 16, Section 59, of the Texas Constitution by Order of the Texas Commission on Environmental Quality, the successor in interest to the Texas Water Commission (collectively, the "Commission"), and the District operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended (the "Act"); WHEREAS, the District is the successor by merger and consolidation of Trophy Club Municipal Utility District No. 1 ("Prior MUD 1") and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2" and with Prior MUD 1, the "Prior MUDs") pursuant to a consolidation election held in the District on May 9, 2009 (the "Consolidation Election") by which the District consolidated the Prior MUDs into the District and assumed all outstanding and voted but unissued bonds and taxes of the Prior MUDs; and WHEREAS, the District currently has outstanding its Trophy Club Utility District No. 2 Unlimited Tax Bonds, Series 2002 (the "Outstanding Bonds"); and WHEREAS, the District now desires to issue refunding bonds to refund all or part of the Outstanding Bonds (the "Refundable Bonds", and those Refundable Bonds designated by the Pricing Officer in the Pricing Certificate, each as defined herein, to be refunded are herein referred to as the "Refunded Bonds"); and WHEREAS, all the Refunded Bonds mature or are subject to redemption prior to maturity within 20 years of the date of the bonds hereinafter authorized; and WHEREAS, the refunding bonds hereafter authorized are being issued and delivered pursuant to Chapter 1207, Texas Government Code, as amended ("Chapter 1207"); and WHEREAS, Chapter 1207 authorizes the District to issue refunding bonds and to deposit the proceeds from the sale thereof together with any other available funds or resources, directly with a place of payment (paying agent) for the Refunded Bonds or eligible trust 1 company or commercial bank, and such deposit, if made before such payment dates, shall constitute the making of firm banking and financial arrangements for the discharge and final payment of the Refunded Bonds; and WHEREAS, Chapter 1207 further authorizes the District to enter into an escrow agreement with respect to the safekeeping, investment, reinvestment, administration and disposition of any such deposit, upon such terms and conditions as the District and such escrow agent may agree, provided that such deposits may be invested and reinvested in Defeasance Securities, as defined herein; and WHEREAS, the Escrow Agreement hereinafter authorized, constitutes an agreement of the kind authorized and permitted by Chapter 1207; and WHEREAS, the Board of Directors of the District deems it advisable and in the best interest of the District to refund the Refunded Bonds in order to achieve a net present value debt service savings of not less than 6.00% of the principal amount of the Refunded Bonds net of any District contribution with such savings, among other information and terms to be included in a Pricing Certificate to be executed by the Pricing Officer, both as hereinafter defined, all in accordance with the provisions of Chapter 1207, including Section 1207.007 thereof; THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1: ARTICLE ONE PREAMBLE SECTION 1.01 INCORPORATION OF PREAMBLE. The Board of Directors of the Trophy Club Municipal Utility District No. 1 (the "District") hereby incorporates the recitals set forth in the preamble hereto as if set forth in full at this place and further finds and determines that the recitals are true and correct. ARTICLE TWO DEFINITIONS AND INTERPRETATIONS SECTION 2.01. DEFINITIONS. When used in this Order, except in Article Six, and in any resolution, order or amendatory or supplemental order hereto, the terms listed below shall have the meanings specified below, unless it is otherwise expressly provided or unless the context otherwise requires: "Accreted Value" shall mean, with respect to a Premium Compound Interest Bond, as of any particular date of calculation, the original principal amount thereof, plus all interest accrued and compounded to the particular date of calculation, as determined in accordance with the Pricing Certificate and the Accretion Table attached as an exhibit to the Pricing Certificate 2 relating to the Bonds that shows the Accreted Value per $5,000 maturity amount on the calculation date of maturity to its maturity. "Accretion Table" means the exhibit attached to the Pricing Certificate that sets forth the rounded original principal amounts at the Issuance Date for the Premium Compound Interest Bonds and the Accreted Values and maturity amounts thereof as of each Compounding Date until final maturity. "Additional Bonds" means the additional bonds payable from ad valorem taxes which the Board expressly reserves the right to issue in Article Eleven of this Bond Order. "Authorized Denominations" means the denomination of $5,000 or any integral multiple thereof with respect to the Current Interest Bonds and in the denomination of $5,000 in maturity amount or any integral multiple thereof with respect to the Premium Compound Interest Bonds. "Authorized Investments" means such investments authorized pursuant to the investment policy of the District and Chapter 2256 of the Texas Government Code, as amended. "Board of Directors" or "Board" means the governing body of the District. "Bond Insurer" means the insurer of the bonds, if any, as designated in the Pricing Certificate. "Bonds" shall mean and include collectively the Premium Compound Interest Bonds and Current Interest Bonds initially issued and delivered pursuant to this Order and the Pricing Certificate and all substitute Bonds and Bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pursuant hereto, and the term "Bond" shall mean any of the Bonds. "Bond Order" or "Order" means this Order of the Board of Directors authorizing the issuance of the Bonds. "Business Day" means any day which is not a Saturday, Sunday or a day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed. "Compounded Amount" shall mean, with respect to a Premium Compound Interest Bond, as of any particular date of calculation, the original principal amount thereof plus all interest accrued and compounded to the particular date of calculation. "Compounding Date" means the amounts as of any September 1 and March 1 as set forth in the Accretion Table. "Current Interest Bonds" shall mean the Bonds paying current interest and maturing in each of the years and in the aggregate principal amounts set forth in the Pricing Certificate. 3 "Defeasance Securities" means (i) Federal Securities, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the Board of Directors adopts or approves proceedings authorizing the issuance of refunding bonds or otherwise provide for the funding of an escrow to effect the defeasance of the Bonds are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the Board of Directors adopts or approves proceedings authorizing the issuance of refunding bonds or otherwise provide for the funding of an escrow to effect the defeasance of the Bonds, are rated as to investment quality by a nationally recognized investment rating firm no less than "AAA" or its equivalent, and (iv) any other then authorized securities or obligations under applicable State law that may be used to defease obligations such as the Bonds. "District" means Trophy Club Municipal Utility District No. 1 and any other public agency succeeding to the powers, rights, privileges, and functions of the District and, when appropriate, the Board of Directors of the District. "Escrow Agent" means The Bank of New York Mellon Trust Company, N. A. or any successor escrow agent under the Escrow Agreement. "Escrow Agreement" means the agreement by and between the District and the Escrow Agent relating to the defeasance of the Refunded Bonds. "Exchange Bonds" means Bonds registered, authenticated, and delivered by the Registrar, as provided in Section 4.01 of this Bond Order. "Federal Securities" as used herein means direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America (including Interest Strips of the Resolution Funding Corporation). "Fiscal Year" means the twelve-month accounting period for the District, which presently is the twelve-month period beginning on October 1 of each year and ending on September 30 of the following year, but which may be changed from time to time by the Board of Directors. "Initial Bond" means the Bond authorized, issued, and initially delivered as provided in Section 3.02 of this Bond Order. "Interest Payment Date" means a date on which interest on the Current Interest Bonds is due and payable as set forth in the Pricing Certificate. "Issuance Date" means the date of delivery of the Bonds. "MSRB" shall mean the Municipal Securities Rulemaking Board. 4 "Outstanding" when used with reference to Bonds, means, as of a particular date, all Bonds theretofore and thereupon delivered except; (a) any Bond canceled by or on behalf of the District at or before said date, (b) any Bond defeased or no longer considered Outstanding pursuant to the provisions of this Order or otherwise defeased as permitted by applicable law and (c) any such Bond in lieu of or in substitution for which another Bond shall have been delivered pursuant to this Order. "Outstanding Bonds" means the District's outstanding Trophy Club Utility District No. 2 Unlimited Tax Bonds, Series 2002, dated June 1, 2002, issued in the original principal amount of $3,510,000. "Premium Compound Interest Bonds" shall mean the Bonds on which no interest is paid prior to maturity, maturing in various amounts and in the aggregate principal amount as set forth in the Pricing Certificate. "Pricing Certificate" means the Pricing Certificate of the District's Pricing Officer to be executed and delivered pursuant to Section 3.02 hereof in connection with the issuance of the Bonds. "Pricing Officer" means the President of the Board of the District or in his or her absence the General Manager of the District, acting as the designated pricing officer of the District to execute the Pricing Certificate. "Record Date" means the 15th day of the month next preceding each Interest Payment Date, whether or not such dates are Business Days. "Redemption Date" means a date fixed for redemption of any Bond pursuant to the terms of this Bond Order and the Pricing Certificate. "Refundable Bonds" means any of the District's Outstanding Bonds that are subject to redemption prior to maturity. "Refunded Bonds" means those Refundable Bonds to be refunded as designated by the Pricing Officer in the Pricing Certificate. "Register" means the registry system maintained on behalf of the District by the Registrar in which are listed the names and addresses of the Registered Owners and the principal amount of Bonds registered in the name of each Registered Owner. "Registered Owner" or "Owner" means any person or entity in whose name a Bond is registered. "Registrar" or "Paying Agent/Registrar" means The Bank of New York Mellon Trust Company, N.A., or such other bank, trust company, financial institution, or other entity as may hereafter be designated by the District to act as paying agent and registrar for the Bonds in accordance with the terms of this Bond Order. 5 "Replacement Bonds" means the Bonds authorized by the District to be issued in substitution for lost, apparently destroyed, or wrongfully taken Bonds as provided in Section 4.02 of this Bond Order. "Rule" shall mean SEC Rule 15c2-12, as amended from time to time. "SEC" shall mean the United States Securities and Exchange Commission. "Special Project Bonds" shall mean those bonds the District reserves the right to issue in Article Eleven of this Order. "System" shall mean the works, improvements, facilities, plants, equipment, and appliances comprising the waterworks, sanitary sewer, and drainage system of the District now owned or to be hereafter purchased, constructed, or otherwise acquired whether by deed, contract, or otherwise, together with any additions or extensions thereto or improvements and replacements thereof, and the water and/or sewer and/or drainage facilities which the District may purchase or acquire with the proceeds of the sale of Special Project Bonds, so long as such Special Project Bonds are outstanding, notwithstanding that such facilities may be physically connected with the System. "Underwriter" means the senior managing underwriter as selected by the Pricing Officer, and such additional investment banking firms as the Pricing Officer deems appropriate. SECTION 2.02. INTERPRETATIONS. The titles and headings of the articles and sections and the page numbers of this Bond Order have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof. This Bond Order and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Bonds and the validity of the taxes levied in payment thereof. ARTICLE THREE AUTHORIZATION. REGISTRATION, EXECUTION, AND AUTHENTICATION OF BONDS SECTION 3.01. AMOUNT, NAME, PURPOSE. AND AUTHORIZATION. Each Bond issued pursuant to this Bond Order shall be known and designated: "TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND, SERIES 2012", and the Bonds are hereby authorized to be issued and delivered in the maximum aggregate principal amount not to exceed $2,355,000 for the purpose of refunding the Refunded Bonds and paying certain costs of issuing the Bonds. The title of each of the Bonds shall be designated by the year in which it is awarded pursuant to Section 3.02 below. The authority of the Pricing Officer to execute a Pricing Certificate shall expire at 5:00 p.m. on June 20, 2012. Bonds priced on or before June 20, 2012 may close after such date. 6 SECTION 3.02. DATE. DENOMINATIONS. NUMBERS. DELEGATION TO PRICING OFFICER, (a) There initially shall be issued, sold and delivered fully registered bonds, without interest coupons, which may be in the form of Current Interest Bonds or Premium Compound Interest Bonds, numbered consecutively from R-l upward, in the case of Current Interest Bonds, and from PC-1 upward, in the case of Premium Compound Interest Bonds (except the initial Bonds delivered to the Attorney General of the State of Texas which shall be numbered T-l and TPC-1, respectively) payable to the respective initial Registered Owners thereof, or to the registered assignee or assignees of said Bonds or any portion or portions thereof, in Authorized Denominations, maturing not later than September 1, 2023, serially or otherwise on the dates, in the years and in the principal amounts, respectively, and dated, all as set forth in the Pricing Certificate to be executed and delivered by the Pricing Officer pursuant to subsection (b) of this Section. The Pricing Certificate is hereby incorporated in and made a part of this Order and shall be filed in the minutes of the Board as a part of this Order. (b) As authorized by Section 1207.007, Texas Government Code, as amended, the Pricing Officer is hereby authorized to act on behalf of the District in selling and delivering the Bonds, determining which of the Refundable Bonds shall be refunded and constitute "Refunded Bonds" under this Order and carrying out the other procedures specified in this Order, including determining the date of the Bonds, any additional or different designation or title by which the Bonds shall be known, the price at which the Bonds will be sold, the years in which the Bonds will mature, the principal amount to mature in each of such years, the aggregate principal amount of Current Interest Bonds and Premium Compound Interest Bonds, the rate of interest to be borne by each such maturity, the interest payment periods, the dates, price, and terms upon and at which the Bonds shall be subject to redemption prior to maturity at the option of the District, as well as any mandatory sinking fund redemption provisions, and all other matters relating to the issuance, sale, and delivery of the Bonds and the refunding of the Refunded Bonds, all of which shall be specified in the Pricing Certificate; provided that (i) the price to be paid for the Bonds shall not be less than 90% of the aggregate original principal amount thereof plus accrued interest thereon from its date to its delivery, (ii) none of the Bonds shall bear interest at a rate, or yield in the case of Premium Compound Interest Bonds, greater than the maximum authorized by law, and (iii) the refunding must produce a net present value debt service savings of at least 6.00% of the principal amount of the Refunded Bonds, net of any District contribution. In establishing the aggregate principal amount of the Bonds, the Pricing Officer shall establish an amount not to exceed the amount authorized in Section 3.01, which shall be sufficient to provide for the purposes for which the Bonds are authorized and to pay the costs of issuing the Bonds. (c) To achieve advantageous borrowing costs for the District, the Bonds shall be sold on a negotiated, placement or competitive basis as determined by the Pricing Officer in the Pricing Certificate. In determining whether to sell the Bonds by negotiated, placement or competitive sale, the Pricing Officer shall take into account any material disclosure issues which might exist at the time, the market conditions expected at the time of the sale and any other matters which, in the judgment of the Pricing Officer, might affect the net borrowing costs on the Bonds. If the Pricing Officer determines that the Bonds should be sold at a competitive sale, the Pricing Officer shall cause to be prepared a notice of sale and official statement in such manner 7 as the Pricing Officer deems appropriate, to make the notice of sale and official statement available to those institutions and firms wishing to submit a bid for the Bonds, to receive such bids, and to award the sale of the Bonds to the bidder submitting the best bid in accordance with the provisions of the notice of sale. If the Pricing Officer determines that the Bonds should be sold by a negotiated sale or placement, the Pricing Officer shall designate the placement purchaser or the senior managing underwriter for the Bonds and such additional investment banking firms as the Pricing Officer deems appropriate to assure that the Bonds are sold on the most advantageous terms to the District. The Pricing Officer, acting for and on behalf of the District, is authorized to enter into and carry out a purchase agreement or other agreement for the Bonds to be sold by negotiated sale or placement, with the underwriters or placement purchasers at such price, with and subject to such terms as determined by the Pricing Officer pursuant to Section 3(b) above. (d) The Current Interest Bonds shall bear interest calculated on the basis of a 360-day year composed of twelve 30-day months from the dates specified in the FORM OF BOND set forth in this Order to their respective dates of maturity or redemption at the rates per annum set forth in the Pricing Certificate. The Premium Compound Interest Bonds shall bear interest from the Issuance Date, calculated on the basis of a 360-day year composed of twelve 30-day months (subject to rounding to the Compounded Amounts thereof), compounded on the Compounding Dates as set forth in the Pricing Certificate, and payable, together with the principal amount thereof, in the manner provided in the Form of Bond at the rates set forth in the Pricing Certificate. Attached to the Pricing Certificate, if Premium Compound Interest Bonds are to be issued, shall be the Accretion Table. The Accreted Value with respect to any date other than a Compounding Date is the amount set forth on the Accretion Table with respect to the last preceding Compounding Date, plus the portion of the difference between such amount and the amount set forth on the Accretion Table with respect to the next succeeding Compounding Date that the number of days (based on 30-day months) from such last preceding Compounding Date to the date for which such determination is being calculated bears to the total number of days (based on 30-day months) from such last preceding Compounding Date to the next succeeding Compounding Date. SECTION 3.03. PAYMENT OF PRINCIPAL AND INTEREST. The Registrar is hereby appointed as the paying agent for the Bonds. The principal of the Bonds, shall be payable, without exchange or collection charges, in any coin or currency of the United States of America which, on the date of payment, is legal tender for the payment of debts due the United States of America, upon their presentation and surrender as they become due and payable, whether at maturity or by prior redemption in the case of the Bonds, at the office for payment of the Registrar. The interest on each Bond shall be payable on as set forth in the Pricing Certificate by check or draft payable on the Interest Payment Date, mailed by the Registrar on or before each Interest Payment Date to the Registered Owner as shown on the Register on the Record Date or, at the request of a Registered Owner, and at the Registered Owner's risk and expense, in such other manner as may be acceptable to the Registered Owner and the Registrar. Any accrued interest payable at maturity or earlier redemption, in the case of the Bonds, shall be 8 paid upon presentation and surrender of the Bond to which such interest appertains. If the date for payment on any Bond is not a Business Day, then the date for such payment shall be the next succeeding Business Day, and payment on such date shall have the same force and effect as if made on the original date payment was due. SECTION 3.04. SUCCESSOR REGISTRARS. The District covenants that at all times while any Bonds are outstanding it will provide a bank, trust company, financial institution or other entity duly qualified and duly authorized to act as Registrar for the Bonds. The District reserves the right to change the Registrar on not less than 30 days written notice to the Registrar, so long as any such notice is effective at such time as to not disrupt payment on the next succeeding principal or interest payment date on the Bonds. Promptly upon the appointment of any successor Registrar, the previous Registrar shall deliver the Register or copies thereof to the new Registrar, and the new Registrar shall notify each Registered Owner, by United States mail, first-class postage prepaid, of such change and of the address of the new Registrar. Each Registrar hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of this Section. SECTION 3.05. SPECIAL RECORD DATE. If interest on any Bond is not paid on any Interest Payment Date and continues unpaid for 30 days thereafter, the Registrar shall establish a new record date for the payment of such interest, to be known as a Special Record Date. The Registrar shall establish a Special Record Date when funds to make such interest payment are received from or on behalf of the District. Such Special Record Date shall be 15 days prior to the date fixed for payment of such past due interest, and notice of the date of payment and the Special Record Date shall be sent by United States mail, first-class, postage prepaid, not later than 5 days prior to the Special Record Date, to each affected Registered Owner of record as of the close of business on the day prior to the mailing of such notice. SECTION 3.06. REGISTERED OWNERS. The District, the Registrar and any other person may treat the person in whose name any Bond is registered as the absolute Registered Owner of such Bond for the purpose of making payment of principal or interest on such Bond, and for all other purposes, whether or not such Bond is overdue, and neither the District, nor the Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Bond in accordance with this Section 3.07 shall be valid and effectual and shall discharge the liability of the District and the Registrar upon such Bond to the extent of the sums paid. SECTION 3.07. EXECUTION OF BONDS. The Bonds shall be signed on behalf of the District by the President or Vice-President of the Board of Directors and attested by the Secretary or Assistant Secretary, by their manual, lithographed, or facsimile signatures, and the official seal of the District shall be impressed or placed in facsimile thereon. The facsimile signatures on the Bonds shall have the same effect as if each of the Bonds had been signed manually and in person by each of said officers, and the facsimile seal on the Bonds shall have the same effect as if the official seal of the District had been manually impressed upon each of the Bonds. If any officer of the District whose manual or facsimile signature appears on the Bonds shall cease to be such officer before the authentication of such Bonds or before the 9 delivery of such Bonds, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. SECTION 3.08. AUTHENTICATION. The Initial Bond shall bear thereon a certificate of registration of the Comptroller of Public Accounts of the State of Texas, substantially in the form provided in Section 6.02 of this Bond Order, manually executed by the Comptroller or a duly authorized deputy. All other Bonds shall bear a certificate of authentication, substantially in the form provided in Section 6.03 of this Bond Order, manually executed by an authorized officer of the Registrar. No Bond shall be valid or obligatory for any purpose unless either the registration certificate of the Comptroller or the authentication certificate of the Registrar has been signed by a duly authorized officer thereof. ARTICLE FOUR REGISTRATION. TRANSFER. AND EXCHANGE SECTION 4.01. REGISTRATION. TRANSFER, AND EXCHANGE. So long as any Bonds remain Outstanding, the Registrar shall keep at its designated office for payment the Register, in which, subject to such reasonable regulations as it may prescribe, the Registrar shall provide for the registration and transfer of Bonds in accordance with the terms of this Bond Order. Each Bond shall be transferable only upon the presentation and surrender thereof at the designated office for payment of the Registrar, duly endorsed for transfer, or accompanied by an assignment duly executed by the Registered Owner or an authorized representative in form satisfactory to the Registrar. Upon due presentation of any Bond for transfer, the Registrar shall authenticate and deliver in exchange therefor, within 72 hours after such presentation, a new Bond or Bonds of the same type, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount, and bearing interest at the same rate as the Bond or Bonds so presented. All Bonds shall be exchangeable upon presentation and surrender thereof at the designated office for payment of the Registrar for a Bond or Bonds of the same maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Bond or Bonds presented for exchange. The Registrar shall be and is hereby authorized to authenticate and deliver exchange Bonds in accordance with the provisions of this Section 4.01. Each Bond delivered in accordance with this Section 4.01 shall be entitled to the benefits and security of this Bond Order to the same extent as the Bond or Bonds in lieu of which such Bond is delivered. The District or the Registrar may require the Registered Owner of any Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Bond. Any fee or charge of the Registrar for such transfer or exchange shall be paid by the District. 10 SECTION 4.02. MUTILATED. LOST, OR STOLEN BONDS. Upon the presentation and surrender to the Registrar of a mutilated Bond, the Registrar shall authenticate and deliver in exchange therefor a replacement Bond of like maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding. If any Bond is lost, apparently destroyed, or wrongfully taken, the District, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such Bond has been acquired by a bona fide purchaser, shall execute and the Registrar shall authenticate and deliver a replacement Bond of like amount, bearing a number not contemporaneously outstanding. The District or the Registrar may require the Registered Owner of a mutilated Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including apparently destroyed, or wrongfully taken, the District, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such Bond has been acquired by a bona fide purchaser, shall execute and the Registrar shall authenticate and deliver a replacement Bond of like amount, bearing a number not contemporaneously outstanding. The District or the Registrar may require the Registered Owner of a mutilated Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including the fees and expenses of the Registrar. The District or the Registrar may require the Registered Owner of a lost, apparently destroyed or wrongfully taken Bond, before any replacement Bond is issued, to: (a) furnish to the District and the Registrar satisfactory evidence of the ownership of and the circumstances of the loss, destruction or theft of such Bond; (b) furnish such security or indemnity as may be required by the Registrar and the District to save them harmless; (c) pay all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Registrar and any tax or other governmental charge that may be imposed; and (d) meet any other reasonable requirements of the District and the Registrar. If, after the delivery of such replacement Bond, a bona fide purchaser of the original Bond which such replacement Bond was issued presents for payment such original Bond, the District and the Registrar shall be entitled to recover such replacement Bond from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the District or the Registrar in connection therewith. If any such mutilated, lost, apparently destroyed or wrongfully taken Bond has become or is about to become due and payable, the District in its discretion may, instead of issuing a replacement Bond, authorize the Registrar to pay such Bond. 11 Each replacement Bond delivered in accordance with this Section 4.02 shall be entitled to the benefits and security of this Bond Order to the same extent as the Bond or Bonds in lieu of which such replacement is delivered. SECTION 4.03. CANCELLATION OF BONDS. All Bonds paid in accordance with this Bond Order, and all Bonds in lieu of which exchange Bonds or replacement Bonds are authenticated, registered, and delivered in accordance herewith, shall be canceled and destroyed upon the making of proper records regarding such payment, redemption, exchange, or replacement. This Registrar shall furnish the District with appropriate certificates of destruction of such Bonds. SECTION 4.04. BOOK-ENTRY-ONLY SYSTEM, (a) Book-Entrv-Onlv System. The Bonds issued in exchange for the Initial Bond issued as provided in Section 3.02 shall be issued in the form of a separate single fully registered Bond for each of the maturities thereof registered in the name of Cede & Co., as nominee of The Depository Trust Company of New York ("DTC") and except as provided in subsection (b) hereof, all of the outstanding Bonds shall be registered in the name of Cede & Co., as nominee of DTC. With respect to Bonds registered in the name of Cede & Co., as nominee of DTC, the District and the Paying Agent/Registrar shall have no responsibility or obligation to any securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC participants (the "DTC Participant") or to any person on behalf of whom such a DTC Participant holds an interest in the Bonds. Without limiting the immediately preceding sentence, the District and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Bonds, (ii) the delivery to any DTC Participant or any other person, other than a Registered Owner, as shown on the Registration Books, of any notice with respect to the Bonds, or (iii) the payment to any DTC Participant or any person, other than a Registered Owner, as shown in the Registration Books of any amount with respect to principal of or interest on the Bonds. Notwithstanding any other provision of this Order to the contrary, but to the extent permitted by law, the District and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Bond is registered in the Registration Books as the absolute owner of such Bond for the purpose of payment of principal of and interest, with respect to such Bond, for the purposes of registering transfers with respect to such Bond, and for all other purposes of registering transfers with respect to such Bonds, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of and interest on the Bonds only to or upon the order of the respective Registered Owners, as shown in the Registration Books as provided in this Order, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the District's obligations with respect to payment of principal of and interest on the Bonds to the extent of the sum or sums so paid. No person other than a Registered Owner, as shown in the Registration Books, shall receive a Bond evidencing the obligation of the District to make payments of principal, and interest pursuant to this Order. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions in 12 this Order with respect to interest checks being mailed to the registered owner at the close of business on the Record Date the word "Cede & Co." in this Order shall refer to such new nominee of DTC. (b) Successor Securities Depository; Transfer Outside Book-Entry-Only System. In the event that the District determines to discontinue the book-entry system through DTC or a successor or DTC determines to discontinue providing its services with respect to the Bonds, the District shall either (i) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC and DTC Participants of the appointment of such successor securities depository and transfer one or more separate Bonds to such successor securities depository or (ii) notify DTC and DTC Participants of the availability through DTC of Bonds and transfer one or more separate Bonds to DTC Participants having Bonds credited to their DTC accounts. In such event, the Bonds shall no longer be restricted to being registered in the Registration Books in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names the Registered Owner transferring or exchanging Bond shall designate, in accordance with the provisions of this Order. (c) Payments to Cede & Co. Notwithstanding any other provision of this Order to the contrary, so long as any Bond is registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, in the manner provided in the Letter of Representations of the District to DTC. (d) DTC Blanket Letter of Representations. The District confirms execution of a Blanket Issuer Letter of Representations with DTC establishing the Book-Entry-Only System which will be utilized with respect to the Bonds. (e) Initial Bond. The Bonds herein authorized shall be initially issued as a fully registered bond, being one Bond, and the Initial Bond shall be registered in the name of the Underwriter or the designees thereof. The Initial Bond shall be the Bond submitted to the Office of the Attorney General of the State of Texas for approval, certified and registered by the Office of the Comptroller of Public Accounts of the State of Texas and delivered to the Underwriter. Immediately after the delivery of the Initial Bond on the closing date, the Paying Agent/Registrar shall cancel the Initial Bond delivered hereunder and exchange therefor Bonds in the form of a separate single fully registered Bond for each of the maturities thereof registered in the name of Cede & Co., as nominee of DTC and except as provided in Section 3.02, all of the outstanding Bonds shall be registered in the name of Cede & Co., as nominee of DTC. ARTICLE FIVE REDEMPTION OF BONDS BEFORE MATURITY SECTION 5.01. REDEMPTION OF BONDS. The Bonds are subject to redemption as set forth in the Pricing Certificate. 13 ARTICLE SIX FORM OF BOND SECTION 6.01. FORM OF BOND. The Bonds authorized by this Bond Order shall be in substantially the following form, with such omissions, insertions, and variations, including variations in form, spacing, and style, as may be necessary and desirable and consistent with the terms of this Bond Order and the Pricing Certificate. The District shall provide sufficient printed bond forms, duly executed by the District, to the Registrar for registration, authentication, and delivery of the Bonds in accordance with the provisions of this Bond Order. FORM OF BOND UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 [FORM OF FDiST PARAGRAPHS OF CURRENT INTEREST BONDS] NO. R- PRINCIPAL AMOUNT $ INTEREST RATE DATE OF BONDS MATURITY DATE CUSP? NO. REGISTERED OWNER: PRINCIPAL AMOUNT ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICH*AL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from on and semiannually on each * and As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. 14 As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this * * thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at , which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Austin, Texas. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each Interest Payment Date by check or draft, dated as of such Interest Payment Date, drawn by the Registrar on, and payable solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Registrar by United States mail, first-class postage prepaid, on or before each such Interest Payment Date, to the Registered Owner hereof, at its address as it appeared on the fifteenth (15th) calendar day of the month next preceding each such date whether or not a business day (the "Record Date") on the Register kept by the Registrar listing the names and addresses of the Registered Owners (the "Register"). In addition, interest may be paid by such other method, acceptable to the Registrar, requested by, and at the risk and expense of, the Registered Owner. In the event of a non-payment of interest on a scheduled payment date, and for 30 calendar days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 calendar days after the Special Record Date) shall be sent at least 5 business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner as it appears on the Register at the close of business on the last business day next preceding the date of mailing of such notice. DURING ANY PERIOD in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. 15 and bearing the same interest rate are to be redeemed, the particular Bonds of such maturity and bearing such interest rate shall be selected in accordance with the arrangements between the District and the securities depository. ANY ACCRUED INTEREST due at maturity or upon the redemption of this Bond prior to maturity as provided herein shall be paid to the Registered Owner upon presentation and surrender of this Bond for payment at the designated office for payment of the Paying Agent/Registrar. The District covenants with the Registered Owner of this Bond that on or before each principal payment date, interest payment date, and any redemption date for this Bond it will make available to the Registrar, from the "Debt Service Fund" the creation of which is affirmed by the Bond Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. [FORM OF FIRST PARAGRAPHS OF PREMIUM COMPOUND INTEREST BOND] NO. PC- MATURITY AMOUNT $ INTEREST RATE ISSUANCE DATE MATURITY DATE CUSIP NO. REGISTERED OWNER: MATURITY AMOUNT: ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assigns (hereinafter called the "Registered Owner") the Maturity Amount set forth above, representing the principal amount hereof and accrued and compounded interest hereon. Interest shall accrue on the principal amount hereof from the Issuance Date at the interest rate per annum specified above, calculated on the basis of a 360 day year comprised of twelve 30 day months, compounded semiannually on and * of each year commencing , 20 . For convenience of reference a table of the "Accreted Value" per $5,000 Maturity Amount is printed on the reverse side of this Bond. The term "Accreted Value" as set forth in the table on the reverse side hereof shall mean the original principal amount plus initial premium per $5,000 Maturity Amount compounded semiannually on * and at the yield shown on such table. THE MATURITY AMOUNT of this Bond is payable in lawful money of the United States of America, without exchange or collection charges. The Maturity Amount of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity, at the designated office for payment of *, which is the "Paying 16 Agent/Registrar" for this Bond, and shall be drawn by the Paying Agent/Registrar on, and solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided, payable to the Registered Owner hereof, as it appears on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. The District covenants with the Registered Owner of this Bond that on or before the Maturity Date for this Bond it will make available to the Paying Agent/Registrar, from the "Debt Service Fund" created by the Bond Order, the amounts required to provide for the payment, in immediately available funds of the Maturity Amount, when due. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. [FORM OF REMAINDER OF EACH BOND] IF THE DATE for any payment due on this Bond shall be a Saturday, Sunday, or a day on which the Paying Agent/Registrar is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, or day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds dated as of * and authorized to be issued pursuant to the Bond Order adopted by the Board of Directors of the District in the principal amount of $ [constituting $ Current Interest Bonds and $ Premium Compound Interest Bonds]" FOR PURPOSES OF REFUNDING THE REFUNDED BONDS AND PAYING CERTAIN COSTS OF ISSUING THE BONDS. Terms used herein and not otherwise defined shall have the meanings given in the Bond Order. ON , 20_ * OR ON ANY DATE THEREAFTER, the Current Interest Bonds maturing on and after , 20 *, may be redeemed prior to their scheduled maturities, at the option of the District, with funds derived from any available and lawful source, at a redemption price equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption as a whole, or from time to time in part, and, if in part, the particular Current Interest Bonds, or portions thereof, to be redeemed shall be selected and designated by the District, and if less than all of a maturity is to be redeemed the Registrar shall determine by lot the Current Interest Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Current Interest Bond may be redeemed only in integral multiples of $5,000 of As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. To be included only if Current Interest Bonds and Premium Compound Interest Bonds are both issued and completed as determined in the Pricing Certificate. 17 principal amount). [The Premium Compound Interest Bonds are not subject to redemption prior to maturity.] [THE BONDS maturing on , 20 (the "Term Bonds") are subject to mandatory sinking fund redemption by lot prior to maturity in the following amounts, on the following dates and at a price of par plus accrued interest to the redemption date. Bonds Maturing , 20 Redemption Date Principal Amount , 20 $ , 20 t f tFinal Maturity THE PRINCIPAL AMOUNT of the Term Bonds required to be redeemed pursuant to the operation of the mandatory sinking fund redemption provisions shall be reduced, at the option of the District by the principal amount of any Term Bonds of the stated maturity which, at least 50 days prior to a mandatory redemption date, (1) shall have been acquired by the District, at a price not exceeding the principal amount of such Term Bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, (2) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the District with monies in the Debt Service Fund at a price not exceeding the principal amount of the Term Bonds plus accrued interest to the date of purchase thereof, or (3) shall have been redeemed pursuant to the optional redemption provisions and not theretofore credited against a mandatory sinking fund redemption requirement.] AT LEAST 30 calendar days prior to the date fixed for any redemption of Current Interest Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Current Interest Bond to be redeemed at its address as it appeared on the Register on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. By the date fixed for any such redemption due provision shall be made with the Registrar for the payment of the required redemption price for the Current Interest Bonds or portions for which such payment is made, all as provided above. The Current Interest Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Registrar out of the funds provided for such payment. If a portion of any Current Interest Bond shall be redeemed, a substitute Current Interest Bond or Bonds having the same maturity date, bearing interest at the same rate, in any authorized denomination or denominations, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be Use of Term Bonds, if any, to be determined by the Pricing Officer. 18 issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the District, all as provided in the Bond Order. WITH RESPECT TO any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Bond Order have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, the District shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. ALL BONDS OF THIS SERIES are issuable solely as fully registered Bonds, without interest coupons, in the principal denomination in the case of the Bonds, of any integral multiple of $5,000. As provided in the Bond Order, this Bond may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred, converted into and exchanged for a like aggregate amount of fully registered Bonds, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having any authorized denomination or denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Bond to the Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Order. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Registrar, evidencing assignment of this Bond or any portion or portions hereof in any authorized denomination to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be registered. The Form of Assignment printed or endorsed on this Bond may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Registrar may be used to evidence the assignment of this Bond or any portion or portions hereof from time to time by the Registered Owner. The Registrar's reasonable standard or customary fees and charges for assigning, transferring, converting and exchanging any Bond or portion thereof will be paid by the District. In any circumstance, any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer, conversion or exchange, as a condition precedent to the exercise of such privilege. The Registrar shall not be required to make any such transfer, conversion or exchange of any Bond or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or Interest Payment Date or (ii) within 45 calendar days prior to its redemption date; provided, however, such limitation on transferability shall not be applicable to an exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. 19 WHENEVER the beneficial ownership of this Bond is determined by a book entry at a securities depository for the Bonds, the foregoing requirements of holding, delivering or transferring this Bond shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. IN THE EVENT any Registrar for the Bonds is changed by the District, resigns, or otherwise ceases to act as such, the District has covenanted in the Bond Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Bonds. THE BONDS are payable from the proceeds of an ad valorem tax, without legal limit as to rate or amount, levied upon all taxable property within the District. The Bond Order provides that the District reserves the right to consolidate with one or more conservation and reclamation districts, to consolidate its waterworks and sewer systems with the systems of such districts, and to secure the Bonds and any other bonds of the District or such districts by a pledge of taxes of the consolidated system. The Bond Order further provides that the pledge of taxes, to the payment of the Bonds shall terminate at such time, if ever, as (i) money and/or defeasance obligations in an amount sufficient to defease the Bonds is deposited with or made available to the Registrar in accordance with the Bond Order or (ii) a city dissolves the District, and assumes the obligations of the District pursuant to existing Texas law. THE BONDS are issued pursuant to the Bond Order, whereunder the District covenants to levy a continuing direct annual ad valorem tax, without legal limit as to rate or amount, on taxable property within the District, for each year while any part of the Bonds are considered outstanding under the provisions of the Bond Order, in sufficient amount, together with revenues and receipts available from other sources which are equally available for such purposes, to pay interest on the Bonds as it becomes due, to provide a sinking fund for the payment of the principal of the Bonds when due or the redemption price at any earlier required redemption date with respect to the Bonds, and to pay the expenses of assessing and collecting such tax, all as more specifically provided in the Bond Order. Reference is hereby made to the Bond Order for provisions with respect to the operation and maintenance of the District's facilities, the custody and application of funds, remedies in the event of a default hereunder or thereunder, and the other rights of the Registered Owners of the Bonds. By acceptance of this Bond the Registered Owner hereof consents to all of the provisions of the Bond Order, a certified copy of which is on file in the office of the District. THE OBLIGATION to pay the principal of and the interest on this Bond is solely and exclusively the obligation of the District until such time, if ever, as the District is abolished and this Bond is assumed as described above. No other entity, including the State of Texas, any political subdivision thereof other than the District, or any other public or private body, is obligated, directly, indirectly, contingently, or in any other manner, to pay the principal of or the interest on this Bond from any source whatsoever. No part of the physical properties of the District, including the properties provided by the proceeds of the Bonds, is encumbered by any lien for the benefit of the Registered Owner of this Bond. 20 THE DISTRICT RESERVES THE RIGHT to issue additional bonds heretofore or hereafter duly authorized at elections held in the District payable from a lien on and pledge of taxes; bonds, notes and other obligations of inferior liens, and revenue bonds, notes and other obligations payable solely from revenues of the District or revenues to be received under contracts with other persons, including private corporations, municipalities and political subdivisions or from any other source. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund any bonds (including the Bonds) at or prior to their respective dates of maturity or redemption. TO THE EXTENT permitted by and in the manner provided in the Bond Order, the terms and provisions of the Bond Order and the rights of the Registered Owners of the Bonds may be modified with, in certain circumstances, the consent of the Registered Owners of a majority in aggregate principal amount of the Bonds affected thereby; provided, however, that, without the consent of the Registered Owners of all of the Bonds affected, no such modification shall (i) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (ii) give any preference to any Bond over any other Bond, or (iii) reduce the aggregate principal amount of the Bonds required for consent to any such modification. THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Bond Order unless this Bond either (a) is registered by the Comptroller of Public Accounts of the State of Texas as evidenced by execution of the registration certificate endorsed hereon or (b) is authenticated as evidenced by execution of the authentication certificate endorsed hereon by the Registrar. IT IS HEREBY CERTIFIED, COVENANTED, AND REPRESENTED that all acts, conditions, and things necessary to be done precedent to the issuance of the Bonds in order to render the same legal, valid, and binding obligations of the District have happened and have been accomplished and performed in regular and due time, form, and manner, as required by law; that provision has been made for the payment of the principal of and interest on the Bonds by the levy of a continuing, direct annual ad valorem tax upon all taxable property within the District and that issuance of the Bonds does not exceed any constitutional or statutory limitation. In the event that any provisions herein contained do or would, presently or prospectively, operate to make any part hereof void or voidable, such provisions shall be without effect or prejudice to the remaining provisions hereof, which shall nevertheless remain operative, and such violative provisions, if any, shall be reformed by a court of competent jurisdiction within the limits of the laws of the State of Texas. IT IS FURTHER CERTIFIED that the District has designated the Bonds as "qualified tax-exempt obligations" within the meaning of Section 265(b) of the Internal Revenue Code of 1986. IN WITNESS WHEREOF, the District has caused this Bond to be signed with the manual or facsimile signature of the President or Vice-President of the Board of Directors of the District and countersigned with the manual or facsimile signature of the Secretary or Assistant 21 Secretary of the Board of Directors of the District, and has caused the official seal of the District to be duly impressed, or placed in facsimile, on this Bond. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Secretary [Assistant Secretary], President [Vice-President], Board of Directors Board of Directors (DISTRICT SEAL) INSERTIONS FOR INITIAL BONDS (i) The Initial Current Interest Bond shall be in the form set forth in this Section, except that: A. immediately under the name of the Current Interest Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below" and "CUSIP NO." shall be deleted. B. the first paragraph of the Current Interest Bond shall be deleted and the following will be inserted: "ON THE MATURITY DATE SPECIFIED BELOW, Trophy Club Municipal Utility District No. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner specified above, or registered assigns (hereinafter called the "Registered Owner"), on in each of the years, in installments of the respective Maturity Amounts set forth in the following schedule: Maturity Interest Year Amounts Rates (Information from Pricing Certificate to be inserted) The District promises to pay interest on the unpaid principal amount hereof (calculated on the basis of a 360-day year of twelve 30-day months) from _* at the respective Interest Rate per annum specified above. Interest is payable on and * As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. 22 semiannually on each * and * thereafter to the date of payment of the principal installment specified above; except, that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full." C. The Initial Current Interest Bond shall be numbered "T-l". (ii) The Initial Compound Interest Bond shall be in the form set forth in this Section, except that: A. Immediately under the name of the Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below" and "CUSIP NO. " shall be deleted. B. the first paragraph shall be deleted and the following will be inserted: "TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1, in Denton and Tarrant Counties, Texas (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assigns (hereinafter called the "Registered Owner") the Payment at Maturity on in each of the years and in the principal installments and bearing interest at the per annum rates set: Maturity Principal Date Amount Interest Rates (Information for the Premium Compound Interest Bonds from the Pricing Certificate to be inserted) The amount shown above as the respective Maturity Amounts represent the principal amount hereof and accrued and compounded interest hereon. Interest shall accrue on the principal amount hereof from the Issuance Date at the interest rate per annum specified above, compounded semiannually on and of each year commencing . For convenience of reference, a table appears on the back of this Bond showing the "Compounded Amount" of the original principal amount plus initial premium, if any, per $5,000 Maturity Amount compounded semiannually at the yield shown on such table." 23 C. the Initial Premium Compound Interest Bond shall be numbered "TPC-1." SECTION 6.02. REGISTRATION OF INITIAL BOND BY STATE COMPTROLLER AND CERTIFICATE. The Initial Bond shall be registered by the Comptroller of Public Accounts of the State of Texas as provided by law. The registration certificate of the Comptroller of Public Accounts of the State of Texas shall be printed on the face of the Initial Bond and shall be in substantially the following form: COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) SECTION 6.03. FORM OF AUTHENTICATION CERTIFICATE. The following form of authentication certificate shall be printed on the face of each of the Bonds other than the Initial Bond: PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Order described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a Bond, Bonds, or a portion of a Bond or Bonds of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. 24 Dated. Registrar By Authorized Representative SECTION 6.04. FORM OF ASSIGNMENT. A form of assignment shall be printed on the back of each of the Bonds and shall be in substantially the following form: ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto Please insert Social Security or Taxpayer Identification Number of Transferee (Please print or typewrite name and address, including zip code of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints , attorney, to register the transfer of the within Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Bond in every particular, without alteration or enlargement or any change whatsoever. 25 SECTION 6.05. CUSIP REGISTRATION. The Pricing Officer may secure the printing of identification numbers on the Bonds through the CUSIP Service Bureau. SECTION 6.06. LEGAL OPINION AND BOND INSURANCE. The approving opinion of McCall, Parkhurst & Horton LLP. may be printed on the back of the Bonds over the certification of the Secretary of the Board of Directors which may be executed in facsimile. In addition, if any bond insurance is obtained, any statement of insurance may be placed on the Bonds. ARTICLE SEVEN SECURITY OF THE BONDS SECTION 7.01. GENERAL. The Bonds are secured by and payable from the levy of a continuing, direct annual ad valorem tax, without legal limitation as to rate or amount, upon all taxable property within the District. SECTION 7.02. LEVY OF TAX, (a) To pay the interest on the Bonds, and to create a sinking fund for the payment of the principal thereof when due, and to pay the expenses of assessing and collecting such taxes, there is hereby levied, and there shall be assessed and collected in due time, a continuing, direct annual ad valorem tax without limit as to rate or amount on all taxable property in the District for each year while any of the Bonds are outstanding. All of the proceeds of such collections, except expenses incurred in that connection, shall be paid into the Debt Service Fund, and the aforementioned tax and such payments into such fund shall continue until the Bonds and the interest thereon have been fully paid and discharged, and such proceeds shall be used for such purposes and no other. While said Bonds, or any of them, are outstanding and unpaid, an ad valorem tax will be ample and sufficient to provide funds to pay the interest on said Bonds and to provide the necessary sinking fund to pay the principal when due, full allowance being made for delinquencies and costs of collection, together with revenues and receipts from other sources that are legally available for such purpose, shall be levied and collected and applied to the payment of principal and interest on the Bonds, as follows: (1) By September 1 in each year, or as soon thereafter as practicable, the Board shall consider the taxable property in the District and determine the actual rate per $100 valuation of taxable property which is to be levied in that year and levy the tax against all taxable property in the District. (2) In determining the actual rate to be levied in each year, the Board shall consider among other things: (i) the amount which should be levied for maintenance and operation purposes; 26 (ii) the amount which should be levied for the payment of principal, interest, and redemption price of the bonds or notes payable in whole or in part from taxes; (iii) the amount which should be levied for the purpose of paying all other contractual obligations of the District payable in whole or in part from taxes; and (iv) the percentage of anticipated tax collections and the cost of collecting the taxes. (3) In determining the amount of taxes which should be levied each year, the Board shall consider whether proceeds from the sale of Bonds have been placed in the Debt Service Fund to pay interest on the Bonds and whether the Board reasonably expects to have revenue or receipts available from other sources which are legally available to pay debt service on the Bonds. (b) Chapter 1208, Government Code, applies to the issuance of the Bonds and the pledge of ad valorem taxes granted by the District under this Order, and such pledge is therefore valid, effective and perfected. If Texas law is amended at any time while the Bonds are outstanding and unpaid such that the pledge of ad valorem taxes granted by the District under this Order is to be subject to the filing requirements of Chapter 9, Business & Commerce Code, then in order to preserve to the registered owners of the Bonds the perfection of the security interest in said pledge, the District agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Business & Commerce Code and enable a filing to perfect the security interest in said pledge to occur. SECTION 7.03. PAYMENT OF BONDS AND PERFORMANCE OF OBLIGATIONS. The District covenants to pay promptly the principal of and interest on the Bonds as the same become due and payable, whether at maturity or by prior redemption, in accordance with the terms of the Bonds and this Bond Order, and to keep and perform faithfully all of its covenants, undertakings, and agreements contained in this Bond Order, or in any Bond executed, authenticated, and delivered hereunder. SECTION 7.04. CONSOLIDATION OR DISSOLUTION OF DISTRICT. To the extent provided by law, the pledge of taxes set forth in Section 7.02 will terminate if a city takes over all properties and assets, assumes all debts, liabilities, and obligations, and performs all functions and services of the District, and the District is abolished pursuant to law. The laws of the State of Texas permit the District to be consolidated with one or more conservation and reclamation districts. In the event the District is consolidated with another district or districts, the District reserves the right to: (i) Consolidate the System with a similar system of one or more districts with which the District is consolidating and operate and maintain the systems as one consolidated system (herein for purposes of this section the "Consolidated System"). 27 (ii) Apply the net revenues from the operation of the Consolidated System to the payment of principal, interest, redemption price and bank charges on the revenue bonds or the combination tax and revenue bonds (herein for purposes of this section the "Revenue Bonds") of the District and of the district or districts with which the District is consolidating (herein collectively the "Consolidating Districts") without preference to any series of bonds (except subordinate lien revenue bonds which shall continue to be subordinate to the first lien Revenue Bonds of the Consolidating Districts). (iii) Pledge the net revenues of the Consolidated System to the payment of principal, interest, redemption price and bank charges on Revenue Bonds which may be issued by the Consolidating Districts on a parity with the outstanding first lien Revenue Bonds of the Consolidating Districts. ARTICLE EIGHT FLOW OF FUNDS AND INVESTMENTS SECTION 8.01. FUNDS. FLOW OF FUNDS. The following funds are hereby created: (i) Debt Service Fund for the Bonds; and (ii) Escrow Fund. Each fund shall be kept separate and apart from all other funds of the District. The Debt Service Fund for the Bonds shall constitute a trust fund which shall be held in trust for the benefit of the owners of the Bonds. All other funds shall be trust funds which shall be used solely as provided in this Bond Order until all of the Bonds have been retired, both as to principal and interest. SECTION 8.02. SECURITY OF FUNDS. Any cash balance in any fund, to the extent not insured by the Federal Deposit Insurance Corporation or its successor, shall be continuously secured in the manner provided by law for the security of funds of counties of the State of Texas. SECTION 8.03. DEBT SERVICE FUND; TAX LEVY. The District shall deposit or cause to be deposited into the Debt Service Fund the aggregate of the following at the time specified: (a) As soon as practicable after the Bonds are sold, accrued interest on the Bonds from their date to the date of their delivery; and (b) The proceeds from collection of the ad valorem taxes levied, assessed and collected for and on account of the Bonds pursuant to Section 7.02 hereof, less costs of collection, as collected. 28 On or before the date for payment of the principal and/or Interest Payment Date on the Bonds, the Board of Directors shall cause the transfer of moneys out of the Debt Service Fund to the Registrar in an amount not less than that which is sufficient to pay the principal which matures on such date and the interest which accrues on such date. The District shall pay fees and charges of the Registrar for its services as paying agent and registrar for the Bonds from the Debt Service Fund. SECTION 8.04. ESCROW FUND. The Escrow Fund shall be created and shall be governed by the terms of the Escrow Agreement in substantially the form attached hereto as Exhibit "B" with such changes as approved by the Pricing Officer. SECTION 8.05. INVESTMENTS: EARNINGS. Moneys deposited into the Debt Service Fund and any other fund or funds which the District may lawfully create may be invested or reinvested in Authorized Investments. All investments and any profits realized from and interest accruing on investments made from any fund may be transferred to the Debt Service Fund. If any moneys are so invested, the District shall have the right to have sold in the open market a sufficient amount of such investments to meet its obligations in the event any fund does not have sufficient uninvested funds on hand to meet the obligations payable out of such fund. After such sale the moneys resulting therefrom shall belong to the fund from which the moneys for such investments were initially taken. The District shall not be responsible to the Registered Owners for any loss arising out of the sale of any investments. ARTICLE NINE APPLICATION OF FUNDS SECTION 9.01. BOND PROCEEDS. Proceeds from the sale of the Bonds will be disbursed in accordance with this Article. SECTION 9.02. ACCRUED INTEREST. Moneys received from the Underwriter of the Bonds representing accrued interest, if any, on the Bonds from their date to the date of their actual delivery shall be deposited into the Debt Service Fund. SECTION 9.03. ESCROW FUND. The proceeds from the sale of the Bonds after making the deposit hereinbefore provided and paying or making provisions for the payment of the costs in connection with issuing the Bonds, shall be deposited into the Escrow Fund as described in the Escrow Agreement in substantially the form attached hereto as Exhibit "B" with such changes as approved by the Pricing Officer. ARTICLE TEN PROVISIONS CONCERNING FEDERAL INCOME TAX EXCLUSION SECTION 10.01. COVENANTS REGARDING TAX EXEMPTION OF INTEREST ON THE BONDS, (a) Covenants. The District covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the 29 Bonds as obligations described in section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the District covenants as follows: (1) to take any action to assure that no more than 10 percent of the proceeds of the Bonds or the Refunded Bonds or the projects financed or refinanced therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than 10 percent of the proceeds of the Bonds or the Refunded Bonds or the projects financed or refinanced therewith are so used, such amounts, whether or not received by the District, with respect to such private business use, do not, under the terms of this Order or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of section 141(b)(2) of the Code; (2) to take any action to assure that in the event that the "private business use" described in subsection (1) hereof exceeds 5 percent of the proceeds of the Bonds or the Refunded Bonds or the projects financed or refinanced therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used for a "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) of the Code, to the governmental use; (3) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; (4) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (5) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of section 149(b) of the Code; (6) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with ~ (A) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less or, in the case of a current refunding bond, for a period of 90 days and in the case of an advance refunding bond, for a period of 30 days, (B) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1(b) of the Treasury Regulations, and (C) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Bonds; 30 (7) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); and (8) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(f) of the Code. (b) Rebate Fund. In order to facilitate compliance with the above covenant (8), a "Rebate Fund" is hereby established by the District for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the bondholders. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. (c) Proceeds. The District understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the Refunded Bonds expended prior to the date of issuance of the Bonds. It is the understanding of the District that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Bonds, the District will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the District agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In furtherance of such intention, the District hereby authorizes and directs the President or Treasurer of the Board of Directors to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the District, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. (d) Disposition of Project. The District covenants that the property constituting the projects refinanced with the proceeds of the Bonds will not be sold or otherwise disposed in a transaction resulting in the receipt by the District of cash or other compensation, unless the District obtains an opinion of nationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. 31 For purposes hereof, the District shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (e) Designation as Qualified Tax-Exempt Bonds. The District hereby designates the Bonds as "qualified tax-exempt bonds" as defined in section 265(b)(3) of the Code. In furtherance of such designation, the District represents, covenants and warrants the following: (a) that during the calendar year in which the Bonds are issued, the District (including any subordinate entities) has not designated nor will designate bonds, which when aggregated with the Bonds, will result in more than $10,000,000 of "qualified tax-exempt bonds" being issued; (b) that the District reasonably anticipates that the amount of tax-exempt obligations issued, during the calendar year in which the Bonds are issued, by the District (or any subordinate entities) will not exceed $10,000,000; and, (c) that the District will take such action or refrain from such action as necessary, and as more particularly set forth in this Section, in order that the Bonds will not be considered "private activity bonds" within the meaning of section 141 of the Code. (f) Written Procedures. Unless superseded by another action of the District, to ensure compliance with the covenants contained in this Order regarding private business use, remedial actions, arbitrage and rebate, the District hereby adopts and establishes the instructions attached hereto as Exhibit "E" as its written procedures. ARTICLE ELEVEN ADDITIONAL BONDS AND REFUNDING BONDS SECTION 11.01. ADDITIONAL BONDS. The District expressly reserves the right to issue, in one or more installments, for the purpose of purchasing, constructing, acquiring, owning, operating, maintaining, repairing, improving, or extending the System, or for any other lawful purpose: (a) the unissued unlimited tax bonds which remain authorized but unissued; and (b) such other unlimited tax bonds as may hereafter be authorized at subsequent elections. SECTION 11.02. OTHER BONDS. The District further reserves the right to issue combination unlimited tax and revenue bonds, if authorized by election, and such other bonds or other obligations as may be lawfully issued by the District including any obligations issued for special projects or defined areas. SECTION 11.03. REFUNDING BONDS. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund the Bonds, the Outstanding Bonds, any Additional Bonds, or any other bonds issued by the District, at or prior to their respective dates of maturity or redemption. 32 ARTICLE TWELVE DEFAULT PROVISIONS SECTION 12.01. REMEDIES IN EVENT OF DEFAULT, (a) Events of Default. Each of the following occurrences or events for the purpose of this Order is hereby declared to be an Event of Default: (i) the failure to make payment of the principal of or interest on any of the Bonds when the same becomes due and payable; or (ii) default in the performance or observance of any other covenant, agreement or obligation of the District, the failure to perform which materially, adversely affects the rights of the Registered Owners of the Bonds, including, but not limited to, their prospect or ability to be repaid in accordance with this Order, and the continuation thereof for a period of 60 days after notice of such default is given by any Registered Owner to the District. (b) Remedies for Default. (i) Upon the happening of any Event of Default, then and in every case, any Registered Owner or an authorized representative thereof, including, but not limited to, a trustee or trustees therefor, may proceed against the District, or any official, officer or employee of the District in their official capacity, for the purpose of protecting and enforcing the rights of the Registered Owners under this Order, by mandamus or other suit, action or special proceeding in equity or at law, in any court of competent jurisdiction, for any relief permitted by law, including the specific performance of any covenant or agreement contained herein, or thereby to enjoin any act or thing that may be unlawful or in violation of any right of the Registered Owners hereunder or any combination of such remedies. (ii) It is provided that all such proceedings shall be instituted and maintained for the equal benefit of all Registered Owners of Bonds then outstanding. (c) Remedies Not Exclusive. (i) No remedy herein conferred or reserved is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or under the Bonds or now or hereafter existing at law or in equity; provided, however, that notwithstanding any other provision of this Order, the right to accelerate the debt evidenced by the Bonds shall not be available as a remedy under this Order. (ii) The exercise of any remedy herein conferred or reserved shall not be deemed a waiver of any other available remedy. (iii) By accepting the delivery of a Bond authorized under this Order, such Registered Owner agrees that the certifications required to effectuate any covenants or representations 33 contained in this Order do not and shall never constitute or give rise to a personal or pecuniary liability or charge against the officers, employees or trustees of the District or the Board of Directors. (iv) None of the members of the Board of Directors, nor any other official or officer, agent, or employee of the District, shall be charged personally by the Registered Owners with any liability, or be held personally liable to the Registered Owners under any term or provision of this Order, or because of any Event of Default or alleged Event of Default under this Order. SECTION 12.02. BOND ORDER IS CONTRACT. In consideration of the purchase and acceptance of the Bonds authorized to be issued hereunder by the Registered Owners, the provisions of this Bond Order shall be deemed to be and shall constitute a contract between the District and the Registered Owners; and the covenants and agreements herein set forth to be performed on behalf of the District shall be for the equal benefit, protection, and security of each of the Registered Owners. The Bonds, regardless of the time or times of their issue or maturity, shall be of equal rank without preference, priority, or distinction of any Bond over any other, except as expressly provided herein. ARTICLE THIRTEEN DISCHARGE BY DEPOSIT SECTION 13.01. DEFEASANCE OF BONDS, (a) Any Bond and the interest thereon shall be deemed to be paid, retired and no longer outstanding (a "Defeased Bond") within the meaning of this Order, except to the extent provided in subsections (c) and (e) of this Section, when payment of the principal of such Bond, plus interest thereon to the due date or dates (whether such due date or dates be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption) or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar or a commercial bank or trust company for such payment (1) lawful money of the United States of America sufficient to make such payment, (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times as will ensure the availability, without reinvestment, of sufficient money to provide for such payment and when proper arrangements have been made by the District with the Paying Agent/Registrar or a commercial bank or trust company for the payment of its services until all Defeased Bonds shall have become due and payable or (3) any combination of (1) and (2). At such time as a Bond shall be deemed to be a Defeased Bond hereunder, as aforesaid, such Bond and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes herein levied as provided in this Order, and such principal and interest shall be payable solely from such money or Defeasance Securities. (b) The deposit under clause (ii) of subsection (a) shall be deemed a payment of a Bond as aforesaid when proper notice of redemption of such Bonds shall have been given, in accordance with this Order. Any money so deposited with the Paying Agent/Registrar or a 34 commercial bank or trust company as provided in this Section may at the discretion of the Board of Directors also be invested in Defeasance Securities, maturing in the amounts and at the times as hereinbefore set forth, and all income from all Defeasance Securities in possession of the Paying Agent/Registrar or a commercial bank or trust company pursuant to this Section which is not required for the payment of such Bond and Premium Compound Interest Bond, if any, and interest thereon with respect to which such money has been so deposited, shall be turned over to the Board of Directors. (c) Notwithstanding any provision of any other Section of this Order which may be contrary to the provisions of this Section, all money or Defeasance Securities set aside and held in trust pursuant to the provisions of this Section for the payment of principal of the Bonds and premium, if any, and interest thereon, shall be applied to and used solely for the payment of the particular Bonds and premium, if any, and interest thereon, with respect to which such money or Defeasance Securities have been so set aside in trust. Until all Defeased Bonds shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Bonds the same as if they had not been defeased, and the District shall make proper arrangements to provide and pay for such services as required by this Order. (d) Notwithstanding anything elsewhere in this Order, if money or Defeasance Securities have been deposited or set aside with the Paying Agent/Registrar or a commercial bank or trust company pursuant to this Section for the payment of Bonds and such Bonds shall not have in fact been actually paid in full, no amendment of the provisions of this Section shall be made without the consent of the registered owner of each Bond affected thereby. (e) Notwithstanding the provisions of subsection (a) immediately above, to the extent that, upon the defeasance of any Defeased Bond to be paid at its maturity, the District retains the right under Texas law to later call that Defeased Bond for redemption in accordance with the provisions of the order authorizing its issuance, the District may call such Defeased Bond for redemption upon complying with the provisions of Texas law and upon the satisfaction of the provisions of subsection (a) immediately above with respect to such Defeased Bond as though it was being defeased at the time of the exercise of the option to redeem the Defeased Bond and the effect of the redemption is taken into account in determining the sufficiency of the provisions made for the payment of the Defeased Bond. ARTICLE FOURTEEN MISCELLANEOUS PROVISIONS SECTION 14.01. DISTRICT'S SUCCESSORS AND ASSIGNS. Whenever in this Bond Order the District is named and referred to, it shall be deemed to include its successors and assigns, and all covenants and agreements in this Bond Order by or on behalf of the District, except as otherwise provided herein, shall bind and inure to the benefit of its successors and assigns whether or not so expressed. 35 SECTION 14.02. NO RECOURSE AGAINST DISTRICT OFFICERS OR DDXECTORS. No recourse shall be had for the payment of the principal of or interest on the Bonds or for any claim based thereon or on this Bond Order against any officer or director of the District or any person executing the Bonds. SECTION 14.03. REGISTRAR. The Registrar shall act as agent for the payment of principal of and interest on the Bonds and shall maintain the Register for the Bonds, all in accordance with the terms of this Bond Order. If the Registrar or its successor becomes unable for any reason to act as Registrar hereunder, or if the Board of Directors of the District determines that a successor Registrar should be appointed, a successor Registrar shall be selected by the District. Any successor Registrar shall be either a bank, trust company, financial institution, or other entity duly qualified and legally authorized to serve and perform the duties as paying agent and registrar for the Bonds. SECTION 14.04. REGISTRAR MAY OWN BONDS. The Registrar, in its individual or any other capacity, may become the owner or pledgee of the Bonds with the same rights it would have if it were not Registrar. SECTION 14.05. BENEFITS OF ORDER PROVISIONS. Nothing in this Bond Order or in the Bonds, expressed or implied, shall give or be construed to give any person, firm, or corporation, other than the District, the Registrar, and the Registered Owners, any legal or equitable right or claim under or in respect of this Bond Order, or under any covenant, condition, or provision herein contained, all the covenants, conditions, and provisions contained in this Bond Order or in the Bonds being for the sole benefit of the District, the Registrar, and the Registered Owners. SECTION 14.06. UNAVAILABILITY OF AUTHORIZED PUBLICATION. If, because of the temporary or permanent suspension of any newspaper, journal, or other publication, or for any reason, publication of notice cannot be made meeting any requirements herein established, any notice required to be published by the provisions of this Bond Order shall be given in such other manner and at such time or times as in the judgment of the District shall most effectively approximate such required publication, and the giving of such notice in such manner shall for all purposes of this Bond Order be deemed to be in compliance with the requirements for publication thereof. SECTION 14.07. SEVERABILITY CLAUSE. If any word, phrase, clause, sentence, paragraph, section, or other part of this Bond Order, or the application thereof to any person or circumstance, shall ever be held to be invalid or unconstitutional by any court of competent jurisdiction, the remainder of this Bond Order and the application of such word, phrase, clause, sentence, paragraph, section, or other part of this Bond Order to any other persons or circumstances shall not be affected thereby. SECTION 14.08. ACCOUNTING. The District will keep proper records and accounts regarding the levy and collection of taxes, which records and accounts will be made available to any Registered Owner on reasonable request. Each year while any of the Bonds are outstanding, the District shall have an audit of its books and accounts by a certified public 36 accountant or firm of certified public accountants, based on its Fiscal year, and copies of such audits will be made available to any Registered Owner upon request. SECTION 14.09. FURTHER PROCEEDINGS. The President and Secretary of the Board of Directors and other appropriate officials of the District are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Bond Order. ARTICLE FIFTEEN SALE AND DELIVERY OF BONDS AND APPROVAL OF DOCUMENTS SECTION 15.01. SALE OF BONDS. The Bonds shall be sold and delivered, pursuant to a purchase agreement at a price and under the terms set forth in the Pricing Certificate. The Pricing Officer is authorized to approve such changes to the purchase agreement as necessary in connection with the sale of the Bonds including Sections 15.03 and 19.01. SECTION 15.02. APPROVAL. REGISTRATION, AND DELIVERY. The President of the Board of Directors of the District and representatives of McCall, Parkhurst & Horton LLP. are hereby authorized and directed to submit the Initial Bond and a transcript of the proceedings relating to the issuance of the Bonds to the Attorney General of the State of Texas for approval and, following said approval, to submit the Initial Bond to the Comptroller of Public Accounts of the State of Texas for registration. Upon registration of the Initial Bond, the Comptroller of Public Accounts (or a deputy designated in writing to act for the Comptroller) shall manually sign the Comptroller's registration certificate prescribed herein to be printed and endorsed on the Initial Bond, and the seal of the Comptroller shall be impressed or placed in facsimile on the Initial Bond. After the Initial Bond has been registered, signed, and sealed by the Comptroller, it shall be delivered to the Underwriter, but only upon receipt of the full purchase price. SECTION 15.03 APPROVAL OF OFFERING DOCUMENTS. PAYING AGENT/REGISTRAR AGREEMENT AND ESCROW AGREEMENT. The Pricing Officer is hereby authorized to approve the Preliminary Official Statement, the Official Statement relating to the Bonds and any addenda, supplement or amendment thereto and to deem such documents final in accordance with Rule 15c2-12. The District further approves the distribution of such Official Statement in the reoffering of the Bonds by the Underwriter in final form, with such changes therein or additions thereto as the Pricing Officer executing the same may deem advisable, such determination to be conclusively evidenced by his execution thereof. The Paying Agent/Registrar Agreement by and between the District and the Paying Agent/Registrar ("Paying Agent Agreement") in substantially the form and substance attached hereto as Exhibit "A" is hereby approved and the Pricing Officer is hereby authorized and directed to complete, amend, modify and execute the Paying Agent Agreement as necessary. 37 The Escrow Agreement by and between the District and the Escrow Agent ("Escrow Agreement") in substantially the form and substance attached hereto as Exhibit "B" is hereby approved, and the Pricing Officer is hereby authorized to complete, amend, modify and execute the Escrow Agreement, as necessary. The President, Vice President, Treasurer, the Secretary or Assistant Secretary are each hereby authorized to take such action as may be necessary to cause the purchase and delivery of the federal securities to be acquired and deposited to the credit of the escrow fund created by the Escrow Agreement. SECTION 15.04. REFUNDING OF REFUNDED BONDS. Concurrently with the delivery of the Bonds, the Pricing Officer shall cause to be deposited an amount from the proceeds of the sale of the Bonds with the Escrow Agent sufficient, together with other legally available funds of the District, to provide for the refunding and defeasance of the Refunded Bonds, which are hereby called for redemption on the date determined by the Pricing Officer in the Pricing Certificate. The Pricing Officer is further authorized and directed to apply and there is hereby appropriated such moneys of the District as are necessary to fund the Escrow Fund to be established by the Escrow Agreement with amounts sufficient to provide for the defeasance of the Refunded Bonds on the date of delivery of the Bonds. The Pricing Officer is hereby authorized and directed to issue to the Escrow Agent Notice of Redemption with respect to the Refunded Bonds in substantially the form set forth in Exhibit "C" hereto with such changes and additions as necessary to conform to the Pricing Certificate. ARTICLE SKTEEN OPEN MEETING AND EFFECTIVE DATE SECTION 16.01. OPEN MEETING. The Board of Directors officially finds, determines, and declares that this Bond Order was reviewed, carefully considered, and adopted at a meeting of the Board, and that a sufficient written notice of the date, hour, place, and subject of this meeting was posted as required by the Open Meetings Act, Chapter 551, Texas Government Code, as amended, and that this meeting has been open to the public as required by law at all times during which this Bond Order and the subject matter hereof has been discussed, considered, and acted upon. The Board of Directors further ratifies, approves and confirms such written notice and the contents and posting thereof. SECTION 16.02. EFFECTIVE DATE OF BOND ORDER. This Bond Order shall take effect and be in full force and effect upon and after its passage. ARTICLE SEVENTEEN AMENDMENTS SECTION 17.01. AMENDMENTS, (a) Amendment with Consent of Owners of Majority of Bonds. The owners of a majority in aggregate principal amount of then outstanding Bonds shall have the right from time to time to approve any amendment to this Bond Order 38 which may be deemed necessary or desirable by the District; provided however, that, other than as permitted by subsection (f) of this Section 17.01, nothing herein contained shall permit or be construed to permit the amendment, without the consent of the owner of each of the outstanding Bonds affected thereby, of the terms and conditions of this Bond Order or the Bonds so as to: (1) change debt service requirements, interest payment dates or the maturity or maturities of the outstanding Bonds; (2) reduce the rate of interest borne by any of the outstanding Bonds; (3) reduce the amount of the principal of, redemption premium, if any, or interest on the outstanding Bonds or impose any conditions with respect to such payments; (4) modify the terms of payment of principal of, redemption premium, if any, or interest on the outstanding Bonds, or impose any conditions with respect to such payments; (5) affect the right of the Registered Owners of less than all of the Bonds then outstanding; or (6) decrease the minimum percentage of the principal amount of Bonds necessary for consent to any such amendment. (b) Notice of Amendment. If at any time the District shall desire to amend this Bond Order it may cause a written notice of the proposed amendment to be published at least once on a business day in a financial newspaper, journal, or publication of general circulation in the City of New York, New York, or in the State of Texas. If, because of temporary or permanent suspension of the publication or general circulation of all such newspapers, journals, or publications, it is impossible or impractical to publish such notice in the manner provided herein, then such publication in lieu thereof as shall be made by the Registrar shall constitute a sufficient publication of notice. In addition to such publication, the Registrar shall cause a written notice of the proposed amendment to be given by registered or certified mail to Registered Owners of the Bonds as shown on the Registration Books maintained by the Registrar; provided, however, that failure to receive such written notice of the proposed amendment, or any defect therein or in the mailing thereof, shall not affect the validity of any proceeding in connection with, or the adoption of, such amendment. Such notice shall briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file at the principal office of the Registrar for inspection by all Registered Owners of Bonds. (c) Consent to Amendment. Whenever at any time not less than 30 days, and within one year, from the date of the first publication of said notice or other services of written notice the District shall receive an instrument or instruments executed by the Registered Owners of at least 51% in aggregate principal amount of all Bonds then outstanding, which instrument or instruments shall refer to the proposed amendment described in said notice and shall specifically consent to and approve such amendment, the District may adopt the amendatory resolution or order in substantially the same form. 39 (d) Effect of Amendment. Upon the adoption of any amendatory resolution or order pursuant to the provisions of this Section, this Bond Order shall be deemed to be amended in accordance with such amendatory resolution or order, and the respective rights, duties, and obligations under such amendatory resolution or order of all the Registered Owners shall thereafter be determined and exercised subject in all respects to such amendments. (e) Consent of Registered Owners. Any consent given by a Registered Owners pursuant to the provisions of this Section shall be irrevocable for a period of six months from the date of the first publication of the notice provided for in this Section, and shall be conclusive and binding upon all future owners of the Bonds during such period. Such consent may be revoked by the Registered Owner who gave such consent at any time after six months from the date of the first giving of such notice, or by a successor in title, by filing notice thereof with the Registrar and the District, but such revocation shall not be effective if the Registered Owners of 51% in aggregate principal amount of the then outstanding Bonds have, prior to the attempted revocation, consented to and approved the amendment. (f) Amendments Without Consent. Notwithstanding the provisions of (a) through (f) of this Section, and without notice of the proposed amendment and without the consent of the Registered Owners. The District may, at any time, amend this Bond Order to cure any ambiguity or to cure, correct, or supplement any defective or inconsistent provision contained therein, or to make any other change that does not in any respect materially and adversely affect the interest of the Registered Owners, provided that no such amendment shall be made contrary to the provision to Section 17.01 (a), and a duly certified or executed copy of each such amendment shall be filed with the Registrar. ARTICLE EIGHTEEN OTHER ACTIONS AND MATTERS SECTION 18.01. OTHER ACTIONS. The President, Vice President, Treasurer, Secretary and Assistant Secretary of the Board of Directors of the District, and all other officers, employees and agents of the District, and each of them, shall be and they are hereby expressly authorized, empowered and directed from time to time and at any time to do and perform all such acts and things and to execute, acknowledge and deliver in the name and under the corporate seal and on behalf of the District all instruments as may be necessary or desirable in order to carry out the terms and provisions of this Bond Order, the Bonds, the initial sale and delivery of the Bonds, the Paying Agent/Registrar Agreement, the Escrow Agreement any insurance commitment letter or insurance policy and the Official Statement. In addition, prior to the initial delivery of the Bonds, President, Vice President or Treasurer and Secretary of the Board of Directors of the District, the District's Attorney and Bond Counsel are hereby authorized and directed to approve any technical changes or corrections to this Order or to any of the instruments authorized and approved by this Order necessary in order to (i) correct any ambiguity or mistake or properly or more completely document the transactions contemplated and approved by this Ordinance and as described in the Official Statement, (ii) obtain a rating from any of the national bond rating agencies or satisfy requirements of the Bond Insurer, or (iii) obtain the approval of the Bonds by the Texas Attorney General's office. 40 SECTION 18.02. ADDITIONAL BOND INSURANCE PROVISIONS. The Pricing Officer is authorized to determine whether the Bonds sell with bond insurance and any provisions related to such insurance as evidenced in the Pricing Certificate in accordance with Section 1207.007(b)(5) of the Texas Government Code, as amended. Bond Counsel is authorized to insert any necessary provisions required by the Bond Insurer and agreed to by the District. SECTION 18.03. PAYMENT OF ATTORNEY GENERAL FEE. The District hereby authorizes the disbursement of a fee equal to the lesser of (i) one-tenth of one percent of the principal amount of the Bonds or (ii) $9,500, provided that such fee shall not be less than $750, to the Attorney General of Texas Public Finance Division for payment of the examination fee charged by the State of Texas for the Attorney General's review and approval of public securities and credit agreements, as required by Section 1202.004 of the Texas Government Code. The appropriate member of the District's staff is hereby instructed to take the necessary measures to make this payment. The District is also authorized to reimburse the appropriate District funds for such payment from proceeds of the Bonds. ARTICLE NINETEEN CONTINUING DISCLOSURE SECTION 19.01. CONTINUING DISCLOSURE UNDERTAKING, (a) Annual Reports. The District shall provide annually to the MSRB, in an electronic format as prescribed by the MSRB, within six months after the end of any fiscal year, financial information and operating data with respect to the District of the general type included in the final Official Statement authorized by Section 15.03 of this Order, being the information described in the Pricing Certificate. Any financial statements to be so provided shall be (1) prepared in accordance with the accounting principles described in Exhibit "D" hereto, or such other accounting principles as the District may be required to employ from time to time pursuant to state law or regulation, and (2) audited, if the District commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the District shall provide unaudited financial statements within such period, and audited financial statements for the applicable fiscal year to the MSRB, when and if the audit report on such statements become available. If the District changes the fiscal year, the District will notify the MSRB of the change (and of the date of the new fiscal year end) prior to the next date by which the District otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this subsection may be set forth in full in one or more documents or may be included by specific reference to any document that is available to the public on the MSRB's internet web site or filed with the SEC. All documents provided to the MSRB pursuant to this subsection shall be accompanied by identifying information as prescribed by the MSRB. 41 (b) Material Event Notices. The District shall notify the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of ten business days after the occurrence of the event, of any of the following events with respect to the Bonds: A. Principal and interest payment delinquencies; B. Non-payment related defaults, if material within the meaning of the federal securities laws; C. Unscheduled draws on debt service reserves reflecting financial difficulties; D. Unscheduled draws on credit enhancements reflecting financial difficulties; E. Substitution of credit or liquidity providers, or their failure to perform; F. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax-exempt status of the Bonds, or other events affecting the tax-exempt status of the Bonds; G. Modifications to rights of holders of the Bonds, if material within the meaning of the federal securities laws; H. Bond calls, if material within the meaning of the federal securities laws; I. Defeasances; J. Release, substitution, or sale of property securing repayment of the Bonds, if material within the meaning of the federal securities laws; K. Rating changes; L. Bankruptcy, insolvency, receivership or similar event of the District; M. The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material within the meaning of the federal securities laws; and N. Appointment of a successor or additional trustee or the change of name of a trustee, if material within the meaning of the federal securities laws. The District shall notify the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner, of any failure by the District to provide financial information or operating 42 data in accordance with this subsection by the time required. All documents provided to the MSRB pursuant to this subsection shall be accompanied by identifying information as prescribed by the MSRB. (c) Limitations, Disclaimers, and Amendments. The District shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the District remains an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the District in any event will give the notice required by this Order of any Bond calls and defeasance that cause the Bonds to be no longer outstanding. The provisions of this Section are for the sole benefit of the holders and beneficial owners of the Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The District undertakes to provide only the financial information, operating data, financial statements, and notices that it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the District's financial results, condition, or prospects relating to the System or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The District does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Bonds at any future date. UNDER NO CIRCUMSTANCES SHALL THE DISTRICT BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE DISTRICT, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the District in observing or performing its obligations under this Section shall constitute a breach of or default under this Order for purposes of any other provision of this Order. Should the Rule be amended to obligate the District to make filings with or provide notices to entities other than the MSRB, the District hereby agrees to undertake such obligation with respect to the Bonds in accordance with the Rule as amended. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the District under federal and state securities laws. The provisions of this Section may be amended by the District from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, but only if (1) the provisions of this Section, as so amended, would have permitted an underwriter to purchase or 43 sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (A) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Order that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (B) a person that is unaffiliated with the District (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. If the District so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with this Section an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information or operating data so provided. The District may also amend or repeal the provisions of this continuing disclosure requirement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling the Bonds in the primary offering of the Bonds. 44 EXHIBIT "A" PAYING AGENT/REGISTRAR AGREEMENT [See Tab 4] TravisCoMUD2\UTRBl l\Del: ORDER A-1 EXHIBIT "B" ESCROW AGREEMENT [See Tab 8] TravisCoMUD2UrrRBll\Del: ORDER B-1 EXHIBIT "C" Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust P.O. Box 396 East Syracuse, New York 13057 By Overnight or Courier The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust 111 Sanders Creek Parkway East Syracuse, New York 13057 In person The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust Corporate Trust Window 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. Dated: , 20_ * The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. (1) To be modified, amended or revised as necessary in accordance with the terms of the Pricing Certificate for each Series. Trophy Club Municipal Utility District No. 1 TravisCoMUD2\UTRBll\Del: ORDER C-1 FORM OF NOTICE OF DEFEASANCE/REDEMPTION(1) Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on in each the years through , inclusive, aggregating $ in principal amount. Maturity Date Principal Amount Interest Rate Redemption Date CUSIP* EXHIBIT "D" TravisCoMUD2\UTRBU\Del: ORDER D-1 CONTINUING DISCLOSURE UNDERTAKING Accounting Principles The accounting and reporting policies of the District relating to the funds and account groups will conform to generally accepted accounting principles (GAAP) as applied to governmental entities. EXHIBIT "E WRITTEN PROCEDURES RELATING TO CONTINUING COMPLIANCE WITH FEDERAL TAX COVENANTS A. Arbitrage. With respect to the investment and expenditure of the proceeds of the Bonds the District's Director of Finance (the "Responsible Person") will: • monitor all amounts deposited into a sinking fund or funds, e.g., the Interest and Sinking Fund, to assure that the maximum amount invested at a yield higher than the yield on the Bonds does not exceed an amount equal to the debt service on the Bonds in the succeeding 12 month period plus a carryover amount equal to one-twelfth of the principal and interest payable on the Bonds for the immediately preceding 12-month period; • monitor the actions of the escrow agent (to the extent an escrow is funded with proceeds) to ensure compliance with the applicable provisions of the escrow agreement, including with respect to reinvestment of cash balances; • retain any official action of the District (such as a reimbursement resolution) stating its intent to reimburse with the proceeds of the Bonds any amount expended prior to the Issue Date for the acquisition, renovation or construction of the facilities; • ensure that the applicable information return (e.g., IRS Form 8038-G, 8038-GC, or any successor forms) is timely filed with the IRS; and • assure that, unless excepted from rebate and yield restriction under section 148(f) of the Code, excess investment earnings are computed and paid to the U.S. government at such time and in such manner as directed by the IRS (i) at least every 5 years after the Issue Date and (ii) within 30 days after the date the Bonds are retired. B. Private Business Use. With respect to the use of the facilities financed or refinanced with the proceeds of the Bonds the Responsible Person will: • monitor the date on which the facilities are substantially complete and available to be used for the purpose intended; • monitor whether, at any time the Bonds are outstanding, any person, other than the District, the employees of the District, the agents of the District or members of the general public has any contractual right (such as a lease, purchase, management or other service agreement) with respect to any portion of the facilities; • monitor whether, at any time the Bonds are outstanding, any person, other than the District, the employees of the District, the agents of the District or members of the general public has a right to use the output of the facilities; • determine whether, at any time the Bonds are outstanding, any person, other than the District, has a naming right for the facilities or any other contractual right granting an intangible benefit; • determine whether, at any time the Bonds are outstanding, the facilities are sold or otherwise disposed of; and • take such action as is necessary to remediate any failure to maintain compliance with the covenants contained in the Ordinance related to the public use of the facilities. TravisCoMUD2\UTRB 1 l\Del: ORDER E-1 C. Record Retention. The Responsible Person will maintain or cause to be maintained all records relating to the investment and expenditure of the proceeds of the Bonds and the use of the facilities financed or refinanced thereby for a period ending three (3) years after the complete extinguishment of the Bonds. If any portion of the Bonds is refunded with the proceeds of another series of tax-exempt obligations, such records shall be maintained until the three (3) years after the refunding obligations are completely extinguished. Such records can be maintained in paper or electronic format. D. Responsible Person. The Responsible Person shall receive appropriate training regarding the District's accounting system, contract intake system, facilities management and other systems necessary to track the investment and expenditure of the proceeds and the use of the facilities financed with the proceeds of the Bonds. The foregoing notwithstanding, the Responsible Person is authorized and instructed to retain such experienced advisors and agents as may be necessary to carry out the purposes of these instructions. TravisCoMUD2\UTRB 1 I\Del: ORDER E-2 TAB 2 PRICING CERTIFICATE I, the undersigned President of the Board of Directors acting as the Pricing Officer of Trophy Club Municipal Utility District No. 1 (the "District"), pursuant to the authority granted to me by the order adopted by the Board of Directors of the District on December 20, 2011 (the "Bond Order") relating to the issuance of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") hereby find, determine and commit on behalf of the District to sell and deliver the Bonds on the following terms. Capitalized terms not otherwise defined herein have the meaning assigned in the Bond Order. 1. The Bonds shall be designated the "Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012." 2. The Bonds are hereby sold and shall be delivered to First Southwest Company (the "Underwriter") pursuant to the terms of the Purchase Contract, dated February 14, 2012, between the District and the Underwriter and attached hereto as Exhibit A, for cash at a price of $2,470,257.70 (being the par amount of the Bonds plus a net original issue premium of $136,075.20 less an underwriting discount of $20,817.50), plus accrued interest from the date of the Bonds to the date of delivery, according to the following terms: A. The aggregate original principal amount of the Bonds shall be $2,355,000. B. The Bonds shall be Current Interest Bonds and shall be dated March 1, 2012 and shall be numbered from R-l upwards (except that the Initial Bond shall be numbered T-l). The Bonds shall mature and bear interest from their dated date as follows: Maturity Date Principal Interest (September 1) Amount ($) Rate (%) 2013 185,000 2.000 2014 190,000 2.000 2015 195,000 2.000 2016 200,000 2.500 2017 205,000 2.500 2018 210,000 2.500 2019 225,000 2.500 2020 225,000 3.000 2021 230,000 3.000 2022 240,000 3.000 2023 250,000 3.000 C. Interest on the Bonds shall be payable March 1 and September lof each year, commencing September 1, 2012. The record date for the Bonds will be the fifteenth day of the month preceding an Interest Payment Date whether or not such dates are Business Days. D. The Bonds scheduled to mature on and after September 1, 2021, shall be redeemable prior to their scheduled maturity, in whole or from time to time in part, at the option of the District, on September 1, 2020 or on any date thereafter, in principal amounts of $5,000 or any integral multiple thereof (and, if in part, the particular Bonds or portions thereof to be redeemed shall be selected by the District in its sole discretion), at the redemption price of par, together with accrued interest to the redemption date. E. The initial Bonds shall be registered in the name of First Southwest Company. 3. The Refundable Bonds that are to be refunded in connection with the issuance of the Bonds, and the redemption date of the Refunded Bonds, are designated and set forth in Exhibit B attached hereto and the form of the Notice of Redemption relating thereto is set forth in Exhibit B attached hereto. The Bonds are in amounts sufficient to redeem and refund the Refunded Bonds and to pay the costs of issuing the Bonds. 4. The issuance of the Bonds is in the best interest of the District and produces a present value debt service savings of $336,286.75 (14.279692% of Refunded Bonds) and a gross debt service savings of $366,771.25. The District is not making a contribution to the refunding. 5. The price to be paid by the Underwriter for the Bonds is not less than 90% of the aggregate original principal amount thereof plus accrued interest to the date of delivery of the Bonds and produces a present value debt service savings of at least 6.00% net of any District contribution. None of the Bonds bear interest at an interest rate greater than the maximum authorized by law. Additionally, all of the requirements of Sections 3.01 and 3.02 of the Bond Order have been met. 7. In accordance with Section 19.01 of the Bond Order, the District shall provide annually to the MSRB, within six months after the end of each fiscal year, financial information and operating data with respect to the District as provided in the Official Statement under the caption "CONTINUING DISCLOSURE OF INFORMATION — Annual Reports." 8. In accordance with Section 15.03 of the Bond Order, the Preliminary Official Statement, dated February 7, 2012, previously prepared and distributed in connection with the pricing of the Bonds is hereby approved and deemed final as of its date (subject to permissible omissions described in Rule 15c2-12) within the meaning of the provisions of 17 C.F.R § 250. 15c2-12(b)(l), and the preparation and distribution of the final Official Statement in reoffering of the Bonds by the Underwriter is hereby approved. 9. In consultation with, and reliance upon the advice of the financial advisor for the District, I hereby find that the terms and sale are the most advantageous reasonably available on the date and time of the pricing of the Bonds given the then existing market conditions and the stated terms of sale on such dated and time. 10. The Bonds shall be in the form as set forth in Exhibit C attached hereto. 2 WITNESS MY HAND this 14th day of February, 2012. TROPHY CLUB MUNICD7AL UTILITY DISTRICT NO. 1 By: Name: Title: Pn i Moss frdent, Board of Directors Pricing Certificate Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 EXHIBIT A Bond Purchase Agreement [See Tab 7] A-1 EXHIBIT B NOTICE OF DEFEASANCE/REDEMPTION Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on September 1 in each of the following years, aggregating $2,355,000 in principal amount. Maturity Date Principal Amount ($) Interest Rate (%) Redemption Date CUSIP* 2013 165,000 4.25 September 1, 2012 897060BE8 2014 170,000 4.35 September 1, 2012 897060BF5 2015 180,000 4.45 September 1, 2012 897060BG3 2016 190,000 4.55 September 1, 2012 897060BH1 2017 200,000 4.70 September 1, 2012 897060BJ7 2018 210,000 4.80 September 1, 2012 897060BK4 2020 460,000 4.95 September 1, 2012 897060BM0 2022 505,000 5.00 September 1, 2012 897060BP3 2023 275,000 5.00 September 1, 2012 897060BQ1 Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail By Overnight or Courier In person The Bank of New York Mellon Trust The Bank of New York Mellon Trust The Bank of New York Mellon Trust Company, N.A. Company, N.A. Company, N.A. Global Corporate Trust Global Corporate Trust Global Corporate Trust P.O. Box 396 111 Sanders Creek Parkway Corporate Trust Window East Syracuse, New York 13057 East Syracuse, New York 13057 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. * The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. Dated: , 20_ Trophy Club Municipal Utility District No. B-1 EXHIBIT C FORM OF BOND UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R- PRINCIPAL AMOUNT $ INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. March 1,2012 REGISTERED OWNER: PRINCIPAL AMOUNT: ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. C-1 THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each Interest Payment Date by check or draft, dated as of such Interest Payment Date, drawn by the Registrar on, and payable solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Registrar by United States mail, first-class postage prepaid, on or before each such Interest Payment Date, to the Registered Owner hereof, at its address as it appeared on the fifteenth (15th) calendar day of the month next preceding each such date whether or not a business day (the "Record Date") on the Register kept by the Registrar listing the names and addresses of the Registered Owners (the "Register"). In addition, interest may be paid by such other method, acceptable to the Registrar, requested by, and at the risk and expense of, the Registered Owner. In the event of a non payment of interest on a scheduled payment date, and for 30 calendar days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 calendar days after the Special Record Date) shall be sent at least 5 business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner as it appears on the Register at the close of business on the last business day next preceding the date of mailing of such notice. DURING ANY PERIOD in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity and bearing the same interest rate are to be redeemed, the particular Bonds of such maturity and bearing such interest rate shall be selected in accordance with the arrangements between the District and the securities depository. ANY ACCRUED INTEREST due at maturity or upon the redemption of this Bond prior to maturity as provided herein shall be paid to the Registered Owner upon presentation and surrender of this Bond for payment at the designated office for payment of the Paying Agent/Registrar. The District covenants with the Registered Owner of this Bond that on or before each principal payment date, interest payment date, and any redemption date for this Bond it will make available to the Registrar, from the "Debt Service Fund" the creation of which is affirmed by the Bond Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. IF THE DATE for any payment due on this Bond shall be a Saturday, Sunday, or a day on which the Paying Agent/Registrar is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, or day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed; C-2 and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds dated as of March 1, 2012 and authorized to be issued pursuant to the Bond Order adopted by the Board of Directors of the District in the principal amount of $2,355,000 FOR PURPOSES OF REFUNDING THE REFUNDED BONDS AND PAYING CERTAIN COSTS OF ISSUING THE BONDS. Terms used herein and not otherwise defined shall have the meanings given in the Bond Order. ON SEPTEMBER 1, 2020 OR ON ANY DATE THEREAFTER, the Bonds maturing on and after September 1, 2021, may be redeemed prior to their scheduled maturities, at the option of the District, with funds derived from any available and lawful source, at a redemption price equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption as a whole, or from time to time in part, and, if in part, the particular Bonds, or portions thereof, to be redeemed shall be selected and designated by the District, and if less than all of a maturity is to be redeemed the Registrar shall determine by lot the Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Bond may be redeemed only in integral multiples of $5,000 of principal amount). AT LEAST 30 calendar days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Bond to be redeemed at its address as it appeared on the Register on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. By the date fixed for any such redemption due provision shall be made with the Registrar for the payment of the required redemption price for the Bonds or portions for which such payment is made, all as provided above. The Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Registrar out of the funds provided for such payment. If a portion of any Bond shall be redeemed, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any authorized denomination or denominations, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the District, all as provided in the Bond Order. WITH RESPECT TO any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Bond Order have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, C-3 the District shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. ALL BONDS OF THIS SERIES are issuable solely as fully registered Bonds, without interest coupons, in the principal denomination in the case of the Bonds, of any integral multiple of $5,000. As provided in the Bond Order, this Bond may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred, converted into and exchanged for a like aggregate amount of fully registered Bonds, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having any authorized denomination or denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Bond to the Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Order. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Registrar, evidencing assignment of this Bond or any portion or portions hereof in any authorized denomination to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be registered. The Form of Assignment printed or endorsed on this Bond may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Registrar may be used to evidence the assignment of this Bond or any portion or portions hereof from time to time by the Registered Owner. The Registrar's reasonable standard or customary fees and charges for assigning, transferring, converting and exchanging any Bond or portion thereof will be paid by the District. In any circumstance, any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer, conversion or exchange, as a condition precedent to the exercise of such privilege. The Registrar shall not be required to make any such transfer, conversion or exchange of any Bond or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or Interest Payment Date or (ii) within 45 calendar days prior to its redemption date; provided, however, such limitation on transferability shall not be applicable to an exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. WHENEVER the beneficial ownership of this Bond is determined by a book entry at a securities depository for the Bonds, the foregoing requirements of holding, delivering or transferring this Bond shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. IN THE EVENT any Registrar for the Bonds is changed by the District, resigns, or otherwise ceases to act as such, the District has covenanted in the Bond Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Bonds. C-4 THE BONDS are payable from the proceeds of an ad valorem tax, without legal limit as to rate or amount, levied upon all taxable property within the District. The Bond Order provides that the District reserves the right to consolidate with one or more conservation and reclamation districts, to consolidate its waterworks and sewer systems with the systems of such districts, and to secure the Bonds and any other bonds of the District or such districts by a pledge of taxes of the consolidated system. The Bond Order further provides that the pledge of taxes, to the payment of the Bonds shall terminate at such time, if ever, as (i) money and/or defeasance obligations in an amount sufficient to defease the Bonds is deposited with or made available to the Registrar in accordance with the Bond Order or (ii) a city dissolves the District, and assumes the obligations of the District pursuant to existing Texas law. THE BONDS are issued pursuant to the Bond Order, whereunder the District covenants to levy a continuing direct annual ad valorem tax, without legal limit as to rate or amount, on taxable property within the District, for each year while any part of the Bonds are considered outstanding under the provisions of the Bond Order, in sufficient amount, together with revenues and receipts available from other sources which are equally available for such purposes, to pay interest on the Bonds as it becomes due, to provide a sinking fund for the payment of the principal of the Bonds when due or the redemption price at any earlier required redemption date with respect to the Bonds, and to pay the expenses of assessing and collecting such tax, all as more specifically provided in the Bond Order. Reference is hereby made to the Bond Order for provisions with respect to the operation and maintenance of the District's facilities, the custody and application of funds, remedies in the event of a default hereunder or thereunder, and the other rights of the Registered Owners of the Bonds. By acceptance of this Bond the Registered Owner hereof consents to all of the provisions of the Bond Order, a certified copy of which is on file in the office of the District. THE OBLIGATION to pay the principal of and the interest on this Bond is solely and exclusively the obligation of the District until such time, if ever, as the District is abolished and this Bond is assumed as described above. No other entity, including the State of Texas, any political subdivision thereof other than the District, or any other public or private body, is obligated, directly, indirectly, contingently, or in any other manner, to pay the principal of or the interest on this Bond from any source whatsoever. No part of the physical properties of the District, including the properties provided by the proceeds of the Bonds, is encumbered by any lien for the benefit of the Registered Owner of this Bond. THE DISTRICT RESERVES THE RIGHT to issue additional bonds heretofore or hereafter duly authorized at elections held in the District payable from a lien on and pledge of taxes; bonds, notes and other obligations of inferior liens, and revenue bonds, notes and other obligations payable solely from revenues of the District or revenues to be received under contracts with other persons, including private corporations, municipalities and political subdivisions or from any other source. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund any bonds (including the Bonds) at or prior to their respective dates of maturity or redemption. TO THE EXTENT permitted by and in the manner provided in the Bond Order, the terms and provisions of the Bond Order and the rights of the Registered Owners of the Bonds may be C-5 modified with, in certain circumstances, the consent of the Registered Owners of a majority in aggregate principal amount of the Bonds affected thereby; provided, however, that, without the consent of the Registered Owners of all of the Bonds affected, no such modification shall (i) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (ii) give any preference to any Bond over any other Bond, or (iii) reduce the aggregate principal amount of the Bonds required for consent to any such modification. THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Bond Order unless this Bond either (a) is registered by the Comptroller of Public Accounts of the State of Texas as evidenced by execution of the registration certificate endorsed hereon or (b) is authenticated as evidenced by execution of the authentication certificate endorsed hereon by the Registrar. IT IS HEREBY CERTIFIED, COVENANTED, AND REPRESENTED that all acts, conditions, and things necessary to be done precedent to the issuance of the Bonds in order to render the same legal, valid, and binding obligations of the District have happened and have been accomplished and performed in regular and due time, form, and manner, as required by law; that provision has been made for the payment of the principal of and interest on the Bonds by the levy of a continuing, direct annual ad valorem tax upon all taxable property within the District and that issuance of the Bonds does not exceed any constitutional or statutory limitation. In the event that any provisions herein contained do or would, presently or prospectively, operate to make any part hereof void or voidable, such provisions shall be without effect or prejudice to the remaining provisions hereof, which shall nevertheless remain operative, and such violative provisions, if any, shall be reformed by a court of competent jurisdiction within the limits of the laws of the State of Texas. IT IS FURTHER CERTIFIED that the District has designated the Bonds as "qualified tax- exempt obligations" within the meaning of Section 265(b) of the Internal Revenue Code of 1986. C-6 IN WITNESS WHEREOF, the District has caused this Bond to be signed with the manual or facsimile signature of the President or Vice-President of the Board of Directors of the District and countersigned with the manual or facsimile signature of the Secretary or Assistant Secretary of the Board of Directors of the District, and has caused the official seal of the District to be duly impressed, or placed in facsimile, on this Bond. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Secretary [Assistant Secretary], President [Vice-President], Board of Directors Board of Directors (DISTRICT SEAL) INSERTIONS FOR INITIAL BONDS The Initial Bond shall be in the form set forth above, except that: A. immediately under the name of the Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below" and "CUSIP NO." shall be deleted. B. the first paragraph of the Bond shall be deleted and the following will be inserted: "TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1, in Denton and Tarrant Counties, Texas (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assigns (hereinafter called the "Registered Owner") the Payment at Maturity on September 1 in the year and in the principal installment and bearing interest at the per annum rate set forth in the following schedule: Maturity Date Principal Interest (September 1) Amount ($) Rate (%) (Information from Pricing Certificate to be inserted) The District promises to pay interest on the unpaid principal amount hereof (calculated on the basis of a 360-day year of twelve 30-day months) from March 1, 2012 at the respective Interest Rate per annum specified above. Interest is payable on September 1, 2012 and semiannually on each March 1 and September 1 thereafter to the date of payment of the principal installment specified above; except, that if this Bond is required to be authenticated and the date of its C-7 authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full." C. The Initial Bond shall be numbered "T-l". COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this . Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) C-8 PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Order described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a Bond, Bonds, or a portion of a Bond or Bonds of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated: Registrar By Authorized Representative ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto Please insert Social Security or Taxpayer Identification Number of Transferee (Please print or typewrite name and address, including zip code of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints , attorney, to register the transfer of the within Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: C-9 Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Bond in every particular, without alteration or enlargement or any change whatsoever. C-10 TAB 3 UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-l PRINCIPAL AMOUNT SI 85,000 INTEREST RATE DATE OF BONDS 2.000% March 1,2012 MATURITY DA IE September I. 2013 CUSIPNO. 807059 EQ0 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: ONE HUNDRED EIGHTY I IVI- THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (ilu- "I )istrict"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to thaipnaturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or. before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however,4hat if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, i lion this Bond shall bear interest from the date to which such interest has been paid in full. 'Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO.R-2 PRINCIPAL AMOl NT SI 90,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 2.000% March 1, 2012 September 1. 2014 897059 ER8 REGISTERED OWNER: CEDE & CO. » ill "lllls. ''w PRINCIPAL AMOUNT: ONE HUNDRED NINETY 11IOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the ^maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Dale next preceding the date of authentication, unless such date of authentication is after any Record Date jjut on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS NO. R-3 PRINCIPAL AMOUNT $195,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 2.000% March 1, 2012 September 1. 2015 897059 ES6 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: ONE HUNDRED NINTTY FIVE Tl IOUSAND DOLLARS ON THE MATURITY DATE SPECD7IED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to gay to the Registered Owner set forth above, or registered assign (hereinafter called the "Regisfered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a»360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest*rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such ^principal amount shall bear interest from the Interest Payment Dategnext preceding the date of authentication, unless such date of authentication is after any Rec8rd Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined onlyby a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-4 PRINCIPAL AMOUNT $200,000 INTEREST RATE DATE OF BONDS 2.500% March 1,2012 MATURITY DATE September I. 2016 CUSIP NO. 897059 ET4 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRI-I) Tl lOUSANl) DOLLARS ON THE MATURITY DAI K SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on'the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on Septembml, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter deli nod), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-5 PRINCIPAL AMOUNT S205,00() INTEREST RATE DATE OF BONDS 2.500% March 1,2012 MATURITY DATE September 1. 2017 CUS1P NO. 897059 EU1 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED I IYI. I HOIISANI) DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Dale next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for whichvthis Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-6 PRINCIPAL AMOUNT S210,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 2.500% March 1, 2012 September 1. 2018 897059 EV9 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED TEN II K >l ISAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO.R-7 PRINCIPAL WlOl M ^225,000 INTEREST RATE DATE OF BONDS MATURM \ DA II. CUSIP NO. 2.500% March 1, 2012 Septemlvi 1. 2011> 897059 EW7 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED TWI"NTY I IVI 11 lOl ^SAND ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall-bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-8 PRINCIPAL AMOliM S225,000 INTEREST RATE DATE OF BONDS 3.000% March 1,2012 MATURITY DATE September 1.2()20 CUSIP NO. 897059 EX5 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED TWENTY 1-1VK THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, atjhe interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), suj&principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. Ibr which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-9 PRINCIPAL •••AMOUNT $230,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 3.000% March 1, 2012 September 1. 2021 897059 EY3 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED THIRTY 11 lOUSANL) DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to thetjuaturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Datevbut on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only; by a book entry at a securities depository for the Bonds, any payment to the security depository, or its nominee or registered assigns, shall be made in accordance with existing^PPIngements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-10 PRINCIPAL AMOl M $240,000 INTEREST RATE DATE OF BONDS 3.000% March 1,2012 MATURITY DATE September 1,2022 CUSIP NO. 897059 EZ0 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED FORTY THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September], 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to lie authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date; but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, how ever, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO.R-11 PRINCIPAL AMOUNT $250,000 INTEREST RATE DATE OF BONDS 3.000% March 1,2012 MATURITY DATE September 1. 2o"S CUSIP NO. 897059 FA4 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED FIFTY THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 160 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and sernffiinually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the |maturity date specified above, or the date of redemption prior to maturity, at Jhe interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or,,before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each Interest Payment Date by check or draft, dated as of such Interest Payment Date, drawn by the Registrar on, and payable solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Registrar by United States mail, first-class postage prepaid, on or before each such Interest Payment Date, to the Registered Owner hereof, at its address as it appeared on the fifteenth (15th) calendar day of the month next preceding each such date whether or not a business day (the "Record Date") on the Register kept by the Registrar listing the names and addresses of the Registered Owners (the "Register"). In addition, interest may be paid by such other method, acceptable to the Registrar, requested by, and at the risk and expense of, the Registered Owner. In the event of a non payment of interest on a scheduled payment date, and for 30 calendar days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 calendar days after the Special Record Date) shall be sent at least 5 business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner as it appears on the Register at the close of business on the last business day next preceding the date of mailing of such notice. DURING ANY PERIOD in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity and bearing the same interest rate are to be redeemed, the particular Bonds of such maturity and bearing such interest rate shall be selected in accordance with the arrangements between the District and the securities depository. ANY ACCRUED INTEREST due at maturity or upon the redemption of this Bond prior to maturity as provided herein shall be paid to the Registered Owner upon presentation and surrender of this Bond for payment at the designated office for payment of the Paying Agent/Registrar. The District covenants with the Registered Owner of this Bond that on or before each principal payment date, interest payment date, and any redemption date for this Bond it will make available to the Registrar, from the "Debt Service Fund" the creation of which is affirmed by the Bond Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. IF THE DATE for any payment due on this Bond shall be a Saturday, Sunday, or a day on which'the Paying Agent/Registrar is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, or day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds dated as of March 1, 2012 and authorized to be issued pursuant to the Bond Order adopted by the Board of Directors of the District in the principal amount of $2,355,000 FOR PURPOSES OF REFUNDING THE REFUNDED BONDS AND PAYING CERTAIN COSTS OF ISSUING THE BONDS. Terms used herein and not otherwise defined shall have the meanings given in the Bond Order. ON SEPTEMBER 1, 2020 OR ON ANY DATE THEREAFTER, the Bonds maturing on and after September 1, 2021, may be redeemed prior to their scheduled maturities, at the option of the District, with funds derived from any available and lawful source, at a redemption price equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption as a whole, or from time to time in part, and, if in part, the particular Bonds, or portions thereof, to be redeemed shall be selected and designated by the District, and if less than all of a maturity is to be redeemed the Registrar shall determine by lot the Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Bond may be redeemed only in integral multiples of $5,000 of principal amount). AT LEAST 30 calendar days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Bond to be redeemed at its address as it appeared on the Register on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. By the date fixed for any such redemption due provision shall be made with the Registrar for the payment of the required redemption price for the Bonds brportions for which such payment is made, all as provided above. The Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Registrar out of the funds provided for such payment. If a portion of any Bond shall be redeemed, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any authorized denomination or,, denominations, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the District, all as provided in the Bond Order. WITH RESPECT TO any optional redemption of the Bonds, unless certain prerequisites^ such redemption required by the Bond Order have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the District, be conditional updntthe satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in *sueh notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, the District shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. ALL BONDS OF THIS SERIES are issuable solely as fully registered Bonds, without interest coupons, in the principal denomination in the case of the Bonds, of any integral multiple of $5,000. As provided in the Bond Order, this Bond may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred, converted into and exchanged for a like aggregate amount of fully registered Bonds, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having any authorized denomination or denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Bond to the Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Order. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Registrar, evidencing assignment of this Bond or any portion or portions hereof in any authorized denomination to the^assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be registered. The Form of Assignment printed or endorsed on this Bond may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Registrar may be used to evidence the assignment of this Bond or any portion or portions hereof from time to time by the Registered Owner. The Registrar's reasonable standard or customary fees and charges for assigning, transferring, converting and exchanging any Bond or portion thereof will be paid by the District. In any circumstance, any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer, conversion or exchange, as a condition precedent to the exercise of such privilege. The Registrar shall not be required to make any such transfer, conversion or exchange of any Bond or an\ portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or Interest Payment Date or (ii) within 45 calendar days prior to its redemption date; provided, however, such limitation on transferability shall not be applicable to an exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. WHENEVER the beneficial ownership of this Bond is determined by a book entry at a securities depository for the Bonds, the foregoing requirements of holding, delivering or transferring this Bond shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. IN THE EVENT any Registrar for the Bonds is changed by the District, resigns, or otherwise ceases to act as such, the District has covenanted in the Bond Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Bonds. THE BONDS are payable from the proceeds of an ad valorem tax, without legal limit as to rate or amount, levied upon all taxable property within the District. The Bond Order provides that the District reserves the right to consolidate with one or more conservation and reclamation districts, to consolidate its waterworks and sewer systems with the systems of such districts, and to secure the Bonds and any other bonds of the District or such districts by a pledge of taxes of the consolidated system. The Bond Order further provides that the pledge of taxes, to the payment of the Bonds shall terminate at such time, if ever, as (i) money and/or defeasance obligations in an amount sufficient to defease the Bonds is deposited with or made available to the Registrar in accordance with the Bond Order or (ii) a city dissolves the District, and assumes the obligations of the District pursuant to existing Texas law. THE BONDS are issued pursuant to the Bond Order, whereunder the District covenants to levy a continuing direct annual ad valorem tax, without legal limit as to rate or amount, on taxable property within the District, for each year while any part of the Bonds are considered outstanding under the provisions of the Bond Order, in sufficient amount, together with revenues and receipts available from other sources which are equally available for such purposes, to pay interest on the Bonds as it becomes due, to provide a sinking fund for the payment of the principal of the Bonds when due or the redemption price at any earlier required redemption date with respect to the Bonds, and to pay the expenses of assessing and collecting such tax, all as more specifically provided in the Bond Order. Reference is hereby made to the Bond Order for provisions with respect to the operation and maintenance of the District's facilities, the custody and application of funds, remedies in the event of a default hereunder or thereunder, and the other rights of the Registered Owners of the Bonds. By acceptance of this Bond the Registered Owner hereof consents to all of the provisions of the Bond Order, a certified copy of which is on file in the office of the District. THE OBLIGATION to pay the principal of and the interest on this Bond is solely and exclusively the obligation of the District until such lime, if ever, as the District is abolished and this Bond is assumed as described above. No other entity, including the State of Texas, any political subdivision thereof other than the District, or any other public or private body, is obligated, directly, indirectly, contingently, or in any other manner, to pay the principal of or the interest on this Bond from any source whatsoever. No part of the physical properties of the District, including the properties provided by the proceeds of the Bonds, is encumbered by any lien for the benefit of the Registered Owner of this Bond. THE DISTRICT RESERVES THE RIGHT to issue additional bonds heretofore or hereafter duly authorized at elections held in the District payable from a lien on and pledge of taxes; bonds, notes and other obligations of inferior liens, and revenue bonds, notes and other obligations payable solely from revenues of the District or revenues to be received under contracts with other persons, including private corporations, municipalities and political subdivisions or from any other source. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund any bonds (including the Bonds) at or prior to their respective dates of maturity or redemption. TO THE EXTENT permitted by and in the manner provided in the Bond Order, the terms and provisions of the Bond Order and the rights of the Registered Owners of the Bonds may be modified with, in certain circumstances, the consent of the Registered Owners of a majority in aggregate principal amount of the Bonds affected thereby; provided, however, that, without the consent of the Registered Owners of all of the Bonds affected, no such modification shall (i) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (ii) give any preference to any Bond over any other Bond, or (iii) reduce the aggregate principal amount of the Bonds required for consent to any such modification. THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Bond Order unless this Bond either (a) is registered by the Comptroller of Public Accounts of the State of Texas as evidenced by execution of the registration certificate endorsed hereon or (b) is authenticated as evidenced by execution of the authentication certificate endorsed hereon by the Registrar. IT IS HEREBY CERTIFIED, COVENANTED, AND REPRESENTED that all acts, conditions, and things necessary to be done precedent to the issuance of the Bonds in order to render the same legal, valid, and binding obligations of the District hmt happened and have been accomplished and performed in regular and due time, form, and manner, assiKequired by law; that provision has been made for the payment of the principal of and interesfr'on the Bonds by the levy of a continuing, direct annual ad valorem tax upon all taxableaprop^erty within the District and that issuance of the Bonds does not exceed any constitutional or statutory limitation. In the event that any provisions herein contained do or would, presently or prospectively, operate to make any part hereof void or voidable, such provisions shall be without effect or prejudice to the remaining provisions hereof, which shall nevertheless remain operative, and such violative provisions, if any, shall be reformed by a court of competent jurisdiction within the limits of the laws of the State of Texas. IT IS FURTHER CERTIFIED that the District has designated the Bonds as "qualified tax-exempt obligations" within thesmeaning of Section ^65(b) of the Internal Revenue Code of 1986. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the District has caused this Bond to be signed with the manual or facsimile signature of the President or Vice-President of the Board of Directors of the District and countersigned with the manual or facsimile signature of the Secretary or Assistant Secretary of the Board of Directors of the District, and has caused the official seal of the District to be duly impressed, or placed in facsimile, on this Bond. TROPHY CLUB MUNICIPAJ, UTILITY DISTRICT NO. 1 Secretary, Board of Directors President, Board of Directors (DISTRICT SEAL) PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Order described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a Bond, Bonds, or a portion of a Bond or Bonds of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated: . THE BAN K OF N EW YORK MELLON TRUST COMPANY, N.A. Registrar B\ Authorized Representative ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto Please insert Social Security or Taxpayer Identification Number of Transferee (Please print or typewrite name and address, including zip code of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints r • , attorney, to register the transfer of the within Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signaturc(s) must be guaranteed by a member firm of the New York Stock Exchange^or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Bond in every particular, without alteration or enlargement or any change whatsoever. TAB 4 PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of March 1, 2012 (this "Agreement"), by and between Trophy Club Municipal Utility District No. 1 (the "Issuer"), and The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, a banking corporation duly organized and existing under the laws of the United States of America (the "Bank"). RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012, (the "Securities"), such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchasers thereof on or about March 5, 2012; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on the Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Order" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of the Securities and with respect to the transfer and exchange thereof as provided herein and in the "Order." The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for political subdivisions, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the designated office for payment of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Financial Advisor" means Southwest Securities, Inc. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Order" means a written request or Order signed in the name of the Issuer by an authorized representative, delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. 2 "Order" means the Order of the governing body of the Issuer pursuant to which the Securities are issued, certified by the Secretary of the Board or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Order). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Order. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice- Chairman of the Board of Directors, the Chairman or Vice-chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Order on which the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," Issuer," and "Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. 3 ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first-class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Principal and interest payments made pursuant to this Section 3.01 shall be made by wire transfer. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Order. Section 3.03 Reporting Requirements. To the extent required by the Internal Revenue Code of 1986, as amended, or the Treasury Regulations, the Bank shall report to or cause to be reported to the Holders and the Internal Revenue Service the amount of interest paid or the amount treated as interest accrued on the Securities which is required to be reported by the Holders on their returns of federal income tax. ARTICLE FOUR REGISTRAR Section 4.01. Security Register - Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register"), and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be 4 reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. The Bank also agrees to keep a copy of the Security Register within the State of Texas. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect a re- registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereof will be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Certificates. The Issuer shall provide an adequate inventory of printed Securities certificates to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities certificates will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities certificates in safekeeping, which shall be not less than the level of care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that it maintains for its own securities. Section 4.03. Form of Security Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. 5 Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order or other notice of a legal proceeding and prior to the release or disclosure of any of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the same or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Certificates. The Bank will, at such reasonable intervals as it determines, surrender to the Issuer, Securities in lieu of which or in exchange for which other Securities have been issued, or which have been paid. Section 4.06. Mutilated, Destroyed, Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Order, to deliver and issue Securities certificates in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities certificates as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities certificates it has paid pursuant to Section 3.01, Securities certificates it has delivered upon the transfer or exchange of any Securities certificates pursuant to Section 4.01, and Securities certificates it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities certificates pursuant to Section 4.06. 6 ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. The Bank is also authorized to transfer funds relating to the closing and initial delivery of the securities in the manner disclosed in the closing memorandum as prepared by the Issuer's Financial Advisor or other agent. The Bank may act on facsimile or e-mail transmission of the closing memorandum acknowledged by the Financial Advisor or the Issuer as the final closing memorandum. The Bank shall not be liable for any losses, costs or expenses arising directly or indirectly from the Bank's reliance upon and compliance with such instructions. Section 5.02. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank by the Issuer. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proven that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any Order, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities certificates containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a Order, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by the Issuer. (e) The Bank may consult with legal counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to 7 any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon, provided that any such written advice or opinion is supplied to the Issuer by the Bank. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Moneys Held by Bank. The Bank shall deposit any moneys received from the Issuer into a segregated account to be held by the Bank solely for the benefit of the owners of the Securities to be used solely for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on the 8 Bank's part, arising out of or in connection with the Bank's acceptance or administration of its duties hereunder, including the cost and expense incurred by the Bank in defending against any claim or from liability imposed on the Bank in connection with the Bank's exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the Denton or Tarrant County, Texas, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction in Denton or Tarrant County, Texas to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. Attached hereto is a copy of the Blanket Issuer Letter of Representations between the Issuer and The Depository Trust Company, New York, New York, providing for the Bonds to be issued in a Book-Entry Only System. The Bank and the Issuer hereby confirm their obligations under such Letter of Representation. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. 9 Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer and the Bank shall bind their respective successors and assigns, whether so expressed or not. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Order constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between this Agreement and the Order, the Order shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment of the principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon thirty (30) days written notice; provided, however, an early termination of this Agreement 10 by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securities, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02, 5.02, 5.03 and 5.06 of this Agreement shall survive and remain in full force and effect following the termination of this Agreement. The resigning Paying Agent/Registrar may petition any court of competent jurisdiction for the appointment of a successor Paying Agent/Registrar if an instrument of acceptance by a successor Paying Agent/Registrar has not been delivered to the resigning Paying Agent/Registrar within sixty (60) days after giving such notice of resignation. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. [The remainder of this page is intentionally left blank.] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. Mailing Address: 2001 Bryan Street, 9th Floor Dallas, Texas 75201 Paying Agent/Registrar Agreement Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By: Title: President/Board of Directors Address: 100 Municipal Drive Trophy Club, Texas 76262 Paying Agent/Registrar Agreement Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 SCHEDULE A Paying Agent/Registrar Fee Schedule A-1 pgr" BNY MELLON CORPORATE TRUST Fee Schedule Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Acceptance Fee None A one-time charge covering the Bank Officer's review of governing documents, communication with members of the closing party, including representatives of the issuer, investment banker(s) and attorney(s), establishment of procedures and controls, set-up of trust accounts and tickler suspense items and the receipt and disbursement/investment of bond proceeds. This fee is payable on the closing date. Annual Paying Agent Administration Fee $500 An annual charge covering the normal paying agent duties related to account administration and bondholder services. Our pricing is based on the assumption that the bonds are DTC-eligible/book-entry only. If the bonds are certificated or physical, then we will have to charge an additional $1000 per year as a paying agent. This fee is payable annually, in advance. Escrow Agent Fee: $750 The Escrow Agent Fee covers the consideration of documents and the normal administrative duties of the escrow agent according to the governing documents. For a full year or partial year escrow the fee is $750 per year. Should the escrow account or depository account be open for less than two months, then we will reduce our fee to $375. Should we not open an escrow, depository or similar account, we will not charge for such services. This fee is payable on the closing date. Pricing for Call or Redemptions of Bonds Per Call $300 Call Pricing includes distribution of the call notice to holders of record, redemption processing, and notification to EMMA. Any publication expenses (i.e. Bond Buyer, regional periodical, financial periodicals, etc.) for the call notice will be billed to the Issuer at cost. Extraordinary Services/Misc Fees At Appraisal The charges for performing extraordinary or other services not contemplated at the time of the execution of the transaction or not specifically covered elsewhere in this schedule will be commensurate with the service to be provided and may be charged in BNY Mellon's sole discretion. If it is contemplated that the Trustee hold and/or value collateral or enter into any investment contract, forward purchase or similar or other agreement, additional acceptance, administration and counsel review fees will be applicable to the agreement governing such services. If the bonds are converted to certificated form, additional annual fees will be charged for any applicable tender agent and/or registrar/paying agent services. Additional information will be provided at such time. Should this transaction terminate prior to closing, all out-of-pocket expenses incurred, including legal fees, will be billed at cost. If all outstanding bonds of a series are defeased or called in full prior to their maturity, a termination fee may be assessed at that time. 2001 Bryan - 11* Floor Dallas, TX 75201 BNY MELLON CORPORATE TRUST These extraordinary services may include, but are not limited to, supplemental agreements, consent operations, unusual releases, tender processing, sinking fund redemptions, failed remarketing processing, the preparation of special or interim reports, custody of collateral, a one-time fee to be charged upon termination of an engagement. Counsel, accountants, special agents and others will be charged at the actual amount of fees and expenses billed, UCC filing fees, money market sweep fees, auditor confirmation fees, wire transfer fees, transaction fees to settle third-party trades and reconcilement fees to balance trust account balances to third- party investment provider statements Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed at $300 per event. FDIC or other governmental charges will be passed along to you as incurred. Terms and Disclosures Terms of Proposal Final acceptance of the appointment under the Indenture is subject to approval of authorized officers of BNYM and full review and execution of all documentation related hereto. Please note that if this transaction does not close, you will be responsible for paying any expenses incurred, including Counsel Fees. We reserve the right to terminate this offer if we do not enter into final written documents within three months from the date this document is first transmitted to you. Fees may be subject to adjustment during the life of the engagement. Customer Notice Required by the USA Patriot Act To help the US government fight the funding of terrorism and money laundering activities, US Federal law requires all financial institutions to obtain, verify, and record information that identifies each person (whether an individual or organization) for which a relationship is established. What this means to you: When you establish a relationship with BNYM, we will ask you to provide certain information (and documents) that will help us to identify you. We will ask for your organization's name, physical address, tax identification or other government registration number and other information that will help us to identify you. We may also ask for a Certificate of Incorporation or similar document or other pertinent identifying documentation for your type of organization. We thank you for your assistance. 2001 Bryan -11* Floor Dallas, TX 75201 TAB 5 5 s 5= J= <D Co -C Co S> £ t CO £s CD CD &g O ffl o ^ co <3 *> % t° -|§ SH CO o 0 0==. CD CO § ^ ° I O C F c .O co lie co .o jo CD ~ §1 111 c CD CD CO » CO S> o CD .9 5> o 'c 0 ^ c c ^= ID O IQ c o s 1 ts ? § S o E t C *Hl ° CO J= I &c5 o CO c o S o- ?ll CD CD S s-s -a S« I CD S CD S = -° _ co s •S * a £ " o 111 ago S 3 c .5 => SS CO CO .c ti ? *= £ S.E1 I'D .C 21 * "TO ]E .3 •lis E m S | co § Q. 3 ¥ NEW ISSUE-BOOK-ENTRY-ONLY Ratings: S&P: " " (Insured) " " (Underlying) (See "RATINGS" and "BOND INSURANCE" and "BOND INSURANCE RISK FACTORS" herein) PRELIMINARY OFFICIAL STATEMENT Dated: February 7,2012 In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX MA TTERS" herein, including the alternative minimum tax on corporations. The District will designate the Bonds as "Qualified Tax-Exempt Obligations". (See "TAX MATTERS - Qualified Tax-Exempt Obligations for Financial Institutions" herein.) $2,355,000* TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 Dated Date: March 1, 2012 Due: September 1, as shown on Page ii The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") $2,355,000* Unlimited Tax Refunding Bonds, Series 2012, which are being issued in part as Current Interest Bonds ("CIBs") and in part as Premium Capital Appreciation Bonds ("CABs") (collectively, the "Bonds") as shown on page ii hereof, are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who will approve a "Pricing Certificate" which will contain the final terms of sale and will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS DESCRIBED HEREIN. (See "INVESTMENT CONSIDERATIONS" herein.) Bond purchasers are encouraged to read this entire Official Statement prior to making an investment decision. Interest on the CIBs will accrue from March 1, 2012 (the "Dated Date") and will be payable March 1 and September 1 of each year, commencing September 1, 2012, until maturity or prior redemption, and will be calculated on the basis of a 360-day year of twelve 30- day months. Interest on the CABs will accrete from the date they are initially delivered to the Underwriter and such interest will compound semiannually on March 1 and September 1 of each year (each an "Accretion Date") commencing September 1, 2012, and be payable only upon maturity, as described in the Order. The CIBs will be issued in fully registered form only, without coupons, in denominations of $5,000 or any integral multiple thereof within a stated maturity and the CABs will be issued as fully registered bonds in denominations of $5,000 representing the total amount of principal, plus the initial premium, if any, therefor and accrued interest payable upon maturity (the "Maturity Amount"), or any integral multiple thereof for a Maturity Amount. The definitive Bonds will be issued as fully registered obligations in book-entry form only and when issued will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company ("DTC"), New York, New York. DTC will act as securities depository for the Bonds until DTC resigns or is discharged. Book-entry interests in the Bonds will be made available for purchase in principal amounts and Maturity Amounts of $5,000 or any integral multiple thereof within a maturity. Purchasers of the Bonds ("Beneficial Owners") will not receive physical delivery of bonds representing their interest in the Bonds purchased. So long as Cede & Co. or its nominee is the registered owner of the Bonds, principal of and interest on the CIBs and Maturity Amount of the CABs will be payable by the paying agent/registrar to DTC, which will be solely responsible for making such payment to the Beneficial Owners of the Bonds. The initial paying agent/registrar for the Bonds shall be The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Paying Agent"). (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING -Purpose" herein.) The District reserves the right to redeem, prior to maturity, in integral multiples of $5,000, those CIBs maturing on and after September 1, 2021, in whole or from time to time in part, on September 1, 2020, and on any date thereafter at a price of par plus accrued interest from the most recent interest payment date to the date fixed for redemption. The CABs are not subject to redemption prior to maturity. (See "THE BONDS -Redemption Provisions" herein.) The District is considering qualifying the Bonds for municipal bond insurance and has made application to municipal bond insurance companies in connection with such consideration. (See "BOND INSURANCE" and "BOND INSURANCE RISK FACTORS" herein.) STATED MATURITY SCHEDULE (See Page ii) The Bonds are offered for delivery, when, as and if issued and received by the Underwriter and subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton LLP., Dallas, Texas, Bond Counsel. The legal opinion of Bond Counsel will be printed on, or will accompany the Bonds. Certain matters will be passed upon for the Underwriter by Fulbright & Jaworski LLP., Dallas, Texas, as counsel to the Underwriter. It is expected that the Bonds will be available for delivery through DTC on or about March 5, 2012. FIRSTSOUTHWEST * Preliminary, subject to change. STATED MATURITY SCHEDULE* (Due September 1) Base CUSIP - 897059 (a) $2,355,000* Unlimited Tax Refunding Bonds, Series 2012 $2,200,000* Current Interest Bonds Stated Initial Initial Maturity Principal Rate Yield CUSIP Due 9-1 Amount (%) (%) Suffix(a) 2012 $ 20,000 2014 185,000 2015 190,000 2016 195,000 2017 205,000 2018 210,000 2019 220,000 2020 230,000 2021 235,000 2022 250,000 2023 260,000 (Interest to accrue from the Dated Date.) $155,000* Premium Capital Appreciation Bonds Maturity Initial Initial Offering Date Principal Yield to Maturity Price per $5,000 CUSIP Sept 1 Amount Maturity Amount in Maturity Amount Suffix 2013 $155,000 (Interest to accrete from the Date of Delivery) [See "SCHEDULE II - SCHEDULE OF ACCRETED VALUES OF PREMIUM CAPITAL APPRECIATION BONDS" ("CABs") herein for a table of the accreted values of the CABs (per $5,000 Maturity Amount) at certain periodic dates.] m CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the District, the Financial Advisor or the Underwriter is responsible for the selection or correctness of the CUSIP numbers set forth herein. * Preliminary, subject to change. ii TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BOARD OF DIRECTORS Name James C. Thomas James Moss Kevin Carr C. Nick Sanders William Armstrong Position Director President Secretary/Treasurer Vice President Director Two-Year Term* Expires. May 2014 2012 2014 2012 2014 Occupation Retired Insurance Adjuster Self Employed Business Owner Retired DISTRICT PERSONNEL AND ADVISORS District Manager Robert Scott Trophy Club, Texas Senior Accountant Renae Gonzales Trophy Club, Texas Attorney for the District Bob West Whitaker Chalk Swindle & Sawyer, LLP Fort Worth, Texas Financial Advisor Southwest Securities Dallas, Texas Bond Counsel McCall, Parkhurst & Horton LLP. Dallas, Texas Independent Auditors LafollettS Co., PLLC Tom Bean, Texas Tax Assessor - Collector Denton County Tax Assessor-Collector Chief Appraiser Denton County, Texas Tarrant County, Texas For Additional Information Please Contact: Mr. Robert Scott Mr. Dan A. Almon Mr. Mark McLiney District Manager Senior Vice President Senior Vice President Trophy Club Municipal Utility District Southwest Securities, Inc. Southwest Securities, Inc. 100 Municipal Drive 1201 Elm Street, Suite 3500 4040 Broadway, Suite 220 Trophy Club, Texas 76262 Dallas, Texas 75270 San Antonio, Texas 78209 (682)831^610 (214)859-9452 (210)226-8677 iii TABLE OF CONTENTS BOARD OF DIRECTORS iii DISTRICT PERSONNEL AND ADVISORS iii TABLE OF CONTENTS iii USE OF INFORMATION IN THE OFFICIAL STATEMENT v SELECTED DATA FROM THE OFFICIAL STATEMENT vi SELECTED FINANCIAL INFORMATION vii PRELIMINARY OFFICIAL STATEMENT 1 INTRODUCTION 1 PLAN OF FINANCING 1 Purpose 1 Refunded Bonds 1 SOURCES AND USES OF FUNDS 2 THE BONDS 2 General Description 2 Yield on Premium Capital Appreciation Bonds 2 Authority for Issuance 2 Security for Payment 2 Payment Record 3 Flow of Funds and Investment of Funds 3 Redemption Provisions 3 Termination of Book-Entry-Only System 4 Defeasance of Outstanding Bonds 5 Paying Agent/Registrar 5 Record Date 5 Issuance of Additional Debt 6 Specific Tax Covenants 6 Additional Covenants 6 Remedies in Event of Default 6 Amendments to the Order 6 RATINGS 6 BOND INSURANCE 7 BOND INSURANCE RISK FACTORS 7 General 7 Claims-Paying Ability and Financial Strength of Municipal Bond Insurers 7 BOOK-ENTRY-ONLY SYSTEM 7 Use of Certain Terms in Other Sections of this Official Statement 9 INVESTMENT CONSIDERATIONS 9 General 9 Approval of the Bonds 9 Tax Collections and Foreclosure Remedies 10 Consolidation 10 Abolition 10 Alteration of Boundaries 10 Registered Owners' Remedies 10 Bankruptcy Limitation to Registered Owners' Rights 11 The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District 11 Continuing Compliance with Certain Covenants 11 Future Debt 12 Future and Proposed Legislation 12 THE DISTRICT 12 Creation of the District 12 Governance 12 Employees 12 General 12 Location 13 Population 13 Topography and Drainage 13 Shopping and Commercial Facilities 13 Fire Protection 13 Police Protection 13 Schools 13 Recreational Opportunities 14 Status of Development of the District 14 Public Improvement District Description 14 THE DISTRICTS SYSTEM 15 Description of the Water System 15 Description of the Wastewater System 15 INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT 15 Current Investments 17 TAX DATA 17 District Bond Tax Rate Limitation 17 Maintenance and Operations Tax 17 Overlapping Taxes 17 TAXING PROCEDURES 17 Authority to Levy Taxes 17 Property Tax Code and County-Wide Appraisal District 17 Valuation of Property for Taxation 19 Notice and Hearing Procedures 19 District and Taxpayer Remedies 19 Levy and Collection of Taxes 20 District's Rights in the Event of Tax Delinquencies 20 TAX MATTERS 20 Opinion 20 Federal Income Tax Accounting Treatment of Original Issue Discount 21 Collateral Federal Income Tax Consequences 21 State, Local and Foreign Taxes 22 Qualified Tax-Exempt Obligations for Financial Institutions 22 CONTINUING DISCLOSURE OF INFORMATION 22 Annual Reports 22 Notice of Certain Events 23 Availability of Information from MSRB 23 Limitations and Amendments 23 Compliance with Prior Agreements 24 OTHER PERTINENT INFORMATION 24 Legal Matters 24 Registration and Qualification of Bonds for Sale 24 Litigation 24 Legal Investments and Eligibility to Secure Public Funds in Texas 24 Underwriting 25 Financial Advisor 25 Forward-Looking Statements Disclaimer 25 Concluding Statement 25 Schedule of Refunded Bonds Schedule I Schedule of Accreted Values of Premium Capital Appreciation Bonds Schedule II Financial Information of the Issuer Appendix A General Information Regarding the District Appendix B Form of Legal Opinion of Bond Counsel Appendix C The Issuer's General Purpose Audited Financial Statements for the Year Ended September 30, 2011 Appendix D The cover page, subsequent pages hereof and the schedules and appendices attached hereto, are part of this Official Statement. iv USE OF INFORMATION IN THE OFFICIAL STATEMENT For purposes of compliance with Rule 15c2-12 of the U.S. Securities and Exchange Commission (the "Rule"), this document constitutes a Preliminary Official Statement of the District with respect to the Bonds that has been "deemed final" by the District as of its date except for the omission of no more than the information permitted by the Rule. This Preliminary Official Statement, which includes the cover page, Schedule I and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Preliminary Official Statement, and, if given or made, such other information or representation must not be relied upon. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchaser of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. Certain information set forth herein has been provided by sources other than the District that the District believes to be reliable, but the District makes no representation as to the accuracy of such information. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of the Preliminary Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described herein since the date hereof. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the District's undertaking to provide certain information on a continuing basis. The Underwriter has provided the following statement for inclusion in this Preliminary Official Statement. The Underwriter has reviewed the information in this Preliminary Official Statement in accordance with, and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. NONE OF THE DISTRICT, ITS FINANCIAL ADVISOR OR THE UNDERWRITER MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS PRELIMINARY OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY ("DTC") OR ITS BOOK-ENTRY-ONLY SYSTEM, AS SUCH INFORMATION HAS BEEN FURNISHED BY DTC. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THIS PRELIMINARY OFFICIAL STATEMENT CONTAINS "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD- LOOKING STATEMENTS. (See "OTHER PERTINENT INFORMATION—Forward Looking Statements Disclaimer" herein.) [The remainder of this page is intentionally left blank.] v SELECTED DATA FROM THE OFFICIAL STATEMENT The following material is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. The Issuer The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") is a political subdivision of the State of Texas located in Denton and Tarrant Counties, Texas. The District was created as a municipal utility district pursuant to Chapter 54 of the Texas Water Code and is a conservation and reclamation district in accordance with Article XVI, Section 59 of the Texas Water Code. The District has also adopted a fire protection plan under Section 50.055 of the Texas Water Code, now codified as Subchapter L of Chapter 49 of the Texas Water Code, pursuant to the Order of the Texas Water Commission of August 22, 1983. In July of 2009, documentation was submitted to the Texas Commission on Environmental Quality ("TCEQ") regarding the consolidation of Trophy Club Municipal Utility District Nos. 1 and 2 pursuant to a May 9, 2009 election. (See "THE DISTRICT" and "APPENDIX B - GENERAL INFORMATION REGARDING THE DISTRICT" herein.) The Bonds The Bonds, which are being issued in part as Current Interest bonds ("CIBs") and in part as Premium Capital Appreciation Bonds ("CABs") (collectively, the "Bonds") as shown on page ii hereof, are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who will approve a "Pricing Certificate" which will contain the final terms of sale and will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) Security for Payment The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivisions or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) Paying Agent/Registrar The initial Paying Agent/Registrar for the Bonds is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas Redemption Provisions CIBs maturing on and after September 1, 2021 are subject to redemption in whole or from time to time in part at the option of the District on September 1, 2020, and on any date thereafter, at par plus accrued interest from the most recent interest payment date to the date of redemption. The CABs are not subject to redemption prior to maturity. Tax Matters In the opinion of Bond Counsel, the interest on the Bonds will be excludable from gross income of the owners thereof for purposes of federal income taxation under existing law subject to matters discussed herein under "TAX MATTERS", including the alternative minimum tax on corporations. (See "TAX MATTERS" and APPENDIX C - "FORM OF LEGAL OPINION OF BOND COUNSEL" herein.) Use of Proceeds Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) Bond Insurance Ratings Book-Entry-Only System The District is considering qualifying the Bonds for municipal bond insurance and has made application to municipal bond insurance companies in connection with such consideration. (See "BOND INSURANCE" and "BOND INSURANCE RISK FACTORS" herein.) The District has made application to Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P") for a municipal bond rating on the Bonds. The District currently has an underlying rating of "AA-" from S&P. An explanation of the significance of a rating may be obtained from the company furnishing the rating. (See "RATINGS" herein.) The Issuer intends to utilize the Book-Entry-Only System of The Depository Trust Company, New York, New York relating to the method and timing of payment and the method of transfer relating to the Bonds. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Future Bond Issues The District has no plans to issue additional bonds within the next twelve months. "INVESTMENT CONSIDERATIONS - Future Debt" herein. See Payment Record Delivery Legality The Issuer has never defaulted in the timely payment of principal of or interest on its general obligation indebtedness. When issued, anticipated on or about March 5, 2012. Delivery of the Bonds is subject to the approval by the Attorney General of the State of Texas and the rendering of an opinion as to legality McCall, Parkhurst & Horton LLP., Bond Counsel, Dallas, Texas. vi SELECTED FINANCIAL INFORMATION Total 2011 Certified Net Taxable Assessed Valuation (ARB Approved) Gross Debt Principal Outstanding (after issuance of the Bonds) Ratio of Gross Debt Principal to 2011 Taxable Assessed Valuation Debt Service Fund Balance as of December 31, 2011 (audited) 2011-2012 Tax Rate Operations Fire Protection Debt Service Average Percentage of Total Tax Collections - Tax Years 2006-2010 Projected Average Annual Debt Service Requirement (2012-2031) Of the Bonds and the Outstanding Bonds ("Projected Average Requirement") Tax Rate Required to Pay Projected Average Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 99% Collections Projected Maximum Annual Debt Service Requirement (2012) of the Bonds and The Outstanding Bonds ("Projected Maximum Requirement") Tax Rate Required to Pay Projected Maximum Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 100% collections Estimated 2011 population $0.00989 0.10925 0.05586 $954,645,475 (a) $7,120,000 * 0.75% * $316,299.71 $0.17500 100.40% (B) $471,485 * $0.04989/$100 A.V. $866,994 * $0.09174/$100 A.V. 7,600 ™2011 Net Taxable Valuation does not include property under protest or values for incomplete accounts. (See "TAXING PROCEDURES" herein.) <a> Historical tax collection information for Tax Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2). * Preliminary, subject to change. vii [This page is intentionally left blank.] PRELIMINARY OFFICIAL STATEMENT relating to $2,355,000* TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 INTRODUCTION This Preliminary Official Statement provides certain information in connection with the issuance by the Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") of its $2,355,000* Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who will approve a "Pricing Certificate" which will contain the final terms of sale and will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Security for Payment" herein.) Unless otherwise indicated, capitalized terms used in this Preliminary Official Statement have the same meaning assigned to such terms in the Order. Included in this Preliminary Official Statement are descriptions of the Bonds, the Order, and certain information about the District and its finances. ALL DESCRIPTIONS OF DOCUMENTS CONTAINED HEREIN ARE SUMMARIES ONLY AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO EACH SUCH DOCUMENT. Copies of such documents may be obtained from the District or Financial Advisor. PLAN OF FINANCING Purpose Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (the "Refunded Bonds") (see "Schedule I - Schedule Of Refunded Bonds" attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. Refunded Bonds A description and identification of the Refunded Bonds appears in Schedule I attached hereto. The Refunded Bonds, and interest due thereon, are to be paid on September 1, 2012* (the "Redemption Date"), from funds to be deposited with The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Escrow Agent") or its successor. The Order approves and authorizes the execution of an escrow agreement (the "Escrow Agreement") between the District and the Escrow Agent. The Order provides that, from the proceeds of the sale of the Bonds received from the Underwriter, the District will deposit the amount necessary, together with other available funds, if any, to accomplish the discharge and final payment of the Refunded Bonds on the Redemption Date. Such funds will be held uninvested by the Escrow Agent pending their disbursement to redeem the Refunded Bonds on the Redemption Date. The Escrow Agent, as the paying agent for the Refunded Bonds, will determine and certify at the time of delivery of the Bonds that the amounts deposited to the Escrow Fund will equal an amount sufficient to pay, on the scheduled redemption date, the principal of and interest on the Refunded Bonds. Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of principal of and interest on the Refunded Obligations and amounts therein will not be available to pay the Bonds. By deposit of the funds with the Escrow Agent pursuant to the Escrow Agreement, the District will have effected the defeasance of all of the Refunded Bonds in accordance with Texas law. As a result of such defeasance, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the funds held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding obligations of the District payable from taxes nor for the purpose of applying any limitation on the issuance of debt, and the obligation of the District to make payments in support of the debt service on the Refunded Bonds will be extinguished. * Preliminary, subject to change. 1 SOURCES AND USES OF FUNDS The proceeds from the sale of the Bonds will be applied approximately as follows: Sources of Funds Par Amount of Bonds Accrued Interest on the CIBs Original Issue Premium Total Sources of Funds Uses of Funds Deposit to Escrow Fund Cost of Issuance (Including Bond Insurance, if applicable) Underwriter's Discount Accrued Interest Deposit to Interest & Sinking Fund Additional Proceeds Deposit to the Debt Service Fund Total Uses of Funds THE BONDS General Description The Bonds are being issued in part as Current Interest Bonds ("CIBs") and in part as Premium Capital Appreciation Bonds ("CABs"). The CIBs will be issued in fully registered form in principal denominations of $5,000 or any integral multiple thereof within a stated maturity, and the CABs will be issued as fully registered certificates in denominations of $5,000 representing the total amount of principal, plus the initial premium, if any, therefor and accrued interest payable upon maturity (the "Maturity Amount"), or any integral multiple thereof for a Maturity Amount. The CIBs shall bear interest from the March 1, 2012 on the unpaid principal amounts, and the amount of interest to be paid each payment period shall be computed on the basis of a 360- day year consisting of twelve 30-day months. Interest on the CIBs will be payable on March 1 and September 1 of each year commencing September 1, 2012, until maturity or prior redemption. Interest on the CABs will accrete from the date they are initially delivered to the Underwriter and such interest will compound on March 1 and September 1 of each year (each an "Accretion Date") commencing September 1, 2012, and be payable only upon maturity, as described in the Order, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Principal of the CIBs and Maturity Amounts of the CABs is payable at the designated offices of the Paying Agent/Registrar, initially The Bank of New York Mellon Trust Company, N.A., Dallas, Texas; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Bonds, all payments will be made as described under "BOOK-ENTRY-ONLY SYSTEM" herein. Interest on the CIBs shall be paid to the registered owners whose names appear on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (as hereinafter defined) and shall be paid by the Paying Agent/Registrar (i) by check sent United States Mail, first class postage prepaid, to the address of the registered owner recorded in the Security Register or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for any payment on the Bonds shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office of the Paying Agent/Registrar is located are authorized to be closed, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. Yield on Premium Capital Appreciation Bonds The approximate yields of the CABs as set forth on page ii of this Official Statement are the approximate yields based upon the initial offering prices therefor set forth on page ii of this Official Statement. Such offering price includes the principal amount of such CABs plus premium, if any, equal to the amount by which such offering price exceeds the principal amount of such CABs. The yield on the CABs to a particular purchaser may differ depending upon the price paid by that purchaser. For various reasons, securities that do not pay interest periodically, such as the CABs, have traditionally experienced greater price fluctuations in the secondary market than securities that pay interest on a periodic basis. Authority for Issuance The Bonds are issued by the District pursuant to the terms and provisions of the Order and the Constitution and general laws of the State, particularly Chapter 1207. Security for Payment The Bonds will constitute valid and legally binding direct obligations of the District payable from the proceeds of a continuing direct annual ad valorem tax levied by the District against all taxable property located therein, without legal limit as to rate or amount. The Order irrevocably pledges such ad valorem taxes to the payment of the principal of and interest on the Bonds while the same remain outstanding. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision 2 or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. Tax Pledge: The Board covenants in the Order that, while any of the Bonds are outstanding and the District is in existence, it will levy and assess a continuing ad valorem tax upon each $100 valuation of taxable property within the District at a rate from year to year sufficient, full allowance being made for anticipated delinquencies, together with revenues and receipts from other sources which are legally available for such purposes, to pay interest on the Bonds as it becomes due, to provide for the payment of principal of the Bonds when due or the redemption price at any earlier redemption date, to pay when due any other contractual obligations of the District payable in whole or in part from taxes, and to pay the expenses of assessing and collecting such tax. The Board additionally covenants in the Order to timely assess and collect such tax. The net proceeds from taxes levied to pay debt service on the Bonds are required to be placed in a special account of the District designated as the "Debt Service Fund" for the Bonds. Abolition: Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Consolidation: A district (such as the District) has the legal authority to consolidate with other municipal utility districts and in connection therewith, to provide for the consolidation of its assets, such as cash and the utility system, with the water and wastewater systems of districts with which it is consolidating as well as its liabilities (which would include the Bonds). The District is the resulting entity from a consolidation in May 2009 of Trophy Club Municipal Utility District No. 1 and Trophy Club Municipal Utility District No. 2 (see "THE DISTRICT"). Payment Record The District has never defaulted on the timely payment of principal of and interest on its general obligation indebtedness. Flow of Funds and Investment of Funds The Bond Order creates a Debt Service Fund. The Debt Service Fund shall be kept separate and apart from all other funds of the District. Any cash balance in the Debt Service Fund must be continuously secured, to the extent that the United States or an instrumentality of the United States does not insure the cash balance, by a valid pledge to the District of securities eligible under the laws of Texas to secure the funds of municipal utility districts having an aggregate market value, exclusive of accrued interest, at all times equal to the cash balance in the fund to which such securities are pledged. The Bond Order establishes the Debt Service Fund to be used to pay principal and interest on the Bonds. The Bond Order requires that the District deposit to the credit of the Debt Service Fund (i) from the delivery of the Bonds to the initial purchaser, the amount received from proceeds of the Bonds representing accrued interest, (ii) District ad valorem taxes (and penalties and interest thereon) levied to pay debt service requirements on the Bonds, and (iii) such other funds as the Board shall, at its option, deem advisable. The Bond Order requires that the Debt Service Fund be applied solely to provide for the payment of the principal or redemption price of and interest on the Bonds when due, and to pay fees to the Paying Agent when due. Redemption Provisions Optional Redemption: The District reserves the right, at its option, to redeem the CIBs maturing on and after September 1, 2021 on September 1, 2020, or any date thereafter, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof (and, if within a stated maturity, selected at random and by lot by the Paying Agent/Registrar), at the redemption price of par plus accrued interest to the date fixed for redemption. Not less than thirty (30) days prior to a redemption date for the CIBs, the District shall cause a notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owners of each CIB or a portion thereof to be redeemed at its address as it appeared on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing of such notice. With respect to any optional redemption of the CIBs, unless certain prerequisites to such redemption required by the Order have been met and money sufficient to pay the principal of and premium, if any, and interest on the CIBs to be redeemed will have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice will state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such money by the Paying Agent/Registrar on or prior to the date fixed for such 3 redemption or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption are not fulfilled, such notice will be of no force and effect, the District will not redeem such CIBs, and the Paying Agent/Registrar will give notice in the manner in which the notice of redemption was given, to the effect that such CIBs have not been redeemed. ANY NOTICE OF REDEMPTION SO MAILED TO THE REGISTERED OWNERS WILL BE DEEMED TO HAVE BEEN DULY GIVEN IRRESPECTIVE OF WHETHER RECEIVED BY ANY HOLDER OF THE CIBS, AND, SUBJECT TO PROVISION FOR PAYMENT OF THE REDEMPTION PRICE HAVING BEEN MADE, AND ANY PRECONDITIONS STATED IN THE NOTICE OF REDEMPTION HAVING BEEN SATISFIED INTEREST ON THE REDEEMED CIBS SHALL CEASE TO ACCRUE FROM AND AFTER SUCH REDEMPTION DATE NOTWITHSTANDING THAT A CIB HAS NOT BEEN PRESENTED FOR PAYMENT. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the CIBs or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the CIBs or portion thereof which are to be redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. The Paying Agent/Registrar and the Issuer, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Bonds or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the Beneficial Owner, will not affect the validity of the redemption of the CIBs called for redemption or any other action premised on any such notice. Redemption of portions of the CIBs by the Issuer will reduce the outstanding principal amount of such CIBs held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such CIBs held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such CIBs from the Beneficial Owners. Any such selection of CIBs to be redeemed will not be governed by the Order and will not be conducted by the Issuer or the Paying Agent/Registrar. Neither the Issuer nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or Beneficial Owners of the selection of portions of the Bonds for redemption. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Termination of Book-Entry-Only System The District is initially utilizing the book-entry-only system of the DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) In the event that the Book-Entry-Only System is discontinued by DTC or the District, the following provisions will be applicable to the Bonds. Payment: Principal of the CIBs will be payable at maturity or upon earlier redemption and the Maturity Amount of the CABs will be payable at maturity to the registered owners as shown by the registration books maintained by the Paying Agent upon presentation and surrender of the Bonds to the Paying Agent at the designated office for payment of the Paying Agent/Registrar in Dallas, Texas (the "Designated Payment/Transfer Office"). Interest on the CIBs will be payable by check or draft, dated as of the applicable interest payment date, sent by the Paying Agent by United States mail, first class, postage prepaid, to the registered owners at their respective addresses shown on such records, or by such other method acceptable to the Paying Agent requested by registered owner at the risk and expense of the registered owner. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, legal holiday or day on which banking institutions in the city where the Designated Payment/Transfer Office of the Paying Agent is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not a Saturday, Sunday, legal holiday or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the original date payment was due. Initially, the only registered owner of the Bonds will be CEDE & CO. as nominee of DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Registration: The Bonds may be transferred and re-registered on the registration books of the Paying Agent only upon presentation and surrender thereof to the Paying Agent/Registrar at the Designated Payment/Transfer Office. A Bond also may be exchanged for a Bond or Bonds of like maturity and interest and having a like aggregate principal amount or Maturity Amount, as the case may be, upon presentation and surrender at the Designated Payment/Transfer Office. All Bonds surrendered for transfer or exchange must be endorsed for assignment by the execution by the registered owner or his duly authorized agent of an assignment form on the Bonds or other instruction of transfer acceptable to the Paying Agent. Transfer and exchange of Bonds will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such transfer or exchange. A new Bond or Bonds, in lieu of the Bond being transferred or exchanged, will be delivered by the Paying Agent/Registrar to the registered owner, at the Designated Payment/Transfer Office of the Paying Agent/Registrar or by United States mail, first-class, postage prepaid. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the denominations of $5,000 or any integral multiple thereof. (See "BOOK-ENTRY-ONLY SYSTEM" herein for a description of the system to be initially utilized in regard to ownership and transferability of the Bonds.) Limitations on Transfer of Bonds: Neither the District nor the Paying Agent shall be required to make any transfer, conversion or exchange to an assignee of the registered owner of the CIBs (i) during the period commencing on the close of business on the 15th calendar day of the month preceding each interest payment date (the "Record Date") and ending with the opening of business on the 4 next following principal or interest payment date or (ii) with respect to any CIB called for redemption, in whole or in part, within forty- five (45) days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a CIB. Replacement Bonds: If a Bond is mutilated, the Paying Agent will provide a replacement Bond in exchange for the mutilated bond. If a Bond is destroyed, lost or stolen, the Paying Agent will provide a replacement Bond upon (i) the filing by the registered owner with the Paying Agent of evidence satisfactory to the Paying Agent of the destruction, loss or theft of the Bond and the authenticity of he registered owner's ownership and (ii) the furnishing to the Paying Agent of indemnification in an amount satisfactory to hold the District and the Paying Agent harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Bond must be borne by the registered owner. The provisions of the Order relating to the replacement Bonds are exclusive and the extent lawful, preclude all other rights and remedies with respect to the replacement and payment of mutilated, destroyed, lost or stolen Bonds. Defeasance of Outstanding Bonds The Order provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The Order provides that "Defeasance Securities" means (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent and (4) any other then authorized securities or obligations under applicable Texas state law that may be used to defease obligation such as the Bonds. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds. Because the Order does not contractually limit such investments, registered owners will be deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under State law. There is no assurance that any particular rating for U.S. Treasury securities used as Government Securities or the rating for any other Government Security will be maintained at any particular rating category. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the CIBs for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the CIBs for redemption is not extinguished if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the CIBs for redemption; (ii) gives notice of the reservation of that right to the owners of the CIBs immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorize. Paying Agent/Registrar Principal of and semiannual interest on the CIBs and the Maturity Amount of the CABs will be paid by The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, the initial Paying Agent/Registrar (the "Paying Agent"). The Paying Agent must be a bank, trust company, financial institution or other entity duly qualified and equally authorized to serve and perform the duties as paying agent and registrar for the Bonds. Provision is made in the Order for the District to replace the Paying Agent by a resolution of the District giving notice to the Paying Agent of the termination of the appointment, stating the effective date of the termination and appointing a successor Paying Agent. If the Paying Agent is replaced by the District, the new Paying Agent shall be required to accept the previous Paying Agent's records and act in the same capacity as the previous Paying Agent. Any successor paying agent/registrar selected by the District shall be subject to the same qualification requirements as the Paying Agent. The successor paying agent/registrar, if any, shall be determined by the Board of Directors and written notice thereof, specifying the name and address of such successor paying agent/registrar will be sent by the District or the successor paying agent/registrar to each Registered Owner by first-class mail, postage prepaid. Record Date The record date for payment of the interest on Bonds on any regularly scheduled interest payment date is defined as the fifteenth day of the month preceding such interest payment date. 5 Issuance of Additional Debt The District may issue bonds necessary to construct waterworks and sewer system improvements and facilities for which the District was created and to provide fire protection to the District, with the approval of the District's voters. Following the issuance of the Bonds, $5,769,217 unlimited tax bonds authorized by the District's voters will remain unissued. The District has no plans to issue additional general obligation debt within the next twelve months. In addition, voters may authorize the issuance of additional bonds or other contractual obligations secured by ad valorem taxes. Neither Texas law nor the Order imposes a limitation on the amount of additional debt which may be issued by the District. Any additional debt issued by the District may dilute the security of the Bonds. (See "INVESTMENT CONSIDERATIONS" herein.) The District may also issue bonds secured by revenues of the water and sewer system or other revenues of the District (other than ad valorem tax revenues ) without voter approval. Specific Tax Covenants In the Order the District has covenanted with respect to, among other matters, the use of the proceeds of the Bonds and the property re-financed therewith by persons other than state or local governmental units, and the manner in which the proceeds of the Bonds are to be invested. The District may cease to comply with any such covenant if it has received a written opinion of a nationally recognized bond counsel to the effect that failure to comply with such covenant will not adversely affect the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. Additional Covenants The District has additionally covenanted in the Order that it will keep accurate records and accounts and employ an independent certified public accountant to audit and report on its financial affairs at the close of each fiscal year, such audits to be in accordance with applicable law, rules and regulations and open to inspection in the office of the District. Remedies in Event of Default The Order provides that, in addition to all other rights and remedies of any owner of Bonds provided by the laws of the State of Texas, in the event the District defaults in the observance or performance of any covenant in the Order including payment when due of the principal of and interest on the Bonds, any Bond owner may apply for a writ of mandamus from a court of competent jurisdiction requiring the Board of Directors or other officers of the District to observe or perform such covenants. The Order provides no additional remedies to a Bond owner. Specifically, the Order does not provide for an appointment of a trustee to protect and enforce the interests of the Bond owners or for the acceleration of maturity of the Bonds upon the occurrence of a default in the District's obligations. Consequently, the remedy of mandamus is a remedy, which may have to be enforced from year to year by the Bond owners (See "INVESTMENT CONSIDERATIONS - Registered Owners' Remedies".). Under Texas law, no judgment obtained against the District may be enforced by execution of a levy against the District's public purpose property. The Bond owners themselves cannot foreclose on property within the District or sell property within the District in order to pay principal of or interest on the Bonds. In addition, the enforceability of the rights and remedies of the Bond owners may be limited by federal bankruptcy laws or other similar laws affecting the rights of creditors of political subdivisions. (See "INVESTMENT CONSIDERATIONS - Bankruptcy Limitation to Registered Owners' Rights".) The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified to the customary rights of debtors relative to their creditors Amendments to the Order The District may without the consent of or notice to any Bond owners amend the Order in any manner not detrimental to the interest of the Bond owners, including the curing of an ambiguity, inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the owners of a majority in principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order, except that, without the consent of the owners of all of the Bonds affected, no such amendment, addition, or rescission may (1) change the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, change the place or places at, or the coin or currency in which, any Bond or the interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) affect the right of the owners of less than all of the Bonds outstanding, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission. In addition, a state, consistent with federal law, may in the exercise of its police powers make such modifications in the terms and conditions of contractual covenants relating to the payment of indebtedness of its political subdivisions as are reasonable and necessary for attainment of an important public purpose. RATINGS In connection with the sale of the Bonds, The District has made application to Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P") for a municipal bond rating on the Bonds. The District currently has an underlying rating of "AA-" from S&P. An explanation of the significance of a rating may be obtained from the company furnishing 6 the rating. The rating reflects only the respective view of such companies, and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by any such rating company, if, in the judgment of such company circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. BOND INSURANCE The Issuer has made application to municipal bond insurance companies to have the payment of the principal of and interest on the Bonds insured by a municipal bond insurance policy. The Issuer shall notify the Underwriter upon obtaining a commitment from a municipal bond insurance company concerning this matter. The final Official Statement shall disclose, to the extent necessary, any relevant information relating to any such municipal bond insurance policy. BOND INSURANCE RISK FACTORS General If a commitment from a bond insurance company (the "Insurer") to provide a municipal bond insurance policy relating to the Bonds (the "Policy") is obtained, the final Official Statement shall disclose certain information relating to the Insurer and the Policy. The purchase of such insurance, if available, and the payment of all associated costs will be at the option and expense of the District. If the District chooses to purchase the Policy, the following risk factors related to municipal bond insurance policies generally apply. In the event of default of the scheduled payment of principal of or interest on the Bonds when all or a portion thereof becomes due, any owner of the Bonds shall have a claim under the Policy for such payments. The payment of principal and interest in connection with mandatory or optional prepayment of the Bonds by the District which is recovered by the District from the registered owner as a voidable preference under applicable bankruptcy law is covered by the Policy; however, such payments will be made by the Insurer at such time and in such amounts as would have been due absent such prepayment by the District (unless the Insurer chooses to pay such amounts at an earlier date). Payment of principal of and interest on the Bonds is not subject to acceleration, but other legal remedies upon the occurrence of non-payment do exist (see "THE BONDS - Default and Remedies"). The Insurer may reserve the right to direct the pursuit of available remedies, and, in addition, may reserve the right to consent to any remedies available to and requested by the registered owners. In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Bonds are payable solely from the ad valorem tax levied on all taxable property located within the District. In the event the Insurer becomes obligated to make payments with respect to the Bonds, no assurance is given that such event will not adversely affect the market price or the marketability (liquidity) of the Bonds. If a Policy is acquired, the long-term ratings on the Bonds will be dependent in part on the financial strength of the Insurer and its claims-paying ability. The Insurer's financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance can be given that the long-term ratings of the Insurer and of the ratings on the Bonds, whether or not subject to a Policy, will not be subject to downgrade and such event could adversely affect the market price or the marketability (liquidity) for the Bonds. See the disclosure described in "BOND INSURANCE RISK FACTORS - Claims-Paying Ability and Financial Strength of Municipal Bond Insurers" herein. The obligations of the Insurer under a Policy are general obligations of the Insurer and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law. None of the District, the Financial Advisor or the Underwriter has made independent investigation into the claims-paying ability of any Insurer and no assurance or representation regarding the financial strength or projected financial strength of any Insurer is given. Claims-Paying Ability and Financial Strength of Municipal Bond Insurers Moody's Investor Services, Inc., Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business and Fitch Ratings (the "Rating Agencies") have, over the last several years, downgraded and/or placed on negative watch the claims- paying and financial strength of most providers of municipal bond insurance. Additional downgrades or negative changes in the rating outlook for all bond insurers are possible. In addition, recent events in the credit markets have had substantial negative effects on the bond insurance business. These developments could be viewed as having a material adverse effect on the claims-paying ability of such bond insurers, including any bond insurer of the Bonds. Thus, when making an investment decision, potential investors should carefully consider the ability of the District to pay principal and interest on the Bonds and the claims-paying ability of any such bond insurer, particularly over the life of the Bonds. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by the Depository Trust Company while the Bonds are registered in its nominee's name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District and the Underwriter believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. 7 The District and the Underwriter cannot and do not give any assurance the (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participant, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The cun-ent rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Bonds, in the aggregate principal amount or Maturity Amount of each maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation", within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of certificated securities. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC is rated "AA-" by Standard & Poor's. The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of Bonds ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Bonds representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the CIBs within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Issuer or the Paying Agent/Registrar, on the payable date in accordance with their 8 respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Issuer or the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered to DTC Participants or the Beneficial Owners, as the case may be. The Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered. (See "THE BONDS - Termination of Book-Entry-Only System" herein.) The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Issuer and Underwriter believe to be reliable, but the Issuer and the Underwriter take no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry- Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. INVESTMENT CONSIDERATIONS General The Bonds are obligations of the District and are not obligations of the Town of Trophy Club, State of Texas, Denton County, Tarrant County or any other political subdivision except the District. The Bonds are payable from a continuing, direct, annual ad valorem tax, without legal limitations as to rate or amount, on all taxable property within the District. (See "THE BONDS - Security for Payment" herein.) The investment quality of the Bonds depends both on the ability of the District to collect from the property owners all taxes levied against their property or, in the event of foreclosure, the value of the taxable property with respect to taxes levied by the District and by other taxing authorities. Approval of the Bonds The Attorney General of Texas must approve the legality of the Bonds prior to their delivery. The Attorney General of Texas does not pass upon or guarantee the quality of the Bonds as an investment, nor does he pass upon the adequacy or accuracy of the information contained in this Official Statement. Factors Affecting Taxable Values and Tax Payments Economic Factors and Interest Rates: A substantial percentage of the taxable value of the District results from the current market value of single-family residences and developed lots. The market value of such homes and lots is related to general economic conditions affecting the demand for and taxable value of residences. Demand for lots and residential dwellings can be significantly affected by factors such as interest rates, credit availability, construction costs, energy availability and the prosperity and demographic characteristics of the urban center toward which the marketing of lots is directed. Decreased levels of construction activity, which has been experienced in the District for the last several years, tend to restrict the growth of property values in the District or could adversely impact existing values. Interest rates and the availability of mortgage and development funding have a direct impact on the construction activity, particularly short-term interest rates at which developers and homebuilders are able to obtain financing for development and construction costs. Interest rate levels may affect the ability of a landowner with undeveloped property to undertake and complete development activities within the District. Because of the numerous and changing factors affecting the availability of funds, the District is unable to assess the future availability of such funds for continued development and construction within the District. In addition, the success of development within the District and growth of District's taxable property values are, to a great extent, a function of the Dallas/Fort Worth metropolitan and regional economics. Impact on District Tax Rates: Assuming no further development, the value of the land and improvements currently within the District will be the major determinant of the ability or willingness of District property owners to pay their taxes. The 2011 certified net taxable assessed valuation (ARB Approved) of the District (see page vii "SELECTED FINANCIAL INFORMATION") is $954,645,475. After issuance of the Bonds the projected maximum annual debt service requirement will be $866,994* (2012) 9 and the projected average annual debt service requirement will be $471,485* (2012 through 2031, inclusive). Assuming no increase or decrease from the 2011 assessed valuation and no use of funds on hand, a tax rate of $0.09174* per $100 assessed valuation at a 99% collection rate would be necessary to pay the projected maximum annual debt service requirement of $866,994* and a tax rate of $0.04989* per $100 assessed valuation at a 99% collection rate would be necessary to pay the projected average annual debt service requirement of $471,485*. After a transfer of $308,000, representing Fire Department rental income, the District's 2011 debt service tax rate is $0.05586 per $100 assessed valuation. (See "APPENDIX A - TABLES 4 and 5" herein. Tax Collections and Foreclosure Remedies The District's ability to make debt service payments may be adversely affected by its inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the District constitutes a lien in favor of the District on a parity with the liens of all other state and local taxing authorities on the property against which taxes are levied, and such lien may be enforced by foreclosure. The District's ability to collect ad valorem taxes through such foreclosure may be impaired by (a) cumbersome, time-consuming and expensive collection procedures, (b) a bankruptcy court's stay of tax collection procedure against a taxpayer, or (c) market conditions limiting the proceeds from a foreclosure sale of taxable property. While the District has a lien on taxable property within the District for taxes levied against such property, such lien can be foreclosed only in a judicial proceeding. Because ownership of the land within the District is highly fragmented among a number of taxpayers, attorney's fees, and other costs of collecting any such taxpayer's delinquencies could substantially reduce the net proceeds to the District from a tax foreclosure sale. Finally, any bankruptcy court with jurisdiction over the bankruptcy proceedings initiated by or against a taxpayer within the District pursuant to the Federal Bankruptcy Code could stay any attempt by the District to collect delinquent ad valorem taxes against such taxpayer. Consolidation A district (such as the District) has the legal authority to consolidate with other municipal utility districts and, in connection therewith, to provide for the consolidation of its assets, such as its water and wastewater systems with the assets of the district(s) with which it is consolidating, as well as its liabilities (which would include the Bonds and other outstanding obligations of the District). The District is the resulting entity from a consolidation in May 2009 of Prior MUD 1 and Prior MUD 2 (see "THE DISTRICT"). No representation is made that the District will consolidate again in the future with any other district. Abolition Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Alteration of Boundaries In certain circumstances, under Texas law the District may alter its boundaries to: 1) upon satisfying certain conditions, annex additional territory; and 2) exclude land subject to taxation within the District that is not served by District facilities if the District simultaneously annexes land of equal acreage and value that may be practicably served by District facilities. No representation is made concerning the likelihood that the District would effect any change in its boundaries. Registered Owners' Remedies If the District defaults in the payment of principal, interest or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Order, or defaults in the observation or performance of any other covenants, conditions or obligations set forth in the Order, the registered owners may seek a writ of mandamus to compel District officials to carry out their legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the covenants contained in the Bonds or in the Order and the District's obligations are not uncertain or disputed. The remedy of mandamus is controlled by equitable principles and rests with the discretion of the court. The issuance of a writ of mandamus is controlled by equitable principles and rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court has ruled in Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006) that a * Preliminary, subject to change 10 waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Therefore, bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Bankruptcy Limitation to Registered Owners' Rights The enforceability of the rights and remedies of Bondholders may be limited by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions such as the District. Texas law requires a municipal utility district such as the District to obtain the approval of the TCEQ as a condition to seeking relief under the Federal Bankruptcy Code. If a petitioning district were allowed to proceed voluntarily under Chapter 9 of the Federal Bankruptcy Code, it could file a plan for an adjustment of its debts. If such a plan were confirmed by the bankruptcy court, it could, among other things, affect Registered Owners by reducing or eliminating the amount of indebtedness, deferring or rearranging the debt service schedule, reducing or eliminating the interest rate, modifying or abrogating collateral or security arrangements, substituting (in whole or in part) other securities, and otherwise compromising and modifying the rights and remedies of the Registered Owner's claim against a district. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9 and such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditors. A district may not be forced into bankruptcy involuntarily. The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District The "Financial Institutions Reform, Recovery and Enforcement Act of 1989" ("FIRREA"), enacted on August 9, 1989, contains certain provisions which affect the time for protesting property valuations, the fixing of tax liens, and the collection of penalties and interest on delinquent taxes on real property owned by the Federal Deposit Insurance Corporation ("FDIC") when the FDIC is acting as the conservator or receiver of an insolvent financial institution. Under FIRREA real property held by the FDIC is still subject to ad valorem taxation, but such act states (i) that no real property of the FDIC shall be subject to foreclosure or sale without the consent of the FDIC and no involuntary liens shall attach to such property, (ii) the FDIC shall not be liable for any penalties or fines, including those arising from the failure to pay any real or personal property tax when due and (iii) notwithstanding failure of a person to challenge an appraisal in accordance with state law, such value shall be determined as of the period for which such tax is imposed. There has been no definitive judicial determination of the validity of the provisions of FIRREA or how they are to be construed and reconciled with respect to conflicting state laws. However, certain federal court decisions have held that the FDIC is not liable for statutory penalties and interest authorized by State property tax law, and that although a lien for taxes may exist against real property, such lien may not be foreclosed without the consent of the FDIC, and no liens for penalties, fines, interest, attorneys fees, costs of abstract and research fees exist against the real property for the failure of the FDIC or a prior property owner to pay ad valorem taxes when due. It is also not known whether the FDIC will attempt to claim the FIRREA exemptions as to the time for contesting valuations and tax assessments made prior to and after the enactment of FIRREA. Accordingly, to the extent that the FIRREA provisions are valid and applicable to any property in the District, and to the extent that the FDIC attempts to enforce the same, these provisions may affect the timeliness of collection of taxes on property, if any, owned by the FDIC in the District, and may prevent the collection of penalties and interest on such taxes. Continuing Compliance with Certain Covenants The Order contains covenants by the District intended to preserve the exclusion from gross income of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. (See "THE BONDS - Specific Tax Covenants " herein.) Failure by the District to comply with such covenants on a continuous basis prior to maturity of the Bonds could result in interest on the Bonds becoming taxable retroactively to the date of original issuance. (See "TAX MATTERS " herein.) 11 Future Debt The District has reserved in the Order the right to issue the remaining $5,769,217 authorized but unissued unlimited tax bonds and such additional bonds as may hereafter be approved by both the Board of Directors and voters of the District. All of the remaining unlimited tax bonds, which have heretofore been authorized by the voters of the District may be issued by the District from time to time for qualified purposes, as determined by the Board of Directors of the District, subject to the approval of the Attorney General of the State of Texas and the TCEQ. The District has no plans to issue additional debt within the next twelve months. Future and Proposed Legislation Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the Bonds under Federal or state law and could affect the market price or marketability of the Bonds. Any such proposal could limit the value of certain deductions and exclusions, including the exclusion for tax-exempt interest. The likelihood of any such proposal being enacted cannot be predicted. Prospective purchasers of the Bonds should consult their own tax advisors regarding the foregoing matters. THE DISTRICT Creation of the District The District was created by the consolidation of two prior municipal utility districts, being Trophy Club Municipal Utility District No. 1 ("Prior MUD 1") and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2° and collectively with Prior MUD 1, the "Prior MUDs"). Prior MUD 1 was created as Denton County Municipal Utility District No. 1 by order of the Texas Water Rights Commission (the "Commission") on March 4, 1975 for the purpose of providing water and sewer facilities and other authorized services to the area within the territory of Prior MUD 1. The name of Prior MUD 1 was changed to Trophy Club Municipal Utility District No. 1 on April 1, 1983. Prior MUD 2 was created as a result of the consolidation of Denton County Municipal Utility District No. 2 and Denton County Municipal Utility District No. 3, which were created by the Texas Commission on Environmental Quality ("TCEQ") for the purpose of providing water, sewer and drainage facilities and other authorized services to the area. The creation of Prior MUD 2 was confirmed by its electorate at an election held on August 9, 1980. On January 26, 2009, the Boards of the Prior MUDs entered into an agreement to consolidate the Prior MUDs into a single Municipal Utility District covering the territory of the Prior MUDs, subject to the approval of the consolidation by the voters at an election held for that purpose. On May 9, 2009, the voters approved the consolidation and the District became the Trophy Club Municipal Utility District No. 1. Pursuant to the consolidation agreement, the District assumed the outstanding bonds, notes and other obligations of the Prior MUDs and the authorized but unissued bonds, taxes and other obligations of the Prior MUDs and became authorized to levy a uniform tax on all taxable property within the District. The functions performed by the District include supplying water for municipal purposes; collecting, transporting, processing and disposing of wastes; establishing, operating and maintaining a fire department; and performing other functions permitted by municipal utility districts under the Texas Water Code. Governance The District is governed by a board of directors which has control over and management supervision of all affairs of the District. There are five elected directors that serve four-year staggered terms. Directors receive no remuneration, except a Director's per diem allowance of $100 per day on which necessary service is performed for the District. The District and all similar districts are subject to the continuing supervision and filing requirements of the TCEQ, including the preparation and filing of an annual independent audit report. All District facility plans are submitted to the TCEQ for review and approval. Employees The District has no employees of its own. Rather, personnel services are furnished under an Interlocal Agreement for Employee and Contractual Services (the "Agreement") between the District and the Town pursuant to Chapter 791 of the Texas Government Code. Under the Agreement, employees who report directly to the District rather than the Town are entitled to the same benefits provided to Town employees, but the District is required to pay all costs associated with the provision of benefits to such employees, including pension benefits. In addition, the District is required to pay 50% of the costs incurred by the Town for salary, benefits and other compensation of employees who provide firefighting and emergency medical services to both the District and the Town. The District's liabilities under the Agreement, including pension benefits, do not have a substantial impact on the District's finances. General The District is comprised of 2,283.5 acres [approximately 94 acres in Westlake (Solana)]. Approximately 195 acres in Trophy Club are undeveloped. Of the developed acres, there are approximately 3,172 existing households, 136 apartment units and 42 townhouses. 12 Location The District is located in southern Denton County and northern Tarrant County partially within the Town of Trophy Club (the "Town") and partially within the Town of Westlake. The District is directly adjacent to and accessible from State Highway 114, north of and approximately mid-way between Dallas and Fort Worth. The District is approximately 27 miles from downtown Dallas, 25 miles from downtown Fort Worth, 17 miles from Denton, 8 miles from Grapevine and 14 miles from the Dallas-Fort Worth International Airport. Major highways connecting these population centers, which will also serve the District, include State Highways 114, 170 and 377 and Interstate Highways 35E and 35W. State Highway 170 connects Trophy Club directly to Alliance Airport which is located seven miles southwest of the District. (See "Vicinity Map" herein.) Population The population of the District is estimated to be approximately 7,600 and the population of the entire Town of Trophy Club, the District and the Trophy Club PID No. 1 (the "Trophy Club Development") is estimated at 8,895 (as of December 2011). Topography and Drainage The land within the District has a gradual slope from the southeast to the northwest toward Marshall Creek, which forms the western boundary of the District. Runoff water enters Grapevine Reservoir just north of the District through Marshall Creek or several other small tributaries. The maximum elevation in the area being developed is approximately 690 feet mean sea level and the minimum elevation in the area being developed is approximately 576 feet mean sea level. The soil is sandy loam and clay loam, and existing vegetation consists of native grasses and small oak trees. Areas which are subject to flooding by a 100- year frequency flood are located in the flood plan of Marshall Creek and have been delineated by the Water Resources Branch of the U.S. Geological Survey. Additional flood studies were made by the engineers to determine what areas may be subject to flooding. It was determined that the area subject to flooding within the District is approximately 58.5 acres based on 100-year flood frequency; however, 57.6 acres of this area is within the golf course area and is not intended to be developed for residential land use. Shopping and Commercial Facilities A shopping center within the District has a major grocery store chain, a bank, a major chain drug store, several service businesses, fast food outlets, and a beauty shop and a dry cleaners. Additionally there are several more businesses and professional offices located in the District, at the primary entrance to the Town of Trophy Club. There are additional shopping facilities in Roanoke, about two (2) miles west of the District and numerous shopping facilities in Southlake about five (5) miles east of the District and in Grapevine about eleven (11) miles east of the District. Full metropolitan shopping facilities are available in Dallas and Fort Worth, Texas which have their central business districts approximately 27 miles and 25 miles, respectively from the District. Fire Protection The District operates its Fire Department (the "Department") with an engine, a Quint, a brush truck and two support vehicles. Currently the Department is staffed with twelve (12) full-time firefighter / paramedics, one full-time Fire chief and a part-time administrative assistant. Operations under the Department include fire suppression, fire prevention, emergency management, investigation/enforcement and emergency medical response. The new $3.1 million fire station was completed and equipped in August 2011 with proceeds from the sale of the Series 2010 Bonds, replacing the previously existing facility. This Department serves the Town of Trophy Club and area in the District that is not in the Town limits, and is currently financed by a combination of a $0.10925 maintenance tax assessment in the District, as well as a $0.10925 Public Improvement District ("PID") assessment in Trophy Club PID No. 1. The 2011-2012 annual operating budget is $1,311,934 with October 1, 2011 reserves of $287,689 (unaudited). Police Protection Twenty-four hour security is provided by the Town of Trophy Club Police Department Schools The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). 13 Recreational Opportunities Recreational opportunities in Trophy Club are afforded by Lake Grapevine and its surrounding parks, which lie two miles north and east of the District. The Town has several community parks, including facilities for soccer, baseball, softball, basketball, tennis, a competitive swimming pool and playground amenities. The Town also operates an 877 acre Corps of Engineers park, which features 100 acres of motorized trails, as well as many passive recreational opportunities such as fishing, hiking and picnicking. Status of Development of the District The area in the District is locally known as "Trophy Club." It is a residential and mixed-use development consisting of approximately 2,283.5 acres. The District is a mature district with roughly 195 acres undeveloped, of which 135 acres are zoned residential and approximately 60 acres are available for commercial development. There is substantial land left for commercial development in the Solana complex, which is located within the City of Westlake. Lot and custom home sales officially began in the District in mid-year 1975. Homes are currently being offered at prices ranging from $200,000 to $1,000,000 and lots range in price from $35,000 to $200,000. The status of single-family home development as of January 1, 2012 is shown below: Status of Single-Family Home Development Houses Additional Total Multi-Family Under Houses Total Developed Houses Units Construction Occupied Houses Lots and Lots Completed(a) 138 3,172 3,310 72 3,382 178 (a) In addition to the single-family development, there are approximately 132 apartments and 42 completed townhouses, which are occupied. Status of Business / Commercial Development The undeveloped commercial land within the Solana business complex (approximately 230 acres) is available for commercial development, however the District is unaware of any current plans for additional development in the Solana business complex. The Town of Trophy Club and the District have commercial land available for development on approximately 52 acres of land along Highway 114. The land is zoned for uses such as a medical complex, hotels, restaurants and a short-stay hospital facility. Additionally, the District currently has a small strip center along Highway 114 containing several food establishments and professional offices. Maguire Thomas Partners ("Maguire") currently owns the Solana business complex, which is the top principal taxpayer in the District (see APPENDIX A "Table 11 - Principal Taxpayers 2011-2012"). On November 16, 2011, a State district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. The District cannot predict the impact that such events may have on the District's financial condition. Public Improvement District Description Trophy Club PID No. 1 (the "PID") consists of approximately 609.683 acres of land generally to the north of Oakmont Drive, Oak Hill Drive and the Quorum Condominiums, east of the Lakes Subdivision and Parkview Drive, south of the Corps of Engineer's property, and west of the Town's eastern limit. The PID is located entirely within the Town limits but outside the District. A master-planned residential community (the "Property") is under construction in the PID and at build-out will be comprised of approximately 1,489 residential units located within the Property, which Property is zoned to permit such use pursuant to the PD Zoning. As of December 31, 2011, 538 homes have been completed and are occupied and an additional 170 homes have been permitted and are currently under construction. The PID is projected to build out as early as 2017 if construction continues at current levels, or as late as 2025 in the event of a decrease in the construction rate. The District provides emergency and fire protection services to the PID, and the PID pays the District an assessment for such services at the current fire tax rate of $0.10925. The District also provides water and sewer service for the PID. The total billed for PID water and sewer for fiscal year 2010-11 was $617,001.57. 14 THE DISTRICT'S SYSTEM The following information describes generally the water and wastewater systems for the District. Description of the Water System Sources of Water Supply: The present water supply is provided from two sources: (i) four ground wells which provide approximately 1,000,000 gallons per day, and (ii) a 21-inch water line which is capable of delivering 10,000,000 gallons per day of treated water from the City of Fort Worth facilities. Currently the District contracts with the City of Fort Worth for unlimited water services. Current maximum usage is approximately 6,500,000 gallons per day (of which 4,500,000 is Fort Worth water). These sources, when combined, provide water which complies with the quality requirements of the TCEQ and needs only chlorination at the District's water plant facility. loafer Plant Facility: The present facility provides 900,000 gallons elevated and 6,000,000 gallons ground storage with pumping/chlorination capacity of 10,000,000 gallons per day. Description of the Wastewater System Wastewater Treatment Plant Facility: The wastewater treatment plant system has a permitted treatment/discharge capacity of 1,750,000 gallons per day from the TCEQ under TPDES Permit No. 11593-001. Although the permit authorizes the discharge of wastewater to the adjacent tributary leading to Lake Grapevine, the plant effluent is currently pumped to various holding ponds within the community of Trophy Club and is re-used for irrigating the golf course. INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Trustees. Both State law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than "A" or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit and share certificates meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended) (i) that are issued by or through an institution that has its main office or a branch office in Texas and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for District deposits; or (ii) where (a) the funds are invested by the District through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the District as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the District; (b) the broker or the depository institution selected by the District arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the District; (c) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the District appoints the depository institution selected under (a) above, a custodian as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the District with respect to the certificates of deposit; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the District, held in the District's name, and deposited at the time the investment is made with the District or with a third party selected and approved by the District and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State; (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than "A" or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less; (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least "A-1" or "P-1" or the equivalent by at least one nationally recognized credit rating agency; (11) commercial paper with a stated maturity of 270 days or less that is rated at least "A-1" or "P-1" or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (12) no-load money market mutual funds registered with and regulated by the United States Securities and Exchange Commission 15 that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and, (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than "AAA" or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than "AAA" or "AAAm" or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the District's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived." At least quarterly the District's investment officers must submit an investment report to the Board of Trustees detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, the ending market value and the fully accrued interest for the reporting period of each pooled fund group, (4) the book value and market value of each separately listed asset at the end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest District funds without express written authority from the Board of Trustees. Under State law, the District is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt by written instrument a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution; (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to: (a) receive and review the District's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the District and the business organization that are not authorized by the District's investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the District's entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the District and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the District's investment policy; (6) provide specific investment training for the Treasurer, chief financial officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in no-load mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. 16 Current Investments As of December 31, 2011 the District's funds were invested in the District's depository bank and TexPool as shown in the table that follows. The District does not currently own, nor does it anticipate the inclusion of long-term securities or derivative products in its portfolio. Fund and Investment Type Amount TexPool - Operating Fund $3,317,514 TexPool - Interest and Sinking Fund 310,178 First Financial Bank Interest Bearing Account - Operating Fund 373.001 Total Investments $4.000.693 TAX DATA District Bond Tax Rate Limitation By law the District's tax rate for debt service on the Bonds is unlimited as to rate or amount. Maintenance and Operations Tax The Board is also authorized to levy and collect an annual ad valorem tax for planning, constructing, acquiring, or maintaining or repairing or operating the District's improvements and facilities, if such maintenance and operations tax is authorized by a vote of the District's electors. Such tax is in addition to taxes which the District is authorized to levy for paying principal of and interest on the Bonds, and any tax bonds which may be issued in the future. As shown in APPENDIX A, TABLE 13 - "TAX RATE DISTRIBUTION," the District levied a 2011-2012 maintenance and operations tax for fire protection purposes of $0.10925/$100 assessed valuation and $0.00989/$100 assessed valuation for all other operations and maintenance purposes. Overlapping Taxes Other governmental entities whose boundaries overlap the District have outstanding bonds payable from ad valorem taxes. The statement of direct and estimated overlapping ad valorem tax debt shown in APPENDIX A - TABLE 14 (page A-6) was developed from several sources, including information contained in "Texas Municipal Reports," published by the Municipal Advisory Council of Texas. Except for the amount relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person is entitled to rely upon information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the dates stated in this table, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Political subdivisions overlapping the District are authorized by Texas law to levy and collect ad valorem taxes for operation, maintenance and/or general revenue purposes in addition to taxes of debt service and the tax burden for operation, maintenance and/or general purposes is not included in these figures. (See APPENDIX A - TABLES 14, 15 & 17 for information on overlapping taxing entities.) TAXING PROCEDURES Authority to Levy Taxes The Board has been authorized to levy an annual ad valorem tax on all taxable property within the District in an amount sufficient to pay the principal of and interest on the Bonds, their pro rata share of debt service on any contract tax bonds and any additional bonds or obligations payable from taxes which the District may hereafter issue and to pay the expenses of assessing and collecting such taxes. The District agrees in the Order to levy such a tax from year-to-year as described more fully herein under "THE BONDS - Security for Payment." Under Texas law, the Board is also authorized to levy and collect an ad valorem tax for the operation and maintenance of the District and for the payment of certain contractual obligations, if authorized by its voters. (See" TAX DATA - District Bond Tax Rate Limitation" herein.) Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") specifies the taxing procedures of all political subdivisions of the State of Texas, including the District. Provisions of the Property Tax Code are complex and are not fully summarized herein. The Property Tax Code requires, among other matters, county-wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within the county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The board of directors of the appraisal district selects a chief appraiser to manage the appraisal offices of the appraisal district. The Denton Central Appraisal District and the Tarrant Appraisal District have the 17 responsibility for appraising property for all taxing units within Denton and Tarrant Counties, including the District. Such appraisal values are subject to review and change by the appraisal review boards of each county. The appraisal roll as approved by the appraisal review boards must be used by the District in establishing its tax roll and tax rate. General: Except for certain exemptions provided by Texas law, all property with a tax situs in the District is subject to taxation by the District; however, no effort is made by the District to collect taxes on tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property applicable to the District include: (i)property owned by the State of Texas or its political subdivisions if the property is used for public purposes; (ii)property exempt from ad valorem taxation by federal law; (iii) certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; (iv) designated historical sites; and (v) solar and wind-powered energy devices. Freeport Exemption: Article VIII, Section 1-j of the Texas Constitution authorizing an ad valorem tax exemption for "freeport property" was approved November 7, 1989. Freeport property is goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. The District does grant this exemption. Goods in Transit: "Goods in Transit", which are certain goods, principally inventory, that are stored, for the purposes of assembling, storing, manufacturing, processing or fabricating the goods, in a location that is not owned by the owner of the goods and are transferred from that location to another location within 175 days; a taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The District does not exempt Goods in Transit. Agricultural/Open-Land Exemption: Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open- space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. The District does have land that qualifies for this exemption. Residence Homestead Exemptions: Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision. Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual's spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. The Board has granted such elderly and disabled exemptions in the amount of $25,000 of assessed valuation. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. The District does not grant the option percentage of market value exemption. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. Disabled/Deceased Veterans Exemption: State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse (for so long as the surviving spouse remains unmarried) or children (under 18 years of age) of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000; provided, however, that beginning in the 2009 tax year, a disabled veteran who receives from the from the United States Department of Veterans Affairs or its successor 100 percent disability compensation due to a service-connected disability and a rating of 100 percent disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran's residence homestead. In addition, effective January 1, 2012, and subject to certain conditions, surviving spouses of a deceased veteran who had received a disability rating of 100% will be entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. The District does grant the disabled / deceased veterans Exemption. 18 Tax Abatement: Denton County, Tarrant County or the Town of Trophy Club may designate all or part of the area within the District as a reinvestment zone. Thereafter, the District may enter into tax abatement agreements with owners of real property within the District for up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with a comprehensive plan. All of the area of the District is included in reinvestment zones designated by the Town of Trophy Club, for tax abatement purposes. Valuation of Property for Taxation Generally, all taxable property in the District must be appraised by the Denton Central Appraisal District and the Tarrant Appraisal District (collectively, the "Appraisal District") at one hundred percent (100%) of market value as of January 1 of each year, subject to review and approval by the Appraisal Review Board. In determining market value, either the replacement cost or the income or the market data method of valuation may be used, whichever is appropriate. Certain land may be appraised at less than market value under the Property Tax Code. Increases in the appraised value of residence homesteads are limited to 10 percent annually regardless of the market value of the property. Upon application of a landowner, land which qualifies as "open-space land" is appraised based on the category of land, using accepted income capitalization methods applied to the average net income derived from the use of the land for agriculture and hunting or recreational leases. Upon application of a landowner, land which qualifies as "timber land" is appraised using accepted income capitalization methods applied to the average net income derived from the use of the land for production of timber. Land which qualifies as an aesthetic management zone, critical wildlife management zone, or streamside management zone or is being regenerated for timber production for 10 years after harvest is valued at one-half that amount. In the case of both open space and timber land valuations, if the use of land changes, an additional tax is generally imposed on the land equal to the difference between the taxes imposed on the land for each of the five (5) years preceding the year in which the change of use occurs and the tax that would have been imposed had the land been taxed on the basis of market value in each of those years, plus interest at an annual rate of seven percent (7%) calculated from the dates on which the differences would have become due. There are also special appraisal methods for agricultural land owned by individuals whose primary occupation and income are farming and for recreational, park, and scenic land. Also, houses or lots held for sale by a developer or builder which remain unoccupied, are not leased or rented and produce no income are required to be assessed at the price for which they would sell as a unit to a purchaser who would continue the owner's business, upon application of the owner. Once an appraisal roll is prepared and approved by the Appraisal Review Board, it is used by the District in establishing its tax rate. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraised values. The plan must provide for appraisal of all real property in the Appraisal District at least one every three (3) years. It is not know what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or countywide basis. Notice and Hearing Procedures The Tax Code establishes a "truth-in-taxation" process identifying increases in the effective tax rate. The rollback tax rate equals 108% of the total tax rate for the prior year. If the District decides to increase the tax rate more than eight percent (8%) above the previous year's tax rate, it must hold a public hearing and give notice to its taxpayers. If the actual tax rate adopted exceeds the rollback tax rate, taxpayers may petition to hold an election to reduce the tax rate to the rollback tax rate for the fiscal year. The Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll District and Taxpayer Remedies The chief appraiser must give written notice before the Appraisal Review Board meeting to an affected owner if a reappraisal has resulted in an increase in value over the prior year or the value rendered by the owner, or if property not previously included on the appraisal roll has been appraised. Any owner who has timely filed notice with the Appraisal Review Board may appeal the final determination by the Appraisal Review Board of the owner's protest by filing suit in Texas district court. Prior to such appeal, however, the owner must pay the tax due on the amount of value of the property involved that is not in dispute or the amount of tax paid in the prior year, whichever is greater, but not to exceed the amount of tax due under the order from which the appeal is taken. In the event of such suit, the value of the property is determined by the court, or a jury if requested by any party. Additionally, the District is entitled to challenge certain matters before the Appraisal Review Board, including the level of appraisal of certain category of property, the exclusion of property from the appraisal records, or the grant in whole or in part of a partial exemption, or a determination that land qualifies for a special use appraisal (agricultural or timber classification, for example). The District may not, however, protest a valuation of individual property. 19 Levy and Collection of Taxes The rate of taxation is set by the Board based upon the valuation of property within the District as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes, and authorized contractual obligations. Unless the Board, or the qualified voters of the District or of Denton County or Tarrant County at an election held for such purpose, determines to transfer the collection of taxes to the Denton Central Appraisal District or Tarrant Appraisal District or another taxing unit, the District is responsible for the levy and collection of its taxes. The District has contracted with the Denton County Tax Collector to collect the taxes for the District. Taxes are due on receipt of the tax bill and become delinquent after January 31 of the following year. The date of the delinquency may be postponed if the tax bills are mailed after January 10 of any year. Delinquent taxes are subject to a 6% penalty for the first month of delinquency, one percent (1%) for each month thereafter to July 1, and 12% total if any taxes are unpaid on July 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. In addition, where a district engages an attorney for collection of delinquent taxes, the Board may impose a further penalty not to exceed twenty percent 20% on all taxes unpaid on July 1. The District may be prohibited from collection of penalties and interest on real property owned by the Federal Depository Insurance Corporation. In prior years the District has engaged a delinquent tax attorney and imposed such a penalty. District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the District is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two years after the purchaser's deed issued at the foreclosure sale is filed in the county records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. (See "INVESTMENT CONSIDERATIONS - General" and "INVESTMENT CONSIDERATIONS - Tax Collections and Foreclosure Remedies".) TAX MATTERS Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel to the Issuer, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Bonds for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel to the Issuer will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds. See Appendix C - Form of Legal Opinion of Bond Counsel. In rendering its opinion, Bond Counsel to the Issuer will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate, and (b) covenants of the Issuer contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the Refunded Bonds and the property financed or refinanced therewith and (c) the certification of the paying agent for the Refunded Bonds that the amount deposited with the Escrow Agent will be sufficient to pay the principal of and interest on the Refunded Bonds when due. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel to the Issuer is conditioned on compliance by the Issuer with such requirements, and Bond Counsel to the Issuer has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. 20 Bond Counsel's opinion represents its legal judgement based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. Federal Income Tax Accounting Treatment of Original Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds may be less than the principal amount or maturity amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Bonds"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. 21 THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Bonds will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. Qualified Tax-Exempt Obligations for Financial Institutions Section 265(a) of the Code provides, in pertinent part, that interest paid or incurred by a taxpayer, including a "financial institution," on indebtedness incurred or continued to purchase or carry tax-exempt obligations is not deductible in determining the taxpayer's taxable income. Section 265(b) of the Code provides an exception to the disallowance of such deduction for any interest expense paid or incurred on indebtedness of a taxpayer that is a "financial institution" allocable to tax-exempt obligations, other than "private activity bonds," that are designated by a "qualified small issuer" as "qualified tax-exempt obligations." A "qualified small issuer" is any governmental issuer (together with any "on-behalf of and "subordinate" issuers) who issues no more than $10,000,000 of tax-exempt obligations during the calendar year. Section 265(b)(5) of the Code defines the term "financial institution" as any "bank" described in section 585(a)(2) of the Code, or any person accepting deposits from the public in the ordinary course of such person's trade or business that is subject to federal or state supervision as a financial institution. Notwithstanding the exception to the disallowance of the deduction of interest on indebtedness related to "qualified tax-exempt obligations" provided by section 265(b) of the Code, section 291 of the Code provides that the allowable deduction to a "bank," as defined in section 585(a)(2) of the Code, for interest on indebtedness incurred or continued to purchase "qualified tax-exempt obligations" shall be reduced by twenty-percent (20%) as a "financial institution preference item." In the Order, the Issuer has designated the Bonds as "qualified tax-exempt obligations" within the meaning of section 265(b) of the Code. In furtherance of that designation, the Issuer has covenanted to take such action that would assure, or to refrain from such action that would adversely affect, the treatment of the Bonds as "qualified tax-exempt obligations." Potential purchasers should be aware that if the issue price to the public exceeds $10,000,000 there is a reasonable basis to conclude that the payment of a de minimis amount of premium in excess of $10,000,000 is disregarded; however, the Internal Revenue Service could take a contrary view. If the Internal Revenue Service takes the position that the amount of such premium is not disregarded, then such obligations might fail to satisfy the aforementioned dollar limitation and the Bonds would not be "qualified tax-exempt obligations." CONTINUING DISCLOSURE OF INFORMATION In the Order, the Issuer has made the following agreement for the benefit of the holders and beneficial owners of each of the Bonds. The Issuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Issuer will be obligated to provide certain updated financial information and operating data annually, and timely notice of certain specified events, to the Municipal Securities Rulemaking Board (the "MSRB"). Annual Reports The Issuer will provide certain updated financial information and operating data to the MSRB. The District will provide all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement. The information to be updated includes Tables 1,12 and 13 of Appendix A, and the annual audited financial statements of the District. The Issuer will update and provide this information within six months after the end of each fiscal year ending in and after 2011. 22 The financial information to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Website or filed with the SEC, as permitted by SEC Rule 15c2-12 (the "Rule"). The updated information will include audited financial statements for the Issuer, if the Issuer commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Issuer will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the Issuer may be required to employ from time to time pursuant to State law or regulation. The Issuer's current fiscal year end is September 30. Accordingly, it must provide updated information by the last day in March in each year, unless the Issuer changes its fiscal year. If the Issuer changes its fiscal year, it will notify the MSRB of the change. Notice of Certain Events The Issuer will also provide timely notices of certain events to the MSRB. The Issuer will provide notice of any of the following events with respect to the Bonds to the MSRB in a timely manner (but not in excess of ten business days after the occurrence of the event): (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the Issuer, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the Issuer or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, the Issuer will provide timely notice of any failure by the Issuer to provide annual financial information in accordance with their agreement described above under "Annual Reports". For these purposes, any event described in clause (12) of the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Issuer in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Issuer, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Issuer. Availability of Information from MSRB The Issuer has agreed to provide the foregoing financial information and operating data only as described above. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org. Limitations and Amendments The Issuer has agreed to update information and to provide notices of certain specified events only as described above. The Issuer has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The Issuer makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Issuer disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the Issuer to comply with its agreement. The Issuer may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Issuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The Issuer may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds giving effect to (a) such 23 provisions as so amended and (b) any amendments or interpretations of the Rule. If the Issuer amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided. Compliance with Prior Agreements For the last five years, the District has complied in all material respects with its previous continuing disclosure agreements made in accordance with the Rule. OTHER PERTINENT INFORMATION Legal Matters The delivery of the Bonds is subject to the receipt of an approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the Issuer, and the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal income tax purposes under section 103(a) of the Code, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. The form of Bond Counsel's opinion is attached hereto as Appendix C. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Bonds, Bond Counsel has been engaged by and only represents the Issuer in the issuance of the Bonds. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions "PLAN OF FINANCING", "THE BONDS" (except for subcaptions "Yield on Premium Capital Appreciation Bonds", "Default and Remedies" and "Payment Record" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS," "CONTINUING DISCLOSURE OF INFORMATION" (exclusive of the subcaption "Compliance With Prior Agreements"), and the subcaptions "Legal Matters" (except for the last two sentences of the second paragraph thereof), "Registration and Qualification of Bonds for Sale" and "Legal Investments and Eligibility to Secure Public Funds in Texas" under the caption "OTHER PERTINENT INFORMATION" to determine whether such information accurately and fairly summarizes the material and documents referred to therein and is correct as to matters of law, and that such information conforms to the Order. Certain legal matters will be passed upon for the Underwriter by Fulbright & Jaworski L.L.P., Dallas, Texas, Counsel for the Underwriter. The legal fees to be paid to Counsel to the Underwriter are contingent upon the sale and delivery of the Bonds. The legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the respective attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Registration and Qualification of Bonds for Sale The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The Issuer assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. Litigation In the opinion of District officials, the Issuer is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the Issuer, would have a material adverse effect on the financial condition of the District. Legal Investments and Eligibility to Secure Public Funds in Texas Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments, investment securities governed by Chapter 8, Texas Business and Commerce Code, and are real and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See 24 "RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, obligations such as the Bonds are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their fair market value. No review by the District has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. No representation is made that the Bonds will be acceptable to public entities to secure their deposits or acceptable to such institutions for investment purposes. The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to any such persons or entities or which might otherwise limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such persons or entities to purchase or invest in the Bonds for such purposes. Underwriting The Underwriter has agreed, subject to certain conditions, to purchase the Bonds from the Issuer at a price of $ (representing the par amount of the Bonds of $ , plus an original issue premium of $ , less an Underwriter's discount of $ ), plus accrued interest on the Bonds to the date of initial delivery of the Bonds to the Underwriter. The Underwriter's obligation is subject to certain conditions precedent. The Underwriter will be obligated to purchase all of the Bonds, if any of the Bonds are purchased. The Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Bonds into investment trusts) and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Financial Advisor Southwest Securities is employed as a Financial Advisor to the Issuer in connection with the issuance of the Bonds. In this capacity, the Financial Advisor has compiled certain data relating to the Bonds and has assisted in drafting this Official Statement. The Financial Advisor has not independently verified any of the data contained herein or conducted a detailed investigation of the affairs of the Issuer to determine the accuracy or completeness of this Official Statement. Because of its limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fees for Financial Advisor are contingent upon the issuance, sale and delivery of the Bonds. Forward-Looking Statements Disclaimer The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. Concluding Statement The financial data and other information contained in this Official Statement have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statues, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such statutes, documents and resolutions for further information. Reference is made to original statutes, documents and resolutions in all respects. 25 This Official Statement will be approved by the Board of Directors of the Issuer for distribution in accordance with the provisions of the U.S. Securities and Exchange Commission's rule codified at 17 C.F.R. Section 240.15c2-12. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 President, Board of Directors Trophy Club Municipal Utility District No. 1 Secretary, Board of Directors Trophy Club Municipal Utility District No. 1 26 SCHEDULE I SCHEDULE OF REFUNDED BONDS* TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Unlimited Tax Bonds, Series 2002 (Redemption Date: 9-1-12* @ par plus accrued interest to the Redemption Date) Original Dated Date June 1, 2002 Total Refunded Bonds $ 2,355,000 Original Maturity Principal Amount to be Interest (Auqust 1) Amount Refunded Rates 2013 $ 165,000 $ 165,000 4.25% 2014 170,000 170,000 4.35% 2015 180,000 180,000 4.45% 2016 190,000 190,000 4.55% 2017 200,000 200,000 4.70% 2018 210,000 210,000 4.80% 2019 225,000 225,000 (a) 4.95% 2020 235,000 235,000 (a) 4.95% 2021 245,000 245,000 (b) 5.00% 2022 260,000 260,000 (b) 5.00% 2023 275,000 275,000 5.00% $ 2,355,000 $ 2,355,000 <a> Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2020. (b> Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2022. * Preliminary, subject to change. [This page is intentbnally left blank.] APPENDIX A FINANCIAL INFORMATION OF THE ISSUER (This appendix contains quantitative financial information and operating data with respect to the Issuer. The information is only a partial representation and does not purport to be complete. For further and more complete information, reference should be made to the original documents, which can be obtained from various sources, as noted.) FINANCIAL INFORMATION OF THE ISSUER ASSESSED VALUATION TABLE 1 2011 Actual Market Value of Taxable Property (100% of Actual)(a) Less Exemptions: Local Optional Over-65 Disabled and Deceased Veterans' Agricultural Productivity Loss Freeport 10% Homestead Cap Value Loss Total Exempt Property Partial Exempt Property 2011 Certified Net Taxable Assessed Valuation(b> Less: Taxable Value of Accounts Incomplete/Under Review 2011 Certified Net Taxable ARB Approved Assessed Valuation $ 1,041,294,157 $13,436,103 2,864,298 3,296,361 1,127,925 22,745,880 5,894 43,476,461 $ 997,817,696 <b> $ (43,172,221) $ 954,645,475 <a> See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. <b> Includes taxable value of incomplete accounts and accounts under ARB Review. Sources: Denton Central Appraisal District and Tarrant Appraisal District GENERAL OBLIGATION BONDED DEBT TABLE 2 General Obligation Debt Principal Outstanding (As of February 1, 2012): Unlimited Tax Bonds, Series 2002 (Excludes the Refunded Bonds) Unlimited Tax Bonds, Series 2003 Unlimited Tax Refunding Bonds, Series 2005 Unlimited Tax Bonds, Series 2010 Total General Obligation Debt Principal Outstanding 155,000 840,000 1,770,000 2,000,000 4,765,000 Current Issue General Obligation Debt Principal Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") Total General Obligation Debt Principal Outstanding (Following the Issuance of the Bonds) 2,355,000 7,120,000 Interest and Sinking Fund Balance as of December 31, 2011 (unaudited) Ratio of General Obligation Debt Principal to 2011 2011 Certified Net Taxable ARB Approved Assessed Valuation 2011 Certified Net Taxable ARB Approved Assessed Valuation(a> Population Estimates: 2000 - 6,350; 2010 - 8,042; Current 2011 (Estimate) - Per Capita 2011 Certified Net Taxable ARB Approved Assessed Valuation - Per Capita General Obligation Debt Principal - (a) See "TAXING PROCEDURES" in the Official Statement for a descriotion of the Issuer's taxation procedures. Preliminary, subject to change. 316,300 0.75% 954,645,475 7,600 125,611 937 A-1 OTHER OBLIGATIONS TABLE 3 Description Interest Year of Rate Issue Payable Average Principal Final Annual Original Outstanding Maturity Payment Amount as of 9-30-11 Public Property Finance Contractual Obligations: Improvements 2004 3. 50% 2012 $ 39,000 $ 270,000 $ Fire Truck 2007 4. 33% 2014 56,000 448,000 Improvements 2009 3. 90% 2012 110,000 330,000 Notes Payable: Equipment Equipment Capital Lease Obligations: Equipment Revenue Debt Payable: Water Storage Improvements 33,750 201,000 114,234 $ 348,984 1999 2.50% 2018 $ 2,245 $ 35,000 $ 14,259 2010 3.90% 2015 $ 201,318 $ 179,955 143,964 $ 158,223 2008 4.00% 2012 $ 9,886 $ 49,432 $ 9,886 2012 2.87% 2014 $ 383,709 $ 1,100,000 $ 1,100,000 Total Other Obligations $ 1,617,093 A-2 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 4 Less: Current Total Refunded The Bonds* Fiscal Year Debt Service Bonds Combined Sept 30 Outstanding"' Debt Service* Principal Interest Total Debt Service* 2012 $ 866,300 $ 56,156 $ 20,000 $ 36,850 $ 56,850 $ 866,994 2013 865,595 277,313 155,000 103,300 258,300 846,583 2014 659,123 275,300 185,000 73,300 258,300 642,123 2015 657,938 277,905 190,000 69,600 259,600 639,633 2016 660,938 279,895 195,000 63,900 258,900 639,943 2017 667,868 281,250 205,000 58,050 263,050 649,668 2018 668,468 281,850 210,000 51,900 261,900 648,518 2019 672,838 286,770 220,000 45,600 265,600 651,668 2020 670,738 285,633 230,000 39,000 269,000 654,105 2021 672,768 284,000 235,000 29,800 264,800 653,568 2022 678,533 286,750 250,000 20,400 270,400 662,183 2023 676,463 288,750 260,000 10,400 270,400 658,113 2024 153,183 ----153,183 2025 152,683 ----152,683 2026 148,083 ----148,083 2027 153,368 ----153,368 2028 153,243 ----153,243 2029 152,783 ----152,783 2030 152,113 ----152,113 2031 151,163 ----151,163 $ 3,161,571 $ 2.355.000 602.100 £. 2957.100 <a> Does not include Public Property Finance Contractual Obligations indebtedness (see Table 3, page A-2). * Preliminary, subject to change. 9,429,709 TAX ADEQUACY TABLE 5 2011 Certified Net Taxable ARB Approved Assessed Valuation Maximum Annual Debt Service Requirements (Fiscal Year Ending 9-30-12)* Indicated Maximum Interest and Sinking Fund Tax Rate at 99% collections * Preliminary, subject to change. Note: Above computation is exclusive of investment earnings, delinquent tax collections and penalties and interest on delinquent tax collections. 954,645,475 866,994 0.09174 INTEREST AND SINKING FUND MANAGEMENT INDEX TABLE 6 Interest and Sinking Fund Balance, Fiscal Year Ended September 30, 2011 (Unaudited) FY 2012 Interest and Sinking Fund Tax Levy of $0.05586 at 99% Collections based on the 2011 Certified Net Taxable ARB Approved Assessed Valuation of $954,645,475 Produces FY 2012 Interest and Sinking Fund Deposit from Fire Department Rental Income FY 2012 Budgeted Income from PID Utility Connection Fees Paid by Developer (guaranteed with bank letter of credit) (to be deposited to l&S Fund on or before June 2012) Total Available for Debt Service Less: General Obligation Debt Service Requirements, Fiscal Year Ending 9-30-12 Estimated Surplus at Fiscal Year Ending 9-30-12(a) $ 107,847 527,932 308,000 6.120 $ 949,900 866,994 $ 82,906 <a> Does not include delinquent tax collections, penalties and interest on delinquent tax collections or investment earnings. * Preliminary, subject to change. A-3 PROJECTED GENERAL OBLIGATION PRINCIPAL REPAYMENT SCHEDULE TABLE 7 (As of February 1, 2012) Principal Repayment Schedule Bonds Percent of Fiscal Year Outstanding The Unpaid at Principal Endina 9/30 Bonds00* Bonds* Total* End of Year* Retired (%)* 2012 $ 565,000 $ 20,000 $ 585,000 $ 6,535,000 8.22% 2013 420,000 155,000 575,000 5,960,000 16.29% 2014 230,000 185,000 415,000 5,545,000 22.12% 2015 235,000 190,000 425,000 5,120,000 28.09% 2016 245,000 195,000 440,000 4,680,000 34.27% 2017 260,000 205,000 465,000 4,215,000 40.80% 2018 270,000 210,000 480,000 3,735,000 47.54% 2019 280,000 220,000 500,000 3,235,000 54.56% 2020 290,000 230,000 520,000 2,715,000 61.87% 2021 305,000 235,000 540,000 2,175,000 69.45% 2022 320,000 250,000 570,000 1,605,000 77.46% 2023 330,000 260,000 590,000 1,015,000 85.74% 2024 110,000 -110,000 905,000 87.29% 2025 115,000 -115,000 790,000 88.90% 2026 115,000 -115,000 675,000 90.52% 2027 125,000 -125,000 550,000 92.28% 2028 130,000 -130,000 420,000 94.10% 2029 135,000 -135,000 285,000 96.00% 2030 140,000 -140,000 145,000 97.96% 2031 145,000 -145,000 -100.00% $ 4,765,000 $ 2,355,000 $ 7,120,000 ,a> Excludes the Refunded Bonds and all PPFCO principal outstanding (see Table 3, page A-2). * Preliminary, subject to change. FUND BALANCES TABLE 8 Unaudited As of 9-30-11 As of 12-31-11 General Fund $ 3,338,441 $ 3,442,735 Debt Service Fund 107,847 316,300 Total $ 3,446,288 $ 3,759,035 TAXABLE ASSESSED VALUATION FOR TAX YEARS 2007-2011 00 TABLE 9 Tax Net Taxable Change From Preceding Year Year Assessed Valuation Amount ($) Percent CM 2007 912,618,000 101,404,000 12.50% 2008 960,911,000 48,293,000 5.29% 2009 1,015,777,389 (b) 54,866,389 5.71% 2010 978,509,574 <"> -37,267,815 -3.67% 2011 954,645,475 <"> -23,864,099 -2.44% Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). ,b> Excludes valuation for incomplete accounts and accounts under ARB review, as of certification. Sources: Denton Central Appraisal District, Tanrant Appraisal District and Issuer's 2009 Audited Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-4 CLASSIFICATION OF ASSESSED VALUATION TABLE 10 %of % of %of %of % of Cateaorv 2011 Total 2010 Total 2009 Total 2008 Total 2007 Total Land ,a) $ -0.00% $ -0.00% $ -0.00% $ 186,574,000 18.75% $ 213,640,000 22.56% Land - HomeSite 193,352,075 18.57% 189,642,427 18.32% 188,045,683 17.48% -0.00% -0.00% Land - Non HomeSite 236,144,259 22.68% 248,891,821 24.04% 271,608,898 25.24% -0.00% -0.00% Land - Agricultural 3,304,866 0.32% 3,957,829 0.38% 3,998,666 0.37% -0.00% -0.00% Improvements{a) -0.00% -0.00% -0.00% 737,273,000 74.10% 638,560,000 67.43% Improvements - HomeSite 497,180,522 47.75% 498,665,743 48.16% 505,293,510 46.96% -0.00% -0.00% Improvements - Non HomeSite 19,001,251 1.82% 19,724,323 1.90% 26,769,054 2.49% -0.00% -0.00% Personal Property|a) 91,866,777 8.82% 73,302,378 7.08% 70,157,777 6.52% 71,091,000 7.15% 94,823,000 10.01% Mineral Property 444,407 0.04% 1,263,858 0.12% 10,174,220 0.95% -0.00% -0.00% Total Appraised Value $ 1,041,294,157 100.00% $ 1,035,448,379 100.00% $ 1,076,047,808 100.00% $ 994,938,000 100.00% $ 947,023,000 100.00% Less Exemptions: Exemptions (a> $ -$ -$ -$ 34,027,000 $ 34,405,000 Optional Over-65 13,436,103 12,886,387 11,972,353 -- Disabled and Deceased Veterans' 2,864,298 1,805,306 1,287,007 -- Agricultural Productivity Loss 3,296,361 3,949,539 3,990,915 -- Freeport --58,351 -- Homestead Cap Adjustment 1,127,925 1,391,082 2,957,045 -- Total Exempt Property 22,745,880 22,572,987 22,740,838 -- Partial Exempt Property 5,894 131,554 7,208 -- Total Exemptions $ 43,476,461 $ 42,736,855 $ 43,013,717 $ 34,027,000 $ 34,405,000 Certified Net Taxable $ 997,817,696 $ 992,711,524 $ 1,033,034,091 $ 960,911,000 $ 912,618,000 Assessed Valuation Less: Taxable Value of Accounts Incomplete/Under Review $ (43,172,221) $ (14,201,850) $ (17,256,702) Certified Net Taxable ARB Approved Assessed Valuation $ 954,645,475 $ 978,509,674 $ 1,015,777,389 ,a> Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities ( Trophy Club MUD No. 1 and Trophy Club MUD No. 2) and detailed information for Land, Improvements and Exemptions is not available. Source: Denton Central Appraisal District, Tarrant Appraisal District and Issuer's 2010 Audited Basic Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-5 PRINCIPAL TAXPAYERS 2011-2012 TABLE 11 % of Total 2011 2011 Net Taxable Assessed Name Tvoe of ProDertv Assessed Valuation Valuation Maguire Thomas Partners ETAL<a) Commercial Office Complex $146,398,876 15.34% Corelogic Real Estate Commercial Real Estate 18,050,838 1.89% CNL RETMT CRSI Trophy Club Texas LP Medical Plaza / Hospital 17,800,000 1.86% Marsh USA Inc. Insurance Consultant / Data Center 10,030,377 1.05% First American Leasing Commercial Office Complex 8,804,230 0.92% Levi Strauss & Co. Commercial Office 8,637,483 0.90% Regency Centers LP Retail Grocery 7,094,526 0.74% Trophy Club Medical Center Healthcare Services 6,163,459 0.65% BDMR Development LLC Real Estate Development 5,956,889 0.62% Armore Trophy Club LLC Real Estate Development 5,665,875 0.59% Total $234,602,553 24 57% Based on a 2011 Certified Net Taxable ARB Approved Assessed Valuation of $ 954,645,475 (b) <b> Although Maguire Thomas Partners ("Maguire") owns the Solana business complex ("Solana"), which comprises the entire taxable assessed valuation shown above, on November 16, 2011, a Sfate district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. Notwithstanding the receivership and possible foreclosure sale, the property taxes for the current have been paid. The District cannot predict the impact that such events may have on the District's financial condition. See "THE DISTRICT" in the Official Statement for information on the current status of the District's commercial and retail development. (b) Excludes taxable values for incomplete accounts and accounts under ARB Review. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas and the Denton Central Appraisal District. PROPERTY TAX RATES AND COLLECTIONS """" TABLE 12 Net Taxable Adjusted Tax Assessed Tax Tax % Collections Fiscal Year Year Valuation Rate Lew Current Total Ended 2006 $ 811,214,000 $ 0.280000 $ 2,191,536 100.62% 100.36% 9-30-07 2007 912,618,000 0.230000 2,234,909 100.62% 100.36% 9-30-08 2008 960,911,000 0.244615 2,380,679 98.94% 99.58% 9-30-09 2009 1,015,777,389 (c) 0.205000 2,091,414 99.66% 100.75% 9-30-10 2010 978,509,574 (c) 0.195000 2,047,972 99.58% 100.36% 9-30-11 2011 954,645,475 (c) 0.175000 1,923,848 (d) In Process of Collection 9-30-12 ,a> See "TAXING PROCEDURES - Levy and Collection of Taxes" in the body of the Official Statement for a complete discussion of the District's provisions. <b> Historical comparison information for Tax Years 2006-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). <c> Excludes value of incomplete accounts and accounts under ARB review, as of certification <d> As of December 31, 2011. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas, the Denton Central Appraisal District and the Issuer Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. TAX RATE DISTRIBUTION TABLE 13 Operations Fire Protection Debt Service TOTAL 2011-12 $0.009890 0.109250 0.055860 2010-11 $0.008790 0.109250 0.076960 $ 0.175000 $ 0.195000 2009-10 $0.027140 0.109140 0.068720 0.205000 2008-09 $0.014040 0.116020 0.114555 0.244615 2007-08 $0.010200 0.120900 0.098900 0.230000 2006-07 $0.030900 0.102700 0.146400 0.280000 Historical comparison information for Tax Years 2006-2008 reoresents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2). Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas A-6 DIRECT AND OVERLAPPING DEBT DATA INFORMATION TABLE 14 The following table indicates the indebtedness, defined as outstanding bonds payable from ad valorem taxes, of governmental entities overlapping the District and the estimated percentages and amounts of such indebtedness attributable to property within the District. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports published by the Texas Municipal Advisory Council. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the date stated, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Gross Debt /o Amount Taxing. Bodv As of Principal Overlapoina Overlapping Carroll Independent School District 02-01-12 249,710,039 3.57% $ 8,914,648 Denton County 02-01-12 477,705,000 1.20% 5,732,460 Northwest Independent School District 02-01-12 249,710,039 1.95% 4,869,346 Tarrant County 02-01-12 335,050,000 0.20% 670,100 Tarrant County College District 02-01-12 29,780,000 0.20% 59,560 Tarrant County Hospital District 02-01-12 27,160,000 0.20% 54,320 Town of Trophy Club 02-01-12 12,444,000 94.53% 11,763,313 Westlake, Town of 02-01-12 21,725,000 21.69% 4,712,153 Total Net Overlapping Debt $1,403,284,078 $ 36,775,900 Trophy Club MUD No. 1 02-01-12 7,120,000 W* 100.00% 7,120,000 Total Gross Direct Principal and Overlapping Debt $1,410,404,078 $ 43,895,900 w* Ratio of Direct and Overlapping Debt to 2011 Certified Net Taxable ARB Approved Assessed Valuation 4.60% (a). Ratio of Direct and Overlapping Debt to 2011 Market Value 4.22% (a). Per Capita Direct and Overlapping Debt $5,776 (a). {a) Includes the Bonds and excludes the Refunded Bonds. * Preliminary, subject to change. Source: Most Recent Texas Municipal Reports published by the Municipal Advisory Council of Texas. ASSESSED VALUATION AND TAX RATE OF OVERLAPPING ENTITIES TABLE 15 2011 Net Taxable 2011 Governmental Entity Assessed Valuation % of Actual Tax Rate Carroll Independent School District $ 5,554,170,040 100% $ 1.415000 Denton County 53,491,990,714 100% 0.277357 Northwest Independent School District 10,307,632,937 100% 1.375000 Tarrant County 123,043,200,369 100% 0.264000 Tarrant County College District 123,490,855,713 100% 0.148970 Tarrant County Hospital District 123,134,885,714 100% 0.227897 Town of Trophy Club 759,499,967 100% 0.530000 Westlake, Town of 1,091,999,232 100% 0.156840 Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and Denton and Tarrant County Appraisal Districts A-7 AUTHORIZED BUT UNISSUED DIRECT GENERAL OBLIGATION BONDS TABLE 16 Date of Amount Issued This Taxing Body Authorization Purpose Authorized To Date Issue Unissued Trophy Club MUD No. 1 10-07-75 Water&Sewer $ 12,344,217 $ 11,115,000 $ - $ 1,229,217 04-04-81 Water&Sewer 5,800,000 3,760,000 - 2,040,000 10-29-88 Water&Sewer 2,500,000 -_ -_ 2,500,000 $ 20,644,217 $ 14,875,000 $ - $5,769,217 AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS OF OVERLAPPING GOVERNMENTAL ENTITIES TABLE 17 Date of Amount Issued Taxing Body Authorization Purpose Authorized To Date Unissued Carroll ISD None Denton County 01-16-99 Road $ 85,320,000 $ 77,629,375 $ 7,690,625 05-15-04 Road 186,970,000 176,610,527 10,359,473 05-15-04 County Offices 17,900,000 17,900,000 - 05-15-04 Equipment 2,000,000 -2,000,000 11-04-08 Road 310,000,000 102,161,781 207,838,219 11-04-08 County Buildings 185,000,000 82,174,444 102,825,556 $ 787,190,000 $456,476,127 $330,713,873 Northwest I S D 05-10-08 School Buildings $ 260,000,000 $170,000,000 $ 90,000,000 Tarrant County 04-04-87 Courthouse Improv. $ 47,000,000 $ 46,500,000 $ 500,000 08-08-98 Law Enforcement Ctr 70,600,000 63,100,000 7,500,000 08-08-98 Healthcare Facility 9,100,000 1,000,000 8,100,000 08-08-98 Jail 14,600,000 14,600,000 - 05-13-06 Road & Bridge 200,000,000 . 126,700,000 73,300,000 05-13-06 Jail 108,000,000 108,000,000 - 05-13-06 County Buildings 62,300,000 47,300,000 15,000,000 05-13-06 Juvenile Deten. Ctr. 36,320,000 4,200,000 32,120,000 05-13-06 County Offices 26,500,000 26,500,000 - $ 574,420,000 $437,900,000 $136,520,000 Tarrant Co. College Dist None Tarrant Co. Hospital Dis None Trophy Club, Town of 11-16-09 Westlake, Town of None Parks & Recreation $ 5,000,000 $ 5,000,000 <a> The County will not issue authorization due to age. Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. A-8 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 18 Fiscal Year Ended September 30 2011 2010 2009 2008 2007 Revenue and Other Financing Sources: Ad Valorem Property Taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 Water & Wastewater Charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 Utility Fees 165,600 80,500 515,200 -- Inspection and Tap Fees 8,560 5,775 4,975 22,550 32,900 Interest Earned 5,534 6,171 20,755 69,447 106,168 Intergovernmental Revenues 89,330 ---- Oversize Meter Reimbursements 70,594 ---- Capital Proceeds/Contractual Obligations --330,000 49,432 - Miscellaneous and Other 80,906 191,498 199,780 116,295 131,124 Total Revenues and Other Financing Sources: $ 7,055,064 $ 5,694,592 $ 6,076,283 $ 4,939,191 $ 4,330,831 Expenditures and Other Financing Uses: Administrative $ 864,263 $ 993,986 $ 1,297,613 $ 905,052 $ 835,590 Water Operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 Wastewater Operations 598,465 711,382 999,388 500,224 480,798 Wastewater Collection System 277,775 308,798 294,869 409,948 402,482 Information Systems 123,605 182,658 175,698 187,908 124,987 Contribution to Trophy Club Fire Dept. 770,123 876,521 783,736 902,353 725,764 Miscellaneous 177,809 558,000 383,009 45,457 135,121 Capital Outlay 515,884 --29,379 442,782 Debt Service 240,245 --29,379 442,782 Total Expenditures and Other Financing Uses: $ 5.839.659 $ 5,513,856 $ 5,745.698 $ 4.944.492 $ 5.228.600 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses 1— 1,215,405 $ 180,736 $ 330,585 $ (5,301) $ (897,769) Other Financing Sources (Uses): (889,878) _ Beginning Fund Balance - October 1 (Restated) 3,012,914 2,832,178 2,501 593 2,477.515 2.93? 502 Ending Fund Balance - September 30 3,338,441 2.832.178 2.472.214 $ 2.034.733 Total Active Retail Connections Water and/or Wastewater Connections 3,554 3,361 3,161 3,092 2,827 NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) Source: The Issuer's Audited Financial Statements A-9 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 19 Fiscal Year Ended September 30 Revenue and Other Financing Sources: Ad Valorem Property Taxes Penalties and Interest Transfers In / Utility Fees Interest Earned Miscellaneous and Other Total Revenues and Other Financing Sources: 2011 777,648 246,100 985 2010 $ 740,420 653,000 4,848 1,000 2009 $ 1,100,081 12,225 383,009 4,105 2008 $ 1,302,763 23,326 29,379 2007 $ 1,325,143 43,456 29,379 1,024,733 $ 1,399,268 $ 1,499,420 $ 1,355,468 $ 1,397,978 Expenditures and Other Financing Uses: Principal Retirement Interest and Fiscal Charges Total Expenditures and Other Financing Uses: 1,115,000 382,019 1,497,019 $ 1,055,000 311,570 $ 1,025,000 352,195 975,000 390,565 $ 945,000 425,838 $ 1.366.570 $ 1.377,195 $ 1,365,565 $ 1,370,838 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses Other Financing Sources: $ (472,286) $ 32,698 $ 122,225 $ (10,097) $ 27,140 $ 308,000 $ $ $ $ Beginning Fund Balance - October 1 (Restated) (Restated) Ending Fund Balance - September 30 | 272,132 107 846 239,434 117,209 N/A N/A NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) N/A = Not Available Source: The Issuer's Audited Financial Statements N/A N/A A-10 APPENDIX B GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS TOWN OF TROPHY CLUB General The Town of Trophy Club (the "Town"), incorporated in January of 1985 is Texas's first premiere planned residential and country-club community. The Town is located in the southern portion of the Denton County (the "County") on State Highway 114 approximately 8 miles west of the City of Grapevine, 17 miles south of the City of Denton and 14 miles northwest of the Dallas- Fort Worth International Airport. Lake Grapevine is located approximately 2 miles north and east of the Town. The majority of property within the Town consists of single-family and multi-family housing. The Solana Business Complex is located adjacent to the Town's eastern border in the cities of Westlake and Southlake. Both residents and businesses of the Town are furnished water and wastewater treatment from Trophy Club Municipal Utility District No. 1. The Town's 2010 Census was 8,024, which is a 26.65% increase over the 2000 Census. The Town's 2011 population estimate is 8,895. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas, U.S. Census Report, North Central Texas Council of Governments and the Town of Trophy Club. Population: Town of Denton Year Trophy Club County 2011 Estimate 8,895 673,780 2010 Census 8,024 662,614 2000 Census 6,350 423,976 1990 Census 3,922 273,525 1980 Census N/A 143,126 Sources: United States Bureau of the Census, North Central Texas Council of Government and the Town of Trophy Club B-1 Leading Employers in the District: Employer Type of Business Number of Employees (2011) Maguire Partners13' Northwest Independent School District Baylor Medical at Trophy Club Trophy Club Country Club Tom Thumb Town of Trophy Club & Trophy Club MUD #1 Merryhill Bank of America First Financial Bank Quizno's Beck Properties Commercial Office Complex Public School District Healthcare Country Club Retail Grocery Municipal Governmental Entities Daycare Financial Institution Financial Institution Delicatessen Real Estate Development 3,531 267 125 100 90 78 31 7 7 4 4 {a> See "THE DISTRICT - Status of Business/Commercial Development' and APPENDIX A "Table 11 - Principal Taxpayers 2011-2012" herein for a description of the current status of the property owned by Maguire Partners ("Maguire"). The District cannot predict the impact that such events may have on Maguire's operations or its employees in the District. Source: Information from the Issuer The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). Source: Information from Northwest Independent School District and the Town of Trophy Club Denton County (the "County") is located in north central Texas. The County was created in 1846. It is the eighth most populous county in the state occupying a land area of 911 square miles. The population of the County has grown by over 55% since the 2010 census and 2% since the 2010 census. The County seat is the City of Denton. The economy is diversified by manufacturing, state supported institutions, and agriculture. The Texas Almanac designates cattle, horses, poultry, hay and wheat as the principal sources of agricultural income. Minerals produced in Denton County include natural gas and clay. Institutions of higher education include University of North Texas and Texas Woman's University with a combined 2011 fall enrollment of over 43,000. Nearby Lake Lewisville attracts over 3,000,000 visitors annually. Alliance Airport, the largest industrial airport in the world is located in the county and continues to attract new transportation, distribution, and manufacturing tenants. The Texas Motor Speedway, a major NASCAR race track, was completed in 1997 and has had a positive impact on employment and recreational spending for the area. A major Wal-Mart distribution center located in Sanger is adding to the growth of the northern portion of the County. Robson Development is constructing one of the nation's largest new communities for retired citizens in the southern portion of the County. Source: Texas Municipal Report and information from the County. Education DENTON COUNTY General B-2 Major Employers in Denton County Number of Employer Principal Line of Business Employees University of North Texas Education 7,100 Lewisville Independent School District Education 4,500 Frito Lay Co Distribution Center 2,436 American Airlines Airline 2,350 Texas Women's University Education 2,200 Denton Independent School District Education 2,000 Horizon Health Healthcare 1,500 Denton State School MHMR Facility 1,473 Denton County County Government 1,467 Xerox Corporation Office Equipment 1,400 City of Denton Municipality 1,200 Federal Express Mail Center 863 Denton Reg. Medical Center Medical Center 850 Wal-Mart Distribution Center Distribution Center 800 FEMA Emergency Management 750 Source: Denton County Economic Development and ONCOR Community Profiles Labor Force Statistics Denton County December December 2011 2010 Civilian Labor Force 362,724 356,579 Total Employed 339,700 330,862 Total Unemployed 23,024 25,717 % Unemployed 6.3% 7.2% % Unemployed (Texas) 7.2% 8.0% % Unemployed (United States) 8.3% 9.1% Source: Texas Workforce Commission, Labor Market Information Department. B-3 [This page is intentionally left blank.] APPENDIX C FORM OF LEGAL OPINION OF BOND COUNSEL Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. [DATE OF DELIVERY] TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS SERIES 2012 DATED MARCH 1,2012 IN THE AGGREGATE PRINCIPAL AMOUNT OF $ AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District") issuer of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates and mature on the dates, and are subject to redemption, in accordance with the terms and conditions stated in the text of the Bonds. Terms used herein and not otherwise defined shall have the meaning given in the Order of the District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXAMINED the Constitution and laws of the State of Texas, and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number T-1), and specimens of Bonds to be authenticated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District or if the District consolidates with another District. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed or refinced therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, APPENDIX D EXCERPTS FROM THE DISTRICT'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 (Independent Auditor's Report, General Financial Statements and Notes to the Financial Statements - not intended to be a complete statement of the Issuer's financial condition. Reference is made to the complete Annual Financial Report for further information.) Follexit: and Company PLLC / / f I Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors Trophy Club Municipal Utility District No. 1 Trophy Club, Texas We have audited the accompanying financial statements of the governmental activities and each major fund of the Trophy Club Municipal Utility District No. 1, (the District), as of and for the year ended September 30, 2011, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. 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 audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, and each major fund of the Trophy Club Municipal Utility District No. 1 as of September 30, 2011, and the changes in financial position for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis, and budgetary comparison information on pages 3 through 10 and 35 through 36, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. 1 LaFollett & Company PLLC PO Box 717 • Tom Bean, TX • 75489 903-546-6975 • vvvvw.lafollettcpa.com In accordance with Government Auditing Standards, we have issued a report dated January 31, 2012 on our consideration of the District's internal control over financial reporting and our tests of compliance with certain provisions of laws, regulations, contracts and grants. The purpose of that report is to describe the scope of testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. The report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise Trophy Club Municipal Utility District No. 1 's basic financial statements. The accompanying individual schedules and other supplementary information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The accompanying individual schedules and other supplementary information have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. LaFollett & Company, PLLC Tom Bean, Texas January 31, 2012 2 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 3 Trophy Club Municipal Utility District No. 1, Texas (the "District") Management's Discussion and Analysis (MD&A) is a narrative overview and analysis designed to provide the reader a means to identify and understand the financial activity of the District and changes in the District's financial position during the fiscal year ended September 30, 2011. The Management's Discussion and Analysis is supplemental to, and should be considered along with, the District's financial statements. Financial Highlights At the close of the fiscal year, the assets of the District exceeded its liabilities by $12,262,122. Of this amount, $3,123,113 is unrestricted net assets and may be used to meet the District's ongoing commitments. The District's net assets increased by $1,991,485 as a result of operations. At the end of the fiscal year, the District's governmental type funds reported a combined fund balance of $3,143,822. As of September 30, 2011, the unassigned fund balance of the General Fund was $2,509,429, which is equal to 42% of total General Fund expenditures. The governmental long-term debt bond obligations of the District decreased by $1,115,000. Overview of the Financial Statements The MD&A is intended to introduce the reader to the District's basic financial statements, which are comprised of three components: 1. Government-Wide Financial Statements, 2. Fund Financial Statements, and 3. Notes to Basic Financial Statements. The report also contains other required supplementary information in addition to the basic financial statements. Government-Wide Financial Statements - the government wide financial statements are designed to provide the reader with a general overview of the District's finances in a way that is comparable with financial statements from the private sector. The government-wide financial statements consist of two statements: 1. The Statement of Net Assets - (Page 11) this statement presents information on all of the District's assets and liabilities; the difference between the two is reported as net assets. Over an extended period, the increase or decrease in net assets will serve as a good indicator of whether the financial position of the District is improving or deteriorating. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Overview of the Financial Statements - continued 2. The Statement of Activities - (Page 12) gives information showing how the District's net assets have changed during the fiscal year. All revenues and expenses are reported on the full accrual basis. Fund Financial Statements - Fund financial statements provide detailed information about the most important funds and not about the District as a whole as in the government-wide financial statements. The District uses fund accounting to demonstrate compliance with finance related legal requirements which can be categorized as governmental fund activities. Governmental Funds - All of the District's activities are reported in governmental funds. They are used to account for those functions known as governmental activities. But unlike government-wide financial statements, governmental fund financial statements focus on how monies flow into and out of those funds and their resulting balances at the end of the fiscal year. Statements of governmental funds provide a detailed short-term view of the District's general government operations and the basic services it provides. Such information can be useful in evaluating a government's short-term financing requirements. The District maintains three governmental funds. Information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances for the General Fund, Debt Service Fund and Capital Projects Fund, all of which are considered to be major funds. The District adopts annual appropriated budgets for the General Fund and Debt Service Funds. A budgetary comparison statement is provided for each annually budgeted fund to demonstrate compliance with its budget. Notes to the Basic Financial Statements - The notes provide additional information that is essential to a full understanding of the data presented in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 17-34. 4 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 Governmental Governmental Activities Activities 2011 2010 Current and other $ 4,782,322 $ 6,211,302 Capital assets 16,742,462 14,187,749 Total Assets 21,524,784 20,399,051 Long-term liabilities 6,850,903 9,080,647 Other liabilities 2,411,759 1,047,767 Total liabilities 9,262,662 10,128,414 Net Assets: Invested in capital assets, net of related debt 9,031,162 7,648,983 Restricted 107,847 262,048 Unrestricted 3,123,113 2,359,606 Total Net Assets (FY10 restated) $ 12,262,122 $ 10,270,637 5 Overview of the Financial Statements - continued Government-wide Financial Analysis The management discussion and analysis highlights the information provided in both the Statement of Net Assets and Statement of Activities in the government-wide financial statements. It may serve over an extended period of time, as a useful indicator of the District's financial position. At the end of the fiscal year, the District's assets exceeded liabilities by $12,262,122. Of this amount $9,031,162 (74%) reflects the District's investment in capital assets (e.g., land, buildings, machinery and equipment, net of accumulated depreciation), less any related outstanding debt used to acquire those assets. The District uses these capital assets to provide service to the community; therefore these assets are not available for future spending. Table 1 Condensed Statements of Net Assets TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 District operational analysis - The following table provides a summary analysis of the District's consolidated operations for the fiscal years ended September 30, 2011 and 2010. Governmental activities have increased the District's net assets by $1,991,485, which amounts to a 19% increase in net assets for the year ended September 30, 2011. Table 2 Changes in Net Assets Governmental Governmental Activities Activities 2011 2010 Revenue: Program revenue Charges for services $ 5,814,098 $ 4,351,155 Grants and Contributions 89,330 11,200 General Revenue Ad valorem taxes 2,081,548 2,216,287 Unrestricted investment earnings 7,573 12,724 Miscellaneous 80,908 179,502 Total Revenue 8,073,457 6,770,868 Expenses: Water & Wastewater operations 3,499,324 2,603,224 General government 1,400,004 1,520,193 Fire 785,195 997,997 Interest and fiscal charges 397,449 317,508 Total Expenses 6,081,972 5,438,922 Increase in net assets (FY10 restated) $ 1,991,485 $ 1,331,946 Financial analysis of the District's funds Governmental Funds - the main focus of the District's governmental funds is to provide information on the flow of monies to and from the funds, and to note the unassigned fund balance, which is a good indicator of resources available for spending in the near term. The 6 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 information derived from these funds is highly useful in assessing the District's financial requirements. The unassigned fund balance may serve as a useful measure of the government's net resources available for use at the fiscal year-end. At the end of the fiscal year, the District's governmental funds reported combined ending fund balances of $3,143,822, of which 70%, or $2,206,963, is unassigned and available to the District for future spending. Additional fund balances of $107,847 are assigned to pay debt service. General Fund budgetary highlights Revenue: Revenues were $1,072,966 more than budgeted • Water and wastewater charges were $973,696 (22%) more than budgeted. The budget was based on a normal year, but the District experienced dry, hot weather increasing the use of water. Expenses: Expenses were $396,693 less than budgeted • Water operations were $179,979 more than budgeted due to a higher water use during above average summer heat and dry weather. • The Fire Department had a $436,517 positive budget variance (see page 35) for 2011 expenditures before transfers and capital outlays. After these items are considered, the positive variance was $50,517. Debt Service Fund: • Actual debt service fund revenue was $12,921 more than budgeted due to the payment of delinquent taxes. The debt service expenses were $1,040 less than budgeted. • The debt service fund reserves decreased from $272,132 to $ 107,847. Overall: • Governmental type funds revenue totaled $8,080,851 while expenditures totaled $9,927,933. • Total governmental type fund balances decreased from $4,990,903 to $3,143,821; a decrease of $1,847,082 or 37%. The decrease was expected due to the Capital Projects Fund's use of $2 million of prior year bond proceeds for fiscal year 2011 capital outlays. 7 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Capital Asset and Debt Administration The District's investment in capital assets for its governmental activities as of September 30, 2011 amounted to $16,742,462, net of accumulated depreciation. This represents a broad range of capital assets including, but not limited to land, buildings, improvements, machinery and equipment, vehicles, and water, wastewater treatment, and wastewater collection systems. Capital assets increased approximately 17% during 2011 primarily due to the completion of the new fire department facility. The Capital Projects Fund expenditure for this facility in 2011 was approximately $2.5 million. A management review of annual depreciation for capital assets was completed during the fiscal year and identified approximately $665,000 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation and net assets have been adjusted accordingly. Additional information about capital assets may be found in Note 5 in the notes to financial statements. Debt administration Long-Term Debt - at the end of the current fiscal year the consolidated District had $7,789,214 of general obligation bonds, contractual obligation bonds, notes payable, capital lease obligations, and accrued compensated absences, a decrease of 14% from the previous fiscal year. Of this amount, $7,511,201 is backed by the full faith and credit of the government. The District had no new debt for fiscal year 2011. General debt currently outstanding Table 3 Outstanding Debt at Year-end Governmental Governmental Activities Activities 2011 2010 General obligation bonds $ 7,162,142 $ 8,280,719 Contractual obligations 349,059 554,752 Notes payable 190,209 196,052 Capital lease obligations 9,888 19,774 Compensated absences 77,916 75,777 Total $ 7,789,214 $ 9,127,074 8 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Economic factors and next year's budgets and rates: General fund fiscal 2012 budgetary highlights Revenue: The District's 2012 operational revenue is budgeted to increase by $1,349,996. • Property tax revenue budget increased by $103,010 due to a decrease in existing values and a substantial increase in new construction residential values. • Water and wastewater revenue budget increased by $993,154 due to an increase in utility rates and new construction in residential homes. • Utility fees revenue increased $170,980 due to the reduction in debt service bond payments. $338,880 of the $345,000 in Utility fees will be allocated to operations. Expenses: The District's 2012 operational expense is budgeted to increase by $1,228,358. • The majority of the increase is related to capital expenses and the four year plan to replace all existing meter heads ($85,000). • Bulk water budget is to increase $310,000 due to the increase in new construction residential homes. Overall: The District's2012 operational budget is anticipated to have expenses of $7,406,912 on revenues of $7,141,830 resulting in a $265,082 use of reserves. Debt Service: • Budgeted 2012 debt service revenues are budgeted to decrease from $1,498,059 in fiscal 2011 to $870,300 in fiscal 2012, a decrease of $627,759, or 41.9%. • Debt service appropriations will decrease from $1,498,059 to $870,300 due to two bond issues being paid off in fiscal year 2011. The consolidated District's overall budget for revenue increased from $7,275,586 in fiscal 2011 to $8,012,130 in fiscal 2012 a 10.12% increase. The overall appropriations increased from $7,554,975 to $8,277,212 a 9.56% increase. 9 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 10 Requests for information This financial report is designed to provide a general overview of the District's consolidated finances for all interested parties. Questions concerning any of the information in this report or requests for additional information should be directed to the Trophy Club Municipal Utility District No. 1, Senior Accountant, 100 Municipal Drive, Trophy Club, Texas 76262. BASIC FINANCIAL STATEMENTS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Governmental Activities ASSETS Cash and cash equivalents $ 3,514,926 Receivables Accounts receivable, net 783,977 Taxes 27,760 Other 253,400 Due from other governments 33,833 Prepaids 7,755 Deferred charges 160,670 Non-depreciable capital assets: Land 248,093 Construction in progress 281,899 Non-depreciable capital assets: Buildings and other improvements 3,813,236 Machinery, vehicles, and other equipment 3,082,168 Water system 16,385,424 Organization costs 2,331,300 Accumulated depreciation (9,399,658) TOTAL ASSETS $ 21,524,784 LIABILITIES Accounts payable $ 1,137,121 Accrued liabilities 24,438 Accrued interest payable 28,237 Due to other governments 96,564 Customer deposits 187,087 Noncurrent liabilities: Debt due within one year 938,311 Debt due in more than one year 6,850,903 TOTAL LIABILITIES 9,262,662 NET ASSETS Invested in capital assets, net of related debt 9,031,162 Restricted for debt service 107,847 Unrestricted 3,123,113 TOTAL NET ASSETS $ 12,262,122 The notes to financial the statements are an integral part of this statement. 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30,2011 Governmental Activities Program Revenues Program Activities Governmental Activities Expenses Charges for Services Operating Grants and Contributions Capital Grants and Contributions General government $ 319,418 $ 484,770 $ $ - Water operations 2,495,780 3,534,489 -- Wastewater operations 646,419 1,794,839 -- Wastewater collection system 357,125 --- Utility billing 207,307 --- Directors 14,356 --- Manager's office 537,597 --- Finance and H.R. 120,227 --- Facilities management 77,493 --- Information systems 123,605 --- Fire 785,195 -11,330 78,000 Interest on long term debt 397,449 --- Total governmental activities $ 6,081,972 $ 5,814,098 $ 11,330 $ 78,000 Net (Expenses) Revenue and Changes in Net Assets Governmental Activities $ 165,352 1,038,709 1,148,420 (357,125) (207,307) (14,356) (537,597) (120,227) (77,493) (123,605) (695,865) (397,449) (178,544) General Revenues: Ad valorem taxes Investment income Miscellaneous Total general revenues Change in net assets Net Assets - beginning of year, as restated 2,081,548 7,573 80,908 2,170,029 1,991,485 10,270,637 $ 12,262,122 The notes to the financial statements are an integral part of this statement. 12 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2011 ASSETS Debt Capital Total Service Projects Governmental General Fund Fund Fund Funds Assets Cash and cash equivalents $ 3,357,805 $ 107,847 $ 49,274 $ 3,514,926 Receivables: Accounts receivables, net 783,977 - - 783,977 Taxes 14,170 13,591 - 27,760 Other receivables 253,400 - - 253,400 Due from other governments 33,833 - - 33,833 Due from other funds 199 - - 199 Prepaids 7,755 - - 7,755 TOTAL ASSETS $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 785,580 $ $ 351,541 $ 1,137,121 Accrued liabilities 24,438 --24,438 Customer deposits 187,087 --187,087 Due to other governments 96,564 -96,564 Due to other funds --199 199 Deferred revenue 19,029 13,591 -32,620 Total liabilities 1,112,698 13,591 351,740 1,478,029 nd Balances Non-spendable prepaids 7,755 --7,755 Assigned - Budgetary deficits 265,082 --265,082 Assigned - Other 556,175 107,847 -664,022 Unassigned 2,509,429 -(302,466) 2,206,963 Total fund balances 3,338,441 107,847 (302,466) 3,143,822 TOTAL LIABILITIES AND FUND BALANCES $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 The notes to financial statements are an integral part of this statement. 13 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Total fund balances - governmental funds $ 3,143,822 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in the governmental funds balance sheet. 16,742,462 Costs associated with the issuance of long-term debt are expensed when incurred in governmental funds. These costs are capitalized and amortized over the life of the debt in the government wide financial statements. 160,670 Revenue reported as deferred revenue in the governmental funds balance sheet is recognized as revenue in the government wide statement financial statements. 32,621 Interest payable on long term debt does not require current financial resources; therefore interest payable is not reported as a liability in the governmental funds balance sheet. (28,237) Accrued compensated absences does not require the use of current financial resources; therefore accrued vacation is not reported as a liability in the governmental funds balance sheet. (77,916) Long-term liabilities, including bonds payable are not due and payable in the current period and, therefore, are not reported in the fund financial statements. (7,711,300) Net assets of governmental activities $ 12,262,122 The notes to the financial statements are an integral part of this statement. 14 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS SEPTEMBER 30,2011 Revenues: Water and wastewater charges Taxes Utility fees Intergovernmental revenues Miscellaneous Oversize meter reimbursements Inspection and tap fees Investment income Total revenues Expenditures Current: Water operations Fire Wastewater operations Manager's office Wastewater collection system Utility billing Information systems Finance General government Facilities management Directors Human resources Capital Outlay Debt Service Principal Interest and fiscal charges Bond issue costs Total expenditures Excess (deficiency) of revenues over (under) expenditures Other financing sources (uses) Transfers in Transfers out Total other financing sources (' Net change in fund balance Fund Balances - beginning of year Fund Balances - end of year Debt Service General Fund Fund $ 5,323,244 $ 1,311,296 777,648 165,600 246,100 89,330 - 80,906 - 70,594 - 8,560 - 5,534 985 7,055,065 1,024,734 2,271,490 770,123 - 598,465 - 537,597 - 277,775 - 207,307 - 123,605 - 119,359 - 85,092 - 77,493 - 14,356 - 868 - 515,884 - 221,422 1,115,000 18,823 379,559 -2,460 5,839,660 1,497,019 1,215,405 (472,285) 308,000 (889,878) - (889,878) 308,000 325,527 (164,285) 3,012,914 272,132 $ 3,338,441 $ 107,847 Total Capital Governmental Projects Fund Funds $ $ 5,323,244 -2,088,945 -411,700 -89,330 -80,906 -70,594 -8,560 1,054 7,573 1,054 8,080,852 2,271,490 -770,123 -598,465 -537,597 -277,775 -207,307 -123,605 -119,359 -85,092 -77,493 -14,356 -868 2,591,255 3,107,139 _ 1,336,422 -398,382 -2,460 2,591,255 9,927,933 (2,590,201) (1,847,081) 581,878 889,878 -(889,878) 581,878 (0) (2,008,323) (1,847,081) 1,705,857 4,990,903 $ (302,466) $ 3,143,822 The notes to the financial statements are an integral part of this statement. 15 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE STATEMENT OF REVENUES EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30,2011 Net change in fund balances - total governmental funds $ (1,847,081) Amounts reportedfor governmental activities in the statement of activities are different because: Depreciation expense on capital assets reported in the statement of activities does not require the use of current financial resources, therefore, depreciation expense is not reported as expenditures in the governmental funds. (612,059) Governmental funds report capital outlays as expenditures. However, in the statement of activities the costs of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of capital assets recorded in the current period. 3,107,139 Debt principal payments reduces long-term liabilities in the statement of net assets, but it is recorded as an expenditure in the governmental funds 1,336,422 Current year changes in the long term liability for compensated absences do not require the use of current financial resources; therefore they are not reported as expenditures in the governmental funds. (2,139) Governmental funds report the effects of issuance costs, premiums, and deferred losses on refunding when debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. (3,577) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing the change in deferred revenue and various other items. The net effect of these reclassifications is to increase net assets. 9,388 Current year changes in accrued interest payable do not require the use of current financial resources and, therefore, are not reported as expenditures in the governmental funds. 3,392 Change in net assets of governmental activities $ 1,991,485 The notes to the financial statements are an integral part of this statement. 16 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General Statement Trophy Club Municipal Utility District No. 1 (the District) was created by an order of the Texas Commission on Environmental Quality (TCEQ) (formerly the Texas Natural Resources Conservation Commission) on March 4, 1975 and confirmed by the electorate of the District at a confirmation election on October 7, 1975. The Board of Director's held its first meeting on April 24, 1975. The Bonds were first sold on June 8, 1976. The District operates pursuant to Article XVI, Chapter 59 of the Texas Constitution and Chapter 54 of the Texas Water Code, as amended. On May 9, 2009, citizens voted to consolidate the District and Trophy Club Municipal Utility District No. 2 (MUD2). As a result, the District reports consolidated activity and balances for the District and the entities formerly known as MUD2 and the Trophy Club Master District Joint Venture (a joint venture of MUD 1 and MUD2). The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for the District. The financial statements of the District have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to government units. B. Financial Reporting Entity As required by accounting principles generally accepted in the United States of America, these financial statements include the activities of the District and any organizations for which the District is financially accountable or for which the nature and significance of their relationship with the District are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization's governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. A primary government has the ability to impose its will on an organization if it can significantly influence the programs, projects, or activities of, or the level of services performed or provided by, the organization. A financial benefit or burden relationship exists if the primary government (a) is entitled to the organization's resources; (b) is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization; or (c) is obligated in some manner for the debt of the organization. Some organizations are included as component units because of their fiscal dependency on the primary government. An organization is fiscally dependent on the primary government if it is unable to adopt its budget, levy taxes, set rates or charges, or issue bonded debt without approval by the primary government. Accordingly, the District has no component units. 17 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED C. Government-Wide and Fund Financial Statements The government-wide financial statements (the statement of net assets and the statement of activities) report information on all of the activities of the District, except for fiduciary funds. The effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The activities of the District are comprised only of governmental activities. The statement of activities demonstrates the degree to which the direct expenses of a given program are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific program. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given program and 2) operating or capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements The District segregates transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. These statements present each major fund as a separate column on the fund financial statements. The District does not report any non-major funds. Governmental funds are those funds through which most governmental functions typically are financed. The measurement focus of governmental funds is on the sources, uses and balance of current financial resources. The District has presented the following major governmental funds: General Fund The General Fund is the main operating fund of the District. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. General operating expenditures, fixed charges and capital improvement costs that are not paid through other funds are paid from the General Fund. Debt Service Fund The Debt Service Fund is used to account for resources accumulated and payments made for principal and interest on the long-term debt of governmental funds. Capital Projects Fund The Capital Projects Fund is used to account for funds received and expended for the acquisition and construction of infrastructure and other capital assets. 18 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED D. Measurement Focus and Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government-wide statements are reported using the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or non-current) are included on the statement of net assets and the operating statements present increases (revenues) and decreases (expenses) in net total assets. Under the accrual basis of accounting, revenues are recognized when earned. Expenses are recognized at the time the liability is incurred. Governmental fund financial statements are reported using the current financial resources measurement focus and are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual; i.e., when they become both measurable and available. "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. The District considers receivables collected within sixty days after year-end to be available and recognizes them as revenues of the current year. Expenditures are recorded when the related fund liability is incurred. However, debt service expenditures are recorded only when payment is due. The revenues susceptible to accrual are interest income and ad valorem taxes. All other governmental fund revenues are recognized when received. E. Cash and Investments The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments of three months or less from the date of acquisition. The District's investment policy requires that all monies be deposited with the authorized District depository or in (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States; (4) obligations of states, agencies, counties, cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than A or its equivalent; (5) certificates of deposit by state and national banks domiciled in this state that are (A) guaranteed or insured by the Federal Deposit 19 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED E. Cash and Investments - Continued Insurance Corporation, or its successor; or, (B) secured by obligations that are described by (1) - (4); or, (6) fully collateralized direct repurchase agreements having a defined termination date, secured by obligations described by (1), pledged with third party selected or approved by the District, and placed through a primary government securities dealer. All investments are recorded at fair value based on quoted market prices. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties. F. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the government-wide financial statements. All capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated assets are valued at their fair market value on the date donated. Repairs and maintenance are recorded as expenses. Renewals and betterments are capitalized. Interest has not been capitalized during the construction period on property, plant and equipment. Assets capitalized have an original cost of $5,000 or more and over one year of useful life. Depreciation has been calculated on each class of depreciable property using the straight-line method. Estimated useful lives are as follows: Buildings 50 Years Improvements other than buildings 15-30 Years Machinery and equipment 5-15 Years Vehicles 6-12 Years Water and wastewater systems 30 - 65 Years G. Accumulated Vacation, Compensated Time and Sick Leave The District has no employees of its own, but instead, personnel services are furnished under a contract with the Town of Trophy Club, Texas. The District records an allocation of personnel costs from the Town in personnel expense accounts rather than as single line item payable to the Town. Accordingly, the District also records current payroll and an allocation in compensated absences earned by the personnel assigned to it. The District reports this liability using the Town's vacation policy; however, the Town retains primary liability for its employee vacation pay. 20 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICffiS - CONTINUED H. Organizational Costs The District, in conformance with requirements of the TCEQ, capitalized costs incurred in the creation of the District. The TCEQ requires capitalization of organizational costs for the construction period, all costs incurred in the issue and sale of bonds, bond interest and amortized bond premium and discount losses on sales of investments, accrued interest on investments purchased, attorney fees and some administrative expenses until construction and acceptance or use of the first revenue producing facility has occurred. The District amortizes the organizational costs using the straight-line method over a period of 22 to 45 years. I. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the District or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. J. Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses/expenditures. Actual results could differ from those estimates. K. Fund Balances The Governmental Accounting Standards Board (GASB) has issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54). This Statement defines the different types of fund balances that a governmental entity must use for financial reporting purposes in the fund financial statements for governmental type funds. It does not apply for the government-wide financial statements. GASB 54 requires the fund balance amounts to be properly reported within one of the following fund balance categories: Nonspendable - such as fund balance associated with inventories, prepaids, long-term loans and notes receivable, and property held for resale (unless the proceeds are restricted, committed, or assigned) 21 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED K. Fund Balances - Continued Restricted - fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation, Committed - fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the Board of Directors (the district's highest level of decision-making authority), Assigned - fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed, and Unassigned - fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications, and other fund's that have total negative fund balances. NOTE 2. CASH AND INVESTMENTS The funds of the District must be deposited and invested under the terms of a contract, contents of which are set out in the Depository Contract Law. The depository bank places approved pledged securities for safekeeping and trust with the District's agent bank in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation (FDIC) insurance. At September 30, 2011, the carrying amount of the District's deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $619,096 and the bank balance was $848,446. The District's cash deposits at September 30, 2011, and during the year then ended were entirely covered by FDIC insurance or by pledged collateral held by the District's agent bank in the District's name. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the District to adopt, implement, and publicize an investment policy. That policy must address the following areas; (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity, allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, (9) and bid solicitation preferences for certificates of deposit. 22 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Statutes and the District's investment policy authorized the District to invest in the following investments as summarized below: Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity of Portfolio In One Issuer U.S. Treasury Obligations 2 years 85% NA U.S. Agencies Securities 2 years 85% NA State of Texas Securities 2 years 85% NA Certificates of Deposits 2 years 85% NA Municipal Securities 2 years 85% NA Money Market 2 years 50% NA Mutual Funds 2 years 50% NA Investment pools 2 years 100% NA The Act also requires the District to have independent auditors perform test procedures related to investment practices as provided by the Act. The District is in substantial compliance with the requirements of the Act and with local policies. Cash and investments as of September 30, 2011 are classified in the accompanying financial statements as follows: Statement of Net Assets Primary Government: Cash and cash equivalents $3,514,926 Total cash and investments $ 3,514,926 Cash and investments as of September 30, 2011 consist of the following: Deposits with financial institutions $ 619,096 Investments 2,895,830 Total cash and investments $ 3,514,926 The District's cash and investments balance includes $187,087 which is restricted for customer deposits. 23 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the District manages its exposure to interest rate risk is by investing mainly in investment pools which purchase a combination of shorter term investments with an average maturity of less than 60 days thus reducing the interest rate risk. The District monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. The District has no specific limitations with respect to this metric. As of September 30, 2011, the District had the following investment: Investment Type Amount Weighted Average Maturity TexPool Total Investments $ 2,895,830 $ 2,895,830 34 days As of September 30, 2011, the District did not invest in any securities which are highly sensitive to interest rate fluctuations. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the Public Funds Investment Act, the District's investment policy, or debt agreements, and the actual rating as of year-end for each investment type. Investment Type Amount Minimum Legal Rating Rating as of Year End TexPool $ 2,895,830 N/A AAAm Total Investments 2,895,830 Concentration of Credit Risk The investment policy of the District contains no limitations on the amount that can be invested in any one issuer. As of September 30, 2011, other than external investment pools, the District did not have 5% or more of its investments with one issuer. 24 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act and the District's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least the bank balance less FDIC insurance at all times. As of September 30, 2011 the District deposits with financial institutions were not in excess of federal depository insurance limits. Investment in State Investment Pools The District is a voluntary participant in TexPool. The State Comptroller of Public Accounts exercises responsibility over TexPool. This oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. TexPool operates in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940. TexPool uses amortized costs rather than market value to report net assets to compute share prices. Accordingly, the fair value of the position in TexPool is the same as the value of TexPool shares. 25 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 3. ACCOUNTS RECEIVABLE Receivables as of year-end, including the applicable allowances for uncollectible accounts, are as follows: Accounts Receivable: MUD water $ 388,269 MUD sewer 161,167 Unbilled receivables 176,861 Refuse (as agent for Town of Trophy Club) 51,903 Refuse tax (as agent for Town of Trophy Club) 4,574 Storm drainage (as agent for Town of Trophy Club) 13,254 796,028 Allowance for uncollectible accounts (12,051) Total (net) $ 783,977 Due from Other Governments: Town of Trophy Club $ 33,833 NOTE 4. INTERFUND TRANSFERS Transfers between funds during the year are as follows: Transfer In Transfer Out Amount Purpose Capital Projects General Fund $ 581,878 Capital Improvement Costs Debt Service General Fund 308,000 Debt service Total $ 889,878 NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS Prior Period Adjustment to Net Assets A management review of annual depreciation for capital assets was completed during the fiscal year and identified $664,937 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation has been decreased and net assets have been increased by this amount on the government-wide financial statements. 26 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Capital Asset Activity Capital asset activity for the year ended September 30, 2011, was as follows: Beginning Balance as Beginning Previously Adjustments/ Balance Retirements/ Ending Reported Reclassifications As Restated Additions Transfers Balance Governmental Activities: Capital assets, not being depreciated Land $ 248,093 $ -$ 248,093 $ $ $ 248,093 Construction in progress 601,102 -601,102 2,817,925 (3,137,128) 281,899 Total capital assets not being depreciated 849,195 -849,195 2,817,925 (3,137,128) 529,992 Capital assets, being depreciated Buildings 506,790 -506,790 -3,041,428 3,548,218 Improvements other than buildings 265,017 -265,017 --265,017 Machinery and equipment 1,179,578 -1,179,578 274,635 -1,454,213 Organization costs 2,331,300 -2,331,300 --2,331,300 Vehicles 1,615,129 -1,615,129 78,000 (65,174) 1,627,955 Water system 8,080,056 -8,080,056 --8,080,056 Wastewater treatment system 5,441,926 -5,441,926 --5,441,926 Wastewater collection system 2,863,443 -2,863,443 --2,863,443 Total capital assets being depreciated 22,283,239 -22,283,239 352,635 2,976,254 25,612,128 Less accumulated depreciation for: Buildings (159,049) 2,788 (156,261) (14,238) 45,485 (125,015) Improvements other than buildings (174,388) 1 (174,387) (13,166) -(187,552) Machinery and equipment (391,884) 427 (391,457) (90,102) -(481,559) Organization costs (2,016,621) (10,781) (2,027,402) (76,350) -(2,103,752) Vehicles (994,555) (1,476) (996,031) (110,759) 65,174 (1,041,616) Water system (3,013,031) 358,073 (2,654,958) (131,125) -(2,786,083) Wastewater treatment system (1,743,613) 357,383 (1,386,230) (127,272) -(1,513,503) Wastewater collection system (1,070,054) (41,479) (Mll,533) (49,046) -(1,160,578) Total accumulated depreciation (9,563,195) 664,937 (8,898,258) (612,058) 110,659 (9,399,658) Governmental activities capital assets, net $ 13,569,239 $ 664,937 $ 14,234,176 $ 2,558,502 $ (50,215) $ 16,742,462 27 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS - Continued Depreciation expense was charged as direct expense to programs of the primary government as follows: General government $ 344,985 Water operations 124,698 Fire department 15,070 Wastewater operations 47,954 Wastewater collection systems 79,351 Total depreciation expense $ 612,058 NOTE 6. LONG-TERM DEBT At September 30, 2011, the District's long-term debt payable consisted of the following: Interest Year Average Rate of Final Annual Original Outstanding Description Payable Issue Maturity Payment Amount 9/30/2011 Tax and revenue bonds: Refunding 3.25-5.90% 1997 2011 $ 398,620 $ 3,075,000 $ - Refunding 4.00-5.00% 2003 2011 252,963 1,949,288 - Improvements 4.00-5.00% 2002 2023 281,058 3,510,000 2,510,000 Operations 4.00-5.00% 2003 2023 89,793 1,200,000 840,000 Refunding 3.00-4.20% 2005 2023 195,676 3,143,998 1,770,000 Improvements 3.50-5.00% 2010 2031 148,205 2,000,000 $ 2,000,000 7,120,000 Contractual Obligations: Fire Truck 4.33% 2007 2014 $ 56,000 $ 448,000 $ 201,000 Improvements 3.50% 2004 2012 39,000 270,000 33,750 Improvements 3.90% 2009 2012 110,000 330,000 $ 114,309 349,059 Notes payable: Equipment 2.50% 1999 2018 $ 2,245 $ 35,000 $ 14,254 Equipment 3.90% 2010 2015 201,318 179,955 $ 175,955 190,209 Capital Lease Obligations: Equipment 4.00% 2008 2012 $ 9,886 $ 49,432 $ 9,886 28 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - Continued The following is a summary of long-term debt transactions of the District for the year ended September 30,2011: Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental Activities: Tax and revenue bonds 03nrractual obligations Deferred loss on refuning Premium on bonding $ 8,235,000 554J52 (55,907) 101,626 $ $ (1,115,000) (205,693) 4,414 (7,991) $ 7,120,000 349,059 (51,493) 93,635 $ 565,000 212,059 (4,414) 7,991 8,835,471 -(1,324,270) 7,511,201 780,636 Notes payable 196,052 -(5,843) 190,209 69,871 Capital lease obligations 19,774 -(9,886) 9,888 9,888 Compensated absences (restated) 75,777 2,139 -77,916 77,916 Total Governmental Activities Long-term Liabilities $ 9,127,074 $ 2,139 $ (1,339,999) $ 7,789,214 $ 938,311 29 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Year Ending September 30, Principal Interest Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017-2021 2,520,000 832,679 3,352,679 2022-2026 1,525,000 283,945 1,808,945 2027-2031 675,000 87,670 762,670 Total $ 7,120,000 $ 2,514,189 $ 9,634,189 Contractual obligations Year Ending September 30, Principal Interest Total 2012 $ 212,059 $ 13,158 $ 225,217 2013 67,000 5,932 72,932 2014 70,000 3,031 73,031 Total $ 349,059 $ 22,121 $ 371,180 Notes payable: Year Ending September 30, Principal Interest Total 2012 $ 69,871 $ 6,201 $ 76,072 2013 37,927 4,578 42,505 2014 37,974 3,107 41,081 2015 38,025 1,634 39,659 2016 2,085 160 2,245 2017-2018 4,327 163_ 4,490 Total $ 190,209 $ 15,843 $ 206,052 30 NOTE 6. LONG-TERM DEBT - CONTINUED The annual requirements to amortize all debts outstanding as of September 30, 2011, are as follows: Tax and revenue bonds: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED Capital Lease: Year Ending September 30, Principal Interest Total 2012 _$ 9,888 J> 399_ _$ 10,287 Total $ 9,888 $ 399 J 10,287 The assets acquired under the capital lease obligations above are included in capital assets at a cost of $50,173. Accumulated depreciation on the assets as of September 30, 2011 was $11,721. The tax revenue bonds are payable from the proceeds of ad valorem taxes levied upon all property subject to taxation within the District, without limitation as to rate or amount, and are further payable from, and secured by a lien on and pledge of the net revenue to be received from the operation of the District's waterworks and sanitary sewer system. The outstanding bonds are callable for redemption prior to maturity at the option of the District as follows: Series 1997 - All maturities from 2008 to 2011 are callable in principal increments of $5,000 on or after September 1, 2007 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2002 - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2003 - No bonds are subject to redemption prior to maturity. Series 2003 (debt issued by the entity formerly known as MUD 2) - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2005 - All maturities from 2014 to 2023 are callable in principal increments of $5,000 on or after September 1, 2013 at par plus unpaid accrued interest to the fixed date for redemptions. Contractual obligations and notes payable are liquidated from the general fund. Tax and revenue bonds are liquidated from the debt service fund. The provisions of the bond resolutions relating to debt service requirements have been met, and the cash allocated for these purposes is sufficient to meet debt service requirements for the year ended September 30, 2011. 31 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED In previous years, the District has legally defeased certain outstanding general obligation debt by placing funds into irrevocable trusts pledged to pay all future debt service payments of the refunded debt. Accordingly, a liability for the defeased debt issue is not included in the District's financial statements. As of September 30, 2011, the following outstanding bonds were legally defeased: Series Type Amount 1995 Unlimited Tax Refunding Bonds $ 2,490,000 Total $ 2,490,000 NOTE 7. PROPERTY TAXES Property taxes are levied as of October 1, on the assessed value listed as of the prior January 1, for all real and certain personal property located in the District and MUD2 (the "Districts"). The appraisal of property within the District is the responsibility of Denton Appraisal District (Appraisal District) as required by legislation passed by the Texas legislature. The Appraisal District is required under such legislation to assess all property within the Appraisal District on the basis of 100% of its appraised value and is prohibited from applying any assessment ratios. The value of property within the Appraisal District must be reviewed every five years; however, the District may, at its own expense, require annual reviews of appraised values. The Districts may challenge appraised values established by the Appraisal District through various appeals and, if necessary, legal action. Property taxes for the Districts are not limited as to rate or amount. In an election held October 7, 1975, the electorate of the Districts authorized the levy of up to $0.25 per $100 valuation per District for the operations and maintenance of the Districts. Property taxes attach as an enforceable lien on property as of January 1, following the levy date. Taxes are due by January 31, following the levy date. Property taxes are recorded as receivables when levied. Following is information regarding the 2011 tax levies: Adjusted taxable values $ 993,169,500 O & M Fire tax levy $0.11804/$ 100 1,284,669 I & S tax levy $0.07696/$ 100 763,303 Total tax levy $0.1950/$100 $ 2,047,972 32 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS 33 NOTE 8. FUND BALANCE CLASSIFICATIONS AND DEFICITS The District's authorized their Director to designate certain fund balances as assigned. Excluding unassigned fund balances, the following describes the District's fund balance classifications at September 30, 2011: Non-Spendable Fund Balances Non-Spendable Fund Balance of $7,755 for the General Fund represents assets not in spendable form. Assigned Fund Balances The District assigned $265,082 of General Fund fund balances to offset expected fiscal year 2012 budgetary deficits for general operations and the fire department. The District assigned a total of $556,175 of General Fund fund balances for the following: $21,000 for water plant equipment, $219,414 for future technology acquisitions, and $315,761 for fiscal year 2012 expected transfers to the Capital Projects Fund. Fund Balance Deficits The Capital Projects Fund has a fund balance deficit at September 30, 2011 of $302,466. In fiscal year 2012, the District intends to transfer funds from the General Fund to eliminate the deficit. NOTE 9. RISK MANAGEMENT The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; injuries to employees; employee health benefits; and other claims of various nature. Commercial insurance is purchased for the risks of loss to which the District is exposed. Any losses reported but unsettled or incurred and not reported, are believed to be insignificant to the District's basic financial statements. Additionally, the District must operate in compliance with rules and regulations mandated for public water supply systems by federal and state governments. The District is subject to compliance oversight by the Texas Commission on Environmental Quality (TCEQ). Fiscal Year 2011 TCEQ Compliance In October of 2011, the District notified TCEQ of inaccuracies in previously submitted, monthly Discharge Monitoring Reports (DMR's). The inaccuracies related to the laboratory measurement results for Carbonaceous Biochemical Oxygen Demand (CBOD). The District submitted corrected DMR's to TCEQ, but has not been formally notified by TCEQ of the resulting action, if any, that will occur due to the reported inaccuracies. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 10. SUBSEQUENT EVENTS The District has evaluated all events and transactions that occurred after September 30, 2011 up through audit report date, which is the date the financial statements were issued. The following is a subsequent for the District: On January 18, 2012, the District issued Trophy Club Municipal Utility District No. 1, Revenue Note, Series 2012 for $1,100,000 (the Note). The Note was issued to finance the expansion of two ground storage tanks. Interest accrues at 2.87% per annum and is payable each March 1st and September 1st commencing March 1, 2012. The following schedule shows amounts that this Note will add to the District's future debt service requirements: Fiscal Year Principal $ 367,000 366,000 367,000 Interest Total $ 386,556 2012 2013 2014 $ 19,556 21,037 10,533 387,037 377,533 $ 1,100,000 $ 51,126 $ 1,151,126 34 [This page is intentionally left blank.] REQUIRED SUPPLEMENTARY INFORMATION TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 GENERAL FUND BUDGETARY COMPARISON SCHEDULE (BUDGETARY BASIS) YEAR ENDED SEPTEMBER 30,2011 Variance with Final Budget Budgeted amounts Positive Original Final Actual (Negative) Revenues Water and wastewater charges $ 4,349,548 $ 4,349,548 $ 5,323,244 $ 973,696 Taxes 1,278,248 1,278,248 1,311,296 33,048 Utility fees 167,900 167,900 165,600 (2,300) Intergovernmental revenues 13,750 93,080 89,330 (3,750) Miscellaneous 37,014 38,323 80,906 42,583 Oversize meter reimbursements 50,000 50,000 70,594 20,594 Inspection and tap fees 3,000 3,000 8,560 5,560 Investment income 2,000 2,000 5,534 3,534 Total revenues 5,901,460 5,982,099 7,055,065 1,072,966 Expenditures: Water operations 2,060,851 2,060,851 2,271,490 (210,639) Fire 1,204,001 1,206,640 770,123 436,517 Wastewater operations 628,207 628,207 598,465 29,742 Manager's office 547,908 547,908 537,597 10,311 Wastewater collection system 381,658 381,658 277,775 103,883 Utility billing 237,571 237,571 207,307 30,264 Information systems 131,012 131,012 123,605 7,407 Finance 113,706 113,706 119,359 (5,653) General government 86,314 86,314 85,092 1,222 Facilities management 90,739 90,739 77,493 13,246 Directors 24,528 24,528 14,356 10,172 Human resources 6,945 6,945 868 6,077 Capital Outlay 486,565 720,544 515,884 204,660 Debt Service --240,245 (240,245) Total expenditures 6,000,005 6,236,623 5,839,660 396,963 Excess of revenues over expenditures (98,545) (254,524) 1,215,405 1,469,929 Other financing sources (uses): Transfers in 54,314 54,314 -(54,314) Transfers out (56,911) (56,911) (889,878) (832,967) Total other financing sources (uses) (2,597) (2,597) (889,878) (887,281) Net change in fund balance (101,142) (257,121) 325,527 582,648 Fund Balances - beginning of year 3,012,914 3,012,914 3,012,914 - Fund Balances - end of year $ 2,911,772 $ 2,755,793 $ 3,338,441 $ 582,648 Notes to Required Supplementary Information: The District annual budgets are approved on the budgetary basis. The Board also approves all revisions and appropriations which lapse at each fiscal year-end. 35 INDIVIDUAL SCHEDULES AND OTHER SUPPLEMENTARY INFORMATION REQUIRED BY TEXAS COMMISSION ON ENVIRONMENTAL QUALITY (TCEQ) TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 DEBT SERVICE FUND BUDGETARY COMPARISON SCHEDULE YEAR ENDED SEPTEMBER 30, 2011 Budgeted Amounts Variance with Final Budget Original Final Actual Positive (Negative) Revenues Taxes Investment income Utility fees $ 765,212 500 246,100 $ 765,212 500 246,100 $ 777,648 985 246,100 $ 12,436 485 Total revenues 1,011,812 1,011,812 1,024,733 12,921 Expenditures: Debt service Principal Interest Fees 1,115,000 379,559 3,500 1,115,000 379,559 3,500 1,115,000 379,559 2,460 1,040 Total expenditures 1,498,059 1,498,059 1,497,019 1,040 Deficiency of revenues under expenditures (486,247) (486,247) (472,286) 13,961 Other financing sources Premium on bonds Transfers in 308,000 308,000 308,000 Total other financing sources 308,000 308,000 308,000 Net change in fund balance (178,247) (178,247) (164,286) 13,961 Fund Balances - beginning of year 272,132 272,132 272,132 - Fund Balances - end of year $ 93,885 $ 93,885 $ 107,846 $ 13,961 36 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES 1. Services provided by the District: a) Retail Water b) Retail Wastewater c) Fire Protection d) Irrigation e) Participates in regional system and/or wastewater service (other than emergency interconnect) 2. Retail service providers: a) Retail rates-based on 5/8" meter: Most prevalent type of meter (if not a 5/8"): 1 inch WATER Admin Fee 12.71 Minimum Usage 0 Flat Rate Y/N No No No No No Rates per 1,000 Gallons Over Minimum $ 2.48 3.00 3.23 3.34 3.44 Usage Levels 0 to 6,000 7,000 to 12,000 13,000 to 25,000 26,000 to 50,000 51,000 + Note: Out of district water rates are double the "in-town" rate and are included in the rate order. WASTEWATER $ 12.71 No No No 2.48 0 to 6,000 3.00 7,000 to 12,000 Caps at 12,000 GOLF COURSE Subject to peak draw rates from Ft Worth water department. NOTE: all rates noted above were amended effective February 1, 2011. District employs winter averaging for wastewater usage? No 37 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 - SERVICE AND RATES - CONTINUED Total water and wastewater charges per 10,000 gallons usage (including surcharges) effective February 1, 2011 First 10,000 gallons used $ 79.18 Next 10,000 gallons used 37.84 Next 10,000 gallons used 32.85 Next 10,000 gallons used 33.40 Next 10,000 gallons used 33.40 Next 10,000 gallons used and subsequent 34.40 Maximum residential wastewater charge is for 12,000 gallons or $45.59 b) Retail service providers: number of retail water and/or wastewater* connections within the District of the fiscal year end. Provide actual numbers and single family equivalents (ESFC). Connections ESFC Active Meter Size Total Active Factor ESFC's Unmetered --1.0 - Less than 3/4" 2,513.0 2,495.0 1.0 2,495.0 1" 958.0 934.0 2.5 2,335.0 1 1/2" 18.0 17.0 5.0 85.0 2" 80.0 75.0 8.0 600.0 3" 14.0 13.0 15.0 195.0 4" 12.0 12.0 25.0 300.0 6" 3.0 3.0 50.0 150.0 8" --80.0 - 10" --115.0 - Total Water 3,598.0 3,549.0 6,160.0 Total Wastewater 3,603.0 3,554.0 1.0 3,554.0 * Number of connections relates to water service if provided. Otherwise, the number of wastewater connections should be provided. Note: "inactive" means that water and wastewater connections were made, but service is not being provided. 38 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES - CONTINUED 3. Total water consumption (in thousands) during the fiscal year: Gallons pumped into the system 1,005,000 Gallons billed to customers 927,407 Water accountability ratio 92.3% 4. Standby Fees: Does the District assess standby fees? Yes For the most recent fiscal year, FY2011: Total Total Percentage Levy Collected Collected Debt Service $ 817,317 $ 824,977 100.9% Operations and Maintenance $ 1,253,588 $ 1,265,337 100.9% Have standby fees been levied in accordance with Water Code Section 49.231, thereby constituting a lien on property? No** Standby fees are levied by the District and constitute a lien under recorded deed restrictions or covenants pursuant to Section 293.150 of Title 30 of Texas Administrative Code. 5. Location of District: Counties in which District is located: a) Denton b) Tarrant Is the District located entirely in one county? No Is the District located within a city? Partially Cities in which District is located: Town of Trophy Club Town of Westlake Is District located within a city's extra territorial jurisdiction (ETJ)? ETJ's in which District is located: Is the general membership of the Board appointed by an office outside the District? Unknown Unknown No 39 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-2 Water Operations Administrative Contribution to Trophy Club Fire Dept Wastewater Operations Capital Outlay Wastewater Collection Systems Information Systems Transfer to Debt Service Misellaneous Total Expenditures and Transfers Number of employees employed by the District: Full time Equivalents (FTEs) Part time Current Year $ 2,271,490 1,042,073 770,123 598,465 515,884 277,775 123,605 1,130,123 $ 6,729,538 29.5 None Prior Year $ 1,882,511 993,986 876,521 711,382 308,798 182,658 558,000 $ 5,513,856 32.5 None 40 GENERAL FUND EXPENDITURES AND OTHER FINANCING USES YEAR ENDED SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-3 TEMPORARY INVESTMENTS SEPTEMBER 30,2011 Identification Interest Maturity Balance End of Accrued Interest Funds Number Rate Date Year End of Year General Fund TexPool 613300002 0.2165% Demand $ 2,787,983 Paid daily Debt Service Fund TexPool 613300003 0.2165% Demand $ 107,847 Paid daily Fire Construction TexPool 613300008 0.2165% Demand $ - Paid daily 2010 GO Fire Station TexPool 613300009 0.2165% Demand $ Paid daily Total - All Funds $ 2,895,830 41 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-4 TAXES LEVIED AND RECEIVABLE YEAR ENDED SEPTEMBER 30,2011 General Fund Debt Operations Fire Total Service Total Taxes receivable beginning of year $ 2,616 $ 15,605 $ 18,221 $ 21,794 $ 40,015 2010 tax levy 87,181 1,197,488 1,284,669 763,303 2,047,972 Total to be accounted for 89,797 1,213,093 1,302,890 785,097 2,087,987 Less collections and adjustments: Current year (86,796) (1,192,694) (1,279,490) (759,932) (2,039,422) Prior years (1,145) (3,228) (4,373) ( 11,574) (15,947) Total to be accounted for (87,941) (1,195,922) (1,283,863) (771,506) (2,055,369) Taxes receivable, end of year $ 1,856 $ 17,171 $ 19,027 $ 13,591 $ 32,618 Taxes receivable by year 1996 and prior 19 108 127 454 581 1997 7 41 48 150 198 1998 7 44 51 140 191 1999 7 48 55 108 163 2000 15 73 88 266 354 2001 34 134 168 440 608 2002 362 2091 2453 3707 6160 2003 70 126 196 132 328 2004 17 145 162 210 372 2005 59 199 258 283 541 2006 169 774 943 1351 2294 2007 67 2125 2192 789 2981 2008 136 2615 2751 920 3671 2009 502 3854 4356 1270 5626 2010 385 4794 5179 3371 8550 $ 1,856 $ 17,171 $ 19,027 $ 13,591 $ 32,618 F/Y F/Y F/Y F/Y F/Y Property valuations (in 000's) 10/11 09/10 08/09 07/08 06/07 Land $ 247,335 $ 209,177 $ 186,574 $ 213,640 $ 193,906 Improvements 713,265 786,539 737,273 638,560 581,667 Personal property 73,914 80,332 71,091 94,823 65,248 Exemptions (41,345) (40,057) (34,027) (34,405) (29,607) $ 993,169 $ 1,035,991 $ 960,911 $ 912,618 $ 811,214 Tax rate per $100 valuation Operations Fire department Debt service Tax rate per $100 valuation Tax levy: Percent of taxes collected to taxes levied 0.008790 0.109250 0.076960 0.195000 0.027140 0.109140 0.068720 0.205000 $ 2,047,972 $ 2,091,414 100.36% 100.36% 0.014040 0.116020 0.114555 0.244615 $ 2,380,679 99.58% 0.010200 0.120860 0.098940 0.230000 $ 2,234,909 100.36% 0.030900 0.102700 0.146400 0.280000 $ 2,191,536 100.62% 42 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 All Bonded Debt Series Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017 460,000 207,868 667,868 2018 480,000 188,468 668,468 2019 505,000 167,838 672,838 2020 525,000 145,737 670,737 2021 550,000 122,768 672,768 2022 580,000 98,533 678,533 2023 605,000 71,463 676,463 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 7,120,000 $ 2,514,189 $ 9,634,189 43 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30, 2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2010 General Obligation Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 65,000 $ 80,733 $ 145,733 2013 65,000 78,458 143,458 2014 70,000 76,183 146,183 2015 70,000 73,733 143,733 2016 75,000 71,283 146,283 2017 80,000 68,658 148,658 2018 85,000 65,858 150,858 2019 85,000 62,883 147,883 2020 90,000 59,908 149,908 2021 95,000 56,758 151,758 2022 100,000 53,433 153,433 2023 105,000 48,433 153,433 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 2,000,000 $ 997,940 $ 2,997,940 44 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2005 Combination Tax Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 290,000 $ 68,685 $ 358,685 2013 295,000 58,535 353,535 2014 100,000 48,210 148,210 2015 105,000 44,210 149,210 2016 105,000 40,010 145,010 2017 110,000 35,810 145,810 2018 115,000 31,410 146,410 2019 120,000 26,810 146,810 2020 125,000 22,010 147,010 2021 130,000 17,010 147,010 2022 135,000 11,550 146,550 2023 140,000 5,880 145,880 $ 1,770,000 $ 410,130 $ 2,180,130 45 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2003 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 $ 55,000 $ 33,215 $ 88,215 2013 60,000 31,290 91,290 2014 60,000 29,430 89,430 2015 60,000 27,090 87,090 2016 65,000 24,750 89,750 2017 70,000 22,150 92,150 2018 70,000 19,350 89,350 2019 75,000 16,375 91,375 2020 75,000 13,187 88,187 2021 80,000 10,000 90,000 2022 85,000 6,800 91,800 2023 85,000 3,400 88,400 $ 840,000 $ 237,037 $ 1,077,037 Series 2002 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 155,000 118,667 273,667 2013 165,000 112,313 277,313 2014 170,000 105,300 275,300 2015 180,000 97,905 277,905 2016 190,000 89,895 279,895 2017 200,000 81,250 281,250 2018 210,000 71,850 281,850 2019 225,000 61,770 286,770 2020 235,000 50,632 285,632 2021 245,000 39,000 284,000 2022 260,000 26,750 286,750 2023 275,000 13,750 288,750 $ 2,510,000 $ 869,082 $ 3,379,082 46 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-6 CHANGES IN LONG-TERM BONDED DEBT YEAR ENDED SEPTEMBER 30,2011 Interest rate Date interest payable Maturity date Bonds outstanding at beginning of year Retirements of principal Bond Issue Bonds outstanding at end of fiscal year Retirements of interest Series 1997 Combination Tax 3.25-5.9% 3/1 &9/I 9/1/98 to 9/1/2011 Series 2002 Series 2003 Series 2003 Series 2005 Series 2010 Combination Combination Unlimited Combination Combination Tax Tax Tax Tax 4.00-5.50% 3/1 & 9/1 9/1/2023 Tax 3.10-4.25% 3/1 & 9/1 9/1/2023 3.25% 3/1 & 9/1 9/1/2011 2.97-4.20% 3/1 & 9/1 9/1/2023 3/1 & 9/1 9/1/2031 380,000 $ 2,660,000 $ 895,000 $ 245,000 $ 2,055,000 $ 2,000,000 (380,000) (150,000) (55,000) (245,000) (285,000) Total $ 8,235,000 (1,115,000) $ 2,510,000 $ 840,000 $ $ 1,770,000 $ 2,000,000 $ 7,120,000 18,620 $ 124,668 $ 35,278 $ 7,963 $ 78,660 $ 114,371 $ 379,560 Paying agent's name & city: All series Bank of New York Mellon P.O. Box 2320 Dallas, Texas 75221-2320 Bond Authority Amount authorized by voters Amount issued Remaining to be issued General Obligation Bonds $ 27,094.217 (23,325,000) $ 3,769,217 The general obligation bonds were authorized on October 7, 1975 Debt Service Fund cash and cash equivalents balance as of Setember 30, 2011 $ 107,847 Average annual debt service payment (principal & interest) for remaining term of debt: $ 481,709 47 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30, 2011 Amounts Percent of total revenue REVENUE AND OTHER FINANCING SOURCES 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 18.6% 26.2% 21.1% 20.3% 21.0% Water and wastewater charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 75.5% 68.8% 61.3% 74.5% 72.8% Utility Fees 165,600 80,500 515,200 --2.3% 1.4% 8.5% 0.0% 0.0% Inspection and tap fees 8,560 5,775 4,975 22,550 32,900 0.1% 0.1% 0.1% 0.5% 0.8% Interest earned 5,534 6,171 20,755 69,447 106,168 0.1% 0.1% 0.3% 1.4% 2.5% Capital lease proceeds/Contractual Obligations --330,000 49,432 -0.0% 0.0% 5.4% 1.0% 0.0% Miscellaneous and other 240,830 191,498 199,780 116,295 131,124 3.4% 3.4% 3.3% 2.4% 3.0% Total revenue and other financing sources 7.055,065 5,694.592 6,076,283 4,939,191 4,330,831 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Water operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 32.2% 33.1% 29.8% 39.2% 37.8% Administrative 1,042,073 993,986 1,297,613 905,052 835,590 14.8% 17.5% 21.4% 18.3% 19.3% Transfers out and debt service 1,130,123 558,000 383,009 --16.0% 9.8% 6.3% 0.0% 0.0% Contribution to Trophy Club Fire Dept 770,123 876.521 783,736 902,353 725,764 10.9% 15.4% 12.9% 18.3% 16.8% Wastewater operations 598,465 711,382 999,388 500,224 480,798 8.5% 12.5% 16.4% 10.1% 11.1% Capital outlay 515,884 --29,379 442,782 7.3% 0.0% 0.0% 0.6% 10.2% Wastewater collection systems 277,775 308,798 294,869 409,948 402,482 3.9% 5.4% 4.9% 8.3% 9.3% Miscellaneous ---45,457 135,121 0.0% 0.0% 0.0% 0.9% 3.1% Information systems 123,605 182,658 175,698 187,908 124,987 1.8% 3.2% 2.9% 3.8% 2.9% Total expenditures 6,729,538 5,513,856 5,745.698 4,915,113 4,785,818 95.4% 96.8% 94.6% 99.5% 110.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections $ 325.527 $ 180,736 $ 330,585 $ 24,078 $ (454,987) 2,827 4.6% 3.2% 5.4% 0.5% -10.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections 3,554 3,361 3,161 3,092 $ (454,987) 2,827 48 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30, 2011 TSI - 7 COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS • CONTINUED Amounts Percent of total revenue REVENUE 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 771,631 $ 740,420 $ 1,100,115 $ 1,302,763 $ 1,325,143 57.9% 52.9% 73.4% 96.1% 94.8% Penalties and interest 6,018 -11,885 --0.5% 0.0% 0.8% 0.0% 0.0% Transfers in 554,100 653,000 383,009 --41.6% 46.7% 25.5% 0.0% 0.0% Interest earned 985 4,848 4,105 23,326 43,456 0.1% 0.3% 0.3% 1.7% 3.1% Miscellaneous and other -1,000 -29,379 29,379 0.0% 0.1% 0.0% 2.2% 2.1% Total revenue 1,332,734 1,399,268 1,499,114 1,355,468 1,397,978 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Principal retirement 1,115,000 1,055,000 1,025,000 975,000 945,000 83.7% 75.4% 68.4% 71.9% 67.6% Interest and fiscal charges 382,019 311,570 352,194 390,565 425,838 28.7% 22.3% 23.5% 28.8% 30.5% Total expenditures 1,497,019 1,366,570 1,377,194 1,365,565 1,370,838 112.3% 97.7% 91.9% 100.7% 98.1% Excess (deficiency) of revenues over (under) expenditures (164,285) $ 32,698 $ 121,920 $ (10,097) $ 27,140 -12.3% 2.3% 8.1% -0.7% 1.9% 49 [This page is intentionally left blank.] Financial Advisory Services Provided By: SWS SOUTHWEST GROUP SECURITIES Building what you value. INVESTMENT BANKERS TAB 6 NEW ISSUE-BOOK-ENTRY-ONLY Ratings: S&P: "AA-" (See "RATINGS" herein) OFFICIAL STATEMENT Dated: February 14,2012 In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. The District has designated the Bonds as "Qualified Tax-Exempt Obligations". (See "TAX MATTERS - Qualified Tax-Exempt Obligations for Financial Institutions" herein.) $2,355,000 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 Dated Date: March 1, 2012 Due: September 1, as shown on Page ii The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") $2,355,000 Unlimited Tax Refunding Bonds, Series 2012, which are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who approved a "Pricing Certificate" which contains the final terms of sale and completed the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS DESCRIBED HEREIN. (See "INVESTMENT CONSIDERATIONS" herein.) Bond purchasers are encouraged to read this entire Official Statement prior to making an investment decision. Interest on the Bonds will accrue from March 1, 2012 (the "Dated Date") and will be payable March 1 and September 1 of each year, commencing September 1, 2012, until maturity or prior redemption, and will be calculated on the basis of a 360-day year of twelve 30-day months. The Bonds will be issued in fully registered form only, without coupons, in denominations of $5,000 or any integral multiple thereof within a stated maturity. The definitive Bonds will be issued as fully registered obligations in book- entry form only and when issued will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company ("DTC"), New York, New York. DTC will act as securities depository for the Bonds until DTC resigns or is discharged. Book-entry interests in the Bonds will be made available for purchase in principal amounts of $5,000 or any integral multiple thereof within a maturity. Purchasers of the Bonds ("Beneficial Owners") will not receive physical delivery of bonds representing their interest in the Bonds purchased. S6 long as Cede & Co. or its nominee is the registered owner of the Bonds, principal of and interest on the Bonds will be payable by the paying agent/registrar to DTC, which will be solely responsible for making such payment to the Beneficial Owners of the Bonds. The initial paying agent/registrar for the Bonds shall be The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Paying Agent"). (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) The District reserves the right to redeem, prior to maturity, in integral multiples of $5,000, those Bonds maturing on and after September 1, 2021, in whole or from time to time in part, on September 1, 2020, and on any date thereafter at a price of par plus accrued interest from the most recent interest payment date to the date fixed for redemption. (See "THE BONDS -Redemption Provisions" herein.) STATED MATURITY SCHEDULE (See Page ii) The Bonds are offered for delivery, when, as and if Issued and received by the Underwriter and subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel. The legal opinion of Bond Counsel will be printed on, or will accompany the Bonds. Certain matters will be passed upon for the Underwriter by Fulbright & Jaworski LLP., Dallas, Texas, as counsel to the Underwriter. It is expected that the Bonds will be available for delivery through DTC on or about March 5, 2012. FIRSTSOUTHWEST STATED MATURITY SCHEDULE (Due September 1) Base CUSIP - 897059 (a> $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 Stated Maturity Due 9-1 Principal Amount Initial Rate (%) Initial Yield (%) CUSIP Suffix(a) 2013 $185,000 2.00 0.60 EQO 2014 190,000 2.00 0.75 ER8 2015 195,000 2.00 0.97 ES6 2016 200,000 2.50 1.10 ET4 2017 205,000 2.50 1.23 EU 1 2018 210,000 2.50 1.41 EV9 2019 225,000 2.50 1.63 EW7 2020 225,000 3.00 1.86 EX 5 2021 230,000 3.00 2.08(b) EY3 2022 240,000 3.00 2.17(b) EZO 2023 250,000 3.00 2.28(b) FA 4 (Interest to accrue from the Dated Date.) CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the District, the Financial Advisor or the Underwriter is responsible for the selection or correctness of the CUSIP numbers set forth herein. Yield calculated to first call date at par, September 1, 2020. ii TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BOARD OF DIRECTORS Name James Moss Kevin Carr C. Nick Sanders William Armstrong James C. Thomas Position President Secretary/Treasurer Vice President Director Director Two-Year Term Expires, May 2012 2014 2012 2014 2014 Occupation Retired Insurance Adjuster Business Owner Retired Retired DISTRICT PERSONNEL AND ADVISORS District Manager Robert Scott Trophy Club, Texas Senior Accountant Renae Gonzales Trophy Club, Texas Attorney for the District Bob West Whitaker Chalk Swindle & Schwartz PLLC Fort Worth, Texas Financial Advisor Southwest Securities Dallas, Texas Bond Counsel McCall, Parkhurst & Horton L.L.P. Dallas, Texas Independent Auditors Lafollett & Co., PLLC Tom Bean, Texas Tax Assessor - Collector Denton County Tax Assessor-Collector Chief Appraiser Denton County, Texas Tarrant County, Texas Mr. Robert Scott District Manager Trophy Club Municipal Utility District 100 Municipal Drive Trophy Club, Texas 76262 (682) 831^610 For Additional Information Please Contact: Mr. Dan A. Almon Senior Vice President Southwest Securities, Inc. 1201 Elm StFeet, Suite 3500 Dallas, Texas 75270 (214) 859-9452 Mr. Mark McLiney Senior Vice President Southwest Securities, Inc. 4040 Broadway, Suite 220 San Antonio, Texas 78209 (210) 226-8677 iii TABLE OF CONTENTS BOARD OF DIRECTORS iii DISTRICT PERSONNEL AND ADVISORS iii TABLE OF CONTENTS iii USE OF INFORMATION IN THE OFFICIAL STATEMENT v SELECTED DATA FROM THE OFFICIAL STATEMENT vi SELECTED FINANCIAL INFORMATION vii OFFICIAL STATEMENT 1 INTRODUCTION 1 PLAN OF FINANCING 1 Purpose 1 Refunded Bonds 1 SOURCES AND USES OF FUNDS 2 THE BONDS 2 General Description 2 Authority for Issuance 2 Security for Payment 2 Payment Record 3 Flow of Funds and Investment of Funds 3 Redemption Provisions 3 Termination of Book-Entry-Only System 4 Defeasance of Outstanding Bonds 4 Paying Agent/Registrar 5 Record Date 5 Issuance of Additional Debt 5 Specific Tax Covenants 6 Additional Covenants 6 Remedies in Event of Default 6 Amendments to the Order 6 RATINGS 6 BOOK-ENTRY-ONLY SYSTEM 6 Use of Certain Terms in Other Sections of this Official Statement 8 INVESTMENT CONSIDERATIONS 8 General 8 Approval of the Bonds 8 Tax Collections and Foreclosure Remedies 9 Consolidation 9 Abolition 9 Alteration of Boundaries 9 Registered Owners' Remedies 9 Bankruptcy Limitation to Registered Owners' Rights 10 The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District 10 Continuing Compliance with Certain Covenants 10 Future Debt 11 Future and Proposed Legislation 11 THE DISTRICT 11 Creation of the District 11 Governance 11 Employees 11 General 11 Location 12 Population 12 Topography and Drainage 12 Shopping and Commercial Facilities 12 Fire Protection 12 Police Protection 12 Schools 12 Recreational Opportunities 13 Status of Development of the District 13 Public Improvement District Description 13 THE DISTRICT'S SYSTEM 14 Description of the Water System 14 Description of the Wastewater System 14 INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT 14 Current Investments 16 TAX DATA 16 District Bond Tax Rate Limitation 16 Maintenance and Operations Tax 16 Overlapping Taxes 16 TAXING PROCEDURES 16 Authority to Levy Taxes 16 Property Tax Code and County-Wide Appraisal District 16 Valuation of Property for Taxation 18 Notice and Hearing Procedures 18 District and Taxpayer Remedies 18 Levy and Collection of Taxes 18 District's Rights in the Event of Tax Delinquencies 19 TAX MATTERS 19 Opinion 19 Federal Income Tax Accounting Treatment of Original Issue Discount 20 Collateral Federal Income Tax Consequences 20 State, Local and Foreign Taxes 21 Qualified Tax-Exempt Obligations for Financial Institutions 21 CONTINUING DISCLOSURE OF INFORMATION 21 Annual Reports 21 Notice of Certain Events 22 Availability of Information from MSRB 22 Limitations and Amendments 22 Compliance with Prior Agreements 23 OTHER PERTINENT INFORMATION 23 Legal Matters 23 Registration and Qualification of Bonds for Sale 23 Litigation 23 Legal Investments and Eligibility to Secure Public Funds in Texas 23 Underwriting 24 Financial Advisor 24 Forward-Looking Statements Disclaimer 24 Concluding Statement 24 Schedule of Refunded Bonds Schedule I Financial Information of the Issuer Appendix A General Information Regarding the District Appendix B Form of Legal Opinion of Bond Counsel Appendix C The Issuer's General Purpose Audited Financial Statements for the Year Ended September 30, 2011 Appendix D The cover page, subsequent pages hereof and the schedules and appendices attached hereto, are part of this Official Statement. iv USE OF INFORMATION IN THE OFFICIAL STATEMENT This Official Statement, which includes the cover page, Schedule I and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any,p.ersnn to whom it is unlawful to make such offer, solicitation or sater No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchaser of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. Certain information set forth herein has been provided by sources other than the District that the District believes to be reliable, but the District makes no representation as to the accuracy of such information. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of the Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described herein since the date hereof. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the District's undertaking to provide certain information on a continuingbasis. The Underwriter has provided the following statement for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. NONE OF THE DISTRICT, ITS FINANCIAL ADVISOR OR THE_i»JDERWRITER MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED" IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY ("DTC") OR ITS BOOK-ENTRY-ONLY SYSTEM, AS SUCH INFORMATION HAS BEEN FURNISHED BY DTC. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH.TFfE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER-«^Y OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THIS OFFICIAL STATEMENT CONTAINS "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS- WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD- LOOKING STATEMENTS. (See "OTHER PERTINENT INFORMATION-Forward Looking Statements Disclaimer" herein.) [The remainder of this page is intentionally left blank.] v SELECTED DATA FROM THE OFFICIAL STATEMENT The following material is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. The Issuer The Bonds The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") is a political subdivision of the State of Texas located in Denton and Tarrant Counties, Texas. The District was created as a municipal utility district pursuant to Chapter 54 of the Texas Water Code and is a conservation and reclamation district in accordance with Article XVI, Section 59 of the Texas Water Code. The District has also adopted a fire protection plan under Section 50.055 of the Texas Water Code, now codified as Subchapter L of Chapter 49 of the Texas Water Code, pursuant to the Order of the Texas Water Commission of August 22, 1983. In July of 2009, documentation was submitted to the Texas Commission on Environmental Quality ("TCEQ") regarding the consolidation of Trophy Club Municipal Utility District Nos. 1 and 2 pursuant to a May 9, 2009 election. (See "THE DISTRICT" and "APPENDIX B - GENERAL INFORMATION REGARDING THE DISTRICT" herein.) The Bonds are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who approved a "Pricing Certificate" which contains the final terms of sale and completed the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) Security for Payment The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivisions or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) Paying Agent/Registrar Redemption Provisions Tax Matters The initial Paying Agent/Registrar for the Bonds is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas Bonds maturing on and after September 1, 2021 are subject to redemption in whole or from time to time in part at the option of the District on September 1, 2020, and on any date thereafter, at par plus accrued interest from the most recent interest payment date to the date of redemption. In the opinion of Bond Counsel, the interest on the Bonds will be excludable from gross income of the owners thereof for purposes of federal income taxation under existing law subject to matters discussed herein under "TAX MATTERS", including the alternative minimum tax on corporations. (See "TAX MATTERS" and APPENDIX C - "FORM OF LEGAL OPINION OF BOND COUNSEL" herein.) Use of Proceeds Ratings Book-Entry-Only System Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) The District received a rating on the Bonds of "AA-" from Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P"). An explanation of the significance of such rating may be obtained from the company furnishing the rating. (See "RATINGS" herein.) The Issuer intends to utilize the Book-Entry-Only System of The Depository Trust Company, New York, New York relating to the method and timing of payment and the method of transfer relating to the Bonds. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Future Bond Issues The District has no plans to issue additional bonds within the next twelve months. "INVESTMENT CONSIDERATIONS - Future Debt" herein. See Payment Record Delivery Legality The Issuer has never defaulted in the timely payment of principal of or interest on its general obligation indebtedness. When issued, anticipated on or about March 5,2012. Delivery of the Bonds is subject to the approval by the Attorney General of the State of Texas and the rendering of an opinion as to legality McCall, Parkhurst & Horton L.L.P., Bond Counsel, Dallas, Texas. vi SELECTED FINANCIAL INFORMATION Total 2011 Certified Net Taxable Assessed Valuation (ARB Approved) Gross Debt Principal Outstanding (after issuance of the Bonds) Ratio of Gross Debt Principal to 2011 Taxable Assessed Valuation Debt Service Fund Balance as of December 31, 2011 (audited) 2011-2012 Tax Rate Operations Fire Protection Debt Service Average Percentage of Total Tax Collections - Tax Years 2006-2010 Projected Average Annual Debt Service Requirement (2012-2031) Of the Bonds and the Outstanding Bonds ("Projected Average Requirement") Tax Rate Required to Pay Projected Average Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 99% Collections Projected Maximum Annual Debt Service Requirement (2012) of the Bonds and The Outstanding Bonds ("Projected Maximum Requirement") Tax Rate Required to Pay Projected Maximum Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 100% collections Estimated 2011 population $0.00989 0.10925 0.05586 $954,645,475 (a) $7,120,000 0.75% $316,299.71 $0.17500 100.40% (b) $463,404 $0.04903/$100 A.V. $840,519 $0.08893/$100 A.V. 7,600 ^ 2011 Net Taxable Valuation does not include property under protest or values for incomplete accounts. (See "TAXING PROCEDURES" herein.) <b> Historical tax collection information for Tax Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2). vii [This page is intentionally left blank.] OFFICIAL STATEMENT relating to $2,355,000 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 INTRODUCTION This Official Statement provides certain information in connection with the issuance by the Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") of its $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who approved a "Pricing Certificate" which contains the final terms of sale and completed the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Security for Payment" herein.) Unless otherwise indicated, capitalized terms used in this Official Statement have the same meaning assigned to such terms in the Order. Included in this Official Statement are descriptions of the Bonds, the Order, and certain information about the District and its finances. ALL DESCRIPTIONS OF DOCUMENTS CONTAINED HEREIN ARE SUMMARIES ONLY AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO EACH SUCH DOCUMENT. Copies of such documents may be obtained from the District or Financial Advisor. PLAN OF FINANCING Purpose Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (the "Refunded Bonds") (see "Schedule I - Schedule Of Refunded Bonds" attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. Refunded Bonds A description and identification of the Refunded Bonds appears in Schedule I attached hereto. The Refunded Bonds, and interest due thereon, are to be paid on September 1, 2012 (the "Redemption Date"), from funds to be deposited with The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Escrow Agent") or its successor. The Order approves and authorizes the execution of an escrow agreement (the "Escrow Agreement") between the District and the Escrow Agent. The Order provides that, from the proceeds of the sale of the Bonds received from the Underwriter, the District will deposit the amount necessary to accomplish the discharge and final payment of tfre;Refunded Bonds on the Redemption Date. Such funds will be held uninvested by the Escrow Agent pending their disbursement to redeem the Refunded Bonds on the Redemption Date. The Escrow Agent, as the paying agent for the Refunded Bonds, will determine and certify at the time of delivery of the Bonds that the amounts deposited to the Escrow Fund will equal an amount sufficient to pay, on the scheduled Redemption Date, the principal of and interest on the Refunded Bonds. Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of principal of and interest on the Refunded Obligations and amounts therein will not be available to pay the Bonds. By deposit of the funds with the Escrow Agent pursuant to the Escrow Agreement, the District will have effected the defeasance of all of the Refunded Bonds in accordance with Texas law. As a result of such defeasance, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the funds held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding obligations of the District payable from taxes nor for the purpose of applying any limitation on the issuance of debt, and the obligation of the District to make payments in support of the debt service on the Refunded Bonds will be extinguished. 1 SOURCES AND USES OF FUNDS The proceeds from the sale of the Bonds will be applied approximately as follows: Sources of Funds Par Amount of Bonds $2,355,000.00 Accrued Interest on the Bonds 675.00 Original Issue Premium 136.075.20 Total Sources of Funds $2.491.750.20 Uses of Funds Deposit to Escrow Fund $2,411,156.25 Cost of Issuance 55,000.00 Underwriter's Discount 20,817.50 Accrued Interest Deposit to Debt Service Fund 675.00 Additional Proceeds Deposit to the Debt Service Fund 4.101.45 Total Uses of Funds $2.491.750.20 THE BONDS General Description The Bonds will be issued in fully registered form in principal denominations of $5,000 or any integral multiple thereof within a stated maturity. The Bonds shall bear interest from the March 1, 2012 on the unpaid principal amounts, and the amount of interest to be paid each payment period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest on the Bonds will be payable on March 1 and September 1 of each year commencing September 1, 2012, until maturity or prior redemption. Principal of the Bonds is payable at the designated offices of the Paying Agent/Registrar, initially The Bank of New York Mellon Trust Company, N.A., Dallas, Texas; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Bonds, all payments will be made as described under "BOOK-ENTRY-ONLY SYSTEM" herein. Interest on the Bonds shall be paid to the registered owners whose names appear on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (as hereinafter defined) and shall be paid by the Paying Agent/Registrar (i) by check sent United States Mail, first class postage prepaid, to the address of the registered owner recorded in the Security Register or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for any payment on the Bonds shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office of the Paying Agent/Registrar is located are authorized to be closed, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. Authority for Issuance The Bonds are issued by the District pursuant to the terms and provisions of the Order and the Constitution and general laws of the State, particularly Chapter 1207. Security for Payment The Bonds will constitute valid and legally binding direct obligations of the District payable from the proceeds of a continuing direct annual ad valorem tax levied by the District against all taxable property located therein, without legal limit as to rate or amount. The Order irrevocably pledges such ad valorem taxes to the payment of the principal of and interest on the Bonds while the same remain outstanding. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. Tax Pledge: The Board covenants in the Order that, while any of the Bonds are outstanding and the District is in existence, it will levy and assess a continuing ad valorem tax upon each $100 valuation of taxable property within the District at a rate from year to year sufficient, full allowance being made for anticipated delinquencies, together with revenues and receipts from other sources which are legally available for such purposes, to pay interest on the Bonds as it becomes due, to provide for the payment of principal of the Bonds when due or the redemption price at any earlier redemption date, to pay when due any other contractual obligations of the District payable in whole or in part from taxes, and to pay the expenses of assessing and collecting such tax. The Board additionally covenants in the Order to timely assess and collect such tax. The net proceeds from taxes levied to pay debt service on the Bonds are required to be placed in a special account of the District designated as the "Debt Service Fund" for the Bonds. 2 Abolition: Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Consolidation: A district (such as the District) has the legal authority to consolidate with other municipal utility districts and in connection therewith, to provide for the consolidation of its assets, such as cash and the utility system, with the water and wastewater systems of districts with which it is consolidating as well as its liabilities (which would include the Bonds). The District is the resulting entity from a consolidation in May 2009 of Trophy Club Municipal Utility District No. 1 and Trophy Club Municipal Utility District No. 2 (see "THE DISTRICT"). Payment Record The District has never defaulted on the timely payment of principal of and interest on its general obligation indebtedness. Flow of Funds and Investment of Funds The Bond Order creates a Debt Service Fund. The Debt Service Fund shall be kept separate and apart from all other funds of the District. Any cash balance in the Debt Service Fund must be continuously secured, to the extent that the United States or an instrumentality of the United States does not insure the cash balance, by a valid pledge to the District of securities eligible under the laws of Texas to secure the funds of municipal utility districts having an aggregate market value, exclusive of accrued interest, at all times equal to the cash balance in the fund to which such securities are pledged. The Bond Order establishes the Debt Service Fund to be used to pay principal and interest on the Bonds. The Bond Order requires that the District deposit to the credit of the Debt Service Fund (i) from the delivery of the Bonds to the initial purchaser, the amount received from proceeds of the Bonds representing accrued interest, (ii) District ad valorem taxes (and penalties and interest thereon) levied to pay debt service requirements on the Bonds, and (iii) such other funds as the Board shall, at its option, deem advisable. The Bond Order requires that the Debt Service Fund be applied solely to provide for the payment of the principal or redemption price of and interest on the Bonds when due, and to pay fees to the Paying Agent when due. Redemption Provisions Optional Redemption: The District reserves the right, at its option, to redeem the Bonds maturing on and after September 1, 2021 on September 1, 2020, or any date thereafter, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof (and, if within a stated maturity, selected at random and by lot by the Paying Agent/Registrar), at the redemption price of par plus accrued interest to the date fixed for redemption. Not less than thirty (30) days prior to a redemption date for the Bonds, the District shall cause a notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owners of each Bond or a portion thereof to be redeemed at its address as it appeared on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing of such notice. With respect to any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Order have been met and money sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed will have^en received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice will state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such money by the Paying Agent/Registrar on or prior to the date fixed for such redemption or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption are not fulfilled, such notice will be of no force and effect, the District will not redeem such Bonds, and the Paying Agent/Registrar will give notice in the manner in which the notice of redemption was given, to the effect that such Bonds have not been redeemed. ANY NOTICE OF REDEMPTION SO MAILED TO THE REGISTERED OWNERS WILL BE DEEMED TO HAVE BEEN DULY GIVEN IRRESPECTIVE OF WHETHER RECEIVED BY ANY HOLDER OF THE BONDS, AND, SUBJECT TO PROVISION FOR PAYMENT OF THE REDEMPTION PRICE HAVING BEEN MADE, AND ANY PRECONDITIONS STATED IN THE NOTICE OF REDEMPTION HAVING BEEN SATISFIED INTEREST ON THE REDEEMED BONDS SHALL CEASE TO ACCRUE FROM AND AFTER SUCH REDEMPTION DATE NOTWITHSTANDING THAT A BOND HAS NOT BEEN PRESENTED FOR PAYMENT. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the Bonds or portion thereof which are to be redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. 3 The Paying Agent/Registrar and the Issuer, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Bonds or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the Beneficial Owner, will not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the Issuer will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the Beneficial Owners. Any such selection of Bonds to be redeemed will not be governed by the Order and will not be conducted by the Issuer or the Paying Agent/Registrar. Neither the Issuer nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or Beneficial Owners of the selection of portions of the Bonds for redemption. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Termination of Book-Entry-Only System The District is initially utilizing the book-entry-only system of the DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) In the event that the Book-Entry-Only System is discontinued by DTC or the District, the following provisions will be applicable to the Bonds. Payment: Principal of the Bonds will be payable at maturity or upon earlier redemption to the registered owners as shown by the registration books maintained by the Paying Agent upon presentation and surrender of the Bonds to the Paying Agent at the designated office for payment of the Paying Agent/Registrar in Dallas, Texas (the "Designated Payment/Transfer Office"). Interest on the Bonds will be payable by check or draft, dated as of the applicable interest payment date, sent by the Paying Agent by United States mail, first class, postage prepaid, to the registered owners at their respective addresses shown on such records, or by such other method acceptable to the Paying Agent requested by registered owner at the risk and expense of the registered owner. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, legal holiday or day on which banking institutions in the city where the Designated Payment/Transfer Office of the Paying Agent is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not a Saturday, Sunday, legal holiday or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the original date payment was due. Initially, the only registered owner of the Bonds will be CEDE & CO. as nominee of DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Registration: The Bonds may be transferred and re-registered on the registration books of the Paying Agent only upon presentation and surrender thereof to the Paying Agent/Registrar at the Designated Payment/Transfer Office. A Bond also may be exchanged for a Bond or Bonds of like maturity and interest and having a like aggregate principal amount upon presentation and surrender at the Designated Payment/Transfer Office. All Bonds surrendered for transfer or exchange must be endorsed for assignment by the execution by the registered owner or his duly authorized agent of an assignment form on the Bonds or other instruction of transfer acceptable to the Paying Agent. Transfer and exchange of Bonds will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such transfer or exchange. A new Bond or Bonds, in lieu of the Bond being transferred or exchanged, will be delivered by the Paying Agent/Registrar to the registered owner, at the Designated Payment/Transfer Office of the Paying Agent/Registrar or by United States mail, first-class, postage prepaid. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the denominations of $5,000 or any integral multiple thereof. (See "BOOK-ENTRY-ONLY SYSTEM" herein for a description of the system to be initially utilized in regard to ownership and transferability of the Bonds.) Limitations on Transfer of Bonds: Neither the District nor the Paying Agent shall be required to make any transfer, conversion or exchange to an assignee of the registered owner of the Bonds (i) during the period commencing on the close of business on the 15th calendar day of the month preceding each interest payment date (the "Record Date") and ending with the opening of business on the next following principal or interest payment date or (ii) with respect to any Bond called for redemption, in whole or in part, within forty- five (45) days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. Replacement Bonds: If a Bond is mutilated, the Paying Agent will provide a replacement Bond in exchange for the mutilated bond. If a Bond is destroyed, lost or stolen, the Paying Agent will provide a replacement Bond upon (i) the filing by the registered owner with the Paying Agent of evidence satisfactory to the Paying Agent of the destruction, loss or theft of the Bond and the authenticity of he registered owner's ownership and (ii) the furnishing to the Paying Agent of indemnification in an amount satisfactory to hold the District and the Paying Agent harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Bond must be borne by the registered owner. The provisions of the Order relating to the replacement Bonds are exclusive and the extent lawful, preclude all other rights and remedies with respect to the replacement and payment of mutilated, destroyed, lost or stolen Bonds. Defeasance of Outstanding Bonds The Order provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts 4 and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The Order provides that "Defeasance Securities" means (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent and (4) any other then authorized securities or obligations under applicable Texas state law that may be used to defease obligation such as the Bonds. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds. Because the Order does not contractually limit such investments, registered owners will be deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under State law. There is no assurance that any particular rating for U.S. Treasury securities used as Government Securities or the rating for any other Government Security will be maintained at any particular rating category. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the Bonds for redemption is not extinguished if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorize. Paying Agent/Registrar Principal of and semiannual interest on the Bonds will be paid by The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, the initial Paying Agent/Registrar (the "Paying Agent"). The Paying Agent must be a bank, trust company, financial institution or other entity duly qualified and equally authorized to serve and perform the duties as paying agent and registrar for the Bonds. Provision is made in the Order for the District to replace the Paying Agent by a resolution of the District giving notice to the Paying Agent of the termination of the appointment, stating the effective date of the termination and appointing a successor Paying Agent. If the Paying Agent is replaced by the District, the new Paying Agent shall be required to accept the previous Paying Agent's records and act in the same capacity as the previous Paying Agent. Any successor paying agent/registrar selected by the District shall be subject to the same qualification requirements as the Paying Agent. The successor paying agent/registrar, if any, shall be determined by the Board of Directors and written notice thereof, specifying the name and address of such successor paying agent/registrar will be sent by the District or the successor paying agent/registrar to each Registered Owner by first-class mail, postage prepaid. Record Date The record date for payment of the interest on Bonds on any regularly scheduled interest payment date is defined as the fifteenth day of the month preceding such interest payment date. Issuance of Additional Debt The District may issue bonds necessary to construct waterworks and sewer system improvements and facilities for which the District was created and to provide fire protection to the District, with the approval of the District's voters. Following the issuance of the Bonds, $5,769,217 unlimited tax bonds authorized by the District's voters will remain unissued. The District has no plans to issue additional general obligation debt within the next twelve months. In addition, voters may authorize the issuance of additional bonds or other contractual obligations secured by ad valorem taxes. Neither Texas law nor the Order imposes a limitation on the amount of additional debt which may be issued by the District. Any additional debt issued by the District may dilute the security of the Bonds. (See "INVESTMENT CONSIDERATIONS" herein.) The District may also issue bonds secured by revenues of the water and sewer system or other revenues of the District (other than ad valorem tax revenues ) without voter approval. 5 Specific Tax Covenants In the Order the District has covenanted with respect to, among other matters, the use of the proceeds of the Bonds and the property re-financed therewith by persons other than state or local governmental units, and the manner in which the proceeds of the Bonds are to be invested. The District may cease to comply with any such covenant if it has received a written opinion of a nationally recognized bond counsel to the effect that failure to comply with such covenant will not adversely affect the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. Additional Covenants The District has additionally covenanted in the Order that it will keep accurate records and accounts and employ an independent certified public accountant to audit and report on its financial affairs at the close of each fiscal year, such audits to be in accordance with applicable law, rules and regulations and open to inspection in the office of the District. Remedies in Event of Default The Order provides that, in addition to all other rights and remedies of any owner of Bonds provided by the laws of the State of Texas, in the event the District defaults in the observance or performance of any covenant in the Order including payment when due of the principal of and interest on the Bonds, any Bond owner may apply for a writ of mandamus from a court of competent jurisdiction requiring the Board of Directors or other officers of the District to observe or perform such covenants. The Order provides no additional remedies to a Bond owner. Specifically, the Order does not provide for an appointment of a trustee to protect and enforce the interests of the Bond owners or for the acceleration of maturity of the Bonds upon the occurrence of a default in the District's obligations. Consequently, the remedy of mandamus is a remedy, which may have to be enforced from year to year by the Bond owners (See "INVESTMENT CONSIDERATIONS - Registered Owners' Remedies".). Under Texas law, no judgment obtained against the District may be enforced by execution of a levy against the District's public purpose property. The Bond owners themselves cannot foreclose on property within the District or sell property within the District in order to pay principal of or interest on the Bonds. In addition, the enforceability of the rights and remedies of the Bond owners may be limited by federal bankruptcy laws or other similar laws affecting the rights of creditors of political subdivisions. (See "INVESTMENT CONSIDERATIONS - Bankruptcy Limitation to Registered Owners' Rights".) The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified to the customary rights of debtors relative to their creditors Amendments to the Order The District may without the consent of or notice to any Bond owners amend the Order in any manner not detrimental to the interest of the Bond owners, including the curing of an ambiguity, inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the owners of a majority in principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order, except that, without the consent of the owners of all of the Bonds affected, no such amendment, addition, or rescission may (1) change the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, change the place or places at, or the coin or currency in which, any Bond or the interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) affect the right of the owners of less than all of the Bonds outstanding, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission. In addition, a state, consistent with federal law, may in the exercise of its police powers make such modifications in the terms and conditions of contractual covenants relating to the payment of indebtedness of its political subdivisions as are reasonable and necessary for attainment of an important public purpose. RATINGS The District received a rating on the Bonds of "AA-" from Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P"). An explanation of the significance of such rating may be obtained from the company furnishing the rating. The rating reflects only the respective view of such companies, and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by any such rating company, if, in the judgment of such company circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by the Depository Trust Company while the Bonds are registered in its nominee's name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District and the Underwriter believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. 6 The District and the Underwriter cannot and do not give any assurance? the (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participant, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will sa/ve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of each maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation", within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of certificated securities. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC is rated "AA-" by Standard & Poor's. The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of Bonds ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Bonds representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Issuer or the Paying Agent/Registrar, on the payable date in accordance with their 7 respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Issuer or the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered to DTC Participants or the Beneficial Owners, as the case may be. The Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered. (See "THE BONDS - Termination of Book-Entry-Only System" herein.) The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Issuer and Underwriter believe to be reliable, but the Issuer and the Underwriter take no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry- Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. INVESTMENT CONSIDERATIONS General The Bonds are obligations of the District and are not obligations of the Town of Trophy Club, State of Texas, Denton County, Tarrant County or any other political subdivision except the District. The Bonds are payable from a continuing, direct, annual ad valorem tax, without legal limitations as to rate or amount, on all taxable property within the District. (See "THE BONDS - Security for Payment" herein.) The investment quality of the Bonds depends both on the ability of the District to collect from the property owners all taxes levied against their property or, in the event of foreclosure, the value of the taxable property with respect to taxes levied by the District and by other taxing authorities. Approval of the Bonds The Attorney General of Texas must approve the legality of the Bonds prior to their delivery. The Attorney General of Texas does not pass upon or guarantee the quality of the Bonds as an investment, nor does he pass upon the adequacy or accuracy of the information contained in this Official Statement. Factors Affecting Taxable Values and Tax Payments Economic Factors and Interest Rates: A substantial percentage of the taxable value of the District results from the current market value of single-family residences and developed lots. The market value of such homes and lots is related to general economic conditions affecting the demand for and taxable value of residences. Demand for lots and residential dwellings can be significantly affected by factors such as interest rates, credit availability, construction costs, energy availability and the prosperity and demographic characteristics of the urban center toward which the marketing of lots is directed. Decreased levels of construction activity, which has been experienced in the District for the last several years, tend to restrict the growth of property values in the District or could adversely impact existing values. Interest rates and the availability of mortgage and development funding have a direct impact on the construction activity, particularly short-term interest rates at which developers and homebuilders are able to obtain financing for development and construction costs. Interest rate levels may affect the ability of a landowner with undeveloped property to undertake and complete development activities within the District. Because of the numerous and changing factors affecting the availability of funds, the District is unable to assess the future availability of such funds for continued development and construction within the District. In addition, the success of development within the District and growth of District's taxable property values are, to a great extent, a function of the Dallas/Fort Worth metropolitan and regional economics. Impact on District Tax Rates: Assuming no further development, the value of the land and improvements currently within the District will be the major determinant of the ability or willingness of District property owners to pay their taxes. The 2011 certified net taxable assessed valuation (ARB Approved) of the District (see page vii "SELECTED FINANCIAL INFORMATION") is $954,645,475. After issuance of the Bonds the projected maximum annual debt service requirement will be $840,519 (2012) 8 and the projected average annual debt service requirement will be $463,404 (2012 through 2031, inclusive). Assuming no increase or decrease from the 2011 assessed valuation and no use of funds on hand, a tax rate of $0.08893 per $100 assessed valuation at a 99% collection rate would be necessary to pay the projected maximum annual debt service requirement of $840,519 and a tax rate of $0.04903 per $100 assessed valuation-si a 99% collection rate would be necessary to pay the projected average annual debt service requirement of $463,404. After a transfer of $308,000, representing Fire Department rental income, the District's 2011 debt service tax rate is $0.05586 per $100 assessed valuation. (See "APPENDIX A - TABLES 4 and 5" herein. Tax Collections and Foreclosure Remedies The District's ability to make debt service payments may be adversely affected by its inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the District constitutes a lien in favor of the District on a parity with the liens of all other state and local taxing authorities on the property against which taxes are levied, and such lien may be enforced by foreclosure. The District's ability to collect ad valorem taxes through such foreclosure may be impaired by (a) cumbersome, time-consuming and expensive collection procedures, (b) a bankruptcy court's stay of tax collection procedure against a taxpayer, or (c) market conditions limiting the proceeds from a foreclosure sale of taxable property. While the District has a lien on taxable property within the District for taxes levied against such property, such lien can be foreclosed only in a judicial proceeding. Because ownership of the land within the District is highly fragmented among a number of taxpayers, attorney's fees, and other costs of collecting any such taxpayer's delinquencies could substantially reduce the net proceeds to the District from a tax foreclosure sale. Finally, any bankruptcy court with jurisdiction over the bankruptcy proceedings initiated by or against a taxpayer within the District pursuant to the Federal Bankruptcy Code could stay any attempt by the District to collect delinquent ad valorem taxes against such taxpayer. Consolidation A district (such as the District) has the legal authority to consolidate with other municipal utility districts and, in connection therewith, to provide for the consolidation of its assets, such as its water and wastewater systems with the assets of the district(s) with which it is consolidating, as well as its liabilities (which would include the Bonds and other outstanding obligations of the District). The District is the resulting entity from a consolidation in May 2009 of Prior MUD 1 and Prior MUD 2 (see "THE DISTRICT"). No representation is made that the District will consolidate again in the future with any other district. Abolition Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Alteration of Boundaries In certain circumstances, under Texas law the District may alter its boundaries to: 1) upon satisfying certain conditions, annex additional territory; and 2) exclude land subject to taxation within the District that is not served by District facilities if the District simultaneously annexes land of equal acreage and value that may be practicably served by District facilities. No representation is made concerning the likelihood that the District would effect any change in its boundaries. Registered Owners' Remedies If the District defaults in the payment of principal, interest or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Order, or defaults in the observation or performance of any other covenants, conditions or obligations set forth in the Order, the registered owners may seek a writ of mandamus to compel District officials to carry out their legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the covenants contained in the Bonds or in the Order and the District's obligations are not uncertain or disputed. The remedy of mandamus is controlled by equitable principles and rests with the discretion of the court. The issuance of a writ of mandamus is controlled by equitable principles and rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court has ruled in Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006) that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. 9 Therefore, bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Bankruptcy Limitation to Registered Owners' Rights The enforceability of the rights and remedies of Bondholders may be limited by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions such as the District. Texas law requires a municipal utility district such as the District to obtain the approval of the TCEQ as a condition to seeking relief under the Federal Bankruptcy Code. If a petitioning district were allowed to proceed voluntarily under Chapter 9 of the Federal Bankruptcy Code, it could file a plan for an adjustment of its debts. If such a plan were confirmed by the bankruptcy court, it could, among other things, affect Registered Owners by reducing or eliminating the amount of indebtedness, deferring or rearranging the debt service schedule, reducing or eliminating the interest rate, modifying or abrogating collateral or security arrangements, substituting (in whole or in part) other securities, and otherwise compromising and modifying the rights and remedies of the Registered Owner's claim against a district. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9 and such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditors. A district may not be forced into bankruptcy involuntarily. The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District The "Financial Institutions Reform, Recovery and Enforcement Act of 1989" ("FIRREA"), enacted on August 9, 1989, contains certain provisions which affect the time for protesting property valuations, the fixing of tax liens, and the collection of penalties and interest on delinquent taxes on real property owned by the Federal Deposit Insurance Corporation ("FDIC") when the FDIC is acting as the conservator or receiver of an insolvent financial institution. Under FIRREA real property held by the FDIC is still subject to ad valorem taxation, but such act states (i) that no real property of the FDIC shall be subject to foreclosure or sale without the consent of the FDIC and no involuntary liens shall attach to such property, (ii) the FDIC shall not be liable for any penalties or fines, including those arising from the failure to pay any real or personal property tax when due and (iii) notwithstanding failure of a person to challenge an appraisal in accordance with state law, such value shall be determined as of the period for which such tax is imposed. There has been no definitive judicial determination of the validity of the provisions of FIRREA or how they are to be construed and reconciled with respect to conflicting state laws. However, certain federal court decisions have held that the FDIC is not liable for statutory penalties and interest authorized by State property tax law, and that although a lien for taxes may exist against real property, such lien may not be foreclosed without the consent of the FDIC, and no liens for penalties, fines, interest, attorneys fees, costs of abstract and research fees exist against the real property for the failure of the FDIC or a prior property owner to pay ad valorem taxes when due. It is also not known whether the FDIC will attempt to claim the FIRREA exemptions as to the time for contesting valuations and tax assessments made prior to and after the enactment of FIRREA. Accordingly, to the extent that the FIRREA provisions are valid and applicable to any property in the District, and to the extent that the FDIC attempts to enforce the same, these provisions may affect the timeliness of collection of taxes on property, if any, owned by the FDIC in the District, and may prevent the collection of penalties and interest on such taxes. Continuing Compliance with Certain Covenants The Order contains covenants by the District intended to preserve the exclusion from gross income of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. (See "THE BONDS - Specific Tax Covenants " herein.) Failure by the District to comply with such covenants on a continuous basis prior to maturity of the Bonds could result in interest on the Bonds becoming taxable retroactively to the date of original issuance. (See "TAX MATTERS " herein.) 10 Future Debt The District has reserved in the Order the right to issue the remaining $5,769,217 authorized but unissued unlimited tax bonds and such additional bonds as may hereafter be approved by both the Board of Directors and voters of the District. All of the remaining unlimited tax bonds, which have heretofore been authorized by the voters of the District may be issued by the District from time to time for qualified purposes, as determined by the Board of Directors of the District, subject to the approval of the Attorney General of the State of Texas and the TCEQ. The District has no plans to issue additional debt within the next twelve months. Future and Proposed Legislation Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the Bonds under Federal or state law and could affect the market price or marketability of the Bonds. Any such proposal could limit the value of certain deductions and exclusions, including the exclusion for tax-exempt interest. The likelihood of any such proposal being enacted cannot be predicted. Prospective purchasers of the Bonds should consult their own tax advisors regarding the foregoing matters. THE DISTRICT Creation of the District The District was created by the consolidation of two prior municipal utility districts, being Trophy Club Municipal Utility District No. 1 ("Prior MUD 1") and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2" and collectively with Prior MUD 1, the "Prior MUDs"). Prior MUD 1 was created as Denton County Municipal Utility District No. 1 by order of the Texas Water Rights Commission (the "Commission") on March 4, 1975 for the purpose of providing water and sewer facilities and other authorized services to the area within the territory of Prior MUD 1. The name of Prior MUD 1 was changed to Trophy Club Municipal Utility District No. 1 on April 1, 1983. Prior MUD 2 was created as a result of the consolidation of Denton County Municipal Utility District No. 2 and Denton County Municipal Utility District No. 3, which were created by the Texas Commission on Environmental Quality ("TCEQ") for the purpose of providing water, sewer and drainage facilities and other authorized services to the area. The creation of Prior MUD 2 was confirmed by its electorate at an election held on August 9, 1980. On January 26, 2009, the Boards of the Prior MUDs entered into an agreement to consolidate the Prior MUDs into a single Municipal Utility District covering the territory of the Prior MUDs, subject to the approval of the consolidation by the voters at an election held for that purpose. On May 9, 2009, the voters approved the consolidation and the District became the Trophy Club Municipal Utility District No. 1. Pursuant to the consolidation agreement, the District assumed the outstanding bonds, notes and other obligations of the Prior MUDs and the authorized but unissued bonds, taxes and other obligations of the Prior MUDs and became authorized to levy a uniform tax on all taxable property within the District. The functions performed by the District include supplying water for municipal purposes; collecting, transporting, processing and disposing of wastes; establishing, operating and maintaining a fire department; and performing other functions permitted by municipal utility districts under the Texas Water Code. Governance The District is governed by a board of directors which has control over and management supervision of all affairs of the District. There are five elected directors that serve four-year staggered terms. Directors receive no remuneration, except a Director's per diem allowance of $100 per day on which necessary service is performed for the District. The District and all similar districts are subject to the continuing supervision and filing requirements of-th&TSEQ, including the preparation and filing of an annual independent audit report. All District facility plans are submitted to the TCEQ for review and approval. Employees The District has no employees of its own. Rather, personnel services are furnished under an Interlocal Agreement for Employee and Contractual Services (the "Agreement") between the District and the Town pursuant to Chapter 791 of the Texas Government Code. Under the Agreement, employees who report directly to the District rather than the Town are entitled to the same benefits provided to Town employees, but the District is required to pay all costs associated with the provision of benefits to such employees, including pension benefits. In addition, the District is required to pay 50% of the costs incurred by the Town for salary, benefits and other compensation of employees who provide firefighting and emergency medical services to both the District and the Town. The District's liabilities under the Agreement, including pension benefits, do not have a substantial impact on the District's finances. General The District is comprised of 2,283.5 acres [approximately 94 acres in Westlake (Solana)]. Approximately 195 acres in Trophy Club are undeveloped. Of the developed acres, there are approximately 3,172 existing households, 136 apartment units and 42 townhouses. 11 Location The District is located in southern Denton County and northern Tarrant County partially within the Town of Trophy Club (the "Town") and partially within the Town of Westlake. The District is directly adjacent to and accessible from State Highway 114, north of and approximately mid-way between Dallas and Fort Worth. The District is approximately 27 miles from downtown Dallas, 25 miles from downtown Fort Worth, 17 miles from Denton, 8 miles from Grapevine and 14 miles from the Dallas-Fort Worth International Airport. Major highways connecting these population centers, which will also serve the District, include State Highways 114, 170 and 377 and Interstate Highways 35E and 35W. State Highway 170 connects Trophy Club directly to Alliance Airport which is located seven miles southwest of the District. (See "Vicinity Map" herein.) Population The population of the District is estimated to be approximately 7,600 and the population of the entire Town of Trophy Club, the District and the Trophy Club PID No. 1 (the "Trophy Club Development") is estimated at 8,895 (as of December 2011). Topography and Drainage The land within the District has a gradual slope toward Marshall Creek, which runs through the District. The city limits of Roanoke forms the western boundary of the District. Runoff water enters Grapevine Reservoir just north of the District through Marshall Creek or several other small tributaries. The maximum elevation in the area being developed is approximately 690 feet mean sea level and the minimum elevation in the area being developed is approximately 576 feet mean sea level. The soil is sandy loam and clay loam, and existing vegetation consists of native grasses and small oak trees. Areas which are subject to flooding by a 100-year frequency flood are located in the flood plan of Marshall Creek and have been delineated by the Water Resources Branch of the U.S. Geological Survey. Additional flood studies were made by the engineers to determine what areas may be subject to flooding. It was determined that the area subject to flooding within the District is approximately 58.5 acres based on 100-year flood frequency; however, 57.6 acres of this area is within the golf course area and is not intended to be developed for residential land use. Shopping and Commercial Facilities A shopping center within the District has a major grocery store chain, a bank, a major chain drug store, several service businesses, fast food outlets, and a beauty shop and a dry cleaners. Additionally there are several more businesses and professional offices located in the District, at the primary entrance to the Town of Trophy Club. There are additional shopping facilities in Roanoke, about two (2) miles west of the District and numerous shopping facilities in Southlake about five (5) miles east of the District and in Grapevine about eleven (11) miles east of the District. Full metropolitan shopping facilities are available in Dallas and Fort Worth, Texas which have their central business districts approximately 27 miles and 25 miles, respectively from the District. Fire Protection The District operates its Fire Department (the "Department") with an engine, a Quint, a brush truck and two support vehicles. Currently the Department is staffed with twelve (12) full-time firefighter / paramedics, one full-time Fire chief and a part-time administrative assistant. Operations under the Department include fire suppression, fire prevention, emergency management, investigation/enforcement and emergency medical response. The new $3.1 million fire station was completed and equipped in August 2011 with proceeds from the sale of the Series 2010 Bonds, replacing the previously existing facility. This Department serves the Town of Trophy Club and area in the District that is not in the Town limits, and is currently financed by a combination of a $0.10925 maintenance tax assessment in the District, as well as a $0.10925 Public Improvement District ("PID") assessment in Trophy Club PID No. 1. The 2011-2012 annual operating budget is $1,311,934 with October 1, 2011 reserves of $287,689 (unaudited). Police Protection Twenty-four hour security is provided by the Town of Trophy Club Police Department Schools The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). 12 Recreational Opportunities Recreational opportunities in Trophy Club are afforded by Lake Grapevine and its surrounding parks, which lie two miles north and east of the District. The Town has several community parks, including facilities for soccer, baseball, Softball, basketball, tennis, a competitive swimming pool and playground amenities. The Town also operates an 877 acre Corps of Engineers park, which features 100 acres of motorized trails, as well as many passive recreational opportunities such as fishing, hiking and picnicking. Status of Development of the District The area in the District is locally known as "Trophy Club." It is a residential and mixed-use development consisting of approximately 2,283.5 acres. The District is a mature district with roughly 195 acres undeveloped, of which 135 acres are zoned residential and approximately 60 acres are available for commercial development. There is substantial land left for commercial development in the Solana complex, which is located within the City of Westlake. Lot and custom home sales officially began in the District in mid-year 1975. Homes are currently being offered at prices ranging from $200,000 to $1,000,000 and lots range in price from $35,000 to $200,000. The status of single-family home development as of January 1, 2012 is shown below: Status of Single-Family Home Development Houses Additional Total Multi-Family Under Houses Total Developed Houses Units Construction Occupied Houses Lots and Lots Completed(a) 138 3,172 3,310 72 3,382 178 (a) In addition to the single-family development, there are approximately 132 apartments and 42 completed townhouses, which are occupied. Status of Business / Commercial Development The undeveloped commercial land within the Solana business complex (approximately 230 acres) is available for commercial development, however the District is unaware of any current plans for additional development in the Solana business complex. The Town of Trophy Club and the District have commercial land available for development on approximately 52 acres of land along Highway 114. The land is zoned for uses such as a medical complex, hotels, restaurants and a short-stay hospital facility. Additionally, the District currently has a small strip center along Highway 114 containing several food establishments and professional offices. Maguire Thomas Partners ("Maguire") currently owns the Solana business complex, which is the top principal taxpayer in the District (see APPENDIX A "Table 11 - Principal Taxpayers 2011-2012"). On November 16, 2011, a State district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. The District cannot predict the impact that such events may have on the District's financial condition. Public Improvement District Description Trophy Club PID No. 1 (the "PID") consists of approximately 609.683 acres of land generally to the north of Oakmont Drive, Oak Hill Drive and the Quorum Condominiums, east of the Lakes Subdivision and Parkview Drive, south of the Corps of Engineer's property, and west of the Town's eastern limit. The PID is located entirely within the Town limits but outside the District. A master-planned residential community (the "Property") is under construction in the PID and at build-out will be comprised of approximately 1,489 residential units located within the Property, which Property is zoned to permit such use pursuant to the PD Zoning. As of December 31, 2011, 538 homes have been completed and are occupied and an additional 170 homes have been permitted and are currently under construction. The PID is projected to build out as early as 2017 if construction continues at current levels, or as late as 2025 in the event of a decrease in the construction rate. The District provides emergency and fire protection services to the PID, and the PID pays the District an assessment for such services at the current fire tax rate of $0.10925. The District also provides water and sewer service for the PID. The total billed for PID water and sewer for fiscal year 2010-11 was $617,001.57. 13 THE DISTRICT'S SYSTEM The following information describes generally the water and wastewater systems for the District. Description of the Water System Sources of Water Supply: The present water supply is provided from two sources: (i) four ground wells which provide approximately 1,000,000 gallons per day, and (ii) a 21-inch water line which is capable of delivering 10,000,000 gallons per day of treated water from the City of Fort Worth facilities. Currently the District contracts with the City of Fort Worth for unlimited water services. Current maximum usage is approximately 6,500,000 gallons per day (of which 4,500,000 is Fort Worth water). These sources, when combined, provide water which complies with the quality requirements of the TCEQ and needs only chlorination at the District's water plant facility. Water Plant Facility: The present facility provides 900,000 gallons elevated and 6,000,000 gallons ground storage with pumping/chlorination capacity of 10,000,000 gallons per day. Description of the Wastewater System Wastewater Treatment Plant Facility: The wastewater treatment plant system has a permitted treatment/discharge capacity of 1,750,000 gallons per day from the TCEQ under TPDES Permit No. 11593-001. Although the permit authorizes the discharge of wastewater to the adjacent tributary leading to Lake Grapevine, the plant effluent is currently pumped to various holding ponds within the community of Trophy Club and is re-used for irrigating the golf course. INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Trustees. Both State law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than "A" or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit and share certificates meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended) (i) that are issued by or through an institution that has its main office or a branch office in Texas and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for District deposits; or (ii) where (a) the funds are invested by the District through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the District as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the District; (b) the broker or the depository institution selected by the District arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the District; (c) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the District appoints the depository institution selected under (a) above, a custodian as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the District with respect to the certificates of deposit; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the District, held in the District's name, and deposited at the time the investment is made with the District or with a third party selected and approved by the District and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State; (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than "A" or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less; (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least "A-1" or "P-1" or the equivalent by at least one nationally recognized credit rating agency; (11) commercial paper with a stated maturity of 270 days or less that is rated at least "A-1" or "P-1" or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (12) no-load money market mutual funds registered with and regulated by the United States Securities and Exchange Commission 14 that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and, (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph, and are continuously rated as to-investment quality by at least one nationally recognized investment rating firm of not less than "AAA" or its equivalent. InarSjition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than "AAA" or "AAAm" or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the District's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived." At least quarterly the District's investment officers must submit an investment report to the Board of Trustees detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, the ending market value and the fully accrued interest for the reporting period of each pooled fund group, (4) the book value and market value of each separately listed asset at the end of the reporting-period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest District funds without express written authority from the Board of Trustees. Under State law, the District is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt by written instrument a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution; (3) require any investment officers with perssnasbusiness relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to: (a) receive and review the District's investment policy, (b) acknowledger that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the District and the business organization that are not authorized by the District's investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the District's entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the District and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the District's investment policy; (6) provide specific investment training for the Treasurer, chief financial officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in no-load mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. 15 Current Investments As of December 31, 2011 the District's funds were invested in the District's depository bank and TexPool as shown in the table that follows. The District does not currently own, nor does it anticipate the inclusion of long-term securities or derivative products in its portfolio. Fund and Investment Type Amount TexPool - Operating Fund $3,317,514 TexPool - Interest and Sinking Fund 310,178 First Financial Bank Interest Bearing Account - Operating Fund 373,001 Total Investments $4,000,693 TAX DATA District Bond Tax Rate Limitation By law the District's tax rate for debt service on the Bonds is unlimited as to rate or amount. Maintenance and Operations Tax The Board is also authorized to levy and collect an annual ad valorem tax for planning, constructing, acquiring, or maintaining or repairing or operating the District's improvements and facilities, if such maintenance and operations tax is authorized by a vote of the District's electors. Such tax is in addition to taxes which the District is authorized to levy for paying principal of and interest on the Bonds, and any tax bonds which may be issued in the future. As shown in APPENDIX A, TABLE 13 - "TAX RATE DISTRIBUTION," the District levied a 2011-2012 maintenance and operations tax for fire protection purposes of $0.10925/$100 assessed valuation and $0.00989/$100 assessed valuation for all other operations and maintenance purposes. Overlapping Taxes Other governmental entities whose boundaries overlap the District have outstanding bonds payable from ad valorem taxes. The statement of direct and estimated overlapping ad valorem tax debt shown in APPENDIX A - TABLE 14 (page A-6) was developed from several sources, including information contained in "Texas Municipal Reports," published by the Municipal Advisory Council of Texas. Except for the amount relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person is entitled to rely upon information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the dates stated in this table, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Political subdivisions overlapping the District are authorized by Texas law to levy and collect ad valorem taxes for operation, maintenance and/or general revenue purposes in addition to taxes of debt service and the tax burden for operation, maintenance and/or general purposes is not included in these figures. (See APPENDIX A - TABLES 14, 15 & 17 for information on overlapping taxing entities.) TAXING PROCEDURES Authority to Levy Taxes The Board has been authorized to levy an annual ad valorem tax on all taxable property within the District in an amount sufficient to pay the principal of and interest on the Bonds, their pro rata share of debt service on any contract tax bonds and any additional bonds or obligations payable from taxes which the District may hereafter issue and to pay the expenses of assessing and collecting such taxes. The District agrees in the Order to levy such a tax from year-to-year as described more fully herein under "THE BONDS - Security for Payment." Under Texas law, the Board is also authorized to levy and collect an ad valorem tax for the operation and maintenance of the District and for the payment of certain contractual obligations, if authorized by its voters. (See " TAX DATA - District Bond Tax Rate Limitation" herein.) Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") specifies the taxing procedures of all political subdivisions of the State of Texas, including the District. Provisions of the Property Tax Code are complex and are not fully summarized herein. The Property Tax Code requires, among other matters, county-wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within the county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The board of directors of the appraisal district selects a chief appraiser to manage the appraisal offices of the appraisal district. The Denton Central Appraisal District and the Tarrant Appraisal District have the 16 responsibility for appraising property for all taxing units within Denton and Tarrant Counties, including the District. Such appraisal values are subject to review and change by the appraisal review boards of each county. The appraisal roll as approved by the appraisal review boards must be used by the District in establishing its tax roll and tax rate. General: Except for certain exemptions provided by Texas law, all property with a tax situs in the District is subject to taxation by the District; however, no effort is made by the District to collect taxes on tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property applicable to the District include: (i)property owned by the State of Texas or its political subdivisions if the property is used for public purposes; (ii)property exempt from ad valorem taxation by federal law; (iii) certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; (iv) designated historical sites; and (v) solar and wind-powered energy devices. Freeport Exemption: Article VIII, Section 1-j of the Texas Constitution authorizing an ad valorem tax exemption for "freeport property" was approved November 7, 1989. Freeport property is goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. The District does grant this exemption. Goods in Transit: "Goods in Transit", which are certain goods, principally inventory, that are stored, for the purposes of assembling, storing, manufacturing, processing or fabricating the goods, in a location that is not owned by the owner of the goods and are transferred from that location to another location within 175 days; a taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The District does not exempt Goods in Transit. Aaricultural/Ooen-Land Exemption: Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open- space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. The District does have land that qualifies for this exemption. Residence Homestead Exemptions: Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision. Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual's spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. The Board has granted such elderly and disabled exemptions in the amount of $25,000 of assessed valuation. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. The District does not grant the option percentage of market value exemption. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. Disabled/Deceased Veterans Exemption: State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse (for so long as the surviving spouse remains unmarried) or children (under 18 years of age) of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000; provided, however, that beginning in the 2009 tax year, a disabled veteran who receives from the from the United States Department of Veterans Affairs or its successor 100 percent disability compensation due to a service-connected disability and a rating of 100 percent disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran's residence homestead. In addition, effective January 1, 2012, and subject to certain conditions, surviving spouses of a deceased veteran who had received a disability rating of 100% will be entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. The District does grant the disabled / deceased veterans Exemption. Tax Abatement: Denton County, Tarrant County or the Town of Trophy Club may designate all or part of the area within the District as a reinvestment zone. Thereafter, the District may enter into tax abatement agreements with owners of real property within the District for up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the 17 agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with a comprehensive plan. All of the area of the District is included in reinvestment zones designated by the Town of Trophy Club, for tax abatement purposes. Valuation of Property for Taxation Generally, all taxable property in the District must be appraised by the Denton Central Appraisal District and the Tarrant Appraisal District (collectively, the "Appraisal District") at one hundred percent (100%) of market value as of January 1 of each year, subject to review and approval by the Appraisal Review Board. In determining market value, either the replacement cost or the income or the market data method of valuation may be used, whichever is appropriate. Certain land may be appraised at less than market value under the Property Tax Code. Increases in the appraised value of residence homesteads are limited to 10 percent annually regardless of the market value of the property. Upon application of a landowner, land which qualifies as "open-space land" is appraised based on the category of land, using accepted income capitalization methods applied to the average net income derived from the use of the land for agriculture and hunting or recreational leases. Upon application of a landowner, land which qualifies as "timber land" is appraised using accepted income capitalization methods applied to the average net income derived from the use of the land for production of timber. Land which qualifies as an aesthetic management zone, critical wildlife management zone, or streamside management zone or is being regenerated for timber production for 10 years after harvest is valued at one-half that amount. In the case of both open space and timber land valuations, if the use of land changes, an additional tax is generally imposed on the land equal to the difference between the taxes imposed on the land for each of the five (5) years preceding the year in which the change of use occurs and the tax that would have been imposed had the land been taxed on the basis of market value in each of those years, plus interest at an annual rate of seven percent (7%) calculated from the dates on which the differences would have become due. There are also special appraisal methods for agricultural land owned by individuals whose primary occupation and income are farming and for recreational, park, and scenic land. Also, houses or lots held for sale by a developer or builder which remain unoccupied, are not leased or rented and produce no income are required to be assessed at the price for which they would sell as a unit to a purchaser who would continue the owner's business, upon application of the owner. Once an appraisal roll is prepared and approved by the Appraisal Review Board, it is used by the District in establishing its tax rate. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraised values. The plan must provide for appraisal of all real property in the Appraisal District at least one every three (3) years. It is not know what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or countywide basis. Notice and Hearing Procedures The Tax Code establishes a "truth-in-taxation" process identifying increases in the effective tax rate. The rollback tax rate equals 108% of the total tax rate for the prior year. If the District decides to increase the tax rate more than eight percent (8%) above the previous year's tax rate, it must hold a public hearing and give notice to its taxpayers. If the actual tax rate adopted exceeds the rollback tax rate, taxpayers may petition to hold an election to reduce the tax rate to the rollback tax rate for the fiscal year. The Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll District and Taxpayer Remedies The chief appraiser must give written notice before the Appraisal Review Board meeting to an affected owner if a reappraisal has resulted in an increase in value over the prior year or the value rendered by the owner, or if property not previously included on the appraisal roll has been appraised. Any owner who has timely filed notice with the Appraisal Review Board may appeal the final determination by the Appraisal Review Board of the owner's protest by filing suit in Texas district court. Prior to such appeal, however, the owner must pay the tax due on the amount of value of the property involved that is not in dispute or the amount of tax paid in the prior year, whichever is greater, but not to exceed the amount of tax due under the order from which the appeal is taken. In the event of such suit, the value of the property is determined by the court, or a jury if requested by any party. Additionally, the District is entitled to challenge certain matters before the Appraisal Review Board, including the level of appraisal of certain category of property, the exclusion of property from the appraisal records, or the grant in whole or in part of a partial exemption, or a determination that land qualifies for a special use appraisal (agricultural or timber classification, for example). The District may not, however, protest a valuation of individual property. Levy and Collection of Taxes The rate of taxation is set by the Board based upon the valuation of property within the District as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes, and authorized contractual obligations. 18 Unless the Board, or the qualified voters of the District or of Denton County or Tarrant County at an election held for such purpose, determines to transfer the collection of taxes to the Denton Central Appraisal District or Tarrant Appraisal District or another taxing unit, the District is responsible for the levy and collection of its taxes. The District has contracted with the Denton County Tax Collector to collect the taxes for the District. Taxes are due on receipt of the tax bill and become delinquent after January 31 of the following year. The date of the delinquency may be postponed if the tax bills are mailed after January 10 of any year. Delinquent taxes are subject to a 6% penalty for the first month of delinquency, one percent (1%) for each month thereafter to July 1, and 12% total if any taxes are unpaid on July 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. In addition, where a district engages an attorney for collection of delinquent taxes, the Board may impose a further penalty not to exceed twenty percent 20% on all taxes unpaid on July 1. The District may be prohibited from collection of penalties and interest on real property owned by the Federal Depository Insurance Corporation. In prior years the District has engaged a delinquent tax attorney and imposed such a penalty. District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the District is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two years after the purchaser's deed issued at the foreclosure sale is filed in the county records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. (See "INVESTMENT CONSIDERATIONS - General" and "INVESTMENT CONSIDERATIONS - Tax Collections and Foreclosure Remedies".) TAX MATTERS Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel to the Issuer, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Bonds for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel to the Issuer will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds. See Appendix C - Form of Legal Opinion of Bond Counsel. In rendering its opinion, Bond Counsel to the Issuer will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate, and (b) covenants of the Issuer contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the Refunded Bonds and the property financed or refinanced therewith and (c) the certification of the paying agent for the Refunded Bonds that the amount deposited with the Escrow Agent will be sufficient to pay the principal of and interest on the Refunded Bonds when due. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel to the Issuer is conditioned on compliance by the Issuer with such requirements, and Bond Counsel to the Issuer has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. 19 Bond Counsel's opinion represents its legal judgement based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. Federal Income Tax Accounting Treatment of Original Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds may be less than the principal amount or maturity amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Bonds"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. 20 THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Bonds will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. Qualified Tax-Exempt Obligations for Financial Institutions Section 265(a) of the Code provides, in pertinent part, that interest paid or incurred by a taxpayer, including a "financial institution," on indebtedness incurred or continued to purchase or carry tax-exempt obligations is not deductible in determining the taxpayer's taxable income. Section 265(b) of the Code provides an exception to the disallowance of such deduction for any interest expense paid or incurred on indebtedness of a taxpayer that is a "financial institution" allocable to tax-exempt obligations, other than "private activity bonds," that are designated by a "qualified small issuer" as "qualified tax-exempt obligations." A "qualified small issuer" is any governmental issuer (together with any "on-behalf of and "subordinate" issuers) who issues no more than $10,000,000 of tax-exempt obligations during the calendar year. Section 265(b)(5) of the Code defines the term "financial institution" as any "bank" described in section 585(a)(2) of the Code, or any person accepting deposits from the public in the ordinary course of such person's trade or business that is subject to federal or state supervision as a financial institution. Notwithstanding the exception to the disallowance of the deduction of interest on indebtedness related to "qualified tax-exempt obligations" provided by section 265(b) of the Code, section 291 of the Code provides that the allowable deduction to a "bank," as defined in section 585(a)(2) of the Code, for interest on indebtedness incurred or continued to purchase "qualified tax-exempt obligations" shall be reduced by twenty-percent (20%) as a "financial institution preference item." In the Order, the Issuer has designated the Bonds as "qualified tax-exempt obligations" within the meaning of section 265(b) of the Code. In furtherance of that designation, the Issuer has covenanted to take such action that would assure, or to refrain from such action that would adversely affect, the treatment of the Bonds as "qualified tax-exempt obligations." Potential purchasers should be aware that if the issue price to the public exceeds $10,000,000 there is a reasonable basis to conclude that the payment of a de minimis amount of premium in excess of $10,000,000 is disregarded; however, the Internal Revenue Service could take a contrary view. If the Internal Revenue Service takes the position that the amount of such premium is not disregarded, then such obligations might fail to satisfy the aforementioned dollar limitation and the Bonds would not be "qualified tax-exempt obligations." CONTINUING DISCLOSURE OF INFORMATION . In the Order, the Issuer has made the following agreement for the benefit of the holders and beneficial owners of each of the Bonds. The Issuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Issuer will be obligated to provide certain updated financial information and operating data annually, and timely notice of certain specified events, to the Municipal Securities Rulemaking Board (the "MSRB"). Annual Reports The Issuer will provide certain updated financial information and operating data to the MSRB. The District will provide all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement. The information to be updated includes Tables 1,12 and 13 of Appendix A, and the annual audited financial statements of the District. The Issuer will update and provide this information within six months after the end of each fiscal year ending in and after 2011. 21 The financial information to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Website or filed with the SEC, as permitted by SEC Rule 15c2-12 (the "Rule"). The updated information will include audited financial statements for the Issuer, if the Issuer commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Issuer will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the Issuer may be required to employ from time to time pursuant to State law or regulation. The Issuer's current fiscal year end is September 30. Accordingly, it must provide updated information by the last day in March in each year, unless the Issuer changes its fiscal year. If the Issuer changes its fiscal year, it will notify the MSRB of the change. Notice of Certain Events The Issuer will also provide timely notices of certain events to the MSRB. The Issuer will provide notice of any of the following events with respect to the Bonds to the MSRB in a timely manner (but not in excess of ten business days after the occurrence of the event): (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the Issuer, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the Issuer or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, the Issuer will provide timely notice of any failure by the Issuer to provide annual financial information in accordance with their agreement described above under "Annual Reports". For these purposes, any event described in clause (12) of the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Issuer in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Issuer, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Issuer. Availability of Information from MSRB The Issuer has agreed to provide the foregoing financial information and operating data only as described above. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org. Limitations and Amendments The Issuer has agreed to update information and to provide notices of certain specified events only as described above. The Issuer has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The Issuer makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Issuer disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the Issuer to comply with its agreement. The Issuer may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Issuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The Issuer may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds giving effect to (a) such 22 provisions as so amended and (b) any amendments or interpretations of the Rule. If the Issuer amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided. Compliance with Prior Agreements For the last five years, the District has complied in all material respects with its previous continuing disclosure agreements made in accordance with the Rule. OTHER PERTINENT INFORMATION Legal Matters The delivery of the Bonds is subject to the receipt of an approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the Issuer, and the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal income tax purposes under section 103(a) of the Code, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. The form of Bond Counsel's opinion is attached hereto as Appendix C. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Bonds, Bond Counsel has been engaged by and only represents the Issuer in the issuance of the Bonds. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions "PLAN OF FINANCING", "THE BONDS" (except for subcaptions "Default and Remedies" and "Payment Record" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS," "CONTINUING DISCLOSURE OF INFORMATION" (exclusive of the subcaption "Compliance With Prior Agreements"), and the subcaptions "Legal Matters" (except for the last two sentences of the second paragraph thereof), "Registration and Qualification of Bonds for Sale" and "Legal Investments and Eligibility to Secure Public Funds in Texas" under the caption "OTHER PERTINENT INFORMATION" to determine whether such information accurately and fairly summarizes the material and documents referred to therein and is correct as to matters of law, and that such information conforms to the Order. Certain legal matters will be passed upon for the Underwriter by Fulbright & Jaworski L.L.P., Dallas, Texas, Counsel for the Underwriter. The legal fees to be paid to Counsel to the Underwriter are contingent upon the sale and delivery of the Bonds. The legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the respective attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Registration and Qualification of Bonds for Sale The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The Issuer assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. Litigation In the opinion of District officials, the Issuer is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the Issuer, would have a material adverse effect on the financial condition of the District. Legal Investments and Eligibility to Secure Public Funds in Texas Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments, investment securities governed by Chapter 8, Texas Business and Commerce Code, and are real and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See 23 "RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, obligations such as the Bonds are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their fair market value. No review by the District has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. No representation is made that the Bonds will be acceptable to public entities to secure their deposits or acceptable to such institutions for investment purposes. The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to any such persons or entities or which might otherwise limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such persons or entities to purchase or invest in the Bonds for such purposes. Underwriting The Underwriter has agreed, subject to certain conditions, to purchase the Bonds from the Issuer at a price of $2,470,257.70 (representing the par amount of the Bonds of $2,355,000.00, plus an original issue premium of $136,075.20, less an Underwriter's discount of $20,817.50), plus accrued interest on the Bonds from the Dated Date to the date of initial delivery of the Bonds to the Underwriter. The Underwriter's obligation is subject to certain conditions precedent. The Underwriter will be obligated to purchase all of the Bonds, if any of the Bonds are purchased. The Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Bonds into investment trusts) and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Financial Advisor Southwest Securities is employed as a Financial Advisor to the Issuer in connection with the issuance of the Bonds. In this capacity, the Financial Advisor has compiled certain data relating to the Bonds and has assisted in drafting this Official Statement. The Financial Advisor has not independently verified any of the data contained herein or conducted a detailed investigation of the affairs of the Issuer to determine the accuracy or completeness of this Official Statement. Because of its limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fees for Financial Advisor are contingent upon the issuance, sale and delivery of the Bonds. Forward-Looking Statements Disclaimer The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. Concluding Statement The financial data and other information contained in this Official Statement have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statues, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such statutes, documents and resolutions for further information. Reference is made to original statutes, documents and resolutions in all respects. 24 This Official Statement was approved by the Board of Directors of the Issuer for distribution in accordance with the provisions of the U.S. Securities and Exchange Commission's rule codified at 17 C.F.R. Section 240.15c2-12. Kevin Carr Secretary, Board of Directors Trophy Club Municipal Utility District No. 1 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 James Moss President, Board of Directors Trophy Club Municipal Utility District No. 1 25 P"his page is intentionally left blank.] SCHEDULE I SCHEDULE OF REFUNDED BONDS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Unlimited Tax Bonds, Series 2002 (Redemption Date: 9-1-12 @ par plus accrued interest to the Redemption Date) Original Dated Date June 1,2002 Original Maturity (September 1) 2013 Principal Amount $ 165,000 Amount to be Refunded $ 165,000 Interest Rates 4.25% 2014 170,000 170,000 4.35% 2015 180,000 180,000 4.45% 2016 190,000 190,000 4.55% 2017 200,000 200,000 4.70% 2018 210,000 210,000 4.80% 2019 225,000 225,000 (a) 4.95% 2020 235,000 235,000 (a) 4.95% 2021 245,000 245,000 (b) 5.00% 2022 260,000 260,000 (b) 5.00% 2023 275,000 $ 2,355,000 275,000 $ 2,355,000 5.00% Total Refunded Bonds $ 2,355,000 <a) Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2020. (b> Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2022. [This page is intentionally left blank.] APPENDIX A FINANCIAL INFORMATION OF THE ISSUER (This appendix contains quantitative financial information and operating data with respect to the Issuer. The information is only a partial representation and does not purport to be complete. For further and more complete information, reference should be made to the original documents, which can be obtained from various sources, as noted.) FINANCIAL INFORMATION OF THE ISSUER ASSESSED VALUATION TABLE 1 2011 Actual Market Value of Taxable Property (100% of Actual)(a) Less Exemptions: Local Optional Over-65 Disabled and Deceased Veterans' Agricultural Productivity Loss Freeport 10% Homestead Cap Value Loss Total Exempt Property Partial Exempt Property 2011 Certified Net Taxable Assessed Valuation(b) Less: Taxable Value of Accounts Incomplete/Under Review 2011 Certified Net Taxable ARB Approved Assessed Valuation $ 1,041,294,157 $13,436,103 2,864,298 3,296,361 1,127,925 22,745,880 5,894 43.476,461 $ 997,817,696 <b> $ (43,172,221) $ 954,645,475 (a> See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. <b> Includes taxable value of incomplete accounts and accounts under ARB Review. Sources: Denton Central Appraisal District and Tarrant Appraisal District GENERAL OBLIGATION BONDED DEBT TABLE 2 General Obligation Debt Principal Outstanding (As of February 1, 2012): Unlimited Tax Bonds, Series 2002 (Excludes the Refunded Bonds) $ 155,000 Unlimited Tax Bonds, Series 2003 840,000 Unlimited Tax Refunding Bonds, Series 2005 1,770,000 Unlimited Tax Bonds, Series 2010 2,000,000 Total General Obligation Debt Principal Outstanding $ 4,765,000 Current Issue General Obligation Debt Principal Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") $ 2,355,000 Total General Obligation Debt Principal Outstanding (Following the Issuance of the Bonds) $ 7,120,000 Interest and Sinking Fund Balance as of December 31, 2011 (unaudited) $ 316,300 Ratio of General Obligation Debt Principal to 2011 2011 Certified Net Taxable ARB Approved Assessed Valuation 0.75% 2011 Certified Net Taxable ARB Approved Assessed Valuation<a) $ 954,645,475 Population Estimates: 2000 - 6,350; 2010 - 8,042; Current 2011 (Estimate) - 7,600 Per Capita 2011 Certified Net Taxable ARB Approved Assessed Valuation - $ 125,611 Per Capita General Obligation Debt Principal - $ 937 (a) See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation Drocedures. A-1 OTHER OBLIGATIONS TABLE 3 Description Year of Issue Interest Rate Payable Average Principal Public Property Finance Contractual Obligations: Improvements Fire Truck Improvements Notes Payable: Equipment Equipment Capital Lease Obligations: Equipment Revenue Debt Payable: Water Storage Improvements 2004 2007 2009 1999 2010 2008 2012 3.50% 4.33% 3.90% 2.50% 3.90% 4.00% 2.87% Final Annual Original Outstanding Maturity Payment Amount as of 9-30-11 2012 $ 39,000 $ 270,000 $ 33,750 2014 56,000 448,000 201,000 2012 110,000 330,000 114,234 $ 348,984 2018 $ 2,245 $ 35,000 $ 14,259 2015 $ 201,318 $ 179,955 143,964 $ 158,223 2012 $ 9,886 $ 49,432 $ 9,886 2014 $ 383,709 $ 1,100,000 $ 1,100,000 Total Other Obligations $ 1,617,093 A-2 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 4 Less: Current Total Refunded The Bonds Fiscal Year Debt Service Bonds Combined SeDt 30 Outstanding' Debt Service Principal Interest Total Debt Service 2012 $ 866,300 $ 56,156 $ - $ 30,375 $ 30,375 $ 840,519 2013 865,595 277,313 185,000 60,750 245,750 834,033 2014 659,123 275,300 190,000 57,050 247,050 630,873 2015 657,938 277,905 195,000 53,250 248,250 628,283 2016 660,938 279,895 200,000 49,350 249,350 630,393 2017 667,868 281,250 205,000 44,350 249,350 635,968 2018 668,468 281,850 210,000 39,225 249,225 635,843 2019 672,838 286,770 225,000 33,975 258,975 645,043 2020 670,738 285,633 225,000 28,350 253,350 638,455 2021 672,768 284,000 230,000 21,600 251,600 640,368 2022 678,533 286,750 240,000 14,700 254,700 646,483 2023 676,463 288,750 250,000 7,500 257,500 645,213 2024 153,183 ----153,183 2025 152,683 ----152,683 2026 148,083 ----148,083 2027 153,368 ----153,368 2028 153,243 ----153,243 2029 152,783 ----152,783 2030 152,113 ----152,113 2031 151,163 ----151,163 $ 9.634.180 $ 3,161,571 $ 2.355.000 $ 440,475 $ 2.795.475 ifi 9 ?fift 084 <a> Does not include Public Property Finance Contractual Obligations indebtedness (see Table 3, page A-2). TAX ADEQUACY TABLE 5 2011 Certified Net Taxable ARB Approved Assessed Valuation Maximum Annual Debt Service Requirements (Fiscal Year Ending 9-30-12) Indicated Maximum Interest and Sinking Fund Tax Rate at 99% collections Note: Above computation is exclusive of investment earnings, delinquent tax collections and penalties and interest on delinquent tax collections. INTEREST AND SINKING FUND MANAGEMENT INDEX Interest and Sinking Fund Balance, Fiscal Year Ended September 30, 2011 (Unaudited) FY 2012 Interest and Sinking Fund Tax Levy of $0.05586 at 99% Collections based on the 2011 Certified Net Taxable ARB Approved Assessed Valuation of $954,645,475 Produces FY 2012 Interest and Sinking Fund Deposit from Fire Department Rental Income FY 2012 Budgeted Income from PID Utility Connection Fees Paid by Developer (guaranteed with bank letter of credit) (to be deposited to l&S Fund on or before June 2012) Total Available for Debt Service Less: General Obligation Debt Service Requirements, Fiscal Year Ending 9-30-12 Estimated Surplus at Fiscal Year Ending 9-30-12(a) 954,645,475 840,519 0.08893 TABLE 6 $ 107,847 527,932 308,000 6,120 $ 949,900 840,519 $ 109,381 (a> Does not include delinquent tax collections, penalties and interest on delinquent tax collections or investment earnings. A-3 PROJECTED GENERAL OBLIGATION PRINCIPAL REPAYMENT SCHEDULE TABLE 7 (As of February 1, 2012) Princi pal Repayment Schedule Bonds Percent of Fiscal Year Outstanding The Unpaid at Principal Endinq 9/30 Bonds'3' Bonds Total End of Year Retired (%) 2012 $ 565,000 $ - $ 565,000 $ 6,555,000 7.94% 2013 420,000 185,000 605,000 5,950,000 16.43% 2014 230,000 190,000 420,000 5,530,000 22.33% 2015 235,000 195,000 430,000 5,100,000 28.37% 2016 245,000 200,000 445,000 4,655,000 34.62% 2017 260,000 205,000 465,000 4,190,000 41.15% 2018 270,000 210,000 480,000 3,710,000 47.89% 2019 280,000 225,000 505,000 3,205,000 54.99% 2020 290,000 225,000 515,000 2,690,000 62.22% 2021 305,000 230,000 535,000 2,155,000 69.73% 2022 320,000 240,000 560,000 1,595,000 77.60% 2023 330,000 250,000 580,000 1,015,000 85.74% 2024 110,000 -110,000 905,000 87.29% 2025 115,000 -115,000 790,000 88.90% 2026 115,000 -115,000 675,000 90.52% 2027 125,000 -125,000 550,000 92.28% 2028 130,000 -130,000 420,000 94.10% 2029 135,000 -135,000 285,000 96.00% 2030 140,000 -140,000 145,000 97.96% 2031 145,000 -145,000 -100.00% $ 4,765,000 $ 2,355,000 $ 7,120,000 Excludes the Refunded Bonds and all PPFCO principal outstanding (see Table 3, page A-2). FUND BALANCES TABLE 8 Unaudited As of 9-30-11 As Of 12-31-11 General Fund $ 3,338,441 $ 3,442,735 Debt Service Fund 107,847 316,300 Total $ 3,446,288 $ 3,759,035 TAXABLE ASSESSED VALUATION FOR TAX YEARS 2007-2011 (a) TABLE 9 Tax Net Taxable Change From Preceding Year Year Assessed Valuation Amount ($) Percent (%) 2007 912,618,000 101,404,000 12.50% 2008 960,911,000 48,293,000 5.29% 2009 1,015,777,389 <b> 54,866,389 5.71% 2010 978,509,574 <b> -37,267,815 -3.67% 2011 954,645,475 (b) -23,864,099 -2.44% (a> Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). (b> Excludes valuation for incomplete accounts and accounts under ARB review, as of certification. Sources: Denton Central Appraisal District, Tarrant Appraisal District and Issuer's 2009 Audited Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-4 CLASSIFICATION OF ASSESSED VALUATION TABLE 10 %of %of %of %0f %of Cateaorv 2011 Total 2010 Total 2009 Total 2008 Total 2007 Total Land(a) $ _ 0.00% $ _ 0.00% $ -0.00% $ 186,574,000 18.75% $ 213,640,000 22.56% Land - Homesite 193,352,075 18.57% 189,642,427 18.32% 188,045,683 17.48% -0.00% -0.00% Land - Non Homesite 236,144,259 22.68% 248,891,821 24.04% 271,608,898 25.24% -0.00% -0.00% Land - Agricultural 3,304,866 0.32% 3,957,829 0.38% 3,998,666 0.37% -0.00% -0.00% Improvements<a) -0.00% -0.00% -0.00% 737,273,000 74.10% 638,560,000 67.43% Improvements - Homesite 497,180,522 47.75% 498,665,743 48.16% 505,293,510 46.96% -0.00% -0.00% Improvements - Non Homesite 19,001,251 1.82% 19,724,323 1.90% 26,769,054 2.49% -0.00% -0.00% Personal Property<a) 91,866,777 8.82% 73,302,378 7.08% 70,157,777 6.52% 71,091,000 7.15% 94,823,000 10.01% Mineral Property 444,407 0.04% 1,263,858 0.12% 10,174,220 0.95% -0.00% -0.00% Total Appraised Value $ 1,041,294,157 100.00% $ 1,035,448,379 100.00% $ 1,076,047,808 100.00% $ 994,938,000 100.00% $ 947,023,000 100.00% Less Exemptions: Exemptions<a| $ -$ -$ -$ 34,027,000 $ 34,405,000 Optional Over-65 13,436,103 12,886,387 11,972,353 -- Disabled and Deceased Veterans' 2,864,298 1,805,306 1,287,007 -- Agricultural Productivity Loss 3,296,361 3,949,539 3,990,915 -- Freeport --58,351 -- Homestead Cap Adjustment 1,127,925 1,391,082 2,957,045 -- Total Exempt Property 22,745,880 22,572,987 22,740,838 -- Partial Exempt Property 5,894 131,554 7,208 -- Total Exemptions $ 43,476,461 $ 42,736,855 $ 43,013,717 $ 34,027,000 $ 34,405,000 Certified Net Taxable $ 997,817,696 $ 992,711,524 $ 1,033,034,091 $ 960,911,000 $ 912,618,000 Assessed Valuation Less: Taxable Value of Accounts Incomplete/Under Review $ (43,172,221) $ (14,201,850) $ (17,256,702) Certified Net Taxable ARB Approved Assessed Valuation $ 954,645,475 $ 978,509,674 $ 1,015,777,389 <a> Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) and detailed information for Land, Improvements and Exemptions is not available. Source: Denton Central Appraisal District, Tarrant Appraisal District and Issuer's 2010 Audited Basic Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. PRINCIPAL TAXPAYERS 2011-2012 TABLE 11 % of Total 2011 2011 Net Taxable Assessed Name Tvoe of Prooertv Assessed Valuation Valuation Maguire Thomas Partners ETAL(a) Commercial Office Complex $146,398,876 15.34% Corelogic Real Estate Commercial Real Estate 18,050,838 1.89% CNL RETMT CRSI Trophy Club Texas LP Medical Plaza / Hospital 17,800,000 1.86% Marsh USA Inc. Insurance Consultant / Data Center 10,030,377 1.05% First American Leasing Commercial Office Complex 8,804,230 0.92% Levi Strauss & Co. Commercial Office 8,637,483 0.90% Regency Centers LP Retail Grocery 7,094,526 0.74% Trophy Club Medical Center Healthcare Services 6,163,459 0.65% BDMR Development LLC Real Estate Development 5,956,889 0.62% Armore Trophy Club LLC Real Estate Development 5,665,875 0.59% Total $234,602,553 24.57% Based on a 2011 Certified Net Taxable ARB Approved Assessed Valuation of $ 954,645,475 (b) (a> Although Maguire Thomas Partners ("Maguire") owns the Solana business complex ("Solana"), which comprises the entire taxable assessed valuation shown above, on November 16, 2011, a State district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. Notwithstanding the receivership and possible foreclosure sale, the property taxes for the current year have been paid. The District cannot predict the impact that such events may have on the District's financial condition. See "THE DISTRICT " in the Official Statement for information on the current status of the District's commercial and retail development. <b> Excludes taxable values for incomplete accounts and accounts under ARB Review. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas and the Denton Central Appraisal District. PROPERTY TAX RATES AND COLLECTIONS (a) (b) TABLE 12 Net Taxable Adjusted Tax Assessed Tax Tax % Collections Fiscal Year Year Valuation Rate Levy Current Total Ended 2006 $ 811,214,000 $ 0.280000 $ 2,191,536 100.62% 100.36% 9-30-07 2007 912,618,000 0.230000 2,234,909 100.62% 100.36% 9-30-08 2008 960,911,000 0.244615 2,380,679 98.94% 99.58% 9-30-09 2009 1,015,777,389 (c) 0.205000 2,091,414 99.66% 100.75% 9-30-10 2010 978,509,574 (c> 0.195000 2,047,972 99.58% 100.36% 9-30-11 2011 954,645,475 (c) 0.175000 1,923,848 (d> In Process of Collection 9-30-12 <a> See "TAXING PROCEDURES - Levy and Collection of Taxes" in the body of the Official Statement for a complete discussion of the District's provisions. <b> Historical comparison information for Tax Years 2006-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). l0> Excludes value of incomplete accounts and accounts under ARB review, as of certification m As of December 31, 2011. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas, the Denton Central Appraisal District and the Issuer Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. TAX RATE DISTRIBUTION (a) TABLE 13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 Operations $0.009890 $0.008790 $0.027140 $0.014040 $0.010200 $0.030900 Fire Protection 0.109250 0.109250 0.109140 0.116020 0.120900 0.102700 Debt Service 0.055860 0.076960 0.068720 0.114555 0.098900 0.146400 TOTAL $ 0.175000 $ 0.195000 $ 0.205000 $ 0.244615 $ 0.230000 $ 0.280000 <a> Historical comDarison information for Tax Years 2006-2008 reoresents the combined totals from two seoarate entities ( Trophy Club MUD No. 1 and Trophy Club MUD No. 2). Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas A-6 DIRECT AND OVERLAPPING DEBT DATA INFORMATION TABLE 14 The following table indicates the indebtedness, defined as outstanding bonds payable from ad valorem taxes, of governmental entities overlapping the District and the estimated percentages and amounts of such indebtedness attributable to property within the District. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports published by the Texas Municipal Advisory Council. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the date stated, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Gross Debt % Amount Taxinq Bodv As of Principal OverlaDDina OverlaDDina Carroll Independent School District 02-01-12 249,710,039 3.57% $ 8,914,648 Denton County 02-01-12 477,705,000 1.20% 5,732,460 Northwest Independent School District 02-01-12 249,710,039 1.95% 4,869,346 Tarrant County 02-01-12 335,050,000 0.20% 670,100 Tarrant County College District 02-01-12 29,780,000 0.20% 59,560 Tarrant County Hospital District 02-01-12 27,160,000 0.20% 54,320 Town of Trophy Club 02-01-12 12,444,000 94.53% 11,763,313 Westlake, Town of 02-01-12 21,725,000 21.69% 4,712,153 Total Net Overlapping Debt $1,403,284,078 $ 36,775,900 Trophy Club MUD No. 1 02-01-12 7,120,000 (a) 100.00% 7,120,000 Total Gross Direct Principal and Overlapping Debt $1,410,404,078 $ 43,895,900 Ratio of Direct and Overlapping Debt to 2011 Certified Net Taxable ARB Approved Assessed Valuation 4.60% Ratio of Direct and Overlapping Debt to 2011 Market Value 4.22% Per Capita Direct and Overlapping Debt $5,776 (a> Includes the Bonds and excludes the Refunded Bonds. Source: Most Recent Texas Municipal Reports published by the Municipal Advisory Council of Texas. ASSESSED VALUATION AND TAX RATE OF OVERLAPPING ENTITIES TABLE 2011 Net Taxable 2011 Governmental Entitv Assessed Valuation % of Actual Tax Rate Carroll Independent School District $ 5,554,170,040 100% $ 1.415000 Denton County 53,491,990,714 100% 0.277357 Northwest Independent School District 10,307,632,937 100% 1.375000 Tarrant County 123,043,200,369 100% 0.264000 Tarrant County College District 123,490,855,713 100% 0.148970 Tarrant County Hospital District 123,134,885,714 100% 0.227897 Town of Trophy Club 759,499,967 100% 0.530000 Westlake, Town of 1,091,999,232 100% 0.156840 Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and Denton and Tarrant County Appraisal Districts A-7 AUTHORIZED BUT UNISSUED DIRECT GENERAL OBLIGATION BONDS TABLE 16 Date of Amount Issued This Taxing Body Authorization Purpose Authorized To Date Issue Unissued Trophy Club MUD No. 1 10-07-75 Water&Sewer $ 12,344,217 $ 11,115,000 $ - $ 1,229,217 04-04-81 Water&Sewer 5,800,000 3,760,000 - 2,040,000 10-29-88 Water&Sewer 2,500,000 -_ -_ 2,500,000 $ 20,644,217 $ 14,875,000 $ - $5,769,217 AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS OF OVERLAPPING GOVERNMENTAL ENTITIES TABLE 17 Taxing Body Carroll ISD Denton County Northwest I S D Tarrant County Date of Authorization None Tarrant Co. College Dist Tarrant Co. Hospital Dis Trophy Club, Town of Westlake, Town of None Purpose Amount Authorized 01-16-99 Road $ 85,320,000 05-15-04 Road 186,970,000 05-15-04 County Offices 17,900,000 05-15-04 Equipment 2,000,000 11-04-08 Road 310,000,000 11-04-08 County Buildings 185,000,000 $ 787,190,000 05-10-08 School Buildings $ 260,000,000 04-04-87 Courthouse Improv. $ 47,000,000 08-08-98 Law Enforcement Ctr 70,600,000 08-08-98 Healthcare Facility 9,100,000 08-08-98 Jail 14,600,000 05-13-06 Road & Bridge 200,000,000 05-13-06 Jail 108,000,000 05-13-06 County Buildings 62,300,000 05-13-06 Juvenile Deten. Ctr. 36,320,000 05-13-06 County Offices 26,500,000 $ 574,420,000 None None 11-16-09 Parks & Recreation $ 5,000,000 Issued To Date $ 77,629,375 176,610,527 17,900,000 102,161,781 82,174,444 $456,476,127 $170,000,000 $ 46,500,000 63,100,000 1,000,000 14,600,000 126,700,000 108,000,000 47,300,000 4,200,000 26,500,000 -_ $437,900,000 $136,520,000 Unissued $ 7,690,625 10,359,473 2,000,000 207,838,219 102,825,556 $330,713,873 $ 90,000,000 $ 500,000 <a> 7,500,000 8,100,000 73,300,000 15,000,000 32,120,000 $ 5,000,000 (a> The County will not issue authorization due to aqe. Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. A-8 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 18 Fiscal Year Ended September 30 2011 2010 2009 2008 Revenue and Other Financing Sources: Total Revenues and Other Financing Sources: Expenditures and Other Financing Uses: 2007 Ad Valorem Property Taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 Water & Wastewater Charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 Utility Fees 165,600 80,500 515,200 -- Inspection and Tap Fees 8,560 5,775 4,975 22,550 32,900 Interest Earned 5,534 6,171 20,755 69,447 106,168 Intergovernmental Revenues 89,330 ---- Oversize Meter Reimbursements 70,594 ---- Capital Proceeds/Contractual Obligations --330,000 49,432 - Miscellaneous and Other 80,906 191,498 199,780 116,295 131,124 $ 7,055,064 $ 5,694,592 $ 6,076,283 $ 4,939,191 $ 4,330,831 Administrative 5 I 864,263 $ 993,986 $ 1,297,613 $ 905,052 $ 835,590 Water Operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 Wastewater Operations 598,465 711,382 999,388 500,224 480,798 Wastewater Collection System 277,775 308,798 294,869 409,948 402,482 Information Systems 123,605 182,658 175,698 187,908 124,987 Contribution to Trophy Club Fire Dept. 770,123 876,521 783,736 902,353 725,764 Miscellaneous 177,809 558,000 383,009 45,457 135,121 Capital Outlay 515,884 --29,379 442,782 Debt Service 240,245 --29,379 442,782 :al Expenditures and Other Financing Uses: 3 5 5.839,659 $ 5.513.856 $ 5,745.698 $ 4,944,492 $ 5.228,600 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses Other Financing Sources (Uses): Beginning Fund Balance - October 1 (Restated) Ending Fund Balance - September 30 Total Active Retail Connections Water and/or Wastewater Connections 1,215,405 $ 180,736 $ 330,585 (889,878) 3,012,914 ft 3.338.441 3,554 2,832,178 S 3012.914 3,361 2,501,593 * ?S3?178 3,161 (5,301) $ (897,769) 2,477,515 ft 2.472.214 3,092 NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) Source: The Issuer's Audited Financial Statements 2,932,502 ft 2034.733 2,827 A-9 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 19 Fiscal Year Ended September 30 2011 2010 2009 2008 2007 Revenue and Other Financing Sources: Ad Valorem Property Taxes $ 777,648 $ 740,420 $ 1,100,081 $ 1,302,763 $ 1,325,143 Penalties and Interest --12,225 -- Transfers In / Utility Fees 246,100 653,000 383,009 -- Interest Earned 985 4,848 4,105 23,326 43,456 Miscellaneous and Other -1,000 -29,379 29,379 Total Revenues and Other Financing Sources: $ 1,024,733 $ 1,399,268 $ 1,499,420 $ 1,355,468 $ 1,397,978 Expenditures and Other Financing Uses: Principal Retirement $ 1,115,000 $ 1,055,000 $ 1,025,000 $ 975,000 $ 945,000 Interest and Fiscal Charges 382,019 311,570 352,195 390,565 425,838 Total Expenditures and Other Financing Uses: $ 1,497,019 $ 1.366.570 $ 1,377,195 $ 1,365,565 $ 1.370,838 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses $ (472,286) $ 32,698 $ 122,225 $ (10,097) $ 27,140 Other Financing Sources: $ 308,000 $ $ $ -$ - Beginning Fund Balance - October 1 (Restated) (Restated) 272,132 239,434 117,209 N/A N/A Ending Fund Balance - September 30 1 107.846 S 272.132 239.434 N/A N/A NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) N/A = Not Available Source: The Issuer's Audited Financial Statements A-10 APPENDIX B GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS TOWN OF TROPHY CLUB General The Town of Trophy Club (the "Town"), incorporated in January of 1985 is Texas's first premiere planned residential and country-club community. The Town is located in the southern portion of the Denton County (the "County") on State Highway 114 approximately 8 miles west of the City of Grapevine, 17 miles south of the City of Denton and 14 miles northwest of the Dallas- Fort Worth International Airport. Lake Grapevine is located approximately 2 miles north and east of the Town. The majority of property within the Town consists of single-family and multi-family housing. The Solana Business Complex is located adjacent to the Town's eastern border in the cities of Westlake and Southlake. Both residents and businesses of the Town are furnished water and wastewater treatment from Trophy Club Municipal Utility District No. 1. The Town's 2010 Census was 8,024, which is a 26.65% increase over the 2000 Census. The Town's 2011 population estimate is 8,895. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas, U.S. Census Report, North Central Texas Council of Governments and the Town of Trophy Club. Population: Town of Denton Year Trophy Club County 2011 Estimate 8,895 673,780 2010 Census 8,024 662,614 2000 Census 6,350 423,976 1990 Census 3,922 273,525 1980 Census N/A 143,126 Sources: United States Bureau of the Census, North Central Texas Council of Government and the Town of Trophy Club B-1 Leading Employers in the District: Employer Type of Business Number of Employees (2011) Maguire Partners1' Northwest Independent School District Baylor Medical at Trophy Club Trophy Club Country Club Tom Thumb Town of Trophy Club & Trophy Club MUD #1 Merryhill Bank of America First Financial Bank Quizno's Beck Properties Commercial Office Complex Public School District Healthcare Country Club Retail Grocery Municipal Governmental Entities Daycare Financial Institution Financial Institution Delicatessen Real Estate Development 3,531 267 125 100 90 78 31 7 7 4 4 m See "THE DISTRICT - Status of Business/Commercial Development" and APPENDIX A "Table 11 - Principal Taxpayers 2011-2012" herein for a description of the current status of the property owned by Maguire Partners ("Maguire"). The District cannot predict the impact that such events may have on Maguire's operations or its employees in the District. Source: Information from the Issuer The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). Source: Information from Northwest Independent School District and the Town of Trophy Club Denton County (the "County") is located in north central Texas. The County was created in 1846. It is the eighth most populous county in the state occupying a land area of 911 square miles. The population of the County has grown by over 55% since the 2010 census and 2% since the 2010 census. The County seat is the City of Denton. The economy is diversified by manufacturing, state supported institutions, and agriculture. The Texas Almanac designates cattle, horses, poultry, hay and wheat as the principal sources of agricultural income. Minerals produced in Denton County include natural gas and clay. Institutions of higher education include University of North Texas and Texas Woman's University with a combined 2011 fall enrollment of over 43,000. Nearby Lake Lewisville attracts over 3,000,000 visitors annually. Alliance Airport, the largest industrial airport in the world is located in the county and continues to attract new transportation, distribution, and manufacturing tenants. The Texas Motor Speedway, a major NASCAR race track, was completed in 1997 and has had a positive impact on employment and recreational spending for the area. A major Wal-Mart distribution center located in Sanger is adding to the growth of the northern portion of the County. Robson Development is constructing one of the nation's largest new communities for retired citizens in the southern portion of the County. Source: Texas Municipal Report and information from the County. Education DENTON COUNTY General B-2 Major Employers in Denton County Number of Employer Principal Line of Business Employees University of North Texas Education 7,100 Lewisville Independent School District Education 4,500 Frito Lay Co Distribution Center 2,436 American Airlines Airline 2,350 Texas Women's University Education 2,200 Denton Independent School District Education 2,000 Horizon Health Healthcare 1,500 Denton State School MHMR Facility 1,473 Denton County County Government 1,467 Xerox Corporation Office Equipment 1,400 City of Denton Municipality 1,200 Federal Express Mail Center 863 Denton Reg. Medical Center Medical Center 850 Wal-Mart Distribution Center Distribution Center 800 FEMA Emergency Management 750 Source: Denton County Economic Development and ONCOR Community Profiles Labor Force Statistics Denton County December December 2011 2010 Civilian Labor Force 362,724 356,579 Total Employed 339,700 330,862 Total Unemployed 23,024 25,717 % Unemployed 6.3% 7.2% % Unemployed (Texas) 7.2% 8.0% % Unemployed (United States) 8.3% 9.1% Source: Texas Workforce Commission, Labor Market Information Department. B-3 rfhis page is intentionally left blank.] APPENDIX C FORM OF LEGAL OPINION OF BOND COUNSEL Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. [DATE OF DELIVERY] TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS SERIES 2012 DATED MARCH 1, 2012 IN THE AGGREGATE PRINCIPAL AMOUNT OF $2,355,000 AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District") issuer of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates and mature on the dates, and are subject to redemption, in accordance with the terms and conditions stated in the text of the Bonds. Terms used herein and not otherwise defined shall have the meaning given in the Order of the District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXAMINED the Constitution and laws of the State of Texas, and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number T-l), and specimens of Bonds to be authenticated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District or if the District consolidates with another District. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed or refinced therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, APPENDIX D EXCERPTS FROM THE DISTRICT'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 (Independent Auditor's Report, General Financial Statements and Notes to the Financial Statements - not intended to be a complete statement of the Issuer's financial condition. Reference is made to the complete Annual Financial Report for further information.) and Company PLLC Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors Trophy Club Municipal Utility District No. 1 Trophy Club, Texas We have audited the accompanying financial statements of the governmental activities and each major fund of the Trophy Club Municipal Utility District No. 1, (the District), as of and for the year ended September 30, 2011, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. 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 audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, and each major fund of the Trophy Club Municipal Utility District No. 1 as of September 30, 2011, and the changes in financial position for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis, and budgetary comparison information on pages 3 through 10 and 35 through 36, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. 1 LaFollett & Company PLLC PO Box 717 • Tom Bean, TX • 75489 903-546-6975 • www.lafollettcpa.com In accordance with Government Auditing Standards, we have issued a report dated January 31, 2012 on our consideration of the District's internal control over financial reporting and our tests of compliance with certain provisions of laws, regulations, contracts and grants. The purpose of that report is to describe the scope of testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. The report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise Trophy Club Municipal Utility District No. 1 's basic financial statements. The accompanying individual schedules and other supplementary information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The accompanying individual schedules and other supplementary information have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. LaFollett & Company, PLLC Tom Bean, Texas January 31, 2012 2 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Trophy Club Municipal Utility District No. 1, Texas (the "District") Management's Discussion and Analysis (MD&A) is a narrative overview and analysis designed to provide the reader a means to identify and understand the financial activity of the District and changes in the District's financial position during the fiscal year ended September 30, 2011. The Management's Discussion and Analysis is supplemental to, and should be considered along with, the District's financial statements. Financial Highlights At the close of the fiscal year, the assets of the District exceeded its liabilities by $12,262,122. Of this amount, $3,123,113 is unrestricted net assets and may be used to meet the District's ongoing commitments. The District's net assets increased by $1,991,485 as a result of operations. At the end of the fiscal year, the District's governmental type funds reported a combined fund balance of $3,143,822. As of September 30, 2011, the unassigned fund balance of the General Fund was $2,509,429, which is equal to 42% of total General Fund expenditures. The governmental long-term debt bond obligations of the District decreased by $1,115,000. Overview of the Financial Statements The MD&A is intended to introduce the reader to the District's basic financial statements, which are comprised of three components: 1. Government-Wide Financial Statements, 2. Fund Financial Statements, and 3. Notes to Basic Financial Statements. The report also contains other required supplementary information in addition to the basic financial statements. Government-Wide Financial Statements - the government wide financial statements are designed to provide the reader with a general overview of the District's finances in a way that is comparable with financial statements from the private sector. The government-wide financial statements consist of two statements: 1. The Statement of Net Assets - (Page 11) this statement presents information on all of the District's assets and liabilities; the difference between the two is reported as net assets. Over an extended period, the increase or decrease in net assets will serve as a good indicator of whether the financial position of the District is improving or deteriorating. 3 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 4 Overview of the Financial Statements - continued 2. The Statement of Activities - (Page 12) gives information showing how the District's net assets have changed during the fiscal year. All revenues and expenses are reported on the full accrual basis. Fund Financial Statements - Fund financial statements provide detailed information about the most important funds and not about the District as a whole as in the government-wide financial statements. The District uses fund accounting to demonstrate compliance with finance related legal requirements which can be categorized as governmental fund activities. Governmental Funds - All of the District's activities are reported in governmental funds. They are used to account for those functions known as governmental activities. But unlike government-wide financial statements, governmental fund financial statements focus on how monies flow into and out of those funds and their resulting balances at the end of the fiscal year. Statements of governmental funds provide a detailed short-term view of the District's general government operations and the basic services it provides. Such information can be useful in evaluating a government's short-term financing requirements. The District maintains three governmental funds. Information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances for the General Fund, Debt Service Fund and Capital Projects Fund, all of which are considered to be major funds. The District adopts annual appropriated budgets for the General Fund and Debt Service Funds. A budgetary comparison statement is provided for each annually budgeted fund to demonstrate compliance with its budget. Notes to the Basic Financial Statements - The notes provide additional information that is essential to a full understanding of the data presented in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 17-34. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Overview of the Financial Statements - continued Government-wide Financial Analysis The management discussion and analysis highlights the information provided in both the Statement of Net Assets and Statement of Activities in the government-wide financial statements. It may serve over an extended period of time, as a useful indicator of the District's financial position. At the end of the fiscal year, the District's assets exceeded liabilities by $12,262,122. Of this amount $9,031,162 (74%) reflects the District's investment in capital assets (e.g., land, buildings, machinery and equipment, net of accumulated depreciation), less any related outstanding debt used to acquire those assets. The District uses these capital assets to provide service to the community; therefore these assets are not available for future spending. Table 1 Condensed Statements of Net Assets Governmental Governmental Activities Activities 2011 2010 Current and other $ 4,782,322 $ 6,211,302 Capital assets 16,742,462 14,187,749 Total Assets 21,524,784 20,399,051 Long-term liabilities 6,850,903 9,080,647 Other liabilities 2,411,759 1,047,767 Total liabilities 9,262,662 10,128,414 Net Assets: Invested in capital assets, net of related debt 9,031,162 7,648,983 Restricted 107,847 262,048 Unrestricted 3,123,113 2,359,606 Total Net Assets (FY10 restated) $ 12,262,122 $ 10,270,637 5 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 District operational analysis - The following table provides a summary analysis of the District's consolidated operations for the fiscal years ended September 30, 2011 and 2010. Governmental activities have increased the District's net assets by $1,991,485, which amounts to a 19% increase in net assets for the year ended September 30, 2011. Table 2 Changes in Net Assets Governmental Governmental Activities Activities _ 2011 2010 Revenue: Program revenue Charges for services $ Grants and Contributions General Revenue Ad valorem taxes Unrestricted investment earnings Miscellaneous 5,814,098 $ 4,351,155 89,330 11,200 2,081,548 2,216,287 7,573 12,724 80,908 179,502 Total Revenue 8,073,457 6,770,868 Expenses: Water & Wastewater operations 3,499,324 2,603,224 General government 1,400,004 1,520,193 Fire 785,195 997,997 Interest and fiscal charges 397,449 317,508 Total Expenses 6,081,972 5,438,922 Increase in net assets (FY10 restated) $ 1,991,485 $ 1,331,946 Financial analysis of the District's funds Governmental Funds - the main focus of the District's governmental funds is to provide information on the flow of monies to and from the funds, and to note the unassigned fund balance, which is a good indicator of resources available for spending in the near term. The 6 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 information derived from these funds is highly useful in assessing the District's financial requirements. The unassigned fund balance may serve as a useful measure of the government's net resources available for use at the fiscal year-end. At the end of the fiscal year, the District's governmental funds reported combined ending fund balances of $3,143,822, of which 70%, or $2,206,963, is unassigned and available to the District for future spending. Additional fund balances of $107,847 are assigned to pay debt service. General Fund budgetary highlights Revenue: Revenues were $1,072,966 more than budgeted • Water and wastewater charges were $973,696 (22%) more than budgeted. The budget was based on a normal year, but the District experienced dry, hot weather increasing the use of water. Expenses: Expenses were $396,693 less than budgeted • Water operations were $179,979 more than budgeted due to a higher water use during above average summer heat and dry weather. • The Fire Department had a $436,517 positive budget variance (see page 35) for 2011 expenditures before transfers and capital outlays. After these items are considered, the positive variance was $50,517. Debt Service Fund: • Actual debt service fund revenue was $12,921 more than budgeted due to the payment of delinquent taxes. The debt service expenses were $1,040 less than budgeted. • The debt service fund reserves decreased from $272,132 to $ 107,847. Overall: • Governmental type funds revenue totaled $8,080,851 while expenditures totaled $9,927,933. • Total governmental type fund balances decreased from $4,990,903 to $3,143,821; a decrease of $1,847,082 or 37%. The decrease was expected due to the Capital Projects Fund's use of $2 million of prior year bond proceeds for fiscal year 2011 capital outlays. 7 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Capital Asset and Debt Administration The District's investment in capital assets for its governmental activities as of September 30, 2011 amounted to $16,742,462, net of accumulated depreciation. This represents a broad range of capital assets including, but not limited to land, buildings, improvements, machinery and equipment, vehicles, and water, wastewater treatment, and wastewater collection systems. Capital assets increased approximately 17% during 2011 primarily due to the completion of the new fire department facility. The Capital Projects Fund expenditure for this facility in 2011 was approximately $2.5 million. A management review of annual depreciation for capital assets was completed during the fiscal year and identified approximately $665,000 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation and net assets have been adjusted accordingly. Additional information about capital assets may be found in Note 5 in the notes to financial statements. Debt administration Long-Term Debt - at the end of the current fiscal year the consolidated District had $7,789,214 of general obligation bonds, contractual obligation bonds, notes payable, capital lease obligations, and accrued compensated absences, a decrease of 14% from the previous fiscal year. Of this amount, $7,511,201 is backed by the full faith and credit of the government. The District had no new debt for fiscal year 2011. General debt currently outstanding Table 3 Outstanding Debt at Year-end Governmental Governmental Activities Activities 2011 2010 General obligation bonds $ 7,162,142 $ 8,280,719 Contractual obligations 349,059 554,752 Notes payable 190,209 196,052 Capital lease obligations 9,888 19,774 Compensated absences 77,916 75,777 Total $ 7,789,214 $ 9,127,074 8 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Economic factors and next year's budgets and rates: General fund fiscal 2012 budgetary highlights Revenue: The District's 2012 operational revenue is budgeted to increase by $1,349,996. • Property tax revenue budget increased by $103,010 due to a decrease in existing values and a substantial increase in new construction residential values. • Water and wastewater revenue budget increased by $993,154 due to an increase in utility rates and new construction in residential homes. • Utility fees revenue increased $170,980 due to the reduction in debt service bond payments. $338,880 of the $345,000 in Utility fees will be allocated to operations. Expenses: The District's 2012 operational expense is budgeted to increase by $1,228,358. • The majority of the increase is related to capital expenses and the four year plan to replace all existing meter heads ($85,000). • Bulk water budget is to increase $310,000 due to the increase in new construction residential homes. Overall: The District's2012 operational budget is anticipated to have expenses of $7,406,912 on revenues of $7,141,830 resulting in a $265,082 use of reserves. Debt Service: • Budgeted 2012 debt service revenues are budgeted to decrease from $1,498,059 in fiscal 2011 to $870,300 in fiscal 2012, a decrease of $627,759, or 41.9%. • Debt service appropriations will decrease from $1,498,059 to $870,300 due to two bond issues being paid off in fiscal year 2011. The consolidated District's overall budget for revenue increased from $7,275,586 in fiscal 2011 to $8,012,130 in fiscal 2012 a 10.12% increase. The overall appropriations increased from $7,554,975 to $8,277,212 a 9.56% increase. 9 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 10 Requests for information This financial report is designed to provide a general overview of the District's consolidated finances for all interested parties. Questions concerning any of the information in this report or requests for additional information should be directed to the Trophy Club Municipal Utility District No. 1, Senior Accountant, 100 Municipal Drive, Trophy Club, Texas 76262. BASIC FINANCIAL STATEMENTS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Governmental Activities ASSETS Cash and cash equivalents $ 3,514,926 Receivables Accounts receivable, net 783,977 Taxes 27,760 Other 253,400 Due from other governments 33,833 Prepaids 7,755 Deferred charges 160,670 Non-depreciable capital assets: Land 248,093 Construction in progress 281,899 Non-depreciable capital assets: Buildings and other improvements 3,813,236 Machinery, vehicles, and other equipment 3,082,168 Water system 16,385,424 Organization costs 2,331,300 Accumulated depreciation (9,399,658) TOTAL ASSETS $ 21,524,784 LIABILITIES Accounts payable $ 1,137,121 Accrued liabilities 24,438 Accrued interest payable 28,237 Due to other governments 96,564 Customer deposits 187,087 Noncurrent liabilities: Debt due within one year 938,311 Debt due in more than one year 6,850,903 TOTAL LIABILITIES 9,262,662 NET ASSETS Invested in capital assets, net of related debt 9,031,162 Restricted for debt service 107,847 Unrestricted 3,123,113 TOTAL NET ASSETS $ 12,262,122 The notes to financial the statements are an integral part of this statement. 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30, 2011 Governmental Activities Program Revenues Program Activities Governmental Activities Expenses Charges for Services Operating Grants and Contributions Capital Grants and Contributions General government $ 319,418 3 i 484,770 $ $ - Water operations 2,495,780 3,534,489 -- Wastewater operations 646,419 1,794,839 -- Wastewater collection system 357,125 --- Utility billing 207,307 --- Directors 14,356 --- Manager's office 537,597 --- Finance and H.R. 120,227 --- Facilities management 77,493 --- Information systems 123,605 --- Fire 785,195 -11,330 78,000 Interest on long term debt 397,449 --- Total governmental activities $ 6,081,972 3 5 5,814,098 $ 11,330 $ 78,000 Net (Expenses) Revenue and Changes in Net Assets Governmental Activities $ 165,352 1,038,709 1,148,420 (357,125) (207,307) (14,356) (537,597) (120,227) (77,493) (123,605) (695,865) (397,449) (178,544) General Revenues: Ad valorem taxes 2,081,548 Investment income 7,573 Miscellaneous " 80,908 Total general revenues 2,170,029 Change in net assets 1,991,485 Net Assets - beginning of year, as restated 10,270,637 Net Assets - end of year $ 12,262,122 The notes to the financial statements are an integral part of this statement. 12 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30,2011 ASSETS Debt Capital Total Service Projects Governmental General Fund Fund Fund Funds Assets Cash and cash equivalents $ 3,357,805 $ 107,847 $ 49,274 $ 3,514,926 Receivables: Accounts receivables, net 783,977 - - 783,977 Taxes 14,170 13,591 - 27,760 Other receivables 253,400 - - 253,400 Due from other governments 33,833 - - 33,833 Due from other funds 199 - - 199 Prepaids 7,755 -_ - 7,755 TOTAL ASSETS $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 785,580 $ -$ 351,541 $ 1,137,121 Accrued liabilities 24,438 --24,438 Customer deposits 187,087 --187,087 Due to other governments 96,564 -96,564 Due to other funds --199 199 Deferred revenue 19,029 13,591 -32,620 Total liabilities 1,112,698 13,591 351,740 1,478,029 nd Balances Non-spendable prepaids 7,755 --7,755 Assigned - Budgetary deficits 265,082 --265,082 Assigned - Other 556,175 107,847 -664,022 Unassigned 2,509,429 -(302,466) 2,206,963 Total fund balances 3,338,441 107,847 (302,466) 3,143,822 TOTAL LIABILITIES AND FUND BALANCES $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 The notes to financial statements are an integral part of this statement. 13 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Total fund balances - governmental funds $ 3,143,822 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in the governmental funds balance sheet. 16,742,462 Costs associated with the issuance of long-term debt are expensed when incurred in governmental funds. These costs are capitalized and amortized over the life of the debt in the government wide financial statements. 160,670 Revenue reported as deferred revenue in the governmental funds balance sheet is recognized as revenue in the government wide statement financial statements. 32,621 Interest payable on long term debt does not require current financial resources; therefore interest payable is not reported as a liability in the governmental funds balance sheet. (28,237) Accrued compensated absences does not require the use of current financial resources; therefore accrued vacation is not reported as a liability in the governmental funds balance sheet. (77,916) Long-term liabilities, including bonds payable are not due and payable in the current period and, therefore, are not reported in the fund financial statements. (7,711,300) Net assets of governmental activities $ 12,262,122 The notes to the financial statements are an integral part of this statement. 14 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS SEPTEMBER 30,2011 Total Debt Service Capital Governmental General Fund Fund Projects Fund Funds Revenues: Water and wastewater charges $ 5,323,244 $ $ $ 5,323,244 Taxes 1,311,296 777,648 -2,088,945 Utility fees 165,600 246,100 -411,700 Intergovernmental revenues 89,330 --89,330 Miscellaneous 80,906 --80,906 Oversize meter reimbursements 70,594 --70,594 Inspection and tap fees 8,560 --8,560 Investment income 5,534 985 1,054 7,573 Total revenues 7,055,065 1,024,734 1,054 8,080,852 Expenditures Current: Water operations 2,271,490 --2,271,490 Fire 770,123 --770,123 Wastewater operations 598,465 --598,465 Manager's office 537,597 --537,597 Wastewater collection system 277,775 --277,775 Utility billing 207,307 --207,307 Information systems 123,605 --123,605 Finance 119,359 --119,359 General government 85,092 --85,092 Facilities management 77,493 --77,493 Directors 14,356 --14,356 Human resources 868 --868 Capital Outlay 515,884 -2,591,255 3,107,139 Debt Service Principal 221,422 1,115,000 -1,336,422 Interest and fiscal charges 18,823 379,559 -398,382 Bond issue costs -2,460 -2,460 Total expenditures 5,839,660 1,497,019 2,591,255 9,927,933 Excess (deficiency) of revenues over (under) expenditures 1,215,405 (472,285) (2,590,201) (1,847,081) Other financing sources (uses) Transfers in -308,000 581,878 889,878 Transfers out (889,878) --(889,878) Total other financing sources (uses) (889,878) 308,000 581,878 (0) Net change in fund balance 325,527 (164,285) (2,008,323) (1,847,081) Fund Balances - beginning of year 3,012,914 272,132 1,705,857 4,990,903 Fund Balances - end of year $ 3,338,441 $ 107,847 $ (302,466) $ 3,143,822 The notes to the financial statements are an integral part of this statement. 15 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE STATEMENT OF REVENUES EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30,2011 Net change in fund balances - total governmental funds $ (1,847,081) Amounts reportedfor governmental activities in the statement of activities are different because: Depreciation expense on capital assets reported in the statement of activities does not require the use of current financial resources, therefore, depreciation expense is not reported as expenditures in the governmental funds. (612,059) Governmental funds report capital outlays as expenditures. However, in the statement of activities the costs of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of capital assets recorded in the current period. 3,107,139 Debt principal payments reduces long-term liabilities in the statement of net assets, but it is recorded as an expenditure in the governmental funds 1,336,422 Current year changes in the long term liability for compensated absences do not require the use of current financial resources; therefore they are not reported as expenditures in the governmental funds. (2,139) Governmental funds report the effects of issuance costs, premiums, and deferred losses on refunding when debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. (3,577) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing the change in deferred revenue and various other items. The net effect of these reclassifications is to increase net assets. 9,388 Current year changes in accrued interest payable do not require the use of current financial resources and, therefore, are not reported as expenditures in the governmental funds. 3,392 Change in net assets of governmental activities $ 1,991,485 The notes to the financial statements are an integral part of this statement. 16 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General Statement Trophy Club Municipal Utility District No. 1 (the District) was created by an order of the Texas Commission on Environmental Quality (TCEQ) (formerly the Texas Natural Resources Conservation Commission) on March 4, 1975 and confirmed by the electorate of the District at a confirmation election on October 7, 1975. The Board of Director's held its first meeting on April 24, 1975. The Bonds were first sold on June 8, 1976. The District operates pursuant to Article XVI, Chapter 59 of the Texas Constitution and Chapter 54 of the Texas Water Code, as amended. On May 9, 2009, citizens voted to consolidate the District and Trophy Club Municipal Utility District No. 2 (MUD2). As a result, the District reports consolidated activity and balances for the District and the entities formerly known as MUD2 and the Trophy Club Master District Joint Venture (a joint venture of MUD 1 and MUD2). The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for the District. The financial statements of the District have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to government units. B. Financial Reporting Entity As required by accounting principles generally accepted in the United States of America, these financial statements include the activities of the District and any organizations for which the District is financially accountable or for which the nature and significance of their relationship with the District are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization's governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. A primary government has the ability to impose its will on an organization if it can significantly influence the programs, projects, or activities of, or the level of services performed or provided by, the organization. A financial benefit or burden relationship exists if the primary government (a) is entitled to the organization's resources; (b) is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization; or (c) is obligated in some manner for the debt of the organization. Some organizations are included as component units because of their fiscal dependency on the primary government. An organization is fiscally dependent on the primary government if it is unable to adopt its budget, levy taxes, set rates or charges, or issue bonded debt without approval by the primary government. Accordingly, the District has no component units. 17 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED C. Government-Wide and Fund Financial Statements The govemment-wide financial statements (the statement of net assets and the statement of activities) report information on all of the activities of the District, except for fiduciary funds. The effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The activities of the District are comprised only of governmental activities. The statement of activities demonstrates the degree to which the direct expenses of a given program are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific program. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given program and 2) operating or capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements The District segregates transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. These statements present each major fund as a separate column on the fund financial statements. The District does not report any non-major funds. Governmental funds are those funds through which most governmental functions typically are financed. The measurement focus of governmental funds is on the sources, uses and balance of current financial resources. The District has presented the following major governmental funds: General Fund The General Fund is the main operating fund of the District. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. General operating expenditures, fixed charges and capital improvement costs that are not paid through other funds are paid from the General Fund. Debt Service Fund The Debt Service Fund is used to account for resources accumulated and payments made for principal and interest on the long-term debt of governmental funds. Capital Projects Fund The Capital Projects Fund is used to account for funds received and expended for the acquisition and construction of infrastructure and other capital assets. 18 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED D. Measurement Focus and Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government-wide statements are reported using the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or non-current) are included on the statement of net assets and the operating statements present increases (revenues) and decreases (expenses) in net total assets. Under the accrual basis of accounting, revenues are recognized when earned. Expenses are recognized at the time the liability is incurred. Governmental fund financial statements are reported using the current financial resources measurement focus and are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual; i.e., when they become both measurable and available. "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. The District considers receivables collected within sixty days after year-end to be available and recognizes them as revenues of the current year. Expenditures are recorded when the related fund liability is incurred. However, debt service expenditures are recorded only when payment is due. The revenues susceptible to accrual are interest income and ad valorem taxes. All other governmental fund revenues are recognized when received. E. Cash and Investments The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments of three months or less from the date of acquisition. The District's investment policy requires that all monies be deposited with the authorized District depository or in (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States; (4) obligations of states, agencies, counties, cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than A or its equivalent; (5) certificates of deposit by state and national banks domiciled in this state that are (A) guaranteed or insured by the Federal Deposit 19 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED E. Cash and Investments - Continued Insurance Corporation, or its successor; or, (B) secured by obligations that are described by (1) - (4); or, (6) fully collateralized direct repurchase agreements having a defined termination date, secured by obligations described by (1), pledged with third party selected or approved by the District, and placed through a primary government securities dealer. All investments are recorded at fair value based on quoted market prices. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties. F. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the government-wide financial statements. All capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated assets are valued at their fair market value on the date donated. Repairs and maintenance are recorded as expenses. Renewals and betterments are capitalized. Interest has not been capitalized during the construction period on property, plant and equipment. Assets capitalized have an original cost of $5,000 or more and over one year of useful life. Depreciation has been calculated on each class of depreciable property using the straight-line method. Estimated useful lives are as follows: Buildings 50 Years Improvements other than buildings 15-30 Years Machinery and equipment 5-15 Years Vehicles 6-12 Years Water and wastewater systems 30-65 Years G. Accumulated Vacation, Compensated Time and Sick Leave The District has no employees of its own, but instead, personnel services are furnished under a contract with the Town of Trophy Club, Texas. The District records an allocation of personnel costs from the Town in personnel expense accounts rather than as single line item payable to the Town. Accordingly, the District also records current payroll and an allocation in compensated absences earned by the personnel assigned to it. The District reports this liability using the Town's vacation policy; however, the Town retains primary liability for its employee vacation pay. 20 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED H. Organizational Costs The District, in conformance with requirements of the TCEQ, capitalized costs incurred in the creation of the District. The TCEQ requires capitalization of organizational costs for the construction period, all costs incurred in the issue and sale of bonds, bond interest and amortized bond premium and discount losses on sales of investments, accrued interest on investments purchased, attorney fees and some administrative expenses until construction and acceptance or use of the first revenue producing facility has occurred. The District amortizes the organizational costs using the straight-line method over a period of 22 to 45 years. I. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the District or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. J. Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses/expenditures. Actual results could differ from those estimates. K. Fund Balances The Governmental Accounting Standards Board (GASB) has issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54). This Statement defines the different types of fund balances that a governmental entity must use for financial reporting purposes in the fund financial statements for governmental type funds. It does not apply for the government-wide financial statements. GASB 54 requires the fund balance amounts to be properly reported within one of the following fund balance categories: Nonspendable - such as fund balance associated with inventories, prepaids, long-term loans and notes receivable, and property held for resale (unless the proceeds are restricted, committed, or assigned) 21 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED K. Fund Balances - Continued Restricted - fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation, Committed - fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the Board of Directors (the district's highest level of decision-making authority), Assigned - fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed, and Unassigned - fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications, and other fund's that have total negative fund balances. NOTE 2. CASH AND INVESTMENTS The funds of the District must be deposited and invested under the terms of a contract, contents of which are set out in the Depository Contract Law. The depository bank places approved pledged securities for safekeeping and trust with the District's agent bank in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation (FDIC) insurance. At September 30, 2011, the carrying amount of the District's deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $619,096 and the bank balance was $848,446. The District's cash deposits at September 30, 2011, and during the year then ended were entirely covered by FDIC insurance or by pledged collateral held by the District's agent bank in the District's name. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the District to adopt, implement, and publicize an investment policy. That policy must address the following areas; (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity, allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, (9) and bid solicitation preferences for certificates of deposit. 22 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Statutes and the District's investment policy authorized the District to invest in the following investments as summarized below: Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity of Portfolio In One Issuer U.S. Treasury Obligations 2 years 85% NA U.S. Agencies Securities 2 years 85% NA State of Texas Securities 2 years 85% NA Certificates of Deposits 2 years 85% NA Municipal Securities 2 years 85% NA Money Market 2 years 50% NA Mutual Funds 2 years 50% NA Investment pools 2 years 100% NA The Act also requires the District to have independent auditors perform test procedures related to investment practices as provided by the Act. The District is in substantial compliance with the requirements of the Act and with local policies. Cash and investments as of September 30, 2011 are classified in the accompanying financial statements as follows: Statement of Net Assets Primary Government: Cash and cash equivalents $ 3,514,926 Total cash and investments $ 3,514,926 Cash and investments as of September 30, 2011 consist of the following: Deposits with financial institutions $ 619,096 Investments 2,895,830 Total cash and investments $ 3,514,926 The District's cash and investments balance includes $187,087 which is restricted for customer deposits. 23 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the District manages its exposure to interest rate risk is by investing mainly in investment pools which purchase a combination of shorter term investments with an average maturity of less than 60 days thus reducing the interest rate risk. The District monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. The District has no specific limitations with respect to this metric. As of September 30, 2011, the District had the following investment: Investment Type TexPool Total Investments Amount Weighted Average Maturity $ 2,895,830 34 days $ 2,895,830 As of September 30, 2011, the District did not invest in any securities which are highly sensitive to interest rate fluctuations. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the Public Funds Investment Act, the District's investment policy, or debt agreements, and the actual rating as of year-end for each investment type. Investment Type Amount Minimum Legal Rating Rating as of Year End TexPool 2,895,830 N/A AAAm Total Investments 2,895,830 Concentration of Credit Risk The investment policy of the District contains no limitations on the amount that can be invested in any one issuer. As of September 30, 2011, other than external investment pools, the District did not have 5% or more of its investments with one issuer. 24 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act and the District's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least the bank balance less FDIC insurance at all times. As of September 30, 2011 the District deposits with financial institutions were not in excess of federal depository insurance limits. Investment in State Investment Pools The District is a voluntary participant in TexPool. The State Comptroller of Public Accounts exercises responsibility over TexPool. This oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. TexPool operates in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940. TexPool uses amortized costs rather than market value to report net assets to compute share prices. Accordingly, the fair value of the position in TexPool is the same as the value of TexPool shares. 25 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 3. ACCOUNTS RECEIVABLE Receivables as of year-end, including the applicable allowances for uncollectible accounts, are as follows: Accounts Receivable: MUD water $ 388,269 MUD sewer 161,167 Unbilled receivables 176,861 Refuse (as agent for Town of Trophy Club) 51,903 Refuse tax (as agent for Town of Trophy Club) 4,574 Storm drainage (as agent for Town of Trophy Club) 13,254 796,028 Allowance for uncollectible accounts (12,051) Total (net) $ 783,977 Due from Other Governments: Town of Trophy Club $ 33,833 NOTE 4. INTERFUND TRANSFERS Transfers between funds during the year are as follows: Transfer In Transfer Out Amount Purpose Capital Projects General Fund $ 581,878 Capital Improvement Costs Debt Service General Fund 308,000 Debt service Total $ 889,878 NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS Prior Period Adjustment to Net Assets A management review of annual depreciation for capital assets was completed during the fiscal year and identified $664,937 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation has been decreased and net assets have been increased by this amount on the government-wide financial statements. 26 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Capital Asset Activity Capital asset activity for the year ended September 30, 2011, was as follows: Beginning Balance as Beginning Previously Adjustments/ Balance Retirements/ Ending Reported Reclassifications As Restated Additions Transfers Balance Governmental Activities: Capital assets, not being depreciated Land $ 248,093 $ -$ 248,093 $ $ $ 248,093 Construction in progress 601,102 -601,102 2,817,925 (3,137,128) 281,899 Total capital assets not being depreciated 849,195 -849,195 2,817,925 (3,137,128) 529,992 Capital assets, being depreciated Buildings 506,790 -506,790 -3,041,428 3,548,218 Improvements other than buildings 265,017 -265,017 --265,017 Machinery and equipment 1,179,578 -1,179,578 274,635 -1,454,213 Organization costs 2,331,300 -2,331,300 --2,331,300 Vehicles 1,615,129 -1,615,129 78,000 (65,174) 1,627,955 Water system 8,080,056 -8,080,056 --8,080,056 Wastewater treatment system 5,441,926 -5,441,926 --5,441,926 Wastewater collection system 2,863,443 -2,863,443 --2,863,443 Total capital assets being depreciated 22,283,239 -22,283,239 352,635 2,976,254 25,612,128 Less accumulated depreciation for: Buildings (159,049) 2,788 (156,261) (14,238) 45,485 (125,015) Improvements other than buildings (174,388) 1 (174,387) (13,166) -(187,552) Machinery and equipment (391,884) 427 (391,457) (90,102) -(481,559) Organization costs (2,016,621) (10,781) (2,027,402) (76,350) -(2,103,752) Vehicles (994,555) (1,476) (996,031) (110,759) 65,174 (1,041,616) Water system (3,013,031) 358,073 (2,654,958) (131,125) -(2,786,083) Wastewater treatment system (1,743,613) 357,383 (1,386,230) (127,272) -(1,513,503) Wastewater collection system (1,070,054) (41,479) (1,111,533) (49,046) -(1,160,578) Total accumulated depreciation (9,563,195) 664,937 (8,898,258) (612,058) 110,659 (9,399,658) Governmental activities capital assets, net $ 13,569,239 $ 664,937 $ 14,234,176 $ 2,558,502 $ (50,215) $ 16,742,462 27 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS - Continued Depreciation expense was charged as direct expense to programs of the primary government as follows: General government $ 344,985 Water operations 124,698 Fire department 15,070 Wastewater operations 47,954 Wastewater collection systems 79,351 Total depreciation expense $ 612,058 NOTE 6. LONG-TERM DEBT At September 30,2011, the District's long-term debt payable consisted of the following: Interest Year Average Rate of Final Annual Original Outstanding Description Payable Issue Maturity Payment Amount 9/30/2011 Tax and revenue bonds: Refunding 3.25-5.90% 1997 2011 $ 398,620 $ 3,075,000 $ Refunding 4.00-5.00% 2003 2011 252,963 1,949,288 - Improvements 4.00-5.00% 2002 2023 281,058 3,510,000 2,510,000 Operations 4.00-5.00% 2003 2023 89,793 1,200,000 840,000 Refunding 3.00-4.20% 2005 2023 195,676 3,143,998 1,770,000 Improvements 3.50-5.00% 2010 2031 148,205 2,000,000 2,000,000 $ 7,120,000 Contractual Obligations: Fire Truck 4.33% 2007 2014 $ 56,000 $ 448,000 $ 201,000 Improvements 3.50% 2004 2012 39,000 270,000 33,750 Improvements 3.90% 2009 2012 110,000 330,000 114,309 $ 349,059 Notes payable: Equipment 2.50% 1999 2018 $ 2,245 $ 35,000 $ 14,254 Equipment 3.90% 2010 2015 201,318 179,955 175,955 $ 190,209 Capital Lease Obligations: Equipment 4.00% 2008 2012 $ 9,886 $ 49,432 $ 9,886 28 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - Continued The following is a summary of long-term debt transactions of the District for the year ended September 30,2011: Beginning Balance Additions Reductions Biding Balance Due Within One Year Governmental Activities: Tax and revenue bonds Contractual obligations Deferred loss on refuning Premium m bonding $ 8,235,000 554,752 (55,907) 101,626 $ $ (1,115,000) (205,693) 4,414 (7,991) $ 7,120,000 349,059 (51,493) 93,635 $ 565,000 212,059 (4,414) 7,991 8,835,471 -(1,324,270) 7,511,201 780,636 Nates payable 196,052 -(5,843) 190,209 69,871 Capital lease obligations 19,774 -(9,886) 9,888 9,888 Compensated absences (restated) 75,777 2,139 -77,916 77,916 Total Governmental Activities Long-term Liabilities $ 9,127,074 $ 2,139 $ (1,339,999) $ 7,789,214 $ 938,311 29 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Year Ending September 30, Principal Interest Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017-2021 2,520,000 832,679 3,352,679 2022-2026 1,525,000 283,945 1,808,945 2027-2031 675,000 87,670 762,670 Total $ 7,120,000 $ 2,514,189 $ 9,634,189 Contractual obligations Year Ending September 30, Principal Interest Total 2012 $ 212,059 $ 13,158 $ 225,217 2013 67,000 5,932 72,932 2014 70,000 3,031 73,031 Total $ 349,059 $ 22,121 $ 371,180 Notes payable: Year Ending September 30, Principal Interest Total 2012 $ 69,871 $ 6,201 $ 76,072 2013 37,927 4,578 42,505 2014 37,974 3,107 41,081 2015 38,025 1,634 39,659 2016 2,085 160 2,245 2017-2018 4,327 163_ 4,490 Total $ 190,209 $ 15,843 $ 206,052 30 NOTE 6. LONG-TERM DEBT - CONTINUED The annual requirements to amortize all debts outstanding as of September 30, 2011, are as follows: Tax and revenue bonds: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED Capital Lease: Year Ending September 30, Principal Interest Total 2012 J 9,888 J 399_ J 10,287 Total $ 9,888 $ 399 $ 10,287 The assets acquired under the capital lease obligations above are included in capital assets at a cost of $50,173. Accumulated depreciation on the assets as of September 30,2011 was $ 11,721. The tax revenue bonds are payable from the proceeds of ad valorem taxes levied upon all property subject to taxation within the District, without limitation as to rate or amount, and are further payable from, and secured by a lien on and pledge of the net revenue to be received from the operation of the District's waterworks and sanitary sewer system. The outstanding bonds are callable for redemption prior to maturity at the option of the District as follows: Series 1997 - All maturities from 2008 to 2011 are callable in principal increments of $5,000 on or after September 1, 2007 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2002 - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2003 - No bonds are subject to redemption prior to maturity. Series 2003 (debt issued by the entity formerly known as MUD 2) - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2005 - All maturities from 2014 to 2023 are callable in principal increments of $5,000 on or after September 1, 2013 at par plus unpaid accrued interest to the fixed date for redemptions. Contractual obligations and notes payable are liquidated from the general fund. Tax and revenue bonds are liquidated from the debt service fund. The provisions of the bond resolutions relating to debt service requirements have been met, and the cash allocated for these purposes is sufficient to meet debt service requirements for the year ended September 30, 2011. 31 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED In previous years, the District has legally defeased certain outstanding general obligation debt by placing funds into irrevocable trusts pledged to pay all future debt service payments of the refunded debt. Accordingly, a liability for the defeased debt issue is not included in the District's financial statements. As of September 30,2011, the following outstanding bonds were legally defeased: Series Type Amount 1995 Unlimited Tax Refunding Bonds $ 2,490,000 Total $ 2,490,000 NOTE 7. PROPERTY TAXES Property taxes are levied as of October 1, on the assessed value listed as of the prior January 1, for all real and certain personal property located in the District and MUD2 (the "Districts"). The appraisal of property within the District is the responsibility of Denton Appraisal District (Appraisal District) as required by legislation passed by the Texas legislature. The Appraisal District is required under such legislation to assess all property within the Appraisal District on the basis of 100% of its appraised value and is prohibited from applying any assessment ratios. The value of property within the Appraisal District must be reviewed every five years; however, the District may, at its own expense, require annual reviews of appraised values. The Districts may challenge appraised values established by the Appraisal District through various appeals and, if necessary, legal action. Property taxes for the Districts are not limited as to rate or amount. In an election held October 7, 1975, the electorate of the Districts authorized the levy of up to $0.25 per $100 valuation per District for the operations and maintenance of the Districts. Property taxes attach as an enforceable lien on property as of January 1, following the levy date. Taxes are due by January 31, following the levy date. Property taxes are recorded as receivables when levied. Following is information regarding the 2011 tax levies: Adjusted taxable values $ 993,169,500 O & M Fire tax levy $0.11804/$100 1,284,669 I&Staxlevy $0.07696/$100 763,303 Total tax levy $0.1950/$100 $ 2,047,972 32 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 8. FUND BALANCE CLASSIFICATIONS AND DEFICITS The District's authorized their Director to designate certain fund balances as assigned. Excluding unassigned fund balances, the following describes the District's fund balance classifications at September 30,2011: Non-Spendable Fund Balances Non-Spendable Fund Balance of $7,755 for the General Fund represents assets not in spendable form. Assigned Fund Balances The District assigned $265,082 of General Fund fund balances to offset expected fiscal year 2012 budgetary deficits for general operations and the fire department. The District assigned a total of $556,175 of General Fund fund balances for the following: $21,000 for water plant equipment, $219,414 for future technology acquisitions, and $315,761 for fiscal year 2012 expected transfers to the Capital Projects Fund. Fund Balance Deficits The Capital Projects Fund has a fund balance deficit at September 30, 2011 of $302,466. In fiscal year 2012, the District intends to transfer funds from the General Fund to eliminate the deficit. NOTE 9. RISK MANAGEMENT The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; injuries to employees; employee health benefits; and other claims of various nature. Commercial insurance is purchased for the risks of loss to which the District is exposed. Any losses reported but unsettled or incurred and not reported, are believed to be insignificant to the District's basic financial statements. Additionally, the District must operate in compliance with rules and regulations mandated for public water supply systems by federal and state governments. The District is subject to compliance oversight by the Texas Commission on Environmental Quality (TCEQ). Fiscal Year 2011 TCEQ Compliance In October of 2011, the District notified TCEQ of inaccuracies in previously submitted, monthly Discharge Monitoring Reports (DMR's). The inaccuracies related to the laboratory measurement results for Carbonaceous Biochemical Oxygen Demand (CBOD). The District submitted corrected DMR's to TCEQ, but has not been formally notified by TCEQ of the resulting action, if any, that will occur due to the reported inaccuracies. 33 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 10. SUBSEQUENT EVENTS The District has evaluated all events and transactions that occurred after September 30, 2011 up through audit report date, which is the date the financial statements were issued. The following is a subsequent for the District: On January 18, 2012, the District issued Trophy Club Municipal Utility District No. 1, Revenue Note, Series 2012 for $1,100,000 (the Note). The Note was issued to finance the expansion of two ground storage tanks. Interest accrues at 2.87% per annum and is payable each March 1st and September 1st commencing March 1, 2012. The following schedule shows amounts that this Note will add to the District's future debt service requirements: Fiscal Year Principal $ 367,000 366,000 367,000 Interest Total $ 386,556 2012 2013 2014 $ 19,556 21,037 10,533 387,037 377,533 $ 1,100,000 $ 51,126 $ 1,151,126 34 rrhis page is intentionally left blank.] REQUIRED SUPPLEMENTARY INFORMATION TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 GENERAL FUND BUDGETARY COMPARISON SCHEDULE (BUDGETARY BASIS) YEAR ENDED SEPTEMBER 30,2011 Variance with Final Budget Budgeted amounts Positive Original Final Actual (Negative) Revenues Water and wastewater charges $ 4,349,548 $ 4,349,548 $ 5,323,244 $ 973,696 Taxes 1,278,248 1,278,248 1,311,296 33,048 Utility fees 167,900 167,900 165,600 (2,300) Intergovernmental revenues 13,750 93,080 89,330 (3,750) Miscellaneous 37,014 38,323 80,906 42,583 Oversize meter reimbursements 50,000 50,000 70,594 20,594 Inspection and tap fees 3,000 3,000 8,560 5,560 Investment income 2,000 2,000 5,534 3,534 Total revenues 5,901,460 5,982,099 7,055,065 1,072,966 Expenditures: Water operations 2,060,851 2,060,851 2,271,490 (210,639) Fire 1,204,001 1,206,640 770,123 436,517 Wastewater operations 628,207 628,207 598,465 29,742 Manager's office 547,908 547,908 537,597 10,311 Wastewater collection system 381,658 381,658 277,775 103,883 Utility billing 237,571 237,571 207,307 30,264 Information systems 131,012 131,012 123,605 7,407 Finance 113,706 113,706 119,359 (5,653) General government 86,314 86,314 85,092 1,222 Facilities management 90,739 90,739 77,493 13,246 Directors 24,528 24,528 14,356 10,172 Human resources 6,945 6,945 868 6,077 Capital Outlay 486,565 720,544 515,884 204,660 Debt Service --240,245 (240,245) Total expenditures 6,000,005 6,236,623 5,839,660 396,963 Excess of revenues over expenditures (98,545) (254,524) 1,215,405 1,469,929 Other financing sources (uses): Transfers in 54,314 54,314 -(54,314) Transfers out (56,911) (56,911) (889,878) (832,967) Total other financing sources (uses) (2,597) (2,597) (889,878) (887,281) Net change in fund balance (101,142) (257,121) 325,527 582,648 Fund Balances - beginning of year 3,012,914 3,012,914 3,012,914 - Fund Balances - end of year $ 2,911,772 $ 2,755,793 $ 3,338,441 $ 582,648 Notes to Required Supplementary Information: The District annual budgets are approved on the budgetary basis. The Board also approves all revisions and appropriations which lapse at each fiscal year-end. 35 INDIVIDUAL SCHEDULES AND OTHER SUPPLEMENTARY INFORMATION REQUIRED BY TEXAS COMMISSION ON ENVIRONMENTAL QUALITY (TCEQ) TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 DEBT SERVICE FUND BUDGETARY COMPARISON SCHEDULE YEAR ENDED SEPTEMBER 30, 2011 Variance with Final Budgeted Amounts Budget Original Final Actual Positive (Negative) Revenues Taxes Investment income Utility fees $ 765,212 500 246,100 $ 765,212 500 246,100 $ 777,648 985 246,100 $ 12,436 485 Total revenues 1,011,812 1,011,812 1,024,733 12,921 Expenditures: Debt service Principal Interest Fees 1,115,000 379,559 3,500 1,115,000 379,559 3,500 1,115,000 379,559 2,460 1,040 Total expenditures 1,498,059 1,498,059 1,497,019 1,040 Deficiency of revenues under expenditures (486,247) (486,247) (472,286) 13,961 Other financing sources Premium on bonds Transfers in 308,000 308,000 308,000 Total other financing sources 308,000 308,000 308,000 Net change in fund balance (178,247) (178,247) (164,286) 13,961 Fund Balances - beginning of year 272,132 272,132 272,132 - Fund Balances - end of year $ 93,885 $ 93,885 $ 107,846 $ 13,961 36 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES 1. Services provided by the District: a) Retail Water b) Retail Wastewater c) Fire Protection d) Irrigation e) Participates in regional system and/or wastewater service (other than emergency interconnect) 2. Retail service providers: a) Retail rates-based on 5/8" meter: Most prevalent type of meter (if not a 5/8"): 1 inch Flat Rates per 1,000 Admin Minimum Rate Gallons Over Fee Usage Y/N Minimum Usage Levels WATER $ 12.71 0 No $ 2.48 0 to 6,000 No 3.00 7,000 to 12,000 No 3.23 13,000 to 25,000 No 3.34 26,000 to 50,000 No 3.44 51,000 + Note: Out of district water rates are double the "in-town" rate and are included in the rate order. WASTEWATER $ 12.71 0 No $ 2.48 0 to 6,000 No 3.00 7,000 to 12,000 No - Caps at 12,000 GOLF COURSE Subject to peak draw rates from Ft Worth water department. NOTE: all rates noted above were amended effective February 1, 2011. District employs winter averaging for wastewater usage? No 37 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 - SERVICE AND RATES - CONTINUED Total water and wastewater charges per 10,000 gallons usage (including surcharges) effective February 1, 2011 First 10,000 gallons used $ 79.18 Next 10,000 gallons used 37.84 Next 10,000 gallons used 32.85 Next 10,000 gallons used 33.40 Next 10,000 gallons used 33.40 Next 10,000 gallons used and subsequent 34.40 Maximum residential wastewater charge is for 12,000 gallons or $45.59 b) Retail service providers: number of retail water and/or wastewater* connections within the District of the fiscal year end. Provide actual numbers and single family equivalents (ESFC). Connections ESFC Active Meter Size Total Active Factor ESFC's Unmetered 1.0 Less than 3/4" 2,513.0 2,495.0 1.0 2,495.0 1" 958.0 934.0 2.5 2,335.0 1 1/2" 18.0 17.0 5.0 85.0 2" 80.0 75.0 8.0 600.0 3" 14.0 13.0 15.0 195.0 4" 12.0 12.0 25.0 300.0 6" 3.0 3.0 50.0 150.0 8" --80.0 - 10" --115.0 - Total Water 3,598.0 3,549.0 6,160.0 Total Wastewater 3,603.0 3,554.0 1.0 3,554.0 * Number of connections relates to water service if provided. Otherwise, the number of wastewater connections should be provided. Note: "inactive" means that water and wastewater connections were made, but service is not being provided. 38 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES - CONTINUED 3. Total water consumption (in thousands) during the fiscal year: Gallons pumped into the system Gallons billed to customers Water accountability ratio 1,005,000 927,407 92.3% 4. Standby Fees: Does the District assess standby fees? For the most recent fiscal year, FY2011: Debt Service Operations and Maintenance Total Collected $ 817,317 $ 824,977 $ 1,253,588 $ 1,265,337 Total Levy Yes Percentage Collected 100.9% 100.9% Have standby fees been levied in accordance with Water Code Section 49.231, thereby constituting a lien on property? No** ** Standby fees are levied by the District and constitute a lien under recorded deed restrictions or covenants pursuant to Section 293.150 of Title 30 of Texas Administrative Code. 5. Location of District: Counties in which District is located: Is the District located entirely in one county? Is the District located within a city? Cities in which District is located: a) Denton bO Tarrant No Partially Town of Trophy Club Town of Westlake Is District located within a city's extra territorial jurisdiction (ETJ)? ETJ's in which District is located: Unknown Unknown Is the general membership of the Board appointed by an office outside the District? No 39 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-2 Water Operations Administrative Contribution to Trophy Club Fire Dept Wastewater Operations Capital Outlay Wastewater Collection Systems Information Systems Transfer to Debt Service Misellaneous Total Expenditures and Transfers Number of employees employed by the District: Full time Equivalents (FTEs) Part time Current Year $ 2,271,490 1,042,073 770,123 598,465 515,884 277,775 123,605 1,130,123 $ 6,729,538 29.5 None Prior Year $ 1,882,511 993,986 876,521 711,382 308,798 182,658 558,000 $ 5,513,856 32.5 None 40 GENERAL FUND EXPENDITURES AND OTHER FINANCING USES YEAR ENDED SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-3 TEMPORARY INVESTMENTS SEPTEMBER 30,2011 Identification Interest Maturity Balance End of Accrued Interest Funds Number Rate Date Year End of Year General Fund TexPool 613300002 0.2165% Demand $ 2,787,983 Paid daily Debt Service Fund TexPool 613300003 0.2165% Demand $ 107,847 Paid daily Fire Construction TexPool 613300008 0.2165% Demand $ - Paid daily 2010 GO Fire Station TexPool 613300009 0.2165% Demand $ Paid daily Total - All Funds $ 2,895,830 41 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-4 TAXES LEVIED AND RECEIVABLE YEAR ENDED SEPTEMBER 30,2011 General Fund Debt Operations Fire Total Service Total Taxes receivable beginning of year $ 2,616 $ 15,605 $ 18,221 $ 21,794 $ 40,015 2010 tax levy 87,181 1,197,488 1,284,669 763,303 2,047,972 Total to be accounted for 89,797 1,213,093 1,302,890 785,097 2,087,987 Less collections and adjustments: Current year (86,796) (1,192,694) (1,279,490) (759,932) (2,039,422) Prior years (1,145) (3,228) (4,373) ( 11,574) (15,947) Total to be accounted for (87,941) (1,195,922) (1,283,863) (771,506) (2,055,369) Taxes receivable, end of year $ 1,856 $ 17,171 $ 19,027 $ 13,591 $ 32,618 Taxes receivable by year 1996 and prior 19 1997 7 1998 7 1999 7 2000 15 2001 34 2002 362 2003 70 2004 17 2005 59 2006 169 2007 67 2008 136 2009 502 2010 385_ _$ 1,856 F/Y Property valuations (in 000's) 10/11 Land $ 247,335 Improvements 713,265 Personal property 73,914 Exemptions (41,345) $ 993,169 Tax rate per $100 valuation Operations 0.008790 Fire department 0.109250 Debt service 0.076960 Tax rate per $ 100 valuation 0.195000 Tax levy: $ 2,047,972 Percent of taxes collected to taxes levied 100.36% 108 127 454 581 41 48 150 198 44 51 140 191 48 55 108 163 73 88 266 354 134 168 440 608 2091 2453 3707 6160 126 196 132 328 145 162 210 372 199 258 283 541 774 943 1351 2294 2125 2192 789 2981 2615 2751 920 3671 3854 4356 1270 5626 4794 5179 3371 8550 $ 17,171 $ 19,027 $ 13,591 $ 32,618 F/Y F/Y F/Y F/Y 09/10 08/09 07/08 06/07 $ 209,177 $ 186,574 $ 213,640 $ 193,906 786,539 737,273 638,560 581,667 80,332 71,091 94,823 65,248 (40,057) (34,027) (34,405) (29,607) $ 1,035,991 $ 960,911 $ 912,618 $ 811,214 0.027140 0.014040 0.010200 0.030900 0.109140 0.116020 0.120860 0.102700 0.068720 0.114555 0.098940 0.146400 0.205000 0.244615 0.230000 0.280000 $ 2,091,414 $ 2,380,679 $ 2,234,909 $ 2,191,536 100.36% 99.58% 100.36% 100.62% 42 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 All Bonded Debt Series Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017 460,000 207,868 667,868 2018 480,000 188,468 668,468 2019 505,000 167,838 672,838 2020 525,000 145,737 670,737 2021 550,000 122,768 672,768 2022 580,000 98,533 678,533 2023 605,000 71,463 676,463 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 7,120,000 $ 2,514,189 $ 9,634,189 43 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2010 General Obligation Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 65,000 $ 80,733 $ 145,733 2013 65,000 78,458 143,458 2014 70,000 76,183 146,183 2015 70,000 73,733 143,733 2016 75,000 71,283 146,283 2017 80,000 68,658 148,658 2018 85,000 65,858 150,858 2019 85,000 62,883 147,883 2020 90,000 59,908 149,908 2021 95,000 56,758 151,758 2022 100,000 53,433 153,433 2023 105,000 48,433 153,433 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 2,000,000 $ 997,940 $ 2,997,940 44 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2005 Combination Tax Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 290,000 $ 68,685 $ 358,685 2013 295,000 58,535 353,535 2014 100,000 48,210 148,210 2015 105,000 44,210 149,210 2016 105,000 40,010 145,010 2017 110,000 35,810 145,810 2018 115,000 31,410 146,410 2019 120,000 26,810 146,810 2020 125,000 22,010 147,010 2021 130,000 17,010 147,010 2022 135,000 11,550 146,550 2023 140,000 5,880 145,880 $ 1,770,000 $ 410,130 $ 2,180,130 45 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2003 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 $ 55,000 $ 33,215 $ 88,215 2013 60,000 31,290 91,290 2014 60,000 29,430 89,430 2015 60,000 27,090 87,090 2016 65,000 24,750 89,750 2017 70,000 22,150 92,150 2018 70,000 19,350 89,350 2019 75,000 16,375 91,375 2020 75,000 13,187 88,187 2021 80,000 10,000 90,000 2022 85,000 6,800 91,800 2023 85,000 3,400 88,400 $ 840,000 $ 237,037 $ 1,077,037 Series 2002 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 155,000 118,667 273,667 2013 165,000 112,313 277,313 2014 170,000 105,300 275,300 2015 180,000 97,905 277,905 2016 190,000 89,895 279,895 2017 200,000 81,250 281,250 2018 210,000 71,850 281,850 2019 225,000 61,770 286,770 2020 235,000 50,632 285,632 2021 245,000 39,000 284,000 2022 260,000 26,750 286,750 2023 275,000 13,750 288,750 $ 2,510,000 $ 869,082 $ 3,379,082 46 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-6 CHANGES IN LONG-TERM BONDED DEBT YEAR ENDED SEPTEMBER 30,2011 Interest rate Date interest payable Maturity date Bonds outstanding at beginning of year Retirements of principal Bond Issue Bonds outstanding at end of fiscal year Retirements of interest Series 1997 Combination Tax 3.25-5.9% 3/1 & 9/1 9/1/98 to 9/1/2011 Series 2002 Series 2003 Series 2003 Series 2005 Series 2010 Combination Combination Unlimited Combination Combination Tax Tax Tax Total Tax 4.00-5.50% 3/1 & 9/1 9/1/2023 Tax 3.10-4.25% 3/1 & 9/1 9/1/2023 3.25% 3/1 & 9/1 9/1/2011 2.97-4.20% 3/1 & 9/1 9/1/2023 3/1 &9/1 9/1/2031 $ 380,000 $ 2,660,000 $ 895,000 $ 245,000 $ 2,055,000 $ 2,000,000 $ 8,235,000 (380,000) (150,000) (55,000) (245,000) (285,000) (1,115,000) $ 2,510.000 $ 840,000 $ $ 1,770,000 $ 2,000,000 $ 7,120,000 18,620 $ 124,668 $ 35,278 $ 7,963 $ 78,660 $ 114,371 $ 379,560 Paying agent's name & city: All series Bank of New York Mellon P.O. Box 2320 Dallas, Texas 75221-2320 Bond Authority Amount authorized by voters Amount issued General Obligation Bonds $ 27,094,217 (23,325,000) Remaining to be issued $ 3,769,217 The general obligation bonds were authorized on October 7, 1975 Debt Service Fund cash and cash equivalents balance as of Setember 30,2011 Average annual debt service payment (principal & interest) for remaining term of debt: $ 107,847 $ 481,709 47 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30, 2011 Amounts Percent of total revenue REVENUE AND OTHER FINANCING SOURCES 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 18.6% 26.2% 21.1% 20.3% 21.0% Water and wastewater charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 75.5% 68.8% 61.3% 74.5% 72.8% Utility Fees 165,600 80,500 515,200 --2.3% 1.4% 8.5% 0.0% 0.0% Inspection and tap fees 8,560 5,775 4,975 22,550 32,900 0.1% 0.1% 0.1% 0.5% 0.8% Interest earned 5,534 6,171 20,755 69,447 106,168 0.1% 0.1% 0.3% 1.4% 2.5% Capital lease proceeds/Contractual Obligations --330,000 49,432 -0.0% 0.0% 5.4% 1.0% 0.0% Miscellaneous and other 240,830 191,498 199,780 116,295 131,124 3.4% 3.4% 3.3% 2.4% 3.0% Total revenue and other financing sources 7,055,065 5,694,592 6,076,283 4,939,191 4,330,831 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Water operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 32.2% 33.1% 29.8% 39.2% 37.8% Administrative 1,042,073 993,986 1,297,613 905,052 835,590 14.8% 17.5% 21.4% 18.3% 19.3% Transfers out and debt service 1,130,123 558,000 383,009 --16.0% 9.8% 6.3% 0.0% 0.0% Contribution to Trophy Club Fire Dept 770,123 876,521 783,736 902,353 725,764 10.9% 15.4% 12.9% 18.3% 16.8% Wastewater operations 598,465 711,382 999,388 500,224 480,798 8.5% 12.5% 16.4% 10.1% 11.1% Capital outlay 515,884 --29,379 442,782 7.3% 0.0% 0.0% 0.6% 10.2% Wastewater collection systems 277,775 308,798 294,869 409,948 402,482 3.9% 5.4% 4.9% 8.3% 9.3% Miscellaneous ---45,457 135,121 0.0% 0.0% 0.0% 0.9% 3.1% Information systems 123,605 182,658 175,698 187,908 124,987 1.8% 3.2% 2.9% 3.8% 2.9% Total expenditures 6,729,538 5,513,856 5,745,698 4,915,113 4,785,818 95.4% 96.8% 94.6% 99.5% 110.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections $ 325,527 $ 180,736 $ 330,585 $ 24,078 $ (454,987) 4.6% 3.2% 5.4% 0.5% -10.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections 3,554 3,361 3,161 3,092 2,827 48 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30,2011 TSI - 7 COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS - CONTINUED Amounts Percent of total revenue REVENUE 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 771,631 $ 740,420 $ 1,100,115 $ 1,302,763 $ 1,325,143 57.9% 52.9% 73.4% 96.1% 94.8% Penalties and interest 6,018 -11,885 --0.5% 0.0% 0.8% 0.0% 0.0% Transfers in 554,100 653,000 383,009 --41.6% 46.7% 25.5% 0.0% 0.0% Interest earned 985 4,848 4,105 23,326 43,456 0.1% 0.3% 0.3% 1.7% 3.1% Miscellaneous and other -1,000 -29,379 29,379 0.0% 0.1% 0.0% 2.2% 2.1% Total revenue 1,332,734 1,399,268 1,499,114 1,355,468 1,397,978 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Principal retirement 1,115,000 1,055,000 1,025,000 975,000 945,000 83.7% 75.4% 68.4% 71.9% 67.6% Interest and fiscal charges 382,019 311,570 352,194 390,565 425,838 28.7% 22.3% 23.5% 28.8% 30.5% Total expenditures 1,497,019 1,366,570 1,377,194 1,365,565 1,370,838 112.3% 97.7% 91.9% 100.7% 98.1% Excess (deficiency) of revenues over (under) expenditures $ (164,285) $ 32,698 $ 121,920 $ (10,097) $ 27,140 -12.3% 2.3% 8.1% -0.7% 1.9% 49 [This page is intentionally left blank.] Financial Advisory Services Provided By: SWS SOUTHWEST GROUP SECURITIES •' Building what you value. INVESTMENT BANKERS TAB 7 Purchase Contract $2,355,000 Trophy Club Municipal Utility District No. 1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 February 14, 2012 Board of Directors Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 Ladies and Gentlemen: The undersigned, First Southwest Company (the "Underwriter"), offers to enter into the following agreement with Trophy Club Municipal Utility District No. 1 (the "Issuer") which, upon the Issuer's written acceptance of this offer (the or this "Contract"), will be binding upon the Issuer and upon the Underwriter. This offer is made subject to the Issuer's written acceptance hereof on or before 10:00 p.m. Central time, on the date hereof, and, if not so accepted, will be subject to withdrawal by the Underwriter upon notice delivered to the Issuer at any time prior to the acceptance hereof by the Issuer. Terms not otherwise defined in this Contract shall have the same meanings set forth in the Bond Order (as defined herein) or in the Official Statement (as defined herein). 1. Purchase and Sale of the Bonds. Subject to the terms and conditions and in reliance upon the representations, warranties and agreements set forth herein, the Underwriter hereby agrees to purchase from the Issuer, and the Issuer hereby agrees to sell and deliver to the Underwriter, all, but not less than all, of the Issuer's $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are to be issued, secured and sold under the provisions of an order (the "Order") adopted by the Board of Directors of the Issuer on December 20, 2011, and shall have the terms and features (including those with respect to price and rates) as set forth in the Pricing Certificate (as defined in the Order)(the Order and the Pricing Certificate are jointly referred to herein as the "Bond Order"). The Pricing Certificate shall be executed on behalf of the Issuer by the representative of the Issuer (the "Pricing Officer") named in the Order and shall be dated the date hereof. The principal amount of the Bonds to be issued, the dated date therefor, the maturities, redemption provisions, yields and interest rates per annum are set forth in Schedule I attached hereto. The Bonds shall otherwise have such terms and provisions as set forth and described in the Official Statement referred to below. The purchase price for the Bonds shall be $2,470,257.70 (representing the principal amount of the Bonds, plus an original issue premium of $136,075.20 and less an underwriting discount of $20,817.50) plus interest accrued on the Bonds from March 1, 2012, to the date of Closing (as hereinafter defined). 77641135.2/08013523 Delivered to the Issuer herewith as a good faith deposit is a corporate check of the Underwriter payable to the order of the Issuer in the amount of $23,550. In the event the Issuer accepts this Contract, such check shall be held uncashed by the Issuer until the time of Closing, at which time such check shall be returned uncashed to the Underwriter. In the event that the Issuer does not accept this Contract, such check will be immediately returned to the Underwriter. Should the Issuer fail to deliver the Bonds at the Closing, or should the Issuer be unable to satisfy the conditions of the obligations of the Underwriter to purchase, accept delivery of and pay for the Bonds, as set forth in this Contract (unless waived by the Underwriter), or should such obligations of the Underwriter be terminated for any reason permitted by this Contract, such check shall immediately be returned to the Underwriter. In the event that the Underwriter fails (other than for a reason permitted hereunder) to purchase, accept delivery of and pay for the Bonds at the Closing as herein provided, such check shall be cashed and the amount thereof retained by the Issuer as and for fully liquidated damages for such failure of the Underwriter, and, except as set forth in Sections 8 and 10 hereof, no party shall have any further rights against the other hereunder. The Underwriter and the Issuer understand that in such event the Issuer's actual damages may be greater or may be less than such amount. Accordingly, the Underwriter hereby waives any right to claim that the Issuer's actual damages are less than such amount, and the Issuer's acceptance of this Contract shall constitute a waiver of any right the Issuer may have to additional damages from the Underwriter. The Underwriter hereby agrees not to stop or cause payment on the check to be stopped unless the Issuer has breached any of the terms of this Contract. 2. Public Offering. The Underwriter agrees to make a bona fide public offering of all of the Bonds at a price not to exceed the public offering prices set forth on page ii of the Official Statement and may subsequently change such offering prices without any requirement of prior notice. The Underwriter may offer and sell Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the public offering prices stated on page ii of the Official Statement; provided that on or before the Closing, the Underwriter shall execute and deliver to McCall, Parkhurst & Horton L.L.P., Dallas, Texas ("Bond Counsel") an issue price certificate for the Bonds prepared by Bond Counsel verifying the initial offering prices to the public at which the Underwriter reasonably expected to sell or in fact sold a substantial amount of each stated maturity of the Bonds to the public. 3. The Official Statement. (a) Preliminary Official Statement. The Issuer previously has delivered, or caused to be delivered, copies of a Preliminary Official Statement, dated February 7, 2012, relating to the Bonds (the "Preliminary Official Statement"), to the Underwriter for its use in determining interest in the Bonds. The Issuer confirms that it has not prepared any document for dissemination to potential customers in connection with any offering of the Bonds (and will not do so without the consent of the Underwriter prior to the availability of the final Official Statement described below), except the Preliminary Official Statement. The Issuer prepared the Preliminary Official Statement for use by the Underwriter in connection with the public offering, sale and distribution of the Bonds. The Issuer hereby ratifies and approves the use by the Underwriter of the Preliminary Official Statement prior to the date hereof, and until the availability of the final Official Statement, in connection with the public offering of the Bonds. The Issuer hereby represents and warrants that it deemed the Preliminary Official Statement final, within the meaning of Rule 15c2-12 issued by the United States Securities and Exchange 77641135.2/08013523 2 Commission under the Securities Exchange Act of 1934 (the "Rule"), as of its date, except for the omission of information specified in Section (b)(1) of the Rule, as permitted by Section (b)(1) of the Rule. The Issuer hereby confirms that it does not object to the distribution of the Preliminary Official Statement in electronic form. (b) Final Official Statement. The Issuer shall prepare and provide, or cause to be provided, to the Underwriter as soon as practicable after the date of the Issuer's acceptance of this Contract (but, in any event, not later than within seven business days after the Issuer's acceptance of this Contract and in sufficient time to accompany any confirmation that requests payment from any customer) a final Official Statement which is complete as of the date of its delivery to the Underwriter, in such quantity and formats as the Underwriter shall request, and in any event in a "designated electronic format" (as defined in MSRB Rule G-32), in order for the Underwriter to comply with Section (b)(4) of the Rule and the rules of the Municipal Securities Rulemaking Board (the "MSRB"). Such final Official Statement shall be substantially in form of the Preliminary Official Statement, with only such changes therein as shall have been accepted by the Underwriter or as shall be permitted by the Rule or the rules of the MSRB. Such final Official Statement, including the cover page, all exhibits, appendices, maps, pictures, diagrams, reports and statements included or incorporated therein or attached thereto, and any amendments and supplements thereto that may be authorized for use with respect to the Bonds, is herein referred to as the "Official Statement." The Issuer hereby authorizes the Underwriter to use the Official Statement and the information contained therein in connection with the public offering and the sale of the Bonds. The Issuer hereby confirms that it does not object to the distribution of the Official Statement in electronic form. If, for any reason, the Issuer is unable or otherwise fails to deliver the final Official Statement to the Underwriter in compliance with this paragraph, the Issuer shall deliver the Preliminary Official Statement, including all amendments and supplements thereto, to the Underwriter in a "designated electronic format" at least one business day before the date of the Closing. The Issuer additionally shall provide, or cause to be provided, to the Underwriter on or before the date of the Closing (and, in any event, not later than within five business days of the date of the Closing) a copy of the fully executed Escrow Agreement (defined herein) in a "designated electronic format". (c) If, after the date of this Contract to and including the date the Underwriter is no longer required to provide an Official Statement to potential customers who request the same pursuant to the Rule (the earlier of (i) 90 days from the "end of the underwriting period", as defined in the Rule, and (ii) the time when the Official Statement is available to any person from the MSRB, but in no case less than 25 days after the "end of the underwriting period" for the Bonds), the Issuer becomes aware of any fact or event which might or would cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading, or if it is necessary to amend or supplement the Official Statement to comply with law, the Issuer will notify the Underwriter (and for the purposes of this clause provide the Underwriter with such information as the Underwriter may from time to time request), and if, in the reasonable opinion of the Underwriter, such fact or event requires preparation and publication of a supplement or amendment to the Official Statement, the Issuer will prepare and furnish, at the Issuer's sole expense, in such quantity and in formats as the Underwriter shall request, and in a "designated electronic format", in order for the Underwriter to comply with Section (b)(4) of the Rule and the rules of the MSRB, copies of either amendments or supplements to the Official Statement so that the statements in the Official 77641135.2/08013523 3 Statement as so amended and supplemented will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or so that the Official Statement will comply with law; provided, however, that for all purposes of this Contract and any certificate delivered by the Issuer in accordance herewith, the Issuer makes no representations with respect to the descriptions in the Preliminary Official Statement or the Official Statement of The Depository Trust Company, New York, New York ("DTC"), or its book-entry-only system. If such notification shall be subsequent to the Closing, the Issuer shall furnish such legal opinions, certificates, instruments and other documents as the Underwriter may reasonably request to evidence the truth and accuracy of such supplement or amendment to the Official Statement. Additionally, if amendments are made to the Escrow Agreement during the period described above, the Issuer will prepare and provide, or cause to be provided, at the Issuer's sole expense, to the Underwriter a copy of the amendment or amendments to the Escrow Agreement in a "designated electronic format". (d) The Underwriter hereby agrees to timely file the Official Statement and the Escrow Agreement (and any supplements or amendments thereto) with the MSRB in the format prescribed by the MSRB. Unless otherwise notified in writing by the Underwriter, the Issuer can assume that the "end of the underwriting period" for purposes of the Rule is the date of the Closing. 4. Representations, Warranties, and Covenants of the Issuer. The Issuer hereby represents and warrants to and covenants with the Underwriter that: (a) The Issuer is a conservation and reclamation district, a body corporate and politic and governmental agency of the State of Texas (the "State"), created as a municipal utility district pursuant to Article 16, Section 59 of the Texas Constitution by Order of the Texas Commission on Environmental Quality, the successor in interest to the Texas Water Commission, and the Issuer operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended, and has full legal right, power and authority pursuant to the Constitution and general laws of the State, including Chapter 1207 of the Texas Government Code, as amended (the "Act"), and at the date of the Closing will have full legal right, power and authority under the Act (i) to adopt the Order and to make the delegations set forth therein and take the actions authorized thereby, (ii) to enter into, execute and deliver the Pricing Certificate, this Contract, any escrow or deposit agreement pertaining to the discharge of the obligations of the Issuer that are being refunded by the Bonds (the "Escrow Agreement"), and all documents required hereunder and thereunder to be executed and delivered by the Issuer (this Contract, the Escrow Agreement and the Bond Order, which contains the Undertaking (as defined in Section 6(i)(2) hereof), are hereinafter referred to as the "Issuer Documents"), (iii) to sell, issue and deliver the Bonds to the Underwriter as provided herein, and (iv) to carry out and consummate the transactions described in the Issuer Documents and the Official Statement, and the Issuer has complied, and will at the Closing be in compliance, in all material respects with the terms of the Act and the Issuer Documents as they pertain to such transactions; (b) By all necessary official action of the Issuer prior to or concurrently with the acceptance of this Contract, the Issuer has duly authorized all necessary action to be taken by it for the (i) adoption of the Order and the issuance and sale of the Bonds, 77641135.2/08013523 4 (ii) approval of the Preliminary Official Statement and the Official Statement, (iii) approval, execution and delivery of, and the performance by the Issuer of the obligations on its part contained in, the Bonds and the Issuer Documents and (iv) consummation by the Issuer of all other transactions described in the Official Statement, the Issuer Documents and any and all such other agreements and documents as may be required to be executed, delivered and/or received by the Issuer in order to carry out, give effect to, and consummate the transactions described herein and in the Official Statement, and the Pricing Officer shall have executed and delivered the Pricing Certificate in accordance with the Order and the Act; (c) The Issuer Documents constitute legal, valid and binding obligations of the Issuer, enforceable in accordance with their respective terms, subject to principles of sovereign immunity of political subdivisions, bankruptcy, insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors' rights; the Bonds, when issued, delivered and paid for, in accordance with the Bond Order and this Contract, will constitute legal, valid and binding obligations of the Issuer entitled to the benefits of the Bond Order and enforceable in accordance with their terms, subject to principles of sovereign immunity of political subdivisions, bankruptcy, insolvency, reorganization, moratorium and other similar laws, and principles of equity relating to or affecting the enforcement of creditors' rights. Upon the issuance, authentication and delivery of the Bonds as aforesaid, the Bond Order will provide, for the benefit of the holders, from time to time, of the Bonds, for the levy and collection of an annual ad valorem tax, levied without limit as to rate or amount, for the payment of the Bonds; (d) The Issuer is not in breach of or default in any material respect under any applicable constitutional provision, law or administrative regulation of the State or the United States or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Issuer is a party or to which the Issuer is, or any of its property or assets are, otherwise subject, and no event has occurred and is continuing which constitutes or with the passage of time or the giving of notice, or both, would constitute a default or event of default by the Issuer under any of the foregoing; and the execution and delivery of the Bonds and the Issuer Documents and the adoption of the Order and compliance with the provisions on the Issuer's part contained therein, will not conflict with or constitute a breach of or default under any constitutional provision, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Issuer is a party or to which the Issuer is, or to which any of its property or assets are, otherwise subject, nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Issuer to be pledged to secure the Bonds or under the terms of any such law, regulation or instrument, except as provided by the Bonds and the Bond Order; (e) All authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matters which are required for the due authorization of, which would constitute a condition precedent to, or the absence of which would materially adversely 77641135.2/08013523 5 affect the due performance by the Issuer of its obligations under the Issuer Documents and the Bonds, have been duly obtained, except for (i) such approvals, consents and orders as may be required under the Blue Sky or securities laws of any jurisdiction in connection with the offering and sale of the Bonds and (ii) the opinion of the Attorney General of the State approving the Bonds as required by law and the registration of the Bonds by the Comptroller of Public Accounts of the State (which Attorney General approval and Comptroller of Public Accounts registration shall have been duly obtained or effected on or before the date of Closing); (f) The Bonds and the Bond Order conform to the descriptions thereof contained in the Official Statement under the captions "PLAN OF FINANCING" and "THE BONDS"; the proceeds of the sale of the Bonds will be applied generally as described in the Official Statement under the caption "SOURCES AND USES OF FUNDS" and will be used for the purposes described in the Official Statement under the subcaption "PLAN OF FINANCING - Purpose"; and the Undertaking (as defined in Section 6(i)(2) hereof) conforms to the description thereof contained in the Official Statement under the caption "CONTINUING DISCLOSURE OF INFORMATION"; (g) There is no litigation, action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, public board or body, pending or, to the best knowledge of the Issuer, threatened against the Issuer, (i) contesting the due organization and valid corporate existence of the Issuer or the titles of its officers to their respective offices, (ii) affecting or seeking to prohibit, restrain or enjoin the sale, issuance or delivery of the Bonds or the levy, assessment and/or collection of ad valorem taxes pledged to the payment of principal of and interest on the Bonds pursuant to the Bond Order, (iii) in any way contesting or affecting the validity or enforceability of the Bonds or the Issuer Documents, (iv) contesting the exclusion from gross income of interest on the Bonds for federal income tax purposes, (v) contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement or any supplement or amendment thereto, or (vi) contesting the powers of the Issuer or any authority for the issuance of the Bonds, the adoption of the Order or the execution and delivery of the Issuer Documents, nor, to the best knowledge of the Issuer, is there any basis therefor, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Bonds or the Issuer Documents; (h) As of the date thereof, the Preliminary Official Statement did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (i) At the time of the Issuer's acceptance hereof and (unless the Official Statement is amended or supplemented pursuant to paragraph (c) of Section 3 of this Contract) at all times subsequent thereto during the period up to and including the date of Closing, the Official Statement does not and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 77641135.2/08013523 6 (j) If the Official Statement is supplemented or amended pursuant to paragraph (c) of Section 3 of this Contract, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto during the period up to and including the date of Closing, the Official Statement as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (k) The Issuer will apply, or cause to be applied, the proceeds from the sale of the Bonds as provided in and subject to all of the terms and provisions of the Bond Order and will not take or omit to take any action which action or omission will adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Bonds; (1) The Issuer will furnish such information and execute such instruments and take such action in cooperation with the Underwriter as the Underwriter may reasonably request, at no expense to the Issuer, (A) to (y) qualify the Bonds for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions in the United States as the Underwriter may designate and (z) determine the eligibility of the Bonds for investment under the laws of such states and other jurisdictions and (B) to continue such qualifications in effect so long as required for the distribution of the Bonds (provided, however, that the Issuer will not be required to qualify as a foreign corporation or to file any general or special consents to service of process under the laws of any jurisdiction) and will advise the Underwriter immediately of receipt by the Issuer of any notification with respect to the suspension of the qualification of the Bonds for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; (m) The financial statements of, and other financial information regarding, the Issuer contained in the Official Statement fairly present the financial position of the Issuer as of the dates and for the periods therein set forth, the audited financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and the other financial information has been determined on a basis substantially consistent with that of the Issuer's audited financial statements included in the Official Statement. Prior to the Closing, the Issuer will not take any action within or under its control that will cause any adverse change of a material nature in such financial position, results of operations or condition, financial or otherwise, of the Issuer from that described in the Official Statement. Except as may be described in the Official Statement, the Issuer is not a party to any litigation or other proceeding pending or, to its knowledge, threatened which, if decided adversely to the Issuer, would have a materially adverse effect on the financial condition of the Issuer; (n) Prior to the Closing, the Issuer will not offer or issue any bonds, notes or other obligations for borrowed money or incur any material liabilities (except in the ordinary course of business), direct or contingent, payable from or secured by any of the ad valorem tax revenues which will secure the Bonds without the prior approval of the Underwriter, such approval not to be unreasonably withheld; 77641135.2/08013523 7 (o) Any certificate, signed by any official of the Issuer authorized to do so in connection with the transactions described in this Contract, shall be deemed a representation and warranty by the Issuer to the Underwriter as to the statements made therein; (p) The Issuer has not been notified of any listing or proposed listing by the Internal Revenue Service to the effect that the Issuer is a bond issuer whose arbitrage certificates may not be relied on; (q) The Issuer, to the extent heretofore requested in writing by the Underwriter, has delivered to the Underwriter true, correct, complete and legible copies of all information, applications, reports or other documents of any nature whatsoever submitted to any rating agency for the purpose of obtaining a rating for the Bonds and to any municipal bond insurance company for the purpose of obtaining a municipal bond insurance policy for the Bonds and, in each instance, true, correct, complete and legible copies of all written correspondence or other written communications relating thereto; and (r) To the best knowledge and belief of the Issuer, the Official Statement contains information, including financial information and operating data, as required by the Rule. During the last five years, the Issuer has complied in all material respects with all continuing disclosure agreements made by it in accordance with the Rule. 5. Closing. (a) At 10:00 a.m. Central time, on March 5, 2012, or at such other time and date as shall have been mutually agreed upon by the Issuer and the Underwriter (the "Closing"), the Issuer will, subject to the terms and conditions hereof, deliver the initial Bonds to The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Paying Agent/Registrar"), as delivery agent for the Underwriter, duly executed and authenticated, together with the other documents hereinafter mentioned, and the Paying Agent/Registrar, as delivery agent for the Underwriter, will, subject to the terms and conditions hereof, accept such delivery and the Underwriter will pay the purchase price of the Bonds as set forth in Section 1 of this Contract in immediately available funds to the order of the Issuer. Payment for the Bonds as aforesaid shall be made at the offices of the Paying Agent/Registrar, or such other place as shall have been mutually agreed upon by the Issuer and the Underwriter. (b) Delivery of the Bonds in definitive form shall be made through DTC, utilizing the book-entry-only form of issuance. The definitive Bonds shall be delivered in definitive fully registered form, bearing CUSEP numbers without coupons, with one Bond for each maturity of the Bonds, registered in the name of Cede & Co., all as provided in the Bond Order, and shall be made available to the Underwriter at least one business day before the Closing for purposes of inspection at the offices of DTC or, if the Bonds are to be held in safekeeping for DTC by the Paying Agent/Registrar pursuant to DTC's FAST system, at the designated payment office of the Paying Agent/Registrar. In addition, the Issuer and the Underwriter agree that there shall be a preliminary Closing held at such place as the Issuer and the Underwriter shall mutually agree, commencing at least 24 hours prior to the Closing; provided, however, that such preliminary Closing shall not be required if Bond Counsel provides a complete Transcript of Proceedings acceptable to counsel for the Underwriter at least 24 hours prior to the Closing. 77641135.2/08013523 8 6. Closing Conditions. The Underwriter has entered into this Contract in reliance upon the representations, warranties and agreements of the Issuer contained herein, and in reliance upon the representations, warranties and agreements to be contained in the documents and instruments to be delivered at the Closing and upon the performance by the Issuer of its obligations hereunder, both as of the date hereof and as of the date of the Closing. Accordingly, the Underwriter's obligations under this Contract to purchase, to accept delivery of and to pay for the Bonds shall be conditioned upon the performance by the Issuer of its obligations to be performed hereunder and under such documents and instruments at or prior to the Closing, and shall also be subject to the following additional conditions, including the delivery by the Issuer of such documents as are enumerated herein, in form and substance reasonably satisfactory to the Underwriter: (a) The representations and warranties of the Issuer contained herein shall be true, complete and correct on the date hereof and on and as of the date of the Closing, as if made on the date of the Closing; (b) The Issuer shall have performed and complied with all agreements and conditions required by this Contract to be performed or complied with by it prior to or at the Closing; (c) At the time of the Closing, (i) the Issuer Documents and the Bonds shall be in full force and effect and shall not have been amended, modified or supplemented, and the Official Statement shall not have been supplemented or amended, except in any such case as may have been agreed to by the Underwriter; and (ii) all actions of the Issuer required to be taken by the Issuer shall be performed in order for Bond Counsel and Underwriter's Counsel to deliver their respective opinions referred to hereafter; (d) At the time of the Closing, all official action of the Issuer relating to the Bonds and the Issuer Documents shall be in full force and effect and shall not have been amended, modified or supplemented; (e) At or prior to the Closing, the Order shall have been duly adopted by the governing body of the Issuer in accordance with law, the Pricing Officer shall have duly executed and delivered the Pricing Certificate pursuant to the Order and the Issuer shall have duly executed and delivered and the Paying Agent/Registrar shall have duly authenticated the Bonds; (f) At the time of the Closing, there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or in the revenues or operations of the Issuer, from that set forth in the Official Statement that in the reasonable judgment of the Underwriter, is material and adverse and that makes it, in the reasonable judgment of the Underwriter, impracticable to market the Bonds on the terms and in the manner described in the Official Statement; (g) The Issuer shall not currently be in default with respect to the payment of principal or interest when due on any of its outstanding obligations for borrowed money; 77641135.2/08013523 9 (h) All steps to be taken and all instruments and other documents to be executed, and all other legal matters in connection with the transactions described in this Contract shall be reasonably satisfactory in legal form and effect to the Underwriter; (i) At or prior to the Closing, the Underwriter shall have received copies of each of the following documents: (1) The Official Statement approved by the Board of Directors or a designated official of the Issuer, and each supplement or amendment thereto, if any, and the reports and audits referred to or appearing in the Official Statement; (2) The Bond Order with such supplements or amendments as may have been agreed to by the Underwriter, which shall include an undertaking of the Issuer which satisfies the requirements of section (b)(5)(i) of the Rule (the "Undertaking"); (3) The approving opinion of Bond Counsel with respect to the Bonds, in substantially the form and substance attached to the Official Statement as Appendix C; (4) A supplemental opinion of Bond Counsel addressed to the Underwriter, substantially to the effect that: (i) the Order has been duly adopted by the Issuer and the Pricing Certificate has been duly executed by the Pricing Officer pursuant to the Order, and both of the foregoing documents are in full force and effect; (ii) the Bonds are exempted securities under the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act or to qualify the Bond Order under the Trust Indenture Act; and (iii) such firm was not requested to participate, and did not take part, in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information under the captions and subcaptions "PLAN OF FINANCING", "THE BONDS" (excluding the information under the subcaptions "Default and Remedies" and "Payment Record" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS", "CONTINUING DISCLOSURE OF INFORMATION" (excluding the information under the subcaption "Compliance with Prior Agreements"), and the subcaptions "Legal Matters" (except for the last two sentences of the second paragraph thereof), "Registration and Qualification of Bonds for Sale" and "Legal .2/08013523 10 Investments and Eligibility to Secure Public Funds in Texas" under the caption "OTHER PERTINENT INFORMATION" in the Official Statement, and such firm is of the opinion that the information relating to the Bonds and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds, such information conforms to the provisions of the Bond Order; The supplemental opinion of Bond Counsel will also state that the Underwriter is entitled to rely upon the opinion of Bond Counsel delivered in accordance with the provisions of Section 6(i)(3) of this Contract. (5) An opinion, dated the date of the Closing and addressed to the Underwriter, of counsel for the Underwriter, to the effect that: (i) the Bonds are exempted securities under the 1933 Act and the Trust Indenture Act and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act and the Bond Order need not be qualified under the Trust Indenture Act; and (ii) based upon their participation at conferences at which the Official Statement was discussed, but without having undertaken to determine independently the accuracy, completeness or fairness of the statements contained in the Official Statement, such counsel has no reason to believe that the Official Statement, as of its date, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for any financial, forecast, technical and statistical statements and data included in the Official Statement and the information regarding DTC and its book-entry system, in each case as to which no view need be expressed); (6) A certificate, dated the date of Closing, of appropriate officials of the Issuer, to the effect that (i) the representations and warranties of the Issuer contained herein are true and correct in all material respects on and as of the date of Closing as if made on the date of Closing; (ii) no litigation or proceeding or tax challenge against the Issuer is pending or, to the best of such persons' knowledge, threatened in any court or administrative body nor, to such persons' knowledge, is there a basis for litigation which would (a) contest the right of the members or officials of the Issuer to hold and exercise their respective positions, (b) contest the due organization and valid existence of the Issuer, (c) contest the validity, due authorization and execution of the Bonds or the Issuer Documents, (d) attempt to limit, enjoin or otherwise restrict or prevent the Issuer from functioning and levying and/or collecting ad valorem taxes or pledging such taxes to the payment of the Bonds and making payments on the Bonds pursuant to the Bond Order, (e) contest the accuracy, completeness or the fairness of the Preliminary Official Statement or the Official Statement, or (f) contest the redemption of the Refunded Bonds; (iii) the Order was duly adopted by the Issuer, is in full force and effect 77641135.2/08013523 11 and has not been modified, amended or repealed, and the Pricing Certificate and this Contract have been duly executed and delivered by the Pricing Officer and are in full force and effect and have not been modified, amended or repealed; (iv) to the best of such persons' knowledge, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which made, not misleading in any respect as of the time of Closing, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the date of the Closing does not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading, and (v) there has not been any materially adverse change in the financial condition of the Issuer since September 30, 2010, the latest date as of which audited financial information is available; (7) A certificate of the Issuer in form and substance satisfactory to Bond Counsel and counsel to the Underwriter setting forth the facts, estimates and circumstances in existence on the date of the Closing, which establish that it is not expected that the proceeds of the Bonds will be used in a manner that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"), and any applicable regulations (whether final, temporary or proposed) issued pursuant to the Code; (8) Any other certificates and opinions required by the Bond Order for the issuance thereunder of the Bonds; (9) Evidence satisfactory to the Underwriter that the Bonds have been rated "AA-" or better by Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business, without regard to credit enhancement, and that such rating is in effect as of the date of Closing; (10) An executed copy of the Escrow Agreement; (11) A certificate or report of either the paying agent for the Refunded Bonds or the Issuer's financial advisor verifying the sufficiency of the Bond proceeds and other cash on hand, if applicable, to pay the principal of and interest on the Refunded Bonds on the scheduled redemption date thereof; (12) An opinion or certificate, dated on or prior to the date of Closing, of the Attorney General of the State, approving the Bonds as required by law, and the registration certificate of the Comptroller of Public Accounts of the State; and (13) Such additional legal opinions, certificates, instruments and other documents as the Underwriter or counsel to the Underwriter may reasonably request to evidence the truth and accuracy, as of the date hereof and as of the date of the Closing, of the Issuer's representations and warranties contained herein and of the statements and information contained in the Official Statement and the due 77641135.2/08013523 12 performance or satisfaction by the Issuer on or prior to the date of the Closing of all the respective agreements then to be performed and conditions then to be satisfied by the Issuer. (j) Immediately following the Closing, the Issuer shall return the corporate check of the Underwriter delivered to the Issuer pursuant to Section 1 hereof. All of the opinions, letters, certificates, instruments and other documents mentioned above or elsewhere in this Contract shall be deemed to be in compliance with the provisions hereof if, but only if, they are in form and substance reasonably satisfactory to the Underwriter. If the Issuer shall be unable to satisfy the conditions to the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds contained in this Contract, or if the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds shall be terminated for any reason permitted by this Contract, this Contract shall terminate and neither the Underwriter nor the Issuer shall be under any further obligation hereunder, except that the respective obligations of the Issuer and the Underwriter set forth in Sections 1 (with respect to the good faith check), 4, 8 and 10 hereof shall continue in full force and effect. 7. Termination. The Underwriter shall have the right to cancel its obligation to purchase the Bonds if, between the date of this Contract and the date of the Closing, the market price or marketability of the Bonds shall be materially adversely affected, in the sole judgment of the Underwriter, reasonably exercised, by the occurrence of any of the following: (a) legislation shall be enacted by or introduced in the Congress of the United States or recommended to the Congress for passage by the President of the United States, or the Treasury Department of the United States or the Internal Revenue Service or any member of the Congress or favorably reported for passage to either House of the Congress by any committee of such House to which such legislation has been referred for consideration, a decision by a court of the United States or of the State or the United States Tax Court shall be rendered, or an order, ruling, regulation (final, temporary or proposed), press release, statement or other form of notice by or on behalf of the Treasury Department of the United States, the Internal Revenue Service or other governmental agency shall be made or proposed, the effect of any or all of which would be to impose, directly or indirectly, federal income taxation upon revenues or other income of the general character to be derived by the Issuer pursuant to the Bond Order, or upon interest received on obligations of the general character of the Bonds or the interest on the Bonds as described in the Official Statement, or other action or events shall have transpired which may have the purpose or effect, directly or indirectly, of changing the federal income tax consequences of any of the transactions described herein; (b) legislation introduced in or enacted (or resolution passed) by the Congress or an order, decree, or injunction issued by any court of competent jurisdiction, or an order, ruling, regulation (final, temporary, or proposed), press release or other form of notice issued or made by or on behalf of the Securities and Exchange Commission, or any other governmental agency having jurisdiction of the subject matter, to the effect that obligations of the general character of the Bonds, including any or all underlying arrangements, are not exempt from registration under or other requirements of the 1933 Act, or that the Bond Order is not exempt from qualification under or other requirements 77641135.2/08013523 13 of the Trust Indenture Act, or that the issuance, offering, or sale of obligations of the general character of the Bonds, including any or all underlying arrangements, as described herein or in the Official Statement or otherwise, is or would be in violation of the federal securities law as amended and then in effect; (c) any state blue sky or securities commission or other governmental agency or body in any jurisdiction in which more than ten percent (10%) of the Bonds have been offered and sold shall have withheld registration, exemption or clearance of the offering of the Bonds as described herein, or issued a stop order or similar ruling relating thereto; (d) a general suspension of trading in securities on the New York Stock Exchange or any other national securities exchange, the establishment of minimum prices on any such exchange, the establishment of material restrictions (not in force as of the date hereof) upon trading securities generally by any governmental authority or any national securities exchange, or a general banking moratorium declared by federal, State of New York, or State officials authorized to do so; (e) the New York Stock Exchange or other national securities exchange or any governmental authority shall impose, as to the Bonds or as to obligations of the general character of the Bonds, any material restrictions not now in force, or increase materially those now in force, with respect to the extension of credit by, or the charge to the net capital requirements of, underwriters and/or broker-dealers; (f) any amendment to the federal or State Constitution or action by any federal or state court, legislative body, regulatory body, or other authority materially adversely affecting the tax status of the Issuer, its property, income securities (or interest thereon), or the validity or enforceability of the assessment, levy or collection of the ad valorem taxes pledged to pay the principal of and interest on the Bonds; (g) any event occurring, or information becoming known which, in the reasonable judgment of the Underwriter, makes untrue in any material respect any statement or information contained in the Official Statement, or has the effect that the Official Statement contains any untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (h) there shall have occurred since the date of this Contract any materially adverse change in the affairs or financial condition of the Issuer, except for changes which the Official Statement discloses are expected to occur, if any; (i) there shall have occurred (whether or not foreseeable) any (a) new material outbreak of hostilities involving the United States (including, without limitation, an act of terrorism) or (b) new material other national or international calamity or crisis including, but not limited to, an escalation of hostilities that existed prior to the date hereof, or (c) material financial crisis or adverse change in the financial or economic conditions affecting the United States government or the securities markets in the United States; 77641135.2/08013523 14 (j) any fact or event shall exist or have existed that, in the Underwriter's reasonable judgment, requires or has required an amendment of or supplement to the Official Statement; (k) there shall have occurred or any notice shall have been given of any intended review for possible downgrade, downgrading, suspension, withdrawal or negative change in credit watch status by any national rating service that as of the date of this Contract has published a rating on the Issuer's debt obligations (or has been asked to furnish a rating on the Bonds) that are secured in a like manner as the Bonds (including any rating to be accorded the Bonds); (1) the purchase of and payment for the Bonds by the Underwriter, or the resale of the Bonds by the Underwriter, on the terms and conditions herein provided shall be prohibited by any applicable law, governmental authority, board, agency or commission; provided, however, that such prohibition occurs after the date of this Contract and is not caused by the action, or failure to act, of the Underwriter; or (m) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred and shall be continuing at the date of Closing. With respect to the conditions described in subsections (e) and (1) above, such conditions shall not apply to any current, pending or proposed law or government inquiry or investigation as of the date of execution of this Contract which would permit the Underwriter to invoke its termination rights hereunder. 8. Expenses. (a) The Underwriter shall be under no obligation to pay, and the Issuer shall pay, any expenses incident to the performance of the Issuer's obligations hereunder, including, but not limited to, (i) the cost of preparation and printing of the Bonds, the Preliminary Official Statement and the Official Statement; (ii) the fees and disbursements of Bond Counsel and counsel to the Issuer, if any; (iii) the fees and disbursements of the Financial Advisor to the Issuer; (iv) the fees and disbursements of the Paying Agent/Registrar for the Bonds, the Escrow Agent, the paying agent for the Refunded Bonds and any engineers, accountants and other experts, consultants or advisers retained by the Issuer; (v) the fees of the Attorney General of the State; and (vi) the fees for bond ratings. (b) The Underwriter shall pay (i) the cost of preparation and printing of this Contract, the Blue Sky Survey and Legal Investment Memorandum, if any; (ii) all advertising expenses in connection with the public offering of the Bonds; and (iii) all other expenses incurred by the Underwriter in connection with the public offering of the Bonds, including the fees and disbursements of counsel retained by the Underwriter. 9. Notices. Any notice or other communication to be given to the Issuer under this Contract may be given by delivering the same in writing to its address set forth above, Attention: Mr. Robert Scott, District Manager, and any notice or other communication to be given to the Underwriter under this Contract may be given by delivering the same in writing to First Southwest Company, 325 N. St. Paul, Suite 800, Dallas, Texas 75201 Attention: Jim Sabonis. 77641135.2/08013523 15 10. Parties in Interest. This Contract shall constitute the entire agreement between the Issuer and the Underwriter and is made solely for the benefit of the Issuer and the Underwriter (including successors or assigns of the Underwriter) and no other person shall acquire or have any right hereunder or by virtue hereof. This Contract may not be assigned by the Issuer. All of the Issuer's representations, warranties and agreements contained in this Contract shall remain operative and in full force and effect, regardless of (i) any investigations made by or on behalf of the Underwriter and (ii) delivery of and payment for the Bonds pursuant to this Contract. All of the Issuer's representations and warranties contained in this Contract shall remain operative and in full force and effect, regardless of any termination of this Contract. 11. Effectiveness. This Contract shall become effective upon the acceptance hereof by the Issuer and shall be valid and binding at the time of such acceptance. 12. Choice of Law. This Contract shall be governed by and construed in accordance with the laws of the State. 13. Severability. If any provision of this Contract shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions because it conflicts with any provisions of any Constitution, statute, rule of public policy, or any other reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions of this Contract invalid, inoperative or unenforceable to any extent whatever. 14. Business Day. For purposes of this Contract, "business day" means any day on which the New York Stock Exchange is open for trading. 15. Section Headings. Section headings have been inserted in this Contract as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Contract and will not be used in the interpretation of any provisions of this Contract. 16. Counterparts. This Contract may be executed in several counterparts each of which shall be regarded as an original (with the same effect as if the signatures thereto and hereto were upon the same document) and all of which shall constitute one and the same document. 17. No Personal Liability. None of the members of the Board of Directors, nor any officer, agent or employee of the Issuer, shall be charged personally by the Underwriter with any liability, or be held liable to the Underwriter under any term or provision of this Contract, or because of execution or attempted execution, or because of any breach or attempted or alleged breach of this Contract. 18. Status of the Underwriter. The Issuer acknowledges and agrees that (i) the purchase and sale of the Bonds pursuant to this Contract is an arm's-length commercial transaction between the Issuer and the Underwriter, (ii) in connection therewith and with the discussions, undertakings and procedures leading up to the consummation of this transaction, the Underwriter is and has been acting solely as a principal and is not acting as the agent or fiduciary of the Issuer, (iii) the Underwriter has not assumed an advisory or fiduciary responsibility in favor of the Issuer with respect to the offering contemplated hereby or the discussions, 77641135.2/08013523 16 undertakings and procedures leading thereto (regardless of whether the Underwriter has provided other services or is currently providing other services to the Issuer on other matters) and the Underwriter has no obligation to the Issuer with respect to the offering contemplated hereby except the obligations expressly set forth in this Contract, and (iv) the Issuer has consulted its own legal, financial and other advisors to the extent it has deemed appropriate. The Issuer recognizes that the Underwriter expects to profit from the acquisition and potential distribution of the Bonds. 19. Entire Agreement. This Contract represents the entire agreement between the Issuer and the Underwriter with respect to the preparation of the Preliminary Official Statement and the Official Statement, the conduct of the offering, and the purchase and sale of the Bonds. [Remainder of page left blank intentionally] 77641135.2/08013523 17 If the Issuer agrees with the foregoing, please sign the enclosed counterpart of this Contract and return it to the Underwriter. This Contract shall become a binding agreement between the Issuer and the Underwriter when at least the counterpart of this Contract shall have been signed by or on behalf of each of the parties hereto. Very truly yours, FIRST SOUTHWEST COMPANY, the Underwriter By: Gary S. Utkov, SVP / Authorized Officer ACCEPTANCE: ACCEPTED AND AGREED TO at 8:33 a.m./p.m. Central Time on February 1*1 2012. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 [Signature page of Purchase Contract relating to Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012] Schedule I $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds Series 2012 Dated Date: March 1, 2012 (Interest to accrue from the Dated Date) Maturity Date Principal Interest Initial (September 1) Amount Rate Yield 2013 $ 185,000 2.00 % 0.60 % 2014 190,000 2.00 0.75 2015 195,000 2.00 0.97 2016 200,000 2.50 1.10 2017 205,000 2.50 1.23 2018 210,000 2.50 1.41 2019 225,000 2.50 1.63 2020 225,000 3.00 1.86 2021 230,000 3.00 2.08* 2022 240,000 3.00 2.17* 2023 250,000 3.00 2.28* * Yield shown is yield to first call date, September 1, 2020. Optional Redemption. The Issuer reserves the right, at its option, to redeem Bonds having stated maturities on and after September 1, 2021, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on September 1, 2020 or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. 77641135.2/08013523 Schedule I TAB 8 ESCROW AGREEMENT Trophy Club Municipal Utility District No. 2 Unlimited Tax Bonds Series 2002 THIS ESCROW AGREEMENT, dated as of March 5, 2012 (herein, together with any amendments or supplements hereto, called the "Agreement") is entered into by and between the Trophy Club Municipal Utility District No. 1 (herein called the "Issuer") and The Bank of New York Mellon Trust Company, N.A., as escrow agent (herein, together with any successor in such capacity, called the "Escrow Agent"). The addresses of the Issuer and the Escrow Agent are shown on Exhibit A attached hereto and made a part hereof. WITNESSETH: WHEREAS, the Issuer heretofore issued and there presently remain outstanding the obligations (the "Refunded Obligations") described in Exhibit B attached hereto and made a part hereof; and WHEREAS, the Refunded Obligations are scheduled to mature in such years, bear interest at such rates, and be payable at such times and in such amounts as are set forth in Exhibit C hereto; and WHEREAS, the Issuer has received the Sufficiency Certificate of The Bank of New York Mellon Trust Company, N.A., as paying agent/registrar of the Refunded Obligations (the "PAIR Certificate") relating to the Refunded Obligations, attached hereto as Exhibit D and made a part hereof; and WHEREAS, when firm banking arrangements have been made for the payment of principal, redemption premium, if any, and interest to the maturity or redemption dates of the Refunded Obligations, then the Refunded Obligations shall no longer be regarded as outstanding except for the purpose of receiving payment from the funds provided for such purpose; and WHEREAS, Chapter 1207, Texas Government Code tf Chapter 1207"), authorizes the Issuer to issue refunding bonds and to deposit the proceeds from the sale thereof, and any other available funds or resources, directly with any paying agent for the Refunded Obligations, or a trust company or commercial bank that does not act as a depository for the Issuer, and such deposit, if made before such payment dates and in sufficient amounts, shall constitute the making of firm banking and financial arrangements for the discharge and final payment of the Refunded Obligations; and WHEREAS, Chapter 1207 further authorizes the Issuer to enter into an escrow agreement with any such paying agent for any of the Refunded Obligations, or a trust company or commercial bank that does not act as a depository for the Issuer, with respect to the safekeeping, investment, administration and disposition of any such deposit, upon such terms and conditions as the Issuer and such paying agent, trust company or commercial bank may agree, provided that such deposits may be invested only in obligations described in Section 1207.062 of Chapter 1207, which obligations may be in book entry form, and which shall mature and/or bear interest payable at such times and in such amounts as will be sufficient to provide for the scheduled payment of principal, redemption premium, if any, and interest on the Refunded Obligations when due; and WHEREAS, the Escrow Agent is the paying agent for the Refunded Obligations (the "Paying Agent") and this Agreement constitutes an escrow agreement of the kind authorized and required by said Chapter 1207; and WHEREAS, Chapter 1207 makes it the duty of the Escrow Agent to comply with the terms of this Agreement and timely make available to the places of payment for the Refunded Obligations the amounts required to provide for the payment of the principal of and interest on such obligations when due, and in accordance with their terms, but solely from the funds, in the manner, and to the extent provided in this Agreement; and WHEREAS, the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Refunding Bonds") have been issued, sold and delivered for the purpose, among others, of obtaining the funds required to provide for the payment of the principal of and redemption premium, if any, on the Refunded Obligations at their respective maturity dates or dates of redemption and the interest thereon to such dates; and WHEREAS, the Issuer desires that, concurrently with the delivery of the Refunding Bonds to the purchasers thereof, certain proceeds of the Refunding Bonds, together with certain other available funds of the Issuer, if applicable, shall be deposited to the credit of the Escrow Fund created pursuant to the terms of this Agreement; and WHEREAS, the cash balances from time to time on deposit in the Escrow Fund and Escrowed Securities, if any, which shall mature and the interest thereon shall be payable at such times and in such amounts so as to provide moneys which together with such cash balances will be sufficient to pay interest on the Refunded Obligations as it accrues and becomes payable and the principal of the Refunded Obligations on their maturity dates or dates of redemption; and WHEREAS, to facilitate the payment of the principal of, redemption premium, if any, and interest on the Refunded Obligations, and to facilitate receipt and transfer of proceeds of Escrowed Securities, particularly those in book entry form, the Issuer desires to establish the Escrow Fund at the corporate trust office of the Escrow Agent; and NOW, THEREFORE, in consideration of the mutual undertakings, promises and agreements herein contained, the sufficiency of which hereby are acknowledged, and to secure the full and timely payment of principal of, redemption premium, if any, and the interest on the Refunded Obligations, the Issuer and the Escrow Agent mutually undertake, promise, and agree for themselves and their respective representatives and successors, as follows: 2 ARTICLE I DEFINITIONS AND INTERPRETATIONS 3 Section 1.01. Definitions. Unless the context clearly indicates otherwise, the following terms shall have the meanings assigned to them below when they are used in this Agreement: "Code" means the Internal Revenue Code of 1986, as amended, or to the extent applicable the Internal Revenue Code of 1954, together with any other applicable provisions of any successor federal income tax laws. "Escrow Fund" means the fund created pursuant to Section 3.01 of this Agreement to be administered by the Escrow Agent pursuant to the provisions of this Agreement. "Escrowed Securities" means , subject to any restrictions set forth in any order, ordinance or resolution of the Issuer authorizing the issuance of the Refunded Obligations, the obligations permitted by Section 1207.062 of Chapter 1207 deposited into the Escrow Fund pursuant to Article IV of this Agreement. Section 1.02. Other Definitions. The terms "Agreement", "Issuer", "Escrow Agent", "Refunded Obligations", "Refunding Bonds", "PA/R Certificate" and "Paying Agent", when they are used in this Agreement, shall have the meanings assigned to them in the preamble to this Agreement. Section 1.03. Interpretations. The titles and headings of the articles and sections of this Agreement have been inserted for convenience and reference only and are not to be considered a part hereof and shall not in any way modify or restrict the terms hereof. This Agreement and all of the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to achieve the intended purpose of providing for the refunding of the Refunded Obligations in accordance with applicable law. ARTICLE II DEPOSIT OF FUNDS AND ESCROW SECURITIES Section 2.01. Deposits in the Escrow Fund. Concurrently with the sale and delivery of the Refunding Bonds the Issuer shall deposit, or cause to be deposited, with the Escrow Agent, for deposit in the Escrow Fund, the sum of $2,411,156.25 to be applied to pay the principal of and interest on the Refunded Obligations on their redemption date. Such amount shall be held uninvested unless the Issuer otherwise directs pursuant to Section 4.02 hereof. The Escrow Agent shall, upon the receipt thereof, acknowledge such receipt to the Issuer in writing. ARTICLE III CREATION AND OPERATION OF ESCROW FUND 4 Section 3.01. Escrow Fund. The Escrow Agent has created on its books a special trust fund and irrevocable escrow to be known as the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Escrow Fund"). The Escrow Agent hereby agrees that upon receipt thereof it will irrevocably deposit to the credit of the Escrow Fund the funds described in Section 2.01 hereof. Such deposit, all proceeds therefrom, and all cash balances from time to time on deposit therein (a) shall be the property of the Escrow Fund, (b) shall be applied only in strict conformity with the terms and conditions of this Agreement, and (c) are hereby irrevocably pledged to the payment of the principal of, redemption premium, if any, and interest on the Refunded Obligations, which payment shall be made by timely transfers of such amounts at such times as are provided for in Section 3.02 hereof. When the final transfers have been made for the payment of such , of redemption premium, if any, and interest on the Refunded Obligations, any balance then remaining in the Escrow Fund shall be transferred to the Issuer, and the Escrow Agent shall thereupon be discharged from any further duties hereunder. Section 3.02. Payment of Principal, Redemption Premium, if any, and Interest. The Escrow Agent is hereby irrevocably instructed to transfer from the cash balances from time to time on deposit in the Escrow Fund and make available to the Paying Agent for the Refunded Obligations, the amounts required to pay the principal of and interest on the Refunded Obligations at their redemption date and interest thereon to such redemption date. Section 3.03. Sufficiency of Escrow Fund. The Issuer represents that the cash balance, and Escrowed Securities, if any, on deposit from time to time in the Escrow Fund will be at all times sufficient to provide moneys for transfer to the Paying Agent at the times and in the amounts required to pay the interest on the Refunded Obligations as such interest comes due and the principal of and the redemption premium, if any, on the Refunded Obligations as the Refunded Obligations mature or are subject to redemption, all as more fully set forth in Exhibit E attached hereto and made a part hereof. If, for any reason, at any time, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund shall be insufficient to transfer the amounts required by each Paying Agent for the Refunded Obligations to make the payments set forth in Section 3.02 hereof, the Issuer shall timely deposit in the Escrow Fund, from any funds that are lawfully available therefor, additional funds in the amounts required to make such payments. Notice of any such insufficiency shall be given as promptly as practicable as hereinafter provided, but the Escrow Agent shall not in any manner be responsible for any insufficiency of funds in the Escrow Fund or the Issuer's failure to make additional deposits thereto. Section 3.04. Trust Fund. The Escrow Agent shall hold at all times the Escrow Fund, any Escrowed Securities and all other assets of the Escrow Fund, wholly segregated from all other funds and securities on deposit with the Escrow Agent; it shall never allow Escrowed Securities or any other assets of the Escrow Fund to be commingled with any other funds or securities of the Escrow Agent; and it shall hold and dispose of the assets of the Escrow Fund only as set forth herein. Uninvested cash, Escrowed Securities and other assets of the Escrow Fund shall always be maintained by the Escrow Agent as trust funds for the benefit of the owners of the Refunded Obligations; and a special account thereof shall at all times be maintained on the books of the Escrow Agent. The owners of the Refunded Obligations shall be entitled to the same preferred claim and first lien upon uninvested cash, Escrowed Securities, the proceeds thereof, and all other assets of the Escrow Fund to which they are entitled as owners of the Refunded Obligations. The amounts received by the Escrow Agent under this Agreement shall not be considered as a banking deposit by the Issuer, and the Escrow Agent shall have no right to title with respect thereto except as a constructive trustee and Escrow Agent under the terms of this Agreement. The amounts received by the Escrow Agent under this Agreement shall not be subject to warrants, drafts or checks drawn by the Issuer or, except to the extent expressly herein provided, by the Paying Agent. Section 3.05. Security for Cash Balances. Cash balances from time to time on deposit in the Escrow Fund shall, to the extent not insured by the Federal Deposit Insurance Corporation or its successor, be continuously secured by a pledge of direct obligations of, or obligations unconditionally guaranteed by, the United States of America, having a market value at least equal to such cash balances. ARTICLE IV LIMITATION ON INVESTMENTS Section 4.01. General Limitations. Except as provided in Sections 3.01, 3.02 and 4.02 hereof, the Escrow Agent shall not have any power or duty to invest or reinvest any money held hereunder, or to make substitutions of Escrowed Securities, or to sell, transfer or otherwise dispose of Escrowed Securities. Section 4.02. Investments and Substitutions. At the discretion and upon the written request of the Issuer, the Escrow Agent shall invest cash balances in the Escrow Fund, make substitutions of Escrowed Securities or redeem Escrowed Securities and reinvest the proceeds thereof or hold such proceeds as cash, together with other moneys or securities held in the Escrow Fund provided that the Issuer delivers to the Escrow Agent the following: (1) an opinion by an independent certified public accountant that after such investment, substitution or reinvestment the principal amount of the securities in the Escrow Fund (which shall be noncallable, not pre-payable obligations described in Section 1207.062 of Chapter 1207, subject to any restrictions set forth in any order, ordinance or resolution of the Issuer authorizing the issuance of the Refunded Obligations), together with the interest thereon and other available moneys in the Escrow Fund, will be sufficient to pay, without further investment or reinvestment, as the same become due, the principal of, interest on and premium, if any, on the Refunded Obligations which have not previously been paid; and (2) an unqualified opinion of nationally recognized municipal bond counsel to the effect that (a) such investment, substitution or reinvestment will not cause the Refunded Obligations to be "arbitrage bonds" within the meaning of Section 103 of the Code or the regulations thereunder in effect on the date of such substitution or reinvestment, or otherwise make the interest on the Refunded Obligations or the Refunding 5 Bonds subject to federal income taxation, and (b) such investment, substitution or reinvestment complies with the Constitution and laws of the State of Texas and with all relevant documents relating to the issuance of the Refunded Obligations. Any balance in the Escrow Fund set forth in the opinion of the independent certified public account as not necessary to pay, without further investment or reinvestment, as the same become due, the principal of, interest on and premium, if any, on the Refunded Obligations which have not previously been paid shall be transferred to the Issuer. The Escrow Agent shall have no responsibility or liability for loss or otherwise with respect to investments made at the direction of the Issuer. Section 4.03. Arbitrage. The Issuer hereby covenants and agrees that it shall never request the Escrow Agent to exercise any power hereunder or permit any part of the money in the Escrow Fund or proceeds from the sale of Escrowed Securities to be used directly or indirectly to acquire any securities or obligations if the exercise of such power or the acquisition of such securities or obligations would cause any Refunding Bonds or Refunded Obligations to be an "arbitrage bond" within the meaning of the Code. ARTICLE V APPLICATION OF CASH BALANCES Section 5.01. In General. Except as provided in Sections 3.02 and 4.02, no withdrawals, transfers, investments or reinvestment shall be made of cash balances in the Escrow Fund. ARTICLE VI RECORDS AND REPORTS Section 6.01. Records. The Escrow Agent will keep books of record and account in which complete and correct entries shall be made of all transactions relating to the receipts, disbursements, allocations and application of the money and Escrowed Securities deposited to the Escrow Fund and all proceeds thereof, and such books shall be available for inspection at reasonable hours and under reasonable conditions by the Issuer and the owners of the Refunded Obligations. Section 6.02. Reports. While this Agreement remains in effect, the Escrow Agent annually shall prepare and send to the Issuer a written report summarizing all transactions relating to the Escrow Fund during the preceding year, including, without limitation, credits to the Escrow Fund as a result of interest payments on or maturities of Escrowed Securities and transfers from the Escrow Fund for payments on the Refunded Obligations or otherwise, together with a detailed statement of all Escrowed Securities and the cash balance on deposit in the Escrow Fund as of the end of such period. 6 ARTICLE VII CONCERNING THE PAYING AGENT AND ESCROW AGENT Section 7.01. Representations. The Escrow Agent hereby represents that it has all necessary power and authority to enter into this Agreement and undertake the obligations and responsibilities imposed upon it herein, and that it will carry out all of its obligations hereunder. Section 7.02. Limitation on Liability and Indemnification. (a) The liability of the Escrow Agent to transfer funds for the payment of the principal of, redemption premium, if any, and interest on the Refunded Obligations shall be limited to the cash balances and proceeds of Escrowed Securities from time to time on deposit in the Escrow Fund. Notwithstanding any provision contained herein to the contrary, neither the Escrow Agent nor the Paying Agent shall have any liability whatsoever for the insufficiency of funds from time to time in the Escrow Fund or any failure of the obligors of the Escrowed Securities to make timely payment thereon, except for the obligation to notify the Issuer as promptly as practicable of any such occurrence. (b) The recitals herein and in the proceedings authorizing the Refunding Bonds shall be taken as the statements of the Issuer and shall not be considered as made by, or imposing any obligation or liability upon, the Escrow Agent. The Escrow Agent is not a party to the proceedings authorizing the Refunding Bonds or the Refunded Obligations and is not responsible for nor bound by any of the provisions thereof (except as a place of payment and paying agent and/or a Paying Agent/Registrar therefor). In its capacity as Escrow Agent, it is agreed that the Escrow Agent need look only to the terms and provisions of this Agreement. (c) The Escrow Agent makes no representations as to the value, conditions or sufficiency of the Escrow Fund, or any part thereof, or as to the title of the Issuer thereto, or as to the security afforded thereby or hereby, and the Escrow Agent shall not incur any liability or responsibility in respect to any of such matters. (d) It is the intention of the parties hereto that the Escrow Agent shall never be required to use or advance its own funds or otherwise incur personal financial liability in the performance of any of its duties or the exercise of any of its rights and powers hereunder. (e) The Escrow Agent shall not be liable for any action taken or neglected to be taken by it in good faith in any exercise of reasonable care and believed by it to be within the discretion or power conferred upon it by this Agreement, nor shall the Escrow Agent be responsible for the consequences of any error of judgment; and the Escrow Agent shall not be answerable except for its own action, neglect or default, nor for any loss unless the same shall have been through its negligence or willful misconduct. (f) Unless it is specifically otherwise provided herein, the Escrow Agent has no duty to determine or inquire into the happening or occurrence of any event or contingency or the performance or failure of performance of the Issuer with respect to arrangements or contracts with 7 others, with the Escrow Agent's sole duty hereunder being to safeguard the Escrow Fund, to dispose of and deliver the same in accordance with this Agreement. If, however, the Escrow Agent is called upon by the terms of this Agreement to determine the occurrence of any event or contingency, the Escrow Agent shall be obligated, in making such determination, only to exercise reasonable care and diligence, and in event of error in making such determination the Escrow Agent shall be liable only for its own willful misconduct or its negligence. In determining the occurrence of any such event or contingency the Escrow Agent may request from the Issuer or any other person such reasonable additional evidence as the Escrow Agent in its discretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and in this connection may make inquiries of, and consult with, among others, the Issuer at any time. (g) To the extent permitted by law, the Issuer agrees to indemnify the Escrow Agent for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 7.03. Compensation. (a) Concurrently with the sale and delivery of the Refunding Bonds, the Issuer shall pay to the Escrow Agent, as a fee for performing the services hereunder and for all expenses incurred or to be incurred by the Escrow Agent in the administration of this Agreement, the amount set forth in Exhibit F attached hereto and made a part hereof, the sufficiency of which is hereby acknowledged by the Escrow Agent. In the event that the Escrow Agent is requested to perform any extraordinary services hereunder, the Issuer hereby agrees to pay reasonable fees to the Escrow Agent for such extraordinary services and to reimburse the Escrow Agent for all expenses incurred by the Escrow Agent in performing such extraordinary services, and the Escrow Agent hereby agrees to look only to the Issuer for the payment of such fees and reimbursement of such expenses. The Escrow Agent hereby agrees that in no event shall it ever assert any claim or lien against the Escrow Fund for any fees for its services, whether regular or extraordinary, as Escrow Agent, or in any other capacity, or for reimbursement for any of its expenses. (b) The Paying Agent is the place of payment (paying agent) for the Refunded Obligations. The Issuer covenants to timely pay for all future paying agency services of the Paying Agent for the Refunded Obligations in accordance with the paying agent fee schedule now in effect through the final payment of the Refunded Obligations, the sufficiency of which is hereby acknowledged by the Paying Agent. Additionally, the Paying Agent agrees to look only to the Issuer for the payment of such fees and reimbursement of such expenses, and for the benefit of the registered owners of the Refunded Obligations, to perform the services as Paying Agent without regard to the future payment of such fees and expenses. The Paying Agent hereby agrees that in no event shall it ever assert any claim or lien against the Escrow Fund for any fees for its services, whether regular or extraordinary, as Paying Agent, or in any other capacity, or for reimbursement for any of its expenses. 8 (c) Upon receipt of the aforesaid specific sums stated in subsections (a) and (b) of this Section 7.03 for Escrow Agent fees, expenses, and services, the Escrow Agent shall acknowledge such receipt to the Issuer in writing. Section 7.04. Successor Escrow Agents. (a) If at any time the Escrow Agent or its legal successor or successors should become unable, through operation or law or otherwise, to act as escrow agent hereunder, or if its property and affairs shall be taken under the control of any state or federal court or administrative body because of insolvency or bankruptcy or for any other reason, a vacancy shall forthwith exist in the office of Escrow Agent hereunder. In such event the Issuer, by appropriate action, promptly shall appoint an Escrow Agent to fill such vacancy. If no successor Escrow Agent shall have been appointed by the Issuer within 60 days, a successor may be appointed by the owners of a majority in principal amount of the Refunded Obligations then outstanding by an instrument or instruments in writing filed with the Issuer, signed by such owners or by their duly authorized attorneys-in-fact. If, in a proper case, no appointment of a successor Escrow Agent shall be made pursuant to the foregoing provisions of this section within three months after a vacancy shall have occurred, the owner of any Refunded Obligation may apply to any court of competent jurisdiction to appoint a successor Escrow Agent. Such court may thereupon, after such notice, if any, as it may deem proper, prescribe and appoint a successor Escrow Agent. (b) Any successor Escrow Agent shall be: (i) a corporation, bank or banking association organized and doing business under the laws of the United States or the State of Texas; (ii) be authorized under such laws to exercise corporate trust powers; (iii) be authorized under Texas law to act as an escrow agent; under Chapter 1207 (iv) have a combined capital and surplus of at least $5,000,000; and (v) be subject to the supervision or examination by Federal or State authority. (c) Any successor Escrow Agent shall execute, acknowledge and deliver to the Issuer and the Escrow Agent an instrument accepting such appointment hereunder, and the Escrow Agent shall execute and deliver an instrument transferring to such successor Escrow Agent, subject to the terms of this Agreement, all the rights, powers and trusts of the Escrow Agent hereunder. Upon the request of any such successor Escrow Agent, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Escrow Agent all such rights, powers and duties. (d) The Escrow Agent at the time acting hereunder may at any time resign and be discharged from the trust hereby created by giving not less than sixty (60) days' written notice to the Issuer and publishing notice thereof, specifying the date when such resignation will take effect, in a newspaper printed in the English language and with general circulation in New York, New York, such publication to be made once at least three (3) weeks prior to the date when the resignation is to take effect. No such resignation shall take effect unless a successor Escrow Agent shall have been appointed by the owners of the Refunded Obligations or by the Issuer as herein provided and such successor Escrow Agent shall be a paying agent for the Refunded Obligations or a trust company or commercial bank that does not act as a depository for the Issuer 9 and shall have accepted such appointment, in which event such resignation shall take effect immediately upon the appointment and acceptance of a successor Escrow Agent. (e) Under any circumstances, the Escrow Agent shall pay over to its successor Escrow Agent proportional parts of the Escrow Agent's fee and, if applicable, its Paying Agent's fee hereunder. Section 7.05. Notice of Redemption of Refunded Obligations. The Escrow Agent, by its execution hereof, as Paying Agent for the Refunded Obligations, hereby agrees to provide notice of redemption of the Refunded Obligations as required under the terms of the order of the Issuer authorizing the issuance of the respective Refunded Obligations, including notices required to be delivered to each registered securities depository and to any national information service that disseminates redemption notices. Section 7.06. Acknowledgment of Notice of Redemption. The Escrow Agent, by its execution hereof, as Paying Agent for the Refunded Obligations, acknowledges receipt of written notice of the redemption of the Refunded Obligations, as required by the proceedings that authorized the issuance of the Refunded Obligations, and agrees to provide or cause to be provided notice of defeasance and redemption of such Refunded Obligations as required by the proceedings that authorized the issuance of such Refunded Obligations. ARTICLE VIII MISCELLANEOUS Section 8.01. Notice. Any notice, authorization, request, or demand required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when mailed by registered or certified mail, postage prepaid addressed to the Issuer or the Escrow Agent at the address shown on Exhibit A attached hereto. The United States Post Office registered or certified mail receipt showing delivery of the aforesaid shall be conclusive evidence of the date and fact of delivery. Any party hereto may change the address to which notices are to be delivered by giving to the other parties not less than ten (10) days prior notice thereof. Prior written notice of any amendment to this Agreement contemplated pursuant to Section 8.08 and immediate written notice of any incidence of a severance pursuant to Section 8.04 shall be sent to Moody's Investors Service, Attn: Public Finance Rating Desk/Refunded Bonds, 99 Church Street, New York, New York 10007, and Standard & Poor's Corporation, Attn: Municipal Bond Department, 25 Broadway, New York, New York 10004. Section 8.02. Termination of Responsibilities. Upon the taking of all the actions as described herein by the Escrow Agent, the Escrow Agent shall have no further obligations or responsibilities hereunder to the Issuer, the owners of the Refunded Obligations or to any other person or persons in connection with this Agreement. Section 8.03. Binding Agreement. This Agreement shall be binding upon the Issuer and the Escrow Agent and their respective successors and legal representatives, and shall inure 10 solely to the benefit of the owners of the Refunded Obligations, the Issuer, the Escrow Agent and their respective successors and legal representatives. Section 8.04. Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. Section 8.05. Texas Law Governs. This Agreement shall be governed exclusively by the provisions hereof and by the applicable laws of the State of Texas. Section 8.06. Time of the Essence. Time shall be of the essence in the performance of obligations from time to time imposed upon the Escrow Agent by this Agreement. Section 8.07. Effective date of Agreement. This Agreement shall be effective upon receipt by the Escrow Agent of the funds described in Section 2.01, together with the specific sums stated in subsection (a) of Section 7.03 for Escrow Agent fees, expenses, and services. Section 8.08. Amendments. This Agreement is made for the benefit of the Issuer, the Escrow Agent and the holders or owners from time to time of the Refunded Obligations, and it shall not be repealed, revoked, altered or amended without the written consent of all such holders or owners and the written consent of the Escrow Agent and the Issuer; provided, however, that the Issuer and the Escrow Agent may, without the consent of, or notice to, such holders or owners and as shall not be inconsistent with the terms and provisions of this Agreement amend this Agreement to cure any ambiguity or formal defect or omission in this Agreement; but provided further that no amendment to or alteration of this Agreement shall conflict with the requirements for firm banking and financial arrangements in accordance with Chapter 1207. No such amendment shall adversely affect the rights of the holders of the Refunded Obligations. No amendment shall be effective unless the same shall be in writing and signed by the parties thereto. Section 8.09. Counterparts. This Agreement may be executed in one or more counterparts, each and all of which shall be deemed an original for all purposes, and all counterparts shall together constitute one and the same instrument. (Execution Page Follows) 11 EXECUTED as of the date first written above. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. By_ Name: Title: S-1 EXECUTED as of the date first written above. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By_ President, Board of Directors THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. Name Title Associate s-i INDEX TO EXHIBITS Exhibit A Addresses of the Issuer and the Escrow Agent Exhibit B Schedule of Refunded Obligations Exhibit C Schedule of Debt Service on Refunded Obligations Exhibit D Sufficiency Certificate of Refunded Obligation Paying Agent Exhibit E Escrow Fund Cash Flow Exhibit F Escrow Agent Fees EXHIBIT A ADDRESSES OF THE ISSUER AND THE ESCROW AGENT ISSUER Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 Attn: District Manager ESCROW AGENT The Bank of New York Mellon Trust Company, N.A. 2001 Bryan Street, 11th Floor Dallas, Texas 75201 Attn: Corporate Trust Services EXHIBIT B SCHEDULE OF REFUNDED OBLIGATIONS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002 Maturity Date Interest Rate 1%) Principal Amount ($) Principal Amount to be Refunded* ($) Redemption Date CUSIP 2013 4.25 165,000 165,000 September 1, 2012 897060BE8 2014 4.35 170,000 170,000 September 1, 2012 897060BF5 2015 4.45 180,000 180,000 September 1, 2012 897060BG3 2016 4.55 190,000 190,000 September 1, 2012 897060BH1 2017 4.70 200,000 200,000 September 1, 2012 897060BJ7 2018 4.80 210,000 210,000 September 1, 2012 897060BK4 2020 4.95 460,000 460,000 September 1, 2012 897060BM0 2022 5.00 505,000 505,000 September 1, 2012 897060BP3 2023 5.00 275,000 275,000 September 1, 2012 897060BQ1 *Redemption at the price of par plus accrued interest to the date of redemption. EXHIBIT C SCHEDULE OF DEBT SERVICE ON REFUNDED OBLIGATIONS SERIES 2002 REFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13,2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 56,156.25 56,156.25 09/30/2013 165,000 4.250% 112,312.50 277,312.50 09/30/2014 170,000 4.350% 105,300.00 275,300.00 09/30/2015 180,000 4.450% 97,905.00 277,905.00 09/30/2016 190,000 4.550% 89,895.00 279,895.00 09/30/2017 200,000 4.700% 81,250.00 281,250.00 09/30/2018 210,000 4.800% 71,850.00 281,850.00 09/30/2019 225,000 4.950% 61,770.00 286,770.00 09/30/2020 235,000 4.950% 50,632.50 285,632.50 09/30/2021 245,000 5.000% 39,000.00 284,000.00 09/30/2022 260,000 5.000% 26,750.00 286,750.00 09/30/2023 275,000 5.000% 13,750.00 288,750.00 2,355,000 806,571.25 3,161,571.25 ESCROW REQUIREMENTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (20021 Period Principal Ending Interest Redeemed Total 09/01/2012 56,156.25 2,355,000.00 2,411,156.25 56,156.25 2,355,000.00 2,411,156.25 EXHIBIT D SUFFICIENCY CERTIFICATE OF REFUNDED OBLIGATION PAYING AGENT (Omitted at this point as it is included elsewhere in the transcript.) EXHIBIT E ESCROWED FUND CASH FLOW $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Unlimited Tax Bonds. Series 2002 (2002") - Allocation of Global Present Value Other Net Escrow to 03/05/2012 Date Cash Flows Receipts @ 0.0000000% 03/05/2012 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 Escrow Cost Summary Purchase date 03/05/2012 Purchase cost of securities 2,411,156.25 Target for yield calculation 2,411,156.25 EXHIBIT F ESCROW AGENT FEES (See attached) BNY MELLON CORPORATE TRUST Fee Schedule Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Acceptance Fee None A one-time charge covering the Bank Officer's review of governing documents, communication with members of the closing party, including representatives of the issuer, investment banker(s) and attorney(s), establishment of procedures and controls, set-up of trust accounts and tickler suspense items and the receipt and disbursement/investment of bond proceeds. This fee is payable on the closing date. An annual charge covering the normal paying agent duties related to account administration and bondholder services. Our pricing is based on the assumption that the bonds are DTC-eligible/book-entry only. If the bonds are certificated or physical, then we will have to charge an additional $1000 per year as a paying agent. This fee is payable annually, in advance. The Escrow Agent Fee covers the consideration of documents and the normal administrative duties of the escrow agent according to the governing documents. For a full year or partial year escrow the fee is $750 per year. Should the escrow account or depository account be open for less than two months, then we will reduce our fee to $375. Should we not open an escrow, depository or similar account, we will not charge for such services. This fee is payable on the closing date. Pricing for Call or Redemptions of Bonds Per Call $300 Call Pricing includes distribution of the call notice to holders of record, redemption processing, and notification to EMMA. Any publication expenses (i.e. Bond Buyer, regional periodical, financial periodicals, etc.) for the call notice will be billed to the Issuer at cost. Extraordinary Services/Misc Fees At Appraisal The charges for performing extraordinary or other services not contemplated at the time of the execution of the transaction or not specifically covered elsewhere in this schedule will be commensurate with the service to be provided and may be charged in BNY Mellon's sole discretion. If it is contemplated that the Trustee hold and/or value collateral or enter into any investment contract, forward purchase or similar or other agreement, additional acceptance, administration and counsel review fees will be applicable to the agreement governing such services. If the bonds are converted to certificated form, additional annual fees will be charged for any applicable tender agent and/or registrar/paying agent services. Additional information will be provided at such time. Should this transaction terminate prior to closing, all out-of-pocket expenses incurred, including legal fees, will be billed at cost. If all outstanding bonds of a series are defeased or called in full prior to their maturity, a termination fee may be assessed at that time. Annual Paying Agent Administration Fee $500 Escrow Agent Fee: $750 2001 Bryan - 1P Floor Dallas, TX 75201 BNY MELLON CORPORATE TRUST 2001 Bryan -IT Floor Dallas, TX 75201 These extraordinary services may include, but are not limited to, supplemental agreements, consent operations, unusual releases, tender processing, sinking fund redemptions, failed remarketing processing, the preparation of special or interim reports, custody of collateral, a one-time fee to be charged upon termination of an engagement. Counsel, accountants, special agents and others will be charged at the actual amount of fees and expenses billed, UCC filing fees, money market sweep fees, auditor confirmation fees, wire transfer fees, transaction fees to settle third-party trades and reconcilement fees to balance trust account balances to third- party investment provider statements Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed at $300 per event. FDIC or other governmental charges will be passed along to you as incurred. Terms and Disclosures Terms of Proposal Final acceptance of the appointment under the Indenture is subject to approval of authorized officers of BNYM and full review and execution of all documentation related hereto. Please note that if this transaction does not close, you will be responsible for paying any expenses incurred, including Counsel Fees. We reserve the right to terminate this offer if we do not enter into final written documents within three months from the date this document is first transmitted to you. Fees may be subject to adjustment during the life of the engagement. Customer Notice Required by the USA Patriot Act To help the US government fight the funding of terrorism and money laundering activities, US Federal law requires all financial institutions to obtain, verify, and record information that identifies each person (whether an individual or organization) for which a relationship is established. What this means to you: When you establish a relationship with BNYM, we will ask you to provide certain information (and documents) that will help us to identify you. We will ask for your organization's name, physical address, tax identification or other government registration number and other information that will help us to identify you. We may also ask for a Certificate of Incorporation or similar document or other pertinent identifying documentation for your type of organization. We thank you for your assistance. TAB 9 SIGNATURE IDENTIFICATION AND AUTHORITY CERTIFICATE OF ESCROW AGENT I, the undersigned officer of The Bank of New York Mellon Trust Company, N. A. (the "Bank"), which is the Escrow Agent appointed by Trophy Club Municipal Utility District No. 1 (the "Issuer"), in connection with the execution and delivery of an Escrow Agreement (the "Escrow Agreement") dated as of March 5, 2012 between the Issuer and the Bank hereby certify as follows: 1. The Bank is a national banking association duly organized under the banking laws of the United States of America and has full power and authority to enter into and perform the obligations of the Escrow Agent under the Escrow Agreement. 2. The Escrow Agreement has been duly executed and attested on behalf of the Bank by one or more of the persons named below whose offices appear set opposite their names; said persons were at the time of executing the Escrow Agreement and are now, duly elected, qualified and acting incumbents of their respective offices; and the signatures appearing after each of said persons' names is the true and correct specimen of such person's genuine signature: Name Office Signature Caresse Tankersley Associate / V, 3. The foregoing officers of the Bank, by virtue of the authority delegated to them as set forth in Exhibit A, are authorized to execute and deliver on behalf of the Escrow Agreement and such other and further documents as may be necessary or incidental to the acceptance and performance of the duties set forth within. IN WITNESS WHEREOF, the undersigned Bank has caused this certificate to be executed and its seal affixed on February 27. 2012. The Bank of New York Mellon Trust Company, N.A. Dallas, Texas as Escrow Agent Title: Associate [BANK SEAL] Exhibit A - Evidence of Delegation of Authority THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. I, the undersigned, Barbara J. Parrish, Assistant Secretary of The Bank of New York Mellon Trust Company, N.A., a national banking association organized under the laws of the United States (the "Association") and located in the State of California, with a trust office located at 2001 Bryan Street, Dallas, Texas, DO HEREBY CERTIFY that the following individuals are duly appointed and qualified Officers of the Association: Officer Title Signing Authority Michelle Baldwin Vice President A, C2, J, N, P2 Rosalyn Y. Davis Vice President A, C2, J, N, P2 Michael K. Herberger Vice President A, C2, J,N, PI Elizabeth Power Vice President A, C2, J, N, P2 Cathleen M. Sokolowski Vice President A, CI, J, N, PI Shannon Straty Vice President A, C2, J, N, P2 Rick Adler Senior Associate A, C5, J, N, P2 Tony Hongnoi Senior Associate A, C5,J,N,P2 Gulnaar Murthy Senior Associate A, C5, J, N, P2 Jason Stephens Senior Associate A, C2, J, N, PI Deirdre A. Wilson Senior Associate A, C5, J, P2 Erin L. Fitzpatrick Associate A, C3, J, N Caresse L. Tankersley Associate A, C3, J, N I further certify that as of this date they have been authorized to sign on behalf of the Association in discharging or performing their duties in accordance with the limited signing powers provided under Article V, Section 5.3 of the By-Laws of the Association and the paragraphs indicated above of the signing authority resolution of the Board of Directors of the Association. Attached hereto are true and correct copies of excerpts of the By-Laws of the Association and the signing authority resolution, which have not been amended or revised since October 15,2009 and are in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of The Bank of New York Mellon Trust Company, N.A. this 26th day January 2012. Barbara J. Parrish, Assistant Secretary Extracts from By-Laws of The Bank of New York Mellon Trust Company, N.A. As Amended through October 15, 2009 ARTICLE V SIGNING AUTHORITIES Section 5.1 Real Property. Real property owned by the Association in its own right shall not be deeded, conveyed, mortgaged, assigned or transferred except when duly authorized by a resolution of the Board. The Board may from time-to-time authorize officers to deed, convey, mortgage, assign or transfer real property owned by the Association in its own right with such maximum values as the Board may fix in its authorizing resolution. Section 5.2. Senior Signing Powers. Subject to the exception provided in Section 5.1, the President and any Executive Vice President is authorized to accept, endorse, execute or sign any document, instrument or paper in the name of, or on behalf of, the Association in all transactions arising out of, or in connection with, the normal course of the Association's business or in any fiduciary, representative or agency capacity and, when required, to affix the seal of the Association thereto. In such instances as in the judgment of the President, or any Executive Vice President may be proper and desirable, any one of said officers may authorize in writing from time-to-time any other officer to have the powers set forth in this section applicable only to the performance or discharge of the duties of such officer within his or her particular division or function. Any officer of the Association authorized in or pursuant to Section 5.3 to have any of the powers set forth therein, other than the officer signing pursuant to this Section 5.2, is authorized to attest to the seal of the Association on any documents requiring such seal. Section 5.3. Limited Signing Powers. Subject to the exception provided in Section 5.1, in such instances as in the judgment of the President or any Executive Vice President, may be proper and desirable, any one of said officers may authorize in writing from time-to-time any other officer, employee or individual to have the limited signing powers or limited power to affix the seal of the Association to specified classes of documents set forth in a resolution of the Board applicable only to the performance or discharge of the duties of such officer, employee or individual within his or her division or function. Section 5.4. Powers of Attorney. All powers of attorney on behalf of the Association shall be executed by any officer of the Association jointly with the President, any Executive Vice President, or any Managing Director, provided that the execution by such Managing Director of said Power of Attorney shall be applicable only to the performance or discharge of the duties of said officer within his or her particular division or function. Any such power of attorney may, however, be executed by any officer or officers or person or persons who may be specifically authorized to execute the same by the Board of Directors. Section 5.5. Auditor. The Auditor or any officer designated by the Auditor is authorized to certify in the name of, or on behalf of the Association, in its own right or in a fiduciary or representative capacity, as to the accuracy and completeness of any account, schedule of assets, or other document, instrument or paper requiring such certification. SIGNING AUTHORITY RESOLUTION Pursuant to Article V, Section 5.3 of the By-Laws Adopted October 15, 2009 RESOLVED that, pursuant to Section 5.3 of the By-Laws of the Association, authority be, and hereby is, granted to the President or any Executive Vice President, in such instances as in the judgment of any one of said officers may be proper and desirable, to authorize in writing from time-to- time any other officer, employee or individual to have the limited signing authority set forth in any one or more of the following paragraphs applicable only to the performance or discharge of the duties of such officer, employee or individual within his or her division or function: (A) All signing authority set forth in paragraphs (B) through (I) below except Level C which must be specifically designated. (Bl) Individuals authorized to accept, endorse, execute or sign any bill receivable; certification; contract, document or other instrument evidencing, embodying a commitment with respect to, or reflecting the terms or conditions of, a loan or an extension of credit by the Association; note; and document, instrument or paper of any type, including stock and bond powers, required for purchasing, selling, transferring, exchanging or otherwise disposing of or dealing in foreign currency, derivatives or any form of securities, including options and futures thereon; in each case in transactions arising out of, or in connection with, the normal course of the Association's business. (B2) Individuals authorized to endorse, execute or sign any certification; disclosure notice required by law; document, instrument or paper of any type required for judicial, regulatory or administrative proceedings or filings; and legal opinions. (CI) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in excess of $500,000,000 with single authorization for all transactions. (C2) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in excess of $500,000,000*. (C3) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $500,000,000. (C4) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount in excess of $100,000,000 but not to exceed $500,000,000*. (C5) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $100,000,000. (C6) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $10,000,000. (C7) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $5,000,000. (C8) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $1,000,000. (C9) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $250,000. (C10) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $50,000. (Cll) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $5,000. *Dual authorization is required by any combination of senior officer and/or Sector Head approved designee for non-exempt transactions. Single authorization required for exempt transactions. (Dl) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $1,000,000. (D2) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $250,000. (D3) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $50,000. (D4) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $5,000. (E) Authority to accept, endorse, execute or sign any guarantee of signature to assignments of stocks, bonds or other instruments; certification required for transfers and deliveries of stocks, bonds or other instruments; and document, instrument or paper of any type required in connection with any Individual Retirement Account or Keogh Plan or similar plan. (F) Authority to accept, endorse, execute or sign any certificate of authentication as bond, unit investment trust or debenture trustee and on behalf of the Association as registrar and transfer agent. (G) Authority to accept, endorse, execute or sign any bankers acceptance; letter of credit; and bill of lading. (H) Authority to accept, endorse, execute or sign any document, instrument or paper of any type required in connection with the ownership, management or transfer of real or personal property held by the Association in trust or in connection with any transaction with respect to which the Association is acting in any fiduciary, representative or agency capacity, including the acceptance of such fiduciary, representative or agency account. (11) Authority to effect the external movement of free delivery of securities and internal transfers resulting in changes of beneficial ownership. (12) Authority to effect the movement of securities versus payment at market or contract value. (J) Authority to either sign on behalf of the Association or to affix the seal of the Association to any of the following classes of documents: Trust Indentures, Escrow Agreements, Pooling and Servicing Agreements, Collateral Agency Agreements, Custody Agreements, Trustee's Deeds, Executor's Deeds, Personal Representative's Deeds, Other Real Estate Deeds for property not owned by the Association in its own right, Corporate Resolutions, Mortgage Satisfactions, Mortgage Assignments, Trust Agreements, Loan Agreements, Trust and Estate Accountings, Probate Petitions, responsive pleadings in litigated matters and Petitions in Probate Court with respect to Accountings, Contracts for providing customers with Association products or services. (N) Individuals authorized to accept, endorse, execute or sign internal transactions only, (i.e., general ledger tickets); does not include the authority to authorize external money movements, internal money movements or internal free deliveries that result in changes of beneficial ownership. (PI) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in excess of $10,000,000. (P2) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $10,000,000. (P3) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $5,000,000. (P4) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $1,000,000. (P5) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $250,000. (P6) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $100,000. (P7) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $50,000. (P8) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $25,000. (P9) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $10,000. (P10) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $5,000. (Pll) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $3,000. RESOLVED, that any signing authority granted pursuant to this resolution may be rescinded by the President or any Executive Vice President and such signing authority shall terminate without the necessity of any further action when the person having such authority leaves the employ of the Association. TAB 10 CERTIFICATE OF NOTICE OF REDEMPTION AND SUFFICIENCY I, the undersigned authorized officer of The Bank of New York Mellon Trust Company, N.A. (the "Bank"), acting on behalf of the Bank, hereby certify as follows: 1. The Bank is the paying agent/registrar for the following series of obligations (the "Outstanding Obligations"): Trophy Club Municipal Utility District No. 1, Unlimited Tax Bonds, Series 2002 2. The Bank, as paying agent/registrar for the Outstanding Obligations hereby acknowledges receipt of the Notice of Redemption attached hereto as Exhibit A setting forth the maturity dates and principal amounts of the Outstanding Obligations to be refunded and redeemed (the "Redeemed Obligations"). 3. The Bank will cause notice of redemption to be furnished to the registered holders of the Redeemed Obligations at least 30 days prior to the date of redemption, in accordance with the order authorizing the Redeemed Obligations. 4. The Bank understands that the Redeemed Obligations described in the attached Notice of Redemption have been called for redemption on September 1, 2012 (the "Redemption Date). 5. The Bank acknowledges that the total amount due on the Redemption Date for the Redeemed Obligations is $2,411,156.25, representing principal in the amount of $2,355,000.00, plus accrued interest of $56,156.25 to the Redemption Date. 6. The Bank hereby acknowledges and represents that it will not demand the payment of or collect future fees or expenses, if any, from funds to be provided to it for the payment of the principal of and interest on the Redeemed Obligations, and agrees to look to the issuer of such Redeemed Obligations for the payment of such fees and expenses and to continue to provide services as paying agent/registrar for the life of the Redeemed Obligations with the remedy for nonpayment being solely an action for amounts owing under the paying agent/registrar agreement with the issuer. [Remainder of page intentionally left blank] Executed this February 27, 2012 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. EXHIBIT A NOTICE OF DEFEASANCE/REDEMPTION Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on September 1 in each of the following years, aggregating $2,355,000 in principal amount. Maturity Date Principal Amount ($) Interest Rate (%) Redemption Date CUSIP* 2013 165,000 4.25 September 1,2012 897060BE8 2014 170,000 4.35 September 1,2012 897060BF5 2015 180,000 4.45 September 1,2012 897060BG3 2016 190,000 4.55 September 1,2012 897060BH1 2017 200,000 4.70 September 1,2012 897060BJ7 2018 210,000 4.80 September 1,2012 897060BK4 2020 460,000 4.95 September 1,2012 897060BM0 2022 505,000 5.00 September 1, 2012 897060BP3 2023 275,000 5.00 September 1,2012 897060BQ1 Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust P.O. Box 396 East Syracuse, New York 13057 By Overnight or Courier The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust 111 Sanders Creek Parkway East Syracuse, New York 13057 In person The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust Corporate Trust Window 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. Dated: March 5, 2012 Trophy Club Municipal Utility District No. 1 TAB 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 March 5, 2012 The Bank of New York Mellon Trust Company, N. A. 2001 Bryan Street, 8th Floor Dallas, Texas 75201 Re: Trophy Club Municipal Utility District No. 2 Unlimited Tax Refunding Bonds, Series 2002 (the "Series 2002 Bonds") Ladies and Gentlemen: Pursuant to the order adopted on December 20, 2011 by the Board of Directors of the Trophy Club Municipal Utility District No. 1 (the "District") authorizing the issuance of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Order"), the District has exercised the option to redeem all of the Series 2002 Bonds as shown below: The District has defeased and will redeem the Series 2002 Bonds maturing on September 1 in the years 2013 through 2018, 2020, 2022 and 2023 in the aggregate principal amount of $2,355,000 on September 1, 2012 (the "Refunded Obligations") at the redemption price equal to the principal amount of the 2002 Refunded Bonds plus accrued interest to the date of redemption as set forth in the attached Notice of Defeasance and Redemption. Enclosed is a copy of the order authorizing the Refunded Obligations (the "Refunded Obligations Order") and the Notices of Defeasance and Redemption with respect to the Refunded Obligations. As Paying Agent/Registrar for the Refunded Obligations, you are hereby requested to give the notices of defeasance and redemption of the Refunded Obligations in the manner required by the Refunded Obligations Order: The Paying Agent/Registrar will cause a written notice of such redemption to be sent at least 30 days prior to the date of redemption by United States mail, first- class postage prepaid, to the Registered Owner of each Refunded Obligation to be redeemed. Thank you for your attention to this matter. Very truly yours, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By: ^A~^t-L^~^~ District Manager Signature Page to Notice of Redemption Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 NOTICE OF DEFEASANCE/REDEMPTION Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICD7AL UTHJTY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on September 1 in each of the following years, aggregating $2,355,000 in principal amount. Maturity Date Principal Amount ($1 Interest Rate (%) Redemption Date CUSP?* 2013 165,000 4.25 September 1,2012 897060BE8 2014 170,000 4.35 September 1,2012 897060BF5 2015 180,000 4.45 September 1,2012 897060BG3 2016 190,000 4.55 September 1,2012 897060BH1 2017 200,000 4.70 September 1,2012 897060BJ7 2018 210,000 4.80 September 1,2012 897060BK4 2020 460,000 4.95 September 1,2012 897060BM0 2022 505,000 5.00 September 1,2012 897060BP3 2023 275,000 5.00 September 1,2012 897060BQ1 Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail By Overnight or Courier In person The Bank of New York Mellon Trust The Bank of New York Mellon Trust The Bank of New York Mellon Trust Company, N.A. Company, N.A. Company, N.A. Global Corporate Trust Global Corporate Trust Global Corporate Trust P.O. Box 396 111 Sanders Creek Parkway Corporate Trust Window East Syracuse, New York 13057 East Syracuse, New York 13057 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. * The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. Dated: March 5, 2012 Trophy Club Municipal Utility District No. 1 TAB 12 FEDERAL TAX CERTIFICATE 1. In General. 1.1. The undersigned is the District Manager of the Trophy Club Municipal Utility District No. 1 (the "Issuer"). 1.2. This Certificate is executed for the purpose of establishing the reasonable expectations of the Issuer as to future events regarding the Issuer's Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are being issued pursuant to an order of the Issuer (the "Order") adopted on the date of sale of the Bonds. The Order is incorporated herein by reference. 1.3. To the best of the undersigned's knowledge, information and belief, the expectations contained in this Federal Tax Certificate are reasonable. 1.4. The undersigned is an officer of the Issuer delegated with the responsibility, among others, of issuing and delivering the Bonds. 1.5. The undersigned is not aware of any facts or circumstances that would cause him to question the accuracy of the representations made by First Southwest Company (the "Underwriter") in the Issue Price Certificate attached hereto as Exhibit "D", and by Southwest Securities, Inc. (the "Financial Advisor") in Subsections 2.2 and 5.3 of this Certificate and with respect to the Schedules attached hereto as Exhibit "E". 2. The Purpose of the Bonds and Useful Lives of Projects. 2.1. The purpose for the issuance of the Bonds, as more fully described in the Order, is to establish an Escrow Fund (the "Escrow Fund") pursuant to an Escrow Agreement (the "Escrow Agreement") between the Issuer and an escrow agent to refund the outstanding obligations of the Issuer as listed in Exhibit "B" to the Escrow Agreement (the "Outstanding Bonds") and to pay the related expenses of issuing the Bonds. The Escrow Agreement is included in the transcript for the Bonds and incorporated herein by reference. 2.2. The Financial Advisor has represented that the Issuer will realize a present value debt service savings (determined without regard to administrative expenses) in connection with the issuance of the Bonds and the refunding of the Outstanding Bonds. The Outstanding Bonds will be redeemed on the earliest date on which the Outstanding Bonds can be redeemed. The proceeds deposited to the Escrow Fund will not exceed the amount required to pay the principal of and interest on the Outstanding Bonds and will not be reinvested. Accordingly, after taking into account proceeds used to pay costs of issuance and accrued interest, the Issuer expects that "excess gross proceeds" within the meaning of section 1.148-10(c) of the Treasury Regulations will not exceed one percent of the sale proceeds of the Bonds. 2.3. The Bonds are the first advance refunding of the Outstanding Bonds, which were originally issued by the Issuer after December 31, 1985. 2.4. The proceeds of the Outstanding Bonds were used to provide for the financing of a wastewater treatment plant expansion; ground storage installation; 21-inch water line additional capacity and waste water treatment plant connection charges (the "Outstanding Projects"). The Outstanding Projects remain in service and have not been sold or otherwise disposed of by the Issuer. 2.5. The Issuer expects that 120 percent of the aggregate useful lives of the Outstanding Projects, on the later of the date that the Outstanding Projects were placed in service or the date of issuance of the Outstanding Bonds, will exceed 18 years. 2.6. Other than members of the general public, the Issuer expects that throughout the lesser of the term of the Bonds, or the useful lives of the Outstanding Projects, the only user of the Outstanding Projects will be the Issuer or the Issuer's employees and agents. The Issuer will be the manager of the Outstanding Projects. The Issuer does not expect to enter into long-term sales of output from the Outstanding Projects and sales of output will be made on the basis of generally-applicable and uniformly applied rates. The Issuer may apply different rates for different classes of customers, including volume purchasers, which are reasonable and customary. In no event will the proceeds of the Bonds or facilities financed therewith be used for private business use in an amount greater than $15 million. 2.7. Except as stated below, the Issuer expects not to sell or otherwise dispose of property constituting the Outstanding Projects prior to the earlier of the end of such property's useful life or the final maturity of the Bonds. The Order provides that the Issuer will not sell or otherwise dispose of the Outstanding Projects unless the Issuer receives an opinion of nationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. 2.8. For purposes of Subsection 2.7 hereof, the Issuer has not included the portion of the Outstanding Projects comprised of personal property that is disposed in the ordinary course at a price that is expected to be less than 25 percent of the original purchase price. The Issuer, upon any disposition of such property, will transfer the receipts from the disposition of such property to the general operating fund and expend such receipts within six months for other governmental programs. 3. Yields. 3.1. The issue price of the Bonds included in the Form 8038-G, is based on the Issue Price Certificate attached hereto. 3.2. The Issuer has not entered into any qualified guarantee or qualified hedge with respect to the Bonds. The yield on the Bonds will not be affected by subsequent unexpected events, except to the extent provided in section 1.148-4(h)(3) of the Treasury Regulations when and if the Issuer enters into a qualified hedge or into any transaction transferring, waiving or modifying any right that is part of the terms of any Bond. The Issuer will consult with nationally recognized bond counsel prior to entering into any of the foregoing transactions. 4. Transferred Proceeds, Excess Proceeds and Disposition Proceeds. 4.1. As of the date of this Certificate, all of the amounts received from the sale of the Outstanding Bonds and the investment earnings thereon have been expended. 4.2. The Issuer has no reason to believe nor has any expectation that a device has been or will be employed in connection with the issuance of the Bonds to obtain a material financial advantage (based on arbitrage) apart from savings attributable to lower interest rates. All of the proceeds of the Bonds, other than an amount, if any, which is less than one percent of the sale proceeds of the Bonds, will be used either to pay costs of issuance of the Bonds or to pay principal and interest on the Outstanding Bonds. 2 5. Debt Service Fund. 5.1. The Order creates a special Debt Service Fund solely for the benefit of the Bonds (the "Debt Service Fund"). Other than as described herein, money deposited in the Debt Service Fund will be used to pay the principal of and interest on the Bonds (the "Bona Fide Debt Service Portion"). The Bona Fide Debt Service Portion constitutes a fund that is used primarily to achieve a proper matching of revenues and debt service within each bond year. Such portion will be completely depleted at least once each year except for an amount not in excess of the greater of (a) one-twelfth of the debt service on the Bonds for the previous year, or (b) the previous year's earnings on such portion of the Debt Service Fund. Amounts deposited in the Debt Service Fund constituting the Bona Fide Debt Service Portion will be spent within a thirteen-month period beginning on the date of deposit, and any amount received from the investment of money held in the Debt Service Fund will be spent within a one-year period beginning on the date of receipt. 5.2. A portion of the funds on deposit in the Debt Service Fund, not otherwise used to pay debt service on the Bonds within thirteen months, will be held in trust for the benefit of the holders of the Bonds (the "Reserve Portion"). If on any interest payment or maturity date, sufficient amounts are not available to make debt service payments on the Bonds, the Issuer is required to use such money constituting the Reserve Portion in an amount sufficient to make such payments. The present value of the investments deposited to the Reserve Portion of the Debt Service Fund and allocable to the Bonds and to the unrefunded portion of the issue of obligations of which the Outstanding Bonds are part that will be invested at a yield higher than the yield on such bonds will not, as of any date, exceed an aggregate amount which equals the lesser of (a) 10 percent of the stated principal amount (or, in the case of a discount, the issue price) of the Bonds, (b) 1.25 of the average annual debt service on the Bonds, or (c) maximum annual debt service on the Bonds. 5.3. Based on the representation of the Financial Advisor, the amount on deposit in the Reserve Portion of the Debt Service Fund should be maintained as a balance allocable to the Bonds in the Debt Service Fund consistent with accepted standards of prudent fiscal management for similar governmental bodies and in order to provide a reserve against periodic fluctuations in the amount and timing of payment of ad valorem taxes to the Issuer. 5.4. Any money deposited in the Debt Service Fund and any amounts received from the investment thereof that accumulate and remain on hand therein after thirteen months from the date of deposit of any such money or one year after the receipt of any such amounts from the investment thereof shall constitute a third and separate portion of the Debt Service Fund. The yield on any investments allocable to the portion of the Debt Service Fund exceeding of the sum of (a) the Bona Fide Debt Service Portion, (b) the Reserve Portion and (c) an amount equal to the lesser of five percent of the sale and investment proceeds of the Bonds or $ 100,000 will be restricted to a yield that does not exceed the yield on the Bonds. 6. Invested Sinking Fund Proceeds, Replacement Proceeds. 6.1. The Issuer has, in addition to the moneys received from the sale of the Bonds, certain other moneys that are invested in various funds which are pledged for various purposes. These other funds are not available to accomplish the purposes described in Section 2 of this Certificate. 6.2. Other than the Debt Service Fund, there are, and will be, no other funds or accounts established, or to be established, by or on behalf of the Issuer (a) which are reasonably expected to be used, or to generate earnings to be used, to pay debt service on the Bonds, or (b) which are reserved or pledged as collateral for payment of debt service on the Bonds and for which there is reasonable assurance that amounts 3 therein will be available to pay such debt service if the Issuer encounters financial difficulties. Accordingly, there are no other amounts constituting "gross proceeds" of the Bonds, within the meaning of section 148 of the Code. 7. Other Obligations. There are no other obligations of the Issuer, that (a) are sold at substantially the same time as the Bonds, i.e., within 15 days of the date of sale of the Bonds, (b) are sold pursuant to a common plan of financing with the Bonds, and (c) will be payable from the same source of funds as the Bonds. 8. Federal Tax Audit Responsibilities. The Issuer acknowledges that in the event of an examination by the Internal Revenue Service (the "Service") to determine compliance of the Bonds with the provisions of the Code as they relate to tax-exempt obligations, the Issuer will respond, and will direct its agents and assigns to respond, in a commercially reasonable manner to any inquiries from the Service in connection with such an examination. The Issuer understands and agrees that the examination may be subject to public disclosure under applicable Texas law. 9. Record Retention and Private Business Use. The Issuer has covenanted in the Order that it will comply with the requirements of the Code relating to the exclusion of the interest on the Bonds under section 103 of the Code. The Service has determined that certain materials, records and information should be retained by the issuers of tax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under section 103 of the Code. ACCORDINGLY, THE ISSUER SHALL TAKE STEPS TO ENSURE THAT ALL MATERIALS, RECORDS AND INFORMATION NECESSARY TO CONFIRM THE EXCLUSION OF THE INTEREST ON THE BONDS UNDER SECTION 103 OF THE CODE ARE RETAINED FOR THE PERIOD BEGINNING ON THE ISSUE DATE OF THE OUTSTANDING BONDS OR, IN THE CASE OF A SEQUENCE OF REFUNDINGS, THE ISSUE DATE OF THE OBLIGATIONS ORIGINALLY FINANCING THE OUTSTANDING PROJECT AND ENDING THREE YEARS AFTER THE DATE THE BONDS ARE RETIRED. The Issuer acknowledges receipt of the letters attached hereto as Exhibit "B" which discusses limitations related to private business use and Exhibit "C" which, in part, discusses specific guidance by the Service with respect to the retention of records relating to tax-exempt bond transactions. The Issuer also acknowledges that Exhibit "C" does not constitute an opinion of Bond Counsel as to the proper record retention policy applicable to any specific transaction. 10. Rebate to United States. The Issuer has covenanted in the Order that it will comply with the requirements of the Code, including section 148(f) of the Code, relating to the required rebate to the United States. Specifically, the Issuer will take steps to ensure that all earnings on gross proceeds of the Bonds in excess of the yield on the Bonds required to be rebated to the United States will be timely paid to the United States. The Issuer acknowledges receipt of the memorandum attached hereto as Exhibit "A" which discusses regulations promulgated pursuant to section 148(f) of the Code. This memorandum does not constitute an opinion of Bond Counsel as to the proper federal tax or accounting treatment of any specific transaction. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 4 DATED as of March 5,2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Bv: ^M^TjU^^ District Manager Trophy Club Municipal Utility District No. 1, Unlimited Tax Refunding Bonds, Series2012 The undersigned represents that, to the best of the undersigned's knowledge, information and belief, the representations contained in Subsections 2.2 and 5.3 of this Federal Tax Certificate and the Schedules attached hereto as Exhibit "E" are, as of March 5, 2012, accurate and complete. We understand that the foregoing information will be relied upon by the Issuer with respect to certain of the representations set forth in this Federal Tax Certificate and by McCall, Parkhurst & Horton L.L.P. (i) in connection with rendering its opinion to the Issuer that interest on the Bonds is excludable from gross income thereof for income tax purposes, and (ii) for purposes of completing the IRS Form 803 8-G. The undersigned is certifying only as to facts in existence on the date hereof. Nothing herein represents the undersigned's interpretation of any laws or the application of any laws to these facts. SOUTHWEST SECURITIES, INC. By:! Trophy Club Municipal Utility District No. 1, Unlimited Tax Refunding Bonds, Series 2012 Exhibit "A' LAW OFFICES MCCALL, PARKHURST & HORTON LLP. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET SUITE 1800 SUITE 900 SUITE 1525 AUSTIN, TEXAS 78701-3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (512) 478-3805 FACSIMILE: (512) 472-0871 TELEPHONE: (214) 754-9200 FACSIMILE: (214) 754-9250 TELEPHONE: (210) 225-2800 FACSIMILE: (210)225-2984 January 1, 2006 ARBITRAGE REBATE REGULATIONS© The arbitrage rebate requirements set forth in section 148(f) of the Internal Revenue Code of 1986 (the "Code") generally provide that in order for interest on any issue of bonds1 to be excluded from gross income (i.e., tax-exempt) the issuer must rebate to the United States the sum of, (1) the excess of the amount earned on all "nonpurpose investments" acquired with "gross proceeds" of the issue over the amount which would have been earned if such investments had been invested at a yield equal to the yield on the issue, and (2) the earnings on such excess earnings. On June 18, 1993, the U.S. Treasury Department promulgated regulations relating to the computation of arbitrage rebate and the rebate exceptions. These regulations, which replace the previously-published regulations promulgated on May 15, 1989, and on May 18, 1992, are effective for bonds issued after June 30,1993. This memorandum was prepared by McCall, Parkhurst & Horton L.L.P. and provides a general discussion of these arbitrage rebate regulations. This memorandum does not otherwise discuss the general arbitrage regulations, other than as they may incidentally relate to rebate. This memorandum also does not attempt to provide an exhaustive discussion of the arbitrage rebate regulations and should not be considered advice with respect to the arbitrage rebate requirements as applied to any individual or governmental unit or any specific transaction. Any tax advice contained in this memorandum is of a general nature and is not intended to be used, and should not be used, by any person to avoid penalties under the Code. McCall, Parkhurst & Horton L.L.P. remains available to provide legal advice to issuers with respect to the provisions of these tax regulations but recommends that issuers seek competent financial and accounting assistance in calculating the amount of such issuer's rebate liability under section 148(f) of the Code and in making elections to apply the rebate exceptions. Effective Dates 1 In this memorandum the word "bond" is defined to include any bond, note, certificate, financing lease or other obligation of an issuer. Copyright 2006 by Harold T. Flanagan, McCall, Parkhurst & Horton L.L.P. All rights reserved. The regulations promulgated on June 18,1993, generally apply to bonds delivered after June 30, 1993, although they do permit an issuer to elect to apply the rules to bonds issued priorto that date. The temporary regulations adopted by the U.S. Treasury Department in 1989 and 1992 incorporated the same effective dates which generally apply for purposes of section 148(f) of the Code. As such, the previous versions of the rebate regulations generally applied to bonds issued between August 1986 and June 30,1993 (or, with an election, to bonds issued priorto August 15,1993). The statutory provisions of section 148(f) of the Code, other than the exception for construction issues, apply to all bonds issued after August 15,1986, (for private activity bonds) and August 31, 1986, (for governmental public purpose bonds). The statutory exception to rebate applicable for construction issues generally applies if such issue is delivered after December 19, 1989. The regulations provide numerous transitional rules for bonds sold priorto July 1,1993. Moreover, since, under prior law, rules were previously published with respect to industrial development bonds and mortgage revenue bonds, the transitional rules contained in these regulations permit an issuer to elect to apply certain of these rules for computing rebate on pre- 1986 bonds. The regulations provide for numerous elections which would permit an issuer to apply the rules (other than 18-month spending exception) to bonds which were issued prior to July 1, 1993 and remain outstanding on June 30, 1993. Due to the complexity of the regulations, it is impossible to discuss in this memorandum all circumstances for which specific elections are provided. If an issuer prefers to use these final version of rebate regulations in lieu of the computational method stated under prior law (e.g., due to prior redemption) or the regulations, please contact McCall, Parkhurst & Horton L.L.P. for advice as to the availability of such options. Future Value Computation Method The regulations employ an actuarial method for computing the rebate amount based on the future value of the investment receipts (i.e., earnings) and payments. The rebate method employs a two-step computation to determine the amount of the rebate payment. First, the issuer determines the bond yield. Second, the issuer determines the arbitrage rebate amount. The regulations require that the computations be made at the end of each five-year period and upon final maturity of the issue (the "computation dates"). THE FINAL MATURITY DATE WILL ACCELERATE IN CIRCUMSTANCES IN WHICH THE BONDS ARE OPTIONALLY REDEEMED PRIOR TO MATURITY. AS SUCH, IF BONDS ARE REFUNDED OR OTHERWISE REDEEMED, THE REBATE MAY BE DUE EARLIER THAN INITIALLY PROJECTED. In order to accommodate accurate record-keeping and to assure that sufficient amounts will be available for the payment of arbitrage rebate liability, however, we recommend that the computations be performed at least annually. Please refer to other materials provided by McCall, Parkhurst & Horton L.L.P. relating to federal tax rules regarding record retention. Under the future value method, the amount of rebate is determined by compounding the aggregate earnings on all the investments from the date of receipt by the issuer to the computation date. Similarly, a payment for an investment is future valued from the date that the payment is made to the computation date. The receipts and payments are future valued at a discount rate equal to the yield on the bonds. The rebatable arbitrage, as of any computation date, is equal to the excess of the (1) future value of all receipts from investments (i.e., earnings), over (2) the future value of all payments. McCall, Parkhurst & Horton L.L.P. - Page 2 The following example is provided in the regulations to illustrate how arbitrage rebate is computed under the future value method for a fixed-yield bond: "On January 1, 1994, City A issues a fixed yield issue and invests all the sale proceeds of the issue ($49 million). There are no other gross proceeds. The issue has a yield of 7.0000 percent per year compounded semiannually (computed on a 30 day month/360 day year basis). City A receives amounts from the investment and immediately expends them for the governmental purpose of the issue as follows: Date Amount 2/1/1994 $ 3,000,000 4/1/1994 5,000,000 6/1/1994 14,000,000 9/1/1994 20,000,000 7/1/1995 10,000,000 City A selects a bond year ending on January 1, and thus the first required computation date is January 1, 1999. The rebate amount as of this date is computed by determining the future value of the receipts and the payments for the investment. The compounding interval is each 6-month (or shorter) period and the 30 day month/360 day year basis is used because these conventions were used to compute yield on the issue. The future value of these amounts, plus the computation credit, as of January 1, 1999, is: Date Receipts (Payments) FY (7.0000 percent) 01/1/1994 ($49,000,000) ($69,119,339) 02/1/1994 3,000,000 4,207,602 04/1/1994 5,000,000 6,932,715 06/1/1994 14,000,000 19,190,277 09/1/1994 20,000,000 26,947,162 01/1/1995 (1,000) (1,317) 07/1/1995 10,000,000 12,722,793 01/1/1996 (1,000) (1.229) Rebate amount (01/01/1999) $878.664" General Method for Computing Yield on Bonds In general, the term "yield," with respect to a bond, means the discount rate that when used in computing the present value of all unconditionally due payments of principal and interest and all of the payments for a qualified guarantee produces an amount equal to the issue price of the bond. The term "issue price" has the same meaning as provided in sections 1273 and 1274 of the Code. That is, if bonds are publicly offered (i.e., sold by the issuer to a bond house, broker or similar person acting in the capacity of underwriter or wholesaler), the issue price of each bond is determined on the basis of the initial offering price to the public (not McCall, Parkhurst & Horton L.L.P. - Page 3 to the aforementioned intermediaries) at which price a substantial amount of such bond was sold to the public (not to the aforementioned intermediaries). The "issue price" is separately determined for each bond (i.e., maturity) comprising an issue. The regulations also provide varying periods for computing yield on the bonds depending on the method by which the interest payment is determined. Thus, for example, yield on an issue of bonds sold with variable interest rates (i.e., interest rates which are reset periodically based on changes in market) is computed separately for each annual period ending on the first anniversary of the delivery date that the issue is outstanding. In effect, yield on a variable yield issue is determined on each computation date by "looking back" at the interest payments for such period. The regulations, however, permit an issuer of a variable-yield issue to elect to compute the yield for annual periods ending on any date in order to permit a matching of such yield to the expenditure of the proceeds. Any such election must be made in writing, is irrevocable, and must be made no later than the earlier of (1) the fifth anniversary date, or (2) the final maturity date. Yield on a fixed interest rate issue (i.e., an issue of bonds the interest rate on which is determined as of the date of the issue) is computed over the entire term of the issue. Issuers of fixed-yield issues generally use the yield computed as of the date of issue for all rebate computations. Such yield on fixed-yield issues generally is recomputed only if (1) the issue is sold at a substantial premium, may be retired within five years of the date of delivery, and such date is earlier than its scheduled maturity date, or (2) the issue is a stepped-coupon bond. In such cases, the regulations require the issuer to recompute the yield on such issues by taking into account the early retirement value of the bonds. Similarly, recomputation may occur in circumstances in which the issuer or bondholder modify or waive certain terms of, or rights with respect to, the issue or in sophisticated hedging transactions. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL. PARKHURST & HORTON LLP. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. For purposes of determining the principal or redemption payments on a bond, different rules are used for fixed-rate and variable-rate bonds. The payment is computed separately on each maturity of bonds rather than on the issue as a whole. In certain circumstances, the yield on the bond is determined by assuming that principal on the bond is paid as scheduled and that the bond is retired on the final maturity date for the stated retirement price. For bonds subject to early redemption or stepped-coupon bonds, described above, or for bonds subject to mandatory early redemption, the yield is computed assuming the bonds are paid on the early redemption date for an amount equal to their value. Premiums paid to guarantee the payment of debt service on bonds are taken into account in computing the yield on the bond. Payments for guarantees are taken into account by treating such premiums as the payment of interest on the bonds. This treatment, in effect, raises the yield on the bond, thereby permitting the issuer to recover such fee with excess earnings. The guarantee must be an unconditional obligation of the guarantor enforceable by the bondholder for the payment of principal or interest on the bond or the tender price of a tender bond. The guarantee may be in the form of an insurance policy, surety bond, irrevocable letter or line of credit, or standby purchase agreement. Importantly, the guarantor must be legally entitled to full reimbursement for any payment made on the guarantee either immediately or McCall, Parkhurst & Horton L.L.P. - Page 4 upon commercially reasonable repayment terms. The guarantor may not be a co-obligor of the bonds or a user of more than 10 percent of the proceeds of the bonds. Payments for the guarantee may not exceed a reasonable charge for the transfer of credit risk. This reasonable charge requirement is not satisfied unless it is reasonably expected that the guarantee will result in a net present value savings on the bond (i.e., the premium does not exceed the present value of the interest savings resulting by virtue of the guarantee). If the guarantee is entered into after June 14, 1989, then any fees charged for the nonguarantee services must be separately stated or the guarantee fee is not recoverable. The regulations also treat certain "hedging" transactions in a manner similarto qualified guarantees. "Hedges" are contracts, e.g., interest rate swaps, futures contracts or options, which are intended to reduce the risk of interest rate fluctuations. Hedges and other financial derivatives are sophisticated and ever-evolving financial products with which a memorandum, such as this, can not readily deal. IN SUCH CIRCUMSTANCES. ISSUERS ARE ADVISED TO CONSULT McCALL. PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Earnings on Nonpurpose Investments The arbitrage rebate provisions apply only to the receipts from the investment of "gross proceeds" in "nonpurpose investments." For this purpose, nonpurpose investments are stock, bonds or other obligations acquired with the gross proceeds of the bonds for the period prior to the expenditure of the gross proceeds for the ultimate purpose. For example, investments deposited to construction funds, reserve funds (including surplus taxes or revenues deposited to sinking funds) or other similar funds are nonpurpose investments. Such investments include only those which are acquired with "gross proceeds." For this purpose, the term "gross proceeds" includes original proceeds received from the sale of the bonds, investment earnings from the investment of such original proceeds, amounts pledged to the payment of debt service on the bonds or amounts actually used to pay debt service on the bonds. The regulations do not provide a sufficient amount of guidance to include an exhaustive list of "gross proceeds" for this purpose; however, it can be assumed that "gross proceeds" represent all amounts received from the sale of bonds, amounts earned as a result of such sale or amounts (including taxes and revenues) which are used to pay, or secure the payment of, debt service for the bonds. The total amount of "gross proceeds" allocated to a bond generally can not exceed the outstanding principal amount of the bonds. The regulations provide that an investment is allocated to an issue for the period (1) that begins on the date gross proceeds are used to acquire the investment, and (2) that ends on the date such investment ceases to be allocated to the issue. In general, proceeds are allocated to a bond issue until expended for the ultimate purpose for which the bond was issued or for which such proceeds are received (e.g., construction of a bond-financed facility or payment of debt service on the bonds). Deposit of gross proceeds to the general fund of the issuer (or other fund in which they are commingled with revenues or taxes) does not eliminate or ameliorate the Issuer's obligation to compute rebate in most cases. As such, proceeds commingled with the general revenues of the issuer are not "freed-up" from the rebate obligation. An exception to this commingling limitation for bonds, other than private activity bonds, permits "investment earnings" (but not sale proceeds or other types of gross proceeds) to be considered spent when deposited to a commingled fund if those amounts are reasonably McCall, Parkhurst & Horton L.L.P. - Page 5 expected to be spent within six months. Other than for these amounts, issuers may consider segregating investments in order to more easily compute the amount of such arbitrage earnings by not having to allocate investments. Special rules are provided for purposes of advance refundings. These rules are too complex to discuss in this memorandum. Essentially, the rules relating to refundings, however, do not require that amounts deposited to the escrow fund to defease the prior obligations of the issuer be subject to arbitrage rebate to the extent that the investments deposited to the escrow fund do not have a yield in excess of the yield on the bonds. Any loss resulting from the investment of proceeds in an escrow fund below the yield on the bonds, however, may be recovered by combining those investments with investments deposited to other funds, e.g., reserve or construction funds. The arbitrage regulations also provide an exception to the arbitrage limitations for the investment of bond proceeds in tax-exempt obligations. As such, investment of proceeds in tax exempt bonds eliminates the Issuer's rebate obligation. A caveat; this exception does not apply to gross proceeds derived allocable to a bond, which is not subject to the alternative minimum tax under section 57(a)(5) of the Code, if invested in tax-exempt bonds subject to the alternative minimum tax, i.e., " private activity bonds." Such "AMT-subject" investment is treated as a taxable investment and must comply with the arbitrage rules, including rebate. Earnings from these tax-exempt investments are subject to arbitrage restrictions, including rebate. Similarly, the investment of gross proceeds in certain tax-exempt mutual funds are treated as a direct investment in the tax-exempt obligations deposited in such fund. While issuers may invest in such funds for purposes of avoiding arbitrage rebate, they should be aware that if "private activity bonds" are included in the fund then a portion of the earnings will be subject to arbitrage rebate. Issuers should be prudent in assuring that the funds do not contain private activity bonds. The arbitrage regulations provide a number of instances in which earnings will be imputed to nonpurpose investments. Receipts generally will be imputed to investments that do not bear interest at an arm's-length (i.e., market) interest rate. As such, the regulations adopt a "market price" rule. In effect, this rule prohibits an issuer from investing bond proceeds in investments at a price which is higher than the market price of comparable obligations, in order to reduce the yield. Special rules are included for determining the market price for investment contracts, certificates of deposit and certain U.S. Treasury obligations. For example, to establish the fair market value of investment contracts a bidding process between three qualified bidders must be used. The fair market value of certificates of deposit which bear a fixed interest rate and are subject to an early withdrawal penalty is its purchase price if that price is not less than the yield on comparable U.S. Treasury obligations and is the highest yield available from the institution. In any event, a basic "common sense" rule-of-thumb that can be used to determine whether a fair market value has been paid is to ask whether the general funds of the issuer would be invested at the same yield or at a higher yield. An exception to this market price rule is available for United States Treasury Obligations - State or Local Government Series in which case the purchase price is always the market price. Reimbursement and Working Capital McCall, Parkhurst & Horton L.L.P. - Page 6 The regulations provide rules for purposes of determining whether gross proceeds are used for working capital and, if so, at what times those proceeds are considered spent. In general, working capital financings are subject to many of the same rules that have existed since the mid-1970s. For example, the regulations generally continue the 13-month temporary period. By adopting a "proceeds-spent-last" rule, the regulations also generally require that an issuer actually incur a deficit (i.e., expenditures must exceed receipts) for the computation period (which generally corresponds to the issuer's fiscal year). Also, the regulations continue to permit an operating reserve, but unlike prior regulations the amount of such reserve may not exceed five percent of the issuer's actual working capital expenditures for the prior fiscal year. Another change made by the regulations is that the issuer may not finance the operating reserve with proceeds of a tax-exempt obligation. Importantly, the regulations contain rules for determining whether proceeds used to reimburse an issuer for costs paid prior to the date of issue of the obligation, in fact, are considered spent at the time of reimbursement. These rules apply to an issuer who uses general revenues for the payment of all or a portion of the costs of a project then uses the proceeds of the bonds to reimburse those general revenues. Failure to comply with these rules would result in the proceeds continuing to be subject to federal income tax restrictions, including rebate. To qualify for reimbursement, a cost must be described in an expression (e.g., resolution, legislative authorization) evidencing the issuer's intent to reimburse which is made no later than 60 days after the payment of the cost. Reimbursement must occur no later than 18 months after the later of (1) the date the cost is paid or (2) the date the project is placed in service. Except for projects requiring an extended construction period or small issuers, in no event can a cost be reimbursed more than three years after the cost is paid. Reimbursement generally is not permitted for working capital; only capital costs, grants and loans may be reimbursed. Moreover, certain anti-abuse rules apply to prevent issuers from avoiding the limitations on refundings. IN CASES INVOLVING WORKING CAPITAL OR REIMBURSEMENT, ISSUERS ARE ADVISED TO CONTACT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. Rebate Payments Rebate payments generally are due 60 days after each installment computation date. The interim computation dates occur each fifth anniversary of the issue date. The final computation date is on the latest of (1) the date 60 days after the date the issue of bonds is no longer outstanding, (2) the date eight months after the date of issue for certain short-term obligations (i.e., obligations retired within three years), or (3) the date the issuer no longer reasonably expects any spending exception, discussed below, to apply to the issue. On such payment dates, other than the final payment date, an issuer is required to pay 90 percent of the rebatable arbitrage to the United States. On the final payment date, an issuer is required to pay 100 percent of the remaining rebate liability. Failure to timely pay rebate does not necessarily result in the loss of tax-exemption. Late payments, however, are subject to the payment of interest, and unless waived, a penalty of 50 percent (or, in the case of private activity bonds, other than qualified 501 (c)(3) bonds, 100 McCall, Parkhurst & Horton L.L.P. - Page 7 percent) of the rebate amount which is due. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Rebate payments are refundable. The issuer, however, must establish to the satisfaction of the Commissioner of the Internal Revenue Service that the issuer paid an amount in excess of the rebate and that the recovery of the overpayment on that date would not result in additional rebatable arbitrage. An overpayment of less than $5,000 may not be recovered before the final computation date. Alternative Penalty Amount In certain cases, an issuer of a bond the proceeds of which are to be used for construction may elect to pay a penalty, in lieu of rebate. The penalty may be elected in circumstances in which the issuer expects to satisfy the two-year spending exception which is more fully described under the heading "Exceptions to Rebate." The penalty is payable, if at all, within 60 days after the end of each six-month period. This is more often than rebate. The election of the alternative penalty amount would subject an issuer, which fails the two-year spend-out requirements, to the payment of a penalty equal to one and one-half of the excess of the amount of proceeds which was required to be spent during that period over the amount which was actually spent during the period. The penalty has characteristics which distinguish it from arbitrage rebate. First, the penalty would be payable without regard to whether any arbitrage profit is actually earned. Second, the penalty continues to accrue until either (1) the appropriate amount is expended or (2) the issuer elects to terminate the penalty. To be able to terminate the penalty, the issuer must meet specific requirements and, in some instances, must pay an additional penalty equal to three percent of the unexpended proceeds. Exceptions to Rebate The Code and regulations provide certain exceptions to the requirement that the excess investment earnings be rebated to the United States. a. Small Issuers. The first exception provides that if an issuer (together with all subordinate issuers) during a calendar year does not issue tax-exempt bonds2 in an aggregate face amount exceeding $5 million, then the obligations are not subject to rebate. Only issuers with general taxing powers may take advantage of this exception. Subordinate issuers are those issuers which derive their authority to issue bonds from the same issuer, e.g., a city and a health facilities development corporation, or which are controlled by the same issuer, e.g., a state and the board of a public university. In the case of bonds issued for public school capital expenditures, the $5 million cap may be increased to as much as $15 million. For purposes of measuring whether bonds in the calendar year exceed these dollar limits, current refunding 2 For this purpose, "private activity bonds" neither are afforded the benefit of this exception nor are taken into account for purposes of determining the amount of bonds issued. McCall, Parkhurst & Horton L.L.P. - Page 8 bonds can be disregarded if they meet certain structural requirements. Please contact McCall, Parkhurst & Horton L.L.P. for further information. b. Spending Exceptions. Six-Month Exception. The second exception to the rebate requirement is available to all tax-exempt bonds, all of the gross proceeds of which are expended during six months. The six month rule is available to bonds issued after the effective date of the Tax Reform Act of 1986. See the discussion of effective dates on page two. For this purpose, proceeds used for the redemption of bonds (other than proceeds of a refunding bond deposited to an escrow fund to discharge refunded bonds) can not be taken into account as expended. As such, bonds with excess gross proceeds generally can not satisfy the second exception unless the amount does not exceed the lesser of five percent or $100,000 and such de minimis amount must be expended within one year. Certain gross proceeds are not subject to the spend-out requirement, including amounts deposited to a bona fide debt service fund, to a reserve fund and amounts which become gross proceeds received from purpose investments. These amounts themselves, however, may be subject to rebate even though the originally expended proceeds were not. The Code provides a special rule for tax and revenue anticipation notes (i.e., obligations issued to pay operating expenses in anticipation of the receipt of taxes and other revenues). Such notes are referred to as TRANs. To determine the timely expenditure of the proceeds of a TRAN, the computation of the "cumulative cash flow deficit" is important. If the "cumulative cash flow deficit" (i.e., the point at which the operating expenditures of the issuer on a cumulative basis exceed the revenues of the issuer during the fiscal year) occurs within the first six months of the date of issue and must be equal to at least 90 percent of the proceeds of the TRAN, then the notes are deemed to satisfy the exception. This special rule requires, however, that the deficit actually occur, not that the issuer merely have an expectation that the deficit will occur. In lieu of the statutory exception for TRANs, the regulations also provide a second exception. Under this exception, 100 percent of the proceeds must be spent within six months, but before note proceeds can be considered spent, all other available amounts of the issuer must be spent first ("proceeds-spent-last" rule). In determining whether all available amounts are spent, a reasonable working capital reserve equal to five percent of the prior year's expenditures may be set aside and treated as unavailable. 18-Month Exception. The regulations also establish a non-statutory exception to arbitrage rebate if all of the gross proceeds (including investment earnings) are expended within 18 months after the date of issue. Under this exception, 15 percent of the gross proceeds must be expended within a six-month spending period, 60 percent within a 12-month spending period and 100 percent within an 18-month spending period. The rule permits an issuer to rely on its reasonable expectations for computing investment earnings which are included as gross proceeds during the first and second spending period. A reasonable retainage not to exceed five percent of the sale proceeds of the issue is not required to be spent within the 18-month period but must be expended within 30 months. Rules similar to the six-month exception relate to the definition of gross proceeds. Two Year Exception. Bonds issued after December 19, 1989 (i.e., the effective date of the Omnibus Reconciliation Act of 1989), at least 75 percent of the net proceeds of which are to be used for construction, may be exempted from rebate if the gross proceeds are spent McCall, Parkhurst & Horton L.L.P. - Page 9 within two years. Bonds more than 25 percent of the proceeds of which are used for acquisition or working capital may not take advantage of this exception. The exception applies only to governmental bonds, qualified 501(c)(3) bonds and private activity bonds for governmentally- owned airports and docks and wharves. The two-year exception requires that at least 10 percent of the available construction proceeds must be expended within six months after the date of issue, 45 percent within 12 months, 75 percent within 18 months and 100 percent within 24 months. The term "available construction proceeds" generally means sale proceeds of the bonds together with investment earnings less amounts deposited to a qualified reserve fund or used to pay costs of issuance. Under this rule, a reasonable retainage not to exceed five percent need not be spent within 24 months but must be spent within 36 months. The two-year rule also provides for numerous elections which must be made not later than the date of issuance of the bonds. Once made, the elections are irrevocable. Certain elections permit an issuer to bifurcate bond issues, thereby treating only a portion of the issue as a qualified construction bond; and, permit an issuer to disregard earnings from reserve funds for purposes of determining "available construction proceeds." Another election permits an issuer to pay the alternative penalty amount discussed above in lieu of rebate if the issuer ultimately fails to satisfy the two-year rule. Issuers should discuss these elections with their financial advisors priorto issuance of the bonds. Of course, McCall, Parkhurst & Horton L.L.P. remains available to assist you by providing legal interpretations thereof. Debt Service Funds. Additionally, an exception to the rebate requirement, whether or not any of the previously discussed exceptions are available, applies for earnings on "bona fide debt service funds." A "bona fide debt service fund" is one in which the amounts are expended within 13 months of the accumulation of such amounts by the issuer. In general, most interest and sinking funds (other than any excess taxes or revenues accumulated therein) satisfy these requirements. For private activity bonds, short term bonds (i.e., have a term of less than five years) or variable rate bonds, the exclusion is available only if the gross earnings in such fund does not exceed $100,000, for the bond year. For other bonds issued after November 11, 1988, no limitation is applied to the gross earnings on such funds for purposes of this exception. Therefore, subject to the foregoing discussion, the issuer is not required to take such amounts into account for purposes of the computation. FOR BONDS ISSUED AFTER THE EFFECTIVE DATE OF THE TAX REFORM ACT OF 1986 WHICH WERE OUTSTANDING AS OF NOVEMBER 11, 1988, OTHER THAN PRIVATE ACTIVITY BONDS, SHORT TERM BONDS OR VARIABLE RATE BONDS, A ONE-TIME ELECTION MAY BE MADE TO EXCLUDE EARNINGS ON "BONA FIDE DEBT SERVICE FUNDS" WITHOUT REGARD TO THE $100,000, LIMITATION. THE ELECTION MUST BE MADE IN WRITING (AND MAINTAINED AS PART OF THE ISSUER'S BOOKS AND RECORDS) NO LATER THAN THE LATER OF MARCH 21, 1990, OR THE FIRST DATE A REBATE PAYMENT IS REQUIRED. Conclusion McCall, Parkhurst & Horton L.L.P. hopes that this memorandum will prove to be useful as a general guide to the arbitrage rebate requirements. Again, this memorandum is not intended as an exhaustive discussion nor as specific advice with respect to any specific transaction. We advise our clients to seek competent McCall, Parkhurst & Horton L.L.P. - Page 10 financial and accounting assistance. Of course, we remain available to provide legal advice regarding all federal income tax matters, including arbitrage rebate. If you have any questions, please feel free to contact either Harold T. Flanagan or Stefano Taverna at (214) 754-9200. McCall, Parkhurst & Horton L.L.P. - Page 11 EXHIBIT "B' LAW OFFICES MCCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701-3248 TELEPHONE: (512) 478-3805 FACSIMILE: (512) 472-0871 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75201-6587 TELEPHONE: (214) 754-9200 FACSIMILE: (214) 754-9250 700 N. ST. MARY'S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (210) 225-2800 FACSIMILE: (210) 225-2984 November 1, 2011 Certain Federal Income Tax Considerations for Private Business Use of Bond-Financed Facilities This memorandum provides a general discussion of those types of contractual arrangements which give rise to private business use, and to what extent that use rises to a prohibited level. Generally, in order for bonds issued by governmental units to be tax- exempt, no more than a de minimis amount of the proceeds of the bonds or the facilities financed with such proceeds may be used by non-governmental users. That is, there may be no more than an incidental use by persons, other than state or local governments. Too much private business use can cause the bonds to become taxable. Private business use for this purpose can be direct or can result from indirect benefits being conveyed to a private person by contractual arrangement. The following discussion describes, in general terms, those types of arrangements which need to be scrutinized. We hope that this general guideline will be useful to you in interacting with private parties regarding the use of bond proceeds or bond-financed facilities. While the statements contained herein are not intended as advice with regard to any specific transaction, McCall, Parkhurst & Horton L.L.P. remains available should you have questions about these rules. If you have any specific questions or comments, please feel free to contact Stefano Taverna or Harold T. Flanagan at (214) 754-9200. I. Private Business Use Arrangements that involve use in a trade or business by a nongovernmental person of bond proceeds or facilities financed with bond proceeds may cause a "private business use" problem. Bond-financed facilities may be used by a variety of people with differing consequences under these rules. For example, students, teachers, employees and the general public may use bond-financed facilities on a non-exclusive basis without constituting private business use. More problematic, however, is use of bond-financed facilities by groups such as managers, lessees (e.g., book store owners), persons providing services (e.g., food or cleaning), seminar groups, sports and entertainment groups, and even alumni associations. The benefits also may be considered to pass to a private person where the right to the output produced by the facility is transferred. For this purpose, the federal government is considered a non-governmental person. Use by an organization organized under section 501 (c)(3) of the Internal Revenue Code in a trade or business unrelated to the exempt purpose of such organization also is considered use by a private person. The term "use" includes both actual and beneficial use. As such, private business use may arise in a variety of ways. For example, ownership of a bond-financed facility by a non-governmental person is private business use. The leasing of a bond-financed facility by a non-governmental person can also cause a private business use problem. Along the same line, management of such facilities by a non-governmental person can cause a problem with private business use, absent compliance with the management contract rules discussed below. Essentially, such use can occur in connection with any arrangement in which the non­ governmental user has a preference to benefit from the proceeds or the facilities. Therefore, any arrangement which results in a non-governmental person being the ultimate beneficiary of the bond financing must be considered. 1. Sales and Leases. The sale of a bond-financed facility to a non­ governmental person would cause a private business use problem if that facility involved the use of more than 10 percent of the bond proceeds. Since state law often prohibits a governmental issuer from lending credit, this circumstance generally does not occur. Leases, however, also could be a problem because such arrangements grant a possessory interest in the facility which results in the lessee receiving a right to use the facility which is superior to members of the general public. 2. Management Contracts. Having a private manager will give rise to private business use unless certain terms of the management agreement demonstrate that beneficial use has not been passed to the manager. These factors relate to the compensation arrangements, contract term, cancellation provisions, and the relationship of the parties. The primary focus of these rules is on compensation. In general, compensation must be reasonable and not be based, in whole or in part, on a share of net profits. Compensation arrangements may take one of four forms: (1) periodic fixed fee; (2) capitation fee; (3) per- unit fee; or (4) percentage of fees charged. In general, a periodic fixed fee arrangement, however, is required in which at least 50 percent of annual compensation be based on a predetermined fee. During the initial two year start-up period, compensation may be based on a percentage of fees charged (i.e., gross revenues, adjusted gross revenues or expenses). The term of a management contract, generally, may not exceed five years, including all renewal options, and must be cancelable by the governmental unit at the end of the third year. If per-unit fee compensation is used, the term is limited to three years, with a cancellation option for the governmental unit at the end of two years. Where compensation is based on a percentage of gross revenues, the contract may not extend beyond a term of two years, cancelable by the governmental unit at the end of the first year. In each instance, cancellation may be upon reasonable notice, but must be "without penalty or cause," meaning no covenant not to compete, buy-out provision or liquidated damages provision is allowed. Finally, the manager may not have any role or relationship with the governmental unit that would limit the ability of the governmental unit to exercise its rights under the contract. Any voting power of either party which is vested in the other party, including its officers, directors, shareholders and employees, may not exceed 20 percent. Further, the chief executive officer of either party may not serve on the governing board of the other party. Similarly, the two parties must not be members of the same controlled group or be related persons, as defined in certain provisions of federal tax law. 3. Cooperative Research Agreements. A cooperative research agreement with a private sponsor whereby the private party uses bond-financed facilities may cause a private business use problem. Nevertheless, such use of a bond-financed facility by a non­ governmental person is to be disregarded for purposes of private business use if the arrangement is in one of the following forms. First, the arrangement may be disregarded if the sponsoring party is required to pay a competitive price for any license or other use of resulting technology, and such price must be determined at the time the technology is available. Second, an arrangement may also qualify if a four-part requirement is met: (1) multiple, unrelated industry sponsors must agree to fund university-performed basic research; (2) the university must determine the research to be performed and the manner in which it is to be performed; (3) the university must have exclusive title to any patent or other product incidentally resulting from the basic research; and (4) sponsors must be limited to no more than a nonexclusive, royalty-free license to use the product of any such research. McCall, Parkhurst & Horton L.L.P. - Page 2 4. Output Contracts. In some circumstances, private business use arises by virtue of contractual arrangements in which a governmental unit agrees to sell the output from a bond-financed facility to a non-governmental person. If the non-governmental person is obligated to take the output or to pay for output even if not taken, then private business use will arise. This is because the benefits and burdens of the bond-financed facility are considered as inuring to the non-governmental purchaser. In addition to the general rule, output-type facilities, including electric and gas generation, transmission and related facilities (but not water facilities) are further limited in the amount of private business use which may be permitted. If more than 5 percent of the proceeds are used for output facilities and if more than 10 percent of the output is sold pursuant to an output arrangement, then the aggregate private business use which may result (for all bond issues) is $15,000,000. II. How Much Private Business Use is Too Much? In general, there is too much private business use if an amount in excess of 10 percent of the proceeds of the bond issue are to be used, directly or indirectly, in a trade or business carried on by persons other than governmental units, and other than as members of the general public. All trade or business use by persons on a basis different than that of the general public is aggregated for the 10 percent limit. Private business use is measured on a facility or bond issue basis. On a facility basis, such use is generally measured by relative square footage, fair market rental value or the percentage of cost allocable to the private use. On a bond issue basis, the proceeds of the bond issue are allocated to private and governmental (or public) use of the facility to determine the amount of private business use over the term of the bond issue. Temporary use is not necessarily "bad" (i.e, private use) even though it results in more than 10 percent of the facility being so used. For example, if 100 percent of a facility is used for a period equal to five percent of the term of the bond such use may not adversely impact the bonds. The question is whether the benefits and burdens of ownership have transferred to the private user, as in the case of a sale, lease or management contract. If these benefits and burdens have not transferred, such use may be disregarded for purposes of private business use. In addition, if the private use is considered "unrelated or disproportionate" to the governmental purpose for issuance of the bonds, the private business use test is met if the level of the prohibited private use rises to 5 percent. The "unrelated" question turns on the operational relationship between the private use and use for the governmental purpose. In most cases, a related use facility must be located within or adjacent to the related governmental facility, e.g., a privately-operated school cafeteria would be related to the school in which it is located. Whereas, the use of a bond-financed facility as an administrative office building for a catering company that operates cafeterias for a school system would not be a related use of bond proceeds. Nonetheless, even if a use is related, it is disproportionate to the extent that bond proceeds used for the private use will exceed proceeds used for the related governmental use. III. When are the tests applied to analyze the qualification of a bond? A bond is tested both (1) on the date of issue, and (2) over the term. The tests are applied to analyze the character of the bond on the date of issue, based on how the issuer expects to use the proceeds and the bond-financed property. This is known as the "reasonable expectations" standard. The tests also continuously are applied during the term of the bonds to determine whether there has been a deviation from those expectations. This is known as the "change of use" standard. When tested, bonds are viewed on an "issue-by-issue" basis. Generally, bonds secured by the same sources of funds are part of the same "issue" if they are sold within 15 days of one another. McCall, Parkhurst & Horton L.L.P. - Page 3 IV. What is the reasonable expectations standard? The reasonable expectations standard will be the basis on which McCall, Parkhurst & Horton L.L.P., as bond counsel, will render the federal income tax opinion on the bonds. The statement of expectations will be incorporated into the Federal Tax Certificate, previously referred to as the Federal Tax Certificate. The certificate also will contain information about the amounts to be expended on different types of property, e.g., land, buildings, equipment, in order to compute a weighted useful life of the bond-financed property. Based on the information on useful life, the maximum weighted average maturity of the bonds tested to ensure that is restricted to no more than 120 percent of the useful life of the property being financed or refinanced. V. Change of Use Standard. The disqualified private business use need not exist on the date of issue. Subsequent use by non-governmental persons also can cause a loss of tax-exemption. Post- issuance "change of use" of bond-financed facilities could result in the loss of the tax-exempt status of the bonds, unless certain elements exist which demonstrate the change was unforeseen. For this purpose, a change in use includes a failure to limit private business use subsequent to the date of issuance of the bonds. A reasonable expectation element requires that, as of the date of issue of the bonds, the governmental unit reasonably have expected to use the proceeds of the issue for qualified facilities for the entire term of the issue. To fall within the safe harbor rules which avoid loss of tax-exempt status the governmental unit must assure that no circumstances be present which indicate an attempt to avoid directly or indirectly the requirements of federal income tax law. Finally, the safe harbor requires that the governmental unit take remedial action that would satisfy one of the following provisions: redemption of bonds; alternative use of disposition proceeds of a facility that is financed by governmental bonds; or, alternative use of a facility that is financed by governmental bonds. For purposes of the latter two remedial action provisions, the governmental unit has 90 days from the date of the change of use to satisfy the requirements. In addition, there is an exception for small transactions for dispositions at a loss. VI. Written Procedures. The Internal Revenue Service ("IRS") has initiated an active audit program intended to investigate the compliance of governmental issuers with the private activity bond rules described herein and the arbitrage rules described in the other memorandum provided to you by our firm. In connection with the expansion of this program, auditors and their supervisors have expressed the viewpoint that each governmental issuer should establish written procedures to assure continuing compliance. Moreover, the IRS is asking issuers to state in a bond issue's informational return (such an 8038-G) whether such procedures have been adopted. The federal tax certificate, together with the attached memoranda and bond covenants can be supplemented by standard written practices adopted by the executive officer or legislative bodies of the issuer. Accordingly, our firm is prepared to advise you with respect to additional practices which we believe would be beneficial in monitoring compliance and taking remedial action in cases of change in use. There is no standard uniform practice for all issuers to adopt because each issuer operates in unique fashion. However, if you wish us to assist you in developing practices which might assist you in complying with the viewpoints expressed by the IRS and its personnel, please contact your bond lawyer at McCall, Parkhurst & Horton LLP. Disclosure Under IRS Circular 230: McCall Parkhurst & Horton LLP informs you that any tax advice contained in this memorandum, including any attachments, was not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax McCall, Parkhurst & Horton L.L.P. - Page 4 related penalties or promoting, marketing or recommending to another party any transaction or matter addressed herein. McCall, Parkhurst & Horton L.L.P. - Page 5 Exhibit "C LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET SUITE 1800 SUITE 900 SUITE 1525 AUSTIN, TEXAS 78701-3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (512) 478-3805 TELEPHONE: (214) 754-9200 TELEPHONE: (210) 225-2800 FACSIMILE: (512) 472-0871 FACSIMILE: (214) 754-9250 FACSIMILE: (210) 225-2984 February 13, 2012 Robert Scott District Manager Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 Re: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Dear Mr. Scott: As you know, Trophy Club Municipal Utility District No. 1 (the "District") will issue the captioned bonds in order to provide for the refunding, in advance of their maturities, of portions of bonds previously issued by the District. As a result of that issuance, the federal income tax laws impose certain restrictions on the investment and expenditure of amounts to be used for the project or to be deposited to the debt service fund for the captioned bonds. The purpose of this letter is to set forth, in somewhat less technical language, those provisions of the tax law which require the timely use of bond proceeds and that investment of these amounts be at a yield which is not higher than the yield on the bonds. Please note that the Form 803 8-G has been prepared based on the information provided by or on your behalf by your financial advisor. Accordingly, while we believe that the information is correct you may wish to have the yield confirmed before your rebate consultant or the paying agent attempt to rely on it. The District has determined that there are no unexpended original and investment proceeds of the outstanding bonds deposited to the construction fund. Generally, the federal tax laws provide that, unless excepted, amounts to be used for the project or to be deposited to the debt service fund must be invested in obligations the combined yield on which does not exceed the yield on the bonds. For this purpose, please refer to line 21 (e) of the Form 803 8-G included in the transcript of proceedings for the yield. Importantly, for purposes of administrative convenience, the bonds, however, have been structured in such a way as to avoid, for the most part, this restriction on investment yield. As such, for analytical purposes only, we have segregated the debt service fund into three separate accounts. This does not require that you segregate monies deposited to the debt service fund into those accounts, but you should keep in mind the limitations imposed on each of those hypothetical accounts. They also contain certain covenants relating to expenditures of proceeds designed to alert you to unintentional failures to comply with the laws affecting expenditures of proceeds and dispositions of property. First, the sale and investment proceeds to be used for the new money project may be invested for up to three years without regard to yield. (Such amounts, however, may be subject to rebate.) Thereafter, they must be invested at or below the bond yield. Importantly, expenditure of these proceeds must be accounted in your books and records. Allocations of these expenditures must occur within 18 months of the later of the date paid or the date the project is completed. The foregoing notwithstanding, the allocation should not occur later than 60 days after the earlier of (1) of five years after the delivery date of the bonds or (2) the date the bonds are retired unless you obtain an opinion of bond counsel. Second, the debt service fund is made up of taxes which are levied annually for the payment of current debt service on all the District's outstanding bonds. Any taxes deposited to the debt service fund which are to be used for the payment of current debt service on the captioned bonds, or any other outstanding bonds, are not subject to yield restriction. By definition, current debt service refers only to debt service to be paid within one year of the date of receipt of the taxes. For the most part, this would be debt service in the current fiscal year. These amounts deposited to the account for current debt service may be invested without regard to any constraint imposed by the federal income tax laws. Third, the debt service fund contains an amount of taxes, which although not expended for debt service within the current year, are necessary to ensure that amounts will be sufficient to pay debt service in the event that taxes are insufficient during that period. This amount, commonly referred to as "coverage," represents a reserve account against periodic fluctuations in the receipt of tax revenues. The Internal Revenue Code permits amounts which are held in reserve for the payment of debt service, in such instances, to be invested without regard to yield restriction if such amounts do not exceed the lesser of (1) 10 percent of the outstanding principal amount of all outstanding bonds, (2) maximum annual debt service on all outstanding bonds, or (3) 125 percent of average annual debt service on all outstanding bonds. Fourth, a portion of the debt service fund is permitted to be invested without regard to yield restriction as a "minor portion." The "minor portion" exception is available for de minimis amounts of taxes deposited to the debt service fund. The maximum amount that may be invested as part of this account may not exceed the lesser of five percent of the principal amount of the bonds or $100,000. Accordingly, you should review the current balance in the debt service fund in order to determine if such balance exceeds the aggregate amount of these three accounts. Additionally, in the future it is important that you be aware of these accounts as additional amounts are deposited to the debt service fund. The amounts which are subject to yield restriction would only be the amounts which are in excess of the sum of (1) the current debt service account, (2) the reserve account, and (3) the "minor portion" account. Moreover, to the extent that additional bonds are issued by the District, whether for new money projects or for refunding, these amounts will change in their proportion. The order contains covenants that require the Issuer to comply with the requirements of the federal tax laws relating to the tax-exempt obligations. The Internal Revenue Service (the "Service") has determined that certain materials, records and information should be retained by the issuers of tax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under the Internal Revenue Code. Accordingly, the Issuer should retain such materials, records and information for the period beginning on the issue date of the outstanding bonds, or, in the case of a sequence of refundings, the issue date of the obligations originally financing the refinanced project and ending three years after the date the captioned bonds are retired. Please note this federal tax law standard may vary from state law standards. The material, records and information required to be retained will generally be contained in the transcript of proceedings for the captioned bonds, however, the Issuer should collect and retain additional materials, records and information to ensure the continued compliance with federal tax law requirements. For example, beyond the transcript of proceedings for the bonds, the Issuer should keep schedules evidencing the expenditure of bond proceeds, documents relating to the use of bond-financed property by governmental and any private parties (e.g., leases and management contracts, if any) and schedules pertaining to the investment of bond proceeds. In the event that you have questions relating to record retention, please contact us. The Service also wants some assurance that any failure to comply with the federal tax laws was not due to an issuer's intentional disregard or gross neglect of the responsibilities imposed on it by the federal tax laws. Therefore, to ensure post-issuance compliance, an issuer should consider adopting formalized written guidelines to help the issuer perform diligence reviews at regular intervals. The goal is for issuers to be able to timely identify and resolve violations of the laws necessary to maintain their obligations' tax-favored status. While the federal tax certificate, together with its attachments, may generally provide a basic written guideline when incorporated in an organizations' operations, the extent to which an organization has appropriate written compliance procedures in place is to be determined on a case-by-case basis Moreover, the Service has indicated that written procedures should identify the personnel that adopted the procedures, the personnel that is responsible for monitoring compliance, the frequency of compliance check activities, the nature of the compliance check activities undertaken, and the date such procedures were originally adopted and subsequently updated, if applicable. The Service has stated that the adoption of such procedures will be a favorable factor that the Service will consider when determining the amount of any penalty to be imposed on an issuer in the event of an unanticipated and non-curable failure to comply with the tax laws. Finally, you should notice that the order contains a covenant that limits the ability of the District to sell or otherwise dispose of bond-financed property for compensation. Beginning for obligations issued after May 15, 1997 (including certain refunding bonds), or in cases in which an issuer elects to apply new private activity bond regulations, such sale or disposition causes the creation of a class of proceeds referred to as "disposition proceeds." Disposition proceeds, like sale proceeds and investment earnings, are tax-restricted funds. Failure to appropriately account, invest or expend such disposition proceeds would adversely affect the tax-exempt status of the bonds. In the event that you anticipate selling property, even in the ordinary course, please contact us. Obviously, this letter only presents a fundamental discussion of the yield restriction rules as applied to amounts deposited to the debt service fund. Moreover, this letter does not address the rebate consequences with respect to the debt service fund and you should review the memorandum attached to the Federal Tax Certificate as Exhibit "A" for this purpose. If you have certain concerns with respect to the matters discussed in this letter or wish to ask additional questions with regards to certain limitations imposed, please feel free to contact our firm. Thank you for your consideration and we look forward to our continued relationship. Very truly yours, McCALL, PARKJTURST & HORTON L.L.P. cc: Gregory C. Schaecher Exhibit "D1 ISSUE PRICE CERTIFICATE The undersigned, as the duly authorized representative of First Southwest Company (the "Underwriter"), with respect to the underwriting of Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") issued by the Trophy Club Municipal Utility District No. 1 (the "Issuer"), hereby certifies and represents on behalf of the Underwriter, but not in his/her own right, based on the Underwriter's records and information available to it that it believes, after reasonable inquiry, to be accurate and complete as of the date hereof, as follows: (a) The Underwriter has offered all of the Bonds to members of the public in a bona fide initial offering at a price which, on the date of such offering, was reasonably expected by the Underwriter to be equal to the fair market value of such maturity. For purposes of this Issue Price Certificate, the term "public" does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Underwriter or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). (b) Other than the obligations maturing in 2021 (the "Retained Maturity or Maturities"), the first price at which a substantial amount (i.e., at least 10 percent) of the principal amount of each maturity of the Bonds was sold to the public is set forth in the Official Statement. In the case of the Retained Maturities, the Underwriter reasonably expected on the offering date to sell a substantial amount (i.e., at least 10 percent) of each Retained Maturity at the initial offering price set forth in the Official Statement. The Official Statement is included in the transcript for the Bonds and is incorporated herein by reference. The Underwriter understands that the representations made in this Issue Price Certificate will be relied upon, by the Issuer with respect to certain of the representations set forth in this Federal Tax Certificate and by McCall, Parkhurst & Horton L.L.P. (i) in connection with rendering its opinion to the Issuer that interest on the Bonds is excludable from gross income thereof for income tax purposes, and (ii) for purposes of completing the IRS Form 803 8-G. The undersigned is certifying only as to facts in existence on the date hereof. Nothing herein represents the undersigned's interpretation of any laws or the application of any laws to these facts. EXECUTED and DELIVERED as of March 5, 2012. FIRST SOUTHWEST COMPANY Title: Sr VP Exhibit "E" SCHEDULES OF FINANCIAL ADVISOR [To be attached hereto] BuMding what you value? SOURCES AND USES OF FUNDS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date 03/01/2012 Delivery Date 03/05/2012 Sources: Bond Proceeds: Par Amount Accrued Interest Premium 2,355,000.00 675.00 136,075.20 2,491,750.20 Uses: Refunding Escrow Deposits: Cash Deposit 2,411,156.25 Other Fund Deposits: Accrued Interest 675.00 Delivery Date Expenses: Cost of Issuance Underwriter's Discount 55,000.00 20,817.50 75,817.50 Other Uses of Funds: Additional Proceeds 4,101.45 2,491,750.20 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 1 SWSI SOUTH WEST GROUP 1 SECURITIES Building what you vakte* SAVINGS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Series 2002 Series 2012 Series 2012 Series 2012 Present Value Refunded Refunding Accrued Refunding to 03/05/2012 Date Debt Service Debt Service Interest Net Cash Flow Savings @ 1.7222694% 09/30/2012 56,156.25 30,375.00 675.00 29,700.00 26,456.25 26,241.01 09/30/2013 277,312.50 245,750.00 245,750.00 31,562.50 30,983.23 09/30/2014 275,300.00 247,050.00 247,050.00 28,250.00 27,268.68 09/30/2015 277,905.00 248,250.00 248,250.00 29,655.00 28,113.86 09/30/2016 279,895.00 249,350.00 249,350.00 30,545.00 28,443.52 09/30/2017 281,250.00 249,350.00 249,350.00 31,900.00 29,178.89 09/30/2018 281,850.00 249,225.00 249,225.00 32,625.00 29,314.95 09/30/2019 286,770.00 258,975.00 258,975.00 27,795.00 24,550.35 09/30/2020 285,632.50 253,350.00 253,350.00 32,282.50 27,991.96 09/30/2021 284,000.00 251,600.00 251,600.00 32,400.00 27,598.00 09/30/2022 286,750.00 254,700.00 254,700.00 32,050.00 26,817.14 09/30/2023 288,750.00 257,500.00 257,500.00 31,250.00 25,683.73 3,161,571.25 2,795,475.00 675.00 2,794,800.00 366,771.25 332,185.30 Savings Summary PV of savings from cash flow 332,185.30 Plus: Refunding funds on hand 4,101.45 Net PV Savings 336,286.75 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 2 SWSiso.ui GROUPlSECU BulUtna SUMMARY OF REFUNDING RESULTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date Delivery Date Arbitrage yield Escrow yield 03/01/2012 03/05/2012 1.722269% Bond Par Amount True Interest Cost Net Interest Cost Average Coupon Average Life 2,355,000.00 1.960767% 2.031656% 2.751679% 6.786 Par amount of refunded bonds Average coupon of refunded bonds Average life of refunded bonds 2,355,000.00 4.880353% 7.007 PV of prior debt to 03/05/2012 @ 1.722269% Net PV Savings Percentage savings of refunded bonds Percentage savings of refunding bonds 2,838,999.35 336,286.75 14.279692% 14.279692% Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 3 SWSi SOUTHWEST group-SECURITIES Building what you vedtte? BOND PRICING $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Bond Component Maturity Date Amount Rate Yield Price Yield to Maturity Premium (-Discount) Takedown Bond Component: 09/01/2013 185,000 2.000% 0.600% 102.072 3,833.20 1.250 09/01/2014 190,000 2.000% 0.750% 103.076 5,844.40 2.500 09/01/2015 195,000 2.000% 0.970% 103.524 6,871.80 3.750 09/01/2016 200,000 2.500% 1.100% 106.115 12,230.00 5.000 09/01/2017 205,000 2.500% 1.230% 106.720 13,776.00 5.000 09/01/2018 210,000 2.500% 1.410% 106.736 14,145.60 5.000 09/01/2019 225,000 2.500% 1.630% 106.109 13,745.25 5.000 09/01/2020 225,000 3.000% 1.860% 108.913 20,054.25 5.000 09/01/2021 230,000 3.000% 2.080% 107.125 C 2.165% 16,387.50 5.000 09/01/2022 240,000 3.000% 2.170% 106.403 C 2.309% 15,367.20 5.000 09/01/2023 250,000 3.000% 2.280% 105.528 C 2.445% 13,820.00 5.000 2,355,000 136,075.20 Dated Date Delivery Date First Coupon 03/01/2012 03/05/2012 09/01/2012 Par Amount Premium Production Underwriter's Discount Purchase Price Accrued Interest 2,355,000.00 136,075.20 2,491,075.20 105.778140% (20,817.50) (0.883970%) 2,470,257.70 104.894170% 675.00 Net Proceeds 2,470,932.70 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD #1:TCMUD_1-2012REF,2012REF) Page 4 CALL PROVISIONS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Call Table: CALL Call Date Call Price 09/01/2020 100.00 Call Provisions Setup Bond Component Call Table Callable Dates Bond Component CALL Any Date Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 5 mo01 SECURITIES: Building tehaf you vaiue? BOND SUMMARY STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date Delivery Date Last Maturity 03/01/2012 03/05/2012 09/01/2023 Arbitrage Yield True Interest Cost (TIC) Net Interest Cost (NIC) All-in TIC Average Coupon 1.722269% 1.960767% 2.031656% 2.326376% 2.751679% Average Life (years) Duration of Issue (years) 6.786 6.227 Par Amount Bond Proceeds Total Interest Net Interest Total Debt Service Maximum Annual Debt Service Average Annual Debt Service 2,355,000.00 2,491,750.20 440,475.00 325,217.30 2,795,475.00 258,975.00 243,261.12 Underwriter's Fees (per $1000) Average Takedown Management Fee Other Fee Total Underwriter's Discount 4.400212 1.000000 3.439490 8.839703 Bid Price 104.894170 Par Average Average Bond Component Value Price Coupon Life Bond Component 2,355,000.00 105.778 2.752% 6.786 2,355,000.00 6.786 Par Value + Accrued Interest + Premium (Discount) - Underwriter's Discount - Cost of Issuance Expense - Other Amounts Target Value TIC 2,355,000.00 136,075.20 (20,817.50) 2,470,257.70 All-in TIC 2,355,000.00 675.00 136,075.20 (20,817.50) (55,000.00) 2,415,932.70 Arbitrage Yield 2,355,000.00 675.00 136,075.20 2,491,750.20 Target Date Yield 03/01/2012 1.960767% 03/05/2012 2.326376% 03/05/2012 1.722269% Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 6 SWSI SOUTHWEST GROuflSECURfTIES Building what you vattwT FORM 8038 STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date Delivery Date 03/01/2012 03/05/2012 Redemption Bond Component Date Principal Coupon Price Issue Price at Maturity Bond Component: 09/01/2013 185,000.00 2.000% 102.072 188,833.20 185,000.00 09/01/2014 190,000.00 2.000% 103.076 195,844.40 190,000.00 09/01/2015 195,000.00 2.000% 103.524 201,871.80 195,000.00 09/01/2016 200,000.00 2.500% 106.115 212,230.00 200,000.00 09/01/2017 205,000.00 2.500% 106.720 218,776.00 205,000.00 09/01/2018 210,000.00 2.500% 106.736 224,145.60 210,000.00 09/01/2019 225,000.00 2.500% 106.109 238,745.25 225,000.00 09/01/2020 225,000.00 3.000% 108.913 245,054.25 225,000.00 09/01/2021 230,000.00 3.000% 107.125 246,387.50 230,000.00 09/01/2022 240,000.00 3.000% 106.403 255,367.20 240,000.00 09/01/2023 250,000.00 3.000% 105.528 263,820.00 250,000.00 2,355,000.00 2,491,075.20 2,355,000.00 Stated Weighted Maturity Interest Issue Redemption Average Date Rate Price at Maturity Maturity Yield Final Maturity 09/01/2023 3.000% 263,820.00 250,000.00 Entire Issue 2,491,075.20 2,355,000.00 6.8230 1.7223% Proceeds used for accrued interest Proceeds used for bond issuance costs (including underwriters' discount) Proceeds used for credit enhancement Proceeds allocated to reasonably required reserve or replacement fund Proceeds used to currently refund prior issues Proceeds used to advance refund prior issues Remaining weighted average maturity of the bonds to be currently refunded Remaining weighted average maturity of the bonds to be advance refunded 675.00 75,817.50 0.00 0.00 0.00 2,411,156.25 0.0000 7.0069 Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 7 SWSi SOUTHWEST GROUP i SECURITIES Building what you value? FORM 8038 STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Refunded Bonds Bond Component Date Principal Coupon Price Issue Price UL Tax Bonds, Series 2002: SERIAL 09/01/2013 165,000.00 4.250% 100.000 165,000.00 SERIAL 09/01/2014 170,000.00 4.350% 100.000 170,000.00 SERIAL 09/01/2015 180,000.00 4.450% 100.000 180,000.00 SERIAL 09/01/2016 190,000.00 4.550% 100.000 190,000.00 SERIAL 09/01/2017 200,000.00 4.700% 100.000 200,000.00 SERIAL 09/01/2018 210,000.00 4.800% 100.000 210,000.00 SERIAL 09/01/2023 275,000.00 5.000% 100.000 275,000.00 TERM 20 09/01/2019 225,000.00 4.950% 100.000 225,000.00 TERM 20 09/01/2020 235,000.00 4.950% 100.000 235,000.00 TERM 22 09/01/2021 245,000.00 5.000% 100.000 245,000.00 TERM22 09/01/2022 260,000.00 5.000% 100.000 260,000.00 2,355,000.00 2,355,000.00 Remaining Last Weighted Call Issue Average Date Date Maturity UL Tax Bonds, Series 2002 09/01/2012 06/27/2002 7.0069 All Refunded Issues 09/01/2012 7.0069 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 8 COST OF ISSUANCE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Cost of Issuance $/1000 Amount Other Cost of Issuance 23.35456 55,000.00 23.35456 55,000.00 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 9 SWSl SOUTHWEST GROUP SECURITIES Building what you. uaiue; Building what you. uaiue; UNDERWRITER'S DISCOUNT $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Underwriter's Discount $/1000 Amount Average Takedown Management Fee UW Counsel UW Expenses 4.40021 1.00000 2.54777 0.89172 10,362.50 2,355.00 6,000.00 2,100.00 8.83970 20,817.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 10 AVERAGE TAKEDOWN $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date 03/01/2012 Delivery Date 03/05/2012 Maturity Par Takedown Takedown Bond Component Date Amount $/Bond Amount Bond Component: 09/01/2013 09/01/2014 09/01/2015 09/01/2016 09/01/2017 09/01/2018 09/01/2019 09/01/2020 09/01/2021 09/01/2022 09/01/2023 185,000 190,000 195,000 200,000 205,000 210,000 225,000 225,000 230,000 240,000 250,000 2. 3. 5. 5. 5. 5. 5. 5. 5. 5. .2500 .5000 .7500 .0000 .0000 .0000 .0000 .0000 .0000 .0000 .0000 231. 475. 731. 1,000. 1,025. 1,050. 1,125. 1,125. 1,150. 1,200. 1,250. .25 .00 .25 .00 .00 .00 .00 .00 .00 .00 .00 2,355,000 4.4002 10,362.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 11 SWS! SOUTHWEST GROUP SECURITIES i'iuildlng what you vaiu&? SERIES 2012 REFUNDING BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Annual Period Debt Ending Principal Coupon Interest Debt Service Service 09/01/2012 30,375.00 30,375.00 09/30/2012 30,375 03/01/2013 30,375.00 30,375.00 09/01/2013 185,000 2.000% 30,375.00 215,375.00 09/30/2013 245,750 03/01/2014 28,525.00 28,525.00 09/01/2014 190,000 2.000% 28,525.00 218,525.00 09/30/2014 247,050 03/01/2015 26,625.00 26,625.00 09/01/2015 195,000 2.000% 26,625.00 221,625.00 09/30/2015 248,250 03/01/2016 24,675.00 24,675.00 09/01/2016 200,000 2.500% 24,675.00 224,675.00 09/30/2016 249,350 03/01/2017 22,175.00 22,175.00 09/01/2017 205,000 2.500% 22,175.00 227,175.00 09/30/2017 249,350 03/01/2018 19,612.50 19,612.50 09/01/2018 210,000 2.500% 19,612.50 229,612.50 09/30/2018 249,225 03/01/2019 16,987.50 16,987.50 09/01/2019 225,000 2.500% 16,987.50 241,987.50 09/30/2019 258,975 03/01/2020 14,175.00 14,175.00 09/01/2020 225,000 3.000% 14,175.00 239,175.00 09/30/2020 253,350 03/01/2021 10,800.00 10,800.00 09/01/2021 230,000 3.000% 10,800.00 240,800.00 09/30/2021 251,600 03/01/2022 7,350.00 7,350.00 09/01/2022 240,000 3.000% 7,350.00 247,350.00 09/30/2022 254,700 03/01/2023 3,750.00 3,750.00 09/01/2023 250,000 3.000% 3,750.00 253,750.00 09/30/2023 257,500 2,355,000 440,475.00 2,795,475.00 2,795,475 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 12 SWS1 SOUTHWEST GROUP 1 SECURITIES Building what you value* SERIES 2012 REFUNDING BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 30,375 30,375 09/30/2013 185,000 2.000% 60,750 245,750 09/30/2014 190,000 2.000% 57,050 247,050 09/30/2015 195,000 2.000% 53,250 248,250 09/30/2016 200,000 2.500% 49,350 249,350 09/30/2017 205,000 2.500% 44,350 249,350 09/30/2018 210,000 2.500% 39,225 249,225 09/30/2019 225,000 2.500% 33,975 258,975 09/30/2020 225,000 3.000% 28,350 253,350 09/30/2021 230,000 3.000% 21,600 251,600 09/30/2022 240,000 3.000% 14,700 254,700 09/30/2023 250,000 3.000% 7,500 257,500 2,355,000 440,475 2,795,475 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 13 SUMMARY OF BONDS REFUNDED $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Maturity Interest Par Call Call Bond Date Rate Amount Date Price UL Tax Bonds, Series 2002, 2002: SERIAL 09/01/2013 4. 4. 4. 4. 4. 4. 5. 4. 4. 5. 5, .250% .350% .450% .550% .700% .800% .000% .950% .950% .000% .000% 165,000.00 170,000.00 180,000.00 190,000.00 200,000.00 210,000.00 275,000.00 225,000.00 235,000.00 245,000.00 260,000.00 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 09/01/2014 09/01/2015 09/01/2016 09/01/2017 09/01/2018 09/01/2023 TERM_20 09/01/2019 09/01/2020 TERM 22 09/01/2021 09/01/2022 2,355,000.00 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 14 SWSI SOUTHWEST GROuplSEGJRITtES tftis&rflru; what tfoit valtMt? SERIES 2002 REFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 56,156.25 56,156.25 09/30/2013 165,000 4.250% 112,312.50 277,312.50 09/30/2014 170,000 4.350% 105,300.00 275,300.00 09/30/2015 180,000 4.450% 97,905.00 277,905.00 09/30/2016 190,000 4.550% 89,895.00 279,895.00 09/30/2017 200,000 4.700% 81,250.00 281,250.00 09/30/2018 210,000 4.800% 71,850.00 281,850.00 09/30/2019 225,000 4.950% 61,770.00 286,770.00 09/30/2020 235,000 4.950% 50,632.50 285,632.50 09/30/2021 245,000 5.000% 39,000.00 284,000.00 09/30/2022 260,000 5.000% 26,750.00 286,750.00 09/30/2023 275,000 5.000% 13,750.00 288,750.00 2,355,000 806,571.25 3,161,571.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 15 Buthditig wHatyott value? SERIES 2002 REFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (2002) Period Annual Ending Principal Coupon Interest Debt Service Debt Service 09/01/2012 56,156.25 56,156.25 09/30/2012 56,156.25 03/01/2013 56,156.25 56,156.25 09/01/2013 165,000 4.250% 56,156.25 221,156.25 09/30/2013 277,312.50 03/01/2014 52,650.00 52,650.00 09/01/2014 170,000 4.350% 52,650.00 222,650.00 09/30/2014 275,300.00 03/01/2015 48,952.50 48,952.50 09/01/2015 180,000 4.450% 48,952.50 228,952.50 09/30/2015 277,905.00 03/01/2016 44,947.50 44,947.50 09/01/2016 190,000 4.550% 44,947.50 234,947.50 09/30/2016 279,895.00 03/01/2017 40,625.00 40,625.00 09/01/2017 200,000 4.700% 40,625.00 240,625.00 09/30/2017 281,250.00 03/01/2018 35,925.00 35,925.00 09/01/2018 210,000 4.800% 35,925.00 245,925.00 09/30/2018 281,850.00 03/01/2019 30,885.00 30,885.00 09/01/2019 225,000 4.950% 30,885.00 255,885.00 09/30/2019 286,770.00 03/01/2020 25,316.25 25,316.25 09/01/2020 235,000 4.950% 25,316.25 260,316.25 09/30/2020 285,632.50 03/01/2021 19,500.00 19,500.00 09/01/2021 245,000 5.000% 19,500.00 264,500.00 09/30/2021 284,000.00 03/01/2022 13,375.00 13,375.00 09/01/2022 260,000 5.000% 13,375.00 273,375.00 09/30/2022 286,750.00 03/01/2023 6,875.00 6,875.00 09/01/2023 275,000 5.000% 6,875.00 281,875.00 09/30/2023 288,750.00 2,355,000 806,571.25 3,161,571.25 3,161,571.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKJPinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 16 SWSlsom GROUPISECU Building Building what you. vakie? SERIES 2002 UNREFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 155,000 4.100% 3,177.50 158,177.50 155,000 3,177.50 158,177.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUDJ-2012REF,2012REF) Page 17 SERIES 2002 UNREFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (2002) Period Ending Principal Coupon Interest Debt Service Annual Debt Service 09/01/2012 09/30/2012 155,000 4.100% 3,177.50 158,177.50 158,177.50 155,000 3,177.50 158,177.50 158,177.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKYFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 18 SWSsoui GROUP'SECU Buildinfj Building what you. value? ESCROW REQUIREMENTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Principal Ending Interest Redeemed Total 09/01/2012 56,156.25 2,355,000.00 2,411,156.25 56,156.25 2,355,000.00 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 19 SWSi SOUTHWEST GROUPISECURITIES Suficitrig what you oolite? ESCROW REQUIREMENTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (2002) Period Principal Ending Interest Redeemed Total 09/01/2012 56,156.25 2,355,000.00 2,411,156.25 56,156.25 2,355,000.00 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 20 SWS1S0UTHWEST G^ouPiSECURlTSES 8utiding what you value." ESCROW COST $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Purchase Cost of Cash Total Date Securities Deposit Escrow Cost 03/05/2012 2,411,156.25 2,411,156.25 0 2,411,156.25 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 21 Building whatyouprttte? ESCROW COST DETAIL $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Purchase Cost of Cash Total Date Securities Deposit Escrow Cost Global Proceeds Escrow: 03/05/2012 2,411,156.25 2,411,156.25 0 2,411,156.25 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 22 Building what you. ttaiuc: ESCROW CASH FLOW $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Unlimited Tax Bonds. Series 2002 (2002) - Allocation of Global Date Other Cash Flows Net Escrow Receipts Present Value to 03/05/2012 @ 0.0000000% 03/05/2012 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 Escrow Cost Summary Purchase date Purchase cost of securities 03/05/2012 2,411,156.25 Target for yield calculation 2,411,156.25 Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 23 ESCROW SUFFICIENCY $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Escrow Net Escrow Excess Excess Date Requirement Receipts Receipts Balance 03/05/2012 09/01/2012 2,411,156.25 2,411,156.25 2,411,156.25 (2,411,156.25) 2,411,156.25 2,411,156.25 2,411,156.25 0.00 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 24 Building what you value? ESCROW STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Total Escrow Cost Modified Duration (years) Yield to Receipt Date Yield to Disbursement Date Perfect Escrow Cost Value of Negative Arbitrage Cost of Dead Time Global Proceeds Escrow: 2,411,156.25 2,391,025.77 20,130.48 2,411,156.25 2,391,025.77 0.00 20,130.48 Delivery date Arbitrage yield 03/05/2012 1.722269% Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 25 SWS - SOUTHWEST GROUP SECURITIES Building what you value: PROOF OF ARBITRAGE YIELD $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Present Value to 03/05/2012 Date Debt Service i @ 1.7222694% 09/01/2012 30,375.00 30,121.40 03/01/2013 30,375.00 29,864.23 09/01/2013 215,375.00 209,945.46 03/01/2014 28,525.00 27,568.49 09/01/2014 218,525.00 209,394.19 03/01/2015 26,625.00 25,294.68 09/01/2015 221,625.00 208,753.88 03/01/2016 24,675.00 23,043.54 09/01/2016 224,675.00 208,028.51 03/01/2017 22,175.00 20,356.72 09/01/2017 227,175.00 206,766.86 03/01/2018 19,612.50 17,698.22 09/01/2018 229,612.50 205,432.07 03/01/2019 16,987.50 15,068.79 09/01/2019 241,987.50 212,822.70 03/01/2020 14,175.00 12,360.16 09/01/2020 959,175.00 829,230.29 2,751,675.00 2,491,750.20 Proceeds Summary Delivery date 03/05/2012 Par Value 2,355,000.00 Accrued interest 675.00 Premium (Discount) 136,075.20 Target for yield calculation 2,491,750.20 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 26 jSWS i SOUTHWEST GROUP'SECURITfES Building what you value*' PROOF OF ARBITRAGE YIELD $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Assumed Call/Computation Dates for Premium Bonds Net Present Value (NPV) Bond Component Maturity Date Rate Yield Call Date Call Price to 03/05/2012 @ 1.7222694% SERIAL 09/01/2021 3.000% 2.080% 09/01/2020 100.000 6,728.93 SERIAL 09/01/2022 3.000% 2.170% 09/01/2020 100.000 8,754.29 SERIAL , 09/01/2023 3.000% 2.280% 09/01/2020 100.000 11,306.56 Rejected Call/Computation Dates for Premium Bonds Bond Component Maturity Date Rate Yield Call Date Call Price Net Present Value (NPV) to 03/05/2012 a 1.7222694% Increase to NPV SERIAL SERIAL SERIAL 09/01/2021 09/01/2022 09/01/2023 3.000% 2.080% 3.000% 2.170% 3.000% 2.280% 9,237.13 13,944.30 19,347.20 2,508.20 5,190.01 8,040.64 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 27 TAB 13 600 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701-3248 Telephone: 512 47S-3SOS Facsimile: 512 472-0871 LAW OFFICES MCCALL, PARKHURST & HORTON L.L.R 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75301-6587 Telephone: 214754-9200 Facsimile: 214 754-9250 700 N. ST. MARY S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 Telephone: 210 225-2800 Facsimile: 2I0 225-2S84 March 26, 2012 CERTIFIED MAIL RRR: 7011 2000 0000 8048 7608 Internal Revenue Service Center Ogden,Utah 84201 Re: Information Reporting - Tax-Exempt Bonds Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Ladies and Gentlemen: Pursuant to the requirements of Section 149(e) of the Internal Revenue Code of 1986, enclosed please find an original of Form 803 8-G which is hereby submitted to you for the above-captioned bonds issued March 5, 2012. Sincerely, McCALL, PARKHURST & HORTON L.L.P. Stefano Tavema ST: kg Enclosures cc: Mr. Gregory C. Schaecher Mr. Jeff H. Gulbas Form8038-G (Rev. September 2011) Department of the Treasury Internal Revenue Service Information Return for Tax-Exempt Governmental Obligations • Under Internal Revenue Code section 149(e) • See separate instructions. Caution: If the issue price is under $100,000, use Form 8038-GC. OMB No. 1545-0720 Reporting Authority If Amended Return, check here • • 1 Issuer's name TROPHY CLUB MUNICIPAL UTILTIY DISTRICT NO. 1 Issuer's employer Identification number (EIN) 75-1502727 3a Name of person (other than Issuer) with whom the IRS may communicate about this return (see Instructions) NONE 3b Telephone number of other person shown on i N/A 4 Number and street (or P.O. box If mall Is not delivered to street address) 100 MUNICIPAL DRIVE Room/suite 5 Report number (For IRS Use Only) 6 City, town, or post office, state, and ZIP code TROPHY CLUB, TEXAS 76262 7 Date of Issue 03/05/2012 B Name of Issue UNLIMITED TAX REFUNDING BONDS, SERIES 2012 CUSIP number 897059 FA4 10a Name and title of officer or other employee of the Issuer whom the IRS may call for more Information (see instructions) ROBERT L. SCOTT, DISTRICT MANAGER Part II 10b Telephone number of officer or other employee shown on 10a (682) 831-4610 Type of Issue (enter the issue price). See the instructions and attach schedule. 11 12 13 14 15 16 17 2,491,075 18 11 12 13 14 15 16 17 18 19 20 Education Health and hospital Transportation Public safety Environment (including sewage bonds) Housing Utilities Other. Describe • If obligations are TANs or RANs, check only box 19a If obligations are BANs, check only box 19b If obligations are in the form of a lease or installment sale, check box Part III Description of Obligations. Complete for the entire issue for which this form is being filed. (a) Final maturity date (b) Issue price (c) Stated redemption price at maturity (d) Weighted average maturity (e) Yield 21 09/01/2023 $ 2,491,075 $ 2,355,000 6.82 years 1.7222 % Part IV 22 23 24 25 26 27 28 29 30 Uses of Proceeds of Bond Issue (including underwriters' discount) Proceeds used for accrued interest Issue price of entire issue (enter amount from line 21, column (b)) . . Proceeds used for bond issuance costs (including underwriters' discount). Proceeds used for credit enhancement Proceeds allocated to reasonably required reserve or replacement fund Proceeds used to currently refund prior issues Proceeds used to advance refund prior issues Total (add lines 24 through 28) 24 75,818 25 .0- 26 -0- 27 -0- 28 2,411,156 22 23 I 29 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) 30 675 2,491,075 2,486,974 4,101 Description of Refunded Bonds. Complete this part only for refunding bonds. PartV 31 Enter the remaining weighted average maturity of the bonds to be currently refunded .... • 32 Enter the remaining weighted average maturity of the bonds to be advance refunded 33 Enter the last date on which the refunded bonds will be called (MM/DD/YYYY) • 34 Enter the date(s) the refunded bonds were issued • (MM/DD/YYYY) 06/27/2002 N/A years 7.00 years 09/01/2012 For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 63773S Form 8038-G (Rev. 9-2011) TROPHY CLUB MUNICIPAL UTILTIY DISTRICT NO. 1 EIN: 75-1502727 Form 8038-G (Rev. 9-2011) Page 2 Miscellaneous 35 Enter the amount of the state volume cap allocated to the Issue under section 141(b)(5) .... 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract b Enter the final maturity date of the GIC • c Enter the name of the GIC provider • 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 35 -0-35 Enter the amount of the state volume cap allocated to the Issue under section 141(b)(5) .... 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract b Enter the final maturity date of the GIC • c Enter the name of the GIC provider • 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 7# 36a -0- 35 Enter the amount of the state volume cap allocated to the Issue under section 141(b)(5) .... 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract b Enter the final maturity date of the GIC • c Enter the name of the GIC provider • 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 37 -0- 38a If this issue is a loan made from the proceeds of another tax-exempt issue, check box • • and enter the following information: b Enter the date of the master pool obligation • c Enter the EIN of the issuer of the master pool obligation • d Enter the name of the issuer of the master pool obligation • 39 If the issuer has designated the issue under section 265(b)(3)(B)(i)(lll) (small issuer exception), check box .... 0 40 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box • • 41a If the issuer has identified a hedge, check here • • and enter the following information: b Name of hedge provider • c Type of hedged d Term of hedge • 42 If the Issuer has superintegrated the hedge, check box • • 43 If the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements under the Code and Regulations (see instructions), check box • 0 44 If the issuer has established written procedures to monitor the requirements of section 148, check box • 0 46a If some portion of the proceeds was used to reimburse expenditures, check here • D and enter the amount of reimbursement • b Enter the date the official intent was adopted • Signature and Consent Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. 1 further declare that 1 consent to the IRS's disclosure of the issuer's return information, as necessary to process this return, to the person that 1 have authorized above. Robert SCOt t, k krLztf—X—03/05/2012 k District Manager J Signature of issuer's authorized representative Date J Type or print name and title Paid Preparer Use Only Print/Type preparer's name STEFANO TAVERNA Preparer^jjanaJufe' ~j s Date 03/05/2012 Check • if self-employed PTIN P01067358 Paid Preparer Use Only Firm's name • MCCALL, PARKHURST & NORTON L.LV Firm's EIN • 75-0799392 Paid Preparer Use Only Firm's address *• 717 N. HARWOOD, SUITE 900, DALLAS, TX 75201 Phone no. 214-754-9200 Form 8038-G (Rev. 9-2011) cO o JO r- a • • • • • • • ru • U.S. Postal Service™ CERTIFIED MAIL™ RECEIPT (Domestic Mail Only; No Insurance Coverage Provided) For delivery information visit our website at www.usps.com,.. 1 - -.; ;• Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees S §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees / ./ / §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees i ) '''1 1 t ! §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees \ §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees §[j p £ Postmark VP* Sent To _ , Internal Revenue Service Center PS Form 3800, August 2006 See Reverse for Instructions TAB 14 GENERAL AND NO-LITIGATION CERTIFICATE THE STATE OF TEXAS : COUNTIES OF DENTON AND TARRANT : TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 : We, the undersigned officers of said TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 ("District"), hereby certify as follows: 1. That this certificate is executed for and on behalf of said District with reference to the issuance of the proposed TROPHY CLUB MUNICH* AL UTILITY DISTRICT NO. 1, UNLIMITED TAX REFUNDING BONDS, SERIES 2012, dated March 1,2012, in the principal amount of $2,355,000 ("Bonds"). 2. The District is a conservation and reclamation district, a body corporate and politic and governmental agency of the State of Texas, created as a municipal utility district pursuant to Article 16, Section 59, of the Texas Constitution by Order of the Texas Water Commission, the predecessor in interest to the Texas Natural Resource Conservation Commission (collectively, the "Commission"), and the District operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended (the "Act") and was the successor bymerger and consolidation of Trophy Club Municipal Utility DistrictNo. 1 ("Prior MUD l")and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2" and collectively with Prior MUD 1, the "Prior MUDs") by consolidation election of May 9, 2009 (the "Consolidation Election"). No changes in the boundaries of the District has occurred since the Consolidation Election. There have there been no changes in the boundaries of the District subsequent to the most recent date of approval by the Office of the Attorney General of Texas of the District's last issuance of public securities. 3. That no litigation of any nature has ever been filed pertaining to, affecting, questioning, or contesting: (a) the order which authorized said District's proposed Bonds described in paragraph 1 of this certificate; (b) the issuance, execution, delivery, payment, security or validity of said proposed Bonds; (c) the authority of the Board of Directors and the officers of said District to issue, execute and deliver said Bonds; (d) the validity of the corporate existence of said District, or (e) the current tax rolls of said District; and that no litigation is pending pertaining to, affecting, questioning, or contesting the current boundaries of said District. 4. That attached to this certificate and marked Exhibit A is a true, full and correct schedule and statement of the aforesaid Bonds and all presently outstanding tax indebtedness of said District after issuance of the Bonds, and there are no outstanding bonds payable out of ad valorem taxes of the Issuer, other than the District's bonds described in Exhibit A. 5. That none of the revenues or income of said District's Waterworks System and Sewer System (the "System") has been pledged or encumbered to the payment of any debt or obligation of said District or said System, except for the District's $1,100,000 Revenue Note, Series 2012. 6. That each of the funds, including the interest and sinking funds, respectively created for the benefit of said District's aforesaid outstanding ad valorem tax bonds contains the amount now required to be deposited therein. 7. That no municipal consents are required for the issuance of the Bonds because the Town of Trophy Club and the Town of Westlake were incorporated after the creation of the District. 8. That the District has not limited the taxing powers granted to it by the Constitution and laws of the State of Texas, and no procedure for such action has been taken. 9. That the District, on October 7,1975, voted a $0.25 per $100 valuation maintenance tax and has levied at a maintenance tax of $0.11914 per $100 valuation for the 2011-12 fiscal year. 10. That no default exists in connection with any of the covenants or requirements of the Orders or Resolutions which authorized the issuance of the District's outstanding bonds. 11. That the currently effective ad valorem tax appraisal roll of said District (the "Tax Roll") is the Tax Roll prepared and approved during the tax year 2011, being the most recently approved Tax Roll of said District; that the taxable property in said District has been appraised, assessed, and valued as required and provided by the Texas Constitution and Property Tax Code (collectively, "Texas law"); that the Tax Roll for said year has been submitted to the Board of Directors of said District as required by Texas law, and has been approved and recorded by said Board of Directors; and according to the Tax Roll for said year the net aggregate taxable value of taxable property in said District (after deducting the amount of all applicable exemptions required or authorized under Texas law), upon which the annual ad valorem tax of said District has been or will be imposed and levied, is $497,817,696. 12. That the District is in compliance with the rules and regulations of the TCEQ and all information has been filed with the TCEQ as required by law, and is current on all such filings. 13. None of the obligations being refunded by the Bonds (the "Refunded Obligations") have been held in, or purchased for the account of, the interest and sinking fund created and maintained for the benefit of such obligations being so refunded, or purchased with any money collected from any taxes levied for the benefit thereof, and no tax money is available or will be used for the retirement of any of the Refunded Obligations. Attached hereto as Exhibit B is a schedule illustrating the debt service savings to be realized by the Issuer as a result of the refunding of the Refunded Obligations by the issuance of the Bonds. 13. That we the undersigned officers of the District officially executed and signed the Bonds by manually executing the Bonds or by causing facsimiles of our manual signatures to be imprinted or lithographed on each of the Bonds, and we hereby adopt said facsimile signatures, if any, as our own, respectively, and declare that such facsimile signatures, if any, constitute our signatures the same as if we had manually signed each of the Bonds. 14. That the Bonds are substantially in the form, and have been duly executed and signed in the manner, prescribed in the order authorizing the issuance of the Bonds. 15. That at the time we so executed and signed the Bonds we were, and at the time of executing this certificate we are, the duly chosen, qualified and acting officers indicated therein, and authorized to execute same. 16. That no litigation of any nature has been filed or is now pending to restrain or enjoin the issuance or delivery of the Bonds, or which would affect the provision made for their payment or security, or in any manner questioning the proceedings or authority concerning the issuance of the Bonds, and that so far as we know and believe no such litigation is threatened. 17. That neither the corporate existence nor boundaries of the Issuer is being contested, that no litigation has been filed or is now pending which would affect the authority of the officers of the Issuer to issue, execute, sign, and deliver any of the Bonds, and that no authority or proceedings for the issuance of any of the Bonds have been repealed, revoked, or rescinded. 18. That we have caused the official seal of the Issuer to be impressed, or printed, or lithographed on each of the Bonds; and said seal on each of the Bonds has been duly adopted as, and is hereby declared to be, the official seal of the Issuer. 19. Any certificate signed by an official of the District delivered to the Initial Purchaser or the Attorney General of the State of Texas shall be deemed a representation and warranty by the District as to the statements made therein. The Public Finance Division of the Office of the Attorney General of the State of Texas is hereby authorized to date this certificate as of the date of approval of the Bonds and is entitled to rely upon the accuracy of the information contained herein unless notified in writing to the contrary. The Comptroller of Public Accounts is further authorized to register the Bonds upon receipt of the Attorney General approval. After registration, the Bonds, opinions and registration papers shall be delivered to Greg Schaecher at McCall, Parkhurst & Horton L.L.P. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] EXECUTED and delivered this March 5. 2012 MANUAL SIGNATURES NAMES AND OFFICIAL TITLES Jim Moss, President, Board of Directors Kevin Carr, Secretary/Treasurer, Board of Directors DISTRICT SEAL Before me, on this day personally appeared the foregoing individuals, known to me to be the persons whose true and genuine signatures were subscribed to the foregoing instrument in my presence. Given under my hand and seal of office this PM"j) (YfWfri I ^ itary Public LAURIE ELIZABETH SLAGHT **Hkr'f* Not^5u,bJi9'<Sil,ie of Texas V#,ii$* August 23, 2015 General Certificate and No-Litigation Certificate Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 EXHIBIT A PRINCIPAL AMOUNT DESCRIPTION OF ISSUE OUTSTANDING Unlimited Tax Bonds, Series 2002 155,000 Unlimited Tax Bonds, Series 2003 840,000 Unlimited Tax Refunding Bonds, Series 2005 1,770,000 Unlimited Tax Bonds, Series 2010 2,000,000 Public Property Finance Contractual Obligations Series 2004 33,750 Public Property Finance Contractual Obligations Series 2007 201,000 Public Property Finance Contractual Obligations Series 2009 114,234 PROPOSED Unlimited Tax Refunding Bonds, Series 2012 $ 2.355.000 EXHIBIT B PROOF OF DEBT SERVICE SAVINGS SAVINGS 52,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13,2012 Series 2002 Series 2012 Series 2012 Series 2012 Present Value Refunded Refunding Accrued Refunding to 03/05.^2012 Date Debt Service Debt Service Merest Net Cash Flow Savings % 1.7222694% 09/30/2012 56,156.25 30,375.00 675.00 29,700.00 26.456.25 26,241.01 09600013 277.312.50 245,750.00 245.750.00 31.562.50 30.983.23 0930/2014 275,300.00 247.050.00 247,050.00 28,250.00 27,268.68 09/30/2015 277,905.00 248,250.00 248,250.00 29,655.00 28,113.86 09/30/2016 279,895.00 249,350.00 249,350.00 30.545.00 28.443.52 09/30/2017 281,250.00 249,350.00 249,350.00 31.900.00 29,178.89 09/30/2018 281,850.00 249,225.00 249.225.00 32,625.00 29,314.95 09/30/2019 286,770.00 258,975.00 258,975.00 27,795.00 24.550.35 09/30/2020 285.632.50 253,350.00 253,350.00 32.2S2.50 27.991.96 09i30/2021 284,000.00 251,600.00 251,600.00 32,400.00 27,598.00 09/30/2022 286,750.00 254,700.00 254,700.00 32.050.00 26,817.14 09/30/2023 288,750.00 257,500.00 257,50000 31,250.00 25,683.73 3,161.571.25 2,795,475.00 675.00 2,794,800.00 366,771.25 332,185.30 Sairngs Summary PV of savings from cash flow 332,185.30 Plus: Refunding funds on hand 4,101.45 Net PV Savings 336,286.75 TAB 15 CLOSING CERTIFICATE I, the undersigned President of the Board of Directors of the Trophy Club Municipal Utility District No. 1 (the "Issuer"), hereby certifies as follows: 1. That this certificate is executed for and on behalf of said Issuer with reference to the issuance of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 in the aggregate principal amount of $2,355,000 (the "Bonds"). This certificate is made in accordance with Section [6(j)(6)] of the Purchase Contract by and between the Issuer and the underwriter of the Bonds, First Southwest Company (the "Underwriter") which is dated February 14,2012 (the "Purchase Contract"). Capitalized terms used herein but not defined have the meanings assigned to such terms in the Purchase Contract. 2. That, to my best knowledge and belief: (i) The representations and warranties of the Issuer contained herein are true and correct in all material respects on and as of the date of Closing as if made on the date of Closing. (ii) No litigation or proceeding or tax challenge against the Issuer is pending or, to the best of my knowledge, threatened in any court or administrative body nor, to my knowledge, is there a basis for litigation which would (a) contest the right of the members or officials of the Issuer to hold and exercise their respective positions, (b) contest the due organization and valid existence of the Issuer, (c) contest the validity, due authorization and execution of the Bonds or the Issuer Documents, (d) attempt to limit, enjoin or otherwise restrict or prevent the Issuer from functioning and levying and/or collecting ad valorem taxes or pledging such taxes to the payment of the Bonds and making payments on the Bonds pursuant to the Bond Order (e) contest the accuracy, completeness or the fairness of the Preliminary Official Statement or the Official Statement, or (f) contest the redemption of the Refunded Bonds. (iii) The Order has been duly adopted by the Issuer, is in full force and effect and has not been modified, amended or repealed, and the Pricing Certificate and the Purchase Contract have been duly executed and delivered by the Pricing Officer and are in full force and effect and have not been modified, amended or repealed. (iv) To the best of my knowledge, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which made, not misleading in any respect as of the time of Closing, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the date of the Closing does not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. (v) There has not been any materially adverse change in the financial condition of the Issuer since September 30, 2010, the latest date as of which audited financial information is available. SIGNED this March 5, 2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 President, B Signature Page to Closing Certificate Trophy Club Municipal Utility District No. 1 Uiuimited Tax Refunding Bonds, Series 2012 TAB 16 ATTORNEY GENERAL OF TEXAS THIS IS TO CERTIFY that Trophy Club Municipal Utility District No. 1 (the "Issuer") has submitted to me Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond. Series 2012 (the "Bond") in the principal amount of $2,355,000 for approval. The Bond is dated March 1, 2012, numbered T-l, and was authorized by an Order of the Issuer passed December 20, 2011. I have examined the law and such certified proceedings and other papers as I deem necessary to render this opinion. As to questions of fact material to my opinion, I have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials furnished to me without undertaking to verify the same by independent investigation. I express no opinion relating to the official statement or any other offering material relating to the Bond. Based on my examination, I am of the opinion, as of the date hereof and under existing law, as follows: (1) The Bond has been issued in accordance with law and is a valid and binding obligation of the Issuer. (2) In accordance with the provisions of the law, including an Escrow Agreement dated as of March 5, 2012, firm banking arrangements have been made for the discharge and final payment or redemption of the obligations being refunded upon deposit of an amount sufficient to pay said obligations when due. (3) The Bond is payable from the proceeds of an ad valorem tax levied, without limitation as to rate or amount, upon all taxable property within the Issuer. Therefore, the Bond is approved. POST OFFICE BOX 12548, AUSTIN, TEXAS 7871 1-2548 TEL: (512) 463-2100 WWW.TEXASATTORNEYGENERAL.GOV Art Equal Employment Opportunity Employer • Printed on Recycled Paper GREG ABBOTT March 2,2012 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond, Series 2012 - $2,355,000 - Page 2 - The Comptroller is instructed that she may register the Bond without the cancellation of the underlying securities being refunded thereby No. 53292 Book No. 2012-A MA OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora, fj Bond Clerk [x] Assistant Bond Clerk in the office of the Comptroller of the State of Texas, do hereby certify that, acting under the direction and authority of the Comptroller on the 2nd day of March, 2012, I signed the name of the Comptroller to the certificate of registration endorsed upon the: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond, Series 2012, numbered T-1. dated March 1, 2012, and that in signing the certificate of registration I used the following signature: IN WITNESS WHEREOF I have executed tjiis certificate this the 2nd day of March, 2012. I, Susan Combs, Comptroller of Public Accounts of the State of Texas, certify that the person who has signed the above certificate was duly designated and appointed by me under authority vested in me by Chapter 403, Subchapter H, Government Code, with authority to sign my name to all certificates of registration, and/or cancellation of bonds required by law to be registered and/or cancelled by me, and was acting as such on the date first mentioned in this certificate, and that the bonds/certificates described in this certificate have been duly registered in the office of the Comptroller, under Registration Number 79693. GIVEN under my hand and seal of office at Austin, Texas, this the 2nd day of March, 2012. SUSAN COMBS Comptroller of Public Accounts of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, SUSAN COMBS, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond, Series 2012 numbered Ti of the denomination of $ 2,355,000, dated March 1, 2012, as authorized by issuer, interest various percent, under and by authority of which said bonds/certificates were registered electronically in the office of the Comptroller, on the 2nd day of March, 2012, under Registration Number 79693. Given under my hand and seal of office, at Austin, Texas, the 2nd day of March, 2012. SUSAN COMBS Comptroller of Public Accounts of the State of Texas TAB 17 600 CONGRESS AVENUE SUITE I8CO AUSTIN, TEXAS 78701-3248 TELEPHONE: 512 478-3305 FACSIMILE: 512 472-0871 LAW OFFICES MCCALL, PARKHURST & HORTON L.L.P. 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75201-6587 TELEPHONE: 214754-9200 FACSIMILE: 214 754-9250 700 N. ST. MARY S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 210225-2800 FACSIMILE: 210225-2984 March 5, 2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS SERIES 2012 DATED MARCH 1,2012 IN THE AGGREGATE PRINCIPAL AMOUNT OF $2,355,000 AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District") issuer of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates and mature on the dates, and are subject to redemption, in accordance with the terms and conditions stated in the text of the Bonds. Terms used herein and not otherwise defined shall have the meaning given in the Order of the District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXAMINED the Constitution and laws of the State of Texas, and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number T-l), and specimens of Bonds to be authenticated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District or if the District consolidates with another District. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 5 7(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed or refinced therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. TAB 18 LAW OFFICES MCCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET SUITE I8CO SUITE 900 SUITE 1535 AUSTIN, TEXAS 78701 -3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 5i2 47a-3S05 TELEPHONE: 214754-9300 TELEPHONE: 210 225-2800 FACSIMILE: 512 472-OB7I FACSIMILE: 214 754-9250 FACSIMILE: 210225-2984 March 5, 2012 Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 First Southwest Company 325 N. St. Paul Street, Suite 800 Dallas, Texas 725201 Re: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Ladies and Gentlemen: This opinion is provided to you pursuant to the requirements of Section 6(i)(4) of the Purchase Contract, dated February 14, 2012 (the "Purchase Contract"), between First Southwest Company (the "Underwriter") and Trophy Club Municipal Utility District No. 1 (the "Issuer") relating to the purchase of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 , dated March 1, 2012, in the principal amount of $2,355,000 (the "Bonds"). All references in this opinion to instruments and other defined terms shall mean the instruments and other terms as defined in the Purchase Contract. The opinions expressed below are qualified to the extent that the enforceability of any provisions in any of the agreements or documents listed may be subject to and affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally, or by general principles of equity which permit the exercise of judicial discretion. Based upon and subject to the above and foregoing, and our examination of such other information and documents, including provisions of the Constitution and applicable State and federal laws as we believe necessary to enable us to render this opinion, we are of the opinion that: (a) The Order was duly adopted by the governing body of the Issuer and the Pricing Certificate has been duly executed by the Pricing Officer, and the Order and the Pricing Certificate are in full force and effect as of the date of this opinion. (b) The Bonds are exempted securities within the meaning of Section 3(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and it is not necessary, in connection with the offer and sale of the Bonds, to register the Bonds under the 1933 Act or to qualify the Order under the Trust Indenture Act. Insofar as the Official Statement is concerned, our review and examination was limited to the information contained under the captions "PLAN OF FINANCING," "THE BONDS" (except under the subcaptions "Payment Record" and "Default and Remedies" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS" and "CONTINUING DISCLOSURE OF INFORMATION" (except under the subcaption "Compliance with Prior Agreements"), and the subcaptions "OTHER PERTINENT INFORMATION"-Registration and Qualification of Bonds for Sale", "OTHER PERTINENT INFORMATION- Legal Investments and Eligibility to Secure Public Funds in Texas", and "OTHER PERTINENT INFORMATION-Legal Matters" (except for the last two sentences of the second paragraph thereof), and we are of the opinion that such descriptions present a fair and accurate summary of the provisions of the laws and instruments therein described and, with respect to the Bonds, such information conforms to the Bond Order. Save and except for the review of the foregoing captions, we have not undertaken to determine independently the accuracy, completeness, or fairness of any other information, data or descriptions contained in the Official Statement, including particularly, but not limited to, the financial and statistical data included therein. In addition, please be advised that the Underwriters are entitled to rely upon the opinion of Bond Counsel delivered in accordance with Section 6(i)(3) of the Purchase Contract. 2 TAB 19 FULBRIGHT Qj>Jaworski L.L.V. Attorneys at Law 2200 Ross Avenue, Suite 2800 • Dallas, Texas 75201-2784 Telephone: 214 855 8000 • Facsimile: 214 855 8200 March 5, 2012 First Southwest Company 325 N. St. Paul, Suite 800 Dallas, Texas 75201 Re: $2,355,000 "Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012", dated March 1, 2012 Ladies and Gentlemen: As the underwriter of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"), you have requested our review of certain documents and proceedings relating to your purchase of the Bonds from the Trophy Club Municipal Utility District No. 1 (the "District"). In that connection, we have examined the Official Statement of the District relating to the Bonds, dated February 14, 2012 (the "Official Statement"), the Purchase Contract, dated February 14, 2012, between the District and you, the Order (as defined in the Purchase Contract) authorizing the issuance of the Bonds, adopted by the Board of Directors of the District on December 20, 2011, and the Pricing Certificate (as defined in the Order) approved and executed pursuant to the Order on February 14, 2012 (the Order and the Pricing Certificate are hereinafter jointly referred to as the "Bond Order"). In making such examinations, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to the original documents of copies of such documents submitted to us as certified or mechanically reproduced copies. As to questions of fact material to the opinions hereinafter expressed, where such facts have not been independently established, and as to the content and form of documents or writings, we have relied in part and to the extent we deem reasonably appropriate upon the representations and warranties of the District contained in the Purchase Contract and certificates of officers and representatives of the District and public officials. Based upon the foregoing, and having due regard for such legal considerations as we deem relevant, we are of the opinion that the Bonds are exempted securities under the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act and the Bond Order need not be qualified under the Trust Indenture Act. 52019170.1 AUSTIN • BEIJING • DALLAS • DENVER • DUBAI • HONG KONG • HOUSTON • LONDON • LOS ANGELES MINNEAPOLIS • MUNICH • NEW YORK • PITTSBURGH-SOUTHPOINTE • RIYADH • SAN ANTONIO • ST. LOUIS • WASHINGTON DC www.Julbright. com Page 2 of Legal Opinion of Fulbright & Jaworski L.L.P. Re: $2,355,000 "Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012", dated March 1, 2012 In addition, we have participated in conferences with officers and other representatives of the District, Bond Counsel, the financial advisor to the District and your representatives at which the contents of the Official Statement and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Official Statement, on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives of the District), no facts have come to our attention to lead us to believe that the Official Statement, as of its date, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for any financial, forecast, technical and statistical statements and data included in the Official Statement and the information regarding The Depository Trust Company and its book-entry system, in each case as to which no view is expressed). The opinions expressed above are specifically limited to the laws of the State of Texas and of the United States of America in effect on the date hereof. The opinions expressed herein are for the sole benefit of you, and may only be relied upon by you in connection with your purchase of the Bonds from the District. In no manner is our opinion to be relied upon for any reason or purpose other than the purpose for which it is expressly furnished hereunder, nor is our opinion to be relied upon by any other person or persons other than for whom it is expressly intended. 52019170.1 TAB 20 sws GROUP SOUTHWEST SECURITIES Building what you value. FINAL MI3MOIIAKIM »l TO: Individuals Listed Below FROM: Dan A. Almon DATE: February 29, 2012 RE: $2,355,000 Trophy Club Municipal Utility District No.1 Unlimited Tax Refunding Bonds, Series 2012 Please find attached the closing memorandum for the above-captioned Bonds. If you have any questions, contact me at (214) 859-9452 / dalmon(d).swst.com or Mary Jane Dietz (214) 859-6803 / midietz&swstcom or fax at (214) 859-9475. Distribution to: Name Entity Email Phone Number Mr. Robert Scott Trophy Club Municipal Utility District No.1 rscott@ci. trophyclub. tx. us 682-831-4610 Ms. Renae Gonzales Trophy Club Municipal Utility District No.1 rgonzales@ci. trophyclub. tx. us 682-831-4611 Mr. Greg Schaecher McCall, Parkhurst & Horton L.L.P. gschaecher@mphlegal. com 214-754-9292 Mr. Chris Settle Fulbright & Jaworski LLP csettle@fulbright. com 214-855-8179 Ms Caresse Tankersley The Bank of New York Mellon Trust Co. Caresse. tankersley@bnymellon. com 214-468-6019 Ms. Joann Smith First Southwest Company joann.smith@@firstsw.com 214-953-4087 Ms. Beverly Knight First Southwest Company beverly.knight@@firstsw.com 214-953-4040 Ms. Claire Miazza First Southwest Company clalre.miazza@@firstsw. com 214-953-4040 1 FINAL TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO.1 $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 CLOSING MEMORANDUM CLOSING Payment for and delivery of the captioned Bonds is scheduled to occur on Monday, March 5, 2012 (the "Closing Date") at 10:00 A.M. at the offices of The Bank of New York Mellon Trust Company, N.A., Dallas, Texas ("BNYM"). RECEIPT AND DISBURSEMENT OF FUNDS On the Closing Date, First Southwest will wire transfer to BNYM ABA #021 000 018, for credit to GLA #211065, FFC: TAS #441705, Re: Trophy Club Municipal Utility District No.1 Unlimited Tax Refunding Bonds, Series 2012, Attn: Caresse Tankersley (214-468-6543, the following amount representing the purchase price for the Bonds : After retaining the funds noted above, BNYM will make the following disbursements on the Closing Date: 2.. By wire transfer, transmit the amount of $33.622.61 to JPMorgan Chase Bank, ABA # 021000021, FAO Southwest Securities, Account # 08805076955, Attention: Public Finance - Amanda Almanza, Reference: Trophy Club MUD #1 - 2012 UL Tax Ref Bonds, Deal #9003-119743. This amount is to pay Southwest Securities, Inc. for fees and reimbursable cost of issuance expenses as listed in Exhibit "A" attached hereto. 3. By wire transfer, transmit the amount of $20.017.00 to PlainsCapital Bank, 325 N. St. Paul Street, Dallas, Texas, 75201, ABA # 1113-2299-4, Account # 4000001208, for credit to McCall, Parkhurst & Horton L.L.P. Operating Account, for further credit to Client Reference #2667.014 Trophy Club Municipal Utility District. This amount is in payment of Bond Counsel fee and expenses and reimbursement for Attorney General Fee as noted in Exhibit "A" attached hereto. Par Amount of Bonds $2,355,000.00 Plus Premium 136,075.20 Plus Accrued Interest 675.00 Less Underwriters' Discount (20.817.50) Total Purchase Price of the Bonds S2.470.932.70 1. BNYM will retain $2.411.956.25 payment of the following: Cash Deposit for Redemption of the Refunded Obligations Paying Agent/Registrar Fee on New Bonds (First Year) Call Notice Fee ($300 per issue) $2,411,156.25 500.00 300.00 $2 411.956.25 2 FINAL 4. By wire transfer, transmit the remaining amount of $5,336.84 to TexPool as follows: State Street Bank and Trust Company, Boston MA ABA (3400) = 011000028 BNF (4200) = Attn: TexPool #67573774 RFB (4320) = Location ID #77384 Participant Name: Trophy Club MUD 1 For final credit by TexPool as follows: (a) Debt Service Account (OBI (6000) - 449, 0613300003) in the amount of $5,336.84 Debt Service Fund amount represents the items shown below. Accrued Interest $ 675.00 "Use of Funds" Additional Proceeds Amount 4,101.45 Excess Cost of Issuance Funds 560.39 Total $5.336.84 GOOD FAITH CHECK On the Closing Date, on behalf of the District, Southwest Securities (the Trophy Club Municipal Utility District's Financial Advisor) is to return via Overnight Delivery or Courier, uncashed. the Good Faith Check for the Series 2012 Refunding Bonds in the amount of $23.550.00 to Beverly Knight, first Southwest Company, 325 North St. Paul St., Suite 800, Dallas, TX 75201, (214-953-4040). 3 FINAL TROPHY CLUB MUNICIPAL UTILITY DISTRICT N0.1 $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 EXHIBIT A Costs of Issuance Paid via Wire by BONY Southwest Securities (Dan Almon) Financial Advisory Fee $23,550.00 Official Statement Electronic Posting/Distribution Via the Internet 1,500.00 Final OS Printing Fee Reimbursement (Clements Printing) 672.61 S&P Rating Fee Reimbursement 7.900.00 $33,622.61 McCall, Parkhurst & Horton L.L.P. (Leroy Grawunder) Bond Counsel Fee (Including Expenses) 17,662.00 Reimbursement for Attorney General Fee 2.355.00 $20,017.00 Additional Cost of Issuance Paying Agent/Registrar Fee / Bond Call Fees (Item #2) $ 800.00 Excess Cost of Issuance Deposited to l&S Fund (Item #5) 560.39 Total Costs of Issuance $55.000.00 4 TAB 21 ISSUER'S RECEIPT OF PAYMENT The undersigned hereby certifies the following information: (a) This certificate is executed and delivered with reference to the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012, in the aggregate principal amount of$2,355,000 (the "Bonds"), issued by the Trophy Club Municipal Utility District No. 1 (the "Issuer"). (b) The undersigned is the duly chosen, qualified and acting officer of the Issuer hereinafter indicated. (c) The Bonds have been duly delivered to the purchaser thereof, First Southwest Company, as set forth in the order authorizing the issuance and sale of the Bonds. (d) The Bonds have been paid for in full by said purchaser concurrently with the delivery of this certificate, and the City has received, and hereby acknowledges receipt of, the agreed purchase price for the Bonds. EXECUTED AND DELIVERED this March 5, 2012 Robert Scott District Manager Trophy Club Municipal Utility District No. 1 TAB 22 RECEIPT AND DELIVERY CERTIFICATE The undersigned, authorized representative of The Bank of New York Mellon Trust Company National Association, as Paying Agent/Registrar with respect to Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"), in the aggregate principal amount of $2,355,000.00, and as escrow agent (the "Escrow Agent") pursuant to that certain Escrow Agreement dated as of March 5,2012 (the "Escrow Agreement") between the Escrow Agent and Trophy Club Municipal Utility District No. 1 (the "District"), relating to the refunding of the District's Refunded Obligations, as defined in the Escrow Agreement, hereby: 1. Acknowledges (i) receipt from the purchaser of the Bonds, First Southwest Company (the "Purchaser"), of $2,470,932.70, representing the aggregate principal amount of the Bonds, plus a premium of $136,075.20, plus $675.00 accrued interest, less $20,817.50 representing the underwriter's discount, being the purchase price for said Bonds as set forth in the closing memorandum (the "Closing Instructions") prepared by Southwest Securities, Inc., financial advisor to the Trophy Club Municipal Utility District No. 1, and (ii) the disposition of said purchase price in accordance with the Closing Instructions, including the deposit of $2,411,156.25 into the Escrow Fund created under the Escrow Agreement; and 2. Certifies that Bonds No. T-l, registered by the Comptroller of Public Accounts of the State of Texas and representing the aggregate principal amount of said issue of Bonds, was delivered to or upon the order of the Purchaser and duly canceled this date by an authorized officer of the undersigned Paying Agent/Registrar upon delivery of definitive Bonds of said aggregate principal amount to or upon the order of said Purchaser. DATED: March 5, 2012. THE BANK OF NEW YORK MELLON TRUST COMPANY NATIONAL ASSOCIATION as Paying Agent/Registrar TAB 23 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 March 5, 2012 The Bank of New York Mellon Trust Company 2001 Bryan Street 8th Floor Dallas, Texas 75201 Re: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Ladies and Gentlemen: The Issuer and the Underwriter of the captioned Bonds have designated your bank as the place, and as their agent, for the delivery and payment of the Bonds. The Bonds, which initially have been issued as a single fully registered Bond payable in installments, will be sent to you in the near future, together with a certified copy of the Order authorizing the issuance of the Bonds. Upon your receipt of the final unqualified approving legal opinion of McCall, Parkhurst & Horton L.L.P., Attorneys at Law, 717 North Harwood Street, Suite 900, Dallas, Texas 75201 as to the validity of the Bonds, you are authorized and directed to deliver the Bonds to the Underwriter thereof, to-wit: FIRST SOUTFIWEST COMPANY, when you have received payment for the Bond, in immediately available funds, in the sum of $2,470,932.70. You are further authorized and directed to cause the proceeds of the above-referenced Bonds to be distributed and deposited, and the Bonds to be delivered to the Purchaser and the closing documents to be dated and distributed, in accordance with the Closing Memorandum prepared by the Issuer's Financial Advisor. Enclosed herewith is one signed copy of each of the General Certificate and Issuer's Receipt of Payment for said Bonds. If any litigation or contest should develop or be filed, or if any event should occur, or any knowledge should come to our attention, which would change or affect the veracity of the statements and representations contained in any of said documents, the undersigned will notify you thereof immediately by telephone. With this assurance you can rely on the absence of any such litigation, contest, event, or knowledge, and on the veracity and currency of each of said documents at the time of delivery of and payment for the Bond, unless you are notified otherwise as aforesaid. After all copies of each of said documents have been dated in accordance with the foregoing instructions, please send all of them to McCall, Parkhurst & Horton. As Escrow Agent for the obligations refunded by the Bonds, you are requested to disburse funds you will receive as Escrow Agent, including the aforementioned purchase price, pursuant to the terms and provisions of the Escrow Agreement between you and the Issuer (the "Escrow Agreement"), as follows: Deposit cash into the Escrow Fund established by the Escrow Agreement in the sum of $2,411,156.25. Sincerely, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By: HA^^-j^^^2— District Manager Signature Page to Paying Agent/Registrar Instruction Letter Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 TAB 24 Summary: Trophy Club Municipal Utility District No. 1, Texas; General Obligation Primary Credit Analyst: OmarTabani, Dallas 214-871-1472; omar_tabani@standardandpoors.com Secondary Contact: Russell Bryce, Dallas (1) 214-871-1419; russell_bryce@standardandpoors.com Tabic Of Contents Rationale Outlook Related Criteria And Research www.standardandpoors.com/ratingsdirect Summary: Trophy Club Municipal Utility District No. 1, Texas; General Obligation Credit Profile US$2,355 mil unltd tax rfdg bnds ser 2012 dtd 03/01/2012 due 09/01/2023 Long Term Rating AA-/Stable New Trophy Club Mun Util Dist #1 GO Unenhanced Rating AA-(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services assigned its 'AA-' rating and stable outlook to Trophy Club Municipal Utility District (MUD) No. 1, Texas' series 2012 unlimited-tax general obligation (GO) refunding bonds and affirmed its 'AA-' rating, with a stable outlook, on the district's series 2010 unlimited-tax GO bonds. The rating reflects our opinion of the district's: • Access to Dallas-Fort Worth's deep economy, resulting in, what we consider, very strong income; • Mature development with limited capital needs; and • Sizable property tax base with, what we view as, a low property tax rate, providing it with revenue-raising flexibility. We believe what we consider the district's moderate overall debt somewhat constrains the rating. An unlimited ad valorem tax levied on all taxable property in the MUD secures the series 2012 refunding bonds. Officials intend to use bond proceeds to refund a portion of the district's debt, resulting in an estimated present value savings of $179,000. MUD No. 1 provides water, sewer, and fire protection services to its 2,284-acre service area in the towns of Trophy Club and Westlake, approximately 27 miles northwest of downtown Dallas and 25 miles northeast of downtown Fort Worth. Trophy Club's access to a broader economy has resulted in, what we view as, very strong median household income equal to 200% of the national level. The MUD is mature with approximately 91% of developable land containing utility infrastructure. Development consists of 3,172 occupied homes ranging in price from $200,000 to $1 million; 178 multifamily units; 138 homes under construction; and 72 vacant lots. The district also contains commercial development that includes an office complex and a shopping center. Approximately 195 acres remain undeveloped, 135 acres of which are zoned for residential purposes and 60 acres of which are zoned for commercial purposes. The property tax base remains sizable. Despite a 6% contraction since fiscal 2010, due primarily to an increase in exemptions and protests of appraised values, the tax base has increased by a cumulative 4.6% since fiscal 2008 to $954.6 million in fiscal 2012. Despite its commercial presence, the tax base is diverse with the 10 leading taxpayers Standard & Poors | RatingsDirect on the Global Credit Portal | February 8, 2012 2 Summary: Trophy Club Municipal Utility District No. 1, Texas; General Obligation accounting for 24.6% of assessed value (AV). The MUD is adjacent to Trophy Club Public Improvement District (PID) No. 1. Significant home construction is also occurring in the PID. While land in the PID is not subject to the MUD's property tax levy, the MUD provides water, sewer, and fire protection services to PID residents; this generates additional operating revenue for the MUD. In our opinion, finances are good. The assigned and unassigned general fund balance of $3.33 million at fiscal year-end 2011 equaled, what we view as, a good 57% of expenditures. Water and sewer charges (75%) and property taxes (19%) generated the bulk of fiscal 2011 general fund revenue. The MUD's debt service fund provides debt service liquidity; the fund contained $107,847 at fiscal year-end 2011, or, in our view, a low 12% of the MUD's maximum annual debt service payment scheduled to occur in 2012. Management attributes essentially all revenue in the debt service fund to property taxes. The MUD's property tax rate is, in our view, a very low 17.5 cents per $100 of AV. Monthly combined water and sewer rates are, what we consider, a competitive $67.18 per 8,000 gallons consumed. The MUD's direct debt is, in our opinion, low at less than 1% of AV. In our view, including all overlapping entities, the MUD's overall net debt is a moderate 4.7% of AV. We consider debt amortization front loaded with officials planning to retire 71% of principal over 10 years and 100% by 2031. Management does not intend to issue any additional debt within the next 18 months. Outlook The stable outlook reflects Standard & Poor's opinion that the MUD's mature development will likely limit any significant debt-supported capital needs and that a sizable property tax base will likely allow direct debt and the MUD's property tax rate to remain, what Standard &c Poor's considers, low and manageable. Given the current rating, we do not think we will change the rating within the outlook's two-year period. Related Criteria And Research USPF Criteria: Methodology And Assumptions: Rating Unlimited Property Tax Basic Infrastructure Districts, March 17, 2009 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard 8c Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. www.standardandpoors.com/ratingsdirect 3 Copyright © 2012 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). 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Scott, District Manager Re: US$2,355,000 Trophy Club Municipal Utility District #1, Texas, Unlimited Tax Refunding Bonds, Series 2012, dated: March 01,2012, due: September 01,2023 Dear Mr. Scott: Pursuant to your request for a Standard & Poor's rating on the above-referenced issuer, we have reviewed the information submitted to us and, subject to the enclosed Terms and Conditions, have assigned a rating of "AA-". Standard & Poor's views the outlook for this rating as stable. A copy of the rationale supporting the rating is enclosed. The rating is not investment, financial, or other advice and you should not and cannot rely upon the rating as such. The rating is based on information supplied to us by you or by your agents but does not represent an audit. We undertake no duty of due diligence or independent verification of any information. The assignment of a rating does not create a fiduciary relationship between us and you or between us and other recipients of the rating. 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PF Ratings U.S. (05/17/11) TRANSCRIPT OF PROCEEDINGS RELATING TO $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Dated: March 5, 2012 MCCALL. PARKHURST & MORTON I...L.J 717 North Harwood, Ninth Floor • Dallas, Texas 75201 • Phone: (214) 754-9200 $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 TABLE OF CONTENTS DOCUMENT TAB NO. Certified Bond Order 1 Pricing Certificate 2 Specimen Bond 3 Paying Agent/Registrar Agreement 4 Preliminary Official Statement 5 Official Statement 6 Bond Purchase Agreement 7 Escrow Agreement 8 Corporate Authority & Signature Identification for Escrow Agent 9 Refunded Bond PA/R Sufficiency Certificate 10 Notice of Redemption 11 Federal Tax Certificate 12 Form 8038-G 13 General and No-Litigation Certificate 14 Closing Certificate 15 Attorney General's Opinion and Comptroller's Registration Certificate 16 Opinion of Bond Counsel 17 Supplemental Opinion of Bond Counsel 18 Opinion of Underwriter Counsel 19 Closing Memorandum 20 Issuer's Receipt 21 Receipt and Delivery Certificate 22 Instruction Letter to Paying Agent/Registrar 23 Rating Letters 24 TRANSCRIPT OF PROCEEDINGS RELATING TO $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Dated: March 5, 2012 MCCALL. PARKHURST & MORTON I...L.J 717 North Harwood, Ninth Floor • Dallas, Texas 75201 • Phone: (214) 754-9200 $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 TABLE OF CONTENTS DOCUMENT TAB NO. Certified Bond Order 1 Pricing Certificate 2 Specimen Bond 3 Paying Agent/Registrar Agreement 4 Preliminary Official Statement 5 Official Statement 6 Bond Purchase Agreement 7 Escrow Agreement 8 Corporate Authority & Signature Identification for Escrow Agent 9 Refunded Bond PA/R Sufficiency Certificate 10 Notice of Redemption 11 Federal Tax Certificate 12 Form 8038-G 13 General and No-Litigation Certificate 14 Closing Certificate 15 Attorney General's Opinion and Comptroller's Registration Certificate 16 Opinion of Bond Counsel 17 Supplemental Opinion of Bond Counsel 18 Opinion of Underwriter Counsel 19 Closing Memorandum 20 Issuer's Receipt 21 Receipt and Delivery Certificate 22 Instruction Letter to Paying Agent/Registrar 23 Rating Letters 24 TAB 1 CERTIFICATE FOR ORDER THE STATE OF TEXAS COUNTIES OF DENTON AND TARRANT TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 We, the undersigned officers of the Board of Directors of said District, hereby certify as follows: 1. The Board of Directors of said District convened in REGULAR MEETING ON DECEMBER 20, 2011, at the designated meeting place, and the roll was called of the duly constituted officers and members of said Board, to wit: Jim Moss, President Nick Sanders, Vice President Kevin Carr, Secretary/Treasurer Bill Armstrong, Director Jim Thomas, Director and all of said persons were present, except the following absentees: None , thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written ORDER AUTHORIZING THE ISSUANCE OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS; LEVYING AN AD VALOREM TAX IN SUPPORT OF THE BONDS; APPROVING AN OFFICIAL STATEMENT; AUTHORIZING THE EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND AN ESCROW AGREEMENT; ESTABLISHING PROCEDURES FOR SELLING AND DELIVERING THE BONDS; AND AUTHORIZING OTHER MATTERS RELATED TO THE ISSUANCE OF THE BONDS was duly introduced for the consideration of said Board and read in full. It was then duly moved and seconded that said Order be passed; and, after due discussion, said motion, carrying with it the passage of said Order, prevailed and carried with all members present voting "AYE" except the following: NAY: 0 ABSTAIN: 0 2. That a true, full, and correct copy of the aforesaid Order passed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Order has been duly recorded in said Board's minutes of said Meeting; that the above and foregoing paragraph is a true, full, and correct excerpt from said Board's minutes of said Meeting pertaining to the passage of said Order; that the persons named in the above and foregoing paragraph are the duly chosen, qualified, and acting officers and members of said Board as indicated therein; that each of the officers and members of said Board was duly and sufficiently notified officially and personally, in advance, of the time, place, and purpose of the aforesaid Meeting, and that said Order would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose; and that said Meeting was open to the public, and public notice of the time, place, and purpose of said Meeting was given all as required by the Texas Government Code, Chapter 551. 3. The President of the Board of Directors has approved and hereby approves the aforesaid Order; and the President and the Secretary/Treasurer of the Board of Directors hereby declare that their signing of this certificate shall constitute the signing of the attached and following copy of said Order for all purposes. SIGNED AND SEALED the 20th day of December, 2011. ORDER ORDER AUTHORIZING THE ISSUANCE OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS; LEVYING AN AD VALOREM TAX IN SUPPORT OF THE BONDS; APPROVING AN OFFICIAL STATEMENT; AUTHORIZING THE EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND AN ESCROW AGREEMENT; ESTABLISHING PROCEDURES FOR SELLING AND DELIVERING THE BONDS; AND AUTHORIZING OTHER MATTERS RELATED TO THE ISSUANCE OF THE BONDS TABLE OF CONTENTS ARTICLE ONE 2 PREAMBLE 2 SECTION 1.01 INCORPORATION OF PREAMBLE 2 ARTICLE TWO 2 DEFINITIONS AND INTERPRETATIONS 2 SECTION 2.01. DEFINITIONS 2 SECTION 2.02. INTERPRETATIONS 6 ARTICLE THREE 6 AUTHORIZATION, REGISTRATION, EXECUTION, 6 AND AUTHENTICATION OF BONDS 6 SECTION 3.01. AMOUNT, NAME, PURPOSE, AND AUTHORIZATION 6 SECTION 3.02. DATE, DENOMINATIONS, NUMBERS, DELEGATION TO PRICING OFFICER. 7 SECTION 3.03. PAYMENT OF PRINCIPAL AND INTEREST 8 SECTION 3.04. SUCCESSOR REGISTRARS 9 SECTION 3.05. SPECIAL RECORD DATE 9 SECTION 3.06. REGISTERED OWNERS 9 SECTION 3.07. EXECUTION OF BONDS 9 SECTION 3.08. AUTHENTICATION 10 ARTICLE FOUR 10 REGISTRATION, TRANSFER, AND EXCHANGE 10 SECTION 4.01. REGISTRATION, TRANSFER, AND EXCHANGE 10 SECTION 4.02. MUTILATED, LOST, OR STOLEN BONDS 11 SECTION 4.03. CANCELLATION OF BONDS 12 SECTION 4.04. BOOK-ENTRY-ONLY SYSTEM 12 ARTICLE FIVE 13 REDEMPTION OF BONDS BEFORE MATURITY 13 SECTION 5.01. REDEMPTION OF BONDS 13 ARTICLE SIX 14 FORM OF BOND 14 SECTION 6.01. FORM OF BOND 14 SECTION 6.02. REGISTRATION OF INITIAL BOND BY STATE COMPTROLLER AND CERTIFICATE 24 SECTION 6.03. FORM OF AUTHENTICATION CERTIFICATE 24 SECTION 6.04. FORM OF ASSIGNMENT 25 SECTION 6.05. CUS1P REGISTRATION 26 SECTION 6.06. LEGAL OPINION AND BOND INSURANCE 26 ARTICLE SEVEN 26 SECURITY OF THE BONDS 26 SECTION 7.01. GENERAL 26 SECTION 7.02. LEVY OF TAX 26 SECTION 7.03. PAYMENT OF BONDS AND PERFORMANCE OF OBLIGATIONS... 27 SECTION 7.04. CONSOLIDATION OR DISSOLUTION OF DISTRICT 27 ARTICLE EIGHT 28 TravisCoMUD2\UTRB 1 l\Del: ORDER i FLOW OF FUNDS AND INVESTMENTS 28 SECTION 8.01. FUNDS, FLOW OF FUNDS 28 SECTION 8.02. SECURITY OF FUNDS 28 SECTION 8.03. DEBT SERVICE FUND; TAX LEVY 28 SECTION 8.04. ESCROW FUND 29 SECTION 8.05. INVESTMENTS; EARNINGS 29 ARTICLE NINE 29 APPLICATION OF FUNDS 29 SECTION 9.01. BOND PROCEEDS 29 SECTION 9.02. ACCRUED INTEREST 29 SECTION 9.03. ESCROW FUND 29 ARTICLE TEN 29 PROVISIONS CONCERNING FEDERAL INCOME TAX EXCLUSION 29 SECTION 10.01. COVENANTS REGARDING TAX EXEMPTION OF INTEREST ON THE BONDS 29 ARTICLE ELEVEN 32 ADDITIONAL BONDS AND REFUNDING BONDS 32 SECTION 11.01. ADDITIONAL BONDS 32 SECTION 11.02. OTHER BONDS 32 SECTION 11.03. REFUNDING BONDS 32 ARTICLE TWELVE 33 DEFAULT PROVISIONS 33 SECTION 12.01. REMEDIES IN EVENT OF DEFAULT 33 SECTION 12.02. BOND ORDER IS CONTRACT 34 ARTICLE THIRTEEN 34 DISCHARGE BY DEPOSIT 34 SECTION 13.01. DEFEASANCE OF BONDS 34 ARTICLE FOURTEEN 35 MISCELLANEOUS PROVISIONS 35 SECTION 14.01. DISTRICT'S SUCCESSORS AND ASSIGNS 35 SECTION 14.02. NO RECOURSE AGAINST DISTRICT OFFICERS OR DIRECTORS. 36 SECTION 14.03. REGISTRAR 36 SECTION 14.04. REGISTRAR MAY OWN BONDS 36 SECTION 14.05. BENEFITS OF ORDER PROVISIONS 36 SECTION 14.06. UNAVAILABILITY OF AUTHORIZED PUBLICATION 36 SECTION 14.07. SEVERABILITY CLAUSE 36 SECTION 14.08. ACCOUNTING 36 SECTION 14.09. FURTHER PROCEEDINGS 37 ARTICLE FIFTEEN 37 SALE AND DELIVERY OF BONDS 37 AND APPROVAL OF DOCUMENTS 37 SECTION 15.01. SALE OF BONDS 37 SECTION 15.02. APPROVAL, REGISTRATION, AND DELIVERY 37 SECTION 15 03 APPROVAL OF OFFERING DOCUMENTS, PAYING AGENT/REGISTRAR AGREEMENT AND ESCROW AGREEMENT 37 SECTION 15.04. REFUNDING OF REFUNDED BONDS 38 TravisCoMUD2\UTRB 1 l\Del: ORDER U ARTICLE SIXTEEN 38 OPEN MEETING AND EFFECTIVE DATE 38 SECTION 16.01. OPEN MEETING 38 SECTION 16.02. EFFECTIVE DATE OF BOND ORDER 38 ARTICLE SEVENTEEN 38 AMENDMENTS 38 SECTION 17.01. AMENDMENTS 38 ARTICLE EIGHTEEN 40 OTHER ACTIONS AND MATTERS 40 SECTION 18.01. OTHER ACTIONS 40 SECTION 18.02. ADDITIONAL BOND INSURANCE PROVISIONS 41 SECTION 18.03. PAYMENT OF ATTORNEY GENERAL FEE 41 ARTICLE NINETEEN 41 CONTINUING DISCLOSURE 41 SECTION 19.01. CONTINUING DISCLOSURE UNDERTAKING 41 EXHIBITS Exhibit "A" Paying Agent/Registrar Agreement Exhibit "B" Escrow Agreement Exhibit "C" Form of Notices of Redemption Exhibit "D" Continuing Disclosure Undertaking Exhibit "E" Written Procedures TiavisCoMUD2\UTRBll\Del. ORDER. iii ORDER AUTHORIZING THE ISSUANCE OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS; LEVYING AN AD VALOREM TAX IN SUPPORT OF THE BONDS; APPROVING AN OFFICIAL STATEMENT; AUTHORIZING THE EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND AN ESCROW AGREEMENT; ESTABLISHING PROCEDURES FOR SELLING AND DELIVERING THE BONDS; AND AUTHORIZING OTHER MATTERS RELATED TO THE ISSUANCE OF THE BONDS THE STATE OF TEXAS § COUNTIES OF DENTON AND TARRANT § TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 § WHEREAS, Trophy Club Municipal Utility District No. 1 (the "District") is a conservation and reclamation district, a body corporate and politic and governmental agency of the State of Texas, created as a municipal utility district pursuant to Article 16, Section 59, of the Texas Constitution by Order of the Texas Commission on Environmental Quality, the successor in interest to the Texas Water Commission (collectively, the "Commission"), and the District operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended (the "Act"); WHEREAS, the District is the successor by merger and consolidation of Trophy Club Municipal Utility District No. 1 ("Prior MUD 1") and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2" and with Prior MUD 1, the "Prior MUDs") pursuant to a consolidation election held in the District on May 9, 2009 (the "Consolidation Election") by which the District consolidated the Prior MUDs into the District and assumed all outstanding and voted but unissued bonds and taxes of the Prior MUDs; and WHEREAS, the District currently has outstanding its Trophy Club Utility District No. 2 Unlimited Tax Bonds, Series 2002 (the "Outstanding Bonds"); and WHEREAS, the District now desires to issue refunding bonds to refund all or part of the Outstanding Bonds (the "Refundable Bonds", and those Refundable Bonds designated by the Pricing Officer in the Pricing Certificate, each as defined herein, to be refunded are herein referred to as the "Refunded Bonds"); and WHEREAS, all the Refunded Bonds mature or are subject to redemption prior to maturity within 20 years of the date of the bonds hereinafter authorized; and WHEREAS, the refunding bonds hereafter authorized are being issued and delivered pursuant to Chapter 1207, Texas Government Code, as amended ("Chapter 1207"); and WHEREAS, Chapter 1207 authorizes the District to issue refunding bonds and to deposit the proceeds from the sale thereof together with any other available funds or resources, directly with a place of payment (paying agent) for the Refunded Bonds or eligible trust 1 company or commercial bank, and such deposit, if made before such payment dates, shall constitute the making of firm banking and financial arrangements for the discharge and final payment of the Refunded Bonds; and WHEREAS, Chapter 1207 further authorizes the District to enter into an escrow agreement with respect to the safekeeping, investment, reinvestment, administration and disposition of any such deposit, upon such terms and conditions as the District and such escrow agent may agree, provided that such deposits may be invested and reinvested in Defeasance Securities, as defined herein; and WHEREAS, the Escrow Agreement hereinafter authorized, constitutes an agreement of the kind authorized and permitted by Chapter 1207; and WHEREAS, the Board of Directors of the District deems it advisable and in the best interest of the District to refund the Refunded Bonds in order to achieve a net present value debt service savings of not less than 6.00% of the principal amount of the Refunded Bonds net of any District contribution with such savings, among other information and terms to be included in a Pricing Certificate to be executed by the Pricing Officer, both as hereinafter defined, all in accordance with the provisions of Chapter 1207, including Section 1207.007 thereof; THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1: ARTICLE ONE PREAMBLE SECTION 1.01 INCORPORATION OF PREAMBLE. The Board of Directors of the Trophy Club Municipal Utility District No. 1 (the "District") hereby incorporates the recitals set forth in the preamble hereto as if set forth in full at this place and further finds and determines that the recitals are true and correct. ARTICLE TWO DEFINITIONS AND INTERPRETATIONS SECTION 2.01. DEFINITIONS. When used in this Order, except in Article Six, and in any resolution, order or amendatory or supplemental order hereto, the terms listed below shall have the meanings specified below, unless it is otherwise expressly provided or unless the context otherwise requires: "Accreted Value" shall mean, with respect to a Premium Compound Interest Bond, as of any particular date of calculation, the original principal amount thereof, plus all interest accrued and compounded to the particular date of calculation, as determined in accordance with the Pricing Certificate and the Accretion Table attached as an exhibit to the Pricing Certificate 2 relating to the Bonds that shows the Accreted Value per $5,000 maturity amount on the calculation date of maturity to its maturity. "Accretion Table" means the exhibit attached to the Pricing Certificate that sets forth the rounded original principal amounts at the Issuance Date for the Premium Compound Interest Bonds and the Accreted Values and maturity amounts thereof as of each Compounding Date until final maturity. "Additional Bonds" means the additional bonds payable from ad valorem taxes which the Board expressly reserves the right to issue in Article Eleven of this Bond Order. "Authorized Denominations" means the denomination of $5,000 or any integral multiple thereof with respect to the Current Interest Bonds and in the denomination of $5,000 in maturity amount or any integral multiple thereof with respect to the Premium Compound Interest Bonds. "Authorized Investments" means such investments authorized pursuant to the investment policy of the District and Chapter 2256 of the Texas Government Code, as amended. "Board of Directors" or "Board" means the governing body of the District. "Bond Insurer" means the insurer of the bonds, if any, as designated in the Pricing Certificate. "Bonds" shall mean and include collectively the Premium Compound Interest Bonds and Current Interest Bonds initially issued and delivered pursuant to this Order and the Pricing Certificate and all substitute Bonds and Bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pursuant hereto, and the term "Bond" shall mean any of the Bonds. "Bond Order" or "Order" means this Order of the Board of Directors authorizing the issuance of the Bonds. "Business Day" means any day which is not a Saturday, Sunday or a day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed. "Compounded Amount" shall mean, with respect to a Premium Compound Interest Bond, as of any particular date of calculation, the original principal amount thereof plus all interest accrued and compounded to the particular date of calculation. "Compounding Date" means the amounts as of any September 1 and March 1 as set forth in the Accretion Table. "Current Interest Bonds" shall mean the Bonds paying current interest and maturing in each of the years and in the aggregate principal amounts set forth in the Pricing Certificate. 3 "Defeasance Securities" means (i) Federal Securities, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the Board of Directors adopts or approves proceedings authorizing the issuance of refunding bonds or otherwise provide for the funding of an escrow to effect the defeasance of the Bonds are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the Board of Directors adopts or approves proceedings authorizing the issuance of refunding bonds or otherwise provide for the funding of an escrow to effect the defeasance of the Bonds, are rated as to investment quality by a nationally recognized investment rating firm no less than "AAA" or its equivalent, and (iv) any other then authorized securities or obligations under applicable State law that may be used to defease obligations such as the Bonds. "District" means Trophy Club Municipal Utility District No. 1 and any other public agency succeeding to the powers, rights, privileges, and functions of the District and, when appropriate, the Board of Directors of the District. "Escrow Agent" means The Bank of New York Mellon Trust Company, N. A. or any successor escrow agent under the Escrow Agreement. "Escrow Agreement" means the agreement by and between the District and the Escrow Agent relating to the defeasance of the Refunded Bonds. "Exchange Bonds" means Bonds registered, authenticated, and delivered by the Registrar, as provided in Section 4.01 of this Bond Order. "Federal Securities" as used herein means direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America (including Interest Strips of the Resolution Funding Corporation). "Fiscal Year" means the twelve-month accounting period for the District, which presently is the twelve-month period beginning on October 1 of each year and ending on September 30 of the following year, but which may be changed from time to time by the Board of Directors. "Initial Bond" means the Bond authorized, issued, and initially delivered as provided in Section 3.02 of this Bond Order. "Interest Payment Date" means a date on which interest on the Current Interest Bonds is due and payable as set forth in the Pricing Certificate. "Issuance Date" means the date of delivery of the Bonds. "MSRB" shall mean the Municipal Securities Rulemaking Board. 4 "Outstanding" when used with reference to Bonds, means, as of a particular date, all Bonds theretofore and thereupon delivered except; (a) any Bond canceled by or on behalf of the District at or before said date, (b) any Bond defeased or no longer considered Outstanding pursuant to the provisions of this Order or otherwise defeased as permitted by applicable law and (c) any such Bond in lieu of or in substitution for which another Bond shall have been delivered pursuant to this Order. "Outstanding Bonds" means the District's outstanding Trophy Club Utility District No. 2 Unlimited Tax Bonds, Series 2002, dated June 1, 2002, issued in the original principal amount of $3,510,000. "Premium Compound Interest Bonds" shall mean the Bonds on which no interest is paid prior to maturity, maturing in various amounts and in the aggregate principal amount as set forth in the Pricing Certificate. "Pricing Certificate" means the Pricing Certificate of the District's Pricing Officer to be executed and delivered pursuant to Section 3.02 hereof in connection with the issuance of the Bonds. "Pricing Officer" means the President of the Board of the District or in his or her absence the General Manager of the District, acting as the designated pricing officer of the District to execute the Pricing Certificate. "Record Date" means the 15th day of the month next preceding each Interest Payment Date, whether or not such dates are Business Days. "Redemption Date" means a date fixed for redemption of any Bond pursuant to the terms of this Bond Order and the Pricing Certificate. "Refundable Bonds" means any of the District's Outstanding Bonds that are subject to redemption prior to maturity. "Refunded Bonds" means those Refundable Bonds to be refunded as designated by the Pricing Officer in the Pricing Certificate. "Register" means the registry system maintained on behalf of the District by the Registrar in which are listed the names and addresses of the Registered Owners and the principal amount of Bonds registered in the name of each Registered Owner. "Registered Owner" or "Owner" means any person or entity in whose name a Bond is registered. "Registrar" or "Paying Agent/Registrar" means The Bank of New York Mellon Trust Company, N.A., or such other bank, trust company, financial institution, or other entity as may hereafter be designated by the District to act as paying agent and registrar for the Bonds in accordance with the terms of this Bond Order. 5 "Replacement Bonds" means the Bonds authorized by the District to be issued in substitution for lost, apparently destroyed, or wrongfully taken Bonds as provided in Section 4.02 of this Bond Order. "Rule" shall mean SEC Rule 15c2-12, as amended from time to time. "SEC" shall mean the United States Securities and Exchange Commission. "Special Project Bonds" shall mean those bonds the District reserves the right to issue in Article Eleven of this Order. "System" shall mean the works, improvements, facilities, plants, equipment, and appliances comprising the waterworks, sanitary sewer, and drainage system of the District now owned or to be hereafter purchased, constructed, or otherwise acquired whether by deed, contract, or otherwise, together with any additions or extensions thereto or improvements and replacements thereof, and the water and/or sewer and/or drainage facilities which the District may purchase or acquire with the proceeds of the sale of Special Project Bonds, so long as such Special Project Bonds are outstanding, notwithstanding that such facilities may be physically connected with the System. "Underwriter" means the senior managing underwriter as selected by the Pricing Officer, and such additional investment banking firms as the Pricing Officer deems appropriate. SECTION 2.02. INTERPRETATIONS. The titles and headings of the articles and sections and the page numbers of this Bond Order have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof. This Bond Order and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity of the Bonds and the validity of the taxes levied in payment thereof. ARTICLE THREE AUTHORIZATION. REGISTRATION, EXECUTION, AND AUTHENTICATION OF BONDS SECTION 3.01. AMOUNT, NAME, PURPOSE. AND AUTHORIZATION. Each Bond issued pursuant to this Bond Order shall be known and designated: "TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND, SERIES 2012", and the Bonds are hereby authorized to be issued and delivered in the maximum aggregate principal amount not to exceed $2,355,000 for the purpose of refunding the Refunded Bonds and paying certain costs of issuing the Bonds. The title of each of the Bonds shall be designated by the year in which it is awarded pursuant to Section 3.02 below. The authority of the Pricing Officer to execute a Pricing Certificate shall expire at 5:00 p.m. on June 20, 2012. Bonds priced on or before June 20, 2012 may close after such date. 6 SECTION 3.02. DATE. DENOMINATIONS. NUMBERS. DELEGATION TO PRICING OFFICER, (a) There initially shall be issued, sold and delivered fully registered bonds, without interest coupons, which may be in the form of Current Interest Bonds or Premium Compound Interest Bonds, numbered consecutively from R-l upward, in the case of Current Interest Bonds, and from PC-1 upward, in the case of Premium Compound Interest Bonds (except the initial Bonds delivered to the Attorney General of the State of Texas which shall be numbered T-l and TPC-1, respectively) payable to the respective initial Registered Owners thereof, or to the registered assignee or assignees of said Bonds or any portion or portions thereof, in Authorized Denominations, maturing not later than September 1, 2023, serially or otherwise on the dates, in the years and in the principal amounts, respectively, and dated, all as set forth in the Pricing Certificate to be executed and delivered by the Pricing Officer pursuant to subsection (b) of this Section. The Pricing Certificate is hereby incorporated in and made a part of this Order and shall be filed in the minutes of the Board as a part of this Order. (b) As authorized by Section 1207.007, Texas Government Code, as amended, the Pricing Officer is hereby authorized to act on behalf of the District in selling and delivering the Bonds, determining which of the Refundable Bonds shall be refunded and constitute "Refunded Bonds" under this Order and carrying out the other procedures specified in this Order, including determining the date of the Bonds, any additional or different designation or title by which the Bonds shall be known, the price at which the Bonds will be sold, the years in which the Bonds will mature, the principal amount to mature in each of such years, the aggregate principal amount of Current Interest Bonds and Premium Compound Interest Bonds, the rate of interest to be borne by each such maturity, the interest payment periods, the dates, price, and terms upon and at which the Bonds shall be subject to redemption prior to maturity at the option of the District, as well as any mandatory sinking fund redemption provisions, and all other matters relating to the issuance, sale, and delivery of the Bonds and the refunding of the Refunded Bonds, all of which shall be specified in the Pricing Certificate; provided that (i) the price to be paid for the Bonds shall not be less than 90% of the aggregate original principal amount thereof plus accrued interest thereon from its date to its delivery, (ii) none of the Bonds shall bear interest at a rate, or yield in the case of Premium Compound Interest Bonds, greater than the maximum authorized by law, and (iii) the refunding must produce a net present value debt service savings of at least 6.00% of the principal amount of the Refunded Bonds, net of any District contribution. In establishing the aggregate principal amount of the Bonds, the Pricing Officer shall establish an amount not to exceed the amount authorized in Section 3.01, which shall be sufficient to provide for the purposes for which the Bonds are authorized and to pay the costs of issuing the Bonds. (c) To achieve advantageous borrowing costs for the District, the Bonds shall be sold on a negotiated, placement or competitive basis as determined by the Pricing Officer in the Pricing Certificate. In determining whether to sell the Bonds by negotiated, placement or competitive sale, the Pricing Officer shall take into account any material disclosure issues which might exist at the time, the market conditions expected at the time of the sale and any other matters which, in the judgment of the Pricing Officer, might affect the net borrowing costs on the Bonds. If the Pricing Officer determines that the Bonds should be sold at a competitive sale, the Pricing Officer shall cause to be prepared a notice of sale and official statement in such manner 7 as the Pricing Officer deems appropriate, to make the notice of sale and official statement available to those institutions and firms wishing to submit a bid for the Bonds, to receive such bids, and to award the sale of the Bonds to the bidder submitting the best bid in accordance with the provisions of the notice of sale. If the Pricing Officer determines that the Bonds should be sold by a negotiated sale or placement, the Pricing Officer shall designate the placement purchaser or the senior managing underwriter for the Bonds and such additional investment banking firms as the Pricing Officer deems appropriate to assure that the Bonds are sold on the most advantageous terms to the District. The Pricing Officer, acting for and on behalf of the District, is authorized to enter into and carry out a purchase agreement or other agreement for the Bonds to be sold by negotiated sale or placement, with the underwriters or placement purchasers at such price, with and subject to such terms as determined by the Pricing Officer pursuant to Section 3(b) above. (d) The Current Interest Bonds shall bear interest calculated on the basis of a 360-day year composed of twelve 30-day months from the dates specified in the FORM OF BOND set forth in this Order to their respective dates of maturity or redemption at the rates per annum set forth in the Pricing Certificate. The Premium Compound Interest Bonds shall bear interest from the Issuance Date, calculated on the basis of a 360-day year composed of twelve 30-day months (subject to rounding to the Compounded Amounts thereof), compounded on the Compounding Dates as set forth in the Pricing Certificate, and payable, together with the principal amount thereof, in the manner provided in the Form of Bond at the rates set forth in the Pricing Certificate. Attached to the Pricing Certificate, if Premium Compound Interest Bonds are to be issued, shall be the Accretion Table. The Accreted Value with respect to any date other than a Compounding Date is the amount set forth on the Accretion Table with respect to the last preceding Compounding Date, plus the portion of the difference between such amount and the amount set forth on the Accretion Table with respect to the next succeeding Compounding Date that the number of days (based on 30-day months) from such last preceding Compounding Date to the date for which such determination is being calculated bears to the total number of days (based on 30-day months) from such last preceding Compounding Date to the next succeeding Compounding Date. SECTION 3.03. PAYMENT OF PRINCIPAL AND INTEREST. The Registrar is hereby appointed as the paying agent for the Bonds. The principal of the Bonds, shall be payable, without exchange or collection charges, in any coin or currency of the United States of America which, on the date of payment, is legal tender for the payment of debts due the United States of America, upon their presentation and surrender as they become due and payable, whether at maturity or by prior redemption in the case of the Bonds, at the office for payment of the Registrar. The interest on each Bond shall be payable on as set forth in the Pricing Certificate by check or draft payable on the Interest Payment Date, mailed by the Registrar on or before each Interest Payment Date to the Registered Owner as shown on the Register on the Record Date or, at the request of a Registered Owner, and at the Registered Owner's risk and expense, in such other manner as may be acceptable to the Registered Owner and the Registrar. Any accrued interest payable at maturity or earlier redemption, in the case of the Bonds, shall be 8 paid upon presentation and surrender of the Bond to which such interest appertains. If the date for payment on any Bond is not a Business Day, then the date for such payment shall be the next succeeding Business Day, and payment on such date shall have the same force and effect as if made on the original date payment was due. SECTION 3.04. SUCCESSOR REGISTRARS. The District covenants that at all times while any Bonds are outstanding it will provide a bank, trust company, financial institution or other entity duly qualified and duly authorized to act as Registrar for the Bonds. The District reserves the right to change the Registrar on not less than 30 days written notice to the Registrar, so long as any such notice is effective at such time as to not disrupt payment on the next succeeding principal or interest payment date on the Bonds. Promptly upon the appointment of any successor Registrar, the previous Registrar shall deliver the Register or copies thereof to the new Registrar, and the new Registrar shall notify each Registered Owner, by United States mail, first-class postage prepaid, of such change and of the address of the new Registrar. Each Registrar hereunder, by acting in that capacity, shall be deemed to have agreed to the provisions of this Section. SECTION 3.05. SPECIAL RECORD DATE. If interest on any Bond is not paid on any Interest Payment Date and continues unpaid for 30 days thereafter, the Registrar shall establish a new record date for the payment of such interest, to be known as a Special Record Date. The Registrar shall establish a Special Record Date when funds to make such interest payment are received from or on behalf of the District. Such Special Record Date shall be 15 days prior to the date fixed for payment of such past due interest, and notice of the date of payment and the Special Record Date shall be sent by United States mail, first-class, postage prepaid, not later than 5 days prior to the Special Record Date, to each affected Registered Owner of record as of the close of business on the day prior to the mailing of such notice. SECTION 3.06. REGISTERED OWNERS. The District, the Registrar and any other person may treat the person in whose name any Bond is registered as the absolute Registered Owner of such Bond for the purpose of making payment of principal or interest on such Bond, and for all other purposes, whether or not such Bond is overdue, and neither the District, nor the Registrar shall be bound by any notice or knowledge to the contrary. All payments made to the person deemed to be the Registered Owner of any Bond in accordance with this Section 3.07 shall be valid and effectual and shall discharge the liability of the District and the Registrar upon such Bond to the extent of the sums paid. SECTION 3.07. EXECUTION OF BONDS. The Bonds shall be signed on behalf of the District by the President or Vice-President of the Board of Directors and attested by the Secretary or Assistant Secretary, by their manual, lithographed, or facsimile signatures, and the official seal of the District shall be impressed or placed in facsimile thereon. The facsimile signatures on the Bonds shall have the same effect as if each of the Bonds had been signed manually and in person by each of said officers, and the facsimile seal on the Bonds shall have the same effect as if the official seal of the District had been manually impressed upon each of the Bonds. If any officer of the District whose manual or facsimile signature appears on the Bonds shall cease to be such officer before the authentication of such Bonds or before the 9 delivery of such Bonds, such manual or facsimile signature shall nevertheless be valid and sufficient for all purposes as if such officer had remained in such office. SECTION 3.08. AUTHENTICATION. The Initial Bond shall bear thereon a certificate of registration of the Comptroller of Public Accounts of the State of Texas, substantially in the form provided in Section 6.02 of this Bond Order, manually executed by the Comptroller or a duly authorized deputy. All other Bonds shall bear a certificate of authentication, substantially in the form provided in Section 6.03 of this Bond Order, manually executed by an authorized officer of the Registrar. No Bond shall be valid or obligatory for any purpose unless either the registration certificate of the Comptroller or the authentication certificate of the Registrar has been signed by a duly authorized officer thereof. ARTICLE FOUR REGISTRATION. TRANSFER. AND EXCHANGE SECTION 4.01. REGISTRATION. TRANSFER, AND EXCHANGE. So long as any Bonds remain Outstanding, the Registrar shall keep at its designated office for payment the Register, in which, subject to such reasonable regulations as it may prescribe, the Registrar shall provide for the registration and transfer of Bonds in accordance with the terms of this Bond Order. Each Bond shall be transferable only upon the presentation and surrender thereof at the designated office for payment of the Registrar, duly endorsed for transfer, or accompanied by an assignment duly executed by the Registered Owner or an authorized representative in form satisfactory to the Registrar. Upon due presentation of any Bond for transfer, the Registrar shall authenticate and deliver in exchange therefor, within 72 hours after such presentation, a new Bond or Bonds of the same type, registered in the name of the transferee or transferees, in authorized denominations and of the same maturity and aggregate principal amount, and bearing interest at the same rate as the Bond or Bonds so presented. All Bonds shall be exchangeable upon presentation and surrender thereof at the designated office for payment of the Registrar for a Bond or Bonds of the same maturity and interest rate and in any authorized denomination, in an aggregate principal amount equal to the unpaid principal amount of the Bond or Bonds presented for exchange. The Registrar shall be and is hereby authorized to authenticate and deliver exchange Bonds in accordance with the provisions of this Section 4.01. Each Bond delivered in accordance with this Section 4.01 shall be entitled to the benefits and security of this Bond Order to the same extent as the Bond or Bonds in lieu of which such Bond is delivered. The District or the Registrar may require the Registered Owner of any Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer or exchange of such Bond. Any fee or charge of the Registrar for such transfer or exchange shall be paid by the District. 10 SECTION 4.02. MUTILATED. LOST, OR STOLEN BONDS. Upon the presentation and surrender to the Registrar of a mutilated Bond, the Registrar shall authenticate and deliver in exchange therefor a replacement Bond of like maturity, interest rate and principal amount, bearing a number not contemporaneously outstanding. If any Bond is lost, apparently destroyed, or wrongfully taken, the District, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such Bond has been acquired by a bona fide purchaser, shall execute and the Registrar shall authenticate and deliver a replacement Bond of like amount, bearing a number not contemporaneously outstanding. The District or the Registrar may require the Registered Owner of a mutilated Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including apparently destroyed, or wrongfully taken, the District, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such Bond has been acquired by a bona fide purchaser, shall execute and the Registrar shall authenticate and deliver a replacement Bond of like amount, bearing a number not contemporaneously outstanding. The District or the Registrar may require the Registered Owner of a mutilated Bond to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith and any other expenses connected therewith, including the fees and expenses of the Registrar. The District or the Registrar may require the Registered Owner of a lost, apparently destroyed or wrongfully taken Bond, before any replacement Bond is issued, to: (a) furnish to the District and the Registrar satisfactory evidence of the ownership of and the circumstances of the loss, destruction or theft of such Bond; (b) furnish such security or indemnity as may be required by the Registrar and the District to save them harmless; (c) pay all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Registrar and any tax or other governmental charge that may be imposed; and (d) meet any other reasonable requirements of the District and the Registrar. If, after the delivery of such replacement Bond, a bona fide purchaser of the original Bond which such replacement Bond was issued presents for payment such original Bond, the District and the Registrar shall be entitled to recover such replacement Bond from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the District or the Registrar in connection therewith. If any such mutilated, lost, apparently destroyed or wrongfully taken Bond has become or is about to become due and payable, the District in its discretion may, instead of issuing a replacement Bond, authorize the Registrar to pay such Bond. 11 Each replacement Bond delivered in accordance with this Section 4.02 shall be entitled to the benefits and security of this Bond Order to the same extent as the Bond or Bonds in lieu of which such replacement is delivered. SECTION 4.03. CANCELLATION OF BONDS. All Bonds paid in accordance with this Bond Order, and all Bonds in lieu of which exchange Bonds or replacement Bonds are authenticated, registered, and delivered in accordance herewith, shall be canceled and destroyed upon the making of proper records regarding such payment, redemption, exchange, or replacement. This Registrar shall furnish the District with appropriate certificates of destruction of such Bonds. SECTION 4.04. BOOK-ENTRY-ONLY SYSTEM, (a) Book-Entrv-Onlv System. The Bonds issued in exchange for the Initial Bond issued as provided in Section 3.02 shall be issued in the form of a separate single fully registered Bond for each of the maturities thereof registered in the name of Cede & Co., as nominee of The Depository Trust Company of New York ("DTC") and except as provided in subsection (b) hereof, all of the outstanding Bonds shall be registered in the name of Cede & Co., as nominee of DTC. With respect to Bonds registered in the name of Cede & Co., as nominee of DTC, the District and the Paying Agent/Registrar shall have no responsibility or obligation to any securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC participants (the "DTC Participant") or to any person on behalf of whom such a DTC Participant holds an interest in the Bonds. Without limiting the immediately preceding sentence, the District and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Bonds, (ii) the delivery to any DTC Participant or any other person, other than a Registered Owner, as shown on the Registration Books, of any notice with respect to the Bonds, or (iii) the payment to any DTC Participant or any person, other than a Registered Owner, as shown in the Registration Books of any amount with respect to principal of or interest on the Bonds. Notwithstanding any other provision of this Order to the contrary, but to the extent permitted by law, the District and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Bond is registered in the Registration Books as the absolute owner of such Bond for the purpose of payment of principal of and interest, with respect to such Bond, for the purposes of registering transfers with respect to such Bond, and for all other purposes of registering transfers with respect to such Bonds, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of and interest on the Bonds only to or upon the order of the respective Registered Owners, as shown in the Registration Books as provided in this Order, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the District's obligations with respect to payment of principal of and interest on the Bonds to the extent of the sum or sums so paid. No person other than a Registered Owner, as shown in the Registration Books, shall receive a Bond evidencing the obligation of the District to make payments of principal, and interest pursuant to this Order. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions in 12 this Order with respect to interest checks being mailed to the registered owner at the close of business on the Record Date the word "Cede & Co." in this Order shall refer to such new nominee of DTC. (b) Successor Securities Depository; Transfer Outside Book-Entry-Only System. In the event that the District determines to discontinue the book-entry system through DTC or a successor or DTC determines to discontinue providing its services with respect to the Bonds, the District shall either (i) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC and DTC Participants of the appointment of such successor securities depository and transfer one or more separate Bonds to such successor securities depository or (ii) notify DTC and DTC Participants of the availability through DTC of Bonds and transfer one or more separate Bonds to DTC Participants having Bonds credited to their DTC accounts. In such event, the Bonds shall no longer be restricted to being registered in the Registration Books in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names the Registered Owner transferring or exchanging Bond shall designate, in accordance with the provisions of this Order. (c) Payments to Cede & Co. Notwithstanding any other provision of this Order to the contrary, so long as any Bond is registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of, and interest on such Bond and all notices with respect to such Bond shall be made and given, respectively, in the manner provided in the Letter of Representations of the District to DTC. (d) DTC Blanket Letter of Representations. The District confirms execution of a Blanket Issuer Letter of Representations with DTC establishing the Book-Entry-Only System which will be utilized with respect to the Bonds. (e) Initial Bond. The Bonds herein authorized shall be initially issued as a fully registered bond, being one Bond, and the Initial Bond shall be registered in the name of the Underwriter or the designees thereof. The Initial Bond shall be the Bond submitted to the Office of the Attorney General of the State of Texas for approval, certified and registered by the Office of the Comptroller of Public Accounts of the State of Texas and delivered to the Underwriter. Immediately after the delivery of the Initial Bond on the closing date, the Paying Agent/Registrar shall cancel the Initial Bond delivered hereunder and exchange therefor Bonds in the form of a separate single fully registered Bond for each of the maturities thereof registered in the name of Cede & Co., as nominee of DTC and except as provided in Section 3.02, all of the outstanding Bonds shall be registered in the name of Cede & Co., as nominee of DTC. ARTICLE FIVE REDEMPTION OF BONDS BEFORE MATURITY SECTION 5.01. REDEMPTION OF BONDS. The Bonds are subject to redemption as set forth in the Pricing Certificate. 13 ARTICLE SIX FORM OF BOND SECTION 6.01. FORM OF BOND. The Bonds authorized by this Bond Order shall be in substantially the following form, with such omissions, insertions, and variations, including variations in form, spacing, and style, as may be necessary and desirable and consistent with the terms of this Bond Order and the Pricing Certificate. The District shall provide sufficient printed bond forms, duly executed by the District, to the Registrar for registration, authentication, and delivery of the Bonds in accordance with the provisions of this Bond Order. FORM OF BOND UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 [FORM OF FDiST PARAGRAPHS OF CURRENT INTEREST BONDS] NO. R- PRINCIPAL AMOUNT $ INTEREST RATE DATE OF BONDS MATURITY DATE CUSP? NO. REGISTERED OWNER: PRINCIPAL AMOUNT ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICH*AL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from on and semiannually on each * and As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. 14 As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this * * thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at , which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Austin, Texas. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each Interest Payment Date by check or draft, dated as of such Interest Payment Date, drawn by the Registrar on, and payable solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Registrar by United States mail, first-class postage prepaid, on or before each such Interest Payment Date, to the Registered Owner hereof, at its address as it appeared on the fifteenth (15th) calendar day of the month next preceding each such date whether or not a business day (the "Record Date") on the Register kept by the Registrar listing the names and addresses of the Registered Owners (the "Register"). In addition, interest may be paid by such other method, acceptable to the Registrar, requested by, and at the risk and expense of, the Registered Owner. In the event of a non-payment of interest on a scheduled payment date, and for 30 calendar days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 calendar days after the Special Record Date) shall be sent at least 5 business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner as it appears on the Register at the close of business on the last business day next preceding the date of mailing of such notice. DURING ANY PERIOD in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. 15 and bearing the same interest rate are to be redeemed, the particular Bonds of such maturity and bearing such interest rate shall be selected in accordance with the arrangements between the District and the securities depository. ANY ACCRUED INTEREST due at maturity or upon the redemption of this Bond prior to maturity as provided herein shall be paid to the Registered Owner upon presentation and surrender of this Bond for payment at the designated office for payment of the Paying Agent/Registrar. The District covenants with the Registered Owner of this Bond that on or before each principal payment date, interest payment date, and any redemption date for this Bond it will make available to the Registrar, from the "Debt Service Fund" the creation of which is affirmed by the Bond Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. [FORM OF FIRST PARAGRAPHS OF PREMIUM COMPOUND INTEREST BOND] NO. PC- MATURITY AMOUNT $ INTEREST RATE ISSUANCE DATE MATURITY DATE CUSIP NO. REGISTERED OWNER: MATURITY AMOUNT: ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assigns (hereinafter called the "Registered Owner") the Maturity Amount set forth above, representing the principal amount hereof and accrued and compounded interest hereon. Interest shall accrue on the principal amount hereof from the Issuance Date at the interest rate per annum specified above, calculated on the basis of a 360 day year comprised of twelve 30 day months, compounded semiannually on and * of each year commencing , 20 . For convenience of reference a table of the "Accreted Value" per $5,000 Maturity Amount is printed on the reverse side of this Bond. The term "Accreted Value" as set forth in the table on the reverse side hereof shall mean the original principal amount plus initial premium per $5,000 Maturity Amount compounded semiannually on * and at the yield shown on such table. THE MATURITY AMOUNT of this Bond is payable in lawful money of the United States of America, without exchange or collection charges. The Maturity Amount of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity, at the designated office for payment of *, which is the "Paying 16 Agent/Registrar" for this Bond, and shall be drawn by the Paying Agent/Registrar on, and solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided, payable to the Registered Owner hereof, as it appears on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. The District covenants with the Registered Owner of this Bond that on or before the Maturity Date for this Bond it will make available to the Paying Agent/Registrar, from the "Debt Service Fund" created by the Bond Order, the amounts required to provide for the payment, in immediately available funds of the Maturity Amount, when due. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. [FORM OF REMAINDER OF EACH BOND] IF THE DATE for any payment due on this Bond shall be a Saturday, Sunday, or a day on which the Paying Agent/Registrar is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, or day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds dated as of * and authorized to be issued pursuant to the Bond Order adopted by the Board of Directors of the District in the principal amount of $ [constituting $ Current Interest Bonds and $ Premium Compound Interest Bonds]" FOR PURPOSES OF REFUNDING THE REFUNDED BONDS AND PAYING CERTAIN COSTS OF ISSUING THE BONDS. Terms used herein and not otherwise defined shall have the meanings given in the Bond Order. ON , 20_ * OR ON ANY DATE THEREAFTER, the Current Interest Bonds maturing on and after , 20 *, may be redeemed prior to their scheduled maturities, at the option of the District, with funds derived from any available and lawful source, at a redemption price equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption as a whole, or from time to time in part, and, if in part, the particular Current Interest Bonds, or portions thereof, to be redeemed shall be selected and designated by the District, and if less than all of a maturity is to be redeemed the Registrar shall determine by lot the Current Interest Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Current Interest Bond may be redeemed only in integral multiples of $5,000 of As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. To be included only if Current Interest Bonds and Premium Compound Interest Bonds are both issued and completed as determined in the Pricing Certificate. 17 principal amount). [The Premium Compound Interest Bonds are not subject to redemption prior to maturity.] [THE BONDS maturing on , 20 (the "Term Bonds") are subject to mandatory sinking fund redemption by lot prior to maturity in the following amounts, on the following dates and at a price of par plus accrued interest to the redemption date. Bonds Maturing , 20 Redemption Date Principal Amount , 20 $ , 20 t f tFinal Maturity THE PRINCIPAL AMOUNT of the Term Bonds required to be redeemed pursuant to the operation of the mandatory sinking fund redemption provisions shall be reduced, at the option of the District by the principal amount of any Term Bonds of the stated maturity which, at least 50 days prior to a mandatory redemption date, (1) shall have been acquired by the District, at a price not exceeding the principal amount of such Term Bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, (2) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the District with monies in the Debt Service Fund at a price not exceeding the principal amount of the Term Bonds plus accrued interest to the date of purchase thereof, or (3) shall have been redeemed pursuant to the optional redemption provisions and not theretofore credited against a mandatory sinking fund redemption requirement.] AT LEAST 30 calendar days prior to the date fixed for any redemption of Current Interest Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Current Interest Bond to be redeemed at its address as it appeared on the Register on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. By the date fixed for any such redemption due provision shall be made with the Registrar for the payment of the required redemption price for the Current Interest Bonds or portions for which such payment is made, all as provided above. The Current Interest Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Registrar out of the funds provided for such payment. If a portion of any Current Interest Bond shall be redeemed, a substitute Current Interest Bond or Bonds having the same maturity date, bearing interest at the same rate, in any authorized denomination or denominations, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be Use of Term Bonds, if any, to be determined by the Pricing Officer. 18 issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the District, all as provided in the Bond Order. WITH RESPECT TO any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Bond Order have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, the District shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. ALL BONDS OF THIS SERIES are issuable solely as fully registered Bonds, without interest coupons, in the principal denomination in the case of the Bonds, of any integral multiple of $5,000. As provided in the Bond Order, this Bond may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred, converted into and exchanged for a like aggregate amount of fully registered Bonds, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having any authorized denomination or denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Bond to the Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Order. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Registrar, evidencing assignment of this Bond or any portion or portions hereof in any authorized denomination to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be registered. The Form of Assignment printed or endorsed on this Bond may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Registrar may be used to evidence the assignment of this Bond or any portion or portions hereof from time to time by the Registered Owner. The Registrar's reasonable standard or customary fees and charges for assigning, transferring, converting and exchanging any Bond or portion thereof will be paid by the District. In any circumstance, any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer, conversion or exchange, as a condition precedent to the exercise of such privilege. The Registrar shall not be required to make any such transfer, conversion or exchange of any Bond or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or Interest Payment Date or (ii) within 45 calendar days prior to its redemption date; provided, however, such limitation on transferability shall not be applicable to an exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. 19 WHENEVER the beneficial ownership of this Bond is determined by a book entry at a securities depository for the Bonds, the foregoing requirements of holding, delivering or transferring this Bond shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. IN THE EVENT any Registrar for the Bonds is changed by the District, resigns, or otherwise ceases to act as such, the District has covenanted in the Bond Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Bonds. THE BONDS are payable from the proceeds of an ad valorem tax, without legal limit as to rate or amount, levied upon all taxable property within the District. The Bond Order provides that the District reserves the right to consolidate with one or more conservation and reclamation districts, to consolidate its waterworks and sewer systems with the systems of such districts, and to secure the Bonds and any other bonds of the District or such districts by a pledge of taxes of the consolidated system. The Bond Order further provides that the pledge of taxes, to the payment of the Bonds shall terminate at such time, if ever, as (i) money and/or defeasance obligations in an amount sufficient to defease the Bonds is deposited with or made available to the Registrar in accordance with the Bond Order or (ii) a city dissolves the District, and assumes the obligations of the District pursuant to existing Texas law. THE BONDS are issued pursuant to the Bond Order, whereunder the District covenants to levy a continuing direct annual ad valorem tax, without legal limit as to rate or amount, on taxable property within the District, for each year while any part of the Bonds are considered outstanding under the provisions of the Bond Order, in sufficient amount, together with revenues and receipts available from other sources which are equally available for such purposes, to pay interest on the Bonds as it becomes due, to provide a sinking fund for the payment of the principal of the Bonds when due or the redemption price at any earlier required redemption date with respect to the Bonds, and to pay the expenses of assessing and collecting such tax, all as more specifically provided in the Bond Order. Reference is hereby made to the Bond Order for provisions with respect to the operation and maintenance of the District's facilities, the custody and application of funds, remedies in the event of a default hereunder or thereunder, and the other rights of the Registered Owners of the Bonds. By acceptance of this Bond the Registered Owner hereof consents to all of the provisions of the Bond Order, a certified copy of which is on file in the office of the District. THE OBLIGATION to pay the principal of and the interest on this Bond is solely and exclusively the obligation of the District until such time, if ever, as the District is abolished and this Bond is assumed as described above. No other entity, including the State of Texas, any political subdivision thereof other than the District, or any other public or private body, is obligated, directly, indirectly, contingently, or in any other manner, to pay the principal of or the interest on this Bond from any source whatsoever. No part of the physical properties of the District, including the properties provided by the proceeds of the Bonds, is encumbered by any lien for the benefit of the Registered Owner of this Bond. 20 THE DISTRICT RESERVES THE RIGHT to issue additional bonds heretofore or hereafter duly authorized at elections held in the District payable from a lien on and pledge of taxes; bonds, notes and other obligations of inferior liens, and revenue bonds, notes and other obligations payable solely from revenues of the District or revenues to be received under contracts with other persons, including private corporations, municipalities and political subdivisions or from any other source. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund any bonds (including the Bonds) at or prior to their respective dates of maturity or redemption. TO THE EXTENT permitted by and in the manner provided in the Bond Order, the terms and provisions of the Bond Order and the rights of the Registered Owners of the Bonds may be modified with, in certain circumstances, the consent of the Registered Owners of a majority in aggregate principal amount of the Bonds affected thereby; provided, however, that, without the consent of the Registered Owners of all of the Bonds affected, no such modification shall (i) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (ii) give any preference to any Bond over any other Bond, or (iii) reduce the aggregate principal amount of the Bonds required for consent to any such modification. THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Bond Order unless this Bond either (a) is registered by the Comptroller of Public Accounts of the State of Texas as evidenced by execution of the registration certificate endorsed hereon or (b) is authenticated as evidenced by execution of the authentication certificate endorsed hereon by the Registrar. IT IS HEREBY CERTIFIED, COVENANTED, AND REPRESENTED that all acts, conditions, and things necessary to be done precedent to the issuance of the Bonds in order to render the same legal, valid, and binding obligations of the District have happened and have been accomplished and performed in regular and due time, form, and manner, as required by law; that provision has been made for the payment of the principal of and interest on the Bonds by the levy of a continuing, direct annual ad valorem tax upon all taxable property within the District and that issuance of the Bonds does not exceed any constitutional or statutory limitation. In the event that any provisions herein contained do or would, presently or prospectively, operate to make any part hereof void or voidable, such provisions shall be without effect or prejudice to the remaining provisions hereof, which shall nevertheless remain operative, and such violative provisions, if any, shall be reformed by a court of competent jurisdiction within the limits of the laws of the State of Texas. IT IS FURTHER CERTIFIED that the District has designated the Bonds as "qualified tax-exempt obligations" within the meaning of Section 265(b) of the Internal Revenue Code of 1986. IN WITNESS WHEREOF, the District has caused this Bond to be signed with the manual or facsimile signature of the President or Vice-President of the Board of Directors of the District and countersigned with the manual or facsimile signature of the Secretary or Assistant 21 Secretary of the Board of Directors of the District, and has caused the official seal of the District to be duly impressed, or placed in facsimile, on this Bond. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Secretary [Assistant Secretary], President [Vice-President], Board of Directors Board of Directors (DISTRICT SEAL) INSERTIONS FOR INITIAL BONDS (i) The Initial Current Interest Bond shall be in the form set forth in this Section, except that: A. immediately under the name of the Current Interest Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below" and "CUSIP NO." shall be deleted. B. the first paragraph of the Current Interest Bond shall be deleted and the following will be inserted: "ON THE MATURITY DATE SPECIFIED BELOW, Trophy Club Municipal Utility District No. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner specified above, or registered assigns (hereinafter called the "Registered Owner"), on in each of the years, in installments of the respective Maturity Amounts set forth in the following schedule: Maturity Interest Year Amounts Rates (Information from Pricing Certificate to be inserted) The District promises to pay interest on the unpaid principal amount hereof (calculated on the basis of a 360-day year of twelve 30-day months) from _* at the respective Interest Rate per annum specified above. Interest is payable on and * As provided in the Pricing Certificate. To the extent that the Pricing Certificate relating to the Bonds is inconsistent with any provisions in this Form of Bond or contains information to complete the missing information in this Form of Bond, the language in the Pricing Certificate shall be used in the executed Bonds. 22 semiannually on each * and * thereafter to the date of payment of the principal installment specified above; except, that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full." C. The Initial Current Interest Bond shall be numbered "T-l". (ii) The Initial Compound Interest Bond shall be in the form set forth in this Section, except that: A. Immediately under the name of the Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below" and "CUSIP NO. " shall be deleted. B. the first paragraph shall be deleted and the following will be inserted: "TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1, in Denton and Tarrant Counties, Texas (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assigns (hereinafter called the "Registered Owner") the Payment at Maturity on in each of the years and in the principal installments and bearing interest at the per annum rates set: Maturity Principal Date Amount Interest Rates (Information for the Premium Compound Interest Bonds from the Pricing Certificate to be inserted) The amount shown above as the respective Maturity Amounts represent the principal amount hereof and accrued and compounded interest hereon. Interest shall accrue on the principal amount hereof from the Issuance Date at the interest rate per annum specified above, compounded semiannually on and of each year commencing . For convenience of reference, a table appears on the back of this Bond showing the "Compounded Amount" of the original principal amount plus initial premium, if any, per $5,000 Maturity Amount compounded semiannually at the yield shown on such table." 23 C. the Initial Premium Compound Interest Bond shall be numbered "TPC-1." SECTION 6.02. REGISTRATION OF INITIAL BOND BY STATE COMPTROLLER AND CERTIFICATE. The Initial Bond shall be registered by the Comptroller of Public Accounts of the State of Texas as provided by law. The registration certificate of the Comptroller of Public Accounts of the State of Texas shall be printed on the face of the Initial Bond and shall be in substantially the following form: COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) SECTION 6.03. FORM OF AUTHENTICATION CERTIFICATE. The following form of authentication certificate shall be printed on the face of each of the Bonds other than the Initial Bond: PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Order described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a Bond, Bonds, or a portion of a Bond or Bonds of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. 24 Dated. Registrar By Authorized Representative SECTION 6.04. FORM OF ASSIGNMENT. A form of assignment shall be printed on the back of each of the Bonds and shall be in substantially the following form: ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto Please insert Social Security or Taxpayer Identification Number of Transferee (Please print or typewrite name and address, including zip code of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints , attorney, to register the transfer of the within Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Bond in every particular, without alteration or enlargement or any change whatsoever. 25 SECTION 6.05. CUSIP REGISTRATION. The Pricing Officer may secure the printing of identification numbers on the Bonds through the CUSIP Service Bureau. SECTION 6.06. LEGAL OPINION AND BOND INSURANCE. The approving opinion of McCall, Parkhurst & Horton LLP. may be printed on the back of the Bonds over the certification of the Secretary of the Board of Directors which may be executed in facsimile. In addition, if any bond insurance is obtained, any statement of insurance may be placed on the Bonds. ARTICLE SEVEN SECURITY OF THE BONDS SECTION 7.01. GENERAL. The Bonds are secured by and payable from the levy of a continuing, direct annual ad valorem tax, without legal limitation as to rate or amount, upon all taxable property within the District. SECTION 7.02. LEVY OF TAX, (a) To pay the interest on the Bonds, and to create a sinking fund for the payment of the principal thereof when due, and to pay the expenses of assessing and collecting such taxes, there is hereby levied, and there shall be assessed and collected in due time, a continuing, direct annual ad valorem tax without limit as to rate or amount on all taxable property in the District for each year while any of the Bonds are outstanding. All of the proceeds of such collections, except expenses incurred in that connection, shall be paid into the Debt Service Fund, and the aforementioned tax and such payments into such fund shall continue until the Bonds and the interest thereon have been fully paid and discharged, and such proceeds shall be used for such purposes and no other. While said Bonds, or any of them, are outstanding and unpaid, an ad valorem tax will be ample and sufficient to provide funds to pay the interest on said Bonds and to provide the necessary sinking fund to pay the principal when due, full allowance being made for delinquencies and costs of collection, together with revenues and receipts from other sources that are legally available for such purpose, shall be levied and collected and applied to the payment of principal and interest on the Bonds, as follows: (1) By September 1 in each year, or as soon thereafter as practicable, the Board shall consider the taxable property in the District and determine the actual rate per $100 valuation of taxable property which is to be levied in that year and levy the tax against all taxable property in the District. (2) In determining the actual rate to be levied in each year, the Board shall consider among other things: (i) the amount which should be levied for maintenance and operation purposes; 26 (ii) the amount which should be levied for the payment of principal, interest, and redemption price of the bonds or notes payable in whole or in part from taxes; (iii) the amount which should be levied for the purpose of paying all other contractual obligations of the District payable in whole or in part from taxes; and (iv) the percentage of anticipated tax collections and the cost of collecting the taxes. (3) In determining the amount of taxes which should be levied each year, the Board shall consider whether proceeds from the sale of Bonds have been placed in the Debt Service Fund to pay interest on the Bonds and whether the Board reasonably expects to have revenue or receipts available from other sources which are legally available to pay debt service on the Bonds. (b) Chapter 1208, Government Code, applies to the issuance of the Bonds and the pledge of ad valorem taxes granted by the District under this Order, and such pledge is therefore valid, effective and perfected. If Texas law is amended at any time while the Bonds are outstanding and unpaid such that the pledge of ad valorem taxes granted by the District under this Order is to be subject to the filing requirements of Chapter 9, Business & Commerce Code, then in order to preserve to the registered owners of the Bonds the perfection of the security interest in said pledge, the District agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Business & Commerce Code and enable a filing to perfect the security interest in said pledge to occur. SECTION 7.03. PAYMENT OF BONDS AND PERFORMANCE OF OBLIGATIONS. The District covenants to pay promptly the principal of and interest on the Bonds as the same become due and payable, whether at maturity or by prior redemption, in accordance with the terms of the Bonds and this Bond Order, and to keep and perform faithfully all of its covenants, undertakings, and agreements contained in this Bond Order, or in any Bond executed, authenticated, and delivered hereunder. SECTION 7.04. CONSOLIDATION OR DISSOLUTION OF DISTRICT. To the extent provided by law, the pledge of taxes set forth in Section 7.02 will terminate if a city takes over all properties and assets, assumes all debts, liabilities, and obligations, and performs all functions and services of the District, and the District is abolished pursuant to law. The laws of the State of Texas permit the District to be consolidated with one or more conservation and reclamation districts. In the event the District is consolidated with another district or districts, the District reserves the right to: (i) Consolidate the System with a similar system of one or more districts with which the District is consolidating and operate and maintain the systems as one consolidated system (herein for purposes of this section the "Consolidated System"). 27 (ii) Apply the net revenues from the operation of the Consolidated System to the payment of principal, interest, redemption price and bank charges on the revenue bonds or the combination tax and revenue bonds (herein for purposes of this section the "Revenue Bonds") of the District and of the district or districts with which the District is consolidating (herein collectively the "Consolidating Districts") without preference to any series of bonds (except subordinate lien revenue bonds which shall continue to be subordinate to the first lien Revenue Bonds of the Consolidating Districts). (iii) Pledge the net revenues of the Consolidated System to the payment of principal, interest, redemption price and bank charges on Revenue Bonds which may be issued by the Consolidating Districts on a parity with the outstanding first lien Revenue Bonds of the Consolidating Districts. ARTICLE EIGHT FLOW OF FUNDS AND INVESTMENTS SECTION 8.01. FUNDS. FLOW OF FUNDS. The following funds are hereby created: (i) Debt Service Fund for the Bonds; and (ii) Escrow Fund. Each fund shall be kept separate and apart from all other funds of the District. The Debt Service Fund for the Bonds shall constitute a trust fund which shall be held in trust for the benefit of the owners of the Bonds. All other funds shall be trust funds which shall be used solely as provided in this Bond Order until all of the Bonds have been retired, both as to principal and interest. SECTION 8.02. SECURITY OF FUNDS. Any cash balance in any fund, to the extent not insured by the Federal Deposit Insurance Corporation or its successor, shall be continuously secured in the manner provided by law for the security of funds of counties of the State of Texas. SECTION 8.03. DEBT SERVICE FUND; TAX LEVY. The District shall deposit or cause to be deposited into the Debt Service Fund the aggregate of the following at the time specified: (a) As soon as practicable after the Bonds are sold, accrued interest on the Bonds from their date to the date of their delivery; and (b) The proceeds from collection of the ad valorem taxes levied, assessed and collected for and on account of the Bonds pursuant to Section 7.02 hereof, less costs of collection, as collected. 28 On or before the date for payment of the principal and/or Interest Payment Date on the Bonds, the Board of Directors shall cause the transfer of moneys out of the Debt Service Fund to the Registrar in an amount not less than that which is sufficient to pay the principal which matures on such date and the interest which accrues on such date. The District shall pay fees and charges of the Registrar for its services as paying agent and registrar for the Bonds from the Debt Service Fund. SECTION 8.04. ESCROW FUND. The Escrow Fund shall be created and shall be governed by the terms of the Escrow Agreement in substantially the form attached hereto as Exhibit "B" with such changes as approved by the Pricing Officer. SECTION 8.05. INVESTMENTS: EARNINGS. Moneys deposited into the Debt Service Fund and any other fund or funds which the District may lawfully create may be invested or reinvested in Authorized Investments. All investments and any profits realized from and interest accruing on investments made from any fund may be transferred to the Debt Service Fund. If any moneys are so invested, the District shall have the right to have sold in the open market a sufficient amount of such investments to meet its obligations in the event any fund does not have sufficient uninvested funds on hand to meet the obligations payable out of such fund. After such sale the moneys resulting therefrom shall belong to the fund from which the moneys for such investments were initially taken. The District shall not be responsible to the Registered Owners for any loss arising out of the sale of any investments. ARTICLE NINE APPLICATION OF FUNDS SECTION 9.01. BOND PROCEEDS. Proceeds from the sale of the Bonds will be disbursed in accordance with this Article. SECTION 9.02. ACCRUED INTEREST. Moneys received from the Underwriter of the Bonds representing accrued interest, if any, on the Bonds from their date to the date of their actual delivery shall be deposited into the Debt Service Fund. SECTION 9.03. ESCROW FUND. The proceeds from the sale of the Bonds after making the deposit hereinbefore provided and paying or making provisions for the payment of the costs in connection with issuing the Bonds, shall be deposited into the Escrow Fund as described in the Escrow Agreement in substantially the form attached hereto as Exhibit "B" with such changes as approved by the Pricing Officer. ARTICLE TEN PROVISIONS CONCERNING FEDERAL INCOME TAX EXCLUSION SECTION 10.01. COVENANTS REGARDING TAX EXEMPTION OF INTEREST ON THE BONDS, (a) Covenants. The District covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the 29 Bonds as obligations described in section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the District covenants as follows: (1) to take any action to assure that no more than 10 percent of the proceeds of the Bonds or the Refunded Bonds or the projects financed or refinanced therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than 10 percent of the proceeds of the Bonds or the Refunded Bonds or the projects financed or refinanced therewith are so used, such amounts, whether or not received by the District, with respect to such private business use, do not, under the terms of this Order or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of section 141(b)(2) of the Code; (2) to take any action to assure that in the event that the "private business use" described in subsection (1) hereof exceeds 5 percent of the proceeds of the Bonds or the Refunded Bonds or the projects financed or refinanced therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used for a "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) of the Code, to the governmental use; (3) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; (4) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (5) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of section 149(b) of the Code; (6) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with ~ (A) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less or, in the case of a current refunding bond, for a period of 90 days and in the case of an advance refunding bond, for a period of 30 days, (B) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1(b) of the Treasury Regulations, and (C) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Bonds; 30 (7) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); and (8) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(f) of the Code. (b) Rebate Fund. In order to facilitate compliance with the above covenant (8), a "Rebate Fund" is hereby established by the District for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the bondholders. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. (c) Proceeds. The District understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the Refunded Bonds expended prior to the date of issuance of the Bonds. It is the understanding of the District that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Bonds, the District will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the District agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Bonds under section 103 of the Code. In furtherance of such intention, the District hereby authorizes and directs the President or Treasurer of the Board of Directors to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the District, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. (d) Disposition of Project. The District covenants that the property constituting the projects refinanced with the proceeds of the Bonds will not be sold or otherwise disposed in a transaction resulting in the receipt by the District of cash or other compensation, unless the District obtains an opinion of nationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. For purposes of the foregoing, the portion of the property comprising personal property and disposed in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. 31 For purposes hereof, the District shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (e) Designation as Qualified Tax-Exempt Bonds. The District hereby designates the Bonds as "qualified tax-exempt bonds" as defined in section 265(b)(3) of the Code. In furtherance of such designation, the District represents, covenants and warrants the following: (a) that during the calendar year in which the Bonds are issued, the District (including any subordinate entities) has not designated nor will designate bonds, which when aggregated with the Bonds, will result in more than $10,000,000 of "qualified tax-exempt bonds" being issued; (b) that the District reasonably anticipates that the amount of tax-exempt obligations issued, during the calendar year in which the Bonds are issued, by the District (or any subordinate entities) will not exceed $10,000,000; and, (c) that the District will take such action or refrain from such action as necessary, and as more particularly set forth in this Section, in order that the Bonds will not be considered "private activity bonds" within the meaning of section 141 of the Code. (f) Written Procedures. Unless superseded by another action of the District, to ensure compliance with the covenants contained in this Order regarding private business use, remedial actions, arbitrage and rebate, the District hereby adopts and establishes the instructions attached hereto as Exhibit "E" as its written procedures. ARTICLE ELEVEN ADDITIONAL BONDS AND REFUNDING BONDS SECTION 11.01. ADDITIONAL BONDS. The District expressly reserves the right to issue, in one or more installments, for the purpose of purchasing, constructing, acquiring, owning, operating, maintaining, repairing, improving, or extending the System, or for any other lawful purpose: (a) the unissued unlimited tax bonds which remain authorized but unissued; and (b) such other unlimited tax bonds as may hereafter be authorized at subsequent elections. SECTION 11.02. OTHER BONDS. The District further reserves the right to issue combination unlimited tax and revenue bonds, if authorized by election, and such other bonds or other obligations as may be lawfully issued by the District including any obligations issued for special projects or defined areas. SECTION 11.03. REFUNDING BONDS. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund the Bonds, the Outstanding Bonds, any Additional Bonds, or any other bonds issued by the District, at or prior to their respective dates of maturity or redemption. 32 ARTICLE TWELVE DEFAULT PROVISIONS SECTION 12.01. REMEDIES IN EVENT OF DEFAULT, (a) Events of Default. Each of the following occurrences or events for the purpose of this Order is hereby declared to be an Event of Default: (i) the failure to make payment of the principal of or interest on any of the Bonds when the same becomes due and payable; or (ii) default in the performance or observance of any other covenant, agreement or obligation of the District, the failure to perform which materially, adversely affects the rights of the Registered Owners of the Bonds, including, but not limited to, their prospect or ability to be repaid in accordance with this Order, and the continuation thereof for a period of 60 days after notice of such default is given by any Registered Owner to the District. (b) Remedies for Default. (i) Upon the happening of any Event of Default, then and in every case, any Registered Owner or an authorized representative thereof, including, but not limited to, a trustee or trustees therefor, may proceed against the District, or any official, officer or employee of the District in their official capacity, for the purpose of protecting and enforcing the rights of the Registered Owners under this Order, by mandamus or other suit, action or special proceeding in equity or at law, in any court of competent jurisdiction, for any relief permitted by law, including the specific performance of any covenant or agreement contained herein, or thereby to enjoin any act or thing that may be unlawful or in violation of any right of the Registered Owners hereunder or any combination of such remedies. (ii) It is provided that all such proceedings shall be instituted and maintained for the equal benefit of all Registered Owners of Bonds then outstanding. (c) Remedies Not Exclusive. (i) No remedy herein conferred or reserved is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or under the Bonds or now or hereafter existing at law or in equity; provided, however, that notwithstanding any other provision of this Order, the right to accelerate the debt evidenced by the Bonds shall not be available as a remedy under this Order. (ii) The exercise of any remedy herein conferred or reserved shall not be deemed a waiver of any other available remedy. (iii) By accepting the delivery of a Bond authorized under this Order, such Registered Owner agrees that the certifications required to effectuate any covenants or representations 33 contained in this Order do not and shall never constitute or give rise to a personal or pecuniary liability or charge against the officers, employees or trustees of the District or the Board of Directors. (iv) None of the members of the Board of Directors, nor any other official or officer, agent, or employee of the District, shall be charged personally by the Registered Owners with any liability, or be held personally liable to the Registered Owners under any term or provision of this Order, or because of any Event of Default or alleged Event of Default under this Order. SECTION 12.02. BOND ORDER IS CONTRACT. In consideration of the purchase and acceptance of the Bonds authorized to be issued hereunder by the Registered Owners, the provisions of this Bond Order shall be deemed to be and shall constitute a contract between the District and the Registered Owners; and the covenants and agreements herein set forth to be performed on behalf of the District shall be for the equal benefit, protection, and security of each of the Registered Owners. The Bonds, regardless of the time or times of their issue or maturity, shall be of equal rank without preference, priority, or distinction of any Bond over any other, except as expressly provided herein. ARTICLE THIRTEEN DISCHARGE BY DEPOSIT SECTION 13.01. DEFEASANCE OF BONDS, (a) Any Bond and the interest thereon shall be deemed to be paid, retired and no longer outstanding (a "Defeased Bond") within the meaning of this Order, except to the extent provided in subsections (c) and (e) of this Section, when payment of the principal of such Bond, plus interest thereon to the due date or dates (whether such due date or dates be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption) or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar or a commercial bank or trust company for such payment (1) lawful money of the United States of America sufficient to make such payment, (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times as will ensure the availability, without reinvestment, of sufficient money to provide for such payment and when proper arrangements have been made by the District with the Paying Agent/Registrar or a commercial bank or trust company for the payment of its services until all Defeased Bonds shall have become due and payable or (3) any combination of (1) and (2). At such time as a Bond shall be deemed to be a Defeased Bond hereunder, as aforesaid, such Bond and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes herein levied as provided in this Order, and such principal and interest shall be payable solely from such money or Defeasance Securities. (b) The deposit under clause (ii) of subsection (a) shall be deemed a payment of a Bond as aforesaid when proper notice of redemption of such Bonds shall have been given, in accordance with this Order. Any money so deposited with the Paying Agent/Registrar or a 34 commercial bank or trust company as provided in this Section may at the discretion of the Board of Directors also be invested in Defeasance Securities, maturing in the amounts and at the times as hereinbefore set forth, and all income from all Defeasance Securities in possession of the Paying Agent/Registrar or a commercial bank or trust company pursuant to this Section which is not required for the payment of such Bond and Premium Compound Interest Bond, if any, and interest thereon with respect to which such money has been so deposited, shall be turned over to the Board of Directors. (c) Notwithstanding any provision of any other Section of this Order which may be contrary to the provisions of this Section, all money or Defeasance Securities set aside and held in trust pursuant to the provisions of this Section for the payment of principal of the Bonds and premium, if any, and interest thereon, shall be applied to and used solely for the payment of the particular Bonds and premium, if any, and interest thereon, with respect to which such money or Defeasance Securities have been so set aside in trust. Until all Defeased Bonds shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Bonds the same as if they had not been defeased, and the District shall make proper arrangements to provide and pay for such services as required by this Order. (d) Notwithstanding anything elsewhere in this Order, if money or Defeasance Securities have been deposited or set aside with the Paying Agent/Registrar or a commercial bank or trust company pursuant to this Section for the payment of Bonds and such Bonds shall not have in fact been actually paid in full, no amendment of the provisions of this Section shall be made without the consent of the registered owner of each Bond affected thereby. (e) Notwithstanding the provisions of subsection (a) immediately above, to the extent that, upon the defeasance of any Defeased Bond to be paid at its maturity, the District retains the right under Texas law to later call that Defeased Bond for redemption in accordance with the provisions of the order authorizing its issuance, the District may call such Defeased Bond for redemption upon complying with the provisions of Texas law and upon the satisfaction of the provisions of subsection (a) immediately above with respect to such Defeased Bond as though it was being defeased at the time of the exercise of the option to redeem the Defeased Bond and the effect of the redemption is taken into account in determining the sufficiency of the provisions made for the payment of the Defeased Bond. ARTICLE FOURTEEN MISCELLANEOUS PROVISIONS SECTION 14.01. DISTRICT'S SUCCESSORS AND ASSIGNS. Whenever in this Bond Order the District is named and referred to, it shall be deemed to include its successors and assigns, and all covenants and agreements in this Bond Order by or on behalf of the District, except as otherwise provided herein, shall bind and inure to the benefit of its successors and assigns whether or not so expressed. 35 SECTION 14.02. NO RECOURSE AGAINST DISTRICT OFFICERS OR DDXECTORS. No recourse shall be had for the payment of the principal of or interest on the Bonds or for any claim based thereon or on this Bond Order against any officer or director of the District or any person executing the Bonds. SECTION 14.03. REGISTRAR. The Registrar shall act as agent for the payment of principal of and interest on the Bonds and shall maintain the Register for the Bonds, all in accordance with the terms of this Bond Order. If the Registrar or its successor becomes unable for any reason to act as Registrar hereunder, or if the Board of Directors of the District determines that a successor Registrar should be appointed, a successor Registrar shall be selected by the District. Any successor Registrar shall be either a bank, trust company, financial institution, or other entity duly qualified and legally authorized to serve and perform the duties as paying agent and registrar for the Bonds. SECTION 14.04. REGISTRAR MAY OWN BONDS. The Registrar, in its individual or any other capacity, may become the owner or pledgee of the Bonds with the same rights it would have if it were not Registrar. SECTION 14.05. BENEFITS OF ORDER PROVISIONS. Nothing in this Bond Order or in the Bonds, expressed or implied, shall give or be construed to give any person, firm, or corporation, other than the District, the Registrar, and the Registered Owners, any legal or equitable right or claim under or in respect of this Bond Order, or under any covenant, condition, or provision herein contained, all the covenants, conditions, and provisions contained in this Bond Order or in the Bonds being for the sole benefit of the District, the Registrar, and the Registered Owners. SECTION 14.06. UNAVAILABILITY OF AUTHORIZED PUBLICATION. If, because of the temporary or permanent suspension of any newspaper, journal, or other publication, or for any reason, publication of notice cannot be made meeting any requirements herein established, any notice required to be published by the provisions of this Bond Order shall be given in such other manner and at such time or times as in the judgment of the District shall most effectively approximate such required publication, and the giving of such notice in such manner shall for all purposes of this Bond Order be deemed to be in compliance with the requirements for publication thereof. SECTION 14.07. SEVERABILITY CLAUSE. If any word, phrase, clause, sentence, paragraph, section, or other part of this Bond Order, or the application thereof to any person or circumstance, shall ever be held to be invalid or unconstitutional by any court of competent jurisdiction, the remainder of this Bond Order and the application of such word, phrase, clause, sentence, paragraph, section, or other part of this Bond Order to any other persons or circumstances shall not be affected thereby. SECTION 14.08. ACCOUNTING. The District will keep proper records and accounts regarding the levy and collection of taxes, which records and accounts will be made available to any Registered Owner on reasonable request. Each year while any of the Bonds are outstanding, the District shall have an audit of its books and accounts by a certified public 36 accountant or firm of certified public accountants, based on its Fiscal year, and copies of such audits will be made available to any Registered Owner upon request. SECTION 14.09. FURTHER PROCEEDINGS. The President and Secretary of the Board of Directors and other appropriate officials of the District are hereby authorized and directed to do any and all things necessary and/or convenient to carry out the terms of this Bond Order. ARTICLE FIFTEEN SALE AND DELIVERY OF BONDS AND APPROVAL OF DOCUMENTS SECTION 15.01. SALE OF BONDS. The Bonds shall be sold and delivered, pursuant to a purchase agreement at a price and under the terms set forth in the Pricing Certificate. The Pricing Officer is authorized to approve such changes to the purchase agreement as necessary in connection with the sale of the Bonds including Sections 15.03 and 19.01. SECTION 15.02. APPROVAL. REGISTRATION, AND DELIVERY. The President of the Board of Directors of the District and representatives of McCall, Parkhurst & Horton LLP. are hereby authorized and directed to submit the Initial Bond and a transcript of the proceedings relating to the issuance of the Bonds to the Attorney General of the State of Texas for approval and, following said approval, to submit the Initial Bond to the Comptroller of Public Accounts of the State of Texas for registration. Upon registration of the Initial Bond, the Comptroller of Public Accounts (or a deputy designated in writing to act for the Comptroller) shall manually sign the Comptroller's registration certificate prescribed herein to be printed and endorsed on the Initial Bond, and the seal of the Comptroller shall be impressed or placed in facsimile on the Initial Bond. After the Initial Bond has been registered, signed, and sealed by the Comptroller, it shall be delivered to the Underwriter, but only upon receipt of the full purchase price. SECTION 15.03 APPROVAL OF OFFERING DOCUMENTS. PAYING AGENT/REGISTRAR AGREEMENT AND ESCROW AGREEMENT. The Pricing Officer is hereby authorized to approve the Preliminary Official Statement, the Official Statement relating to the Bonds and any addenda, supplement or amendment thereto and to deem such documents final in accordance with Rule 15c2-12. The District further approves the distribution of such Official Statement in the reoffering of the Bonds by the Underwriter in final form, with such changes therein or additions thereto as the Pricing Officer executing the same may deem advisable, such determination to be conclusively evidenced by his execution thereof. The Paying Agent/Registrar Agreement by and between the District and the Paying Agent/Registrar ("Paying Agent Agreement") in substantially the form and substance attached hereto as Exhibit "A" is hereby approved and the Pricing Officer is hereby authorized and directed to complete, amend, modify and execute the Paying Agent Agreement as necessary. 37 The Escrow Agreement by and between the District and the Escrow Agent ("Escrow Agreement") in substantially the form and substance attached hereto as Exhibit "B" is hereby approved, and the Pricing Officer is hereby authorized to complete, amend, modify and execute the Escrow Agreement, as necessary. The President, Vice President, Treasurer, the Secretary or Assistant Secretary are each hereby authorized to take such action as may be necessary to cause the purchase and delivery of the federal securities to be acquired and deposited to the credit of the escrow fund created by the Escrow Agreement. SECTION 15.04. REFUNDING OF REFUNDED BONDS. Concurrently with the delivery of the Bonds, the Pricing Officer shall cause to be deposited an amount from the proceeds of the sale of the Bonds with the Escrow Agent sufficient, together with other legally available funds of the District, to provide for the refunding and defeasance of the Refunded Bonds, which are hereby called for redemption on the date determined by the Pricing Officer in the Pricing Certificate. The Pricing Officer is further authorized and directed to apply and there is hereby appropriated such moneys of the District as are necessary to fund the Escrow Fund to be established by the Escrow Agreement with amounts sufficient to provide for the defeasance of the Refunded Bonds on the date of delivery of the Bonds. The Pricing Officer is hereby authorized and directed to issue to the Escrow Agent Notice of Redemption with respect to the Refunded Bonds in substantially the form set forth in Exhibit "C" hereto with such changes and additions as necessary to conform to the Pricing Certificate. ARTICLE SKTEEN OPEN MEETING AND EFFECTIVE DATE SECTION 16.01. OPEN MEETING. The Board of Directors officially finds, determines, and declares that this Bond Order was reviewed, carefully considered, and adopted at a meeting of the Board, and that a sufficient written notice of the date, hour, place, and subject of this meeting was posted as required by the Open Meetings Act, Chapter 551, Texas Government Code, as amended, and that this meeting has been open to the public as required by law at all times during which this Bond Order and the subject matter hereof has been discussed, considered, and acted upon. The Board of Directors further ratifies, approves and confirms such written notice and the contents and posting thereof. SECTION 16.02. EFFECTIVE DATE OF BOND ORDER. This Bond Order shall take effect and be in full force and effect upon and after its passage. ARTICLE SEVENTEEN AMENDMENTS SECTION 17.01. AMENDMENTS, (a) Amendment with Consent of Owners of Majority of Bonds. The owners of a majority in aggregate principal amount of then outstanding Bonds shall have the right from time to time to approve any amendment to this Bond Order 38 which may be deemed necessary or desirable by the District; provided however, that, other than as permitted by subsection (f) of this Section 17.01, nothing herein contained shall permit or be construed to permit the amendment, without the consent of the owner of each of the outstanding Bonds affected thereby, of the terms and conditions of this Bond Order or the Bonds so as to: (1) change debt service requirements, interest payment dates or the maturity or maturities of the outstanding Bonds; (2) reduce the rate of interest borne by any of the outstanding Bonds; (3) reduce the amount of the principal of, redemption premium, if any, or interest on the outstanding Bonds or impose any conditions with respect to such payments; (4) modify the terms of payment of principal of, redemption premium, if any, or interest on the outstanding Bonds, or impose any conditions with respect to such payments; (5) affect the right of the Registered Owners of less than all of the Bonds then outstanding; or (6) decrease the minimum percentage of the principal amount of Bonds necessary for consent to any such amendment. (b) Notice of Amendment. If at any time the District shall desire to amend this Bond Order it may cause a written notice of the proposed amendment to be published at least once on a business day in a financial newspaper, journal, or publication of general circulation in the City of New York, New York, or in the State of Texas. If, because of temporary or permanent suspension of the publication or general circulation of all such newspapers, journals, or publications, it is impossible or impractical to publish such notice in the manner provided herein, then such publication in lieu thereof as shall be made by the Registrar shall constitute a sufficient publication of notice. In addition to such publication, the Registrar shall cause a written notice of the proposed amendment to be given by registered or certified mail to Registered Owners of the Bonds as shown on the Registration Books maintained by the Registrar; provided, however, that failure to receive such written notice of the proposed amendment, or any defect therein or in the mailing thereof, shall not affect the validity of any proceeding in connection with, or the adoption of, such amendment. Such notice shall briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file at the principal office of the Registrar for inspection by all Registered Owners of Bonds. (c) Consent to Amendment. Whenever at any time not less than 30 days, and within one year, from the date of the first publication of said notice or other services of written notice the District shall receive an instrument or instruments executed by the Registered Owners of at least 51% in aggregate principal amount of all Bonds then outstanding, which instrument or instruments shall refer to the proposed amendment described in said notice and shall specifically consent to and approve such amendment, the District may adopt the amendatory resolution or order in substantially the same form. 39 (d) Effect of Amendment. Upon the adoption of any amendatory resolution or order pursuant to the provisions of this Section, this Bond Order shall be deemed to be amended in accordance with such amendatory resolution or order, and the respective rights, duties, and obligations under such amendatory resolution or order of all the Registered Owners shall thereafter be determined and exercised subject in all respects to such amendments. (e) Consent of Registered Owners. Any consent given by a Registered Owners pursuant to the provisions of this Section shall be irrevocable for a period of six months from the date of the first publication of the notice provided for in this Section, and shall be conclusive and binding upon all future owners of the Bonds during such period. Such consent may be revoked by the Registered Owner who gave such consent at any time after six months from the date of the first giving of such notice, or by a successor in title, by filing notice thereof with the Registrar and the District, but such revocation shall not be effective if the Registered Owners of 51% in aggregate principal amount of the then outstanding Bonds have, prior to the attempted revocation, consented to and approved the amendment. (f) Amendments Without Consent. Notwithstanding the provisions of (a) through (f) of this Section, and without notice of the proposed amendment and without the consent of the Registered Owners. The District may, at any time, amend this Bond Order to cure any ambiguity or to cure, correct, or supplement any defective or inconsistent provision contained therein, or to make any other change that does not in any respect materially and adversely affect the interest of the Registered Owners, provided that no such amendment shall be made contrary to the provision to Section 17.01 (a), and a duly certified or executed copy of each such amendment shall be filed with the Registrar. ARTICLE EIGHTEEN OTHER ACTIONS AND MATTERS SECTION 18.01. OTHER ACTIONS. The President, Vice President, Treasurer, Secretary and Assistant Secretary of the Board of Directors of the District, and all other officers, employees and agents of the District, and each of them, shall be and they are hereby expressly authorized, empowered and directed from time to time and at any time to do and perform all such acts and things and to execute, acknowledge and deliver in the name and under the corporate seal and on behalf of the District all instruments as may be necessary or desirable in order to carry out the terms and provisions of this Bond Order, the Bonds, the initial sale and delivery of the Bonds, the Paying Agent/Registrar Agreement, the Escrow Agreement any insurance commitment letter or insurance policy and the Official Statement. In addition, prior to the initial delivery of the Bonds, President, Vice President or Treasurer and Secretary of the Board of Directors of the District, the District's Attorney and Bond Counsel are hereby authorized and directed to approve any technical changes or corrections to this Order or to any of the instruments authorized and approved by this Order necessary in order to (i) correct any ambiguity or mistake or properly or more completely document the transactions contemplated and approved by this Ordinance and as described in the Official Statement, (ii) obtain a rating from any of the national bond rating agencies or satisfy requirements of the Bond Insurer, or (iii) obtain the approval of the Bonds by the Texas Attorney General's office. 40 SECTION 18.02. ADDITIONAL BOND INSURANCE PROVISIONS. The Pricing Officer is authorized to determine whether the Bonds sell with bond insurance and any provisions related to such insurance as evidenced in the Pricing Certificate in accordance with Section 1207.007(b)(5) of the Texas Government Code, as amended. Bond Counsel is authorized to insert any necessary provisions required by the Bond Insurer and agreed to by the District. SECTION 18.03. PAYMENT OF ATTORNEY GENERAL FEE. The District hereby authorizes the disbursement of a fee equal to the lesser of (i) one-tenth of one percent of the principal amount of the Bonds or (ii) $9,500, provided that such fee shall not be less than $750, to the Attorney General of Texas Public Finance Division for payment of the examination fee charged by the State of Texas for the Attorney General's review and approval of public securities and credit agreements, as required by Section 1202.004 of the Texas Government Code. The appropriate member of the District's staff is hereby instructed to take the necessary measures to make this payment. The District is also authorized to reimburse the appropriate District funds for such payment from proceeds of the Bonds. ARTICLE NINETEEN CONTINUING DISCLOSURE SECTION 19.01. CONTINUING DISCLOSURE UNDERTAKING, (a) Annual Reports. The District shall provide annually to the MSRB, in an electronic format as prescribed by the MSRB, within six months after the end of any fiscal year, financial information and operating data with respect to the District of the general type included in the final Official Statement authorized by Section 15.03 of this Order, being the information described in the Pricing Certificate. Any financial statements to be so provided shall be (1) prepared in accordance with the accounting principles described in Exhibit "D" hereto, or such other accounting principles as the District may be required to employ from time to time pursuant to state law or regulation, and (2) audited, if the District commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the District shall provide unaudited financial statements within such period, and audited financial statements for the applicable fiscal year to the MSRB, when and if the audit report on such statements become available. If the District changes the fiscal year, the District will notify the MSRB of the change (and of the date of the new fiscal year end) prior to the next date by which the District otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this subsection may be set forth in full in one or more documents or may be included by specific reference to any document that is available to the public on the MSRB's internet web site or filed with the SEC. All documents provided to the MSRB pursuant to this subsection shall be accompanied by identifying information as prescribed by the MSRB. 41 (b) Material Event Notices. The District shall notify the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of ten business days after the occurrence of the event, of any of the following events with respect to the Bonds: A. Principal and interest payment delinquencies; B. Non-payment related defaults, if material within the meaning of the federal securities laws; C. Unscheduled draws on debt service reserves reflecting financial difficulties; D. Unscheduled draws on credit enhancements reflecting financial difficulties; E. Substitution of credit or liquidity providers, or their failure to perform; F. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax-exempt status of the Bonds, or other events affecting the tax-exempt status of the Bonds; G. Modifications to rights of holders of the Bonds, if material within the meaning of the federal securities laws; H. Bond calls, if material within the meaning of the federal securities laws; I. Defeasances; J. Release, substitution, or sale of property securing repayment of the Bonds, if material within the meaning of the federal securities laws; K. Rating changes; L. Bankruptcy, insolvency, receivership or similar event of the District; M. The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material within the meaning of the federal securities laws; and N. Appointment of a successor or additional trustee or the change of name of a trustee, if material within the meaning of the federal securities laws. The District shall notify the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner, of any failure by the District to provide financial information or operating 42 data in accordance with this subsection by the time required. All documents provided to the MSRB pursuant to this subsection shall be accompanied by identifying information as prescribed by the MSRB. (c) Limitations, Disclaimers, and Amendments. The District shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the District remains an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the District in any event will give the notice required by this Order of any Bond calls and defeasance that cause the Bonds to be no longer outstanding. The provisions of this Section are for the sole benefit of the holders and beneficial owners of the Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The District undertakes to provide only the financial information, operating data, financial statements, and notices that it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the District's financial results, condition, or prospects relating to the System or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The District does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Bonds at any future date. UNDER NO CIRCUMSTANCES SHALL THE DISTRICT BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE DISTRICT, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the District in observing or performing its obligations under this Section shall constitute a breach of or default under this Order for purposes of any other provision of this Order. Should the Rule be amended to obligate the District to make filings with or provide notices to entities other than the MSRB, the District hereby agrees to undertake such obligation with respect to the Bonds in accordance with the Rule as amended. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the District under federal and state securities laws. The provisions of this Section may be amended by the District from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, but only if (1) the provisions of this Section, as so amended, would have permitted an underwriter to purchase or 43 sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (2) either (A) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Order that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (B) a person that is unaffiliated with the District (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. If the District so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with this Section an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information or operating data so provided. The District may also amend or repeal the provisions of this continuing disclosure requirement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling the Bonds in the primary offering of the Bonds. 44 EXHIBIT "A" PAYING AGENT/REGISTRAR AGREEMENT [See Tab 4] TravisCoMUD2\UTRBl l\Del: ORDER A-1 EXHIBIT "B" ESCROW AGREEMENT [See Tab 8] TravisCoMUD2UrrRBll\Del: ORDER B-1 EXHIBIT "C" Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust P.O. Box 396 East Syracuse, New York 13057 By Overnight or Courier The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust 111 Sanders Creek Parkway East Syracuse, New York 13057 In person The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust Corporate Trust Window 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. Dated: , 20_ * The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. (1) To be modified, amended or revised as necessary in accordance with the terms of the Pricing Certificate for each Series. Trophy Club Municipal Utility District No. 1 TravisCoMUD2\UTRBll\Del: ORDER C-1 FORM OF NOTICE OF DEFEASANCE/REDEMPTION(1) Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on in each the years through , inclusive, aggregating $ in principal amount. Maturity Date Principal Amount Interest Rate Redemption Date CUSIP* EXHIBIT "D" TravisCoMUD2\UTRBU\Del: ORDER D-1 CONTINUING DISCLOSURE UNDERTAKING Accounting Principles The accounting and reporting policies of the District relating to the funds and account groups will conform to generally accepted accounting principles (GAAP) as applied to governmental entities. EXHIBIT "E WRITTEN PROCEDURES RELATING TO CONTINUING COMPLIANCE WITH FEDERAL TAX COVENANTS A. Arbitrage. With respect to the investment and expenditure of the proceeds of the Bonds the District's Director of Finance (the "Responsible Person") will: • monitor all amounts deposited into a sinking fund or funds, e.g., the Interest and Sinking Fund, to assure that the maximum amount invested at a yield higher than the yield on the Bonds does not exceed an amount equal to the debt service on the Bonds in the succeeding 12 month period plus a carryover amount equal to one-twelfth of the principal and interest payable on the Bonds for the immediately preceding 12-month period; • monitor the actions of the escrow agent (to the extent an escrow is funded with proceeds) to ensure compliance with the applicable provisions of the escrow agreement, including with respect to reinvestment of cash balances; • retain any official action of the District (such as a reimbursement resolution) stating its intent to reimburse with the proceeds of the Bonds any amount expended prior to the Issue Date for the acquisition, renovation or construction of the facilities; • ensure that the applicable information return (e.g., IRS Form 8038-G, 8038-GC, or any successor forms) is timely filed with the IRS; and • assure that, unless excepted from rebate and yield restriction under section 148(f) of the Code, excess investment earnings are computed and paid to the U.S. government at such time and in such manner as directed by the IRS (i) at least every 5 years after the Issue Date and (ii) within 30 days after the date the Bonds are retired. B. Private Business Use. With respect to the use of the facilities financed or refinanced with the proceeds of the Bonds the Responsible Person will: • monitor the date on which the facilities are substantially complete and available to be used for the purpose intended; • monitor whether, at any time the Bonds are outstanding, any person, other than the District, the employees of the District, the agents of the District or members of the general public has any contractual right (such as a lease, purchase, management or other service agreement) with respect to any portion of the facilities; • monitor whether, at any time the Bonds are outstanding, any person, other than the District, the employees of the District, the agents of the District or members of the general public has a right to use the output of the facilities; • determine whether, at any time the Bonds are outstanding, any person, other than the District, has a naming right for the facilities or any other contractual right granting an intangible benefit; • determine whether, at any time the Bonds are outstanding, the facilities are sold or otherwise disposed of; and • take such action as is necessary to remediate any failure to maintain compliance with the covenants contained in the Ordinance related to the public use of the facilities. TravisCoMUD2\UTRB 1 l\Del: ORDER E-1 C. Record Retention. The Responsible Person will maintain or cause to be maintained all records relating to the investment and expenditure of the proceeds of the Bonds and the use of the facilities financed or refinanced thereby for a period ending three (3) years after the complete extinguishment of the Bonds. If any portion of the Bonds is refunded with the proceeds of another series of tax-exempt obligations, such records shall be maintained until the three (3) years after the refunding obligations are completely extinguished. Such records can be maintained in paper or electronic format. D. Responsible Person. The Responsible Person shall receive appropriate training regarding the District's accounting system, contract intake system, facilities management and other systems necessary to track the investment and expenditure of the proceeds and the use of the facilities financed with the proceeds of the Bonds. The foregoing notwithstanding, the Responsible Person is authorized and instructed to retain such experienced advisors and agents as may be necessary to carry out the purposes of these instructions. TravisCoMUD2\UTRB 1 I\Del: ORDER E-2 TAB 2 PRICING CERTIFICATE I, the undersigned President of the Board of Directors acting as the Pricing Officer of Trophy Club Municipal Utility District No. 1 (the "District"), pursuant to the authority granted to me by the order adopted by the Board of Directors of the District on December 20, 2011 (the "Bond Order") relating to the issuance of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") hereby find, determine and commit on behalf of the District to sell and deliver the Bonds on the following terms. Capitalized terms not otherwise defined herein have the meaning assigned in the Bond Order. 1. The Bonds shall be designated the "Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012." 2. The Bonds are hereby sold and shall be delivered to First Southwest Company (the "Underwriter") pursuant to the terms of the Purchase Contract, dated February 14, 2012, between the District and the Underwriter and attached hereto as Exhibit A, for cash at a price of $2,470,257.70 (being the par amount of the Bonds plus a net original issue premium of $136,075.20 less an underwriting discount of $20,817.50), plus accrued interest from the date of the Bonds to the date of delivery, according to the following terms: A. The aggregate original principal amount of the Bonds shall be $2,355,000. B. The Bonds shall be Current Interest Bonds and shall be dated March 1, 2012 and shall be numbered from R-l upwards (except that the Initial Bond shall be numbered T-l). The Bonds shall mature and bear interest from their dated date as follows: Maturity Date Principal Interest (September 1) Amount ($) Rate (%) 2013 185,000 2.000 2014 190,000 2.000 2015 195,000 2.000 2016 200,000 2.500 2017 205,000 2.500 2018 210,000 2.500 2019 225,000 2.500 2020 225,000 3.000 2021 230,000 3.000 2022 240,000 3.000 2023 250,000 3.000 C. Interest on the Bonds shall be payable March 1 and September lof each year, commencing September 1, 2012. The record date for the Bonds will be the fifteenth day of the month preceding an Interest Payment Date whether or not such dates are Business Days. D. The Bonds scheduled to mature on and after September 1, 2021, shall be redeemable prior to their scheduled maturity, in whole or from time to time in part, at the option of the District, on September 1, 2020 or on any date thereafter, in principal amounts of $5,000 or any integral multiple thereof (and, if in part, the particular Bonds or portions thereof to be redeemed shall be selected by the District in its sole discretion), at the redemption price of par, together with accrued interest to the redemption date. E. The initial Bonds shall be registered in the name of First Southwest Company. 3. The Refundable Bonds that are to be refunded in connection with the issuance of the Bonds, and the redemption date of the Refunded Bonds, are designated and set forth in Exhibit B attached hereto and the form of the Notice of Redemption relating thereto is set forth in Exhibit B attached hereto. The Bonds are in amounts sufficient to redeem and refund the Refunded Bonds and to pay the costs of issuing the Bonds. 4. The issuance of the Bonds is in the best interest of the District and produces a present value debt service savings of $336,286.75 (14.279692% of Refunded Bonds) and a gross debt service savings of $366,771.25. The District is not making a contribution to the refunding. 5. The price to be paid by the Underwriter for the Bonds is not less than 90% of the aggregate original principal amount thereof plus accrued interest to the date of delivery of the Bonds and produces a present value debt service savings of at least 6.00% net of any District contribution. None of the Bonds bear interest at an interest rate greater than the maximum authorized by law. Additionally, all of the requirements of Sections 3.01 and 3.02 of the Bond Order have been met. 7. In accordance with Section 19.01 of the Bond Order, the District shall provide annually to the MSRB, within six months after the end of each fiscal year, financial information and operating data with respect to the District as provided in the Official Statement under the caption "CONTINUING DISCLOSURE OF INFORMATION — Annual Reports." 8. In accordance with Section 15.03 of the Bond Order, the Preliminary Official Statement, dated February 7, 2012, previously prepared and distributed in connection with the pricing of the Bonds is hereby approved and deemed final as of its date (subject to permissible omissions described in Rule 15c2-12) within the meaning of the provisions of 17 C.F.R § 250. 15c2-12(b)(l), and the preparation and distribution of the final Official Statement in reoffering of the Bonds by the Underwriter is hereby approved. 9. In consultation with, and reliance upon the advice of the financial advisor for the District, I hereby find that the terms and sale are the most advantageous reasonably available on the date and time of the pricing of the Bonds given the then existing market conditions and the stated terms of sale on such dated and time. 10. The Bonds shall be in the form as set forth in Exhibit C attached hereto. 2 WITNESS MY HAND this 14th day of February, 2012. TROPHY CLUB MUNICD7AL UTILITY DISTRICT NO. 1 By: Name: Title: Pn i Moss frdent, Board of Directors Pricing Certificate Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 EXHIBIT A Bond Purchase Agreement [See Tab 7] A-1 EXHIBIT B NOTICE OF DEFEASANCE/REDEMPTION Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on September 1 in each of the following years, aggregating $2,355,000 in principal amount. Maturity Date Principal Amount ($) Interest Rate (%) Redemption Date CUSIP* 2013 165,000 4.25 September 1, 2012 897060BE8 2014 170,000 4.35 September 1, 2012 897060BF5 2015 180,000 4.45 September 1, 2012 897060BG3 2016 190,000 4.55 September 1, 2012 897060BH1 2017 200,000 4.70 September 1, 2012 897060BJ7 2018 210,000 4.80 September 1, 2012 897060BK4 2020 460,000 4.95 September 1, 2012 897060BM0 2022 505,000 5.00 September 1, 2012 897060BP3 2023 275,000 5.00 September 1, 2012 897060BQ1 Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail By Overnight or Courier In person The Bank of New York Mellon Trust The Bank of New York Mellon Trust The Bank of New York Mellon Trust Company, N.A. Company, N.A. Company, N.A. Global Corporate Trust Global Corporate Trust Global Corporate Trust P.O. Box 396 111 Sanders Creek Parkway Corporate Trust Window East Syracuse, New York 13057 East Syracuse, New York 13057 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. * The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. Dated: , 20_ Trophy Club Municipal Utility District No. B-1 EXHIBIT C FORM OF BOND UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R- PRINCIPAL AMOUNT $ INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. March 1,2012 REGISTERED OWNER: PRINCIPAL AMOUNT: ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. C-1 THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each Interest Payment Date by check or draft, dated as of such Interest Payment Date, drawn by the Registrar on, and payable solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Registrar by United States mail, first-class postage prepaid, on or before each such Interest Payment Date, to the Registered Owner hereof, at its address as it appeared on the fifteenth (15th) calendar day of the month next preceding each such date whether or not a business day (the "Record Date") on the Register kept by the Registrar listing the names and addresses of the Registered Owners (the "Register"). In addition, interest may be paid by such other method, acceptable to the Registrar, requested by, and at the risk and expense of, the Registered Owner. In the event of a non payment of interest on a scheduled payment date, and for 30 calendar days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 calendar days after the Special Record Date) shall be sent at least 5 business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner as it appears on the Register at the close of business on the last business day next preceding the date of mailing of such notice. DURING ANY PERIOD in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity and bearing the same interest rate are to be redeemed, the particular Bonds of such maturity and bearing such interest rate shall be selected in accordance with the arrangements between the District and the securities depository. ANY ACCRUED INTEREST due at maturity or upon the redemption of this Bond prior to maturity as provided herein shall be paid to the Registered Owner upon presentation and surrender of this Bond for payment at the designated office for payment of the Paying Agent/Registrar. The District covenants with the Registered Owner of this Bond that on or before each principal payment date, interest payment date, and any redemption date for this Bond it will make available to the Registrar, from the "Debt Service Fund" the creation of which is affirmed by the Bond Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. IF THE DATE for any payment due on this Bond shall be a Saturday, Sunday, or a day on which the Paying Agent/Registrar is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, or day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed; C-2 and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds dated as of March 1, 2012 and authorized to be issued pursuant to the Bond Order adopted by the Board of Directors of the District in the principal amount of $2,355,000 FOR PURPOSES OF REFUNDING THE REFUNDED BONDS AND PAYING CERTAIN COSTS OF ISSUING THE BONDS. Terms used herein and not otherwise defined shall have the meanings given in the Bond Order. ON SEPTEMBER 1, 2020 OR ON ANY DATE THEREAFTER, the Bonds maturing on and after September 1, 2021, may be redeemed prior to their scheduled maturities, at the option of the District, with funds derived from any available and lawful source, at a redemption price equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption as a whole, or from time to time in part, and, if in part, the particular Bonds, or portions thereof, to be redeemed shall be selected and designated by the District, and if less than all of a maturity is to be redeemed the Registrar shall determine by lot the Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Bond may be redeemed only in integral multiples of $5,000 of principal amount). AT LEAST 30 calendar days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Bond to be redeemed at its address as it appeared on the Register on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. By the date fixed for any such redemption due provision shall be made with the Registrar for the payment of the required redemption price for the Bonds or portions for which such payment is made, all as provided above. The Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Registrar out of the funds provided for such payment. If a portion of any Bond shall be redeemed, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any authorized denomination or denominations, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the District, all as provided in the Bond Order. WITH RESPECT TO any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Bond Order have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, C-3 the District shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. ALL BONDS OF THIS SERIES are issuable solely as fully registered Bonds, without interest coupons, in the principal denomination in the case of the Bonds, of any integral multiple of $5,000. As provided in the Bond Order, this Bond may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred, converted into and exchanged for a like aggregate amount of fully registered Bonds, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having any authorized denomination or denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Bond to the Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Order. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Registrar, evidencing assignment of this Bond or any portion or portions hereof in any authorized denomination to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be registered. The Form of Assignment printed or endorsed on this Bond may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Registrar may be used to evidence the assignment of this Bond or any portion or portions hereof from time to time by the Registered Owner. The Registrar's reasonable standard or customary fees and charges for assigning, transferring, converting and exchanging any Bond or portion thereof will be paid by the District. In any circumstance, any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer, conversion or exchange, as a condition precedent to the exercise of such privilege. The Registrar shall not be required to make any such transfer, conversion or exchange of any Bond or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or Interest Payment Date or (ii) within 45 calendar days prior to its redemption date; provided, however, such limitation on transferability shall not be applicable to an exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. WHENEVER the beneficial ownership of this Bond is determined by a book entry at a securities depository for the Bonds, the foregoing requirements of holding, delivering or transferring this Bond shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. IN THE EVENT any Registrar for the Bonds is changed by the District, resigns, or otherwise ceases to act as such, the District has covenanted in the Bond Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Bonds. C-4 THE BONDS are payable from the proceeds of an ad valorem tax, without legal limit as to rate or amount, levied upon all taxable property within the District. The Bond Order provides that the District reserves the right to consolidate with one or more conservation and reclamation districts, to consolidate its waterworks and sewer systems with the systems of such districts, and to secure the Bonds and any other bonds of the District or such districts by a pledge of taxes of the consolidated system. The Bond Order further provides that the pledge of taxes, to the payment of the Bonds shall terminate at such time, if ever, as (i) money and/or defeasance obligations in an amount sufficient to defease the Bonds is deposited with or made available to the Registrar in accordance with the Bond Order or (ii) a city dissolves the District, and assumes the obligations of the District pursuant to existing Texas law. THE BONDS are issued pursuant to the Bond Order, whereunder the District covenants to levy a continuing direct annual ad valorem tax, without legal limit as to rate or amount, on taxable property within the District, for each year while any part of the Bonds are considered outstanding under the provisions of the Bond Order, in sufficient amount, together with revenues and receipts available from other sources which are equally available for such purposes, to pay interest on the Bonds as it becomes due, to provide a sinking fund for the payment of the principal of the Bonds when due or the redemption price at any earlier required redemption date with respect to the Bonds, and to pay the expenses of assessing and collecting such tax, all as more specifically provided in the Bond Order. Reference is hereby made to the Bond Order for provisions with respect to the operation and maintenance of the District's facilities, the custody and application of funds, remedies in the event of a default hereunder or thereunder, and the other rights of the Registered Owners of the Bonds. By acceptance of this Bond the Registered Owner hereof consents to all of the provisions of the Bond Order, a certified copy of which is on file in the office of the District. THE OBLIGATION to pay the principal of and the interest on this Bond is solely and exclusively the obligation of the District until such time, if ever, as the District is abolished and this Bond is assumed as described above. No other entity, including the State of Texas, any political subdivision thereof other than the District, or any other public or private body, is obligated, directly, indirectly, contingently, or in any other manner, to pay the principal of or the interest on this Bond from any source whatsoever. No part of the physical properties of the District, including the properties provided by the proceeds of the Bonds, is encumbered by any lien for the benefit of the Registered Owner of this Bond. THE DISTRICT RESERVES THE RIGHT to issue additional bonds heretofore or hereafter duly authorized at elections held in the District payable from a lien on and pledge of taxes; bonds, notes and other obligations of inferior liens, and revenue bonds, notes and other obligations payable solely from revenues of the District or revenues to be received under contracts with other persons, including private corporations, municipalities and political subdivisions or from any other source. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund any bonds (including the Bonds) at or prior to their respective dates of maturity or redemption. TO THE EXTENT permitted by and in the manner provided in the Bond Order, the terms and provisions of the Bond Order and the rights of the Registered Owners of the Bonds may be C-5 modified with, in certain circumstances, the consent of the Registered Owners of a majority in aggregate principal amount of the Bonds affected thereby; provided, however, that, without the consent of the Registered Owners of all of the Bonds affected, no such modification shall (i) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (ii) give any preference to any Bond over any other Bond, or (iii) reduce the aggregate principal amount of the Bonds required for consent to any such modification. THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Bond Order unless this Bond either (a) is registered by the Comptroller of Public Accounts of the State of Texas as evidenced by execution of the registration certificate endorsed hereon or (b) is authenticated as evidenced by execution of the authentication certificate endorsed hereon by the Registrar. IT IS HEREBY CERTIFIED, COVENANTED, AND REPRESENTED that all acts, conditions, and things necessary to be done precedent to the issuance of the Bonds in order to render the same legal, valid, and binding obligations of the District have happened and have been accomplished and performed in regular and due time, form, and manner, as required by law; that provision has been made for the payment of the principal of and interest on the Bonds by the levy of a continuing, direct annual ad valorem tax upon all taxable property within the District and that issuance of the Bonds does not exceed any constitutional or statutory limitation. In the event that any provisions herein contained do or would, presently or prospectively, operate to make any part hereof void or voidable, such provisions shall be without effect or prejudice to the remaining provisions hereof, which shall nevertheless remain operative, and such violative provisions, if any, shall be reformed by a court of competent jurisdiction within the limits of the laws of the State of Texas. IT IS FURTHER CERTIFIED that the District has designated the Bonds as "qualified tax- exempt obligations" within the meaning of Section 265(b) of the Internal Revenue Code of 1986. C-6 IN WITNESS WHEREOF, the District has caused this Bond to be signed with the manual or facsimile signature of the President or Vice-President of the Board of Directors of the District and countersigned with the manual or facsimile signature of the Secretary or Assistant Secretary of the Board of Directors of the District, and has caused the official seal of the District to be duly impressed, or placed in facsimile, on this Bond. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Secretary [Assistant Secretary], President [Vice-President], Board of Directors Board of Directors (DISTRICT SEAL) INSERTIONS FOR INITIAL BONDS The Initial Bond shall be in the form set forth above, except that: A. immediately under the name of the Bond, the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the words "As shown below" and "CUSIP NO." shall be deleted. B. the first paragraph of the Bond shall be deleted and the following will be inserted: "TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1, in Denton and Tarrant Counties, Texas (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assigns (hereinafter called the "Registered Owner") the Payment at Maturity on September 1 in the year and in the principal installment and bearing interest at the per annum rate set forth in the following schedule: Maturity Date Principal Interest (September 1) Amount ($) Rate (%) (Information from Pricing Certificate to be inserted) The District promises to pay interest on the unpaid principal amount hereof (calculated on the basis of a 360-day year of twelve 30-day months) from March 1, 2012 at the respective Interest Rate per annum specified above. Interest is payable on September 1, 2012 and semiannually on each March 1 and September 1 thereafter to the date of payment of the principal installment specified above; except, that if this Bond is required to be authenticated and the date of its C-7 authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full." C. The Initial Bond shall be numbered "T-l". COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this . Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) C-8 PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Order described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a Bond, Bonds, or a portion of a Bond or Bonds of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated: Registrar By Authorized Representative ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto Please insert Social Security or Taxpayer Identification Number of Transferee (Please print or typewrite name and address, including zip code of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints , attorney, to register the transfer of the within Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: C-9 Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Bond in every particular, without alteration or enlargement or any change whatsoever. C-10 TAB 3 UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-l PRINCIPAL AMOUNT SI 85,000 INTEREST RATE DATE OF BONDS 2.000% March 1,2012 MATURITY DA IE September I. 2013 CUSIPNO. 807059 EQ0 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: ONE HUNDRED EIGHTY I IVI- THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (ilu- "I )istrict"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to thaipnaturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or. before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however,4hat if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, i lion this Bond shall bear interest from the date to which such interest has been paid in full. 'Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO.R-2 PRINCIPAL AMOl NT SI 90,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 2.000% March 1, 2012 September 1. 2014 897059 ER8 REGISTERED OWNER: CEDE & CO. » ill "lllls. ''w PRINCIPAL AMOUNT: ONE HUNDRED NINETY 11IOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the ^maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Dale next preceding the date of authentication, unless such date of authentication is after any Record Date jjut on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS NO. R-3 PRINCIPAL AMOUNT $195,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 2.000% March 1, 2012 September 1. 2015 897059 ES6 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: ONE HUNDRED NINTTY FIVE Tl IOUSAND DOLLARS ON THE MATURITY DATE SPECD7IED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to gay to the Registered Owner set forth above, or registered assign (hereinafter called the "Regisfered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a»360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest*rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such ^principal amount shall bear interest from the Interest Payment Dategnext preceding the date of authentication, unless such date of authentication is after any Rec8rd Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined onlyby a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-4 PRINCIPAL AMOUNT $200,000 INTEREST RATE DATE OF BONDS 2.500% March 1,2012 MATURITY DATE September I. 2016 CUSIP NO. 897059 ET4 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRI-I) Tl lOUSANl) DOLLARS ON THE MATURITY DAI K SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on'the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on Septembml, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter deli nod), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-5 PRINCIPAL AMOUNT S205,00() INTEREST RATE DATE OF BONDS 2.500% March 1,2012 MATURITY DATE September 1. 2017 CUS1P NO. 897059 EU1 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED I IYI. I HOIISANI) DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Dale next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for whichvthis Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-6 PRINCIPAL AMOUNT S210,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 2.500% March 1, 2012 September 1. 2018 897059 EV9 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED TEN II K >l ISAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO.R-7 PRINCIPAL WlOl M ^225,000 INTEREST RATE DATE OF BONDS MATURM \ DA II. CUSIP NO. 2.500% March 1, 2012 Septemlvi 1. 2011> 897059 EW7 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED TWI"NTY I IVI 11 lOl ^SAND ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall-bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-8 PRINCIPAL AMOliM S225,000 INTEREST RATE DATE OF BONDS 3.000% March 1,2012 MATURITY DATE September 1.2()20 CUSIP NO. 897059 EX5 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED TWENTY 1-1VK THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, atjhe interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), suj&principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. Ibr which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-9 PRINCIPAL •••AMOUNT $230,000 INTEREST RATE DATE OF BONDS MATURITY DATE CUSIP NO. 3.000% March 1, 2012 September 1. 2021 897059 EY3 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED THIRTY 11 lOUSANL) DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to thetjuaturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Datevbut on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only; by a book entry at a securities depository for the Bonds, any payment to the security depository, or its nominee or registered assigns, shall be made in accordance with existing^PPIngements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO. R-10 PRINCIPAL AMOl M $240,000 INTEREST RATE DATE OF BONDS 3.000% March 1,2012 MATURITY DATE September 1,2022 CUSIP NO. 897059 EZ0 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED FORTY THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 360 day year of twelve 30 day months, from March 1, 2012 on September], 2012 and semiannually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the maturity date specified above, or the date of redemption prior to maturity, at the interest rate per annum specified above; except that if this Bond is required to lie authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date; but on or before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, how ever, that if on the date of authentication hereof the interest on the Bond or Bonds, if any. for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this UNITED STATES OF AMERICA STATE OF TEXAS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BOND SERIES 2012 NO.R-11 PRINCIPAL AMOUNT $250,000 INTEREST RATE DATE OF BONDS 3.000% March 1,2012 MATURITY DATE September 1. 2o"S CUSIP NO. 897059 FA4 REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: TWO HUNDRED FIFTY THOUSAND DOLLARS ON THE MATURITY DATE SPECIFIED ABOVE, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner set forth above, or registered assign (hereinafter called the "Registered Owner") the principal amount set forth above, and to pay interest thereon calculated on the basis of a 160 day year of twelve 30 day months, from March 1, 2012 on September 1, 2012 and sernffiinually on each March 1 and September 1 thereafter (an "Interest Payment Date") to the |maturity date specified above, or the date of redemption prior to maturity, at Jhe interest rate per annum specified above; except that if this Bond is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such principal amount shall bear interest from the Interest Payment Date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or,,before the next following Interest Payment Date, in which case such principal amount shall bear interest from such next following Interest Payment Date; provided, however, that if on the date of authentication hereof the interest on the Bond or Bonds, if any, for which this Bond is being exchanged or converted from is due but has not been paid, then this Bond shall bear interest from the date to which such interest has been paid in full. Notwithstanding the foregoing, during any period in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, any payment to the securities depository, or its nominee or registered assigns, shall be made in accordance with existing arrangements between the District and the securities depository. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the Registered Owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity at The Bank of New York Mellon Trust Company, N.A., which is the "Registrar" or "Paying Agent/Registrar" for this Bond, at its designated office for payment in Dallas, Texas. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each Interest Payment Date by check or draft, dated as of such Interest Payment Date, drawn by the Registrar on, and payable solely from, funds of the District required by the order authorizing the issuance of the Bonds (the "Bond Order") to be on deposit with the Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Registrar by United States mail, first-class postage prepaid, on or before each such Interest Payment Date, to the Registered Owner hereof, at its address as it appeared on the fifteenth (15th) calendar day of the month next preceding each such date whether or not a business day (the "Record Date") on the Register kept by the Registrar listing the names and addresses of the Registered Owners (the "Register"). In addition, interest may be paid by such other method, acceptable to the Registrar, requested by, and at the risk and expense of, the Registered Owner. In the event of a non payment of interest on a scheduled payment date, and for 30 calendar days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 calendar days after the Special Record Date) shall be sent at least 5 business days prior to the Special Record Date by United States mail, first-class postage prepaid, to the address of each Registered Owner as it appears on the Register at the close of business on the last business day next preceding the date of mailing of such notice. DURING ANY PERIOD in which ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if fewer than all of the Bonds of the same maturity and bearing the same interest rate are to be redeemed, the particular Bonds of such maturity and bearing such interest rate shall be selected in accordance with the arrangements between the District and the securities depository. ANY ACCRUED INTEREST due at maturity or upon the redemption of this Bond prior to maturity as provided herein shall be paid to the Registered Owner upon presentation and surrender of this Bond for payment at the designated office for payment of the Paying Agent/Registrar. The District covenants with the Registered Owner of this Bond that on or before each principal payment date, interest payment date, and any redemption date for this Bond it will make available to the Registrar, from the "Debt Service Fund" the creation of which is affirmed by the Bond Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. IF THE DATE for any payment due on this Bond shall be a Saturday, Sunday, or a day on which'the Paying Agent/Registrar is authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, or day on which the Paying Agent/Registrar is authorized by law or executive order to remain closed; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of a series of Bonds dated as of March 1, 2012 and authorized to be issued pursuant to the Bond Order adopted by the Board of Directors of the District in the principal amount of $2,355,000 FOR PURPOSES OF REFUNDING THE REFUNDED BONDS AND PAYING CERTAIN COSTS OF ISSUING THE BONDS. Terms used herein and not otherwise defined shall have the meanings given in the Bond Order. ON SEPTEMBER 1, 2020 OR ON ANY DATE THEREAFTER, the Bonds maturing on and after September 1, 2021, may be redeemed prior to their scheduled maturities, at the option of the District, with funds derived from any available and lawful source, at a redemption price equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption as a whole, or from time to time in part, and, if in part, the particular Bonds, or portions thereof, to be redeemed shall be selected and designated by the District, and if less than all of a maturity is to be redeemed the Registrar shall determine by lot the Bonds, or portions thereof within such maturity to be redeemed (provided that a portion of a Bond may be redeemed only in integral multiples of $5,000 of principal amount). AT LEAST 30 calendar days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be sent by the Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Bond to be redeemed at its address as it appeared on the Register on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. By the date fixed for any such redemption due provision shall be made with the Registrar for the payment of the required redemption price for the Bonds brportions for which such payment is made, all as provided above. The Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Registrar out of the funds provided for such payment. If a portion of any Bond shall be redeemed, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any authorized denomination or,, denominations, at the written request of the Registered Owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the District, all as provided in the Bond Order. WITH RESPECT TO any optional redemption of the Bonds, unless certain prerequisites^ such redemption required by the Bond Order have been met and moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice shall state that said redemption may, at the option of the District, be conditional updntthe satisfaction of such prerequisites and receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon any prerequisite set forth in *sueh notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption and sufficient moneys are not received, such notice shall be of no force and effect, the District shall not redeem such Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Bonds have not been redeemed. ALL BONDS OF THIS SERIES are issuable solely as fully registered Bonds, without interest coupons, in the principal denomination in the case of the Bonds, of any integral multiple of $5,000. As provided in the Bond Order, this Bond may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred, converted into and exchanged for a like aggregate amount of fully registered Bonds, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having any authorized denomination or denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Bond to the Registrar for cancellation, all in accordance with the form and procedures set forth in the Bond Order. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Registrar, evidencing assignment of this Bond or any portion or portions hereof in any authorized denomination to the^assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be registered. The Form of Assignment printed or endorsed on this Bond may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Registrar may be used to evidence the assignment of this Bond or any portion or portions hereof from time to time by the Registered Owner. The Registrar's reasonable standard or customary fees and charges for assigning, transferring, converting and exchanging any Bond or portion thereof will be paid by the District. In any circumstance, any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer, conversion or exchange, as a condition precedent to the exercise of such privilege. The Registrar shall not be required to make any such transfer, conversion or exchange of any Bond or an\ portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or Interest Payment Date or (ii) within 45 calendar days prior to its redemption date; provided, however, such limitation on transferability shall not be applicable to an exchange by the Registered Owner of the unredeemed balance hereof in the event of its redemption in part. WHENEVER the beneficial ownership of this Bond is determined by a book entry at a securities depository for the Bonds, the foregoing requirements of holding, delivering or transferring this Bond shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. IN THE EVENT any Registrar for the Bonds is changed by the District, resigns, or otherwise ceases to act as such, the District has covenanted in the Bond Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Bonds. THE BONDS are payable from the proceeds of an ad valorem tax, without legal limit as to rate or amount, levied upon all taxable property within the District. The Bond Order provides that the District reserves the right to consolidate with one or more conservation and reclamation districts, to consolidate its waterworks and sewer systems with the systems of such districts, and to secure the Bonds and any other bonds of the District or such districts by a pledge of taxes of the consolidated system. The Bond Order further provides that the pledge of taxes, to the payment of the Bonds shall terminate at such time, if ever, as (i) money and/or defeasance obligations in an amount sufficient to defease the Bonds is deposited with or made available to the Registrar in accordance with the Bond Order or (ii) a city dissolves the District, and assumes the obligations of the District pursuant to existing Texas law. THE BONDS are issued pursuant to the Bond Order, whereunder the District covenants to levy a continuing direct annual ad valorem tax, without legal limit as to rate or amount, on taxable property within the District, for each year while any part of the Bonds are considered outstanding under the provisions of the Bond Order, in sufficient amount, together with revenues and receipts available from other sources which are equally available for such purposes, to pay interest on the Bonds as it becomes due, to provide a sinking fund for the payment of the principal of the Bonds when due or the redemption price at any earlier required redemption date with respect to the Bonds, and to pay the expenses of assessing and collecting such tax, all as more specifically provided in the Bond Order. Reference is hereby made to the Bond Order for provisions with respect to the operation and maintenance of the District's facilities, the custody and application of funds, remedies in the event of a default hereunder or thereunder, and the other rights of the Registered Owners of the Bonds. By acceptance of this Bond the Registered Owner hereof consents to all of the provisions of the Bond Order, a certified copy of which is on file in the office of the District. THE OBLIGATION to pay the principal of and the interest on this Bond is solely and exclusively the obligation of the District until such lime, if ever, as the District is abolished and this Bond is assumed as described above. No other entity, including the State of Texas, any political subdivision thereof other than the District, or any other public or private body, is obligated, directly, indirectly, contingently, or in any other manner, to pay the principal of or the interest on this Bond from any source whatsoever. No part of the physical properties of the District, including the properties provided by the proceeds of the Bonds, is encumbered by any lien for the benefit of the Registered Owner of this Bond. THE DISTRICT RESERVES THE RIGHT to issue additional bonds heretofore or hereafter duly authorized at elections held in the District payable from a lien on and pledge of taxes; bonds, notes and other obligations of inferior liens, and revenue bonds, notes and other obligations payable solely from revenues of the District or revenues to be received under contracts with other persons, including private corporations, municipalities and political subdivisions or from any other source. The District further reserves the right to issue refunding bonds in any manner permitted by law to refund any bonds (including the Bonds) at or prior to their respective dates of maturity or redemption. TO THE EXTENT permitted by and in the manner provided in the Bond Order, the terms and provisions of the Bond Order and the rights of the Registered Owners of the Bonds may be modified with, in certain circumstances, the consent of the Registered Owners of a majority in aggregate principal amount of the Bonds affected thereby; provided, however, that, without the consent of the Registered Owners of all of the Bonds affected, no such modification shall (i) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (ii) give any preference to any Bond over any other Bond, or (iii) reduce the aggregate principal amount of the Bonds required for consent to any such modification. THIS BOND shall not be valid or obligatory for any purpose or be entitled to any benefit under the Bond Order unless this Bond either (a) is registered by the Comptroller of Public Accounts of the State of Texas as evidenced by execution of the registration certificate endorsed hereon or (b) is authenticated as evidenced by execution of the authentication certificate endorsed hereon by the Registrar. IT IS HEREBY CERTIFIED, COVENANTED, AND REPRESENTED that all acts, conditions, and things necessary to be done precedent to the issuance of the Bonds in order to render the same legal, valid, and binding obligations of the District hmt happened and have been accomplished and performed in regular and due time, form, and manner, assiKequired by law; that provision has been made for the payment of the principal of and interesfr'on the Bonds by the levy of a continuing, direct annual ad valorem tax upon all taxableaprop^erty within the District and that issuance of the Bonds does not exceed any constitutional or statutory limitation. In the event that any provisions herein contained do or would, presently or prospectively, operate to make any part hereof void or voidable, such provisions shall be without effect or prejudice to the remaining provisions hereof, which shall nevertheless remain operative, and such violative provisions, if any, shall be reformed by a court of competent jurisdiction within the limits of the laws of the State of Texas. IT IS FURTHER CERTIFIED that the District has designated the Bonds as "qualified tax-exempt obligations" within thesmeaning of Section ^65(b) of the Internal Revenue Code of 1986. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the District has caused this Bond to be signed with the manual or facsimile signature of the President or Vice-President of the Board of Directors of the District and countersigned with the manual or facsimile signature of the Secretary or Assistant Secretary of the Board of Directors of the District, and has caused the official seal of the District to be duly impressed, or placed in facsimile, on this Bond. TROPHY CLUB MUNICIPAJ, UTILITY DISTRICT NO. 1 Secretary, Board of Directors President, Board of Directors (DISTRICT SEAL) PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Order described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a Bond, Bonds, or a portion of a Bond or Bonds of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated: . THE BAN K OF N EW YORK MELLON TRUST COMPANY, N.A. Registrar B\ Authorized Representative ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto Please insert Social Security or Taxpayer Identification Number of Transferee (Please print or typewrite name and address, including zip code of Transferee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints r • , attorney, to register the transfer of the within Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signaturc(s) must be guaranteed by a member firm of the New York Stock Exchange^or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Bond in every particular, without alteration or enlargement or any change whatsoever. TAB 4 PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of March 1, 2012 (this "Agreement"), by and between Trophy Club Municipal Utility District No. 1 (the "Issuer"), and The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, a banking corporation duly organized and existing under the laws of the United States of America (the "Bank"). RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012, (the "Securities"), such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchasers thereof on or about March 5, 2012; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on the Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Order" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of the Securities and with respect to the transfer and exchange thereof as provided herein and in the "Order." The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for political subdivisions, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the designated office for payment of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Financial Advisor" means Southwest Securities, Inc. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Order" means a written request or Order signed in the name of the Issuer by an authorized representative, delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. 2 "Order" means the Order of the governing body of the Issuer pursuant to which the Securities are issued, certified by the Secretary of the Board or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Order). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Order. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice- Chairman of the Board of Directors, the Chairman or Vice-chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Order on which the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," Issuer," and "Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. 3 ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first-class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Principal and interest payments made pursuant to this Section 3.01 shall be made by wire transfer. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Order. Section 3.03 Reporting Requirements. To the extent required by the Internal Revenue Code of 1986, as amended, or the Treasury Regulations, the Bank shall report to or cause to be reported to the Holders and the Internal Revenue Service the amount of interest paid or the amount treated as interest accrued on the Securities which is required to be reported by the Holders on their returns of federal income tax. ARTICLE FOUR REGISTRAR Section 4.01. Security Register - Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register"), and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be 4 reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. The Bank also agrees to keep a copy of the Security Register within the State of Texas. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect a re- registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereof will be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Certificates. The Issuer shall provide an adequate inventory of printed Securities certificates to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities certificates will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities certificates in safekeeping, which shall be not less than the level of care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that it maintains for its own securities. Section 4.03. Form of Security Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. 5 Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order or other notice of a legal proceeding and prior to the release or disclosure of any of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the same or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Certificates. The Bank will, at such reasonable intervals as it determines, surrender to the Issuer, Securities in lieu of which or in exchange for which other Securities have been issued, or which have been paid. Section 4.06. Mutilated, Destroyed, Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Order, to deliver and issue Securities certificates in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities certificates as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities certificates it has paid pursuant to Section 3.01, Securities certificates it has delivered upon the transfer or exchange of any Securities certificates pursuant to Section 4.01, and Securities certificates it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities certificates pursuant to Section 4.06. 6 ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. The Bank is also authorized to transfer funds relating to the closing and initial delivery of the securities in the manner disclosed in the closing memorandum as prepared by the Issuer's Financial Advisor or other agent. The Bank may act on facsimile or e-mail transmission of the closing memorandum acknowledged by the Financial Advisor or the Issuer as the final closing memorandum. The Bank shall not be liable for any losses, costs or expenses arising directly or indirectly from the Bank's reliance upon and compliance with such instructions. Section 5.02. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank by the Issuer. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proven that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any Order, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities certificates containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a Order, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by the Issuer. (e) The Bank may consult with legal counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to 7 any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon, provided that any such written advice or opinion is supplied to the Issuer by the Bank. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Moneys Held by Bank. The Bank shall deposit any moneys received from the Issuer into a segregated account to be held by the Bank solely for the benefit of the owners of the Securities to be used solely for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on the 8 Bank's part, arising out of or in connection with the Bank's acceptance or administration of its duties hereunder, including the cost and expense incurred by the Bank in defending against any claim or from liability imposed on the Bank in connection with the Bank's exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the Denton or Tarrant County, Texas, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction in Denton or Tarrant County, Texas to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. Attached hereto is a copy of the Blanket Issuer Letter of Representations between the Issuer and The Depository Trust Company, New York, New York, providing for the Bonds to be issued in a Book-Entry Only System. The Bank and the Issuer hereby confirm their obligations under such Letter of Representation. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. 9 Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer and the Bank shall bind their respective successors and assigns, whether so expressed or not. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Order constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between this Agreement and the Order, the Order shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment of the principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon thirty (30) days written notice; provided, however, an early termination of this Agreement 10 by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securities, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02, 5.02, 5.03 and 5.06 of this Agreement shall survive and remain in full force and effect following the termination of this Agreement. The resigning Paying Agent/Registrar may petition any court of competent jurisdiction for the appointment of a successor Paying Agent/Registrar if an instrument of acceptance by a successor Paying Agent/Registrar has not been delivered to the resigning Paying Agent/Registrar within sixty (60) days after giving such notice of resignation. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. [The remainder of this page is intentionally left blank.] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. Mailing Address: 2001 Bryan Street, 9th Floor Dallas, Texas 75201 Paying Agent/Registrar Agreement Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By: Title: President/Board of Directors Address: 100 Municipal Drive Trophy Club, Texas 76262 Paying Agent/Registrar Agreement Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 SCHEDULE A Paying Agent/Registrar Fee Schedule A-1 pgr" BNY MELLON CORPORATE TRUST Fee Schedule Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Acceptance Fee None A one-time charge covering the Bank Officer's review of governing documents, communication with members of the closing party, including representatives of the issuer, investment banker(s) and attorney(s), establishment of procedures and controls, set-up of trust accounts and tickler suspense items and the receipt and disbursement/investment of bond proceeds. This fee is payable on the closing date. Annual Paying Agent Administration Fee $500 An annual charge covering the normal paying agent duties related to account administration and bondholder services. Our pricing is based on the assumption that the bonds are DTC-eligible/book-entry only. If the bonds are certificated or physical, then we will have to charge an additional $1000 per year as a paying agent. This fee is payable annually, in advance. Escrow Agent Fee: $750 The Escrow Agent Fee covers the consideration of documents and the normal administrative duties of the escrow agent according to the governing documents. For a full year or partial year escrow the fee is $750 per year. Should the escrow account or depository account be open for less than two months, then we will reduce our fee to $375. Should we not open an escrow, depository or similar account, we will not charge for such services. This fee is payable on the closing date. Pricing for Call or Redemptions of Bonds Per Call $300 Call Pricing includes distribution of the call notice to holders of record, redemption processing, and notification to EMMA. Any publication expenses (i.e. Bond Buyer, regional periodical, financial periodicals, etc.) for the call notice will be billed to the Issuer at cost. Extraordinary Services/Misc Fees At Appraisal The charges for performing extraordinary or other services not contemplated at the time of the execution of the transaction or not specifically covered elsewhere in this schedule will be commensurate with the service to be provided and may be charged in BNY Mellon's sole discretion. If it is contemplated that the Trustee hold and/or value collateral or enter into any investment contract, forward purchase or similar or other agreement, additional acceptance, administration and counsel review fees will be applicable to the agreement governing such services. If the bonds are converted to certificated form, additional annual fees will be charged for any applicable tender agent and/or registrar/paying agent services. Additional information will be provided at such time. Should this transaction terminate prior to closing, all out-of-pocket expenses incurred, including legal fees, will be billed at cost. If all outstanding bonds of a series are defeased or called in full prior to their maturity, a termination fee may be assessed at that time. 2001 Bryan - 11* Floor Dallas, TX 75201 BNY MELLON CORPORATE TRUST These extraordinary services may include, but are not limited to, supplemental agreements, consent operations, unusual releases, tender processing, sinking fund redemptions, failed remarketing processing, the preparation of special or interim reports, custody of collateral, a one-time fee to be charged upon termination of an engagement. Counsel, accountants, special agents and others will be charged at the actual amount of fees and expenses billed, UCC filing fees, money market sweep fees, auditor confirmation fees, wire transfer fees, transaction fees to settle third-party trades and reconcilement fees to balance trust account balances to third- party investment provider statements Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed at $300 per event. FDIC or other governmental charges will be passed along to you as incurred. Terms and Disclosures Terms of Proposal Final acceptance of the appointment under the Indenture is subject to approval of authorized officers of BNYM and full review and execution of all documentation related hereto. Please note that if this transaction does not close, you will be responsible for paying any expenses incurred, including Counsel Fees. We reserve the right to terminate this offer if we do not enter into final written documents within three months from the date this document is first transmitted to you. Fees may be subject to adjustment during the life of the engagement. Customer Notice Required by the USA Patriot Act To help the US government fight the funding of terrorism and money laundering activities, US Federal law requires all financial institutions to obtain, verify, and record information that identifies each person (whether an individual or organization) for which a relationship is established. What this means to you: When you establish a relationship with BNYM, we will ask you to provide certain information (and documents) that will help us to identify you. We will ask for your organization's name, physical address, tax identification or other government registration number and other information that will help us to identify you. We may also ask for a Certificate of Incorporation or similar document or other pertinent identifying documentation for your type of organization. We thank you for your assistance. 2001 Bryan -11* Floor Dallas, TX 75201 TAB 5 5 s 5= J= <D Co -C Co S> £ t CO £s CD CD &g O ffl o ^ co <3 *> % t° -|§ SH CO o 0 0==. CD CO § ^ ° I O C F c .O co lie co .o jo CD ~ §1 111 c CD CD CO » CO S> o CD .9 5> o 'c 0 ^ c c ^= ID O IQ c o s 1 ts ? § S o E t C *Hl ° CO J= I &c5 o CO c o S o- ?ll CD CD S s-s -a S« I CD S CD S = -° _ co s •S * a £ " o 111 ago S 3 c .5 => SS CO CO .c ti ? *= £ S.E1 I'D .C 21 * "TO ]E .3 •lis E m S | co § Q. 3 ¥ NEW ISSUE-BOOK-ENTRY-ONLY Ratings: S&P: " " (Insured) " " (Underlying) (See "RATINGS" and "BOND INSURANCE" and "BOND INSURANCE RISK FACTORS" herein) PRELIMINARY OFFICIAL STATEMENT Dated: February 7,2012 In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX MA TTERS" herein, including the alternative minimum tax on corporations. The District will designate the Bonds as "Qualified Tax-Exempt Obligations". (See "TAX MATTERS - Qualified Tax-Exempt Obligations for Financial Institutions" herein.) $2,355,000* TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 Dated Date: March 1, 2012 Due: September 1, as shown on Page ii The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") $2,355,000* Unlimited Tax Refunding Bonds, Series 2012, which are being issued in part as Current Interest Bonds ("CIBs") and in part as Premium Capital Appreciation Bonds ("CABs") (collectively, the "Bonds") as shown on page ii hereof, are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who will approve a "Pricing Certificate" which will contain the final terms of sale and will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS DESCRIBED HEREIN. (See "INVESTMENT CONSIDERATIONS" herein.) Bond purchasers are encouraged to read this entire Official Statement prior to making an investment decision. Interest on the CIBs will accrue from March 1, 2012 (the "Dated Date") and will be payable March 1 and September 1 of each year, commencing September 1, 2012, until maturity or prior redemption, and will be calculated on the basis of a 360-day year of twelve 30- day months. Interest on the CABs will accrete from the date they are initially delivered to the Underwriter and such interest will compound semiannually on March 1 and September 1 of each year (each an "Accretion Date") commencing September 1, 2012, and be payable only upon maturity, as described in the Order. The CIBs will be issued in fully registered form only, without coupons, in denominations of $5,000 or any integral multiple thereof within a stated maturity and the CABs will be issued as fully registered bonds in denominations of $5,000 representing the total amount of principal, plus the initial premium, if any, therefor and accrued interest payable upon maturity (the "Maturity Amount"), or any integral multiple thereof for a Maturity Amount. The definitive Bonds will be issued as fully registered obligations in book-entry form only and when issued will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company ("DTC"), New York, New York. DTC will act as securities depository for the Bonds until DTC resigns or is discharged. Book-entry interests in the Bonds will be made available for purchase in principal amounts and Maturity Amounts of $5,000 or any integral multiple thereof within a maturity. Purchasers of the Bonds ("Beneficial Owners") will not receive physical delivery of bonds representing their interest in the Bonds purchased. So long as Cede & Co. or its nominee is the registered owner of the Bonds, principal of and interest on the CIBs and Maturity Amount of the CABs will be payable by the paying agent/registrar to DTC, which will be solely responsible for making such payment to the Beneficial Owners of the Bonds. The initial paying agent/registrar for the Bonds shall be The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Paying Agent"). (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING -Purpose" herein.) The District reserves the right to redeem, prior to maturity, in integral multiples of $5,000, those CIBs maturing on and after September 1, 2021, in whole or from time to time in part, on September 1, 2020, and on any date thereafter at a price of par plus accrued interest from the most recent interest payment date to the date fixed for redemption. The CABs are not subject to redemption prior to maturity. (See "THE BONDS -Redemption Provisions" herein.) The District is considering qualifying the Bonds for municipal bond insurance and has made application to municipal bond insurance companies in connection with such consideration. (See "BOND INSURANCE" and "BOND INSURANCE RISK FACTORS" herein.) STATED MATURITY SCHEDULE (See Page ii) The Bonds are offered for delivery, when, as and if issued and received by the Underwriter and subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton LLP., Dallas, Texas, Bond Counsel. The legal opinion of Bond Counsel will be printed on, or will accompany the Bonds. Certain matters will be passed upon for the Underwriter by Fulbright & Jaworski LLP., Dallas, Texas, as counsel to the Underwriter. It is expected that the Bonds will be available for delivery through DTC on or about March 5, 2012. FIRSTSOUTHWEST * Preliminary, subject to change. STATED MATURITY SCHEDULE* (Due September 1) Base CUSIP - 897059 (a) $2,355,000* Unlimited Tax Refunding Bonds, Series 2012 $2,200,000* Current Interest Bonds Stated Initial Initial Maturity Principal Rate Yield CUSIP Due 9-1 Amount (%) (%) Suffix(a) 2012 $ 20,000 2014 185,000 2015 190,000 2016 195,000 2017 205,000 2018 210,000 2019 220,000 2020 230,000 2021 235,000 2022 250,000 2023 260,000 (Interest to accrue from the Dated Date.) $155,000* Premium Capital Appreciation Bonds Maturity Initial Initial Offering Date Principal Yield to Maturity Price per $5,000 CUSIP Sept 1 Amount Maturity Amount in Maturity Amount Suffix 2013 $155,000 (Interest to accrete from the Date of Delivery) [See "SCHEDULE II - SCHEDULE OF ACCRETED VALUES OF PREMIUM CAPITAL APPRECIATION BONDS" ("CABs") herein for a table of the accreted values of the CABs (per $5,000 Maturity Amount) at certain periodic dates.] m CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the District, the Financial Advisor or the Underwriter is responsible for the selection or correctness of the CUSIP numbers set forth herein. * Preliminary, subject to change. ii TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BOARD OF DIRECTORS Name James C. Thomas James Moss Kevin Carr C. Nick Sanders William Armstrong Position Director President Secretary/Treasurer Vice President Director Two-Year Term* Expires. May 2014 2012 2014 2012 2014 Occupation Retired Insurance Adjuster Self Employed Business Owner Retired DISTRICT PERSONNEL AND ADVISORS District Manager Robert Scott Trophy Club, Texas Senior Accountant Renae Gonzales Trophy Club, Texas Attorney for the District Bob West Whitaker Chalk Swindle & Sawyer, LLP Fort Worth, Texas Financial Advisor Southwest Securities Dallas, Texas Bond Counsel McCall, Parkhurst & Horton LLP. Dallas, Texas Independent Auditors LafollettS Co., PLLC Tom Bean, Texas Tax Assessor - Collector Denton County Tax Assessor-Collector Chief Appraiser Denton County, Texas Tarrant County, Texas For Additional Information Please Contact: Mr. Robert Scott Mr. Dan A. Almon Mr. Mark McLiney District Manager Senior Vice President Senior Vice President Trophy Club Municipal Utility District Southwest Securities, Inc. Southwest Securities, Inc. 100 Municipal Drive 1201 Elm Street, Suite 3500 4040 Broadway, Suite 220 Trophy Club, Texas 76262 Dallas, Texas 75270 San Antonio, Texas 78209 (682)831^610 (214)859-9452 (210)226-8677 iii TABLE OF CONTENTS BOARD OF DIRECTORS iii DISTRICT PERSONNEL AND ADVISORS iii TABLE OF CONTENTS iii USE OF INFORMATION IN THE OFFICIAL STATEMENT v SELECTED DATA FROM THE OFFICIAL STATEMENT vi SELECTED FINANCIAL INFORMATION vii PRELIMINARY OFFICIAL STATEMENT 1 INTRODUCTION 1 PLAN OF FINANCING 1 Purpose 1 Refunded Bonds 1 SOURCES AND USES OF FUNDS 2 THE BONDS 2 General Description 2 Yield on Premium Capital Appreciation Bonds 2 Authority for Issuance 2 Security for Payment 2 Payment Record 3 Flow of Funds and Investment of Funds 3 Redemption Provisions 3 Termination of Book-Entry-Only System 4 Defeasance of Outstanding Bonds 5 Paying Agent/Registrar 5 Record Date 5 Issuance of Additional Debt 6 Specific Tax Covenants 6 Additional Covenants 6 Remedies in Event of Default 6 Amendments to the Order 6 RATINGS 6 BOND INSURANCE 7 BOND INSURANCE RISK FACTORS 7 General 7 Claims-Paying Ability and Financial Strength of Municipal Bond Insurers 7 BOOK-ENTRY-ONLY SYSTEM 7 Use of Certain Terms in Other Sections of this Official Statement 9 INVESTMENT CONSIDERATIONS 9 General 9 Approval of the Bonds 9 Tax Collections and Foreclosure Remedies 10 Consolidation 10 Abolition 10 Alteration of Boundaries 10 Registered Owners' Remedies 10 Bankruptcy Limitation to Registered Owners' Rights 11 The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District 11 Continuing Compliance with Certain Covenants 11 Future Debt 12 Future and Proposed Legislation 12 THE DISTRICT 12 Creation of the District 12 Governance 12 Employees 12 General 12 Location 13 Population 13 Topography and Drainage 13 Shopping and Commercial Facilities 13 Fire Protection 13 Police Protection 13 Schools 13 Recreational Opportunities 14 Status of Development of the District 14 Public Improvement District Description 14 THE DISTRICTS SYSTEM 15 Description of the Water System 15 Description of the Wastewater System 15 INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT 15 Current Investments 17 TAX DATA 17 District Bond Tax Rate Limitation 17 Maintenance and Operations Tax 17 Overlapping Taxes 17 TAXING PROCEDURES 17 Authority to Levy Taxes 17 Property Tax Code and County-Wide Appraisal District 17 Valuation of Property for Taxation 19 Notice and Hearing Procedures 19 District and Taxpayer Remedies 19 Levy and Collection of Taxes 20 District's Rights in the Event of Tax Delinquencies 20 TAX MATTERS 20 Opinion 20 Federal Income Tax Accounting Treatment of Original Issue Discount 21 Collateral Federal Income Tax Consequences 21 State, Local and Foreign Taxes 22 Qualified Tax-Exempt Obligations for Financial Institutions 22 CONTINUING DISCLOSURE OF INFORMATION 22 Annual Reports 22 Notice of Certain Events 23 Availability of Information from MSRB 23 Limitations and Amendments 23 Compliance with Prior Agreements 24 OTHER PERTINENT INFORMATION 24 Legal Matters 24 Registration and Qualification of Bonds for Sale 24 Litigation 24 Legal Investments and Eligibility to Secure Public Funds in Texas 24 Underwriting 25 Financial Advisor 25 Forward-Looking Statements Disclaimer 25 Concluding Statement 25 Schedule of Refunded Bonds Schedule I Schedule of Accreted Values of Premium Capital Appreciation Bonds Schedule II Financial Information of the Issuer Appendix A General Information Regarding the District Appendix B Form of Legal Opinion of Bond Counsel Appendix C The Issuer's General Purpose Audited Financial Statements for the Year Ended September 30, 2011 Appendix D The cover page, subsequent pages hereof and the schedules and appendices attached hereto, are part of this Official Statement. iv USE OF INFORMATION IN THE OFFICIAL STATEMENT For purposes of compliance with Rule 15c2-12 of the U.S. Securities and Exchange Commission (the "Rule"), this document constitutes a Preliminary Official Statement of the District with respect to the Bonds that has been "deemed final" by the District as of its date except for the omission of no more than the information permitted by the Rule. This Preliminary Official Statement, which includes the cover page, Schedule I and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Preliminary Official Statement, and, if given or made, such other information or representation must not be relied upon. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchaser of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. Certain information set forth herein has been provided by sources other than the District that the District believes to be reliable, but the District makes no representation as to the accuracy of such information. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of the Preliminary Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described herein since the date hereof. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the District's undertaking to provide certain information on a continuing basis. The Underwriter has provided the following statement for inclusion in this Preliminary Official Statement. The Underwriter has reviewed the information in this Preliminary Official Statement in accordance with, and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. NONE OF THE DISTRICT, ITS FINANCIAL ADVISOR OR THE UNDERWRITER MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS PRELIMINARY OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY ("DTC") OR ITS BOOK-ENTRY-ONLY SYSTEM, AS SUCH INFORMATION HAS BEEN FURNISHED BY DTC. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THIS PRELIMINARY OFFICIAL STATEMENT CONTAINS "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD- LOOKING STATEMENTS. (See "OTHER PERTINENT INFORMATION—Forward Looking Statements Disclaimer" herein.) [The remainder of this page is intentionally left blank.] v SELECTED DATA FROM THE OFFICIAL STATEMENT The following material is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. The Issuer The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") is a political subdivision of the State of Texas located in Denton and Tarrant Counties, Texas. The District was created as a municipal utility district pursuant to Chapter 54 of the Texas Water Code and is a conservation and reclamation district in accordance with Article XVI, Section 59 of the Texas Water Code. The District has also adopted a fire protection plan under Section 50.055 of the Texas Water Code, now codified as Subchapter L of Chapter 49 of the Texas Water Code, pursuant to the Order of the Texas Water Commission of August 22, 1983. In July of 2009, documentation was submitted to the Texas Commission on Environmental Quality ("TCEQ") regarding the consolidation of Trophy Club Municipal Utility District Nos. 1 and 2 pursuant to a May 9, 2009 election. (See "THE DISTRICT" and "APPENDIX B - GENERAL INFORMATION REGARDING THE DISTRICT" herein.) The Bonds The Bonds, which are being issued in part as Current Interest bonds ("CIBs") and in part as Premium Capital Appreciation Bonds ("CABs") (collectively, the "Bonds") as shown on page ii hereof, are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who will approve a "Pricing Certificate" which will contain the final terms of sale and will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) Security for Payment The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivisions or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) Paying Agent/Registrar The initial Paying Agent/Registrar for the Bonds is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas Redemption Provisions CIBs maturing on and after September 1, 2021 are subject to redemption in whole or from time to time in part at the option of the District on September 1, 2020, and on any date thereafter, at par plus accrued interest from the most recent interest payment date to the date of redemption. The CABs are not subject to redemption prior to maturity. Tax Matters In the opinion of Bond Counsel, the interest on the Bonds will be excludable from gross income of the owners thereof for purposes of federal income taxation under existing law subject to matters discussed herein under "TAX MATTERS", including the alternative minimum tax on corporations. (See "TAX MATTERS" and APPENDIX C - "FORM OF LEGAL OPINION OF BOND COUNSEL" herein.) Use of Proceeds Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) Bond Insurance Ratings Book-Entry-Only System The District is considering qualifying the Bonds for municipal bond insurance and has made application to municipal bond insurance companies in connection with such consideration. (See "BOND INSURANCE" and "BOND INSURANCE RISK FACTORS" herein.) The District has made application to Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P") for a municipal bond rating on the Bonds. The District currently has an underlying rating of "AA-" from S&P. An explanation of the significance of a rating may be obtained from the company furnishing the rating. (See "RATINGS" herein.) The Issuer intends to utilize the Book-Entry-Only System of The Depository Trust Company, New York, New York relating to the method and timing of payment and the method of transfer relating to the Bonds. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Future Bond Issues The District has no plans to issue additional bonds within the next twelve months. "INVESTMENT CONSIDERATIONS - Future Debt" herein. See Payment Record Delivery Legality The Issuer has never defaulted in the timely payment of principal of or interest on its general obligation indebtedness. When issued, anticipated on or about March 5, 2012. Delivery of the Bonds is subject to the approval by the Attorney General of the State of Texas and the rendering of an opinion as to legality McCall, Parkhurst & Horton LLP., Bond Counsel, Dallas, Texas. vi SELECTED FINANCIAL INFORMATION Total 2011 Certified Net Taxable Assessed Valuation (ARB Approved) Gross Debt Principal Outstanding (after issuance of the Bonds) Ratio of Gross Debt Principal to 2011 Taxable Assessed Valuation Debt Service Fund Balance as of December 31, 2011 (audited) 2011-2012 Tax Rate Operations Fire Protection Debt Service Average Percentage of Total Tax Collections - Tax Years 2006-2010 Projected Average Annual Debt Service Requirement (2012-2031) Of the Bonds and the Outstanding Bonds ("Projected Average Requirement") Tax Rate Required to Pay Projected Average Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 99% Collections Projected Maximum Annual Debt Service Requirement (2012) of the Bonds and The Outstanding Bonds ("Projected Maximum Requirement") Tax Rate Required to Pay Projected Maximum Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 100% collections Estimated 2011 population $0.00989 0.10925 0.05586 $954,645,475 (a) $7,120,000 * 0.75% * $316,299.71 $0.17500 100.40% (B) $471,485 * $0.04989/$100 A.V. $866,994 * $0.09174/$100 A.V. 7,600 ™2011 Net Taxable Valuation does not include property under protest or values for incomplete accounts. (See "TAXING PROCEDURES" herein.) <a> Historical tax collection information for Tax Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2). * Preliminary, subject to change. vii [This page is intentionally left blank.] PRELIMINARY OFFICIAL STATEMENT relating to $2,355,000* TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 INTRODUCTION This Preliminary Official Statement provides certain information in connection with the issuance by the Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") of its $2,355,000* Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who will approve a "Pricing Certificate" which will contain the final terms of sale and will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Security for Payment" herein.) Unless otherwise indicated, capitalized terms used in this Preliminary Official Statement have the same meaning assigned to such terms in the Order. Included in this Preliminary Official Statement are descriptions of the Bonds, the Order, and certain information about the District and its finances. ALL DESCRIPTIONS OF DOCUMENTS CONTAINED HEREIN ARE SUMMARIES ONLY AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO EACH SUCH DOCUMENT. Copies of such documents may be obtained from the District or Financial Advisor. PLAN OF FINANCING Purpose Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (the "Refunded Bonds") (see "Schedule I - Schedule Of Refunded Bonds" attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. Refunded Bonds A description and identification of the Refunded Bonds appears in Schedule I attached hereto. The Refunded Bonds, and interest due thereon, are to be paid on September 1, 2012* (the "Redemption Date"), from funds to be deposited with The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Escrow Agent") or its successor. The Order approves and authorizes the execution of an escrow agreement (the "Escrow Agreement") between the District and the Escrow Agent. The Order provides that, from the proceeds of the sale of the Bonds received from the Underwriter, the District will deposit the amount necessary, together with other available funds, if any, to accomplish the discharge and final payment of the Refunded Bonds on the Redemption Date. Such funds will be held uninvested by the Escrow Agent pending their disbursement to redeem the Refunded Bonds on the Redemption Date. The Escrow Agent, as the paying agent for the Refunded Bonds, will determine and certify at the time of delivery of the Bonds that the amounts deposited to the Escrow Fund will equal an amount sufficient to pay, on the scheduled redemption date, the principal of and interest on the Refunded Bonds. Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of principal of and interest on the Refunded Obligations and amounts therein will not be available to pay the Bonds. By deposit of the funds with the Escrow Agent pursuant to the Escrow Agreement, the District will have effected the defeasance of all of the Refunded Bonds in accordance with Texas law. As a result of such defeasance, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the funds held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding obligations of the District payable from taxes nor for the purpose of applying any limitation on the issuance of debt, and the obligation of the District to make payments in support of the debt service on the Refunded Bonds will be extinguished. * Preliminary, subject to change. 1 SOURCES AND USES OF FUNDS The proceeds from the sale of the Bonds will be applied approximately as follows: Sources of Funds Par Amount of Bonds Accrued Interest on the CIBs Original Issue Premium Total Sources of Funds Uses of Funds Deposit to Escrow Fund Cost of Issuance (Including Bond Insurance, if applicable) Underwriter's Discount Accrued Interest Deposit to Interest & Sinking Fund Additional Proceeds Deposit to the Debt Service Fund Total Uses of Funds THE BONDS General Description The Bonds are being issued in part as Current Interest Bonds ("CIBs") and in part as Premium Capital Appreciation Bonds ("CABs"). The CIBs will be issued in fully registered form in principal denominations of $5,000 or any integral multiple thereof within a stated maturity, and the CABs will be issued as fully registered certificates in denominations of $5,000 representing the total amount of principal, plus the initial premium, if any, therefor and accrued interest payable upon maturity (the "Maturity Amount"), or any integral multiple thereof for a Maturity Amount. The CIBs shall bear interest from the March 1, 2012 on the unpaid principal amounts, and the amount of interest to be paid each payment period shall be computed on the basis of a 360- day year consisting of twelve 30-day months. Interest on the CIBs will be payable on March 1 and September 1 of each year commencing September 1, 2012, until maturity or prior redemption. Interest on the CABs will accrete from the date they are initially delivered to the Underwriter and such interest will compound on March 1 and September 1 of each year (each an "Accretion Date") commencing September 1, 2012, and be payable only upon maturity, as described in the Order, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Principal of the CIBs and Maturity Amounts of the CABs is payable at the designated offices of the Paying Agent/Registrar, initially The Bank of New York Mellon Trust Company, N.A., Dallas, Texas; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Bonds, all payments will be made as described under "BOOK-ENTRY-ONLY SYSTEM" herein. Interest on the CIBs shall be paid to the registered owners whose names appear on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (as hereinafter defined) and shall be paid by the Paying Agent/Registrar (i) by check sent United States Mail, first class postage prepaid, to the address of the registered owner recorded in the Security Register or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for any payment on the Bonds shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office of the Paying Agent/Registrar is located are authorized to be closed, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. Yield on Premium Capital Appreciation Bonds The approximate yields of the CABs as set forth on page ii of this Official Statement are the approximate yields based upon the initial offering prices therefor set forth on page ii of this Official Statement. Such offering price includes the principal amount of such CABs plus premium, if any, equal to the amount by which such offering price exceeds the principal amount of such CABs. The yield on the CABs to a particular purchaser may differ depending upon the price paid by that purchaser. For various reasons, securities that do not pay interest periodically, such as the CABs, have traditionally experienced greater price fluctuations in the secondary market than securities that pay interest on a periodic basis. Authority for Issuance The Bonds are issued by the District pursuant to the terms and provisions of the Order and the Constitution and general laws of the State, particularly Chapter 1207. Security for Payment The Bonds will constitute valid and legally binding direct obligations of the District payable from the proceeds of a continuing direct annual ad valorem tax levied by the District against all taxable property located therein, without legal limit as to rate or amount. The Order irrevocably pledges such ad valorem taxes to the payment of the principal of and interest on the Bonds while the same remain outstanding. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision 2 or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. Tax Pledge: The Board covenants in the Order that, while any of the Bonds are outstanding and the District is in existence, it will levy and assess a continuing ad valorem tax upon each $100 valuation of taxable property within the District at a rate from year to year sufficient, full allowance being made for anticipated delinquencies, together with revenues and receipts from other sources which are legally available for such purposes, to pay interest on the Bonds as it becomes due, to provide for the payment of principal of the Bonds when due or the redemption price at any earlier redemption date, to pay when due any other contractual obligations of the District payable in whole or in part from taxes, and to pay the expenses of assessing and collecting such tax. The Board additionally covenants in the Order to timely assess and collect such tax. The net proceeds from taxes levied to pay debt service on the Bonds are required to be placed in a special account of the District designated as the "Debt Service Fund" for the Bonds. Abolition: Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Consolidation: A district (such as the District) has the legal authority to consolidate with other municipal utility districts and in connection therewith, to provide for the consolidation of its assets, such as cash and the utility system, with the water and wastewater systems of districts with which it is consolidating as well as its liabilities (which would include the Bonds). The District is the resulting entity from a consolidation in May 2009 of Trophy Club Municipal Utility District No. 1 and Trophy Club Municipal Utility District No. 2 (see "THE DISTRICT"). Payment Record The District has never defaulted on the timely payment of principal of and interest on its general obligation indebtedness. Flow of Funds and Investment of Funds The Bond Order creates a Debt Service Fund. The Debt Service Fund shall be kept separate and apart from all other funds of the District. Any cash balance in the Debt Service Fund must be continuously secured, to the extent that the United States or an instrumentality of the United States does not insure the cash balance, by a valid pledge to the District of securities eligible under the laws of Texas to secure the funds of municipal utility districts having an aggregate market value, exclusive of accrued interest, at all times equal to the cash balance in the fund to which such securities are pledged. The Bond Order establishes the Debt Service Fund to be used to pay principal and interest on the Bonds. The Bond Order requires that the District deposit to the credit of the Debt Service Fund (i) from the delivery of the Bonds to the initial purchaser, the amount received from proceeds of the Bonds representing accrued interest, (ii) District ad valorem taxes (and penalties and interest thereon) levied to pay debt service requirements on the Bonds, and (iii) such other funds as the Board shall, at its option, deem advisable. The Bond Order requires that the Debt Service Fund be applied solely to provide for the payment of the principal or redemption price of and interest on the Bonds when due, and to pay fees to the Paying Agent when due. Redemption Provisions Optional Redemption: The District reserves the right, at its option, to redeem the CIBs maturing on and after September 1, 2021 on September 1, 2020, or any date thereafter, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof (and, if within a stated maturity, selected at random and by lot by the Paying Agent/Registrar), at the redemption price of par plus accrued interest to the date fixed for redemption. Not less than thirty (30) days prior to a redemption date for the CIBs, the District shall cause a notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owners of each CIB or a portion thereof to be redeemed at its address as it appeared on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing of such notice. With respect to any optional redemption of the CIBs, unless certain prerequisites to such redemption required by the Order have been met and money sufficient to pay the principal of and premium, if any, and interest on the CIBs to be redeemed will have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice will state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such money by the Paying Agent/Registrar on or prior to the date fixed for such 3 redemption or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption are not fulfilled, such notice will be of no force and effect, the District will not redeem such CIBs, and the Paying Agent/Registrar will give notice in the manner in which the notice of redemption was given, to the effect that such CIBs have not been redeemed. ANY NOTICE OF REDEMPTION SO MAILED TO THE REGISTERED OWNERS WILL BE DEEMED TO HAVE BEEN DULY GIVEN IRRESPECTIVE OF WHETHER RECEIVED BY ANY HOLDER OF THE CIBS, AND, SUBJECT TO PROVISION FOR PAYMENT OF THE REDEMPTION PRICE HAVING BEEN MADE, AND ANY PRECONDITIONS STATED IN THE NOTICE OF REDEMPTION HAVING BEEN SATISFIED INTEREST ON THE REDEEMED CIBS SHALL CEASE TO ACCRUE FROM AND AFTER SUCH REDEMPTION DATE NOTWITHSTANDING THAT A CIB HAS NOT BEEN PRESENTED FOR PAYMENT. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the CIBs or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the CIBs or portion thereof which are to be redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. The Paying Agent/Registrar and the Issuer, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Bonds or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the Beneficial Owner, will not affect the validity of the redemption of the CIBs called for redemption or any other action premised on any such notice. Redemption of portions of the CIBs by the Issuer will reduce the outstanding principal amount of such CIBs held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such CIBs held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such CIBs from the Beneficial Owners. Any such selection of CIBs to be redeemed will not be governed by the Order and will not be conducted by the Issuer or the Paying Agent/Registrar. Neither the Issuer nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or Beneficial Owners of the selection of portions of the Bonds for redemption. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Termination of Book-Entry-Only System The District is initially utilizing the book-entry-only system of the DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) In the event that the Book-Entry-Only System is discontinued by DTC or the District, the following provisions will be applicable to the Bonds. Payment: Principal of the CIBs will be payable at maturity or upon earlier redemption and the Maturity Amount of the CABs will be payable at maturity to the registered owners as shown by the registration books maintained by the Paying Agent upon presentation and surrender of the Bonds to the Paying Agent at the designated office for payment of the Paying Agent/Registrar in Dallas, Texas (the "Designated Payment/Transfer Office"). Interest on the CIBs will be payable by check or draft, dated as of the applicable interest payment date, sent by the Paying Agent by United States mail, first class, postage prepaid, to the registered owners at their respective addresses shown on such records, or by such other method acceptable to the Paying Agent requested by registered owner at the risk and expense of the registered owner. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, legal holiday or day on which banking institutions in the city where the Designated Payment/Transfer Office of the Paying Agent is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not a Saturday, Sunday, legal holiday or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the original date payment was due. Initially, the only registered owner of the Bonds will be CEDE & CO. as nominee of DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Registration: The Bonds may be transferred and re-registered on the registration books of the Paying Agent only upon presentation and surrender thereof to the Paying Agent/Registrar at the Designated Payment/Transfer Office. A Bond also may be exchanged for a Bond or Bonds of like maturity and interest and having a like aggregate principal amount or Maturity Amount, as the case may be, upon presentation and surrender at the Designated Payment/Transfer Office. All Bonds surrendered for transfer or exchange must be endorsed for assignment by the execution by the registered owner or his duly authorized agent of an assignment form on the Bonds or other instruction of transfer acceptable to the Paying Agent. Transfer and exchange of Bonds will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such transfer or exchange. A new Bond or Bonds, in lieu of the Bond being transferred or exchanged, will be delivered by the Paying Agent/Registrar to the registered owner, at the Designated Payment/Transfer Office of the Paying Agent/Registrar or by United States mail, first-class, postage prepaid. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the denominations of $5,000 or any integral multiple thereof. (See "BOOK-ENTRY-ONLY SYSTEM" herein for a description of the system to be initially utilized in regard to ownership and transferability of the Bonds.) Limitations on Transfer of Bonds: Neither the District nor the Paying Agent shall be required to make any transfer, conversion or exchange to an assignee of the registered owner of the CIBs (i) during the period commencing on the close of business on the 15th calendar day of the month preceding each interest payment date (the "Record Date") and ending with the opening of business on the 4 next following principal or interest payment date or (ii) with respect to any CIB called for redemption, in whole or in part, within forty- five (45) days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a CIB. Replacement Bonds: If a Bond is mutilated, the Paying Agent will provide a replacement Bond in exchange for the mutilated bond. If a Bond is destroyed, lost or stolen, the Paying Agent will provide a replacement Bond upon (i) the filing by the registered owner with the Paying Agent of evidence satisfactory to the Paying Agent of the destruction, loss or theft of the Bond and the authenticity of he registered owner's ownership and (ii) the furnishing to the Paying Agent of indemnification in an amount satisfactory to hold the District and the Paying Agent harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Bond must be borne by the registered owner. The provisions of the Order relating to the replacement Bonds are exclusive and the extent lawful, preclude all other rights and remedies with respect to the replacement and payment of mutilated, destroyed, lost or stolen Bonds. Defeasance of Outstanding Bonds The Order provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The Order provides that "Defeasance Securities" means (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent and (4) any other then authorized securities or obligations under applicable Texas state law that may be used to defease obligation such as the Bonds. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds. Because the Order does not contractually limit such investments, registered owners will be deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under State law. There is no assurance that any particular rating for U.S. Treasury securities used as Government Securities or the rating for any other Government Security will be maintained at any particular rating category. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the CIBs for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the CIBs for redemption is not extinguished if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the CIBs for redemption; (ii) gives notice of the reservation of that right to the owners of the CIBs immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorize. Paying Agent/Registrar Principal of and semiannual interest on the CIBs and the Maturity Amount of the CABs will be paid by The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, the initial Paying Agent/Registrar (the "Paying Agent"). The Paying Agent must be a bank, trust company, financial institution or other entity duly qualified and equally authorized to serve and perform the duties as paying agent and registrar for the Bonds. Provision is made in the Order for the District to replace the Paying Agent by a resolution of the District giving notice to the Paying Agent of the termination of the appointment, stating the effective date of the termination and appointing a successor Paying Agent. If the Paying Agent is replaced by the District, the new Paying Agent shall be required to accept the previous Paying Agent's records and act in the same capacity as the previous Paying Agent. Any successor paying agent/registrar selected by the District shall be subject to the same qualification requirements as the Paying Agent. The successor paying agent/registrar, if any, shall be determined by the Board of Directors and written notice thereof, specifying the name and address of such successor paying agent/registrar will be sent by the District or the successor paying agent/registrar to each Registered Owner by first-class mail, postage prepaid. Record Date The record date for payment of the interest on Bonds on any regularly scheduled interest payment date is defined as the fifteenth day of the month preceding such interest payment date. 5 Issuance of Additional Debt The District may issue bonds necessary to construct waterworks and sewer system improvements and facilities for which the District was created and to provide fire protection to the District, with the approval of the District's voters. Following the issuance of the Bonds, $5,769,217 unlimited tax bonds authorized by the District's voters will remain unissued. The District has no plans to issue additional general obligation debt within the next twelve months. In addition, voters may authorize the issuance of additional bonds or other contractual obligations secured by ad valorem taxes. Neither Texas law nor the Order imposes a limitation on the amount of additional debt which may be issued by the District. Any additional debt issued by the District may dilute the security of the Bonds. (See "INVESTMENT CONSIDERATIONS" herein.) The District may also issue bonds secured by revenues of the water and sewer system or other revenues of the District (other than ad valorem tax revenues ) without voter approval. Specific Tax Covenants In the Order the District has covenanted with respect to, among other matters, the use of the proceeds of the Bonds and the property re-financed therewith by persons other than state or local governmental units, and the manner in which the proceeds of the Bonds are to be invested. The District may cease to comply with any such covenant if it has received a written opinion of a nationally recognized bond counsel to the effect that failure to comply with such covenant will not adversely affect the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. Additional Covenants The District has additionally covenanted in the Order that it will keep accurate records and accounts and employ an independent certified public accountant to audit and report on its financial affairs at the close of each fiscal year, such audits to be in accordance with applicable law, rules and regulations and open to inspection in the office of the District. Remedies in Event of Default The Order provides that, in addition to all other rights and remedies of any owner of Bonds provided by the laws of the State of Texas, in the event the District defaults in the observance or performance of any covenant in the Order including payment when due of the principal of and interest on the Bonds, any Bond owner may apply for a writ of mandamus from a court of competent jurisdiction requiring the Board of Directors or other officers of the District to observe or perform such covenants. The Order provides no additional remedies to a Bond owner. Specifically, the Order does not provide for an appointment of a trustee to protect and enforce the interests of the Bond owners or for the acceleration of maturity of the Bonds upon the occurrence of a default in the District's obligations. Consequently, the remedy of mandamus is a remedy, which may have to be enforced from year to year by the Bond owners (See "INVESTMENT CONSIDERATIONS - Registered Owners' Remedies".). Under Texas law, no judgment obtained against the District may be enforced by execution of a levy against the District's public purpose property. The Bond owners themselves cannot foreclose on property within the District or sell property within the District in order to pay principal of or interest on the Bonds. In addition, the enforceability of the rights and remedies of the Bond owners may be limited by federal bankruptcy laws or other similar laws affecting the rights of creditors of political subdivisions. (See "INVESTMENT CONSIDERATIONS - Bankruptcy Limitation to Registered Owners' Rights".) The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified to the customary rights of debtors relative to their creditors Amendments to the Order The District may without the consent of or notice to any Bond owners amend the Order in any manner not detrimental to the interest of the Bond owners, including the curing of an ambiguity, inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the owners of a majority in principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order, except that, without the consent of the owners of all of the Bonds affected, no such amendment, addition, or rescission may (1) change the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, change the place or places at, or the coin or currency in which, any Bond or the interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) affect the right of the owners of less than all of the Bonds outstanding, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission. In addition, a state, consistent with federal law, may in the exercise of its police powers make such modifications in the terms and conditions of contractual covenants relating to the payment of indebtedness of its political subdivisions as are reasonable and necessary for attainment of an important public purpose. RATINGS In connection with the sale of the Bonds, The District has made application to Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P") for a municipal bond rating on the Bonds. The District currently has an underlying rating of "AA-" from S&P. An explanation of the significance of a rating may be obtained from the company furnishing 6 the rating. The rating reflects only the respective view of such companies, and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by any such rating company, if, in the judgment of such company circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. BOND INSURANCE The Issuer has made application to municipal bond insurance companies to have the payment of the principal of and interest on the Bonds insured by a municipal bond insurance policy. The Issuer shall notify the Underwriter upon obtaining a commitment from a municipal bond insurance company concerning this matter. The final Official Statement shall disclose, to the extent necessary, any relevant information relating to any such municipal bond insurance policy. BOND INSURANCE RISK FACTORS General If a commitment from a bond insurance company (the "Insurer") to provide a municipal bond insurance policy relating to the Bonds (the "Policy") is obtained, the final Official Statement shall disclose certain information relating to the Insurer and the Policy. The purchase of such insurance, if available, and the payment of all associated costs will be at the option and expense of the District. If the District chooses to purchase the Policy, the following risk factors related to municipal bond insurance policies generally apply. In the event of default of the scheduled payment of principal of or interest on the Bonds when all or a portion thereof becomes due, any owner of the Bonds shall have a claim under the Policy for such payments. The payment of principal and interest in connection with mandatory or optional prepayment of the Bonds by the District which is recovered by the District from the registered owner as a voidable preference under applicable bankruptcy law is covered by the Policy; however, such payments will be made by the Insurer at such time and in such amounts as would have been due absent such prepayment by the District (unless the Insurer chooses to pay such amounts at an earlier date). Payment of principal of and interest on the Bonds is not subject to acceleration, but other legal remedies upon the occurrence of non-payment do exist (see "THE BONDS - Default and Remedies"). The Insurer may reserve the right to direct the pursuit of available remedies, and, in addition, may reserve the right to consent to any remedies available to and requested by the registered owners. In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Bonds are payable solely from the ad valorem tax levied on all taxable property located within the District. In the event the Insurer becomes obligated to make payments with respect to the Bonds, no assurance is given that such event will not adversely affect the market price or the marketability (liquidity) of the Bonds. If a Policy is acquired, the long-term ratings on the Bonds will be dependent in part on the financial strength of the Insurer and its claims-paying ability. The Insurer's financial strength and claims paying ability are predicated upon a number of factors which could change over time. No assurance can be given that the long-term ratings of the Insurer and of the ratings on the Bonds, whether or not subject to a Policy, will not be subject to downgrade and such event could adversely affect the market price or the marketability (liquidity) for the Bonds. See the disclosure described in "BOND INSURANCE RISK FACTORS - Claims-Paying Ability and Financial Strength of Municipal Bond Insurers" herein. The obligations of the Insurer under a Policy are general obligations of the Insurer and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law. None of the District, the Financial Advisor or the Underwriter has made independent investigation into the claims-paying ability of any Insurer and no assurance or representation regarding the financial strength or projected financial strength of any Insurer is given. Claims-Paying Ability and Financial Strength of Municipal Bond Insurers Moody's Investor Services, Inc., Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business and Fitch Ratings (the "Rating Agencies") have, over the last several years, downgraded and/or placed on negative watch the claims- paying and financial strength of most providers of municipal bond insurance. Additional downgrades or negative changes in the rating outlook for all bond insurers are possible. In addition, recent events in the credit markets have had substantial negative effects on the bond insurance business. These developments could be viewed as having a material adverse effect on the claims-paying ability of such bond insurers, including any bond insurer of the Bonds. Thus, when making an investment decision, potential investors should carefully consider the ability of the District to pay principal and interest on the Bonds and the claims-paying ability of any such bond insurer, particularly over the life of the Bonds. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by the Depository Trust Company while the Bonds are registered in its nominee's name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District and the Underwriter believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. 7 The District and the Underwriter cannot and do not give any assurance the (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participant, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The cun-ent rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Bonds, in the aggregate principal amount or Maturity Amount of each maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation", within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of certificated securities. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC is rated "AA-" by Standard & Poor's. The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of Bonds ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Bonds representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the CIBs within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Issuer or the Paying Agent/Registrar, on the payable date in accordance with their 8 respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Issuer or the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered to DTC Participants or the Beneficial Owners, as the case may be. The Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered. (See "THE BONDS - Termination of Book-Entry-Only System" herein.) The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Issuer and Underwriter believe to be reliable, but the Issuer and the Underwriter take no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry- Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. INVESTMENT CONSIDERATIONS General The Bonds are obligations of the District and are not obligations of the Town of Trophy Club, State of Texas, Denton County, Tarrant County or any other political subdivision except the District. The Bonds are payable from a continuing, direct, annual ad valorem tax, without legal limitations as to rate or amount, on all taxable property within the District. (See "THE BONDS - Security for Payment" herein.) The investment quality of the Bonds depends both on the ability of the District to collect from the property owners all taxes levied against their property or, in the event of foreclosure, the value of the taxable property with respect to taxes levied by the District and by other taxing authorities. Approval of the Bonds The Attorney General of Texas must approve the legality of the Bonds prior to their delivery. The Attorney General of Texas does not pass upon or guarantee the quality of the Bonds as an investment, nor does he pass upon the adequacy or accuracy of the information contained in this Official Statement. Factors Affecting Taxable Values and Tax Payments Economic Factors and Interest Rates: A substantial percentage of the taxable value of the District results from the current market value of single-family residences and developed lots. The market value of such homes and lots is related to general economic conditions affecting the demand for and taxable value of residences. Demand for lots and residential dwellings can be significantly affected by factors such as interest rates, credit availability, construction costs, energy availability and the prosperity and demographic characteristics of the urban center toward which the marketing of lots is directed. Decreased levels of construction activity, which has been experienced in the District for the last several years, tend to restrict the growth of property values in the District or could adversely impact existing values. Interest rates and the availability of mortgage and development funding have a direct impact on the construction activity, particularly short-term interest rates at which developers and homebuilders are able to obtain financing for development and construction costs. Interest rate levels may affect the ability of a landowner with undeveloped property to undertake and complete development activities within the District. Because of the numerous and changing factors affecting the availability of funds, the District is unable to assess the future availability of such funds for continued development and construction within the District. In addition, the success of development within the District and growth of District's taxable property values are, to a great extent, a function of the Dallas/Fort Worth metropolitan and regional economics. Impact on District Tax Rates: Assuming no further development, the value of the land and improvements currently within the District will be the major determinant of the ability or willingness of District property owners to pay their taxes. The 2011 certified net taxable assessed valuation (ARB Approved) of the District (see page vii "SELECTED FINANCIAL INFORMATION") is $954,645,475. After issuance of the Bonds the projected maximum annual debt service requirement will be $866,994* (2012) 9 and the projected average annual debt service requirement will be $471,485* (2012 through 2031, inclusive). Assuming no increase or decrease from the 2011 assessed valuation and no use of funds on hand, a tax rate of $0.09174* per $100 assessed valuation at a 99% collection rate would be necessary to pay the projected maximum annual debt service requirement of $866,994* and a tax rate of $0.04989* per $100 assessed valuation at a 99% collection rate would be necessary to pay the projected average annual debt service requirement of $471,485*. After a transfer of $308,000, representing Fire Department rental income, the District's 2011 debt service tax rate is $0.05586 per $100 assessed valuation. (See "APPENDIX A - TABLES 4 and 5" herein. Tax Collections and Foreclosure Remedies The District's ability to make debt service payments may be adversely affected by its inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the District constitutes a lien in favor of the District on a parity with the liens of all other state and local taxing authorities on the property against which taxes are levied, and such lien may be enforced by foreclosure. The District's ability to collect ad valorem taxes through such foreclosure may be impaired by (a) cumbersome, time-consuming and expensive collection procedures, (b) a bankruptcy court's stay of tax collection procedure against a taxpayer, or (c) market conditions limiting the proceeds from a foreclosure sale of taxable property. While the District has a lien on taxable property within the District for taxes levied against such property, such lien can be foreclosed only in a judicial proceeding. Because ownership of the land within the District is highly fragmented among a number of taxpayers, attorney's fees, and other costs of collecting any such taxpayer's delinquencies could substantially reduce the net proceeds to the District from a tax foreclosure sale. Finally, any bankruptcy court with jurisdiction over the bankruptcy proceedings initiated by or against a taxpayer within the District pursuant to the Federal Bankruptcy Code could stay any attempt by the District to collect delinquent ad valorem taxes against such taxpayer. Consolidation A district (such as the District) has the legal authority to consolidate with other municipal utility districts and, in connection therewith, to provide for the consolidation of its assets, such as its water and wastewater systems with the assets of the district(s) with which it is consolidating, as well as its liabilities (which would include the Bonds and other outstanding obligations of the District). The District is the resulting entity from a consolidation in May 2009 of Prior MUD 1 and Prior MUD 2 (see "THE DISTRICT"). No representation is made that the District will consolidate again in the future with any other district. Abolition Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Alteration of Boundaries In certain circumstances, under Texas law the District may alter its boundaries to: 1) upon satisfying certain conditions, annex additional territory; and 2) exclude land subject to taxation within the District that is not served by District facilities if the District simultaneously annexes land of equal acreage and value that may be practicably served by District facilities. No representation is made concerning the likelihood that the District would effect any change in its boundaries. Registered Owners' Remedies If the District defaults in the payment of principal, interest or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Order, or defaults in the observation or performance of any other covenants, conditions or obligations set forth in the Order, the registered owners may seek a writ of mandamus to compel District officials to carry out their legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the covenants contained in the Bonds or in the Order and the District's obligations are not uncertain or disputed. The remedy of mandamus is controlled by equitable principles and rests with the discretion of the court. The issuance of a writ of mandamus is controlled by equitable principles and rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court has ruled in Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006) that a * Preliminary, subject to change 10 waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Therefore, bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Bankruptcy Limitation to Registered Owners' Rights The enforceability of the rights and remedies of Bondholders may be limited by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions such as the District. Texas law requires a municipal utility district such as the District to obtain the approval of the TCEQ as a condition to seeking relief under the Federal Bankruptcy Code. If a petitioning district were allowed to proceed voluntarily under Chapter 9 of the Federal Bankruptcy Code, it could file a plan for an adjustment of its debts. If such a plan were confirmed by the bankruptcy court, it could, among other things, affect Registered Owners by reducing or eliminating the amount of indebtedness, deferring or rearranging the debt service schedule, reducing or eliminating the interest rate, modifying or abrogating collateral or security arrangements, substituting (in whole or in part) other securities, and otherwise compromising and modifying the rights and remedies of the Registered Owner's claim against a district. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9 and such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditors. A district may not be forced into bankruptcy involuntarily. The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District The "Financial Institutions Reform, Recovery and Enforcement Act of 1989" ("FIRREA"), enacted on August 9, 1989, contains certain provisions which affect the time for protesting property valuations, the fixing of tax liens, and the collection of penalties and interest on delinquent taxes on real property owned by the Federal Deposit Insurance Corporation ("FDIC") when the FDIC is acting as the conservator or receiver of an insolvent financial institution. Under FIRREA real property held by the FDIC is still subject to ad valorem taxation, but such act states (i) that no real property of the FDIC shall be subject to foreclosure or sale without the consent of the FDIC and no involuntary liens shall attach to such property, (ii) the FDIC shall not be liable for any penalties or fines, including those arising from the failure to pay any real or personal property tax when due and (iii) notwithstanding failure of a person to challenge an appraisal in accordance with state law, such value shall be determined as of the period for which such tax is imposed. There has been no definitive judicial determination of the validity of the provisions of FIRREA or how they are to be construed and reconciled with respect to conflicting state laws. However, certain federal court decisions have held that the FDIC is not liable for statutory penalties and interest authorized by State property tax law, and that although a lien for taxes may exist against real property, such lien may not be foreclosed without the consent of the FDIC, and no liens for penalties, fines, interest, attorneys fees, costs of abstract and research fees exist against the real property for the failure of the FDIC or a prior property owner to pay ad valorem taxes when due. It is also not known whether the FDIC will attempt to claim the FIRREA exemptions as to the time for contesting valuations and tax assessments made prior to and after the enactment of FIRREA. Accordingly, to the extent that the FIRREA provisions are valid and applicable to any property in the District, and to the extent that the FDIC attempts to enforce the same, these provisions may affect the timeliness of collection of taxes on property, if any, owned by the FDIC in the District, and may prevent the collection of penalties and interest on such taxes. Continuing Compliance with Certain Covenants The Order contains covenants by the District intended to preserve the exclusion from gross income of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. (See "THE BONDS - Specific Tax Covenants " herein.) Failure by the District to comply with such covenants on a continuous basis prior to maturity of the Bonds could result in interest on the Bonds becoming taxable retroactively to the date of original issuance. (See "TAX MATTERS " herein.) 11 Future Debt The District has reserved in the Order the right to issue the remaining $5,769,217 authorized but unissued unlimited tax bonds and such additional bonds as may hereafter be approved by both the Board of Directors and voters of the District. All of the remaining unlimited tax bonds, which have heretofore been authorized by the voters of the District may be issued by the District from time to time for qualified purposes, as determined by the Board of Directors of the District, subject to the approval of the Attorney General of the State of Texas and the TCEQ. The District has no plans to issue additional debt within the next twelve months. Future and Proposed Legislation Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the Bonds under Federal or state law and could affect the market price or marketability of the Bonds. Any such proposal could limit the value of certain deductions and exclusions, including the exclusion for tax-exempt interest. The likelihood of any such proposal being enacted cannot be predicted. Prospective purchasers of the Bonds should consult their own tax advisors regarding the foregoing matters. THE DISTRICT Creation of the District The District was created by the consolidation of two prior municipal utility districts, being Trophy Club Municipal Utility District No. 1 ("Prior MUD 1") and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2° and collectively with Prior MUD 1, the "Prior MUDs"). Prior MUD 1 was created as Denton County Municipal Utility District No. 1 by order of the Texas Water Rights Commission (the "Commission") on March 4, 1975 for the purpose of providing water and sewer facilities and other authorized services to the area within the territory of Prior MUD 1. The name of Prior MUD 1 was changed to Trophy Club Municipal Utility District No. 1 on April 1, 1983. Prior MUD 2 was created as a result of the consolidation of Denton County Municipal Utility District No. 2 and Denton County Municipal Utility District No. 3, which were created by the Texas Commission on Environmental Quality ("TCEQ") for the purpose of providing water, sewer and drainage facilities and other authorized services to the area. The creation of Prior MUD 2 was confirmed by its electorate at an election held on August 9, 1980. On January 26, 2009, the Boards of the Prior MUDs entered into an agreement to consolidate the Prior MUDs into a single Municipal Utility District covering the territory of the Prior MUDs, subject to the approval of the consolidation by the voters at an election held for that purpose. On May 9, 2009, the voters approved the consolidation and the District became the Trophy Club Municipal Utility District No. 1. Pursuant to the consolidation agreement, the District assumed the outstanding bonds, notes and other obligations of the Prior MUDs and the authorized but unissued bonds, taxes and other obligations of the Prior MUDs and became authorized to levy a uniform tax on all taxable property within the District. The functions performed by the District include supplying water for municipal purposes; collecting, transporting, processing and disposing of wastes; establishing, operating and maintaining a fire department; and performing other functions permitted by municipal utility districts under the Texas Water Code. Governance The District is governed by a board of directors which has control over and management supervision of all affairs of the District. There are five elected directors that serve four-year staggered terms. Directors receive no remuneration, except a Director's per diem allowance of $100 per day on which necessary service is performed for the District. The District and all similar districts are subject to the continuing supervision and filing requirements of the TCEQ, including the preparation and filing of an annual independent audit report. All District facility plans are submitted to the TCEQ for review and approval. Employees The District has no employees of its own. Rather, personnel services are furnished under an Interlocal Agreement for Employee and Contractual Services (the "Agreement") between the District and the Town pursuant to Chapter 791 of the Texas Government Code. Under the Agreement, employees who report directly to the District rather than the Town are entitled to the same benefits provided to Town employees, but the District is required to pay all costs associated with the provision of benefits to such employees, including pension benefits. In addition, the District is required to pay 50% of the costs incurred by the Town for salary, benefits and other compensation of employees who provide firefighting and emergency medical services to both the District and the Town. The District's liabilities under the Agreement, including pension benefits, do not have a substantial impact on the District's finances. General The District is comprised of 2,283.5 acres [approximately 94 acres in Westlake (Solana)]. Approximately 195 acres in Trophy Club are undeveloped. Of the developed acres, there are approximately 3,172 existing households, 136 apartment units and 42 townhouses. 12 Location The District is located in southern Denton County and northern Tarrant County partially within the Town of Trophy Club (the "Town") and partially within the Town of Westlake. The District is directly adjacent to and accessible from State Highway 114, north of and approximately mid-way between Dallas and Fort Worth. The District is approximately 27 miles from downtown Dallas, 25 miles from downtown Fort Worth, 17 miles from Denton, 8 miles from Grapevine and 14 miles from the Dallas-Fort Worth International Airport. Major highways connecting these population centers, which will also serve the District, include State Highways 114, 170 and 377 and Interstate Highways 35E and 35W. State Highway 170 connects Trophy Club directly to Alliance Airport which is located seven miles southwest of the District. (See "Vicinity Map" herein.) Population The population of the District is estimated to be approximately 7,600 and the population of the entire Town of Trophy Club, the District and the Trophy Club PID No. 1 (the "Trophy Club Development") is estimated at 8,895 (as of December 2011). Topography and Drainage The land within the District has a gradual slope from the southeast to the northwest toward Marshall Creek, which forms the western boundary of the District. Runoff water enters Grapevine Reservoir just north of the District through Marshall Creek or several other small tributaries. The maximum elevation in the area being developed is approximately 690 feet mean sea level and the minimum elevation in the area being developed is approximately 576 feet mean sea level. The soil is sandy loam and clay loam, and existing vegetation consists of native grasses and small oak trees. Areas which are subject to flooding by a 100- year frequency flood are located in the flood plan of Marshall Creek and have been delineated by the Water Resources Branch of the U.S. Geological Survey. Additional flood studies were made by the engineers to determine what areas may be subject to flooding. It was determined that the area subject to flooding within the District is approximately 58.5 acres based on 100-year flood frequency; however, 57.6 acres of this area is within the golf course area and is not intended to be developed for residential land use. Shopping and Commercial Facilities A shopping center within the District has a major grocery store chain, a bank, a major chain drug store, several service businesses, fast food outlets, and a beauty shop and a dry cleaners. Additionally there are several more businesses and professional offices located in the District, at the primary entrance to the Town of Trophy Club. There are additional shopping facilities in Roanoke, about two (2) miles west of the District and numerous shopping facilities in Southlake about five (5) miles east of the District and in Grapevine about eleven (11) miles east of the District. Full metropolitan shopping facilities are available in Dallas and Fort Worth, Texas which have their central business districts approximately 27 miles and 25 miles, respectively from the District. Fire Protection The District operates its Fire Department (the "Department") with an engine, a Quint, a brush truck and two support vehicles. Currently the Department is staffed with twelve (12) full-time firefighter / paramedics, one full-time Fire chief and a part-time administrative assistant. Operations under the Department include fire suppression, fire prevention, emergency management, investigation/enforcement and emergency medical response. The new $3.1 million fire station was completed and equipped in August 2011 with proceeds from the sale of the Series 2010 Bonds, replacing the previously existing facility. This Department serves the Town of Trophy Club and area in the District that is not in the Town limits, and is currently financed by a combination of a $0.10925 maintenance tax assessment in the District, as well as a $0.10925 Public Improvement District ("PID") assessment in Trophy Club PID No. 1. The 2011-2012 annual operating budget is $1,311,934 with October 1, 2011 reserves of $287,689 (unaudited). Police Protection Twenty-four hour security is provided by the Town of Trophy Club Police Department Schools The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). 13 Recreational Opportunities Recreational opportunities in Trophy Club are afforded by Lake Grapevine and its surrounding parks, which lie two miles north and east of the District. The Town has several community parks, including facilities for soccer, baseball, softball, basketball, tennis, a competitive swimming pool and playground amenities. The Town also operates an 877 acre Corps of Engineers park, which features 100 acres of motorized trails, as well as many passive recreational opportunities such as fishing, hiking and picnicking. Status of Development of the District The area in the District is locally known as "Trophy Club." It is a residential and mixed-use development consisting of approximately 2,283.5 acres. The District is a mature district with roughly 195 acres undeveloped, of which 135 acres are zoned residential and approximately 60 acres are available for commercial development. There is substantial land left for commercial development in the Solana complex, which is located within the City of Westlake. Lot and custom home sales officially began in the District in mid-year 1975. Homes are currently being offered at prices ranging from $200,000 to $1,000,000 and lots range in price from $35,000 to $200,000. The status of single-family home development as of January 1, 2012 is shown below: Status of Single-Family Home Development Houses Additional Total Multi-Family Under Houses Total Developed Houses Units Construction Occupied Houses Lots and Lots Completed(a) 138 3,172 3,310 72 3,382 178 (a) In addition to the single-family development, there are approximately 132 apartments and 42 completed townhouses, which are occupied. Status of Business / Commercial Development The undeveloped commercial land within the Solana business complex (approximately 230 acres) is available for commercial development, however the District is unaware of any current plans for additional development in the Solana business complex. The Town of Trophy Club and the District have commercial land available for development on approximately 52 acres of land along Highway 114. The land is zoned for uses such as a medical complex, hotels, restaurants and a short-stay hospital facility. Additionally, the District currently has a small strip center along Highway 114 containing several food establishments and professional offices. Maguire Thomas Partners ("Maguire") currently owns the Solana business complex, which is the top principal taxpayer in the District (see APPENDIX A "Table 11 - Principal Taxpayers 2011-2012"). On November 16, 2011, a State district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. The District cannot predict the impact that such events may have on the District's financial condition. Public Improvement District Description Trophy Club PID No. 1 (the "PID") consists of approximately 609.683 acres of land generally to the north of Oakmont Drive, Oak Hill Drive and the Quorum Condominiums, east of the Lakes Subdivision and Parkview Drive, south of the Corps of Engineer's property, and west of the Town's eastern limit. The PID is located entirely within the Town limits but outside the District. A master-planned residential community (the "Property") is under construction in the PID and at build-out will be comprised of approximately 1,489 residential units located within the Property, which Property is zoned to permit such use pursuant to the PD Zoning. As of December 31, 2011, 538 homes have been completed and are occupied and an additional 170 homes have been permitted and are currently under construction. The PID is projected to build out as early as 2017 if construction continues at current levels, or as late as 2025 in the event of a decrease in the construction rate. The District provides emergency and fire protection services to the PID, and the PID pays the District an assessment for such services at the current fire tax rate of $0.10925. The District also provides water and sewer service for the PID. The total billed for PID water and sewer for fiscal year 2010-11 was $617,001.57. 14 THE DISTRICT'S SYSTEM The following information describes generally the water and wastewater systems for the District. Description of the Water System Sources of Water Supply: The present water supply is provided from two sources: (i) four ground wells which provide approximately 1,000,000 gallons per day, and (ii) a 21-inch water line which is capable of delivering 10,000,000 gallons per day of treated water from the City of Fort Worth facilities. Currently the District contracts with the City of Fort Worth for unlimited water services. Current maximum usage is approximately 6,500,000 gallons per day (of which 4,500,000 is Fort Worth water). These sources, when combined, provide water which complies with the quality requirements of the TCEQ and needs only chlorination at the District's water plant facility. loafer Plant Facility: The present facility provides 900,000 gallons elevated and 6,000,000 gallons ground storage with pumping/chlorination capacity of 10,000,000 gallons per day. Description of the Wastewater System Wastewater Treatment Plant Facility: The wastewater treatment plant system has a permitted treatment/discharge capacity of 1,750,000 gallons per day from the TCEQ under TPDES Permit No. 11593-001. Although the permit authorizes the discharge of wastewater to the adjacent tributary leading to Lake Grapevine, the plant effluent is currently pumped to various holding ponds within the community of Trophy Club and is re-used for irrigating the golf course. INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Trustees. Both State law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than "A" or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit and share certificates meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended) (i) that are issued by or through an institution that has its main office or a branch office in Texas and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for District deposits; or (ii) where (a) the funds are invested by the District through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the District as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the District; (b) the broker or the depository institution selected by the District arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the District; (c) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the District appoints the depository institution selected under (a) above, a custodian as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the District with respect to the certificates of deposit; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the District, held in the District's name, and deposited at the time the investment is made with the District or with a third party selected and approved by the District and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State; (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than "A" or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less; (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least "A-1" or "P-1" or the equivalent by at least one nationally recognized credit rating agency; (11) commercial paper with a stated maturity of 270 days or less that is rated at least "A-1" or "P-1" or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (12) no-load money market mutual funds registered with and regulated by the United States Securities and Exchange Commission 15 that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and, (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than "AAA" or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than "AAA" or "AAAm" or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the District's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived." At least quarterly the District's investment officers must submit an investment report to the Board of Trustees detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, the ending market value and the fully accrued interest for the reporting period of each pooled fund group, (4) the book value and market value of each separately listed asset at the end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest District funds without express written authority from the Board of Trustees. Under State law, the District is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt by written instrument a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution; (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to: (a) receive and review the District's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the District and the business organization that are not authorized by the District's investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the District's entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the District and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the District's investment policy; (6) provide specific investment training for the Treasurer, chief financial officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in no-load mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. 16 Current Investments As of December 31, 2011 the District's funds were invested in the District's depository bank and TexPool as shown in the table that follows. The District does not currently own, nor does it anticipate the inclusion of long-term securities or derivative products in its portfolio. Fund and Investment Type Amount TexPool - Operating Fund $3,317,514 TexPool - Interest and Sinking Fund 310,178 First Financial Bank Interest Bearing Account - Operating Fund 373.001 Total Investments $4.000.693 TAX DATA District Bond Tax Rate Limitation By law the District's tax rate for debt service on the Bonds is unlimited as to rate or amount. Maintenance and Operations Tax The Board is also authorized to levy and collect an annual ad valorem tax for planning, constructing, acquiring, or maintaining or repairing or operating the District's improvements and facilities, if such maintenance and operations tax is authorized by a vote of the District's electors. Such tax is in addition to taxes which the District is authorized to levy for paying principal of and interest on the Bonds, and any tax bonds which may be issued in the future. As shown in APPENDIX A, TABLE 13 - "TAX RATE DISTRIBUTION," the District levied a 2011-2012 maintenance and operations tax for fire protection purposes of $0.10925/$100 assessed valuation and $0.00989/$100 assessed valuation for all other operations and maintenance purposes. Overlapping Taxes Other governmental entities whose boundaries overlap the District have outstanding bonds payable from ad valorem taxes. The statement of direct and estimated overlapping ad valorem tax debt shown in APPENDIX A - TABLE 14 (page A-6) was developed from several sources, including information contained in "Texas Municipal Reports," published by the Municipal Advisory Council of Texas. Except for the amount relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person is entitled to rely upon information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the dates stated in this table, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Political subdivisions overlapping the District are authorized by Texas law to levy and collect ad valorem taxes for operation, maintenance and/or general revenue purposes in addition to taxes of debt service and the tax burden for operation, maintenance and/or general purposes is not included in these figures. (See APPENDIX A - TABLES 14, 15 & 17 for information on overlapping taxing entities.) TAXING PROCEDURES Authority to Levy Taxes The Board has been authorized to levy an annual ad valorem tax on all taxable property within the District in an amount sufficient to pay the principal of and interest on the Bonds, their pro rata share of debt service on any contract tax bonds and any additional bonds or obligations payable from taxes which the District may hereafter issue and to pay the expenses of assessing and collecting such taxes. The District agrees in the Order to levy such a tax from year-to-year as described more fully herein under "THE BONDS - Security for Payment." Under Texas law, the Board is also authorized to levy and collect an ad valorem tax for the operation and maintenance of the District and for the payment of certain contractual obligations, if authorized by its voters. (See" TAX DATA - District Bond Tax Rate Limitation" herein.) Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") specifies the taxing procedures of all political subdivisions of the State of Texas, including the District. Provisions of the Property Tax Code are complex and are not fully summarized herein. The Property Tax Code requires, among other matters, county-wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within the county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The board of directors of the appraisal district selects a chief appraiser to manage the appraisal offices of the appraisal district. The Denton Central Appraisal District and the Tarrant Appraisal District have the 17 responsibility for appraising property for all taxing units within Denton and Tarrant Counties, including the District. Such appraisal values are subject to review and change by the appraisal review boards of each county. The appraisal roll as approved by the appraisal review boards must be used by the District in establishing its tax roll and tax rate. General: Except for certain exemptions provided by Texas law, all property with a tax situs in the District is subject to taxation by the District; however, no effort is made by the District to collect taxes on tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property applicable to the District include: (i)property owned by the State of Texas or its political subdivisions if the property is used for public purposes; (ii)property exempt from ad valorem taxation by federal law; (iii) certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; (iv) designated historical sites; and (v) solar and wind-powered energy devices. Freeport Exemption: Article VIII, Section 1-j of the Texas Constitution authorizing an ad valorem tax exemption for "freeport property" was approved November 7, 1989. Freeport property is goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. The District does grant this exemption. Goods in Transit: "Goods in Transit", which are certain goods, principally inventory, that are stored, for the purposes of assembling, storing, manufacturing, processing or fabricating the goods, in a location that is not owned by the owner of the goods and are transferred from that location to another location within 175 days; a taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The District does not exempt Goods in Transit. Agricultural/Open-Land Exemption: Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open- space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. The District does have land that qualifies for this exemption. Residence Homestead Exemptions: Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision. Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual's spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. The Board has granted such elderly and disabled exemptions in the amount of $25,000 of assessed valuation. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. The District does not grant the option percentage of market value exemption. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. Disabled/Deceased Veterans Exemption: State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse (for so long as the surviving spouse remains unmarried) or children (under 18 years of age) of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000; provided, however, that beginning in the 2009 tax year, a disabled veteran who receives from the from the United States Department of Veterans Affairs or its successor 100 percent disability compensation due to a service-connected disability and a rating of 100 percent disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran's residence homestead. In addition, effective January 1, 2012, and subject to certain conditions, surviving spouses of a deceased veteran who had received a disability rating of 100% will be entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. The District does grant the disabled / deceased veterans Exemption. 18 Tax Abatement: Denton County, Tarrant County or the Town of Trophy Club may designate all or part of the area within the District as a reinvestment zone. Thereafter, the District may enter into tax abatement agreements with owners of real property within the District for up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with a comprehensive plan. All of the area of the District is included in reinvestment zones designated by the Town of Trophy Club, for tax abatement purposes. Valuation of Property for Taxation Generally, all taxable property in the District must be appraised by the Denton Central Appraisal District and the Tarrant Appraisal District (collectively, the "Appraisal District") at one hundred percent (100%) of market value as of January 1 of each year, subject to review and approval by the Appraisal Review Board. In determining market value, either the replacement cost or the income or the market data method of valuation may be used, whichever is appropriate. Certain land may be appraised at less than market value under the Property Tax Code. Increases in the appraised value of residence homesteads are limited to 10 percent annually regardless of the market value of the property. Upon application of a landowner, land which qualifies as "open-space land" is appraised based on the category of land, using accepted income capitalization methods applied to the average net income derived from the use of the land for agriculture and hunting or recreational leases. Upon application of a landowner, land which qualifies as "timber land" is appraised using accepted income capitalization methods applied to the average net income derived from the use of the land for production of timber. Land which qualifies as an aesthetic management zone, critical wildlife management zone, or streamside management zone or is being regenerated for timber production for 10 years after harvest is valued at one-half that amount. In the case of both open space and timber land valuations, if the use of land changes, an additional tax is generally imposed on the land equal to the difference between the taxes imposed on the land for each of the five (5) years preceding the year in which the change of use occurs and the tax that would have been imposed had the land been taxed on the basis of market value in each of those years, plus interest at an annual rate of seven percent (7%) calculated from the dates on which the differences would have become due. There are also special appraisal methods for agricultural land owned by individuals whose primary occupation and income are farming and for recreational, park, and scenic land. Also, houses or lots held for sale by a developer or builder which remain unoccupied, are not leased or rented and produce no income are required to be assessed at the price for which they would sell as a unit to a purchaser who would continue the owner's business, upon application of the owner. Once an appraisal roll is prepared and approved by the Appraisal Review Board, it is used by the District in establishing its tax rate. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraised values. The plan must provide for appraisal of all real property in the Appraisal District at least one every three (3) years. It is not know what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or countywide basis. Notice and Hearing Procedures The Tax Code establishes a "truth-in-taxation" process identifying increases in the effective tax rate. The rollback tax rate equals 108% of the total tax rate for the prior year. If the District decides to increase the tax rate more than eight percent (8%) above the previous year's tax rate, it must hold a public hearing and give notice to its taxpayers. If the actual tax rate adopted exceeds the rollback tax rate, taxpayers may petition to hold an election to reduce the tax rate to the rollback tax rate for the fiscal year. The Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll District and Taxpayer Remedies The chief appraiser must give written notice before the Appraisal Review Board meeting to an affected owner if a reappraisal has resulted in an increase in value over the prior year or the value rendered by the owner, or if property not previously included on the appraisal roll has been appraised. Any owner who has timely filed notice with the Appraisal Review Board may appeal the final determination by the Appraisal Review Board of the owner's protest by filing suit in Texas district court. Prior to such appeal, however, the owner must pay the tax due on the amount of value of the property involved that is not in dispute or the amount of tax paid in the prior year, whichever is greater, but not to exceed the amount of tax due under the order from which the appeal is taken. In the event of such suit, the value of the property is determined by the court, or a jury if requested by any party. Additionally, the District is entitled to challenge certain matters before the Appraisal Review Board, including the level of appraisal of certain category of property, the exclusion of property from the appraisal records, or the grant in whole or in part of a partial exemption, or a determination that land qualifies for a special use appraisal (agricultural or timber classification, for example). The District may not, however, protest a valuation of individual property. 19 Levy and Collection of Taxes The rate of taxation is set by the Board based upon the valuation of property within the District as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes, and authorized contractual obligations. Unless the Board, or the qualified voters of the District or of Denton County or Tarrant County at an election held for such purpose, determines to transfer the collection of taxes to the Denton Central Appraisal District or Tarrant Appraisal District or another taxing unit, the District is responsible for the levy and collection of its taxes. The District has contracted with the Denton County Tax Collector to collect the taxes for the District. Taxes are due on receipt of the tax bill and become delinquent after January 31 of the following year. The date of the delinquency may be postponed if the tax bills are mailed after January 10 of any year. Delinquent taxes are subject to a 6% penalty for the first month of delinquency, one percent (1%) for each month thereafter to July 1, and 12% total if any taxes are unpaid on July 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. In addition, where a district engages an attorney for collection of delinquent taxes, the Board may impose a further penalty not to exceed twenty percent 20% on all taxes unpaid on July 1. The District may be prohibited from collection of penalties and interest on real property owned by the Federal Depository Insurance Corporation. In prior years the District has engaged a delinquent tax attorney and imposed such a penalty. District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the District is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two years after the purchaser's deed issued at the foreclosure sale is filed in the county records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. (See "INVESTMENT CONSIDERATIONS - General" and "INVESTMENT CONSIDERATIONS - Tax Collections and Foreclosure Remedies".) TAX MATTERS Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel to the Issuer, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Bonds for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel to the Issuer will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds. See Appendix C - Form of Legal Opinion of Bond Counsel. In rendering its opinion, Bond Counsel to the Issuer will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate, and (b) covenants of the Issuer contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the Refunded Bonds and the property financed or refinanced therewith and (c) the certification of the paying agent for the Refunded Bonds that the amount deposited with the Escrow Agent will be sufficient to pay the principal of and interest on the Refunded Bonds when due. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel to the Issuer is conditioned on compliance by the Issuer with such requirements, and Bond Counsel to the Issuer has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. 20 Bond Counsel's opinion represents its legal judgement based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. Federal Income Tax Accounting Treatment of Original Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds may be less than the principal amount or maturity amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Bonds"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. 21 THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Bonds will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. Qualified Tax-Exempt Obligations for Financial Institutions Section 265(a) of the Code provides, in pertinent part, that interest paid or incurred by a taxpayer, including a "financial institution," on indebtedness incurred or continued to purchase or carry tax-exempt obligations is not deductible in determining the taxpayer's taxable income. Section 265(b) of the Code provides an exception to the disallowance of such deduction for any interest expense paid or incurred on indebtedness of a taxpayer that is a "financial institution" allocable to tax-exempt obligations, other than "private activity bonds," that are designated by a "qualified small issuer" as "qualified tax-exempt obligations." A "qualified small issuer" is any governmental issuer (together with any "on-behalf of and "subordinate" issuers) who issues no more than $10,000,000 of tax-exempt obligations during the calendar year. Section 265(b)(5) of the Code defines the term "financial institution" as any "bank" described in section 585(a)(2) of the Code, or any person accepting deposits from the public in the ordinary course of such person's trade or business that is subject to federal or state supervision as a financial institution. Notwithstanding the exception to the disallowance of the deduction of interest on indebtedness related to "qualified tax-exempt obligations" provided by section 265(b) of the Code, section 291 of the Code provides that the allowable deduction to a "bank," as defined in section 585(a)(2) of the Code, for interest on indebtedness incurred or continued to purchase "qualified tax-exempt obligations" shall be reduced by twenty-percent (20%) as a "financial institution preference item." In the Order, the Issuer has designated the Bonds as "qualified tax-exempt obligations" within the meaning of section 265(b) of the Code. In furtherance of that designation, the Issuer has covenanted to take such action that would assure, or to refrain from such action that would adversely affect, the treatment of the Bonds as "qualified tax-exempt obligations." Potential purchasers should be aware that if the issue price to the public exceeds $10,000,000 there is a reasonable basis to conclude that the payment of a de minimis amount of premium in excess of $10,000,000 is disregarded; however, the Internal Revenue Service could take a contrary view. If the Internal Revenue Service takes the position that the amount of such premium is not disregarded, then such obligations might fail to satisfy the aforementioned dollar limitation and the Bonds would not be "qualified tax-exempt obligations." CONTINUING DISCLOSURE OF INFORMATION In the Order, the Issuer has made the following agreement for the benefit of the holders and beneficial owners of each of the Bonds. The Issuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Issuer will be obligated to provide certain updated financial information and operating data annually, and timely notice of certain specified events, to the Municipal Securities Rulemaking Board (the "MSRB"). Annual Reports The Issuer will provide certain updated financial information and operating data to the MSRB. The District will provide all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement. The information to be updated includes Tables 1,12 and 13 of Appendix A, and the annual audited financial statements of the District. The Issuer will update and provide this information within six months after the end of each fiscal year ending in and after 2011. 22 The financial information to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Website or filed with the SEC, as permitted by SEC Rule 15c2-12 (the "Rule"). The updated information will include audited financial statements for the Issuer, if the Issuer commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Issuer will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the Issuer may be required to employ from time to time pursuant to State law or regulation. The Issuer's current fiscal year end is September 30. Accordingly, it must provide updated information by the last day in March in each year, unless the Issuer changes its fiscal year. If the Issuer changes its fiscal year, it will notify the MSRB of the change. Notice of Certain Events The Issuer will also provide timely notices of certain events to the MSRB. The Issuer will provide notice of any of the following events with respect to the Bonds to the MSRB in a timely manner (but not in excess of ten business days after the occurrence of the event): (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the Issuer, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the Issuer or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, the Issuer will provide timely notice of any failure by the Issuer to provide annual financial information in accordance with their agreement described above under "Annual Reports". For these purposes, any event described in clause (12) of the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Issuer in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Issuer, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Issuer. Availability of Information from MSRB The Issuer has agreed to provide the foregoing financial information and operating data only as described above. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org. Limitations and Amendments The Issuer has agreed to update information and to provide notices of certain specified events only as described above. The Issuer has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The Issuer makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Issuer disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the Issuer to comply with its agreement. The Issuer may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Issuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The Issuer may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds giving effect to (a) such 23 provisions as so amended and (b) any amendments or interpretations of the Rule. If the Issuer amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided. Compliance with Prior Agreements For the last five years, the District has complied in all material respects with its previous continuing disclosure agreements made in accordance with the Rule. OTHER PERTINENT INFORMATION Legal Matters The delivery of the Bonds is subject to the receipt of an approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the Issuer, and the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal income tax purposes under section 103(a) of the Code, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. The form of Bond Counsel's opinion is attached hereto as Appendix C. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Bonds, Bond Counsel has been engaged by and only represents the Issuer in the issuance of the Bonds. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions "PLAN OF FINANCING", "THE BONDS" (except for subcaptions "Yield on Premium Capital Appreciation Bonds", "Default and Remedies" and "Payment Record" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS," "CONTINUING DISCLOSURE OF INFORMATION" (exclusive of the subcaption "Compliance With Prior Agreements"), and the subcaptions "Legal Matters" (except for the last two sentences of the second paragraph thereof), "Registration and Qualification of Bonds for Sale" and "Legal Investments and Eligibility to Secure Public Funds in Texas" under the caption "OTHER PERTINENT INFORMATION" to determine whether such information accurately and fairly summarizes the material and documents referred to therein and is correct as to matters of law, and that such information conforms to the Order. Certain legal matters will be passed upon for the Underwriter by Fulbright & Jaworski L.L.P., Dallas, Texas, Counsel for the Underwriter. The legal fees to be paid to Counsel to the Underwriter are contingent upon the sale and delivery of the Bonds. The legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the respective attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Registration and Qualification of Bonds for Sale The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The Issuer assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. Litigation In the opinion of District officials, the Issuer is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the Issuer, would have a material adverse effect on the financial condition of the District. Legal Investments and Eligibility to Secure Public Funds in Texas Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments, investment securities governed by Chapter 8, Texas Business and Commerce Code, and are real and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See 24 "RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, obligations such as the Bonds are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their fair market value. No review by the District has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. No representation is made that the Bonds will be acceptable to public entities to secure their deposits or acceptable to such institutions for investment purposes. The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to any such persons or entities or which might otherwise limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such persons or entities to purchase or invest in the Bonds for such purposes. Underwriting The Underwriter has agreed, subject to certain conditions, to purchase the Bonds from the Issuer at a price of $ (representing the par amount of the Bonds of $ , plus an original issue premium of $ , less an Underwriter's discount of $ ), plus accrued interest on the Bonds to the date of initial delivery of the Bonds to the Underwriter. The Underwriter's obligation is subject to certain conditions precedent. The Underwriter will be obligated to purchase all of the Bonds, if any of the Bonds are purchased. The Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Bonds into investment trusts) and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Financial Advisor Southwest Securities is employed as a Financial Advisor to the Issuer in connection with the issuance of the Bonds. In this capacity, the Financial Advisor has compiled certain data relating to the Bonds and has assisted in drafting this Official Statement. The Financial Advisor has not independently verified any of the data contained herein or conducted a detailed investigation of the affairs of the Issuer to determine the accuracy or completeness of this Official Statement. Because of its limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fees for Financial Advisor are contingent upon the issuance, sale and delivery of the Bonds. Forward-Looking Statements Disclaimer The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. Concluding Statement The financial data and other information contained in this Official Statement have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statues, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such statutes, documents and resolutions for further information. Reference is made to original statutes, documents and resolutions in all respects. 25 This Official Statement will be approved by the Board of Directors of the Issuer for distribution in accordance with the provisions of the U.S. Securities and Exchange Commission's rule codified at 17 C.F.R. Section 240.15c2-12. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 President, Board of Directors Trophy Club Municipal Utility District No. 1 Secretary, Board of Directors Trophy Club Municipal Utility District No. 1 26 SCHEDULE I SCHEDULE OF REFUNDED BONDS* TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Unlimited Tax Bonds, Series 2002 (Redemption Date: 9-1-12* @ par plus accrued interest to the Redemption Date) Original Dated Date June 1, 2002 Total Refunded Bonds $ 2,355,000 Original Maturity Principal Amount to be Interest (Auqust 1) Amount Refunded Rates 2013 $ 165,000 $ 165,000 4.25% 2014 170,000 170,000 4.35% 2015 180,000 180,000 4.45% 2016 190,000 190,000 4.55% 2017 200,000 200,000 4.70% 2018 210,000 210,000 4.80% 2019 225,000 225,000 (a) 4.95% 2020 235,000 235,000 (a) 4.95% 2021 245,000 245,000 (b) 5.00% 2022 260,000 260,000 (b) 5.00% 2023 275,000 275,000 5.00% $ 2,355,000 $ 2,355,000 <a> Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2020. (b> Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2022. * Preliminary, subject to change. [This page is intentbnally left blank.] APPENDIX A FINANCIAL INFORMATION OF THE ISSUER (This appendix contains quantitative financial information and operating data with respect to the Issuer. The information is only a partial representation and does not purport to be complete. For further and more complete information, reference should be made to the original documents, which can be obtained from various sources, as noted.) FINANCIAL INFORMATION OF THE ISSUER ASSESSED VALUATION TABLE 1 2011 Actual Market Value of Taxable Property (100% of Actual)(a) Less Exemptions: Local Optional Over-65 Disabled and Deceased Veterans' Agricultural Productivity Loss Freeport 10% Homestead Cap Value Loss Total Exempt Property Partial Exempt Property 2011 Certified Net Taxable Assessed Valuation(b> Less: Taxable Value of Accounts Incomplete/Under Review 2011 Certified Net Taxable ARB Approved Assessed Valuation $ 1,041,294,157 $13,436,103 2,864,298 3,296,361 1,127,925 22,745,880 5,894 43,476,461 $ 997,817,696 <b> $ (43,172,221) $ 954,645,475 <a> See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. <b> Includes taxable value of incomplete accounts and accounts under ARB Review. Sources: Denton Central Appraisal District and Tarrant Appraisal District GENERAL OBLIGATION BONDED DEBT TABLE 2 General Obligation Debt Principal Outstanding (As of February 1, 2012): Unlimited Tax Bonds, Series 2002 (Excludes the Refunded Bonds) Unlimited Tax Bonds, Series 2003 Unlimited Tax Refunding Bonds, Series 2005 Unlimited Tax Bonds, Series 2010 Total General Obligation Debt Principal Outstanding 155,000 840,000 1,770,000 2,000,000 4,765,000 Current Issue General Obligation Debt Principal Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") Total General Obligation Debt Principal Outstanding (Following the Issuance of the Bonds) 2,355,000 7,120,000 Interest and Sinking Fund Balance as of December 31, 2011 (unaudited) Ratio of General Obligation Debt Principal to 2011 2011 Certified Net Taxable ARB Approved Assessed Valuation 2011 Certified Net Taxable ARB Approved Assessed Valuation(a> Population Estimates: 2000 - 6,350; 2010 - 8,042; Current 2011 (Estimate) - Per Capita 2011 Certified Net Taxable ARB Approved Assessed Valuation - Per Capita General Obligation Debt Principal - (a) See "TAXING PROCEDURES" in the Official Statement for a descriotion of the Issuer's taxation procedures. Preliminary, subject to change. 316,300 0.75% 954,645,475 7,600 125,611 937 A-1 OTHER OBLIGATIONS TABLE 3 Description Interest Year of Rate Issue Payable Average Principal Final Annual Original Outstanding Maturity Payment Amount as of 9-30-11 Public Property Finance Contractual Obligations: Improvements 2004 3. 50% 2012 $ 39,000 $ 270,000 $ Fire Truck 2007 4. 33% 2014 56,000 448,000 Improvements 2009 3. 90% 2012 110,000 330,000 Notes Payable: Equipment Equipment Capital Lease Obligations: Equipment Revenue Debt Payable: Water Storage Improvements 33,750 201,000 114,234 $ 348,984 1999 2.50% 2018 $ 2,245 $ 35,000 $ 14,259 2010 3.90% 2015 $ 201,318 $ 179,955 143,964 $ 158,223 2008 4.00% 2012 $ 9,886 $ 49,432 $ 9,886 2012 2.87% 2014 $ 383,709 $ 1,100,000 $ 1,100,000 Total Other Obligations $ 1,617,093 A-2 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 4 Less: Current Total Refunded The Bonds* Fiscal Year Debt Service Bonds Combined Sept 30 Outstanding"' Debt Service* Principal Interest Total Debt Service* 2012 $ 866,300 $ 56,156 $ 20,000 $ 36,850 $ 56,850 $ 866,994 2013 865,595 277,313 155,000 103,300 258,300 846,583 2014 659,123 275,300 185,000 73,300 258,300 642,123 2015 657,938 277,905 190,000 69,600 259,600 639,633 2016 660,938 279,895 195,000 63,900 258,900 639,943 2017 667,868 281,250 205,000 58,050 263,050 649,668 2018 668,468 281,850 210,000 51,900 261,900 648,518 2019 672,838 286,770 220,000 45,600 265,600 651,668 2020 670,738 285,633 230,000 39,000 269,000 654,105 2021 672,768 284,000 235,000 29,800 264,800 653,568 2022 678,533 286,750 250,000 20,400 270,400 662,183 2023 676,463 288,750 260,000 10,400 270,400 658,113 2024 153,183 ----153,183 2025 152,683 ----152,683 2026 148,083 ----148,083 2027 153,368 ----153,368 2028 153,243 ----153,243 2029 152,783 ----152,783 2030 152,113 ----152,113 2031 151,163 ----151,163 $ 3,161,571 $ 2.355.000 602.100 £. 2957.100 <a> Does not include Public Property Finance Contractual Obligations indebtedness (see Table 3, page A-2). * Preliminary, subject to change. 9,429,709 TAX ADEQUACY TABLE 5 2011 Certified Net Taxable ARB Approved Assessed Valuation Maximum Annual Debt Service Requirements (Fiscal Year Ending 9-30-12)* Indicated Maximum Interest and Sinking Fund Tax Rate at 99% collections * Preliminary, subject to change. Note: Above computation is exclusive of investment earnings, delinquent tax collections and penalties and interest on delinquent tax collections. 954,645,475 866,994 0.09174 INTEREST AND SINKING FUND MANAGEMENT INDEX TABLE 6 Interest and Sinking Fund Balance, Fiscal Year Ended September 30, 2011 (Unaudited) FY 2012 Interest and Sinking Fund Tax Levy of $0.05586 at 99% Collections based on the 2011 Certified Net Taxable ARB Approved Assessed Valuation of $954,645,475 Produces FY 2012 Interest and Sinking Fund Deposit from Fire Department Rental Income FY 2012 Budgeted Income from PID Utility Connection Fees Paid by Developer (guaranteed with bank letter of credit) (to be deposited to l&S Fund on or before June 2012) Total Available for Debt Service Less: General Obligation Debt Service Requirements, Fiscal Year Ending 9-30-12 Estimated Surplus at Fiscal Year Ending 9-30-12(a) $ 107,847 527,932 308,000 6.120 $ 949,900 866,994 $ 82,906 <a> Does not include delinquent tax collections, penalties and interest on delinquent tax collections or investment earnings. * Preliminary, subject to change. A-3 PROJECTED GENERAL OBLIGATION PRINCIPAL REPAYMENT SCHEDULE TABLE 7 (As of February 1, 2012) Principal Repayment Schedule Bonds Percent of Fiscal Year Outstanding The Unpaid at Principal Endina 9/30 Bonds00* Bonds* Total* End of Year* Retired (%)* 2012 $ 565,000 $ 20,000 $ 585,000 $ 6,535,000 8.22% 2013 420,000 155,000 575,000 5,960,000 16.29% 2014 230,000 185,000 415,000 5,545,000 22.12% 2015 235,000 190,000 425,000 5,120,000 28.09% 2016 245,000 195,000 440,000 4,680,000 34.27% 2017 260,000 205,000 465,000 4,215,000 40.80% 2018 270,000 210,000 480,000 3,735,000 47.54% 2019 280,000 220,000 500,000 3,235,000 54.56% 2020 290,000 230,000 520,000 2,715,000 61.87% 2021 305,000 235,000 540,000 2,175,000 69.45% 2022 320,000 250,000 570,000 1,605,000 77.46% 2023 330,000 260,000 590,000 1,015,000 85.74% 2024 110,000 -110,000 905,000 87.29% 2025 115,000 -115,000 790,000 88.90% 2026 115,000 -115,000 675,000 90.52% 2027 125,000 -125,000 550,000 92.28% 2028 130,000 -130,000 420,000 94.10% 2029 135,000 -135,000 285,000 96.00% 2030 140,000 -140,000 145,000 97.96% 2031 145,000 -145,000 -100.00% $ 4,765,000 $ 2,355,000 $ 7,120,000 ,a> Excludes the Refunded Bonds and all PPFCO principal outstanding (see Table 3, page A-2). * Preliminary, subject to change. FUND BALANCES TABLE 8 Unaudited As of 9-30-11 As of 12-31-11 General Fund $ 3,338,441 $ 3,442,735 Debt Service Fund 107,847 316,300 Total $ 3,446,288 $ 3,759,035 TAXABLE ASSESSED VALUATION FOR TAX YEARS 2007-2011 00 TABLE 9 Tax Net Taxable Change From Preceding Year Year Assessed Valuation Amount ($) Percent CM 2007 912,618,000 101,404,000 12.50% 2008 960,911,000 48,293,000 5.29% 2009 1,015,777,389 (b) 54,866,389 5.71% 2010 978,509,574 <"> -37,267,815 -3.67% 2011 954,645,475 <"> -23,864,099 -2.44% Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). ,b> Excludes valuation for incomplete accounts and accounts under ARB review, as of certification. Sources: Denton Central Appraisal District, Tanrant Appraisal District and Issuer's 2009 Audited Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-4 CLASSIFICATION OF ASSESSED VALUATION TABLE 10 %of % of %of %of % of Cateaorv 2011 Total 2010 Total 2009 Total 2008 Total 2007 Total Land ,a) $ -0.00% $ -0.00% $ -0.00% $ 186,574,000 18.75% $ 213,640,000 22.56% Land - HomeSite 193,352,075 18.57% 189,642,427 18.32% 188,045,683 17.48% -0.00% -0.00% Land - Non HomeSite 236,144,259 22.68% 248,891,821 24.04% 271,608,898 25.24% -0.00% -0.00% Land - Agricultural 3,304,866 0.32% 3,957,829 0.38% 3,998,666 0.37% -0.00% -0.00% Improvements{a) -0.00% -0.00% -0.00% 737,273,000 74.10% 638,560,000 67.43% Improvements - HomeSite 497,180,522 47.75% 498,665,743 48.16% 505,293,510 46.96% -0.00% -0.00% Improvements - Non HomeSite 19,001,251 1.82% 19,724,323 1.90% 26,769,054 2.49% -0.00% -0.00% Personal Property|a) 91,866,777 8.82% 73,302,378 7.08% 70,157,777 6.52% 71,091,000 7.15% 94,823,000 10.01% Mineral Property 444,407 0.04% 1,263,858 0.12% 10,174,220 0.95% -0.00% -0.00% Total Appraised Value $ 1,041,294,157 100.00% $ 1,035,448,379 100.00% $ 1,076,047,808 100.00% $ 994,938,000 100.00% $ 947,023,000 100.00% Less Exemptions: Exemptions (a> $ -$ -$ -$ 34,027,000 $ 34,405,000 Optional Over-65 13,436,103 12,886,387 11,972,353 -- Disabled and Deceased Veterans' 2,864,298 1,805,306 1,287,007 -- Agricultural Productivity Loss 3,296,361 3,949,539 3,990,915 -- Freeport --58,351 -- Homestead Cap Adjustment 1,127,925 1,391,082 2,957,045 -- Total Exempt Property 22,745,880 22,572,987 22,740,838 -- Partial Exempt Property 5,894 131,554 7,208 -- Total Exemptions $ 43,476,461 $ 42,736,855 $ 43,013,717 $ 34,027,000 $ 34,405,000 Certified Net Taxable $ 997,817,696 $ 992,711,524 $ 1,033,034,091 $ 960,911,000 $ 912,618,000 Assessed Valuation Less: Taxable Value of Accounts Incomplete/Under Review $ (43,172,221) $ (14,201,850) $ (17,256,702) Certified Net Taxable ARB Approved Assessed Valuation $ 954,645,475 $ 978,509,674 $ 1,015,777,389 ,a> Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities ( Trophy Club MUD No. 1 and Trophy Club MUD No. 2) and detailed information for Land, Improvements and Exemptions is not available. Source: Denton Central Appraisal District, Tarrant Appraisal District and Issuer's 2010 Audited Basic Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-5 PRINCIPAL TAXPAYERS 2011-2012 TABLE 11 % of Total 2011 2011 Net Taxable Assessed Name Tvoe of ProDertv Assessed Valuation Valuation Maguire Thomas Partners ETAL<a) Commercial Office Complex $146,398,876 15.34% Corelogic Real Estate Commercial Real Estate 18,050,838 1.89% CNL RETMT CRSI Trophy Club Texas LP Medical Plaza / Hospital 17,800,000 1.86% Marsh USA Inc. Insurance Consultant / Data Center 10,030,377 1.05% First American Leasing Commercial Office Complex 8,804,230 0.92% Levi Strauss & Co. Commercial Office 8,637,483 0.90% Regency Centers LP Retail Grocery 7,094,526 0.74% Trophy Club Medical Center Healthcare Services 6,163,459 0.65% BDMR Development LLC Real Estate Development 5,956,889 0.62% Armore Trophy Club LLC Real Estate Development 5,665,875 0.59% Total $234,602,553 24 57% Based on a 2011 Certified Net Taxable ARB Approved Assessed Valuation of $ 954,645,475 (b) <b> Although Maguire Thomas Partners ("Maguire") owns the Solana business complex ("Solana"), which comprises the entire taxable assessed valuation shown above, on November 16, 2011, a Sfate district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. Notwithstanding the receivership and possible foreclosure sale, the property taxes for the current have been paid. The District cannot predict the impact that such events may have on the District's financial condition. See "THE DISTRICT" in the Official Statement for information on the current status of the District's commercial and retail development. (b) Excludes taxable values for incomplete accounts and accounts under ARB Review. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas and the Denton Central Appraisal District. PROPERTY TAX RATES AND COLLECTIONS """" TABLE 12 Net Taxable Adjusted Tax Assessed Tax Tax % Collections Fiscal Year Year Valuation Rate Lew Current Total Ended 2006 $ 811,214,000 $ 0.280000 $ 2,191,536 100.62% 100.36% 9-30-07 2007 912,618,000 0.230000 2,234,909 100.62% 100.36% 9-30-08 2008 960,911,000 0.244615 2,380,679 98.94% 99.58% 9-30-09 2009 1,015,777,389 (c) 0.205000 2,091,414 99.66% 100.75% 9-30-10 2010 978,509,574 (c) 0.195000 2,047,972 99.58% 100.36% 9-30-11 2011 954,645,475 (c) 0.175000 1,923,848 (d) In Process of Collection 9-30-12 ,a> See "TAXING PROCEDURES - Levy and Collection of Taxes" in the body of the Official Statement for a complete discussion of the District's provisions. <b> Historical comparison information for Tax Years 2006-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). <c> Excludes value of incomplete accounts and accounts under ARB review, as of certification <d> As of December 31, 2011. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas, the Denton Central Appraisal District and the Issuer Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. TAX RATE DISTRIBUTION TABLE 13 Operations Fire Protection Debt Service TOTAL 2011-12 $0.009890 0.109250 0.055860 2010-11 $0.008790 0.109250 0.076960 $ 0.175000 $ 0.195000 2009-10 $0.027140 0.109140 0.068720 0.205000 2008-09 $0.014040 0.116020 0.114555 0.244615 2007-08 $0.010200 0.120900 0.098900 0.230000 2006-07 $0.030900 0.102700 0.146400 0.280000 Historical comparison information for Tax Years 2006-2008 reoresents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2). Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas A-6 DIRECT AND OVERLAPPING DEBT DATA INFORMATION TABLE 14 The following table indicates the indebtedness, defined as outstanding bonds payable from ad valorem taxes, of governmental entities overlapping the District and the estimated percentages and amounts of such indebtedness attributable to property within the District. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports published by the Texas Municipal Advisory Council. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the date stated, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Gross Debt /o Amount Taxing. Bodv As of Principal Overlapoina Overlapping Carroll Independent School District 02-01-12 249,710,039 3.57% $ 8,914,648 Denton County 02-01-12 477,705,000 1.20% 5,732,460 Northwest Independent School District 02-01-12 249,710,039 1.95% 4,869,346 Tarrant County 02-01-12 335,050,000 0.20% 670,100 Tarrant County College District 02-01-12 29,780,000 0.20% 59,560 Tarrant County Hospital District 02-01-12 27,160,000 0.20% 54,320 Town of Trophy Club 02-01-12 12,444,000 94.53% 11,763,313 Westlake, Town of 02-01-12 21,725,000 21.69% 4,712,153 Total Net Overlapping Debt $1,403,284,078 $ 36,775,900 Trophy Club MUD No. 1 02-01-12 7,120,000 W* 100.00% 7,120,000 Total Gross Direct Principal and Overlapping Debt $1,410,404,078 $ 43,895,900 w* Ratio of Direct and Overlapping Debt to 2011 Certified Net Taxable ARB Approved Assessed Valuation 4.60% (a). Ratio of Direct and Overlapping Debt to 2011 Market Value 4.22% (a). Per Capita Direct and Overlapping Debt $5,776 (a). {a) Includes the Bonds and excludes the Refunded Bonds. * Preliminary, subject to change. Source: Most Recent Texas Municipal Reports published by the Municipal Advisory Council of Texas. ASSESSED VALUATION AND TAX RATE OF OVERLAPPING ENTITIES TABLE 15 2011 Net Taxable 2011 Governmental Entity Assessed Valuation % of Actual Tax Rate Carroll Independent School District $ 5,554,170,040 100% $ 1.415000 Denton County 53,491,990,714 100% 0.277357 Northwest Independent School District 10,307,632,937 100% 1.375000 Tarrant County 123,043,200,369 100% 0.264000 Tarrant County College District 123,490,855,713 100% 0.148970 Tarrant County Hospital District 123,134,885,714 100% 0.227897 Town of Trophy Club 759,499,967 100% 0.530000 Westlake, Town of 1,091,999,232 100% 0.156840 Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and Denton and Tarrant County Appraisal Districts A-7 AUTHORIZED BUT UNISSUED DIRECT GENERAL OBLIGATION BONDS TABLE 16 Date of Amount Issued This Taxing Body Authorization Purpose Authorized To Date Issue Unissued Trophy Club MUD No. 1 10-07-75 Water&Sewer $ 12,344,217 $ 11,115,000 $ - $ 1,229,217 04-04-81 Water&Sewer 5,800,000 3,760,000 - 2,040,000 10-29-88 Water&Sewer 2,500,000 -_ -_ 2,500,000 $ 20,644,217 $ 14,875,000 $ - $5,769,217 AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS OF OVERLAPPING GOVERNMENTAL ENTITIES TABLE 17 Date of Amount Issued Taxing Body Authorization Purpose Authorized To Date Unissued Carroll ISD None Denton County 01-16-99 Road $ 85,320,000 $ 77,629,375 $ 7,690,625 05-15-04 Road 186,970,000 176,610,527 10,359,473 05-15-04 County Offices 17,900,000 17,900,000 - 05-15-04 Equipment 2,000,000 -2,000,000 11-04-08 Road 310,000,000 102,161,781 207,838,219 11-04-08 County Buildings 185,000,000 82,174,444 102,825,556 $ 787,190,000 $456,476,127 $330,713,873 Northwest I S D 05-10-08 School Buildings $ 260,000,000 $170,000,000 $ 90,000,000 Tarrant County 04-04-87 Courthouse Improv. $ 47,000,000 $ 46,500,000 $ 500,000 08-08-98 Law Enforcement Ctr 70,600,000 63,100,000 7,500,000 08-08-98 Healthcare Facility 9,100,000 1,000,000 8,100,000 08-08-98 Jail 14,600,000 14,600,000 - 05-13-06 Road & Bridge 200,000,000 . 126,700,000 73,300,000 05-13-06 Jail 108,000,000 108,000,000 - 05-13-06 County Buildings 62,300,000 47,300,000 15,000,000 05-13-06 Juvenile Deten. Ctr. 36,320,000 4,200,000 32,120,000 05-13-06 County Offices 26,500,000 26,500,000 - $ 574,420,000 $437,900,000 $136,520,000 Tarrant Co. College Dist None Tarrant Co. Hospital Dis None Trophy Club, Town of 11-16-09 Westlake, Town of None Parks & Recreation $ 5,000,000 $ 5,000,000 <a> The County will not issue authorization due to age. Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. A-8 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 18 Fiscal Year Ended September 30 2011 2010 2009 2008 2007 Revenue and Other Financing Sources: Ad Valorem Property Taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 Water & Wastewater Charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 Utility Fees 165,600 80,500 515,200 -- Inspection and Tap Fees 8,560 5,775 4,975 22,550 32,900 Interest Earned 5,534 6,171 20,755 69,447 106,168 Intergovernmental Revenues 89,330 ---- Oversize Meter Reimbursements 70,594 ---- Capital Proceeds/Contractual Obligations --330,000 49,432 - Miscellaneous and Other 80,906 191,498 199,780 116,295 131,124 Total Revenues and Other Financing Sources: $ 7,055,064 $ 5,694,592 $ 6,076,283 $ 4,939,191 $ 4,330,831 Expenditures and Other Financing Uses: Administrative $ 864,263 $ 993,986 $ 1,297,613 $ 905,052 $ 835,590 Water Operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 Wastewater Operations 598,465 711,382 999,388 500,224 480,798 Wastewater Collection System 277,775 308,798 294,869 409,948 402,482 Information Systems 123,605 182,658 175,698 187,908 124,987 Contribution to Trophy Club Fire Dept. 770,123 876,521 783,736 902,353 725,764 Miscellaneous 177,809 558,000 383,009 45,457 135,121 Capital Outlay 515,884 --29,379 442,782 Debt Service 240,245 --29,379 442,782 Total Expenditures and Other Financing Uses: $ 5.839.659 $ 5,513,856 $ 5,745.698 $ 4.944.492 $ 5.228.600 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses 1— 1,215,405 $ 180,736 $ 330,585 $ (5,301) $ (897,769) Other Financing Sources (Uses): (889,878) _ Beginning Fund Balance - October 1 (Restated) 3,012,914 2,832,178 2,501 593 2,477.515 2.93? 502 Ending Fund Balance - September 30 3,338,441 2.832.178 2.472.214 $ 2.034.733 Total Active Retail Connections Water and/or Wastewater Connections 3,554 3,361 3,161 3,092 2,827 NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) Source: The Issuer's Audited Financial Statements A-9 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 19 Fiscal Year Ended September 30 Revenue and Other Financing Sources: Ad Valorem Property Taxes Penalties and Interest Transfers In / Utility Fees Interest Earned Miscellaneous and Other Total Revenues and Other Financing Sources: 2011 777,648 246,100 985 2010 $ 740,420 653,000 4,848 1,000 2009 $ 1,100,081 12,225 383,009 4,105 2008 $ 1,302,763 23,326 29,379 2007 $ 1,325,143 43,456 29,379 1,024,733 $ 1,399,268 $ 1,499,420 $ 1,355,468 $ 1,397,978 Expenditures and Other Financing Uses: Principal Retirement Interest and Fiscal Charges Total Expenditures and Other Financing Uses: 1,115,000 382,019 1,497,019 $ 1,055,000 311,570 $ 1,025,000 352,195 975,000 390,565 $ 945,000 425,838 $ 1.366.570 $ 1.377,195 $ 1,365,565 $ 1,370,838 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses Other Financing Sources: $ (472,286) $ 32,698 $ 122,225 $ (10,097) $ 27,140 $ 308,000 $ $ $ $ Beginning Fund Balance - October 1 (Restated) (Restated) Ending Fund Balance - September 30 | 272,132 107 846 239,434 117,209 N/A N/A NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) N/A = Not Available Source: The Issuer's Audited Financial Statements N/A N/A A-10 APPENDIX B GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS TOWN OF TROPHY CLUB General The Town of Trophy Club (the "Town"), incorporated in January of 1985 is Texas's first premiere planned residential and country-club community. The Town is located in the southern portion of the Denton County (the "County") on State Highway 114 approximately 8 miles west of the City of Grapevine, 17 miles south of the City of Denton and 14 miles northwest of the Dallas- Fort Worth International Airport. Lake Grapevine is located approximately 2 miles north and east of the Town. The majority of property within the Town consists of single-family and multi-family housing. The Solana Business Complex is located adjacent to the Town's eastern border in the cities of Westlake and Southlake. Both residents and businesses of the Town are furnished water and wastewater treatment from Trophy Club Municipal Utility District No. 1. The Town's 2010 Census was 8,024, which is a 26.65% increase over the 2000 Census. The Town's 2011 population estimate is 8,895. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas, U.S. Census Report, North Central Texas Council of Governments and the Town of Trophy Club. Population: Town of Denton Year Trophy Club County 2011 Estimate 8,895 673,780 2010 Census 8,024 662,614 2000 Census 6,350 423,976 1990 Census 3,922 273,525 1980 Census N/A 143,126 Sources: United States Bureau of the Census, North Central Texas Council of Government and the Town of Trophy Club B-1 Leading Employers in the District: Employer Type of Business Number of Employees (2011) Maguire Partners13' Northwest Independent School District Baylor Medical at Trophy Club Trophy Club Country Club Tom Thumb Town of Trophy Club & Trophy Club MUD #1 Merryhill Bank of America First Financial Bank Quizno's Beck Properties Commercial Office Complex Public School District Healthcare Country Club Retail Grocery Municipal Governmental Entities Daycare Financial Institution Financial Institution Delicatessen Real Estate Development 3,531 267 125 100 90 78 31 7 7 4 4 {a> See "THE DISTRICT - Status of Business/Commercial Development' and APPENDIX A "Table 11 - Principal Taxpayers 2011-2012" herein for a description of the current status of the property owned by Maguire Partners ("Maguire"). The District cannot predict the impact that such events may have on Maguire's operations or its employees in the District. Source: Information from the Issuer The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). Source: Information from Northwest Independent School District and the Town of Trophy Club Denton County (the "County") is located in north central Texas. The County was created in 1846. It is the eighth most populous county in the state occupying a land area of 911 square miles. The population of the County has grown by over 55% since the 2010 census and 2% since the 2010 census. The County seat is the City of Denton. The economy is diversified by manufacturing, state supported institutions, and agriculture. The Texas Almanac designates cattle, horses, poultry, hay and wheat as the principal sources of agricultural income. Minerals produced in Denton County include natural gas and clay. Institutions of higher education include University of North Texas and Texas Woman's University with a combined 2011 fall enrollment of over 43,000. Nearby Lake Lewisville attracts over 3,000,000 visitors annually. Alliance Airport, the largest industrial airport in the world is located in the county and continues to attract new transportation, distribution, and manufacturing tenants. The Texas Motor Speedway, a major NASCAR race track, was completed in 1997 and has had a positive impact on employment and recreational spending for the area. A major Wal-Mart distribution center located in Sanger is adding to the growth of the northern portion of the County. Robson Development is constructing one of the nation's largest new communities for retired citizens in the southern portion of the County. Source: Texas Municipal Report and information from the County. Education DENTON COUNTY General B-2 Major Employers in Denton County Number of Employer Principal Line of Business Employees University of North Texas Education 7,100 Lewisville Independent School District Education 4,500 Frito Lay Co Distribution Center 2,436 American Airlines Airline 2,350 Texas Women's University Education 2,200 Denton Independent School District Education 2,000 Horizon Health Healthcare 1,500 Denton State School MHMR Facility 1,473 Denton County County Government 1,467 Xerox Corporation Office Equipment 1,400 City of Denton Municipality 1,200 Federal Express Mail Center 863 Denton Reg. Medical Center Medical Center 850 Wal-Mart Distribution Center Distribution Center 800 FEMA Emergency Management 750 Source: Denton County Economic Development and ONCOR Community Profiles Labor Force Statistics Denton County December December 2011 2010 Civilian Labor Force 362,724 356,579 Total Employed 339,700 330,862 Total Unemployed 23,024 25,717 % Unemployed 6.3% 7.2% % Unemployed (Texas) 7.2% 8.0% % Unemployed (United States) 8.3% 9.1% Source: Texas Workforce Commission, Labor Market Information Department. B-3 [This page is intentionally left blank.] APPENDIX C FORM OF LEGAL OPINION OF BOND COUNSEL Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. [DATE OF DELIVERY] TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS SERIES 2012 DATED MARCH 1,2012 IN THE AGGREGATE PRINCIPAL AMOUNT OF $ AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District") issuer of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates and mature on the dates, and are subject to redemption, in accordance with the terms and conditions stated in the text of the Bonds. Terms used herein and not otherwise defined shall have the meaning given in the Order of the District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXAMINED the Constitution and laws of the State of Texas, and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number T-1), and specimens of Bonds to be authenticated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District or if the District consolidates with another District. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed or refinced therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, APPENDIX D EXCERPTS FROM THE DISTRICT'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 (Independent Auditor's Report, General Financial Statements and Notes to the Financial Statements - not intended to be a complete statement of the Issuer's financial condition. Reference is made to the complete Annual Financial Report for further information.) Follexit: and Company PLLC / / f I Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors Trophy Club Municipal Utility District No. 1 Trophy Club, Texas We have audited the accompanying financial statements of the governmental activities and each major fund of the Trophy Club Municipal Utility District No. 1, (the District), as of and for the year ended September 30, 2011, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. 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 audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, and each major fund of the Trophy Club Municipal Utility District No. 1 as of September 30, 2011, and the changes in financial position for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis, and budgetary comparison information on pages 3 through 10 and 35 through 36, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. 1 LaFollett & Company PLLC PO Box 717 • Tom Bean, TX • 75489 903-546-6975 • vvvvw.lafollettcpa.com In accordance with Government Auditing Standards, we have issued a report dated January 31, 2012 on our consideration of the District's internal control over financial reporting and our tests of compliance with certain provisions of laws, regulations, contracts and grants. The purpose of that report is to describe the scope of testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. The report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise Trophy Club Municipal Utility District No. 1 's basic financial statements. The accompanying individual schedules and other supplementary information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The accompanying individual schedules and other supplementary information have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. LaFollett & Company, PLLC Tom Bean, Texas January 31, 2012 2 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 3 Trophy Club Municipal Utility District No. 1, Texas (the "District") Management's Discussion and Analysis (MD&A) is a narrative overview and analysis designed to provide the reader a means to identify and understand the financial activity of the District and changes in the District's financial position during the fiscal year ended September 30, 2011. The Management's Discussion and Analysis is supplemental to, and should be considered along with, the District's financial statements. Financial Highlights At the close of the fiscal year, the assets of the District exceeded its liabilities by $12,262,122. Of this amount, $3,123,113 is unrestricted net assets and may be used to meet the District's ongoing commitments. The District's net assets increased by $1,991,485 as a result of operations. At the end of the fiscal year, the District's governmental type funds reported a combined fund balance of $3,143,822. As of September 30, 2011, the unassigned fund balance of the General Fund was $2,509,429, which is equal to 42% of total General Fund expenditures. The governmental long-term debt bond obligations of the District decreased by $1,115,000. Overview of the Financial Statements The MD&A is intended to introduce the reader to the District's basic financial statements, which are comprised of three components: 1. Government-Wide Financial Statements, 2. Fund Financial Statements, and 3. Notes to Basic Financial Statements. The report also contains other required supplementary information in addition to the basic financial statements. Government-Wide Financial Statements - the government wide financial statements are designed to provide the reader with a general overview of the District's finances in a way that is comparable with financial statements from the private sector. The government-wide financial statements consist of two statements: 1. The Statement of Net Assets - (Page 11) this statement presents information on all of the District's assets and liabilities; the difference between the two is reported as net assets. Over an extended period, the increase or decrease in net assets will serve as a good indicator of whether the financial position of the District is improving or deteriorating. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Overview of the Financial Statements - continued 2. The Statement of Activities - (Page 12) gives information showing how the District's net assets have changed during the fiscal year. All revenues and expenses are reported on the full accrual basis. Fund Financial Statements - Fund financial statements provide detailed information about the most important funds and not about the District as a whole as in the government-wide financial statements. The District uses fund accounting to demonstrate compliance with finance related legal requirements which can be categorized as governmental fund activities. Governmental Funds - All of the District's activities are reported in governmental funds. They are used to account for those functions known as governmental activities. But unlike government-wide financial statements, governmental fund financial statements focus on how monies flow into and out of those funds and their resulting balances at the end of the fiscal year. Statements of governmental funds provide a detailed short-term view of the District's general government operations and the basic services it provides. Such information can be useful in evaluating a government's short-term financing requirements. The District maintains three governmental funds. Information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances for the General Fund, Debt Service Fund and Capital Projects Fund, all of which are considered to be major funds. The District adopts annual appropriated budgets for the General Fund and Debt Service Funds. A budgetary comparison statement is provided for each annually budgeted fund to demonstrate compliance with its budget. Notes to the Basic Financial Statements - The notes provide additional information that is essential to a full understanding of the data presented in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 17-34. 4 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 Governmental Governmental Activities Activities 2011 2010 Current and other $ 4,782,322 $ 6,211,302 Capital assets 16,742,462 14,187,749 Total Assets 21,524,784 20,399,051 Long-term liabilities 6,850,903 9,080,647 Other liabilities 2,411,759 1,047,767 Total liabilities 9,262,662 10,128,414 Net Assets: Invested in capital assets, net of related debt 9,031,162 7,648,983 Restricted 107,847 262,048 Unrestricted 3,123,113 2,359,606 Total Net Assets (FY10 restated) $ 12,262,122 $ 10,270,637 5 Overview of the Financial Statements - continued Government-wide Financial Analysis The management discussion and analysis highlights the information provided in both the Statement of Net Assets and Statement of Activities in the government-wide financial statements. It may serve over an extended period of time, as a useful indicator of the District's financial position. At the end of the fiscal year, the District's assets exceeded liabilities by $12,262,122. Of this amount $9,031,162 (74%) reflects the District's investment in capital assets (e.g., land, buildings, machinery and equipment, net of accumulated depreciation), less any related outstanding debt used to acquire those assets. The District uses these capital assets to provide service to the community; therefore these assets are not available for future spending. Table 1 Condensed Statements of Net Assets TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 District operational analysis - The following table provides a summary analysis of the District's consolidated operations for the fiscal years ended September 30, 2011 and 2010. Governmental activities have increased the District's net assets by $1,991,485, which amounts to a 19% increase in net assets for the year ended September 30, 2011. Table 2 Changes in Net Assets Governmental Governmental Activities Activities 2011 2010 Revenue: Program revenue Charges for services $ 5,814,098 $ 4,351,155 Grants and Contributions 89,330 11,200 General Revenue Ad valorem taxes 2,081,548 2,216,287 Unrestricted investment earnings 7,573 12,724 Miscellaneous 80,908 179,502 Total Revenue 8,073,457 6,770,868 Expenses: Water & Wastewater operations 3,499,324 2,603,224 General government 1,400,004 1,520,193 Fire 785,195 997,997 Interest and fiscal charges 397,449 317,508 Total Expenses 6,081,972 5,438,922 Increase in net assets (FY10 restated) $ 1,991,485 $ 1,331,946 Financial analysis of the District's funds Governmental Funds - the main focus of the District's governmental funds is to provide information on the flow of monies to and from the funds, and to note the unassigned fund balance, which is a good indicator of resources available for spending in the near term. The 6 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2011 information derived from these funds is highly useful in assessing the District's financial requirements. The unassigned fund balance may serve as a useful measure of the government's net resources available for use at the fiscal year-end. At the end of the fiscal year, the District's governmental funds reported combined ending fund balances of $3,143,822, of which 70%, or $2,206,963, is unassigned and available to the District for future spending. Additional fund balances of $107,847 are assigned to pay debt service. General Fund budgetary highlights Revenue: Revenues were $1,072,966 more than budgeted • Water and wastewater charges were $973,696 (22%) more than budgeted. The budget was based on a normal year, but the District experienced dry, hot weather increasing the use of water. Expenses: Expenses were $396,693 less than budgeted • Water operations were $179,979 more than budgeted due to a higher water use during above average summer heat and dry weather. • The Fire Department had a $436,517 positive budget variance (see page 35) for 2011 expenditures before transfers and capital outlays. After these items are considered, the positive variance was $50,517. Debt Service Fund: • Actual debt service fund revenue was $12,921 more than budgeted due to the payment of delinquent taxes. The debt service expenses were $1,040 less than budgeted. • The debt service fund reserves decreased from $272,132 to $ 107,847. Overall: • Governmental type funds revenue totaled $8,080,851 while expenditures totaled $9,927,933. • Total governmental type fund balances decreased from $4,990,903 to $3,143,821; a decrease of $1,847,082 or 37%. The decrease was expected due to the Capital Projects Fund's use of $2 million of prior year bond proceeds for fiscal year 2011 capital outlays. 7 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Capital Asset and Debt Administration The District's investment in capital assets for its governmental activities as of September 30, 2011 amounted to $16,742,462, net of accumulated depreciation. This represents a broad range of capital assets including, but not limited to land, buildings, improvements, machinery and equipment, vehicles, and water, wastewater treatment, and wastewater collection systems. Capital assets increased approximately 17% during 2011 primarily due to the completion of the new fire department facility. The Capital Projects Fund expenditure for this facility in 2011 was approximately $2.5 million. A management review of annual depreciation for capital assets was completed during the fiscal year and identified approximately $665,000 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation and net assets have been adjusted accordingly. Additional information about capital assets may be found in Note 5 in the notes to financial statements. Debt administration Long-Term Debt - at the end of the current fiscal year the consolidated District had $7,789,214 of general obligation bonds, contractual obligation bonds, notes payable, capital lease obligations, and accrued compensated absences, a decrease of 14% from the previous fiscal year. Of this amount, $7,511,201 is backed by the full faith and credit of the government. The District had no new debt for fiscal year 2011. General debt currently outstanding Table 3 Outstanding Debt at Year-end Governmental Governmental Activities Activities 2011 2010 General obligation bonds $ 7,162,142 $ 8,280,719 Contractual obligations 349,059 554,752 Notes payable 190,209 196,052 Capital lease obligations 9,888 19,774 Compensated absences 77,916 75,777 Total $ 7,789,214 $ 9,127,074 8 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Economic factors and next year's budgets and rates: General fund fiscal 2012 budgetary highlights Revenue: The District's 2012 operational revenue is budgeted to increase by $1,349,996. • Property tax revenue budget increased by $103,010 due to a decrease in existing values and a substantial increase in new construction residential values. • Water and wastewater revenue budget increased by $993,154 due to an increase in utility rates and new construction in residential homes. • Utility fees revenue increased $170,980 due to the reduction in debt service bond payments. $338,880 of the $345,000 in Utility fees will be allocated to operations. Expenses: The District's 2012 operational expense is budgeted to increase by $1,228,358. • The majority of the increase is related to capital expenses and the four year plan to replace all existing meter heads ($85,000). • Bulk water budget is to increase $310,000 due to the increase in new construction residential homes. Overall: The District's2012 operational budget is anticipated to have expenses of $7,406,912 on revenues of $7,141,830 resulting in a $265,082 use of reserves. Debt Service: • Budgeted 2012 debt service revenues are budgeted to decrease from $1,498,059 in fiscal 2011 to $870,300 in fiscal 2012, a decrease of $627,759, or 41.9%. • Debt service appropriations will decrease from $1,498,059 to $870,300 due to two bond issues being paid off in fiscal year 2011. The consolidated District's overall budget for revenue increased from $7,275,586 in fiscal 2011 to $8,012,130 in fiscal 2012 a 10.12% increase. The overall appropriations increased from $7,554,975 to $8,277,212 a 9.56% increase. 9 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 10 Requests for information This financial report is designed to provide a general overview of the District's consolidated finances for all interested parties. Questions concerning any of the information in this report or requests for additional information should be directed to the Trophy Club Municipal Utility District No. 1, Senior Accountant, 100 Municipal Drive, Trophy Club, Texas 76262. BASIC FINANCIAL STATEMENTS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Governmental Activities ASSETS Cash and cash equivalents $ 3,514,926 Receivables Accounts receivable, net 783,977 Taxes 27,760 Other 253,400 Due from other governments 33,833 Prepaids 7,755 Deferred charges 160,670 Non-depreciable capital assets: Land 248,093 Construction in progress 281,899 Non-depreciable capital assets: Buildings and other improvements 3,813,236 Machinery, vehicles, and other equipment 3,082,168 Water system 16,385,424 Organization costs 2,331,300 Accumulated depreciation (9,399,658) TOTAL ASSETS $ 21,524,784 LIABILITIES Accounts payable $ 1,137,121 Accrued liabilities 24,438 Accrued interest payable 28,237 Due to other governments 96,564 Customer deposits 187,087 Noncurrent liabilities: Debt due within one year 938,311 Debt due in more than one year 6,850,903 TOTAL LIABILITIES 9,262,662 NET ASSETS Invested in capital assets, net of related debt 9,031,162 Restricted for debt service 107,847 Unrestricted 3,123,113 TOTAL NET ASSETS $ 12,262,122 The notes to financial the statements are an integral part of this statement. 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30,2011 Governmental Activities Program Revenues Program Activities Governmental Activities Expenses Charges for Services Operating Grants and Contributions Capital Grants and Contributions General government $ 319,418 $ 484,770 $ $ - Water operations 2,495,780 3,534,489 -- Wastewater operations 646,419 1,794,839 -- Wastewater collection system 357,125 --- Utility billing 207,307 --- Directors 14,356 --- Manager's office 537,597 --- Finance and H.R. 120,227 --- Facilities management 77,493 --- Information systems 123,605 --- Fire 785,195 -11,330 78,000 Interest on long term debt 397,449 --- Total governmental activities $ 6,081,972 $ 5,814,098 $ 11,330 $ 78,000 Net (Expenses) Revenue and Changes in Net Assets Governmental Activities $ 165,352 1,038,709 1,148,420 (357,125) (207,307) (14,356) (537,597) (120,227) (77,493) (123,605) (695,865) (397,449) (178,544) General Revenues: Ad valorem taxes Investment income Miscellaneous Total general revenues Change in net assets Net Assets - beginning of year, as restated 2,081,548 7,573 80,908 2,170,029 1,991,485 10,270,637 $ 12,262,122 The notes to the financial statements are an integral part of this statement. 12 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2011 ASSETS Debt Capital Total Service Projects Governmental General Fund Fund Fund Funds Assets Cash and cash equivalents $ 3,357,805 $ 107,847 $ 49,274 $ 3,514,926 Receivables: Accounts receivables, net 783,977 - - 783,977 Taxes 14,170 13,591 - 27,760 Other receivables 253,400 - - 253,400 Due from other governments 33,833 - - 33,833 Due from other funds 199 - - 199 Prepaids 7,755 - - 7,755 TOTAL ASSETS $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 785,580 $ $ 351,541 $ 1,137,121 Accrued liabilities 24,438 --24,438 Customer deposits 187,087 --187,087 Due to other governments 96,564 -96,564 Due to other funds --199 199 Deferred revenue 19,029 13,591 -32,620 Total liabilities 1,112,698 13,591 351,740 1,478,029 nd Balances Non-spendable prepaids 7,755 --7,755 Assigned - Budgetary deficits 265,082 --265,082 Assigned - Other 556,175 107,847 -664,022 Unassigned 2,509,429 -(302,466) 2,206,963 Total fund balances 3,338,441 107,847 (302,466) 3,143,822 TOTAL LIABILITIES AND FUND BALANCES $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 The notes to financial statements are an integral part of this statement. 13 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Total fund balances - governmental funds $ 3,143,822 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in the governmental funds balance sheet. 16,742,462 Costs associated with the issuance of long-term debt are expensed when incurred in governmental funds. These costs are capitalized and amortized over the life of the debt in the government wide financial statements. 160,670 Revenue reported as deferred revenue in the governmental funds balance sheet is recognized as revenue in the government wide statement financial statements. 32,621 Interest payable on long term debt does not require current financial resources; therefore interest payable is not reported as a liability in the governmental funds balance sheet. (28,237) Accrued compensated absences does not require the use of current financial resources; therefore accrued vacation is not reported as a liability in the governmental funds balance sheet. (77,916) Long-term liabilities, including bonds payable are not due and payable in the current period and, therefore, are not reported in the fund financial statements. (7,711,300) Net assets of governmental activities $ 12,262,122 The notes to the financial statements are an integral part of this statement. 14 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS SEPTEMBER 30,2011 Revenues: Water and wastewater charges Taxes Utility fees Intergovernmental revenues Miscellaneous Oversize meter reimbursements Inspection and tap fees Investment income Total revenues Expenditures Current: Water operations Fire Wastewater operations Manager's office Wastewater collection system Utility billing Information systems Finance General government Facilities management Directors Human resources Capital Outlay Debt Service Principal Interest and fiscal charges Bond issue costs Total expenditures Excess (deficiency) of revenues over (under) expenditures Other financing sources (uses) Transfers in Transfers out Total other financing sources (' Net change in fund balance Fund Balances - beginning of year Fund Balances - end of year Debt Service General Fund Fund $ 5,323,244 $ 1,311,296 777,648 165,600 246,100 89,330 - 80,906 - 70,594 - 8,560 - 5,534 985 7,055,065 1,024,734 2,271,490 770,123 - 598,465 - 537,597 - 277,775 - 207,307 - 123,605 - 119,359 - 85,092 - 77,493 - 14,356 - 868 - 515,884 - 221,422 1,115,000 18,823 379,559 -2,460 5,839,660 1,497,019 1,215,405 (472,285) 308,000 (889,878) - (889,878) 308,000 325,527 (164,285) 3,012,914 272,132 $ 3,338,441 $ 107,847 Total Capital Governmental Projects Fund Funds $ $ 5,323,244 -2,088,945 -411,700 -89,330 -80,906 -70,594 -8,560 1,054 7,573 1,054 8,080,852 2,271,490 -770,123 -598,465 -537,597 -277,775 -207,307 -123,605 -119,359 -85,092 -77,493 -14,356 -868 2,591,255 3,107,139 _ 1,336,422 -398,382 -2,460 2,591,255 9,927,933 (2,590,201) (1,847,081) 581,878 889,878 -(889,878) 581,878 (0) (2,008,323) (1,847,081) 1,705,857 4,990,903 $ (302,466) $ 3,143,822 The notes to the financial statements are an integral part of this statement. 15 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE STATEMENT OF REVENUES EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30,2011 Net change in fund balances - total governmental funds $ (1,847,081) Amounts reportedfor governmental activities in the statement of activities are different because: Depreciation expense on capital assets reported in the statement of activities does not require the use of current financial resources, therefore, depreciation expense is not reported as expenditures in the governmental funds. (612,059) Governmental funds report capital outlays as expenditures. However, in the statement of activities the costs of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of capital assets recorded in the current period. 3,107,139 Debt principal payments reduces long-term liabilities in the statement of net assets, but it is recorded as an expenditure in the governmental funds 1,336,422 Current year changes in the long term liability for compensated absences do not require the use of current financial resources; therefore they are not reported as expenditures in the governmental funds. (2,139) Governmental funds report the effects of issuance costs, premiums, and deferred losses on refunding when debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. (3,577) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing the change in deferred revenue and various other items. The net effect of these reclassifications is to increase net assets. 9,388 Current year changes in accrued interest payable do not require the use of current financial resources and, therefore, are not reported as expenditures in the governmental funds. 3,392 Change in net assets of governmental activities $ 1,991,485 The notes to the financial statements are an integral part of this statement. 16 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General Statement Trophy Club Municipal Utility District No. 1 (the District) was created by an order of the Texas Commission on Environmental Quality (TCEQ) (formerly the Texas Natural Resources Conservation Commission) on March 4, 1975 and confirmed by the electorate of the District at a confirmation election on October 7, 1975. The Board of Director's held its first meeting on April 24, 1975. The Bonds were first sold on June 8, 1976. The District operates pursuant to Article XVI, Chapter 59 of the Texas Constitution and Chapter 54 of the Texas Water Code, as amended. On May 9, 2009, citizens voted to consolidate the District and Trophy Club Municipal Utility District No. 2 (MUD2). As a result, the District reports consolidated activity and balances for the District and the entities formerly known as MUD2 and the Trophy Club Master District Joint Venture (a joint venture of MUD 1 and MUD2). The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for the District. The financial statements of the District have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to government units. B. Financial Reporting Entity As required by accounting principles generally accepted in the United States of America, these financial statements include the activities of the District and any organizations for which the District is financially accountable or for which the nature and significance of their relationship with the District are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization's governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. A primary government has the ability to impose its will on an organization if it can significantly influence the programs, projects, or activities of, or the level of services performed or provided by, the organization. A financial benefit or burden relationship exists if the primary government (a) is entitled to the organization's resources; (b) is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization; or (c) is obligated in some manner for the debt of the organization. Some organizations are included as component units because of their fiscal dependency on the primary government. An organization is fiscally dependent on the primary government if it is unable to adopt its budget, levy taxes, set rates or charges, or issue bonded debt without approval by the primary government. Accordingly, the District has no component units. 17 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED C. Government-Wide and Fund Financial Statements The government-wide financial statements (the statement of net assets and the statement of activities) report information on all of the activities of the District, except for fiduciary funds. The effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The activities of the District are comprised only of governmental activities. The statement of activities demonstrates the degree to which the direct expenses of a given program are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific program. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given program and 2) operating or capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements The District segregates transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. These statements present each major fund as a separate column on the fund financial statements. The District does not report any non-major funds. Governmental funds are those funds through which most governmental functions typically are financed. The measurement focus of governmental funds is on the sources, uses and balance of current financial resources. The District has presented the following major governmental funds: General Fund The General Fund is the main operating fund of the District. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. General operating expenditures, fixed charges and capital improvement costs that are not paid through other funds are paid from the General Fund. Debt Service Fund The Debt Service Fund is used to account for resources accumulated and payments made for principal and interest on the long-term debt of governmental funds. Capital Projects Fund The Capital Projects Fund is used to account for funds received and expended for the acquisition and construction of infrastructure and other capital assets. 18 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED D. Measurement Focus and Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government-wide statements are reported using the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or non-current) are included on the statement of net assets and the operating statements present increases (revenues) and decreases (expenses) in net total assets. Under the accrual basis of accounting, revenues are recognized when earned. Expenses are recognized at the time the liability is incurred. Governmental fund financial statements are reported using the current financial resources measurement focus and are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual; i.e., when they become both measurable and available. "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. The District considers receivables collected within sixty days after year-end to be available and recognizes them as revenues of the current year. Expenditures are recorded when the related fund liability is incurred. However, debt service expenditures are recorded only when payment is due. The revenues susceptible to accrual are interest income and ad valorem taxes. All other governmental fund revenues are recognized when received. E. Cash and Investments The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments of three months or less from the date of acquisition. The District's investment policy requires that all monies be deposited with the authorized District depository or in (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States; (4) obligations of states, agencies, counties, cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than A or its equivalent; (5) certificates of deposit by state and national banks domiciled in this state that are (A) guaranteed or insured by the Federal Deposit 19 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED E. Cash and Investments - Continued Insurance Corporation, or its successor; or, (B) secured by obligations that are described by (1) - (4); or, (6) fully collateralized direct repurchase agreements having a defined termination date, secured by obligations described by (1), pledged with third party selected or approved by the District, and placed through a primary government securities dealer. All investments are recorded at fair value based on quoted market prices. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties. F. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the government-wide financial statements. All capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated assets are valued at their fair market value on the date donated. Repairs and maintenance are recorded as expenses. Renewals and betterments are capitalized. Interest has not been capitalized during the construction period on property, plant and equipment. Assets capitalized have an original cost of $5,000 or more and over one year of useful life. Depreciation has been calculated on each class of depreciable property using the straight-line method. Estimated useful lives are as follows: Buildings 50 Years Improvements other than buildings 15-30 Years Machinery and equipment 5-15 Years Vehicles 6-12 Years Water and wastewater systems 30 - 65 Years G. Accumulated Vacation, Compensated Time and Sick Leave The District has no employees of its own, but instead, personnel services are furnished under a contract with the Town of Trophy Club, Texas. The District records an allocation of personnel costs from the Town in personnel expense accounts rather than as single line item payable to the Town. Accordingly, the District also records current payroll and an allocation in compensated absences earned by the personnel assigned to it. The District reports this liability using the Town's vacation policy; however, the Town retains primary liability for its employee vacation pay. 20 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICffiS - CONTINUED H. Organizational Costs The District, in conformance with requirements of the TCEQ, capitalized costs incurred in the creation of the District. The TCEQ requires capitalization of organizational costs for the construction period, all costs incurred in the issue and sale of bonds, bond interest and amortized bond premium and discount losses on sales of investments, accrued interest on investments purchased, attorney fees and some administrative expenses until construction and acceptance or use of the first revenue producing facility has occurred. The District amortizes the organizational costs using the straight-line method over a period of 22 to 45 years. I. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the District or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. J. Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses/expenditures. Actual results could differ from those estimates. K. Fund Balances The Governmental Accounting Standards Board (GASB) has issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54). This Statement defines the different types of fund balances that a governmental entity must use for financial reporting purposes in the fund financial statements for governmental type funds. It does not apply for the government-wide financial statements. GASB 54 requires the fund balance amounts to be properly reported within one of the following fund balance categories: Nonspendable - such as fund balance associated with inventories, prepaids, long-term loans and notes receivable, and property held for resale (unless the proceeds are restricted, committed, or assigned) 21 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED K. Fund Balances - Continued Restricted - fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation, Committed - fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the Board of Directors (the district's highest level of decision-making authority), Assigned - fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed, and Unassigned - fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications, and other fund's that have total negative fund balances. NOTE 2. CASH AND INVESTMENTS The funds of the District must be deposited and invested under the terms of a contract, contents of which are set out in the Depository Contract Law. The depository bank places approved pledged securities for safekeeping and trust with the District's agent bank in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation (FDIC) insurance. At September 30, 2011, the carrying amount of the District's deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $619,096 and the bank balance was $848,446. The District's cash deposits at September 30, 2011, and during the year then ended were entirely covered by FDIC insurance or by pledged collateral held by the District's agent bank in the District's name. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the District to adopt, implement, and publicize an investment policy. That policy must address the following areas; (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity, allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, (9) and bid solicitation preferences for certificates of deposit. 22 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Statutes and the District's investment policy authorized the District to invest in the following investments as summarized below: Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity of Portfolio In One Issuer U.S. Treasury Obligations 2 years 85% NA U.S. Agencies Securities 2 years 85% NA State of Texas Securities 2 years 85% NA Certificates of Deposits 2 years 85% NA Municipal Securities 2 years 85% NA Money Market 2 years 50% NA Mutual Funds 2 years 50% NA Investment pools 2 years 100% NA The Act also requires the District to have independent auditors perform test procedures related to investment practices as provided by the Act. The District is in substantial compliance with the requirements of the Act and with local policies. Cash and investments as of September 30, 2011 are classified in the accompanying financial statements as follows: Statement of Net Assets Primary Government: Cash and cash equivalents $3,514,926 Total cash and investments $ 3,514,926 Cash and investments as of September 30, 2011 consist of the following: Deposits with financial institutions $ 619,096 Investments 2,895,830 Total cash and investments $ 3,514,926 The District's cash and investments balance includes $187,087 which is restricted for customer deposits. 23 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the District manages its exposure to interest rate risk is by investing mainly in investment pools which purchase a combination of shorter term investments with an average maturity of less than 60 days thus reducing the interest rate risk. The District monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. The District has no specific limitations with respect to this metric. As of September 30, 2011, the District had the following investment: Investment Type Amount Weighted Average Maturity TexPool Total Investments $ 2,895,830 $ 2,895,830 34 days As of September 30, 2011, the District did not invest in any securities which are highly sensitive to interest rate fluctuations. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the Public Funds Investment Act, the District's investment policy, or debt agreements, and the actual rating as of year-end for each investment type. Investment Type Amount Minimum Legal Rating Rating as of Year End TexPool $ 2,895,830 N/A AAAm Total Investments 2,895,830 Concentration of Credit Risk The investment policy of the District contains no limitations on the amount that can be invested in any one issuer. As of September 30, 2011, other than external investment pools, the District did not have 5% or more of its investments with one issuer. 24 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act and the District's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least the bank balance less FDIC insurance at all times. As of September 30, 2011 the District deposits with financial institutions were not in excess of federal depository insurance limits. Investment in State Investment Pools The District is a voluntary participant in TexPool. The State Comptroller of Public Accounts exercises responsibility over TexPool. This oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. TexPool operates in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940. TexPool uses amortized costs rather than market value to report net assets to compute share prices. Accordingly, the fair value of the position in TexPool is the same as the value of TexPool shares. 25 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 3. ACCOUNTS RECEIVABLE Receivables as of year-end, including the applicable allowances for uncollectible accounts, are as follows: Accounts Receivable: MUD water $ 388,269 MUD sewer 161,167 Unbilled receivables 176,861 Refuse (as agent for Town of Trophy Club) 51,903 Refuse tax (as agent for Town of Trophy Club) 4,574 Storm drainage (as agent for Town of Trophy Club) 13,254 796,028 Allowance for uncollectible accounts (12,051) Total (net) $ 783,977 Due from Other Governments: Town of Trophy Club $ 33,833 NOTE 4. INTERFUND TRANSFERS Transfers between funds during the year are as follows: Transfer In Transfer Out Amount Purpose Capital Projects General Fund $ 581,878 Capital Improvement Costs Debt Service General Fund 308,000 Debt service Total $ 889,878 NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS Prior Period Adjustment to Net Assets A management review of annual depreciation for capital assets was completed during the fiscal year and identified $664,937 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation has been decreased and net assets have been increased by this amount on the government-wide financial statements. 26 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Capital Asset Activity Capital asset activity for the year ended September 30, 2011, was as follows: Beginning Balance as Beginning Previously Adjustments/ Balance Retirements/ Ending Reported Reclassifications As Restated Additions Transfers Balance Governmental Activities: Capital assets, not being depreciated Land $ 248,093 $ -$ 248,093 $ $ $ 248,093 Construction in progress 601,102 -601,102 2,817,925 (3,137,128) 281,899 Total capital assets not being depreciated 849,195 -849,195 2,817,925 (3,137,128) 529,992 Capital assets, being depreciated Buildings 506,790 -506,790 -3,041,428 3,548,218 Improvements other than buildings 265,017 -265,017 --265,017 Machinery and equipment 1,179,578 -1,179,578 274,635 -1,454,213 Organization costs 2,331,300 -2,331,300 --2,331,300 Vehicles 1,615,129 -1,615,129 78,000 (65,174) 1,627,955 Water system 8,080,056 -8,080,056 --8,080,056 Wastewater treatment system 5,441,926 -5,441,926 --5,441,926 Wastewater collection system 2,863,443 -2,863,443 --2,863,443 Total capital assets being depreciated 22,283,239 -22,283,239 352,635 2,976,254 25,612,128 Less accumulated depreciation for: Buildings (159,049) 2,788 (156,261) (14,238) 45,485 (125,015) Improvements other than buildings (174,388) 1 (174,387) (13,166) -(187,552) Machinery and equipment (391,884) 427 (391,457) (90,102) -(481,559) Organization costs (2,016,621) (10,781) (2,027,402) (76,350) -(2,103,752) Vehicles (994,555) (1,476) (996,031) (110,759) 65,174 (1,041,616) Water system (3,013,031) 358,073 (2,654,958) (131,125) -(2,786,083) Wastewater treatment system (1,743,613) 357,383 (1,386,230) (127,272) -(1,513,503) Wastewater collection system (1,070,054) (41,479) (Mll,533) (49,046) -(1,160,578) Total accumulated depreciation (9,563,195) 664,937 (8,898,258) (612,058) 110,659 (9,399,658) Governmental activities capital assets, net $ 13,569,239 $ 664,937 $ 14,234,176 $ 2,558,502 $ (50,215) $ 16,742,462 27 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS - Continued Depreciation expense was charged as direct expense to programs of the primary government as follows: General government $ 344,985 Water operations 124,698 Fire department 15,070 Wastewater operations 47,954 Wastewater collection systems 79,351 Total depreciation expense $ 612,058 NOTE 6. LONG-TERM DEBT At September 30, 2011, the District's long-term debt payable consisted of the following: Interest Year Average Rate of Final Annual Original Outstanding Description Payable Issue Maturity Payment Amount 9/30/2011 Tax and revenue bonds: Refunding 3.25-5.90% 1997 2011 $ 398,620 $ 3,075,000 $ - Refunding 4.00-5.00% 2003 2011 252,963 1,949,288 - Improvements 4.00-5.00% 2002 2023 281,058 3,510,000 2,510,000 Operations 4.00-5.00% 2003 2023 89,793 1,200,000 840,000 Refunding 3.00-4.20% 2005 2023 195,676 3,143,998 1,770,000 Improvements 3.50-5.00% 2010 2031 148,205 2,000,000 $ 2,000,000 7,120,000 Contractual Obligations: Fire Truck 4.33% 2007 2014 $ 56,000 $ 448,000 $ 201,000 Improvements 3.50% 2004 2012 39,000 270,000 33,750 Improvements 3.90% 2009 2012 110,000 330,000 $ 114,309 349,059 Notes payable: Equipment 2.50% 1999 2018 $ 2,245 $ 35,000 $ 14,254 Equipment 3.90% 2010 2015 201,318 179,955 $ 175,955 190,209 Capital Lease Obligations: Equipment 4.00% 2008 2012 $ 9,886 $ 49,432 $ 9,886 28 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - Continued The following is a summary of long-term debt transactions of the District for the year ended September 30,2011: Beginning Balance Additions Reductions Ending Balance Due Within One Year Governmental Activities: Tax and revenue bonds 03nrractual obligations Deferred loss on refuning Premium on bonding $ 8,235,000 554J52 (55,907) 101,626 $ $ (1,115,000) (205,693) 4,414 (7,991) $ 7,120,000 349,059 (51,493) 93,635 $ 565,000 212,059 (4,414) 7,991 8,835,471 -(1,324,270) 7,511,201 780,636 Notes payable 196,052 -(5,843) 190,209 69,871 Capital lease obligations 19,774 -(9,886) 9,888 9,888 Compensated absences (restated) 75,777 2,139 -77,916 77,916 Total Governmental Activities Long-term Liabilities $ 9,127,074 $ 2,139 $ (1,339,999) $ 7,789,214 $ 938,311 29 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Year Ending September 30, Principal Interest Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017-2021 2,520,000 832,679 3,352,679 2022-2026 1,525,000 283,945 1,808,945 2027-2031 675,000 87,670 762,670 Total $ 7,120,000 $ 2,514,189 $ 9,634,189 Contractual obligations Year Ending September 30, Principal Interest Total 2012 $ 212,059 $ 13,158 $ 225,217 2013 67,000 5,932 72,932 2014 70,000 3,031 73,031 Total $ 349,059 $ 22,121 $ 371,180 Notes payable: Year Ending September 30, Principal Interest Total 2012 $ 69,871 $ 6,201 $ 76,072 2013 37,927 4,578 42,505 2014 37,974 3,107 41,081 2015 38,025 1,634 39,659 2016 2,085 160 2,245 2017-2018 4,327 163_ 4,490 Total $ 190,209 $ 15,843 $ 206,052 30 NOTE 6. LONG-TERM DEBT - CONTINUED The annual requirements to amortize all debts outstanding as of September 30, 2011, are as follows: Tax and revenue bonds: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED Capital Lease: Year Ending September 30, Principal Interest Total 2012 _$ 9,888 J> 399_ _$ 10,287 Total $ 9,888 $ 399 J 10,287 The assets acquired under the capital lease obligations above are included in capital assets at a cost of $50,173. Accumulated depreciation on the assets as of September 30, 2011 was $11,721. The tax revenue bonds are payable from the proceeds of ad valorem taxes levied upon all property subject to taxation within the District, without limitation as to rate or amount, and are further payable from, and secured by a lien on and pledge of the net revenue to be received from the operation of the District's waterworks and sanitary sewer system. The outstanding bonds are callable for redemption prior to maturity at the option of the District as follows: Series 1997 - All maturities from 2008 to 2011 are callable in principal increments of $5,000 on or after September 1, 2007 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2002 - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2003 - No bonds are subject to redemption prior to maturity. Series 2003 (debt issued by the entity formerly known as MUD 2) - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2005 - All maturities from 2014 to 2023 are callable in principal increments of $5,000 on or after September 1, 2013 at par plus unpaid accrued interest to the fixed date for redemptions. Contractual obligations and notes payable are liquidated from the general fund. Tax and revenue bonds are liquidated from the debt service fund. The provisions of the bond resolutions relating to debt service requirements have been met, and the cash allocated for these purposes is sufficient to meet debt service requirements for the year ended September 30, 2011. 31 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED In previous years, the District has legally defeased certain outstanding general obligation debt by placing funds into irrevocable trusts pledged to pay all future debt service payments of the refunded debt. Accordingly, a liability for the defeased debt issue is not included in the District's financial statements. As of September 30, 2011, the following outstanding bonds were legally defeased: Series Type Amount 1995 Unlimited Tax Refunding Bonds $ 2,490,000 Total $ 2,490,000 NOTE 7. PROPERTY TAXES Property taxes are levied as of October 1, on the assessed value listed as of the prior January 1, for all real and certain personal property located in the District and MUD2 (the "Districts"). The appraisal of property within the District is the responsibility of Denton Appraisal District (Appraisal District) as required by legislation passed by the Texas legislature. The Appraisal District is required under such legislation to assess all property within the Appraisal District on the basis of 100% of its appraised value and is prohibited from applying any assessment ratios. The value of property within the Appraisal District must be reviewed every five years; however, the District may, at its own expense, require annual reviews of appraised values. The Districts may challenge appraised values established by the Appraisal District through various appeals and, if necessary, legal action. Property taxes for the Districts are not limited as to rate or amount. In an election held October 7, 1975, the electorate of the Districts authorized the levy of up to $0.25 per $100 valuation per District for the operations and maintenance of the Districts. Property taxes attach as an enforceable lien on property as of January 1, following the levy date. Taxes are due by January 31, following the levy date. Property taxes are recorded as receivables when levied. Following is information regarding the 2011 tax levies: Adjusted taxable values $ 993,169,500 O & M Fire tax levy $0.11804/$ 100 1,284,669 I & S tax levy $0.07696/$ 100 763,303 Total tax levy $0.1950/$100 $ 2,047,972 32 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS 33 NOTE 8. FUND BALANCE CLASSIFICATIONS AND DEFICITS The District's authorized their Director to designate certain fund balances as assigned. Excluding unassigned fund balances, the following describes the District's fund balance classifications at September 30, 2011: Non-Spendable Fund Balances Non-Spendable Fund Balance of $7,755 for the General Fund represents assets not in spendable form. Assigned Fund Balances The District assigned $265,082 of General Fund fund balances to offset expected fiscal year 2012 budgetary deficits for general operations and the fire department. The District assigned a total of $556,175 of General Fund fund balances for the following: $21,000 for water plant equipment, $219,414 for future technology acquisitions, and $315,761 for fiscal year 2012 expected transfers to the Capital Projects Fund. Fund Balance Deficits The Capital Projects Fund has a fund balance deficit at September 30, 2011 of $302,466. In fiscal year 2012, the District intends to transfer funds from the General Fund to eliminate the deficit. NOTE 9. RISK MANAGEMENT The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; injuries to employees; employee health benefits; and other claims of various nature. Commercial insurance is purchased for the risks of loss to which the District is exposed. Any losses reported but unsettled or incurred and not reported, are believed to be insignificant to the District's basic financial statements. Additionally, the District must operate in compliance with rules and regulations mandated for public water supply systems by federal and state governments. The District is subject to compliance oversight by the Texas Commission on Environmental Quality (TCEQ). Fiscal Year 2011 TCEQ Compliance In October of 2011, the District notified TCEQ of inaccuracies in previously submitted, monthly Discharge Monitoring Reports (DMR's). The inaccuracies related to the laboratory measurement results for Carbonaceous Biochemical Oxygen Demand (CBOD). The District submitted corrected DMR's to TCEQ, but has not been formally notified by TCEQ of the resulting action, if any, that will occur due to the reported inaccuracies. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 10. SUBSEQUENT EVENTS The District has evaluated all events and transactions that occurred after September 30, 2011 up through audit report date, which is the date the financial statements were issued. The following is a subsequent for the District: On January 18, 2012, the District issued Trophy Club Municipal Utility District No. 1, Revenue Note, Series 2012 for $1,100,000 (the Note). The Note was issued to finance the expansion of two ground storage tanks. Interest accrues at 2.87% per annum and is payable each March 1st and September 1st commencing March 1, 2012. The following schedule shows amounts that this Note will add to the District's future debt service requirements: Fiscal Year Principal $ 367,000 366,000 367,000 Interest Total $ 386,556 2012 2013 2014 $ 19,556 21,037 10,533 387,037 377,533 $ 1,100,000 $ 51,126 $ 1,151,126 34 [This page is intentionally left blank.] REQUIRED SUPPLEMENTARY INFORMATION TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 GENERAL FUND BUDGETARY COMPARISON SCHEDULE (BUDGETARY BASIS) YEAR ENDED SEPTEMBER 30,2011 Variance with Final Budget Budgeted amounts Positive Original Final Actual (Negative) Revenues Water and wastewater charges $ 4,349,548 $ 4,349,548 $ 5,323,244 $ 973,696 Taxes 1,278,248 1,278,248 1,311,296 33,048 Utility fees 167,900 167,900 165,600 (2,300) Intergovernmental revenues 13,750 93,080 89,330 (3,750) Miscellaneous 37,014 38,323 80,906 42,583 Oversize meter reimbursements 50,000 50,000 70,594 20,594 Inspection and tap fees 3,000 3,000 8,560 5,560 Investment income 2,000 2,000 5,534 3,534 Total revenues 5,901,460 5,982,099 7,055,065 1,072,966 Expenditures: Water operations 2,060,851 2,060,851 2,271,490 (210,639) Fire 1,204,001 1,206,640 770,123 436,517 Wastewater operations 628,207 628,207 598,465 29,742 Manager's office 547,908 547,908 537,597 10,311 Wastewater collection system 381,658 381,658 277,775 103,883 Utility billing 237,571 237,571 207,307 30,264 Information systems 131,012 131,012 123,605 7,407 Finance 113,706 113,706 119,359 (5,653) General government 86,314 86,314 85,092 1,222 Facilities management 90,739 90,739 77,493 13,246 Directors 24,528 24,528 14,356 10,172 Human resources 6,945 6,945 868 6,077 Capital Outlay 486,565 720,544 515,884 204,660 Debt Service --240,245 (240,245) Total expenditures 6,000,005 6,236,623 5,839,660 396,963 Excess of revenues over expenditures (98,545) (254,524) 1,215,405 1,469,929 Other financing sources (uses): Transfers in 54,314 54,314 -(54,314) Transfers out (56,911) (56,911) (889,878) (832,967) Total other financing sources (uses) (2,597) (2,597) (889,878) (887,281) Net change in fund balance (101,142) (257,121) 325,527 582,648 Fund Balances - beginning of year 3,012,914 3,012,914 3,012,914 - Fund Balances - end of year $ 2,911,772 $ 2,755,793 $ 3,338,441 $ 582,648 Notes to Required Supplementary Information: The District annual budgets are approved on the budgetary basis. The Board also approves all revisions and appropriations which lapse at each fiscal year-end. 35 INDIVIDUAL SCHEDULES AND OTHER SUPPLEMENTARY INFORMATION REQUIRED BY TEXAS COMMISSION ON ENVIRONMENTAL QUALITY (TCEQ) TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 DEBT SERVICE FUND BUDGETARY COMPARISON SCHEDULE YEAR ENDED SEPTEMBER 30, 2011 Budgeted Amounts Variance with Final Budget Original Final Actual Positive (Negative) Revenues Taxes Investment income Utility fees $ 765,212 500 246,100 $ 765,212 500 246,100 $ 777,648 985 246,100 $ 12,436 485 Total revenues 1,011,812 1,011,812 1,024,733 12,921 Expenditures: Debt service Principal Interest Fees 1,115,000 379,559 3,500 1,115,000 379,559 3,500 1,115,000 379,559 2,460 1,040 Total expenditures 1,498,059 1,498,059 1,497,019 1,040 Deficiency of revenues under expenditures (486,247) (486,247) (472,286) 13,961 Other financing sources Premium on bonds Transfers in 308,000 308,000 308,000 Total other financing sources 308,000 308,000 308,000 Net change in fund balance (178,247) (178,247) (164,286) 13,961 Fund Balances - beginning of year 272,132 272,132 272,132 - Fund Balances - end of year $ 93,885 $ 93,885 $ 107,846 $ 13,961 36 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES 1. Services provided by the District: a) Retail Water b) Retail Wastewater c) Fire Protection d) Irrigation e) Participates in regional system and/or wastewater service (other than emergency interconnect) 2. Retail service providers: a) Retail rates-based on 5/8" meter: Most prevalent type of meter (if not a 5/8"): 1 inch WATER Admin Fee 12.71 Minimum Usage 0 Flat Rate Y/N No No No No No Rates per 1,000 Gallons Over Minimum $ 2.48 3.00 3.23 3.34 3.44 Usage Levels 0 to 6,000 7,000 to 12,000 13,000 to 25,000 26,000 to 50,000 51,000 + Note: Out of district water rates are double the "in-town" rate and are included in the rate order. WASTEWATER $ 12.71 No No No 2.48 0 to 6,000 3.00 7,000 to 12,000 Caps at 12,000 GOLF COURSE Subject to peak draw rates from Ft Worth water department. NOTE: all rates noted above were amended effective February 1, 2011. District employs winter averaging for wastewater usage? No 37 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 - SERVICE AND RATES - CONTINUED Total water and wastewater charges per 10,000 gallons usage (including surcharges) effective February 1, 2011 First 10,000 gallons used $ 79.18 Next 10,000 gallons used 37.84 Next 10,000 gallons used 32.85 Next 10,000 gallons used 33.40 Next 10,000 gallons used 33.40 Next 10,000 gallons used and subsequent 34.40 Maximum residential wastewater charge is for 12,000 gallons or $45.59 b) Retail service providers: number of retail water and/or wastewater* connections within the District of the fiscal year end. Provide actual numbers and single family equivalents (ESFC). Connections ESFC Active Meter Size Total Active Factor ESFC's Unmetered --1.0 - Less than 3/4" 2,513.0 2,495.0 1.0 2,495.0 1" 958.0 934.0 2.5 2,335.0 1 1/2" 18.0 17.0 5.0 85.0 2" 80.0 75.0 8.0 600.0 3" 14.0 13.0 15.0 195.0 4" 12.0 12.0 25.0 300.0 6" 3.0 3.0 50.0 150.0 8" --80.0 - 10" --115.0 - Total Water 3,598.0 3,549.0 6,160.0 Total Wastewater 3,603.0 3,554.0 1.0 3,554.0 * Number of connections relates to water service if provided. Otherwise, the number of wastewater connections should be provided. Note: "inactive" means that water and wastewater connections were made, but service is not being provided. 38 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES - CONTINUED 3. Total water consumption (in thousands) during the fiscal year: Gallons pumped into the system 1,005,000 Gallons billed to customers 927,407 Water accountability ratio 92.3% 4. Standby Fees: Does the District assess standby fees? Yes For the most recent fiscal year, FY2011: Total Total Percentage Levy Collected Collected Debt Service $ 817,317 $ 824,977 100.9% Operations and Maintenance $ 1,253,588 $ 1,265,337 100.9% Have standby fees been levied in accordance with Water Code Section 49.231, thereby constituting a lien on property? No** Standby fees are levied by the District and constitute a lien under recorded deed restrictions or covenants pursuant to Section 293.150 of Title 30 of Texas Administrative Code. 5. Location of District: Counties in which District is located: a) Denton b) Tarrant Is the District located entirely in one county? No Is the District located within a city? Partially Cities in which District is located: Town of Trophy Club Town of Westlake Is District located within a city's extra territorial jurisdiction (ETJ)? ETJ's in which District is located: Is the general membership of the Board appointed by an office outside the District? Unknown Unknown No 39 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-2 Water Operations Administrative Contribution to Trophy Club Fire Dept Wastewater Operations Capital Outlay Wastewater Collection Systems Information Systems Transfer to Debt Service Misellaneous Total Expenditures and Transfers Number of employees employed by the District: Full time Equivalents (FTEs) Part time Current Year $ 2,271,490 1,042,073 770,123 598,465 515,884 277,775 123,605 1,130,123 $ 6,729,538 29.5 None Prior Year $ 1,882,511 993,986 876,521 711,382 308,798 182,658 558,000 $ 5,513,856 32.5 None 40 GENERAL FUND EXPENDITURES AND OTHER FINANCING USES YEAR ENDED SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-3 TEMPORARY INVESTMENTS SEPTEMBER 30,2011 Identification Interest Maturity Balance End of Accrued Interest Funds Number Rate Date Year End of Year General Fund TexPool 613300002 0.2165% Demand $ 2,787,983 Paid daily Debt Service Fund TexPool 613300003 0.2165% Demand $ 107,847 Paid daily Fire Construction TexPool 613300008 0.2165% Demand $ - Paid daily 2010 GO Fire Station TexPool 613300009 0.2165% Demand $ Paid daily Total - All Funds $ 2,895,830 41 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-4 TAXES LEVIED AND RECEIVABLE YEAR ENDED SEPTEMBER 30,2011 General Fund Debt Operations Fire Total Service Total Taxes receivable beginning of year $ 2,616 $ 15,605 $ 18,221 $ 21,794 $ 40,015 2010 tax levy 87,181 1,197,488 1,284,669 763,303 2,047,972 Total to be accounted for 89,797 1,213,093 1,302,890 785,097 2,087,987 Less collections and adjustments: Current year (86,796) (1,192,694) (1,279,490) (759,932) (2,039,422) Prior years (1,145) (3,228) (4,373) ( 11,574) (15,947) Total to be accounted for (87,941) (1,195,922) (1,283,863) (771,506) (2,055,369) Taxes receivable, end of year $ 1,856 $ 17,171 $ 19,027 $ 13,591 $ 32,618 Taxes receivable by year 1996 and prior 19 108 127 454 581 1997 7 41 48 150 198 1998 7 44 51 140 191 1999 7 48 55 108 163 2000 15 73 88 266 354 2001 34 134 168 440 608 2002 362 2091 2453 3707 6160 2003 70 126 196 132 328 2004 17 145 162 210 372 2005 59 199 258 283 541 2006 169 774 943 1351 2294 2007 67 2125 2192 789 2981 2008 136 2615 2751 920 3671 2009 502 3854 4356 1270 5626 2010 385 4794 5179 3371 8550 $ 1,856 $ 17,171 $ 19,027 $ 13,591 $ 32,618 F/Y F/Y F/Y F/Y F/Y Property valuations (in 000's) 10/11 09/10 08/09 07/08 06/07 Land $ 247,335 $ 209,177 $ 186,574 $ 213,640 $ 193,906 Improvements 713,265 786,539 737,273 638,560 581,667 Personal property 73,914 80,332 71,091 94,823 65,248 Exemptions (41,345) (40,057) (34,027) (34,405) (29,607) $ 993,169 $ 1,035,991 $ 960,911 $ 912,618 $ 811,214 Tax rate per $100 valuation Operations Fire department Debt service Tax rate per $100 valuation Tax levy: Percent of taxes collected to taxes levied 0.008790 0.109250 0.076960 0.195000 0.027140 0.109140 0.068720 0.205000 $ 2,047,972 $ 2,091,414 100.36% 100.36% 0.014040 0.116020 0.114555 0.244615 $ 2,380,679 99.58% 0.010200 0.120860 0.098940 0.230000 $ 2,234,909 100.36% 0.030900 0.102700 0.146400 0.280000 $ 2,191,536 100.62% 42 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 All Bonded Debt Series Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017 460,000 207,868 667,868 2018 480,000 188,468 668,468 2019 505,000 167,838 672,838 2020 525,000 145,737 670,737 2021 550,000 122,768 672,768 2022 580,000 98,533 678,533 2023 605,000 71,463 676,463 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 7,120,000 $ 2,514,189 $ 9,634,189 43 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30, 2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2010 General Obligation Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 65,000 $ 80,733 $ 145,733 2013 65,000 78,458 143,458 2014 70,000 76,183 146,183 2015 70,000 73,733 143,733 2016 75,000 71,283 146,283 2017 80,000 68,658 148,658 2018 85,000 65,858 150,858 2019 85,000 62,883 147,883 2020 90,000 59,908 149,908 2021 95,000 56,758 151,758 2022 100,000 53,433 153,433 2023 105,000 48,433 153,433 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 2,000,000 $ 997,940 $ 2,997,940 44 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2005 Combination Tax Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 290,000 $ 68,685 $ 358,685 2013 295,000 58,535 353,535 2014 100,000 48,210 148,210 2015 105,000 44,210 149,210 2016 105,000 40,010 145,010 2017 110,000 35,810 145,810 2018 115,000 31,410 146,410 2019 120,000 26,810 146,810 2020 125,000 22,010 147,010 2021 130,000 17,010 147,010 2022 135,000 11,550 146,550 2023 140,000 5,880 145,880 $ 1,770,000 $ 410,130 $ 2,180,130 45 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2003 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 $ 55,000 $ 33,215 $ 88,215 2013 60,000 31,290 91,290 2014 60,000 29,430 89,430 2015 60,000 27,090 87,090 2016 65,000 24,750 89,750 2017 70,000 22,150 92,150 2018 70,000 19,350 89,350 2019 75,000 16,375 91,375 2020 75,000 13,187 88,187 2021 80,000 10,000 90,000 2022 85,000 6,800 91,800 2023 85,000 3,400 88,400 $ 840,000 $ 237,037 $ 1,077,037 Series 2002 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 155,000 118,667 273,667 2013 165,000 112,313 277,313 2014 170,000 105,300 275,300 2015 180,000 97,905 277,905 2016 190,000 89,895 279,895 2017 200,000 81,250 281,250 2018 210,000 71,850 281,850 2019 225,000 61,770 286,770 2020 235,000 50,632 285,632 2021 245,000 39,000 284,000 2022 260,000 26,750 286,750 2023 275,000 13,750 288,750 $ 2,510,000 $ 869,082 $ 3,379,082 46 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-6 CHANGES IN LONG-TERM BONDED DEBT YEAR ENDED SEPTEMBER 30,2011 Interest rate Date interest payable Maturity date Bonds outstanding at beginning of year Retirements of principal Bond Issue Bonds outstanding at end of fiscal year Retirements of interest Series 1997 Combination Tax 3.25-5.9% 3/1 &9/I 9/1/98 to 9/1/2011 Series 2002 Series 2003 Series 2003 Series 2005 Series 2010 Combination Combination Unlimited Combination Combination Tax Tax Tax Tax 4.00-5.50% 3/1 & 9/1 9/1/2023 Tax 3.10-4.25% 3/1 & 9/1 9/1/2023 3.25% 3/1 & 9/1 9/1/2011 2.97-4.20% 3/1 & 9/1 9/1/2023 3/1 & 9/1 9/1/2031 380,000 $ 2,660,000 $ 895,000 $ 245,000 $ 2,055,000 $ 2,000,000 (380,000) (150,000) (55,000) (245,000) (285,000) Total $ 8,235,000 (1,115,000) $ 2,510,000 $ 840,000 $ $ 1,770,000 $ 2,000,000 $ 7,120,000 18,620 $ 124,668 $ 35,278 $ 7,963 $ 78,660 $ 114,371 $ 379,560 Paying agent's name & city: All series Bank of New York Mellon P.O. Box 2320 Dallas, Texas 75221-2320 Bond Authority Amount authorized by voters Amount issued Remaining to be issued General Obligation Bonds $ 27,094.217 (23,325,000) $ 3,769,217 The general obligation bonds were authorized on October 7, 1975 Debt Service Fund cash and cash equivalents balance as of Setember 30, 2011 $ 107,847 Average annual debt service payment (principal & interest) for remaining term of debt: $ 481,709 47 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30, 2011 Amounts Percent of total revenue REVENUE AND OTHER FINANCING SOURCES 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 18.6% 26.2% 21.1% 20.3% 21.0% Water and wastewater charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 75.5% 68.8% 61.3% 74.5% 72.8% Utility Fees 165,600 80,500 515,200 --2.3% 1.4% 8.5% 0.0% 0.0% Inspection and tap fees 8,560 5,775 4,975 22,550 32,900 0.1% 0.1% 0.1% 0.5% 0.8% Interest earned 5,534 6,171 20,755 69,447 106,168 0.1% 0.1% 0.3% 1.4% 2.5% Capital lease proceeds/Contractual Obligations --330,000 49,432 -0.0% 0.0% 5.4% 1.0% 0.0% Miscellaneous and other 240,830 191,498 199,780 116,295 131,124 3.4% 3.4% 3.3% 2.4% 3.0% Total revenue and other financing sources 7.055,065 5,694.592 6,076,283 4,939,191 4,330,831 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Water operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 32.2% 33.1% 29.8% 39.2% 37.8% Administrative 1,042,073 993,986 1,297,613 905,052 835,590 14.8% 17.5% 21.4% 18.3% 19.3% Transfers out and debt service 1,130,123 558,000 383,009 --16.0% 9.8% 6.3% 0.0% 0.0% Contribution to Trophy Club Fire Dept 770,123 876.521 783,736 902,353 725,764 10.9% 15.4% 12.9% 18.3% 16.8% Wastewater operations 598,465 711,382 999,388 500,224 480,798 8.5% 12.5% 16.4% 10.1% 11.1% Capital outlay 515,884 --29,379 442,782 7.3% 0.0% 0.0% 0.6% 10.2% Wastewater collection systems 277,775 308,798 294,869 409,948 402,482 3.9% 5.4% 4.9% 8.3% 9.3% Miscellaneous ---45,457 135,121 0.0% 0.0% 0.0% 0.9% 3.1% Information systems 123,605 182,658 175,698 187,908 124,987 1.8% 3.2% 2.9% 3.8% 2.9% Total expenditures 6,729,538 5,513,856 5,745.698 4,915,113 4,785,818 95.4% 96.8% 94.6% 99.5% 110.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections $ 325.527 $ 180,736 $ 330,585 $ 24,078 $ (454,987) 2,827 4.6% 3.2% 5.4% 0.5% -10.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections 3,554 3,361 3,161 3,092 $ (454,987) 2,827 48 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30, 2011 TSI - 7 COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS • CONTINUED Amounts Percent of total revenue REVENUE 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 771,631 $ 740,420 $ 1,100,115 $ 1,302,763 $ 1,325,143 57.9% 52.9% 73.4% 96.1% 94.8% Penalties and interest 6,018 -11,885 --0.5% 0.0% 0.8% 0.0% 0.0% Transfers in 554,100 653,000 383,009 --41.6% 46.7% 25.5% 0.0% 0.0% Interest earned 985 4,848 4,105 23,326 43,456 0.1% 0.3% 0.3% 1.7% 3.1% Miscellaneous and other -1,000 -29,379 29,379 0.0% 0.1% 0.0% 2.2% 2.1% Total revenue 1,332,734 1,399,268 1,499,114 1,355,468 1,397,978 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Principal retirement 1,115,000 1,055,000 1,025,000 975,000 945,000 83.7% 75.4% 68.4% 71.9% 67.6% Interest and fiscal charges 382,019 311,570 352,194 390,565 425,838 28.7% 22.3% 23.5% 28.8% 30.5% Total expenditures 1,497,019 1,366,570 1,377,194 1,365,565 1,370,838 112.3% 97.7% 91.9% 100.7% 98.1% Excess (deficiency) of revenues over (under) expenditures (164,285) $ 32,698 $ 121,920 $ (10,097) $ 27,140 -12.3% 2.3% 8.1% -0.7% 1.9% 49 [This page is intentionally left blank.] Financial Advisory Services Provided By: SWS SOUTHWEST GROUP SECURITIES Building what you value. INVESTMENT BANKERS TAB 6 NEW ISSUE-BOOK-ENTRY-ONLY Ratings: S&P: "AA-" (See "RATINGS" herein) OFFICIAL STATEMENT Dated: February 14,2012 In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. The District has designated the Bonds as "Qualified Tax-Exempt Obligations". (See "TAX MATTERS - Qualified Tax-Exempt Obligations for Financial Institutions" herein.) $2,355,000 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 Dated Date: March 1, 2012 Due: September 1, as shown on Page ii The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") $2,355,000 Unlimited Tax Refunding Bonds, Series 2012, which are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who approved a "Pricing Certificate" which contains the final terms of sale and completed the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS DESCRIBED HEREIN. (See "INVESTMENT CONSIDERATIONS" herein.) Bond purchasers are encouraged to read this entire Official Statement prior to making an investment decision. Interest on the Bonds will accrue from March 1, 2012 (the "Dated Date") and will be payable March 1 and September 1 of each year, commencing September 1, 2012, until maturity or prior redemption, and will be calculated on the basis of a 360-day year of twelve 30-day months. The Bonds will be issued in fully registered form only, without coupons, in denominations of $5,000 or any integral multiple thereof within a stated maturity. The definitive Bonds will be issued as fully registered obligations in book- entry form only and when issued will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company ("DTC"), New York, New York. DTC will act as securities depository for the Bonds until DTC resigns or is discharged. Book-entry interests in the Bonds will be made available for purchase in principal amounts of $5,000 or any integral multiple thereof within a maturity. Purchasers of the Bonds ("Beneficial Owners") will not receive physical delivery of bonds representing their interest in the Bonds purchased. S6 long as Cede & Co. or its nominee is the registered owner of the Bonds, principal of and interest on the Bonds will be payable by the paying agent/registrar to DTC, which will be solely responsible for making such payment to the Beneficial Owners of the Bonds. The initial paying agent/registrar for the Bonds shall be The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Paying Agent"). (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) The District reserves the right to redeem, prior to maturity, in integral multiples of $5,000, those Bonds maturing on and after September 1, 2021, in whole or from time to time in part, on September 1, 2020, and on any date thereafter at a price of par plus accrued interest from the most recent interest payment date to the date fixed for redemption. (See "THE BONDS -Redemption Provisions" herein.) STATED MATURITY SCHEDULE (See Page ii) The Bonds are offered for delivery, when, as and if Issued and received by the Underwriter and subject to the approving opinion of the Attorney General of the State of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel. The legal opinion of Bond Counsel will be printed on, or will accompany the Bonds. Certain matters will be passed upon for the Underwriter by Fulbright & Jaworski LLP., Dallas, Texas, as counsel to the Underwriter. It is expected that the Bonds will be available for delivery through DTC on or about March 5, 2012. FIRSTSOUTHWEST STATED MATURITY SCHEDULE (Due September 1) Base CUSIP - 897059 (a> $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 Stated Maturity Due 9-1 Principal Amount Initial Rate (%) Initial Yield (%) CUSIP Suffix(a) 2013 $185,000 2.00 0.60 EQO 2014 190,000 2.00 0.75 ER8 2015 195,000 2.00 0.97 ES6 2016 200,000 2.50 1.10 ET4 2017 205,000 2.50 1.23 EU 1 2018 210,000 2.50 1.41 EV9 2019 225,000 2.50 1.63 EW7 2020 225,000 3.00 1.86 EX 5 2021 230,000 3.00 2.08(b) EY3 2022 240,000 3.00 2.17(b) EZO 2023 250,000 3.00 2.28(b) FA 4 (Interest to accrue from the Dated Date.) CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services, managed by Standard & Poor's Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the District, the Financial Advisor or the Underwriter is responsible for the selection or correctness of the CUSIP numbers set forth herein. Yield calculated to first call date at par, September 1, 2020. ii TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BOARD OF DIRECTORS Name James Moss Kevin Carr C. Nick Sanders William Armstrong James C. Thomas Position President Secretary/Treasurer Vice President Director Director Two-Year Term Expires, May 2012 2014 2012 2014 2014 Occupation Retired Insurance Adjuster Business Owner Retired Retired DISTRICT PERSONNEL AND ADVISORS District Manager Robert Scott Trophy Club, Texas Senior Accountant Renae Gonzales Trophy Club, Texas Attorney for the District Bob West Whitaker Chalk Swindle & Schwartz PLLC Fort Worth, Texas Financial Advisor Southwest Securities Dallas, Texas Bond Counsel McCall, Parkhurst & Horton L.L.P. Dallas, Texas Independent Auditors Lafollett & Co., PLLC Tom Bean, Texas Tax Assessor - Collector Denton County Tax Assessor-Collector Chief Appraiser Denton County, Texas Tarrant County, Texas Mr. Robert Scott District Manager Trophy Club Municipal Utility District 100 Municipal Drive Trophy Club, Texas 76262 (682) 831^610 For Additional Information Please Contact: Mr. Dan A. Almon Senior Vice President Southwest Securities, Inc. 1201 Elm StFeet, Suite 3500 Dallas, Texas 75270 (214) 859-9452 Mr. Mark McLiney Senior Vice President Southwest Securities, Inc. 4040 Broadway, Suite 220 San Antonio, Texas 78209 (210) 226-8677 iii TABLE OF CONTENTS BOARD OF DIRECTORS iii DISTRICT PERSONNEL AND ADVISORS iii TABLE OF CONTENTS iii USE OF INFORMATION IN THE OFFICIAL STATEMENT v SELECTED DATA FROM THE OFFICIAL STATEMENT vi SELECTED FINANCIAL INFORMATION vii OFFICIAL STATEMENT 1 INTRODUCTION 1 PLAN OF FINANCING 1 Purpose 1 Refunded Bonds 1 SOURCES AND USES OF FUNDS 2 THE BONDS 2 General Description 2 Authority for Issuance 2 Security for Payment 2 Payment Record 3 Flow of Funds and Investment of Funds 3 Redemption Provisions 3 Termination of Book-Entry-Only System 4 Defeasance of Outstanding Bonds 4 Paying Agent/Registrar 5 Record Date 5 Issuance of Additional Debt 5 Specific Tax Covenants 6 Additional Covenants 6 Remedies in Event of Default 6 Amendments to the Order 6 RATINGS 6 BOOK-ENTRY-ONLY SYSTEM 6 Use of Certain Terms in Other Sections of this Official Statement 8 INVESTMENT CONSIDERATIONS 8 General 8 Approval of the Bonds 8 Tax Collections and Foreclosure Remedies 9 Consolidation 9 Abolition 9 Alteration of Boundaries 9 Registered Owners' Remedies 9 Bankruptcy Limitation to Registered Owners' Rights 10 The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District 10 Continuing Compliance with Certain Covenants 10 Future Debt 11 Future and Proposed Legislation 11 THE DISTRICT 11 Creation of the District 11 Governance 11 Employees 11 General 11 Location 12 Population 12 Topography and Drainage 12 Shopping and Commercial Facilities 12 Fire Protection 12 Police Protection 12 Schools 12 Recreational Opportunities 13 Status of Development of the District 13 Public Improvement District Description 13 THE DISTRICT'S SYSTEM 14 Description of the Water System 14 Description of the Wastewater System 14 INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT 14 Current Investments 16 TAX DATA 16 District Bond Tax Rate Limitation 16 Maintenance and Operations Tax 16 Overlapping Taxes 16 TAXING PROCEDURES 16 Authority to Levy Taxes 16 Property Tax Code and County-Wide Appraisal District 16 Valuation of Property for Taxation 18 Notice and Hearing Procedures 18 District and Taxpayer Remedies 18 Levy and Collection of Taxes 18 District's Rights in the Event of Tax Delinquencies 19 TAX MATTERS 19 Opinion 19 Federal Income Tax Accounting Treatment of Original Issue Discount 20 Collateral Federal Income Tax Consequences 20 State, Local and Foreign Taxes 21 Qualified Tax-Exempt Obligations for Financial Institutions 21 CONTINUING DISCLOSURE OF INFORMATION 21 Annual Reports 21 Notice of Certain Events 22 Availability of Information from MSRB 22 Limitations and Amendments 22 Compliance with Prior Agreements 23 OTHER PERTINENT INFORMATION 23 Legal Matters 23 Registration and Qualification of Bonds for Sale 23 Litigation 23 Legal Investments and Eligibility to Secure Public Funds in Texas 23 Underwriting 24 Financial Advisor 24 Forward-Looking Statements Disclaimer 24 Concluding Statement 24 Schedule of Refunded Bonds Schedule I Financial Information of the Issuer Appendix A General Information Regarding the District Appendix B Form of Legal Opinion of Bond Counsel Appendix C The Issuer's General Purpose Audited Financial Statements for the Year Ended September 30, 2011 Appendix D The cover page, subsequent pages hereof and the schedules and appendices attached hereto, are part of this Official Statement. iv USE OF INFORMATION IN THE OFFICIAL STATEMENT This Official Statement, which includes the cover page, Schedule I and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any,p.ersnn to whom it is unlawful to make such offer, solicitation or sater No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon. The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchaser of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. Certain information set forth herein has been provided by sources other than the District that the District believes to be reliable, but the District makes no representation as to the accuracy of such information. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of the Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described herein since the date hereof. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the District's undertaking to provide certain information on a continuingbasis. The Underwriter has provided the following statement for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. NONE OF THE DISTRICT, ITS FINANCIAL ADVISOR OR THE_i»JDERWRITER MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED" IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY ("DTC") OR ITS BOOK-ENTRY-ONLY SYSTEM, AS SUCH INFORMATION HAS BEEN FURNISHED BY DTC. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH.TFfE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER-«^Y OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THIS OFFICIAL STATEMENT CONTAINS "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS- WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD- LOOKING STATEMENTS. (See "OTHER PERTINENT INFORMATION-Forward Looking Statements Disclaimer" herein.) [The remainder of this page is intentionally left blank.] v SELECTED DATA FROM THE OFFICIAL STATEMENT The following material is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. The Issuer The Bonds The Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") is a political subdivision of the State of Texas located in Denton and Tarrant Counties, Texas. The District was created as a municipal utility district pursuant to Chapter 54 of the Texas Water Code and is a conservation and reclamation district in accordance with Article XVI, Section 59 of the Texas Water Code. The District has also adopted a fire protection plan under Section 50.055 of the Texas Water Code, now codified as Subchapter L of Chapter 49 of the Texas Water Code, pursuant to the Order of the Texas Water Commission of August 22, 1983. In July of 2009, documentation was submitted to the Texas Commission on Environmental Quality ("TCEQ") regarding the consolidation of Trophy Club Municipal Utility District Nos. 1 and 2 pursuant to a May 9, 2009 election. (See "THE DISTRICT" and "APPENDIX B - GENERAL INFORMATION REGARDING THE DISTRICT" herein.) The Bonds are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who approved a "Pricing Certificate" which contains the final terms of sale and completed the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Authority for Issuance" herein.) Security for Payment The Bonds, when issued, will constitute direct and general obligations of the District, payable from the proceeds of an annual ad valorem tax levied against all taxable property located therein, without limitation as to rate or amount. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivisions or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. (See "THE BONDS -Security for Payment" herein.) Paying Agent/Registrar Redemption Provisions Tax Matters The initial Paying Agent/Registrar for the Bonds is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas Bonds maturing on and after September 1, 2021 are subject to redemption in whole or from time to time in part at the option of the District on September 1, 2020, and on any date thereafter, at par plus accrued interest from the most recent interest payment date to the date of redemption. In the opinion of Bond Counsel, the interest on the Bonds will be excludable from gross income of the owners thereof for purposes of federal income taxation under existing law subject to matters discussed herein under "TAX MATTERS", including the alternative minimum tax on corporations. (See "TAX MATTERS" and APPENDIX C - "FORM OF LEGAL OPINION OF BOND COUNSEL" herein.) Use of Proceeds Ratings Book-Entry-Only System Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (see Schedule 1 attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) The District received a rating on the Bonds of "AA-" from Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P"). An explanation of the significance of such rating may be obtained from the company furnishing the rating. (See "RATINGS" herein.) The Issuer intends to utilize the Book-Entry-Only System of The Depository Trust Company, New York, New York relating to the method and timing of payment and the method of transfer relating to the Bonds. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Future Bond Issues The District has no plans to issue additional bonds within the next twelve months. "INVESTMENT CONSIDERATIONS - Future Debt" herein. See Payment Record Delivery Legality The Issuer has never defaulted in the timely payment of principal of or interest on its general obligation indebtedness. When issued, anticipated on or about March 5,2012. Delivery of the Bonds is subject to the approval by the Attorney General of the State of Texas and the rendering of an opinion as to legality McCall, Parkhurst & Horton L.L.P., Bond Counsel, Dallas, Texas. vi SELECTED FINANCIAL INFORMATION Total 2011 Certified Net Taxable Assessed Valuation (ARB Approved) Gross Debt Principal Outstanding (after issuance of the Bonds) Ratio of Gross Debt Principal to 2011 Taxable Assessed Valuation Debt Service Fund Balance as of December 31, 2011 (audited) 2011-2012 Tax Rate Operations Fire Protection Debt Service Average Percentage of Total Tax Collections - Tax Years 2006-2010 Projected Average Annual Debt Service Requirement (2012-2031) Of the Bonds and the Outstanding Bonds ("Projected Average Requirement") Tax Rate Required to Pay Projected Average Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 99% Collections Projected Maximum Annual Debt Service Requirement (2012) of the Bonds and The Outstanding Bonds ("Projected Maximum Requirement") Tax Rate Required to Pay Projected Maximum Annual Requirement Based Upon Current Net Taxable Assessed Valuations at 100% collections Estimated 2011 population $0.00989 0.10925 0.05586 $954,645,475 (a) $7,120,000 0.75% $316,299.71 $0.17500 100.40% (b) $463,404 $0.04903/$100 A.V. $840,519 $0.08893/$100 A.V. 7,600 ^ 2011 Net Taxable Valuation does not include property under protest or values for incomplete accounts. (See "TAXING PROCEDURES" herein.) <b> Historical tax collection information for Tax Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2). vii [This page is intentionally left blank.] OFFICIAL STATEMENT relating to $2,355,000 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (A Political Subdivision of the State of Texas Located in Denton and Tarrant Counties, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2012 INTRODUCTION This Official Statement provides certain information in connection with the issuance by the Trophy Club Municipal Utility District No. 1 (the "District" or "Issuer") of its $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are being issued pursuant to the terms and provisions of an order (the "Bond Order") of the Board of Directors of the District (the "Board") and in accordance with the Constitution and general laws of the State of Texas (the "State"), including particularly Chapter 1207, Texas Government Code, as amended ("Chapter 1207"). In the Bond Order, the District delegated pricing of the Bonds and certain other matters to a "Pricing Officer" who approved a "Pricing Certificate" which contains the final terms of sale and completed the sale of the Bonds (the Bond Order and the Pricing Certificate are jointly referred to herein as the "Order"). (See "THE BONDS - Security for Payment" herein.) Unless otherwise indicated, capitalized terms used in this Official Statement have the same meaning assigned to such terms in the Order. Included in this Official Statement are descriptions of the Bonds, the Order, and certain information about the District and its finances. ALL DESCRIPTIONS OF DOCUMENTS CONTAINED HEREIN ARE SUMMARIES ONLY AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO EACH SUCH DOCUMENT. Copies of such documents may be obtained from the District or Financial Advisor. PLAN OF FINANCING Purpose Proceeds from the sale of the Bonds are being used to (i) refund for debt service savings the District's outstanding Unlimited Tax Bonds, Series 2002 (the "Refunded Bonds") (see "Schedule I - Schedule Of Refunded Bonds" attached hereto) and (ii) to pay the costs related to the issuance of the Bonds. Refunded Bonds A description and identification of the Refunded Bonds appears in Schedule I attached hereto. The Refunded Bonds, and interest due thereon, are to be paid on September 1, 2012 (the "Redemption Date"), from funds to be deposited with The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Escrow Agent") or its successor. The Order approves and authorizes the execution of an escrow agreement (the "Escrow Agreement") between the District and the Escrow Agent. The Order provides that, from the proceeds of the sale of the Bonds received from the Underwriter, the District will deposit the amount necessary to accomplish the discharge and final payment of tfre;Refunded Bonds on the Redemption Date. Such funds will be held uninvested by the Escrow Agent pending their disbursement to redeem the Refunded Bonds on the Redemption Date. The Escrow Agent, as the paying agent for the Refunded Bonds, will determine and certify at the time of delivery of the Bonds that the amounts deposited to the Escrow Fund will equal an amount sufficient to pay, on the scheduled Redemption Date, the principal of and interest on the Refunded Bonds. Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of principal of and interest on the Refunded Obligations and amounts therein will not be available to pay the Bonds. By deposit of the funds with the Escrow Agent pursuant to the Escrow Agreement, the District will have effected the defeasance of all of the Refunded Bonds in accordance with Texas law. As a result of such defeasance, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the funds held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding obligations of the District payable from taxes nor for the purpose of applying any limitation on the issuance of debt, and the obligation of the District to make payments in support of the debt service on the Refunded Bonds will be extinguished. 1 SOURCES AND USES OF FUNDS The proceeds from the sale of the Bonds will be applied approximately as follows: Sources of Funds Par Amount of Bonds $2,355,000.00 Accrued Interest on the Bonds 675.00 Original Issue Premium 136.075.20 Total Sources of Funds $2.491.750.20 Uses of Funds Deposit to Escrow Fund $2,411,156.25 Cost of Issuance 55,000.00 Underwriter's Discount 20,817.50 Accrued Interest Deposit to Debt Service Fund 675.00 Additional Proceeds Deposit to the Debt Service Fund 4.101.45 Total Uses of Funds $2.491.750.20 THE BONDS General Description The Bonds will be issued in fully registered form in principal denominations of $5,000 or any integral multiple thereof within a stated maturity. The Bonds shall bear interest from the March 1, 2012 on the unpaid principal amounts, and the amount of interest to be paid each payment period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest on the Bonds will be payable on March 1 and September 1 of each year commencing September 1, 2012, until maturity or prior redemption. Principal of the Bonds is payable at the designated offices of the Paying Agent/Registrar, initially The Bank of New York Mellon Trust Company, N.A., Dallas, Texas; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Bonds, all payments will be made as described under "BOOK-ENTRY-ONLY SYSTEM" herein. Interest on the Bonds shall be paid to the registered owners whose names appear on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (as hereinafter defined) and shall be paid by the Paying Agent/Registrar (i) by check sent United States Mail, first class postage prepaid, to the address of the registered owner recorded in the Security Register or (ii) by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for any payment on the Bonds shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office of the Paying Agent/Registrar is located are authorized to be closed, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. Authority for Issuance The Bonds are issued by the District pursuant to the terms and provisions of the Order and the Constitution and general laws of the State, particularly Chapter 1207. Security for Payment The Bonds will constitute valid and legally binding direct obligations of the District payable from the proceeds of a continuing direct annual ad valorem tax levied by the District against all taxable property located therein, without legal limit as to rate or amount. The Order irrevocably pledges such ad valorem taxes to the payment of the principal of and interest on the Bonds while the same remain outstanding. Neither the State of Texas, Denton or Tarrant Counties, Texas nor any political subdivision or municipality, other than the District shall be obligated to pay the principal of or interest on the Bonds. Neither the faith and credit nor the taxing power of the State of Texas or Denton or Tarrant Counties, Texas or any political subdivision or municipality thereof, other than the District, is pledged to the payment of the principal of or interest on or the redemption price of the Bonds. Tax Pledge: The Board covenants in the Order that, while any of the Bonds are outstanding and the District is in existence, it will levy and assess a continuing ad valorem tax upon each $100 valuation of taxable property within the District at a rate from year to year sufficient, full allowance being made for anticipated delinquencies, together with revenues and receipts from other sources which are legally available for such purposes, to pay interest on the Bonds as it becomes due, to provide for the payment of principal of the Bonds when due or the redemption price at any earlier redemption date, to pay when due any other contractual obligations of the District payable in whole or in part from taxes, and to pay the expenses of assessing and collecting such tax. The Board additionally covenants in the Order to timely assess and collect such tax. The net proceeds from taxes levied to pay debt service on the Bonds are required to be placed in a special account of the District designated as the "Debt Service Fund" for the Bonds. 2 Abolition: Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Consolidation: A district (such as the District) has the legal authority to consolidate with other municipal utility districts and in connection therewith, to provide for the consolidation of its assets, such as cash and the utility system, with the water and wastewater systems of districts with which it is consolidating as well as its liabilities (which would include the Bonds). The District is the resulting entity from a consolidation in May 2009 of Trophy Club Municipal Utility District No. 1 and Trophy Club Municipal Utility District No. 2 (see "THE DISTRICT"). Payment Record The District has never defaulted on the timely payment of principal of and interest on its general obligation indebtedness. Flow of Funds and Investment of Funds The Bond Order creates a Debt Service Fund. The Debt Service Fund shall be kept separate and apart from all other funds of the District. Any cash balance in the Debt Service Fund must be continuously secured, to the extent that the United States or an instrumentality of the United States does not insure the cash balance, by a valid pledge to the District of securities eligible under the laws of Texas to secure the funds of municipal utility districts having an aggregate market value, exclusive of accrued interest, at all times equal to the cash balance in the fund to which such securities are pledged. The Bond Order establishes the Debt Service Fund to be used to pay principal and interest on the Bonds. The Bond Order requires that the District deposit to the credit of the Debt Service Fund (i) from the delivery of the Bonds to the initial purchaser, the amount received from proceeds of the Bonds representing accrued interest, (ii) District ad valorem taxes (and penalties and interest thereon) levied to pay debt service requirements on the Bonds, and (iii) such other funds as the Board shall, at its option, deem advisable. The Bond Order requires that the Debt Service Fund be applied solely to provide for the payment of the principal or redemption price of and interest on the Bonds when due, and to pay fees to the Paying Agent when due. Redemption Provisions Optional Redemption: The District reserves the right, at its option, to redeem the Bonds maturing on and after September 1, 2021 on September 1, 2020, or any date thereafter, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof (and, if within a stated maturity, selected at random and by lot by the Paying Agent/Registrar), at the redemption price of par plus accrued interest to the date fixed for redemption. Not less than thirty (30) days prior to a redemption date for the Bonds, the District shall cause a notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owners of each Bond or a portion thereof to be redeemed at its address as it appeared on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing of such notice. With respect to any optional redemption of the Bonds, unless certain prerequisites to such redemption required by the Order have been met and money sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed will have^en received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice will state that said redemption may, at the option of the District, be conditional upon the satisfaction of such prerequisites and receipt of such money by the Paying Agent/Registrar on or prior to the date fixed for such redemption or upon any prerequisite set forth in such notice of redemption. If a conditional notice of redemption is given and such prerequisites to the redemption are not fulfilled, such notice will be of no force and effect, the District will not redeem such Bonds, and the Paying Agent/Registrar will give notice in the manner in which the notice of redemption was given, to the effect that such Bonds have not been redeemed. ANY NOTICE OF REDEMPTION SO MAILED TO THE REGISTERED OWNERS WILL BE DEEMED TO HAVE BEEN DULY GIVEN IRRESPECTIVE OF WHETHER RECEIVED BY ANY HOLDER OF THE BONDS, AND, SUBJECT TO PROVISION FOR PAYMENT OF THE REDEMPTION PRICE HAVING BEEN MADE, AND ANY PRECONDITIONS STATED IN THE NOTICE OF REDEMPTION HAVING BEEN SATISFIED INTEREST ON THE REDEEMED BONDS SHALL CEASE TO ACCRUE FROM AND AFTER SUCH REDEMPTION DATE NOTWITHSTANDING THAT A BOND HAS NOT BEEN PRESENTED FOR PAYMENT. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the Bonds or portion thereof which are to be redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. 3 The Paying Agent/Registrar and the Issuer, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Bonds or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the Beneficial Owner, will not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the Issuer will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the Beneficial Owners. Any such selection of Bonds to be redeemed will not be governed by the Order and will not be conducted by the Issuer or the Paying Agent/Registrar. Neither the Issuer nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or Beneficial Owners of the selection of portions of the Bonds for redemption. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Termination of Book-Entry-Only System The District is initially utilizing the book-entry-only system of the DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) In the event that the Book-Entry-Only System is discontinued by DTC or the District, the following provisions will be applicable to the Bonds. Payment: Principal of the Bonds will be payable at maturity or upon earlier redemption to the registered owners as shown by the registration books maintained by the Paying Agent upon presentation and surrender of the Bonds to the Paying Agent at the designated office for payment of the Paying Agent/Registrar in Dallas, Texas (the "Designated Payment/Transfer Office"). Interest on the Bonds will be payable by check or draft, dated as of the applicable interest payment date, sent by the Paying Agent by United States mail, first class, postage prepaid, to the registered owners at their respective addresses shown on such records, or by such other method acceptable to the Paying Agent requested by registered owner at the risk and expense of the registered owner. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, legal holiday or day on which banking institutions in the city where the Designated Payment/Transfer Office of the Paying Agent is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not a Saturday, Sunday, legal holiday or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the original date payment was due. Initially, the only registered owner of the Bonds will be CEDE & CO. as nominee of DTC. (See "BOOK-ENTRY-ONLY SYSTEM" herein.) Registration: The Bonds may be transferred and re-registered on the registration books of the Paying Agent only upon presentation and surrender thereof to the Paying Agent/Registrar at the Designated Payment/Transfer Office. A Bond also may be exchanged for a Bond or Bonds of like maturity and interest and having a like aggregate principal amount upon presentation and surrender at the Designated Payment/Transfer Office. All Bonds surrendered for transfer or exchange must be endorsed for assignment by the execution by the registered owner or his duly authorized agent of an assignment form on the Bonds or other instruction of transfer acceptable to the Paying Agent. Transfer and exchange of Bonds will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such transfer or exchange. A new Bond or Bonds, in lieu of the Bond being transferred or exchanged, will be delivered by the Paying Agent/Registrar to the registered owner, at the Designated Payment/Transfer Office of the Paying Agent/Registrar or by United States mail, first-class, postage prepaid. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the denominations of $5,000 or any integral multiple thereof. (See "BOOK-ENTRY-ONLY SYSTEM" herein for a description of the system to be initially utilized in regard to ownership and transferability of the Bonds.) Limitations on Transfer of Bonds: Neither the District nor the Paying Agent shall be required to make any transfer, conversion or exchange to an assignee of the registered owner of the Bonds (i) during the period commencing on the close of business on the 15th calendar day of the month preceding each interest payment date (the "Record Date") and ending with the opening of business on the next following principal or interest payment date or (ii) with respect to any Bond called for redemption, in whole or in part, within forty- five (45) days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. Replacement Bonds: If a Bond is mutilated, the Paying Agent will provide a replacement Bond in exchange for the mutilated bond. If a Bond is destroyed, lost or stolen, the Paying Agent will provide a replacement Bond upon (i) the filing by the registered owner with the Paying Agent of evidence satisfactory to the Paying Agent of the destruction, loss or theft of the Bond and the authenticity of he registered owner's ownership and (ii) the furnishing to the Paying Agent of indemnification in an amount satisfactory to hold the District and the Paying Agent harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Bond must be borne by the registered owner. The provisions of the Order relating to the replacement Bonds are exclusive and the extent lawful, preclude all other rights and remedies with respect to the replacement and payment of mutilated, destroyed, lost or stolen Bonds. Defeasance of Outstanding Bonds The Order provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts 4 and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The Order provides that "Defeasance Securities" means (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent and (4) any other then authorized securities or obligations under applicable Texas state law that may be used to defease obligation such as the Bonds. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds. Because the Order does not contractually limit such investments, registered owners will be deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under State law. There is no assurance that any particular rating for U.S. Treasury securities used as Government Securities or the rating for any other Government Security will be maintained at any particular rating category. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities for the Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the Bonds for redemption is not extinguished if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorize. Paying Agent/Registrar Principal of and semiannual interest on the Bonds will be paid by The Bank of New York Mellon Trust Company, N.A., Dallas, Texas, the initial Paying Agent/Registrar (the "Paying Agent"). The Paying Agent must be a bank, trust company, financial institution or other entity duly qualified and equally authorized to serve and perform the duties as paying agent and registrar for the Bonds. Provision is made in the Order for the District to replace the Paying Agent by a resolution of the District giving notice to the Paying Agent of the termination of the appointment, stating the effective date of the termination and appointing a successor Paying Agent. If the Paying Agent is replaced by the District, the new Paying Agent shall be required to accept the previous Paying Agent's records and act in the same capacity as the previous Paying Agent. Any successor paying agent/registrar selected by the District shall be subject to the same qualification requirements as the Paying Agent. The successor paying agent/registrar, if any, shall be determined by the Board of Directors and written notice thereof, specifying the name and address of such successor paying agent/registrar will be sent by the District or the successor paying agent/registrar to each Registered Owner by first-class mail, postage prepaid. Record Date The record date for payment of the interest on Bonds on any regularly scheduled interest payment date is defined as the fifteenth day of the month preceding such interest payment date. Issuance of Additional Debt The District may issue bonds necessary to construct waterworks and sewer system improvements and facilities for which the District was created and to provide fire protection to the District, with the approval of the District's voters. Following the issuance of the Bonds, $5,769,217 unlimited tax bonds authorized by the District's voters will remain unissued. The District has no plans to issue additional general obligation debt within the next twelve months. In addition, voters may authorize the issuance of additional bonds or other contractual obligations secured by ad valorem taxes. Neither Texas law nor the Order imposes a limitation on the amount of additional debt which may be issued by the District. Any additional debt issued by the District may dilute the security of the Bonds. (See "INVESTMENT CONSIDERATIONS" herein.) The District may also issue bonds secured by revenues of the water and sewer system or other revenues of the District (other than ad valorem tax revenues ) without voter approval. 5 Specific Tax Covenants In the Order the District has covenanted with respect to, among other matters, the use of the proceeds of the Bonds and the property re-financed therewith by persons other than state or local governmental units, and the manner in which the proceeds of the Bonds are to be invested. The District may cease to comply with any such covenant if it has received a written opinion of a nationally recognized bond counsel to the effect that failure to comply with such covenant will not adversely affect the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. Additional Covenants The District has additionally covenanted in the Order that it will keep accurate records and accounts and employ an independent certified public accountant to audit and report on its financial affairs at the close of each fiscal year, such audits to be in accordance with applicable law, rules and regulations and open to inspection in the office of the District. Remedies in Event of Default The Order provides that, in addition to all other rights and remedies of any owner of Bonds provided by the laws of the State of Texas, in the event the District defaults in the observance or performance of any covenant in the Order including payment when due of the principal of and interest on the Bonds, any Bond owner may apply for a writ of mandamus from a court of competent jurisdiction requiring the Board of Directors or other officers of the District to observe or perform such covenants. The Order provides no additional remedies to a Bond owner. Specifically, the Order does not provide for an appointment of a trustee to protect and enforce the interests of the Bond owners or for the acceleration of maturity of the Bonds upon the occurrence of a default in the District's obligations. Consequently, the remedy of mandamus is a remedy, which may have to be enforced from year to year by the Bond owners (See "INVESTMENT CONSIDERATIONS - Registered Owners' Remedies".). Under Texas law, no judgment obtained against the District may be enforced by execution of a levy against the District's public purpose property. The Bond owners themselves cannot foreclose on property within the District or sell property within the District in order to pay principal of or interest on the Bonds. In addition, the enforceability of the rights and remedies of the Bond owners may be limited by federal bankruptcy laws or other similar laws affecting the rights of creditors of political subdivisions. (See "INVESTMENT CONSIDERATIONS - Bankruptcy Limitation to Registered Owners' Rights".) The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified to the customary rights of debtors relative to their creditors Amendments to the Order The District may without the consent of or notice to any Bond owners amend the Order in any manner not detrimental to the interest of the Bond owners, including the curing of an ambiguity, inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the owners of a majority in principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order, except that, without the consent of the owners of all of the Bonds affected, no such amendment, addition, or rescission may (1) change the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, change the place or places at, or the coin or currency in which, any Bond or the interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) affect the right of the owners of less than all of the Bonds outstanding, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission. In addition, a state, consistent with federal law, may in the exercise of its police powers make such modifications in the terms and conditions of contractual covenants relating to the payment of indebtedness of its political subdivisions as are reasonable and necessary for attainment of an important public purpose. RATINGS The District received a rating on the Bonds of "AA-" from Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P"). An explanation of the significance of such rating may be obtained from the company furnishing the rating. The rating reflects only the respective view of such companies, and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by any such rating company, if, in the judgment of such company circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Bonds. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by the Depository Trust Company while the Bonds are registered in its nominee's name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District and the Underwriter believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. 6 The District and the Underwriter cannot and do not give any assurance? the (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participant, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will sa/ve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of each maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation", within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of certificated securities. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC is rated "AA-" by Standard & Poor's. The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of Bonds ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Bonds representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Issuer or the Paying Agent/Registrar, on the payable date in accordance with their 7 respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of the Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Issuer or the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered to DTC Participants or the Beneficial Owners, as the case may be. The Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered. (See "THE BONDS - Termination of Book-Entry-Only System" herein.) The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Issuer and Underwriter believe to be reliable, but the Issuer and the Underwriter take no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry- Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. INVESTMENT CONSIDERATIONS General The Bonds are obligations of the District and are not obligations of the Town of Trophy Club, State of Texas, Denton County, Tarrant County or any other political subdivision except the District. The Bonds are payable from a continuing, direct, annual ad valorem tax, without legal limitations as to rate or amount, on all taxable property within the District. (See "THE BONDS - Security for Payment" herein.) The investment quality of the Bonds depends both on the ability of the District to collect from the property owners all taxes levied against their property or, in the event of foreclosure, the value of the taxable property with respect to taxes levied by the District and by other taxing authorities. Approval of the Bonds The Attorney General of Texas must approve the legality of the Bonds prior to their delivery. The Attorney General of Texas does not pass upon or guarantee the quality of the Bonds as an investment, nor does he pass upon the adequacy or accuracy of the information contained in this Official Statement. Factors Affecting Taxable Values and Tax Payments Economic Factors and Interest Rates: A substantial percentage of the taxable value of the District results from the current market value of single-family residences and developed lots. The market value of such homes and lots is related to general economic conditions affecting the demand for and taxable value of residences. Demand for lots and residential dwellings can be significantly affected by factors such as interest rates, credit availability, construction costs, energy availability and the prosperity and demographic characteristics of the urban center toward which the marketing of lots is directed. Decreased levels of construction activity, which has been experienced in the District for the last several years, tend to restrict the growth of property values in the District or could adversely impact existing values. Interest rates and the availability of mortgage and development funding have a direct impact on the construction activity, particularly short-term interest rates at which developers and homebuilders are able to obtain financing for development and construction costs. Interest rate levels may affect the ability of a landowner with undeveloped property to undertake and complete development activities within the District. Because of the numerous and changing factors affecting the availability of funds, the District is unable to assess the future availability of such funds for continued development and construction within the District. In addition, the success of development within the District and growth of District's taxable property values are, to a great extent, a function of the Dallas/Fort Worth metropolitan and regional economics. Impact on District Tax Rates: Assuming no further development, the value of the land and improvements currently within the District will be the major determinant of the ability or willingness of District property owners to pay their taxes. The 2011 certified net taxable assessed valuation (ARB Approved) of the District (see page vii "SELECTED FINANCIAL INFORMATION") is $954,645,475. After issuance of the Bonds the projected maximum annual debt service requirement will be $840,519 (2012) 8 and the projected average annual debt service requirement will be $463,404 (2012 through 2031, inclusive). Assuming no increase or decrease from the 2011 assessed valuation and no use of funds on hand, a tax rate of $0.08893 per $100 assessed valuation at a 99% collection rate would be necessary to pay the projected maximum annual debt service requirement of $840,519 and a tax rate of $0.04903 per $100 assessed valuation-si a 99% collection rate would be necessary to pay the projected average annual debt service requirement of $463,404. After a transfer of $308,000, representing Fire Department rental income, the District's 2011 debt service tax rate is $0.05586 per $100 assessed valuation. (See "APPENDIX A - TABLES 4 and 5" herein. Tax Collections and Foreclosure Remedies The District's ability to make debt service payments may be adversely affected by its inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the District constitutes a lien in favor of the District on a parity with the liens of all other state and local taxing authorities on the property against which taxes are levied, and such lien may be enforced by foreclosure. The District's ability to collect ad valorem taxes through such foreclosure may be impaired by (a) cumbersome, time-consuming and expensive collection procedures, (b) a bankruptcy court's stay of tax collection procedure against a taxpayer, or (c) market conditions limiting the proceeds from a foreclosure sale of taxable property. While the District has a lien on taxable property within the District for taxes levied against such property, such lien can be foreclosed only in a judicial proceeding. Because ownership of the land within the District is highly fragmented among a number of taxpayers, attorney's fees, and other costs of collecting any such taxpayer's delinquencies could substantially reduce the net proceeds to the District from a tax foreclosure sale. Finally, any bankruptcy court with jurisdiction over the bankruptcy proceedings initiated by or against a taxpayer within the District pursuant to the Federal Bankruptcy Code could stay any attempt by the District to collect delinquent ad valorem taxes against such taxpayer. Consolidation A district (such as the District) has the legal authority to consolidate with other municipal utility districts and, in connection therewith, to provide for the consolidation of its assets, such as its water and wastewater systems with the assets of the district(s) with which it is consolidating, as well as its liabilities (which would include the Bonds and other outstanding obligations of the District). The District is the resulting entity from a consolidation in May 2009 of Prior MUD 1 and Prior MUD 2 (see "THE DISTRICT"). No representation is made that the District will consolidate again in the future with any other district. Abolition Under Texas law, If a district is located wholly in two or more municipalities and in an unincorporated area, the district may be abolished by agreement among the district and all of the municipalities in which parts of the district are located. The abolition agreement must provide for the distribution of assets and liabilities (including the Bonds) of the abolished district. The agreement must also provide for the distribution among one or more of the municipalities the pro rata assets and liabilities located in the unincorporated area and must provide for service to customers in unincorporated areas in the service area of the abolished district. The municipality that provides the service in the unincorporated area may charge its usual and customary fees and assessments to the customers in that area. No representation is made concerning the likelihood of abolition or the ability of the municipalities which contain parts of the District to make debt service payments on the Bonds should abolition occur. Alteration of Boundaries In certain circumstances, under Texas law the District may alter its boundaries to: 1) upon satisfying certain conditions, annex additional territory; and 2) exclude land subject to taxation within the District that is not served by District facilities if the District simultaneously annexes land of equal acreage and value that may be practicably served by District facilities. No representation is made concerning the likelihood that the District would effect any change in its boundaries. Registered Owners' Remedies If the District defaults in the payment of principal, interest or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Order, or defaults in the observation or performance of any other covenants, conditions or obligations set forth in the Order, the registered owners may seek a writ of mandamus to compel District officials to carry out their legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the covenants contained in the Bonds or in the Order and the District's obligations are not uncertain or disputed. The remedy of mandamus is controlled by equitable principles and rests with the discretion of the court. The issuance of a writ of mandamus is controlled by equitable principles and rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Order does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court has ruled in Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006) that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. 9 Therefore, bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. Bankruptcy Limitation to Registered Owners' Rights The enforceability of the rights and remedies of Bondholders may be limited by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions such as the District. Texas law requires a municipal utility district such as the District to obtain the approval of the TCEQ as a condition to seeking relief under the Federal Bankruptcy Code. If a petitioning district were allowed to proceed voluntarily under Chapter 9 of the Federal Bankruptcy Code, it could file a plan for an adjustment of its debts. If such a plan were confirmed by the bankruptcy court, it could, among other things, affect Registered Owners by reducing or eliminating the amount of indebtedness, deferring or rearranging the debt service schedule, reducing or eliminating the interest rate, modifying or abrogating collateral or security arrangements, substituting (in whole or in part) other securities, and otherwise compromising and modifying the rights and remedies of the Registered Owner's claim against a district. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9 and such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Bonds are qualified with respect to the customary rights of debtors relative to their creditors. A district may not be forced into bankruptcy involuntarily. The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District The "Financial Institutions Reform, Recovery and Enforcement Act of 1989" ("FIRREA"), enacted on August 9, 1989, contains certain provisions which affect the time for protesting property valuations, the fixing of tax liens, and the collection of penalties and interest on delinquent taxes on real property owned by the Federal Deposit Insurance Corporation ("FDIC") when the FDIC is acting as the conservator or receiver of an insolvent financial institution. Under FIRREA real property held by the FDIC is still subject to ad valorem taxation, but such act states (i) that no real property of the FDIC shall be subject to foreclosure or sale without the consent of the FDIC and no involuntary liens shall attach to such property, (ii) the FDIC shall not be liable for any penalties or fines, including those arising from the failure to pay any real or personal property tax when due and (iii) notwithstanding failure of a person to challenge an appraisal in accordance with state law, such value shall be determined as of the period for which such tax is imposed. There has been no definitive judicial determination of the validity of the provisions of FIRREA or how they are to be construed and reconciled with respect to conflicting state laws. However, certain federal court decisions have held that the FDIC is not liable for statutory penalties and interest authorized by State property tax law, and that although a lien for taxes may exist against real property, such lien may not be foreclosed without the consent of the FDIC, and no liens for penalties, fines, interest, attorneys fees, costs of abstract and research fees exist against the real property for the failure of the FDIC or a prior property owner to pay ad valorem taxes when due. It is also not known whether the FDIC will attempt to claim the FIRREA exemptions as to the time for contesting valuations and tax assessments made prior to and after the enactment of FIRREA. Accordingly, to the extent that the FIRREA provisions are valid and applicable to any property in the District, and to the extent that the FDIC attempts to enforce the same, these provisions may affect the timeliness of collection of taxes on property, if any, owned by the FDIC in the District, and may prevent the collection of penalties and interest on such taxes. Continuing Compliance with Certain Covenants The Order contains covenants by the District intended to preserve the exclusion from gross income of interest on the Bonds from the gross income of the owners thereof for federal income tax purposes. (See "THE BONDS - Specific Tax Covenants " herein.) Failure by the District to comply with such covenants on a continuous basis prior to maturity of the Bonds could result in interest on the Bonds becoming taxable retroactively to the date of original issuance. (See "TAX MATTERS " herein.) 10 Future Debt The District has reserved in the Order the right to issue the remaining $5,769,217 authorized but unissued unlimited tax bonds and such additional bonds as may hereafter be approved by both the Board of Directors and voters of the District. All of the remaining unlimited tax bonds, which have heretofore been authorized by the voters of the District may be issued by the District from time to time for qualified purposes, as determined by the Board of Directors of the District, subject to the approval of the Attorney General of the State of Texas and the TCEQ. The District has no plans to issue additional debt within the next twelve months. Future and Proposed Legislation Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the Bonds under Federal or state law and could affect the market price or marketability of the Bonds. Any such proposal could limit the value of certain deductions and exclusions, including the exclusion for tax-exempt interest. The likelihood of any such proposal being enacted cannot be predicted. Prospective purchasers of the Bonds should consult their own tax advisors regarding the foregoing matters. THE DISTRICT Creation of the District The District was created by the consolidation of two prior municipal utility districts, being Trophy Club Municipal Utility District No. 1 ("Prior MUD 1") and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2" and collectively with Prior MUD 1, the "Prior MUDs"). Prior MUD 1 was created as Denton County Municipal Utility District No. 1 by order of the Texas Water Rights Commission (the "Commission") on March 4, 1975 for the purpose of providing water and sewer facilities and other authorized services to the area within the territory of Prior MUD 1. The name of Prior MUD 1 was changed to Trophy Club Municipal Utility District No. 1 on April 1, 1983. Prior MUD 2 was created as a result of the consolidation of Denton County Municipal Utility District No. 2 and Denton County Municipal Utility District No. 3, which were created by the Texas Commission on Environmental Quality ("TCEQ") for the purpose of providing water, sewer and drainage facilities and other authorized services to the area. The creation of Prior MUD 2 was confirmed by its electorate at an election held on August 9, 1980. On January 26, 2009, the Boards of the Prior MUDs entered into an agreement to consolidate the Prior MUDs into a single Municipal Utility District covering the territory of the Prior MUDs, subject to the approval of the consolidation by the voters at an election held for that purpose. On May 9, 2009, the voters approved the consolidation and the District became the Trophy Club Municipal Utility District No. 1. Pursuant to the consolidation agreement, the District assumed the outstanding bonds, notes and other obligations of the Prior MUDs and the authorized but unissued bonds, taxes and other obligations of the Prior MUDs and became authorized to levy a uniform tax on all taxable property within the District. The functions performed by the District include supplying water for municipal purposes; collecting, transporting, processing and disposing of wastes; establishing, operating and maintaining a fire department; and performing other functions permitted by municipal utility districts under the Texas Water Code. Governance The District is governed by a board of directors which has control over and management supervision of all affairs of the District. There are five elected directors that serve four-year staggered terms. Directors receive no remuneration, except a Director's per diem allowance of $100 per day on which necessary service is performed for the District. The District and all similar districts are subject to the continuing supervision and filing requirements of-th&TSEQ, including the preparation and filing of an annual independent audit report. All District facility plans are submitted to the TCEQ for review and approval. Employees The District has no employees of its own. Rather, personnel services are furnished under an Interlocal Agreement for Employee and Contractual Services (the "Agreement") between the District and the Town pursuant to Chapter 791 of the Texas Government Code. Under the Agreement, employees who report directly to the District rather than the Town are entitled to the same benefits provided to Town employees, but the District is required to pay all costs associated with the provision of benefits to such employees, including pension benefits. In addition, the District is required to pay 50% of the costs incurred by the Town for salary, benefits and other compensation of employees who provide firefighting and emergency medical services to both the District and the Town. The District's liabilities under the Agreement, including pension benefits, do not have a substantial impact on the District's finances. General The District is comprised of 2,283.5 acres [approximately 94 acres in Westlake (Solana)]. Approximately 195 acres in Trophy Club are undeveloped. Of the developed acres, there are approximately 3,172 existing households, 136 apartment units and 42 townhouses. 11 Location The District is located in southern Denton County and northern Tarrant County partially within the Town of Trophy Club (the "Town") and partially within the Town of Westlake. The District is directly adjacent to and accessible from State Highway 114, north of and approximately mid-way between Dallas and Fort Worth. The District is approximately 27 miles from downtown Dallas, 25 miles from downtown Fort Worth, 17 miles from Denton, 8 miles from Grapevine and 14 miles from the Dallas-Fort Worth International Airport. Major highways connecting these population centers, which will also serve the District, include State Highways 114, 170 and 377 and Interstate Highways 35E and 35W. State Highway 170 connects Trophy Club directly to Alliance Airport which is located seven miles southwest of the District. (See "Vicinity Map" herein.) Population The population of the District is estimated to be approximately 7,600 and the population of the entire Town of Trophy Club, the District and the Trophy Club PID No. 1 (the "Trophy Club Development") is estimated at 8,895 (as of December 2011). Topography and Drainage The land within the District has a gradual slope toward Marshall Creek, which runs through the District. The city limits of Roanoke forms the western boundary of the District. Runoff water enters Grapevine Reservoir just north of the District through Marshall Creek or several other small tributaries. The maximum elevation in the area being developed is approximately 690 feet mean sea level and the minimum elevation in the area being developed is approximately 576 feet mean sea level. The soil is sandy loam and clay loam, and existing vegetation consists of native grasses and small oak trees. Areas which are subject to flooding by a 100-year frequency flood are located in the flood plan of Marshall Creek and have been delineated by the Water Resources Branch of the U.S. Geological Survey. Additional flood studies were made by the engineers to determine what areas may be subject to flooding. It was determined that the area subject to flooding within the District is approximately 58.5 acres based on 100-year flood frequency; however, 57.6 acres of this area is within the golf course area and is not intended to be developed for residential land use. Shopping and Commercial Facilities A shopping center within the District has a major grocery store chain, a bank, a major chain drug store, several service businesses, fast food outlets, and a beauty shop and a dry cleaners. Additionally there are several more businesses and professional offices located in the District, at the primary entrance to the Town of Trophy Club. There are additional shopping facilities in Roanoke, about two (2) miles west of the District and numerous shopping facilities in Southlake about five (5) miles east of the District and in Grapevine about eleven (11) miles east of the District. Full metropolitan shopping facilities are available in Dallas and Fort Worth, Texas which have their central business districts approximately 27 miles and 25 miles, respectively from the District. Fire Protection The District operates its Fire Department (the "Department") with an engine, a Quint, a brush truck and two support vehicles. Currently the Department is staffed with twelve (12) full-time firefighter / paramedics, one full-time Fire chief and a part-time administrative assistant. Operations under the Department include fire suppression, fire prevention, emergency management, investigation/enforcement and emergency medical response. The new $3.1 million fire station was completed and equipped in August 2011 with proceeds from the sale of the Series 2010 Bonds, replacing the previously existing facility. This Department serves the Town of Trophy Club and area in the District that is not in the Town limits, and is currently financed by a combination of a $0.10925 maintenance tax assessment in the District, as well as a $0.10925 Public Improvement District ("PID") assessment in Trophy Club PID No. 1. The 2011-2012 annual operating budget is $1,311,934 with October 1, 2011 reserves of $287,689 (unaudited). Police Protection Twenty-four hour security is provided by the Town of Trophy Club Police Department Schools The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). 12 Recreational Opportunities Recreational opportunities in Trophy Club are afforded by Lake Grapevine and its surrounding parks, which lie two miles north and east of the District. The Town has several community parks, including facilities for soccer, baseball, Softball, basketball, tennis, a competitive swimming pool and playground amenities. The Town also operates an 877 acre Corps of Engineers park, which features 100 acres of motorized trails, as well as many passive recreational opportunities such as fishing, hiking and picnicking. Status of Development of the District The area in the District is locally known as "Trophy Club." It is a residential and mixed-use development consisting of approximately 2,283.5 acres. The District is a mature district with roughly 195 acres undeveloped, of which 135 acres are zoned residential and approximately 60 acres are available for commercial development. There is substantial land left for commercial development in the Solana complex, which is located within the City of Westlake. Lot and custom home sales officially began in the District in mid-year 1975. Homes are currently being offered at prices ranging from $200,000 to $1,000,000 and lots range in price from $35,000 to $200,000. The status of single-family home development as of January 1, 2012 is shown below: Status of Single-Family Home Development Houses Additional Total Multi-Family Under Houses Total Developed Houses Units Construction Occupied Houses Lots and Lots Completed(a) 138 3,172 3,310 72 3,382 178 (a) In addition to the single-family development, there are approximately 132 apartments and 42 completed townhouses, which are occupied. Status of Business / Commercial Development The undeveloped commercial land within the Solana business complex (approximately 230 acres) is available for commercial development, however the District is unaware of any current plans for additional development in the Solana business complex. The Town of Trophy Club and the District have commercial land available for development on approximately 52 acres of land along Highway 114. The land is zoned for uses such as a medical complex, hotels, restaurants and a short-stay hospital facility. Additionally, the District currently has a small strip center along Highway 114 containing several food establishments and professional offices. Maguire Thomas Partners ("Maguire") currently owns the Solana business complex, which is the top principal taxpayer in the District (see APPENDIX A "Table 11 - Principal Taxpayers 2011-2012"). On November 16, 2011, a State district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. The District cannot predict the impact that such events may have on the District's financial condition. Public Improvement District Description Trophy Club PID No. 1 (the "PID") consists of approximately 609.683 acres of land generally to the north of Oakmont Drive, Oak Hill Drive and the Quorum Condominiums, east of the Lakes Subdivision and Parkview Drive, south of the Corps of Engineer's property, and west of the Town's eastern limit. The PID is located entirely within the Town limits but outside the District. A master-planned residential community (the "Property") is under construction in the PID and at build-out will be comprised of approximately 1,489 residential units located within the Property, which Property is zoned to permit such use pursuant to the PD Zoning. As of December 31, 2011, 538 homes have been completed and are occupied and an additional 170 homes have been permitted and are currently under construction. The PID is projected to build out as early as 2017 if construction continues at current levels, or as late as 2025 in the event of a decrease in the construction rate. The District provides emergency and fire protection services to the PID, and the PID pays the District an assessment for such services at the current fire tax rate of $0.10925. The District also provides water and sewer service for the PID. The total billed for PID water and sewer for fiscal year 2010-11 was $617,001.57. 13 THE DISTRICT'S SYSTEM The following information describes generally the water and wastewater systems for the District. Description of the Water System Sources of Water Supply: The present water supply is provided from two sources: (i) four ground wells which provide approximately 1,000,000 gallons per day, and (ii) a 21-inch water line which is capable of delivering 10,000,000 gallons per day of treated water from the City of Fort Worth facilities. Currently the District contracts with the City of Fort Worth for unlimited water services. Current maximum usage is approximately 6,500,000 gallons per day (of which 4,500,000 is Fort Worth water). These sources, when combined, provide water which complies with the quality requirements of the TCEQ and needs only chlorination at the District's water plant facility. Water Plant Facility: The present facility provides 900,000 gallons elevated and 6,000,000 gallons ground storage with pumping/chlorination capacity of 10,000,000 gallons per day. Description of the Wastewater System Wastewater Treatment Plant Facility: The wastewater treatment plant system has a permitted treatment/discharge capacity of 1,750,000 gallons per day from the TCEQ under TPDES Permit No. 11593-001. Although the permit authorizes the discharge of wastewater to the adjacent tributary leading to Lake Grapevine, the plant effluent is currently pumped to various holding ponds within the community of Trophy Club and is re-used for irrigating the golf course. INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Trustees. Both State law and the District's investment policies are subject to change. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than "A" or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit and share certificates meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code, as amended) (i) that are issued by or through an institution that has its main office or a branch office in Texas and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for District deposits; or (ii) where (a) the funds are invested by the District through (I) a broker that has its main office or a branch office in the State of Texas and is selected from a list adopted by the District as required by law or (II) a depository institution that has its main office or a branch office in the State of Texas that is selected by the District; (b) the broker or the depository institution selected by the District arranges for the deposit of the funds in certificates of deposit in one or more federally insured depository institutions, wherever located, for the account of the District; (c) the full amount of the principal and accrued interest of each of the certificates of deposit is insured by the United States or an instrumentality of the United States, and (d) the District appoints the depository institution selected under (a) above, a custodian as described by Section 2257.041(d) of the Texas Government Code, or a clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R. Section 240.15c3-3) as custodian for the District with respect to the certificates of deposit; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1) which are pledged to the District, held in the District's name, and deposited at the time the investment is made with the District or with a third party selected and approved by the District and are placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in the State; (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than "A" or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less; (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least "A-1" or "P-1" or the equivalent by at least one nationally recognized credit rating agency; (11) commercial paper with a stated maturity of 270 days or less that is rated at least "A-1" or "P-1" or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank; (12) no-load money market mutual funds registered with and regulated by the United States Securities and Exchange Commission 14 that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; and, (13) no-load mutual funds registered with the United States Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph, and are continuously rated as to-investment quality by at least one nationally recognized investment rating firm of not less than "AAA" or its equivalent. InarSjition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than "AAA" or "AAAm" or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the District's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived." At least quarterly the District's investment officers must submit an investment report to the Board of Trustees detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, the ending market value and the fully accrued interest for the reporting period of each pooled fund group, (4) the book value and market value of each separately listed asset at the end of the reporting-period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest District funds without express written authority from the Board of Trustees. Under State law, the District is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt by written instrument a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution; (3) require any investment officers with perssnasbusiness relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the District to: (a) receive and review the District's investment policy, (b) acknowledger that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the District and the business organization that are not authorized by the District's investment policy (except to the extent that this authorization is dependent on an analysis of the makeup of the District's entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the District and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the District's investment policy; (6) provide specific investment training for the Treasurer, chief financial officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in no-load mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the District. 15 Current Investments As of December 31, 2011 the District's funds were invested in the District's depository bank and TexPool as shown in the table that follows. The District does not currently own, nor does it anticipate the inclusion of long-term securities or derivative products in its portfolio. Fund and Investment Type Amount TexPool - Operating Fund $3,317,514 TexPool - Interest and Sinking Fund 310,178 First Financial Bank Interest Bearing Account - Operating Fund 373,001 Total Investments $4,000,693 TAX DATA District Bond Tax Rate Limitation By law the District's tax rate for debt service on the Bonds is unlimited as to rate or amount. Maintenance and Operations Tax The Board is also authorized to levy and collect an annual ad valorem tax for planning, constructing, acquiring, or maintaining or repairing or operating the District's improvements and facilities, if such maintenance and operations tax is authorized by a vote of the District's electors. Such tax is in addition to taxes which the District is authorized to levy for paying principal of and interest on the Bonds, and any tax bonds which may be issued in the future. As shown in APPENDIX A, TABLE 13 - "TAX RATE DISTRIBUTION," the District levied a 2011-2012 maintenance and operations tax for fire protection purposes of $0.10925/$100 assessed valuation and $0.00989/$100 assessed valuation for all other operations and maintenance purposes. Overlapping Taxes Other governmental entities whose boundaries overlap the District have outstanding bonds payable from ad valorem taxes. The statement of direct and estimated overlapping ad valorem tax debt shown in APPENDIX A - TABLE 14 (page A-6) was developed from several sources, including information contained in "Texas Municipal Reports," published by the Municipal Advisory Council of Texas. Except for the amount relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person is entitled to rely upon information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the dates stated in this table, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Political subdivisions overlapping the District are authorized by Texas law to levy and collect ad valorem taxes for operation, maintenance and/or general revenue purposes in addition to taxes of debt service and the tax burden for operation, maintenance and/or general purposes is not included in these figures. (See APPENDIX A - TABLES 14, 15 & 17 for information on overlapping taxing entities.) TAXING PROCEDURES Authority to Levy Taxes The Board has been authorized to levy an annual ad valorem tax on all taxable property within the District in an amount sufficient to pay the principal of and interest on the Bonds, their pro rata share of debt service on any contract tax bonds and any additional bonds or obligations payable from taxes which the District may hereafter issue and to pay the expenses of assessing and collecting such taxes. The District agrees in the Order to levy such a tax from year-to-year as described more fully herein under "THE BONDS - Security for Payment." Under Texas law, the Board is also authorized to levy and collect an ad valorem tax for the operation and maintenance of the District and for the payment of certain contractual obligations, if authorized by its voters. (See " TAX DATA - District Bond Tax Rate Limitation" herein.) Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") specifies the taxing procedures of all political subdivisions of the State of Texas, including the District. Provisions of the Property Tax Code are complex and are not fully summarized herein. The Property Tax Code requires, among other matters, county-wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within the county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The board of directors of the appraisal district selects a chief appraiser to manage the appraisal offices of the appraisal district. The Denton Central Appraisal District and the Tarrant Appraisal District have the 16 responsibility for appraising property for all taxing units within Denton and Tarrant Counties, including the District. Such appraisal values are subject to review and change by the appraisal review boards of each county. The appraisal roll as approved by the appraisal review boards must be used by the District in establishing its tax roll and tax rate. General: Except for certain exemptions provided by Texas law, all property with a tax situs in the District is subject to taxation by the District; however, no effort is made by the District to collect taxes on tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property applicable to the District include: (i)property owned by the State of Texas or its political subdivisions if the property is used for public purposes; (ii)property exempt from ad valorem taxation by federal law; (iii) certain property owned by charitable organizations, youth development associations, religious organizations, and qualified schools; (iv) designated historical sites; and (v) solar and wind-powered energy devices. Freeport Exemption: Article VIII, Section 1-j of the Texas Constitution authorizing an ad valorem tax exemption for "freeport property" was approved November 7, 1989. Freeport property is goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. The District does grant this exemption. Goods in Transit: "Goods in Transit", which are certain goods, principally inventory, that are stored, for the purposes of assembling, storing, manufacturing, processing or fabricating the goods, in a location that is not owned by the owner of the goods and are transferred from that location to another location within 175 days; a taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The District does not exempt Goods in Transit. Aaricultural/Ooen-Land Exemption: Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open- space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. The District does have land that qualifies for this exemption. Residence Homestead Exemptions: Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision. Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual's spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. The Board has granted such elderly and disabled exemptions in the amount of $25,000 of assessed valuation. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. The District does not grant the option percentage of market value exemption. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. Disabled/Deceased Veterans Exemption: State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse (for so long as the surviving spouse remains unmarried) or children (under 18 years of age) of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000; provided, however, that beginning in the 2009 tax year, a disabled veteran who receives from the from the United States Department of Veterans Affairs or its successor 100 percent disability compensation due to a service-connected disability and a rating of 100 percent disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran's residence homestead. In addition, effective January 1, 2012, and subject to certain conditions, surviving spouses of a deceased veteran who had received a disability rating of 100% will be entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. The District does grant the disabled / deceased veterans Exemption. Tax Abatement: Denton County, Tarrant County or the Town of Trophy Club may designate all or part of the area within the District as a reinvestment zone. Thereafter, the District may enter into tax abatement agreements with owners of real property within the District for up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the 17 agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with a comprehensive plan. All of the area of the District is included in reinvestment zones designated by the Town of Trophy Club, for tax abatement purposes. Valuation of Property for Taxation Generally, all taxable property in the District must be appraised by the Denton Central Appraisal District and the Tarrant Appraisal District (collectively, the "Appraisal District") at one hundred percent (100%) of market value as of January 1 of each year, subject to review and approval by the Appraisal Review Board. In determining market value, either the replacement cost or the income or the market data method of valuation may be used, whichever is appropriate. Certain land may be appraised at less than market value under the Property Tax Code. Increases in the appraised value of residence homesteads are limited to 10 percent annually regardless of the market value of the property. Upon application of a landowner, land which qualifies as "open-space land" is appraised based on the category of land, using accepted income capitalization methods applied to the average net income derived from the use of the land for agriculture and hunting or recreational leases. Upon application of a landowner, land which qualifies as "timber land" is appraised using accepted income capitalization methods applied to the average net income derived from the use of the land for production of timber. Land which qualifies as an aesthetic management zone, critical wildlife management zone, or streamside management zone or is being regenerated for timber production for 10 years after harvest is valued at one-half that amount. In the case of both open space and timber land valuations, if the use of land changes, an additional tax is generally imposed on the land equal to the difference between the taxes imposed on the land for each of the five (5) years preceding the year in which the change of use occurs and the tax that would have been imposed had the land been taxed on the basis of market value in each of those years, plus interest at an annual rate of seven percent (7%) calculated from the dates on which the differences would have become due. There are also special appraisal methods for agricultural land owned by individuals whose primary occupation and income are farming and for recreational, park, and scenic land. Also, houses or lots held for sale by a developer or builder which remain unoccupied, are not leased or rented and produce no income are required to be assessed at the price for which they would sell as a unit to a purchaser who would continue the owner's business, upon application of the owner. Once an appraisal roll is prepared and approved by the Appraisal Review Board, it is used by the District in establishing its tax rate. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraised values. The plan must provide for appraisal of all real property in the Appraisal District at least one every three (3) years. It is not know what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or countywide basis. Notice and Hearing Procedures The Tax Code establishes a "truth-in-taxation" process identifying increases in the effective tax rate. The rollback tax rate equals 108% of the total tax rate for the prior year. If the District decides to increase the tax rate more than eight percent (8%) above the previous year's tax rate, it must hold a public hearing and give notice to its taxpayers. If the actual tax rate adopted exceeds the rollback tax rate, taxpayers may petition to hold an election to reduce the tax rate to the rollback tax rate for the fiscal year. The Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property values, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll District and Taxpayer Remedies The chief appraiser must give written notice before the Appraisal Review Board meeting to an affected owner if a reappraisal has resulted in an increase in value over the prior year or the value rendered by the owner, or if property not previously included on the appraisal roll has been appraised. Any owner who has timely filed notice with the Appraisal Review Board may appeal the final determination by the Appraisal Review Board of the owner's protest by filing suit in Texas district court. Prior to such appeal, however, the owner must pay the tax due on the amount of value of the property involved that is not in dispute or the amount of tax paid in the prior year, whichever is greater, but not to exceed the amount of tax due under the order from which the appeal is taken. In the event of such suit, the value of the property is determined by the court, or a jury if requested by any party. Additionally, the District is entitled to challenge certain matters before the Appraisal Review Board, including the level of appraisal of certain category of property, the exclusion of property from the appraisal records, or the grant in whole or in part of a partial exemption, or a determination that land qualifies for a special use appraisal (agricultural or timber classification, for example). The District may not, however, protest a valuation of individual property. Levy and Collection of Taxes The rate of taxation is set by the Board based upon the valuation of property within the District as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes, and authorized contractual obligations. 18 Unless the Board, or the qualified voters of the District or of Denton County or Tarrant County at an election held for such purpose, determines to transfer the collection of taxes to the Denton Central Appraisal District or Tarrant Appraisal District or another taxing unit, the District is responsible for the levy and collection of its taxes. The District has contracted with the Denton County Tax Collector to collect the taxes for the District. Taxes are due on receipt of the tax bill and become delinquent after January 31 of the following year. The date of the delinquency may be postponed if the tax bills are mailed after January 10 of any year. Delinquent taxes are subject to a 6% penalty for the first month of delinquency, one percent (1%) for each month thereafter to July 1, and 12% total if any taxes are unpaid on July 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. In addition, where a district engages an attorney for collection of delinquent taxes, the Board may impose a further penalty not to exceed twenty percent 20% on all taxes unpaid on July 1. The District may be prohibited from collection of penalties and interest on real property owned by the Federal Depository Insurance Corporation. In prior years the District has engaged a delinquent tax attorney and imposed such a penalty. District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the District is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two years after the purchaser's deed issued at the foreclosure sale is filed in the county records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. (See "INVESTMENT CONSIDERATIONS - General" and "INVESTMENT CONSIDERATIONS - Tax Collections and Foreclosure Remedies".) TAX MATTERS Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel to the Issuer, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ("Existing Law"), (1) interest on the Bonds for federal income tax purposes will be excludable from the "gross income" of the holders thereof and (2) the Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel to the Issuer will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds. See Appendix C - Form of Legal Opinion of Bond Counsel. In rendering its opinion, Bond Counsel to the Issuer will rely upon (a) certain information and representations of the Issuer, including information and representations contained in the Issuer's federal tax certificate, and (b) covenants of the Issuer contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the Refunded Bonds and the property financed or refinanced therewith and (c) the certification of the paying agent for the Refunded Bonds that the amount deposited with the Escrow Agent will be sufficient to pay the principal of and interest on the Refunded Bonds when due. Failure by the Issuer to observe the aforementioned representations or covenants could cause the interest on the Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel to the Issuer is conditioned on compliance by the Issuer with such requirements, and Bond Counsel to the Issuer has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. 19 Bond Counsel's opinion represents its legal judgement based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel's opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds. A ruling was not sought from the Internal Revenue Service by the Issuer with respect to the Bonds or the property financed or refinanced with proceeds of the Bonds. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Bonds, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the Issuer as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. Federal Income Tax Accounting Treatment of Original Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds may be less than the principal amount or maturity amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the "Original Issue Discount Bonds"). In such event, the difference between (i) the "stated redemption price at maturity" of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under existing law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. 20 THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. Interest on the Bonds will be includable as an adjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a "market discount" and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to "market discount bonds" to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the "revised issue price" (i.e., the issue price plus accrued original issue discount). The "accrued market discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. Qualified Tax-Exempt Obligations for Financial Institutions Section 265(a) of the Code provides, in pertinent part, that interest paid or incurred by a taxpayer, including a "financial institution," on indebtedness incurred or continued to purchase or carry tax-exempt obligations is not deductible in determining the taxpayer's taxable income. Section 265(b) of the Code provides an exception to the disallowance of such deduction for any interest expense paid or incurred on indebtedness of a taxpayer that is a "financial institution" allocable to tax-exempt obligations, other than "private activity bonds," that are designated by a "qualified small issuer" as "qualified tax-exempt obligations." A "qualified small issuer" is any governmental issuer (together with any "on-behalf of and "subordinate" issuers) who issues no more than $10,000,000 of tax-exempt obligations during the calendar year. Section 265(b)(5) of the Code defines the term "financial institution" as any "bank" described in section 585(a)(2) of the Code, or any person accepting deposits from the public in the ordinary course of such person's trade or business that is subject to federal or state supervision as a financial institution. Notwithstanding the exception to the disallowance of the deduction of interest on indebtedness related to "qualified tax-exempt obligations" provided by section 265(b) of the Code, section 291 of the Code provides that the allowable deduction to a "bank," as defined in section 585(a)(2) of the Code, for interest on indebtedness incurred or continued to purchase "qualified tax-exempt obligations" shall be reduced by twenty-percent (20%) as a "financial institution preference item." In the Order, the Issuer has designated the Bonds as "qualified tax-exempt obligations" within the meaning of section 265(b) of the Code. In furtherance of that designation, the Issuer has covenanted to take such action that would assure, or to refrain from such action that would adversely affect, the treatment of the Bonds as "qualified tax-exempt obligations." Potential purchasers should be aware that if the issue price to the public exceeds $10,000,000 there is a reasonable basis to conclude that the payment of a de minimis amount of premium in excess of $10,000,000 is disregarded; however, the Internal Revenue Service could take a contrary view. If the Internal Revenue Service takes the position that the amount of such premium is not disregarded, then such obligations might fail to satisfy the aforementioned dollar limitation and the Bonds would not be "qualified tax-exempt obligations." CONTINUING DISCLOSURE OF INFORMATION . In the Order, the Issuer has made the following agreement for the benefit of the holders and beneficial owners of each of the Bonds. The Issuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Issuer will be obligated to provide certain updated financial information and operating data annually, and timely notice of certain specified events, to the Municipal Securities Rulemaking Board (the "MSRB"). Annual Reports The Issuer will provide certain updated financial information and operating data to the MSRB. The District will provide all quantitative financial information and operating data with respect to the District of the general type included in this Official Statement. The information to be updated includes Tables 1,12 and 13 of Appendix A, and the annual audited financial statements of the District. The Issuer will update and provide this information within six months after the end of each fiscal year ending in and after 2011. 21 The financial information to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB's Internet Website or filed with the SEC, as permitted by SEC Rule 15c2-12 (the "Rule"). The updated information will include audited financial statements for the Issuer, if the Issuer commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Issuer will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the Issuer may be required to employ from time to time pursuant to State law or regulation. The Issuer's current fiscal year end is September 30. Accordingly, it must provide updated information by the last day in March in each year, unless the Issuer changes its fiscal year. If the Issuer changes its fiscal year, it will notify the MSRB of the change. Notice of Certain Events The Issuer will also provide timely notices of certain events to the MSRB. The Issuer will provide notice of any of the following events with respect to the Bonds to the MSRB in a timely manner (but not in excess of ten business days after the occurrence of the event): (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the Issuer, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the Issuer or the sale of all or substantially all of its assets, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, the Issuer will provide timely notice of any failure by the Issuer to provide annual financial information in accordance with their agreement described above under "Annual Reports". For these purposes, any event described in clause (12) of the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the Issuer in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Issuer, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Issuer. Availability of Information from MSRB The Issuer has agreed to provide the foregoing financial information and operating data only as described above. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org. Limitations and Amendments The Issuer has agreed to update information and to provide notices of certain specified events only as described above. The Issuer has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The Issuer makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Issuer disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the Issuer to comply with its agreement. The Issuer may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Issuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The Issuer may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds giving effect to (a) such 22 provisions as so amended and (b) any amendments or interpretations of the Rule. If the Issuer amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided. Compliance with Prior Agreements For the last five years, the District has complied in all material respects with its previous continuing disclosure agreements made in accordance with the Rule. OTHER PERTINENT INFORMATION Legal Matters The delivery of the Bonds is subject to the receipt of an approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and legally binding obligations of the Issuer, and the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal income tax purposes under section 103(a) of the Code, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. The form of Bond Counsel's opinion is attached hereto as Appendix C. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. Though it represents the Financial Advisor and the Underwriter from time to time in matters unrelated to the issuance of the Bonds, Bond Counsel has been engaged by and only represents the Issuer in the issuance of the Bonds. Except as noted below, Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein except that in its capacity as Bond Counsel, such firm has reviewed the information appearing under captions "PLAN OF FINANCING", "THE BONDS" (except for subcaptions "Default and Remedies" and "Payment Record" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS," "CONTINUING DISCLOSURE OF INFORMATION" (exclusive of the subcaption "Compliance With Prior Agreements"), and the subcaptions "Legal Matters" (except for the last two sentences of the second paragraph thereof), "Registration and Qualification of Bonds for Sale" and "Legal Investments and Eligibility to Secure Public Funds in Texas" under the caption "OTHER PERTINENT INFORMATION" to determine whether such information accurately and fairly summarizes the material and documents referred to therein and is correct as to matters of law, and that such information conforms to the Order. Certain legal matters will be passed upon for the Underwriter by Fulbright & Jaworski L.L.P., Dallas, Texas, Counsel for the Underwriter. The legal fees to be paid to Counsel to the Underwriter are contingent upon the sale and delivery of the Bonds. The legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the respective attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Registration and Qualification of Bonds for Sale The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The Issuer assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. Litigation In the opinion of District officials, the Issuer is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the Issuer, would have a material adverse effect on the financial condition of the District. Legal Investments and Eligibility to Secure Public Funds in Texas Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments, investment securities governed by Chapter 8, Texas Business and Commerce Code, and are real and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See 23 "RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, obligations such as the Bonds are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their fair market value. No review by the District has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. No representation is made that the Bonds will be acceptable to public entities to secure their deposits or acceptable to such institutions for investment purposes. The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to any such persons or entities or which might otherwise limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such persons or entities to purchase or invest in the Bonds for such purposes. Underwriting The Underwriter has agreed, subject to certain conditions, to purchase the Bonds from the Issuer at a price of $2,470,257.70 (representing the par amount of the Bonds of $2,355,000.00, plus an original issue premium of $136,075.20, less an Underwriter's discount of $20,817.50), plus accrued interest on the Bonds from the Dated Date to the date of initial delivery of the Bonds to the Underwriter. The Underwriter's obligation is subject to certain conditions precedent. The Underwriter will be obligated to purchase all of the Bonds, if any of the Bonds are purchased. The Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Bonds into investment trusts) and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriter. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. Financial Advisor Southwest Securities is employed as a Financial Advisor to the Issuer in connection with the issuance of the Bonds. In this capacity, the Financial Advisor has compiled certain data relating to the Bonds and has assisted in drafting this Official Statement. The Financial Advisor has not independently verified any of the data contained herein or conducted a detailed investigation of the affairs of the Issuer to determine the accuracy or completeness of this Official Statement. Because of its limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fees for Financial Advisor are contingent upon the issuance, sale and delivery of the Bonds. Forward-Looking Statements Disclaimer The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. Concluding Statement The financial data and other information contained in this Official Statement have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statues, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such statutes, documents and resolutions for further information. Reference is made to original statutes, documents and resolutions in all respects. 24 This Official Statement was approved by the Board of Directors of the Issuer for distribution in accordance with the provisions of the U.S. Securities and Exchange Commission's rule codified at 17 C.F.R. Section 240.15c2-12. Kevin Carr Secretary, Board of Directors Trophy Club Municipal Utility District No. 1 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 James Moss President, Board of Directors Trophy Club Municipal Utility District No. 1 25 P"his page is intentionally left blank.] SCHEDULE I SCHEDULE OF REFUNDED BONDS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Unlimited Tax Bonds, Series 2002 (Redemption Date: 9-1-12 @ par plus accrued interest to the Redemption Date) Original Dated Date June 1,2002 Original Maturity (September 1) 2013 Principal Amount $ 165,000 Amount to be Refunded $ 165,000 Interest Rates 4.25% 2014 170,000 170,000 4.35% 2015 180,000 180,000 4.45% 2016 190,000 190,000 4.55% 2017 200,000 200,000 4.70% 2018 210,000 210,000 4.80% 2019 225,000 225,000 (a) 4.95% 2020 235,000 235,000 (a) 4.95% 2021 245,000 245,000 (b) 5.00% 2022 260,000 260,000 (b) 5.00% 2023 275,000 $ 2,355,000 275,000 $ 2,355,000 5.00% Total Refunded Bonds $ 2,355,000 <a) Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2020. (b> Represents a portion of a sinking fund redemption of a term bond that matures September 1, 2022. [This page is intentionally left blank.] APPENDIX A FINANCIAL INFORMATION OF THE ISSUER (This appendix contains quantitative financial information and operating data with respect to the Issuer. The information is only a partial representation and does not purport to be complete. For further and more complete information, reference should be made to the original documents, which can be obtained from various sources, as noted.) FINANCIAL INFORMATION OF THE ISSUER ASSESSED VALUATION TABLE 1 2011 Actual Market Value of Taxable Property (100% of Actual)(a) Less Exemptions: Local Optional Over-65 Disabled and Deceased Veterans' Agricultural Productivity Loss Freeport 10% Homestead Cap Value Loss Total Exempt Property Partial Exempt Property 2011 Certified Net Taxable Assessed Valuation(b) Less: Taxable Value of Accounts Incomplete/Under Review 2011 Certified Net Taxable ARB Approved Assessed Valuation $ 1,041,294,157 $13,436,103 2,864,298 3,296,361 1,127,925 22,745,880 5,894 43.476,461 $ 997,817,696 <b> $ (43,172,221) $ 954,645,475 (a> See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. <b> Includes taxable value of incomplete accounts and accounts under ARB Review. Sources: Denton Central Appraisal District and Tarrant Appraisal District GENERAL OBLIGATION BONDED DEBT TABLE 2 General Obligation Debt Principal Outstanding (As of February 1, 2012): Unlimited Tax Bonds, Series 2002 (Excludes the Refunded Bonds) $ 155,000 Unlimited Tax Bonds, Series 2003 840,000 Unlimited Tax Refunding Bonds, Series 2005 1,770,000 Unlimited Tax Bonds, Series 2010 2,000,000 Total General Obligation Debt Principal Outstanding $ 4,765,000 Current Issue General Obligation Debt Principal Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") $ 2,355,000 Total General Obligation Debt Principal Outstanding (Following the Issuance of the Bonds) $ 7,120,000 Interest and Sinking Fund Balance as of December 31, 2011 (unaudited) $ 316,300 Ratio of General Obligation Debt Principal to 2011 2011 Certified Net Taxable ARB Approved Assessed Valuation 0.75% 2011 Certified Net Taxable ARB Approved Assessed Valuation<a) $ 954,645,475 Population Estimates: 2000 - 6,350; 2010 - 8,042; Current 2011 (Estimate) - 7,600 Per Capita 2011 Certified Net Taxable ARB Approved Assessed Valuation - $ 125,611 Per Capita General Obligation Debt Principal - $ 937 (a) See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation Drocedures. A-1 OTHER OBLIGATIONS TABLE 3 Description Year of Issue Interest Rate Payable Average Principal Public Property Finance Contractual Obligations: Improvements Fire Truck Improvements Notes Payable: Equipment Equipment Capital Lease Obligations: Equipment Revenue Debt Payable: Water Storage Improvements 2004 2007 2009 1999 2010 2008 2012 3.50% 4.33% 3.90% 2.50% 3.90% 4.00% 2.87% Final Annual Original Outstanding Maturity Payment Amount as of 9-30-11 2012 $ 39,000 $ 270,000 $ 33,750 2014 56,000 448,000 201,000 2012 110,000 330,000 114,234 $ 348,984 2018 $ 2,245 $ 35,000 $ 14,259 2015 $ 201,318 $ 179,955 143,964 $ 158,223 2012 $ 9,886 $ 49,432 $ 9,886 2014 $ 383,709 $ 1,100,000 $ 1,100,000 Total Other Obligations $ 1,617,093 A-2 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 4 Less: Current Total Refunded The Bonds Fiscal Year Debt Service Bonds Combined SeDt 30 Outstanding' Debt Service Principal Interest Total Debt Service 2012 $ 866,300 $ 56,156 $ - $ 30,375 $ 30,375 $ 840,519 2013 865,595 277,313 185,000 60,750 245,750 834,033 2014 659,123 275,300 190,000 57,050 247,050 630,873 2015 657,938 277,905 195,000 53,250 248,250 628,283 2016 660,938 279,895 200,000 49,350 249,350 630,393 2017 667,868 281,250 205,000 44,350 249,350 635,968 2018 668,468 281,850 210,000 39,225 249,225 635,843 2019 672,838 286,770 225,000 33,975 258,975 645,043 2020 670,738 285,633 225,000 28,350 253,350 638,455 2021 672,768 284,000 230,000 21,600 251,600 640,368 2022 678,533 286,750 240,000 14,700 254,700 646,483 2023 676,463 288,750 250,000 7,500 257,500 645,213 2024 153,183 ----153,183 2025 152,683 ----152,683 2026 148,083 ----148,083 2027 153,368 ----153,368 2028 153,243 ----153,243 2029 152,783 ----152,783 2030 152,113 ----152,113 2031 151,163 ----151,163 $ 9.634.180 $ 3,161,571 $ 2.355.000 $ 440,475 $ 2.795.475 ifi 9 ?fift 084 <a> Does not include Public Property Finance Contractual Obligations indebtedness (see Table 3, page A-2). TAX ADEQUACY TABLE 5 2011 Certified Net Taxable ARB Approved Assessed Valuation Maximum Annual Debt Service Requirements (Fiscal Year Ending 9-30-12) Indicated Maximum Interest and Sinking Fund Tax Rate at 99% collections Note: Above computation is exclusive of investment earnings, delinquent tax collections and penalties and interest on delinquent tax collections. INTEREST AND SINKING FUND MANAGEMENT INDEX Interest and Sinking Fund Balance, Fiscal Year Ended September 30, 2011 (Unaudited) FY 2012 Interest and Sinking Fund Tax Levy of $0.05586 at 99% Collections based on the 2011 Certified Net Taxable ARB Approved Assessed Valuation of $954,645,475 Produces FY 2012 Interest and Sinking Fund Deposit from Fire Department Rental Income FY 2012 Budgeted Income from PID Utility Connection Fees Paid by Developer (guaranteed with bank letter of credit) (to be deposited to l&S Fund on or before June 2012) Total Available for Debt Service Less: General Obligation Debt Service Requirements, Fiscal Year Ending 9-30-12 Estimated Surplus at Fiscal Year Ending 9-30-12(a) 954,645,475 840,519 0.08893 TABLE 6 $ 107,847 527,932 308,000 6,120 $ 949,900 840,519 $ 109,381 (a> Does not include delinquent tax collections, penalties and interest on delinquent tax collections or investment earnings. A-3 PROJECTED GENERAL OBLIGATION PRINCIPAL REPAYMENT SCHEDULE TABLE 7 (As of February 1, 2012) Princi pal Repayment Schedule Bonds Percent of Fiscal Year Outstanding The Unpaid at Principal Endinq 9/30 Bonds'3' Bonds Total End of Year Retired (%) 2012 $ 565,000 $ - $ 565,000 $ 6,555,000 7.94% 2013 420,000 185,000 605,000 5,950,000 16.43% 2014 230,000 190,000 420,000 5,530,000 22.33% 2015 235,000 195,000 430,000 5,100,000 28.37% 2016 245,000 200,000 445,000 4,655,000 34.62% 2017 260,000 205,000 465,000 4,190,000 41.15% 2018 270,000 210,000 480,000 3,710,000 47.89% 2019 280,000 225,000 505,000 3,205,000 54.99% 2020 290,000 225,000 515,000 2,690,000 62.22% 2021 305,000 230,000 535,000 2,155,000 69.73% 2022 320,000 240,000 560,000 1,595,000 77.60% 2023 330,000 250,000 580,000 1,015,000 85.74% 2024 110,000 -110,000 905,000 87.29% 2025 115,000 -115,000 790,000 88.90% 2026 115,000 -115,000 675,000 90.52% 2027 125,000 -125,000 550,000 92.28% 2028 130,000 -130,000 420,000 94.10% 2029 135,000 -135,000 285,000 96.00% 2030 140,000 -140,000 145,000 97.96% 2031 145,000 -145,000 -100.00% $ 4,765,000 $ 2,355,000 $ 7,120,000 Excludes the Refunded Bonds and all PPFCO principal outstanding (see Table 3, page A-2). FUND BALANCES TABLE 8 Unaudited As of 9-30-11 As Of 12-31-11 General Fund $ 3,338,441 $ 3,442,735 Debt Service Fund 107,847 316,300 Total $ 3,446,288 $ 3,759,035 TAXABLE ASSESSED VALUATION FOR TAX YEARS 2007-2011 (a) TABLE 9 Tax Net Taxable Change From Preceding Year Year Assessed Valuation Amount ($) Percent (%) 2007 912,618,000 101,404,000 12.50% 2008 960,911,000 48,293,000 5.29% 2009 1,015,777,389 <b> 54,866,389 5.71% 2010 978,509,574 <b> -37,267,815 -3.67% 2011 954,645,475 (b) -23,864,099 -2.44% (a> Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). (b> Excludes valuation for incomplete accounts and accounts under ARB review, as of certification. Sources: Denton Central Appraisal District, Tarrant Appraisal District and Issuer's 2009 Audited Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-4 CLASSIFICATION OF ASSESSED VALUATION TABLE 10 %of %of %of %0f %of Cateaorv 2011 Total 2010 Total 2009 Total 2008 Total 2007 Total Land(a) $ _ 0.00% $ _ 0.00% $ -0.00% $ 186,574,000 18.75% $ 213,640,000 22.56% Land - Homesite 193,352,075 18.57% 189,642,427 18.32% 188,045,683 17.48% -0.00% -0.00% Land - Non Homesite 236,144,259 22.68% 248,891,821 24.04% 271,608,898 25.24% -0.00% -0.00% Land - Agricultural 3,304,866 0.32% 3,957,829 0.38% 3,998,666 0.37% -0.00% -0.00% Improvements<a) -0.00% -0.00% -0.00% 737,273,000 74.10% 638,560,000 67.43% Improvements - Homesite 497,180,522 47.75% 498,665,743 48.16% 505,293,510 46.96% -0.00% -0.00% Improvements - Non Homesite 19,001,251 1.82% 19,724,323 1.90% 26,769,054 2.49% -0.00% -0.00% Personal Property<a) 91,866,777 8.82% 73,302,378 7.08% 70,157,777 6.52% 71,091,000 7.15% 94,823,000 10.01% Mineral Property 444,407 0.04% 1,263,858 0.12% 10,174,220 0.95% -0.00% -0.00% Total Appraised Value $ 1,041,294,157 100.00% $ 1,035,448,379 100.00% $ 1,076,047,808 100.00% $ 994,938,000 100.00% $ 947,023,000 100.00% Less Exemptions: Exemptions<a| $ -$ -$ -$ 34,027,000 $ 34,405,000 Optional Over-65 13,436,103 12,886,387 11,972,353 -- Disabled and Deceased Veterans' 2,864,298 1,805,306 1,287,007 -- Agricultural Productivity Loss 3,296,361 3,949,539 3,990,915 -- Freeport --58,351 -- Homestead Cap Adjustment 1,127,925 1,391,082 2,957,045 -- Total Exempt Property 22,745,880 22,572,987 22,740,838 -- Partial Exempt Property 5,894 131,554 7,208 -- Total Exemptions $ 43,476,461 $ 42,736,855 $ 43,013,717 $ 34,027,000 $ 34,405,000 Certified Net Taxable $ 997,817,696 $ 992,711,524 $ 1,033,034,091 $ 960,911,000 $ 912,618,000 Assessed Valuation Less: Taxable Value of Accounts Incomplete/Under Review $ (43,172,221) $ (14,201,850) $ (17,256,702) Certified Net Taxable ARB Approved Assessed Valuation $ 954,645,475 $ 978,509,674 $ 1,015,777,389 <a> Historical comparison information for Tax Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) and detailed information for Land, Improvements and Exemptions is not available. Source: Denton Central Appraisal District, Tarrant Appraisal District and Issuer's 2010 Audited Basic Financial Statements (Supplemental Information) Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. PRINCIPAL TAXPAYERS 2011-2012 TABLE 11 % of Total 2011 2011 Net Taxable Assessed Name Tvoe of Prooertv Assessed Valuation Valuation Maguire Thomas Partners ETAL(a) Commercial Office Complex $146,398,876 15.34% Corelogic Real Estate Commercial Real Estate 18,050,838 1.89% CNL RETMT CRSI Trophy Club Texas LP Medical Plaza / Hospital 17,800,000 1.86% Marsh USA Inc. Insurance Consultant / Data Center 10,030,377 1.05% First American Leasing Commercial Office Complex 8,804,230 0.92% Levi Strauss & Co. Commercial Office 8,637,483 0.90% Regency Centers LP Retail Grocery 7,094,526 0.74% Trophy Club Medical Center Healthcare Services 6,163,459 0.65% BDMR Development LLC Real Estate Development 5,956,889 0.62% Armore Trophy Club LLC Real Estate Development 5,665,875 0.59% Total $234,602,553 24.57% Based on a 2011 Certified Net Taxable ARB Approved Assessed Valuation of $ 954,645,475 (b) (a> Although Maguire Thomas Partners ("Maguire") owns the Solana business complex ("Solana"), which comprises the entire taxable assessed valuation shown above, on November 16, 2011, a State district judge in Tarrant County appointed a receiver to take control of Solana. According to court filings, the receiver will operate Solana, take all necessary actions to preserve the income and value of the property, and market the property for sale. It is expected that Solana will be posted for foreclosure in the near future. Notwithstanding the receivership and possible foreclosure sale, the property taxes for the current year have been paid. The District cannot predict the impact that such events may have on the District's financial condition. See "THE DISTRICT " in the Official Statement for information on the current status of the District's commercial and retail development. <b> Excludes taxable values for incomplete accounts and accounts under ARB Review. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas and the Denton Central Appraisal District. PROPERTY TAX RATES AND COLLECTIONS (a) (b) TABLE 12 Net Taxable Adjusted Tax Assessed Tax Tax % Collections Fiscal Year Year Valuation Rate Levy Current Total Ended 2006 $ 811,214,000 $ 0.280000 $ 2,191,536 100.62% 100.36% 9-30-07 2007 912,618,000 0.230000 2,234,909 100.62% 100.36% 9-30-08 2008 960,911,000 0.244615 2,380,679 98.94% 99.58% 9-30-09 2009 1,015,777,389 (c) 0.205000 2,091,414 99.66% 100.75% 9-30-10 2010 978,509,574 (c> 0.195000 2,047,972 99.58% 100.36% 9-30-11 2011 954,645,475 (c) 0.175000 1,923,848 (d> In Process of Collection 9-30-12 <a> See "TAXING PROCEDURES - Levy and Collection of Taxes" in the body of the Official Statement for a complete discussion of the District's provisions. <b> Historical comparison information for Tax Years 2006-2008 represents the combined totals from two separate entities ( Trophy Club MUD NO. 1 and Trophy Club MUD NO. 2). l0> Excludes value of incomplete accounts and accounts under ARB review, as of certification m As of December 31, 2011. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas, the Denton Central Appraisal District and the Issuer Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. TAX RATE DISTRIBUTION (a) TABLE 13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 Operations $0.009890 $0.008790 $0.027140 $0.014040 $0.010200 $0.030900 Fire Protection 0.109250 0.109250 0.109140 0.116020 0.120900 0.102700 Debt Service 0.055860 0.076960 0.068720 0.114555 0.098900 0.146400 TOTAL $ 0.175000 $ 0.195000 $ 0.205000 $ 0.244615 $ 0.230000 $ 0.280000 <a> Historical comDarison information for Tax Years 2006-2008 reoresents the combined totals from two seoarate entities ( Trophy Club MUD No. 1 and Trophy Club MUD No. 2). Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas A-6 DIRECT AND OVERLAPPING DEBT DATA INFORMATION TABLE 14 The following table indicates the indebtedness, defined as outstanding bonds payable from ad valorem taxes, of governmental entities overlapping the District and the estimated percentages and amounts of such indebtedness attributable to property within the District. This information is based upon data secured from the individual jurisdictions and/or the Texas Municipal Reports published by the Texas Municipal Advisory Council. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the date stated, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. Gross Debt % Amount Taxinq Bodv As of Principal OverlaDDina OverlaDDina Carroll Independent School District 02-01-12 249,710,039 3.57% $ 8,914,648 Denton County 02-01-12 477,705,000 1.20% 5,732,460 Northwest Independent School District 02-01-12 249,710,039 1.95% 4,869,346 Tarrant County 02-01-12 335,050,000 0.20% 670,100 Tarrant County College District 02-01-12 29,780,000 0.20% 59,560 Tarrant County Hospital District 02-01-12 27,160,000 0.20% 54,320 Town of Trophy Club 02-01-12 12,444,000 94.53% 11,763,313 Westlake, Town of 02-01-12 21,725,000 21.69% 4,712,153 Total Net Overlapping Debt $1,403,284,078 $ 36,775,900 Trophy Club MUD No. 1 02-01-12 7,120,000 (a) 100.00% 7,120,000 Total Gross Direct Principal and Overlapping Debt $1,410,404,078 $ 43,895,900 Ratio of Direct and Overlapping Debt to 2011 Certified Net Taxable ARB Approved Assessed Valuation 4.60% Ratio of Direct and Overlapping Debt to 2011 Market Value 4.22% Per Capita Direct and Overlapping Debt $5,776 (a> Includes the Bonds and excludes the Refunded Bonds. Source: Most Recent Texas Municipal Reports published by the Municipal Advisory Council of Texas. ASSESSED VALUATION AND TAX RATE OF OVERLAPPING ENTITIES TABLE 2011 Net Taxable 2011 Governmental Entitv Assessed Valuation % of Actual Tax Rate Carroll Independent School District $ 5,554,170,040 100% $ 1.415000 Denton County 53,491,990,714 100% 0.277357 Northwest Independent School District 10,307,632,937 100% 1.375000 Tarrant County 123,043,200,369 100% 0.264000 Tarrant County College District 123,490,855,713 100% 0.148970 Tarrant County Hospital District 123,134,885,714 100% 0.227897 Town of Trophy Club 759,499,967 100% 0.530000 Westlake, Town of 1,091,999,232 100% 0.156840 Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and Denton and Tarrant County Appraisal Districts A-7 AUTHORIZED BUT UNISSUED DIRECT GENERAL OBLIGATION BONDS TABLE 16 Date of Amount Issued This Taxing Body Authorization Purpose Authorized To Date Issue Unissued Trophy Club MUD No. 1 10-07-75 Water&Sewer $ 12,344,217 $ 11,115,000 $ - $ 1,229,217 04-04-81 Water&Sewer 5,800,000 3,760,000 - 2,040,000 10-29-88 Water&Sewer 2,500,000 -_ -_ 2,500,000 $ 20,644,217 $ 14,875,000 $ - $5,769,217 AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS OF OVERLAPPING GOVERNMENTAL ENTITIES TABLE 17 Taxing Body Carroll ISD Denton County Northwest I S D Tarrant County Date of Authorization None Tarrant Co. College Dist Tarrant Co. Hospital Dis Trophy Club, Town of Westlake, Town of None Purpose Amount Authorized 01-16-99 Road $ 85,320,000 05-15-04 Road 186,970,000 05-15-04 County Offices 17,900,000 05-15-04 Equipment 2,000,000 11-04-08 Road 310,000,000 11-04-08 County Buildings 185,000,000 $ 787,190,000 05-10-08 School Buildings $ 260,000,000 04-04-87 Courthouse Improv. $ 47,000,000 08-08-98 Law Enforcement Ctr 70,600,000 08-08-98 Healthcare Facility 9,100,000 08-08-98 Jail 14,600,000 05-13-06 Road & Bridge 200,000,000 05-13-06 Jail 108,000,000 05-13-06 County Buildings 62,300,000 05-13-06 Juvenile Deten. Ctr. 36,320,000 05-13-06 County Offices 26,500,000 $ 574,420,000 None None 11-16-09 Parks & Recreation $ 5,000,000 Issued To Date $ 77,629,375 176,610,527 17,900,000 102,161,781 82,174,444 $456,476,127 $170,000,000 $ 46,500,000 63,100,000 1,000,000 14,600,000 126,700,000 108,000,000 47,300,000 4,200,000 26,500,000 -_ $437,900,000 $136,520,000 Unissued $ 7,690,625 10,359,473 2,000,000 207,838,219 102,825,556 $330,713,873 $ 90,000,000 $ 500,000 <a> 7,500,000 8,100,000 73,300,000 15,000,000 32,120,000 $ 5,000,000 (a> The County will not issue authorization due to aqe. Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. A-8 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 18 Fiscal Year Ended September 30 2011 2010 2009 2008 Revenue and Other Financing Sources: Total Revenues and Other Financing Sources: Expenditures and Other Financing Uses: 2007 Ad Valorem Property Taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 Water & Wastewater Charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 Utility Fees 165,600 80,500 515,200 -- Inspection and Tap Fees 8,560 5,775 4,975 22,550 32,900 Interest Earned 5,534 6,171 20,755 69,447 106,168 Intergovernmental Revenues 89,330 ---- Oversize Meter Reimbursements 70,594 ---- Capital Proceeds/Contractual Obligations --330,000 49,432 - Miscellaneous and Other 80,906 191,498 199,780 116,295 131,124 $ 7,055,064 $ 5,694,592 $ 6,076,283 $ 4,939,191 $ 4,330,831 Administrative 5 I 864,263 $ 993,986 $ 1,297,613 $ 905,052 $ 835,590 Water Operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 Wastewater Operations 598,465 711,382 999,388 500,224 480,798 Wastewater Collection System 277,775 308,798 294,869 409,948 402,482 Information Systems 123,605 182,658 175,698 187,908 124,987 Contribution to Trophy Club Fire Dept. 770,123 876,521 783,736 902,353 725,764 Miscellaneous 177,809 558,000 383,009 45,457 135,121 Capital Outlay 515,884 --29,379 442,782 Debt Service 240,245 --29,379 442,782 :al Expenditures and Other Financing Uses: 3 5 5.839,659 $ 5.513.856 $ 5,745.698 $ 4,944,492 $ 5.228,600 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses Other Financing Sources (Uses): Beginning Fund Balance - October 1 (Restated) Ending Fund Balance - September 30 Total Active Retail Connections Water and/or Wastewater Connections 1,215,405 $ 180,736 $ 330,585 (889,878) 3,012,914 ft 3.338.441 3,554 2,832,178 S 3012.914 3,361 2,501,593 * ?S3?178 3,161 (5,301) $ (897,769) 2,477,515 ft 2.472.214 3,092 NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) Source: The Issuer's Audited Financial Statements 2,932,502 ft 2034.733 2,827 A-9 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND EXPENDITURES TABLE 19 Fiscal Year Ended September 30 2011 2010 2009 2008 2007 Revenue and Other Financing Sources: Ad Valorem Property Taxes $ 777,648 $ 740,420 $ 1,100,081 $ 1,302,763 $ 1,325,143 Penalties and Interest --12,225 -- Transfers In / Utility Fees 246,100 653,000 383,009 -- Interest Earned 985 4,848 4,105 23,326 43,456 Miscellaneous and Other -1,000 -29,379 29,379 Total Revenues and Other Financing Sources: $ 1,024,733 $ 1,399,268 $ 1,499,420 $ 1,355,468 $ 1,397,978 Expenditures and Other Financing Uses: Principal Retirement $ 1,115,000 $ 1,055,000 $ 1,025,000 $ 975,000 $ 945,000 Interest and Fiscal Charges 382,019 311,570 352,195 390,565 425,838 Total Expenditures and Other Financing Uses: $ 1,497,019 $ 1.366.570 $ 1,377,195 $ 1,365,565 $ 1.370,838 Excess (Deficit) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses $ (472,286) $ 32,698 $ 122,225 $ (10,097) $ 27,140 Other Financing Sources: $ 308,000 $ $ $ -$ - Beginning Fund Balance - October 1 (Restated) (Restated) 272,132 239,434 117,209 N/A N/A Ending Fund Balance - September 30 1 107.846 S 272.132 239.434 N/A N/A NOTE: Historical comparison information for Fiscal Years 2007-2008 represents the combined totals from two separate entities (Trophy Club MUD No. 1 and Trophy Club MUD No. 2) N/A = Not Available Source: The Issuer's Audited Financial Statements A-10 APPENDIX B GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS TOWN OF TROPHY CLUB General The Town of Trophy Club (the "Town"), incorporated in January of 1985 is Texas's first premiere planned residential and country-club community. The Town is located in the southern portion of the Denton County (the "County") on State Highway 114 approximately 8 miles west of the City of Grapevine, 17 miles south of the City of Denton and 14 miles northwest of the Dallas- Fort Worth International Airport. Lake Grapevine is located approximately 2 miles north and east of the Town. The majority of property within the Town consists of single-family and multi-family housing. The Solana Business Complex is located adjacent to the Town's eastern border in the cities of Westlake and Southlake. Both residents and businesses of the Town are furnished water and wastewater treatment from Trophy Club Municipal Utility District No. 1. The Town's 2010 Census was 8,024, which is a 26.65% increase over the 2000 Census. The Town's 2011 population estimate is 8,895. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas, U.S. Census Report, North Central Texas Council of Governments and the Town of Trophy Club. Population: Town of Denton Year Trophy Club County 2011 Estimate 8,895 673,780 2010 Census 8,024 662,614 2000 Census 6,350 423,976 1990 Census 3,922 273,525 1980 Census N/A 143,126 Sources: United States Bureau of the Census, North Central Texas Council of Government and the Town of Trophy Club B-1 Leading Employers in the District: Employer Type of Business Number of Employees (2011) Maguire Partners1' Northwest Independent School District Baylor Medical at Trophy Club Trophy Club Country Club Tom Thumb Town of Trophy Club & Trophy Club MUD #1 Merryhill Bank of America First Financial Bank Quizno's Beck Properties Commercial Office Complex Public School District Healthcare Country Club Retail Grocery Municipal Governmental Entities Daycare Financial Institution Financial Institution Delicatessen Real Estate Development 3,531 267 125 100 90 78 31 7 7 4 4 m See "THE DISTRICT - Status of Business/Commercial Development" and APPENDIX A "Table 11 - Principal Taxpayers 2011-2012" herein for a description of the current status of the property owned by Maguire Partners ("Maguire"). The District cannot predict the impact that such events may have on Maguire's operations or its employees in the District. Source: Information from the Issuer The Town is served by the Northwest Independent School District (the "School District" or "Northwest ISD"). Northwest ISD covers approximately 232 square miles in Denton, Wise and Tarrant Counties. In addition to serving the Town, the School District also serves the communities of Aurora, Fairview, Haslet, Justin, Newark, Northlake, Rhome, Roanoke and portions of Flower Mound, Fort Worth, Keller, Southlake and Westlake. Northwest ISD is comprised of 16 primary schools for grades pre- kindergarten through fifth, 4 middle schools for grades sixth through eighth, 3 high schools for grades ninth through twelfth, and 2 alternative education campuses for grades seventh through twelfth. One of the high schools, Byron Nelson High School, is located in the Town of Trophy Club. All campuses offer enriched curricula with special programs for gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. The School District serves a 2011-2012 estimated enrollment of 16,630 students (as of November 1, 2011). Source: Information from Northwest Independent School District and the Town of Trophy Club Denton County (the "County") is located in north central Texas. The County was created in 1846. It is the eighth most populous county in the state occupying a land area of 911 square miles. The population of the County has grown by over 55% since the 2010 census and 2% since the 2010 census. The County seat is the City of Denton. The economy is diversified by manufacturing, state supported institutions, and agriculture. The Texas Almanac designates cattle, horses, poultry, hay and wheat as the principal sources of agricultural income. Minerals produced in Denton County include natural gas and clay. Institutions of higher education include University of North Texas and Texas Woman's University with a combined 2011 fall enrollment of over 43,000. Nearby Lake Lewisville attracts over 3,000,000 visitors annually. Alliance Airport, the largest industrial airport in the world is located in the county and continues to attract new transportation, distribution, and manufacturing tenants. The Texas Motor Speedway, a major NASCAR race track, was completed in 1997 and has had a positive impact on employment and recreational spending for the area. A major Wal-Mart distribution center located in Sanger is adding to the growth of the northern portion of the County. Robson Development is constructing one of the nation's largest new communities for retired citizens in the southern portion of the County. Source: Texas Municipal Report and information from the County. Education DENTON COUNTY General B-2 Major Employers in Denton County Number of Employer Principal Line of Business Employees University of North Texas Education 7,100 Lewisville Independent School District Education 4,500 Frito Lay Co Distribution Center 2,436 American Airlines Airline 2,350 Texas Women's University Education 2,200 Denton Independent School District Education 2,000 Horizon Health Healthcare 1,500 Denton State School MHMR Facility 1,473 Denton County County Government 1,467 Xerox Corporation Office Equipment 1,400 City of Denton Municipality 1,200 Federal Express Mail Center 863 Denton Reg. Medical Center Medical Center 850 Wal-Mart Distribution Center Distribution Center 800 FEMA Emergency Management 750 Source: Denton County Economic Development and ONCOR Community Profiles Labor Force Statistics Denton County December December 2011 2010 Civilian Labor Force 362,724 356,579 Total Employed 339,700 330,862 Total Unemployed 23,024 25,717 % Unemployed 6.3% 7.2% % Unemployed (Texas) 7.2% 8.0% % Unemployed (United States) 8.3% 9.1% Source: Texas Workforce Commission, Labor Market Information Department. B-3 rfhis page is intentionally left blank.] APPENDIX C FORM OF LEGAL OPINION OF BOND COUNSEL Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. [DATE OF DELIVERY] TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS SERIES 2012 DATED MARCH 1, 2012 IN THE AGGREGATE PRINCIPAL AMOUNT OF $2,355,000 AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District") issuer of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates and mature on the dates, and are subject to redemption, in accordance with the terms and conditions stated in the text of the Bonds. Terms used herein and not otherwise defined shall have the meaning given in the Order of the District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXAMINED the Constitution and laws of the State of Texas, and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number T-l), and specimens of Bonds to be authenticated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District or if the District consolidates with another District. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed or refinced therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, APPENDIX D EXCERPTS FROM THE DISTRICT'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 (Independent Auditor's Report, General Financial Statements and Notes to the Financial Statements - not intended to be a complete statement of the Issuer's financial condition. Reference is made to the complete Annual Financial Report for further information.) and Company PLLC Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors Trophy Club Municipal Utility District No. 1 Trophy Club, Texas We have audited the accompanying financial statements of the governmental activities and each major fund of the Trophy Club Municipal Utility District No. 1, (the District), as of and for the year ended September 30, 2011, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. 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 audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, and each major fund of the Trophy Club Municipal Utility District No. 1 as of September 30, 2011, and the changes in financial position for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis, and budgetary comparison information on pages 3 through 10 and 35 through 36, are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. 1 LaFollett & Company PLLC PO Box 717 • Tom Bean, TX • 75489 903-546-6975 • www.lafollettcpa.com In accordance with Government Auditing Standards, we have issued a report dated January 31, 2012 on our consideration of the District's internal control over financial reporting and our tests of compliance with certain provisions of laws, regulations, contracts and grants. The purpose of that report is to describe the scope of testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. The report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise Trophy Club Municipal Utility District No. 1 's basic financial statements. The accompanying individual schedules and other supplementary information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The accompanying individual schedules and other supplementary information have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. LaFollett & Company, PLLC Tom Bean, Texas January 31, 2012 2 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Trophy Club Municipal Utility District No. 1, Texas (the "District") Management's Discussion and Analysis (MD&A) is a narrative overview and analysis designed to provide the reader a means to identify and understand the financial activity of the District and changes in the District's financial position during the fiscal year ended September 30, 2011. The Management's Discussion and Analysis is supplemental to, and should be considered along with, the District's financial statements. Financial Highlights At the close of the fiscal year, the assets of the District exceeded its liabilities by $12,262,122. Of this amount, $3,123,113 is unrestricted net assets and may be used to meet the District's ongoing commitments. The District's net assets increased by $1,991,485 as a result of operations. At the end of the fiscal year, the District's governmental type funds reported a combined fund balance of $3,143,822. As of September 30, 2011, the unassigned fund balance of the General Fund was $2,509,429, which is equal to 42% of total General Fund expenditures. The governmental long-term debt bond obligations of the District decreased by $1,115,000. Overview of the Financial Statements The MD&A is intended to introduce the reader to the District's basic financial statements, which are comprised of three components: 1. Government-Wide Financial Statements, 2. Fund Financial Statements, and 3. Notes to Basic Financial Statements. The report also contains other required supplementary information in addition to the basic financial statements. Government-Wide Financial Statements - the government wide financial statements are designed to provide the reader with a general overview of the District's finances in a way that is comparable with financial statements from the private sector. The government-wide financial statements consist of two statements: 1. The Statement of Net Assets - (Page 11) this statement presents information on all of the District's assets and liabilities; the difference between the two is reported as net assets. Over an extended period, the increase or decrease in net assets will serve as a good indicator of whether the financial position of the District is improving or deteriorating. 3 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 4 Overview of the Financial Statements - continued 2. The Statement of Activities - (Page 12) gives information showing how the District's net assets have changed during the fiscal year. All revenues and expenses are reported on the full accrual basis. Fund Financial Statements - Fund financial statements provide detailed information about the most important funds and not about the District as a whole as in the government-wide financial statements. The District uses fund accounting to demonstrate compliance with finance related legal requirements which can be categorized as governmental fund activities. Governmental Funds - All of the District's activities are reported in governmental funds. They are used to account for those functions known as governmental activities. But unlike government-wide financial statements, governmental fund financial statements focus on how monies flow into and out of those funds and their resulting balances at the end of the fiscal year. Statements of governmental funds provide a detailed short-term view of the District's general government operations and the basic services it provides. Such information can be useful in evaluating a government's short-term financing requirements. The District maintains three governmental funds. Information is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances for the General Fund, Debt Service Fund and Capital Projects Fund, all of which are considered to be major funds. The District adopts annual appropriated budgets for the General Fund and Debt Service Funds. A budgetary comparison statement is provided for each annually budgeted fund to demonstrate compliance with its budget. Notes to the Basic Financial Statements - The notes provide additional information that is essential to a full understanding of the data presented in the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 17-34. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Overview of the Financial Statements - continued Government-wide Financial Analysis The management discussion and analysis highlights the information provided in both the Statement of Net Assets and Statement of Activities in the government-wide financial statements. It may serve over an extended period of time, as a useful indicator of the District's financial position. At the end of the fiscal year, the District's assets exceeded liabilities by $12,262,122. Of this amount $9,031,162 (74%) reflects the District's investment in capital assets (e.g., land, buildings, machinery and equipment, net of accumulated depreciation), less any related outstanding debt used to acquire those assets. The District uses these capital assets to provide service to the community; therefore these assets are not available for future spending. Table 1 Condensed Statements of Net Assets Governmental Governmental Activities Activities 2011 2010 Current and other $ 4,782,322 $ 6,211,302 Capital assets 16,742,462 14,187,749 Total Assets 21,524,784 20,399,051 Long-term liabilities 6,850,903 9,080,647 Other liabilities 2,411,759 1,047,767 Total liabilities 9,262,662 10,128,414 Net Assets: Invested in capital assets, net of related debt 9,031,162 7,648,983 Restricted 107,847 262,048 Unrestricted 3,123,113 2,359,606 Total Net Assets (FY10 restated) $ 12,262,122 $ 10,270,637 5 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 District operational analysis - The following table provides a summary analysis of the District's consolidated operations for the fiscal years ended September 30, 2011 and 2010. Governmental activities have increased the District's net assets by $1,991,485, which amounts to a 19% increase in net assets for the year ended September 30, 2011. Table 2 Changes in Net Assets Governmental Governmental Activities Activities _ 2011 2010 Revenue: Program revenue Charges for services $ Grants and Contributions General Revenue Ad valorem taxes Unrestricted investment earnings Miscellaneous 5,814,098 $ 4,351,155 89,330 11,200 2,081,548 2,216,287 7,573 12,724 80,908 179,502 Total Revenue 8,073,457 6,770,868 Expenses: Water & Wastewater operations 3,499,324 2,603,224 General government 1,400,004 1,520,193 Fire 785,195 997,997 Interest and fiscal charges 397,449 317,508 Total Expenses 6,081,972 5,438,922 Increase in net assets (FY10 restated) $ 1,991,485 $ 1,331,946 Financial analysis of the District's funds Governmental Funds - the main focus of the District's governmental funds is to provide information on the flow of monies to and from the funds, and to note the unassigned fund balance, which is a good indicator of resources available for spending in the near term. The 6 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 information derived from these funds is highly useful in assessing the District's financial requirements. The unassigned fund balance may serve as a useful measure of the government's net resources available for use at the fiscal year-end. At the end of the fiscal year, the District's governmental funds reported combined ending fund balances of $3,143,822, of which 70%, or $2,206,963, is unassigned and available to the District for future spending. Additional fund balances of $107,847 are assigned to pay debt service. General Fund budgetary highlights Revenue: Revenues were $1,072,966 more than budgeted • Water and wastewater charges were $973,696 (22%) more than budgeted. The budget was based on a normal year, but the District experienced dry, hot weather increasing the use of water. Expenses: Expenses were $396,693 less than budgeted • Water operations were $179,979 more than budgeted due to a higher water use during above average summer heat and dry weather. • The Fire Department had a $436,517 positive budget variance (see page 35) for 2011 expenditures before transfers and capital outlays. After these items are considered, the positive variance was $50,517. Debt Service Fund: • Actual debt service fund revenue was $12,921 more than budgeted due to the payment of delinquent taxes. The debt service expenses were $1,040 less than budgeted. • The debt service fund reserves decreased from $272,132 to $ 107,847. Overall: • Governmental type funds revenue totaled $8,080,851 while expenditures totaled $9,927,933. • Total governmental type fund balances decreased from $4,990,903 to $3,143,821; a decrease of $1,847,082 or 37%. The decrease was expected due to the Capital Projects Fund's use of $2 million of prior year bond proceeds for fiscal year 2011 capital outlays. 7 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Capital Asset and Debt Administration The District's investment in capital assets for its governmental activities as of September 30, 2011 amounted to $16,742,462, net of accumulated depreciation. This represents a broad range of capital assets including, but not limited to land, buildings, improvements, machinery and equipment, vehicles, and water, wastewater treatment, and wastewater collection systems. Capital assets increased approximately 17% during 2011 primarily due to the completion of the new fire department facility. The Capital Projects Fund expenditure for this facility in 2011 was approximately $2.5 million. A management review of annual depreciation for capital assets was completed during the fiscal year and identified approximately $665,000 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation and net assets have been adjusted accordingly. Additional information about capital assets may be found in Note 5 in the notes to financial statements. Debt administration Long-Term Debt - at the end of the current fiscal year the consolidated District had $7,789,214 of general obligation bonds, contractual obligation bonds, notes payable, capital lease obligations, and accrued compensated absences, a decrease of 14% from the previous fiscal year. Of this amount, $7,511,201 is backed by the full faith and credit of the government. The District had no new debt for fiscal year 2011. General debt currently outstanding Table 3 Outstanding Debt at Year-end Governmental Governmental Activities Activities 2011 2010 General obligation bonds $ 7,162,142 $ 8,280,719 Contractual obligations 349,059 554,752 Notes payable 190,209 196,052 Capital lease obligations 9,888 19,774 Compensated absences 77,916 75,777 Total $ 7,789,214 $ 9,127,074 8 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 Economic factors and next year's budgets and rates: General fund fiscal 2012 budgetary highlights Revenue: The District's 2012 operational revenue is budgeted to increase by $1,349,996. • Property tax revenue budget increased by $103,010 due to a decrease in existing values and a substantial increase in new construction residential values. • Water and wastewater revenue budget increased by $993,154 due to an increase in utility rates and new construction in residential homes. • Utility fees revenue increased $170,980 due to the reduction in debt service bond payments. $338,880 of the $345,000 in Utility fees will be allocated to operations. Expenses: The District's 2012 operational expense is budgeted to increase by $1,228,358. • The majority of the increase is related to capital expenses and the four year plan to replace all existing meter heads ($85,000). • Bulk water budget is to increase $310,000 due to the increase in new construction residential homes. Overall: The District's2012 operational budget is anticipated to have expenses of $7,406,912 on revenues of $7,141,830 resulting in a $265,082 use of reserves. Debt Service: • Budgeted 2012 debt service revenues are budgeted to decrease from $1,498,059 in fiscal 2011 to $870,300 in fiscal 2012, a decrease of $627,759, or 41.9%. • Debt service appropriations will decrease from $1,498,059 to $870,300 due to two bond issues being paid off in fiscal year 2011. The consolidated District's overall budget for revenue increased from $7,275,586 in fiscal 2011 to $8,012,130 in fiscal 2012 a 10.12% increase. The overall appropriations increased from $7,554,975 to $8,277,212 a 9.56% increase. 9 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30,2011 10 Requests for information This financial report is designed to provide a general overview of the District's consolidated finances for all interested parties. Questions concerning any of the information in this report or requests for additional information should be directed to the Trophy Club Municipal Utility District No. 1, Senior Accountant, 100 Municipal Drive, Trophy Club, Texas 76262. BASIC FINANCIAL STATEMENTS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Governmental Activities ASSETS Cash and cash equivalents $ 3,514,926 Receivables Accounts receivable, net 783,977 Taxes 27,760 Other 253,400 Due from other governments 33,833 Prepaids 7,755 Deferred charges 160,670 Non-depreciable capital assets: Land 248,093 Construction in progress 281,899 Non-depreciable capital assets: Buildings and other improvements 3,813,236 Machinery, vehicles, and other equipment 3,082,168 Water system 16,385,424 Organization costs 2,331,300 Accumulated depreciation (9,399,658) TOTAL ASSETS $ 21,524,784 LIABILITIES Accounts payable $ 1,137,121 Accrued liabilities 24,438 Accrued interest payable 28,237 Due to other governments 96,564 Customer deposits 187,087 Noncurrent liabilities: Debt due within one year 938,311 Debt due in more than one year 6,850,903 TOTAL LIABILITIES 9,262,662 NET ASSETS Invested in capital assets, net of related debt 9,031,162 Restricted for debt service 107,847 Unrestricted 3,123,113 TOTAL NET ASSETS $ 12,262,122 The notes to financial the statements are an integral part of this statement. 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30, 2011 Governmental Activities Program Revenues Program Activities Governmental Activities Expenses Charges for Services Operating Grants and Contributions Capital Grants and Contributions General government $ 319,418 3 i 484,770 $ $ - Water operations 2,495,780 3,534,489 -- Wastewater operations 646,419 1,794,839 -- Wastewater collection system 357,125 --- Utility billing 207,307 --- Directors 14,356 --- Manager's office 537,597 --- Finance and H.R. 120,227 --- Facilities management 77,493 --- Information systems 123,605 --- Fire 785,195 -11,330 78,000 Interest on long term debt 397,449 --- Total governmental activities $ 6,081,972 3 5 5,814,098 $ 11,330 $ 78,000 Net (Expenses) Revenue and Changes in Net Assets Governmental Activities $ 165,352 1,038,709 1,148,420 (357,125) (207,307) (14,356) (537,597) (120,227) (77,493) (123,605) (695,865) (397,449) (178,544) General Revenues: Ad valorem taxes 2,081,548 Investment income 7,573 Miscellaneous " 80,908 Total general revenues 2,170,029 Change in net assets 1,991,485 Net Assets - beginning of year, as restated 10,270,637 Net Assets - end of year $ 12,262,122 The notes to the financial statements are an integral part of this statement. 12 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30,2011 ASSETS Debt Capital Total Service Projects Governmental General Fund Fund Fund Funds Assets Cash and cash equivalents $ 3,357,805 $ 107,847 $ 49,274 $ 3,514,926 Receivables: Accounts receivables, net 783,977 - - 783,977 Taxes 14,170 13,591 - 27,760 Other receivables 253,400 - - 253,400 Due from other governments 33,833 - - 33,833 Due from other funds 199 - - 199 Prepaids 7,755 -_ - 7,755 TOTAL ASSETS $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 LIABILITIES AND FUND BALANCES Liabilities Accounts payable $ 785,580 $ -$ 351,541 $ 1,137,121 Accrued liabilities 24,438 --24,438 Customer deposits 187,087 --187,087 Due to other governments 96,564 -96,564 Due to other funds --199 199 Deferred revenue 19,029 13,591 -32,620 Total liabilities 1,112,698 13,591 351,740 1,478,029 nd Balances Non-spendable prepaids 7,755 --7,755 Assigned - Budgetary deficits 265,082 --265,082 Assigned - Other 556,175 107,847 -664,022 Unassigned 2,509,429 -(302,466) 2,206,963 Total fund balances 3,338,441 107,847 (302,466) 3,143,822 TOTAL LIABILITIES AND FUND BALANCES $ 4,451,139 $ 121,438 $ 49,274 $ 4,621,851 The notes to financial statements are an integral part of this statement. 13 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO STATEMENT OF NET ASSETS SEPTEMBER 30,2011 Total fund balances - governmental funds $ 3,143,822 Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not current financial resources and, therefore, are not reported in the governmental funds balance sheet. 16,742,462 Costs associated with the issuance of long-term debt are expensed when incurred in governmental funds. These costs are capitalized and amortized over the life of the debt in the government wide financial statements. 160,670 Revenue reported as deferred revenue in the governmental funds balance sheet is recognized as revenue in the government wide statement financial statements. 32,621 Interest payable on long term debt does not require current financial resources; therefore interest payable is not reported as a liability in the governmental funds balance sheet. (28,237) Accrued compensated absences does not require the use of current financial resources; therefore accrued vacation is not reported as a liability in the governmental funds balance sheet. (77,916) Long-term liabilities, including bonds payable are not due and payable in the current period and, therefore, are not reported in the fund financial statements. (7,711,300) Net assets of governmental activities $ 12,262,122 The notes to the financial statements are an integral part of this statement. 14 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS SEPTEMBER 30,2011 Total Debt Service Capital Governmental General Fund Fund Projects Fund Funds Revenues: Water and wastewater charges $ 5,323,244 $ $ $ 5,323,244 Taxes 1,311,296 777,648 -2,088,945 Utility fees 165,600 246,100 -411,700 Intergovernmental revenues 89,330 --89,330 Miscellaneous 80,906 --80,906 Oversize meter reimbursements 70,594 --70,594 Inspection and tap fees 8,560 --8,560 Investment income 5,534 985 1,054 7,573 Total revenues 7,055,065 1,024,734 1,054 8,080,852 Expenditures Current: Water operations 2,271,490 --2,271,490 Fire 770,123 --770,123 Wastewater operations 598,465 --598,465 Manager's office 537,597 --537,597 Wastewater collection system 277,775 --277,775 Utility billing 207,307 --207,307 Information systems 123,605 --123,605 Finance 119,359 --119,359 General government 85,092 --85,092 Facilities management 77,493 --77,493 Directors 14,356 --14,356 Human resources 868 --868 Capital Outlay 515,884 -2,591,255 3,107,139 Debt Service Principal 221,422 1,115,000 -1,336,422 Interest and fiscal charges 18,823 379,559 -398,382 Bond issue costs -2,460 -2,460 Total expenditures 5,839,660 1,497,019 2,591,255 9,927,933 Excess (deficiency) of revenues over (under) expenditures 1,215,405 (472,285) (2,590,201) (1,847,081) Other financing sources (uses) Transfers in -308,000 581,878 889,878 Transfers out (889,878) --(889,878) Total other financing sources (uses) (889,878) 308,000 581,878 (0) Net change in fund balance 325,527 (164,285) (2,008,323) (1,847,081) Fund Balances - beginning of year 3,012,914 272,132 1,705,857 4,990,903 Fund Balances - end of year $ 3,338,441 $ 107,847 $ (302,466) $ 3,143,822 The notes to the financial statements are an integral part of this statement. 15 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RECONCILIATION OF THE STATEMENT OF REVENUES EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES YEAR ENDED SEPTEMBER 30,2011 Net change in fund balances - total governmental funds $ (1,847,081) Amounts reportedfor governmental activities in the statement of activities are different because: Depreciation expense on capital assets reported in the statement of activities does not require the use of current financial resources, therefore, depreciation expense is not reported as expenditures in the governmental funds. (612,059) Governmental funds report capital outlays as expenditures. However, in the statement of activities the costs of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount of capital assets recorded in the current period. 3,107,139 Debt principal payments reduces long-term liabilities in the statement of net assets, but it is recorded as an expenditure in the governmental funds 1,336,422 Current year changes in the long term liability for compensated absences do not require the use of current financial resources; therefore they are not reported as expenditures in the governmental funds. (2,139) Governmental funds report the effects of issuance costs, premiums, and deferred losses on refunding when debt is first issued, whereas the amounts are deferred and amortized in the statement of activities. (3,577) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing the change in deferred revenue and various other items. The net effect of these reclassifications is to increase net assets. 9,388 Current year changes in accrued interest payable do not require the use of current financial resources and, therefore, are not reported as expenditures in the governmental funds. 3,392 Change in net assets of governmental activities $ 1,991,485 The notes to the financial statements are an integral part of this statement. 16 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General Statement Trophy Club Municipal Utility District No. 1 (the District) was created by an order of the Texas Commission on Environmental Quality (TCEQ) (formerly the Texas Natural Resources Conservation Commission) on March 4, 1975 and confirmed by the electorate of the District at a confirmation election on October 7, 1975. The Board of Director's held its first meeting on April 24, 1975. The Bonds were first sold on June 8, 1976. The District operates pursuant to Article XVI, Chapter 59 of the Texas Constitution and Chapter 54 of the Texas Water Code, as amended. On May 9, 2009, citizens voted to consolidate the District and Trophy Club Municipal Utility District No. 2 (MUD2). As a result, the District reports consolidated activity and balances for the District and the entities formerly known as MUD2 and the Trophy Club Master District Joint Venture (a joint venture of MUD 1 and MUD2). The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for the District. The financial statements of the District have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to government units. B. Financial Reporting Entity As required by accounting principles generally accepted in the United States of America, these financial statements include the activities of the District and any organizations for which the District is financially accountable or for which the nature and significance of their relationship with the District are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organization's governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. A primary government has the ability to impose its will on an organization if it can significantly influence the programs, projects, or activities of, or the level of services performed or provided by, the organization. A financial benefit or burden relationship exists if the primary government (a) is entitled to the organization's resources; (b) is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization; or (c) is obligated in some manner for the debt of the organization. Some organizations are included as component units because of their fiscal dependency on the primary government. An organization is fiscally dependent on the primary government if it is unable to adopt its budget, levy taxes, set rates or charges, or issue bonded debt without approval by the primary government. Accordingly, the District has no component units. 17 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED C. Government-Wide and Fund Financial Statements The govemment-wide financial statements (the statement of net assets and the statement of activities) report information on all of the activities of the District, except for fiduciary funds. The effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The activities of the District are comprised only of governmental activities. The statement of activities demonstrates the degree to which the direct expenses of a given program are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific program. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given program and 2) operating or capital grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Taxes and other items not properly included among program revenues are reported instead as general revenues. Fund Financial Statements The District segregates transactions related to certain functions or activities in separate funds in order to aid financial management and to demonstrate legal compliance. These statements present each major fund as a separate column on the fund financial statements. The District does not report any non-major funds. Governmental funds are those funds through which most governmental functions typically are financed. The measurement focus of governmental funds is on the sources, uses and balance of current financial resources. The District has presented the following major governmental funds: General Fund The General Fund is the main operating fund of the District. This fund is used to account for all financial resources not accounted for in other funds. All general tax revenues and other receipts that are not restricted by law or contractual agreement to some other fund are accounted for in this fund. General operating expenditures, fixed charges and capital improvement costs that are not paid through other funds are paid from the General Fund. Debt Service Fund The Debt Service Fund is used to account for resources accumulated and payments made for principal and interest on the long-term debt of governmental funds. Capital Projects Fund The Capital Projects Fund is used to account for funds received and expended for the acquisition and construction of infrastructure and other capital assets. 18 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED D. Measurement Focus and Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government-wide statements are reported using the economic resources measurement focus and the accrual basis of accounting. The economic resources measurement focus means all assets and liabilities (whether current or non-current) are included on the statement of net assets and the operating statements present increases (revenues) and decreases (expenses) in net total assets. Under the accrual basis of accounting, revenues are recognized when earned. Expenses are recognized at the time the liability is incurred. Governmental fund financial statements are reported using the current financial resources measurement focus and are accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual; i.e., when they become both measurable and available. "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. The District considers receivables collected within sixty days after year-end to be available and recognizes them as revenues of the current year. Expenditures are recorded when the related fund liability is incurred. However, debt service expenditures are recorded only when payment is due. The revenues susceptible to accrual are interest income and ad valorem taxes. All other governmental fund revenues are recognized when received. E. Cash and Investments The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments of three months or less from the date of acquisition. The District's investment policy requires that all monies be deposited with the authorized District depository or in (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States; (4) obligations of states, agencies, counties, cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than A or its equivalent; (5) certificates of deposit by state and national banks domiciled in this state that are (A) guaranteed or insured by the Federal Deposit 19 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED E. Cash and Investments - Continued Insurance Corporation, or its successor; or, (B) secured by obligations that are described by (1) - (4); or, (6) fully collateralized direct repurchase agreements having a defined termination date, secured by obligations described by (1), pledged with third party selected or approved by the District, and placed through a primary government securities dealer. All investments are recorded at fair value based on quoted market prices. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties. F. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the government-wide financial statements. All capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated assets are valued at their fair market value on the date donated. Repairs and maintenance are recorded as expenses. Renewals and betterments are capitalized. Interest has not been capitalized during the construction period on property, plant and equipment. Assets capitalized have an original cost of $5,000 or more and over one year of useful life. Depreciation has been calculated on each class of depreciable property using the straight-line method. Estimated useful lives are as follows: Buildings 50 Years Improvements other than buildings 15-30 Years Machinery and equipment 5-15 Years Vehicles 6-12 Years Water and wastewater systems 30-65 Years G. Accumulated Vacation, Compensated Time and Sick Leave The District has no employees of its own, but instead, personnel services are furnished under a contract with the Town of Trophy Club, Texas. The District records an allocation of personnel costs from the Town in personnel expense accounts rather than as single line item payable to the Town. Accordingly, the District also records current payroll and an allocation in compensated absences earned by the personnel assigned to it. The District reports this liability using the Town's vacation policy; however, the Town retains primary liability for its employee vacation pay. 20 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED H. Organizational Costs The District, in conformance with requirements of the TCEQ, capitalized costs incurred in the creation of the District. The TCEQ requires capitalization of organizational costs for the construction period, all costs incurred in the issue and sale of bonds, bond interest and amortized bond premium and discount losses on sales of investments, accrued interest on investments purchased, attorney fees and some administrative expenses until construction and acceptance or use of the first revenue producing facility has occurred. The District amortizes the organizational costs using the straight-line method over a period of 22 to 45 years. I. Net Assets Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the District or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. J. Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses/expenditures. Actual results could differ from those estimates. K. Fund Balances The Governmental Accounting Standards Board (GASB) has issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54). This Statement defines the different types of fund balances that a governmental entity must use for financial reporting purposes in the fund financial statements for governmental type funds. It does not apply for the government-wide financial statements. GASB 54 requires the fund balance amounts to be properly reported within one of the following fund balance categories: Nonspendable - such as fund balance associated with inventories, prepaids, long-term loans and notes receivable, and property held for resale (unless the proceeds are restricted, committed, or assigned) 21 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED K. Fund Balances - Continued Restricted - fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation, Committed - fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the Board of Directors (the district's highest level of decision-making authority), Assigned - fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed, and Unassigned - fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications, and other fund's that have total negative fund balances. NOTE 2. CASH AND INVESTMENTS The funds of the District must be deposited and invested under the terms of a contract, contents of which are set out in the Depository Contract Law. The depository bank places approved pledged securities for safekeeping and trust with the District's agent bank in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation (FDIC) insurance. At September 30, 2011, the carrying amount of the District's deposits (cash, certificates of deposit, and interest-bearing savings accounts included in temporary investments) was $619,096 and the bank balance was $848,446. The District's cash deposits at September 30, 2011, and during the year then ended were entirely covered by FDIC insurance or by pledged collateral held by the District's agent bank in the District's name. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the District to adopt, implement, and publicize an investment policy. That policy must address the following areas; (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity, allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, (9) and bid solicitation preferences for certificates of deposit. 22 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Statutes and the District's investment policy authorized the District to invest in the following investments as summarized below: Maximum Maximum Authorized Maximum Percentage Investment Investment Type Maturity of Portfolio In One Issuer U.S. Treasury Obligations 2 years 85% NA U.S. Agencies Securities 2 years 85% NA State of Texas Securities 2 years 85% NA Certificates of Deposits 2 years 85% NA Municipal Securities 2 years 85% NA Money Market 2 years 50% NA Mutual Funds 2 years 50% NA Investment pools 2 years 100% NA The Act also requires the District to have independent auditors perform test procedures related to investment practices as provided by the Act. The District is in substantial compliance with the requirements of the Act and with local policies. Cash and investments as of September 30, 2011 are classified in the accompanying financial statements as follows: Statement of Net Assets Primary Government: Cash and cash equivalents $ 3,514,926 Total cash and investments $ 3,514,926 Cash and investments as of September 30, 2011 consist of the following: Deposits with financial institutions $ 619,096 Investments 2,895,830 Total cash and investments $ 3,514,926 The District's cash and investments balance includes $187,087 which is restricted for customer deposits. 23 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the District manages its exposure to interest rate risk is by investing mainly in investment pools which purchase a combination of shorter term investments with an average maturity of less than 60 days thus reducing the interest rate risk. The District monitors the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. The District has no specific limitations with respect to this metric. As of September 30, 2011, the District had the following investment: Investment Type TexPool Total Investments Amount Weighted Average Maturity $ 2,895,830 34 days $ 2,895,830 As of September 30, 2011, the District did not invest in any securities which are highly sensitive to interest rate fluctuations. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. Presented below is the minimum rating required by (where applicable) the Public Funds Investment Act, the District's investment policy, or debt agreements, and the actual rating as of year-end for each investment type. Investment Type Amount Minimum Legal Rating Rating as of Year End TexPool 2,895,830 N/A AAAm Total Investments 2,895,830 Concentration of Credit Risk The investment policy of the District contains no limitations on the amount that can be invested in any one issuer. As of September 30, 2011, other than external investment pools, the District did not have 5% or more of its investments with one issuer. 24 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 2. CASH AND INVESTMENTS - CONTINUED Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The Public Funds Investment Act and the District's investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The Public Funds Investment Act requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least the bank balance less FDIC insurance at all times. As of September 30, 2011 the District deposits with financial institutions were not in excess of federal depository insurance limits. Investment in State Investment Pools The District is a voluntary participant in TexPool. The State Comptroller of Public Accounts exercises responsibility over TexPool. This oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. TexPool operates in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940. TexPool uses amortized costs rather than market value to report net assets to compute share prices. Accordingly, the fair value of the position in TexPool is the same as the value of TexPool shares. 25 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 3. ACCOUNTS RECEIVABLE Receivables as of year-end, including the applicable allowances for uncollectible accounts, are as follows: Accounts Receivable: MUD water $ 388,269 MUD sewer 161,167 Unbilled receivables 176,861 Refuse (as agent for Town of Trophy Club) 51,903 Refuse tax (as agent for Town of Trophy Club) 4,574 Storm drainage (as agent for Town of Trophy Club) 13,254 796,028 Allowance for uncollectible accounts (12,051) Total (net) $ 783,977 Due from Other Governments: Town of Trophy Club $ 33,833 NOTE 4. INTERFUND TRANSFERS Transfers between funds during the year are as follows: Transfer In Transfer Out Amount Purpose Capital Projects General Fund $ 581,878 Capital Improvement Costs Debt Service General Fund 308,000 Debt service Total $ 889,878 NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS Prior Period Adjustment to Net Assets A management review of annual depreciation for capital assets was completed during the fiscal year and identified $664,937 of depreciation that had over accumulated through the end of fiscal year 2010. Beginning fiscal year 2011 accumulated depreciation has been decreased and net assets have been increased by this amount on the government-wide financial statements. 26 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Capital Asset Activity Capital asset activity for the year ended September 30, 2011, was as follows: Beginning Balance as Beginning Previously Adjustments/ Balance Retirements/ Ending Reported Reclassifications As Restated Additions Transfers Balance Governmental Activities: Capital assets, not being depreciated Land $ 248,093 $ -$ 248,093 $ $ $ 248,093 Construction in progress 601,102 -601,102 2,817,925 (3,137,128) 281,899 Total capital assets not being depreciated 849,195 -849,195 2,817,925 (3,137,128) 529,992 Capital assets, being depreciated Buildings 506,790 -506,790 -3,041,428 3,548,218 Improvements other than buildings 265,017 -265,017 --265,017 Machinery and equipment 1,179,578 -1,179,578 274,635 -1,454,213 Organization costs 2,331,300 -2,331,300 --2,331,300 Vehicles 1,615,129 -1,615,129 78,000 (65,174) 1,627,955 Water system 8,080,056 -8,080,056 --8,080,056 Wastewater treatment system 5,441,926 -5,441,926 --5,441,926 Wastewater collection system 2,863,443 -2,863,443 --2,863,443 Total capital assets being depreciated 22,283,239 -22,283,239 352,635 2,976,254 25,612,128 Less accumulated depreciation for: Buildings (159,049) 2,788 (156,261) (14,238) 45,485 (125,015) Improvements other than buildings (174,388) 1 (174,387) (13,166) -(187,552) Machinery and equipment (391,884) 427 (391,457) (90,102) -(481,559) Organization costs (2,016,621) (10,781) (2,027,402) (76,350) -(2,103,752) Vehicles (994,555) (1,476) (996,031) (110,759) 65,174 (1,041,616) Water system (3,013,031) 358,073 (2,654,958) (131,125) -(2,786,083) Wastewater treatment system (1,743,613) 357,383 (1,386,230) (127,272) -(1,513,503) Wastewater collection system (1,070,054) (41,479) (1,111,533) (49,046) -(1,160,578) Total accumulated depreciation (9,563,195) 664,937 (8,898,258) (612,058) 110,659 (9,399,658) Governmental activities capital assets, net $ 13,569,239 $ 664,937 $ 14,234,176 $ 2,558,502 $ (50,215) $ 16,742,462 27 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 5. CAPITAL ASSETS AND PRIOR PERIOD ADJUSTMENTS - Continued Depreciation expense was charged as direct expense to programs of the primary government as follows: General government $ 344,985 Water operations 124,698 Fire department 15,070 Wastewater operations 47,954 Wastewater collection systems 79,351 Total depreciation expense $ 612,058 NOTE 6. LONG-TERM DEBT At September 30,2011, the District's long-term debt payable consisted of the following: Interest Year Average Rate of Final Annual Original Outstanding Description Payable Issue Maturity Payment Amount 9/30/2011 Tax and revenue bonds: Refunding 3.25-5.90% 1997 2011 $ 398,620 $ 3,075,000 $ Refunding 4.00-5.00% 2003 2011 252,963 1,949,288 - Improvements 4.00-5.00% 2002 2023 281,058 3,510,000 2,510,000 Operations 4.00-5.00% 2003 2023 89,793 1,200,000 840,000 Refunding 3.00-4.20% 2005 2023 195,676 3,143,998 1,770,000 Improvements 3.50-5.00% 2010 2031 148,205 2,000,000 2,000,000 $ 7,120,000 Contractual Obligations: Fire Truck 4.33% 2007 2014 $ 56,000 $ 448,000 $ 201,000 Improvements 3.50% 2004 2012 39,000 270,000 33,750 Improvements 3.90% 2009 2012 110,000 330,000 114,309 $ 349,059 Notes payable: Equipment 2.50% 1999 2018 $ 2,245 $ 35,000 $ 14,254 Equipment 3.90% 2010 2015 201,318 179,955 175,955 $ 190,209 Capital Lease Obligations: Equipment 4.00% 2008 2012 $ 9,886 $ 49,432 $ 9,886 28 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - Continued The following is a summary of long-term debt transactions of the District for the year ended September 30,2011: Beginning Balance Additions Reductions Biding Balance Due Within One Year Governmental Activities: Tax and revenue bonds Contractual obligations Deferred loss on refuning Premium m bonding $ 8,235,000 554,752 (55,907) 101,626 $ $ (1,115,000) (205,693) 4,414 (7,991) $ 7,120,000 349,059 (51,493) 93,635 $ 565,000 212,059 (4,414) 7,991 8,835,471 -(1,324,270) 7,511,201 780,636 Nates payable 196,052 -(5,843) 190,209 69,871 Capital lease obligations 19,774 -(9,886) 9,888 9,888 Compensated absences (restated) 75,777 2,139 -77,916 77,916 Total Governmental Activities Long-term Liabilities $ 9,127,074 $ 2,139 $ (1,339,999) $ 7,789,214 $ 938,311 29 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS Year Ending September 30, Principal Interest Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017-2021 2,520,000 832,679 3,352,679 2022-2026 1,525,000 283,945 1,808,945 2027-2031 675,000 87,670 762,670 Total $ 7,120,000 $ 2,514,189 $ 9,634,189 Contractual obligations Year Ending September 30, Principal Interest Total 2012 $ 212,059 $ 13,158 $ 225,217 2013 67,000 5,932 72,932 2014 70,000 3,031 73,031 Total $ 349,059 $ 22,121 $ 371,180 Notes payable: Year Ending September 30, Principal Interest Total 2012 $ 69,871 $ 6,201 $ 76,072 2013 37,927 4,578 42,505 2014 37,974 3,107 41,081 2015 38,025 1,634 39,659 2016 2,085 160 2,245 2017-2018 4,327 163_ 4,490 Total $ 190,209 $ 15,843 $ 206,052 30 NOTE 6. LONG-TERM DEBT - CONTINUED The annual requirements to amortize all debts outstanding as of September 30, 2011, are as follows: Tax and revenue bonds: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED Capital Lease: Year Ending September 30, Principal Interest Total 2012 J 9,888 J 399_ J 10,287 Total $ 9,888 $ 399 $ 10,287 The assets acquired under the capital lease obligations above are included in capital assets at a cost of $50,173. Accumulated depreciation on the assets as of September 30,2011 was $ 11,721. The tax revenue bonds are payable from the proceeds of ad valorem taxes levied upon all property subject to taxation within the District, without limitation as to rate or amount, and are further payable from, and secured by a lien on and pledge of the net revenue to be received from the operation of the District's waterworks and sanitary sewer system. The outstanding bonds are callable for redemption prior to maturity at the option of the District as follows: Series 1997 - All maturities from 2008 to 2011 are callable in principal increments of $5,000 on or after September 1, 2007 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2002 - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2003 - No bonds are subject to redemption prior to maturity. Series 2003 (debt issued by the entity formerly known as MUD 2) - All maturities from 2013 to 2023 are callable in principal increments of $5,000 on or after September 1, 2012 at par plus unpaid accrued interest to the fixed date for redemptions. Series 2005 - All maturities from 2014 to 2023 are callable in principal increments of $5,000 on or after September 1, 2013 at par plus unpaid accrued interest to the fixed date for redemptions. Contractual obligations and notes payable are liquidated from the general fund. Tax and revenue bonds are liquidated from the debt service fund. The provisions of the bond resolutions relating to debt service requirements have been met, and the cash allocated for these purposes is sufficient to meet debt service requirements for the year ended September 30, 2011. 31 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 6. LONG-TERM DEBT - CONTINUED In previous years, the District has legally defeased certain outstanding general obligation debt by placing funds into irrevocable trusts pledged to pay all future debt service payments of the refunded debt. Accordingly, a liability for the defeased debt issue is not included in the District's financial statements. As of September 30,2011, the following outstanding bonds were legally defeased: Series Type Amount 1995 Unlimited Tax Refunding Bonds $ 2,490,000 Total $ 2,490,000 NOTE 7. PROPERTY TAXES Property taxes are levied as of October 1, on the assessed value listed as of the prior January 1, for all real and certain personal property located in the District and MUD2 (the "Districts"). The appraisal of property within the District is the responsibility of Denton Appraisal District (Appraisal District) as required by legislation passed by the Texas legislature. The Appraisal District is required under such legislation to assess all property within the Appraisal District on the basis of 100% of its appraised value and is prohibited from applying any assessment ratios. The value of property within the Appraisal District must be reviewed every five years; however, the District may, at its own expense, require annual reviews of appraised values. The Districts may challenge appraised values established by the Appraisal District through various appeals and, if necessary, legal action. Property taxes for the Districts are not limited as to rate or amount. In an election held October 7, 1975, the electorate of the Districts authorized the levy of up to $0.25 per $100 valuation per District for the operations and maintenance of the Districts. Property taxes attach as an enforceable lien on property as of January 1, following the levy date. Taxes are due by January 31, following the levy date. Property taxes are recorded as receivables when levied. Following is information regarding the 2011 tax levies: Adjusted taxable values $ 993,169,500 O & M Fire tax levy $0.11804/$100 1,284,669 I&Staxlevy $0.07696/$100 763,303 Total tax levy $0.1950/$100 $ 2,047,972 32 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 8. FUND BALANCE CLASSIFICATIONS AND DEFICITS The District's authorized their Director to designate certain fund balances as assigned. Excluding unassigned fund balances, the following describes the District's fund balance classifications at September 30,2011: Non-Spendable Fund Balances Non-Spendable Fund Balance of $7,755 for the General Fund represents assets not in spendable form. Assigned Fund Balances The District assigned $265,082 of General Fund fund balances to offset expected fiscal year 2012 budgetary deficits for general operations and the fire department. The District assigned a total of $556,175 of General Fund fund balances for the following: $21,000 for water plant equipment, $219,414 for future technology acquisitions, and $315,761 for fiscal year 2012 expected transfers to the Capital Projects Fund. Fund Balance Deficits The Capital Projects Fund has a fund balance deficit at September 30, 2011 of $302,466. In fiscal year 2012, the District intends to transfer funds from the General Fund to eliminate the deficit. NOTE 9. RISK MANAGEMENT The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; injuries to employees; employee health benefits; and other claims of various nature. Commercial insurance is purchased for the risks of loss to which the District is exposed. Any losses reported but unsettled or incurred and not reported, are believed to be insignificant to the District's basic financial statements. Additionally, the District must operate in compliance with rules and regulations mandated for public water supply systems by federal and state governments. The District is subject to compliance oversight by the Texas Commission on Environmental Quality (TCEQ). Fiscal Year 2011 TCEQ Compliance In October of 2011, the District notified TCEQ of inaccuracies in previously submitted, monthly Discharge Monitoring Reports (DMR's). The inaccuracies related to the laboratory measurement results for Carbonaceous Biochemical Oxygen Demand (CBOD). The District submitted corrected DMR's to TCEQ, but has not been formally notified by TCEQ of the resulting action, if any, that will occur due to the reported inaccuracies. 33 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 NOTES TO BASIC FINANCIAL STATEMENTS NOTE 10. SUBSEQUENT EVENTS The District has evaluated all events and transactions that occurred after September 30, 2011 up through audit report date, which is the date the financial statements were issued. The following is a subsequent for the District: On January 18, 2012, the District issued Trophy Club Municipal Utility District No. 1, Revenue Note, Series 2012 for $1,100,000 (the Note). The Note was issued to finance the expansion of two ground storage tanks. Interest accrues at 2.87% per annum and is payable each March 1st and September 1st commencing March 1, 2012. The following schedule shows amounts that this Note will add to the District's future debt service requirements: Fiscal Year Principal $ 367,000 366,000 367,000 Interest Total $ 386,556 2012 2013 2014 $ 19,556 21,037 10,533 387,037 377,533 $ 1,100,000 $ 51,126 $ 1,151,126 34 rrhis page is intentionally left blank.] REQUIRED SUPPLEMENTARY INFORMATION TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 GENERAL FUND BUDGETARY COMPARISON SCHEDULE (BUDGETARY BASIS) YEAR ENDED SEPTEMBER 30,2011 Variance with Final Budget Budgeted amounts Positive Original Final Actual (Negative) Revenues Water and wastewater charges $ 4,349,548 $ 4,349,548 $ 5,323,244 $ 973,696 Taxes 1,278,248 1,278,248 1,311,296 33,048 Utility fees 167,900 167,900 165,600 (2,300) Intergovernmental revenues 13,750 93,080 89,330 (3,750) Miscellaneous 37,014 38,323 80,906 42,583 Oversize meter reimbursements 50,000 50,000 70,594 20,594 Inspection and tap fees 3,000 3,000 8,560 5,560 Investment income 2,000 2,000 5,534 3,534 Total revenues 5,901,460 5,982,099 7,055,065 1,072,966 Expenditures: Water operations 2,060,851 2,060,851 2,271,490 (210,639) Fire 1,204,001 1,206,640 770,123 436,517 Wastewater operations 628,207 628,207 598,465 29,742 Manager's office 547,908 547,908 537,597 10,311 Wastewater collection system 381,658 381,658 277,775 103,883 Utility billing 237,571 237,571 207,307 30,264 Information systems 131,012 131,012 123,605 7,407 Finance 113,706 113,706 119,359 (5,653) General government 86,314 86,314 85,092 1,222 Facilities management 90,739 90,739 77,493 13,246 Directors 24,528 24,528 14,356 10,172 Human resources 6,945 6,945 868 6,077 Capital Outlay 486,565 720,544 515,884 204,660 Debt Service --240,245 (240,245) Total expenditures 6,000,005 6,236,623 5,839,660 396,963 Excess of revenues over expenditures (98,545) (254,524) 1,215,405 1,469,929 Other financing sources (uses): Transfers in 54,314 54,314 -(54,314) Transfers out (56,911) (56,911) (889,878) (832,967) Total other financing sources (uses) (2,597) (2,597) (889,878) (887,281) Net change in fund balance (101,142) (257,121) 325,527 582,648 Fund Balances - beginning of year 3,012,914 3,012,914 3,012,914 - Fund Balances - end of year $ 2,911,772 $ 2,755,793 $ 3,338,441 $ 582,648 Notes to Required Supplementary Information: The District annual budgets are approved on the budgetary basis. The Board also approves all revisions and appropriations which lapse at each fiscal year-end. 35 INDIVIDUAL SCHEDULES AND OTHER SUPPLEMENTARY INFORMATION REQUIRED BY TEXAS COMMISSION ON ENVIRONMENTAL QUALITY (TCEQ) TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 DEBT SERVICE FUND BUDGETARY COMPARISON SCHEDULE YEAR ENDED SEPTEMBER 30, 2011 Variance with Final Budgeted Amounts Budget Original Final Actual Positive (Negative) Revenues Taxes Investment income Utility fees $ 765,212 500 246,100 $ 765,212 500 246,100 $ 777,648 985 246,100 $ 12,436 485 Total revenues 1,011,812 1,011,812 1,024,733 12,921 Expenditures: Debt service Principal Interest Fees 1,115,000 379,559 3,500 1,115,000 379,559 3,500 1,115,000 379,559 2,460 1,040 Total expenditures 1,498,059 1,498,059 1,497,019 1,040 Deficiency of revenues under expenditures (486,247) (486,247) (472,286) 13,961 Other financing sources Premium on bonds Transfers in 308,000 308,000 308,000 Total other financing sources 308,000 308,000 308,000 Net change in fund balance (178,247) (178,247) (164,286) 13,961 Fund Balances - beginning of year 272,132 272,132 272,132 - Fund Balances - end of year $ 93,885 $ 93,885 $ 107,846 $ 13,961 36 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES 1. Services provided by the District: a) Retail Water b) Retail Wastewater c) Fire Protection d) Irrigation e) Participates in regional system and/or wastewater service (other than emergency interconnect) 2. Retail service providers: a) Retail rates-based on 5/8" meter: Most prevalent type of meter (if not a 5/8"): 1 inch Flat Rates per 1,000 Admin Minimum Rate Gallons Over Fee Usage Y/N Minimum Usage Levels WATER $ 12.71 0 No $ 2.48 0 to 6,000 No 3.00 7,000 to 12,000 No 3.23 13,000 to 25,000 No 3.34 26,000 to 50,000 No 3.44 51,000 + Note: Out of district water rates are double the "in-town" rate and are included in the rate order. WASTEWATER $ 12.71 0 No $ 2.48 0 to 6,000 No 3.00 7,000 to 12,000 No - Caps at 12,000 GOLF COURSE Subject to peak draw rates from Ft Worth water department. NOTE: all rates noted above were amended effective February 1, 2011. District employs winter averaging for wastewater usage? No 37 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 - SERVICE AND RATES - CONTINUED Total water and wastewater charges per 10,000 gallons usage (including surcharges) effective February 1, 2011 First 10,000 gallons used $ 79.18 Next 10,000 gallons used 37.84 Next 10,000 gallons used 32.85 Next 10,000 gallons used 33.40 Next 10,000 gallons used 33.40 Next 10,000 gallons used and subsequent 34.40 Maximum residential wastewater charge is for 12,000 gallons or $45.59 b) Retail service providers: number of retail water and/or wastewater* connections within the District of the fiscal year end. Provide actual numbers and single family equivalents (ESFC). Connections ESFC Active Meter Size Total Active Factor ESFC's Unmetered 1.0 Less than 3/4" 2,513.0 2,495.0 1.0 2,495.0 1" 958.0 934.0 2.5 2,335.0 1 1/2" 18.0 17.0 5.0 85.0 2" 80.0 75.0 8.0 600.0 3" 14.0 13.0 15.0 195.0 4" 12.0 12.0 25.0 300.0 6" 3.0 3.0 50.0 150.0 8" --80.0 - 10" --115.0 - Total Water 3,598.0 3,549.0 6,160.0 Total Wastewater 3,603.0 3,554.0 1.0 3,554.0 * Number of connections relates to water service if provided. Otherwise, the number of wastewater connections should be provided. Note: "inactive" means that water and wastewater connections were made, but service is not being provided. 38 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-1 SERVICES AND RATES (CONTINUED) YEAR ENDED SEPTEMBER 30,2011 TSI - SERVICE AND RATES - CONTINUED 3. Total water consumption (in thousands) during the fiscal year: Gallons pumped into the system Gallons billed to customers Water accountability ratio 1,005,000 927,407 92.3% 4. Standby Fees: Does the District assess standby fees? For the most recent fiscal year, FY2011: Debt Service Operations and Maintenance Total Collected $ 817,317 $ 824,977 $ 1,253,588 $ 1,265,337 Total Levy Yes Percentage Collected 100.9% 100.9% Have standby fees been levied in accordance with Water Code Section 49.231, thereby constituting a lien on property? No** ** Standby fees are levied by the District and constitute a lien under recorded deed restrictions or covenants pursuant to Section 293.150 of Title 30 of Texas Administrative Code. 5. Location of District: Counties in which District is located: Is the District located entirely in one county? Is the District located within a city? Cities in which District is located: a) Denton bO Tarrant No Partially Town of Trophy Club Town of Westlake Is District located within a city's extra territorial jurisdiction (ETJ)? ETJ's in which District is located: Unknown Unknown Is the general membership of the Board appointed by an office outside the District? No 39 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-2 Water Operations Administrative Contribution to Trophy Club Fire Dept Wastewater Operations Capital Outlay Wastewater Collection Systems Information Systems Transfer to Debt Service Misellaneous Total Expenditures and Transfers Number of employees employed by the District: Full time Equivalents (FTEs) Part time Current Year $ 2,271,490 1,042,073 770,123 598,465 515,884 277,775 123,605 1,130,123 $ 6,729,538 29.5 None Prior Year $ 1,882,511 993,986 876,521 711,382 308,798 182,658 558,000 $ 5,513,856 32.5 None 40 GENERAL FUND EXPENDITURES AND OTHER FINANCING USES YEAR ENDED SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-3 TEMPORARY INVESTMENTS SEPTEMBER 30,2011 Identification Interest Maturity Balance End of Accrued Interest Funds Number Rate Date Year End of Year General Fund TexPool 613300002 0.2165% Demand $ 2,787,983 Paid daily Debt Service Fund TexPool 613300003 0.2165% Demand $ 107,847 Paid daily Fire Construction TexPool 613300008 0.2165% Demand $ - Paid daily 2010 GO Fire Station TexPool 613300009 0.2165% Demand $ Paid daily Total - All Funds $ 2,895,830 41 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-4 TAXES LEVIED AND RECEIVABLE YEAR ENDED SEPTEMBER 30,2011 General Fund Debt Operations Fire Total Service Total Taxes receivable beginning of year $ 2,616 $ 15,605 $ 18,221 $ 21,794 $ 40,015 2010 tax levy 87,181 1,197,488 1,284,669 763,303 2,047,972 Total to be accounted for 89,797 1,213,093 1,302,890 785,097 2,087,987 Less collections and adjustments: Current year (86,796) (1,192,694) (1,279,490) (759,932) (2,039,422) Prior years (1,145) (3,228) (4,373) ( 11,574) (15,947) Total to be accounted for (87,941) (1,195,922) (1,283,863) (771,506) (2,055,369) Taxes receivable, end of year $ 1,856 $ 17,171 $ 19,027 $ 13,591 $ 32,618 Taxes receivable by year 1996 and prior 19 1997 7 1998 7 1999 7 2000 15 2001 34 2002 362 2003 70 2004 17 2005 59 2006 169 2007 67 2008 136 2009 502 2010 385_ _$ 1,856 F/Y Property valuations (in 000's) 10/11 Land $ 247,335 Improvements 713,265 Personal property 73,914 Exemptions (41,345) $ 993,169 Tax rate per $100 valuation Operations 0.008790 Fire department 0.109250 Debt service 0.076960 Tax rate per $ 100 valuation 0.195000 Tax levy: $ 2,047,972 Percent of taxes collected to taxes levied 100.36% 108 127 454 581 41 48 150 198 44 51 140 191 48 55 108 163 73 88 266 354 134 168 440 608 2091 2453 3707 6160 126 196 132 328 145 162 210 372 199 258 283 541 774 943 1351 2294 2125 2192 789 2981 2615 2751 920 3671 3854 4356 1270 5626 4794 5179 3371 8550 $ 17,171 $ 19,027 $ 13,591 $ 32,618 F/Y F/Y F/Y F/Y 09/10 08/09 07/08 06/07 $ 209,177 $ 186,574 $ 213,640 $ 193,906 786,539 737,273 638,560 581,667 80,332 71,091 94,823 65,248 (40,057) (34,027) (34,405) (29,607) $ 1,035,991 $ 960,911 $ 912,618 $ 811,214 0.027140 0.014040 0.010200 0.030900 0.109140 0.116020 0.120860 0.102700 0.068720 0.114555 0.098940 0.146400 0.205000 0.244615 0.230000 0.280000 $ 2,091,414 $ 2,380,679 $ 2,234,909 $ 2,191,536 100.36% 99.58% 100.36% 100.62% 42 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 All Bonded Debt Series Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 565,000 $ 301,300 $ 866,300 2013 585,000 280,596 865,596 2014 400,000 259,123 659,123 2015 415,000 242,938 657,938 2016 435,000 225,938 660,938 2017 460,000 207,868 667,868 2018 480,000 188,468 668,468 2019 505,000 167,838 672,838 2020 525,000 145,737 670,737 2021 550,000 122,768 672,768 2022 580,000 98,533 678,533 2023 605,000 71,463 676,463 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 7,120,000 $ 2,514,189 $ 9,634,189 43 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2010 General Obligation Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 65,000 $ 80,733 $ 145,733 2013 65,000 78,458 143,458 2014 70,000 76,183 146,183 2015 70,000 73,733 143,733 2016 75,000 71,283 146,283 2017 80,000 68,658 148,658 2018 85,000 65,858 150,858 2019 85,000 62,883 147,883 2020 90,000 59,908 149,908 2021 95,000 56,758 151,758 2022 100,000 53,433 153,433 2023 105,000 48,433 153,433 2024 110,000 43,183 153,183 2025 115,000 37,683 152,683 2026 115,000 33,083 148,083 2027 125,000 28,368 153,368 2028 130,000 23,243 153,243 2029 135,000 17,783 152,783 2030 140,000 12,113 152,113 2031 145,000 6,163 151,163 $ 2,000,000 $ 997,940 $ 2,997,940 44 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2005 Combination Tax Bonds Due During Fiscal Principal Due Interest Due Years Ending 1-Sep Mar 1/Sep 1 Total 2012 $ 290,000 $ 68,685 $ 358,685 2013 295,000 58,535 353,535 2014 100,000 48,210 148,210 2015 105,000 44,210 149,210 2016 105,000 40,010 145,010 2017 110,000 35,810 145,810 2018 115,000 31,410 146,410 2019 120,000 26,810 146,810 2020 125,000 22,010 147,010 2021 130,000 17,010 147,010 2022 135,000 11,550 146,550 2023 140,000 5,880 145,880 $ 1,770,000 $ 410,130 $ 2,180,130 45 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-5 Series 2003 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 $ 55,000 $ 33,215 $ 88,215 2013 60,000 31,290 91,290 2014 60,000 29,430 89,430 2015 60,000 27,090 87,090 2016 65,000 24,750 89,750 2017 70,000 22,150 92,150 2018 70,000 19,350 89,350 2019 75,000 16,375 91,375 2020 75,000 13,187 88,187 2021 80,000 10,000 90,000 2022 85,000 6,800 91,800 2023 85,000 3,400 88,400 $ 840,000 $ 237,037 $ 1,077,037 Series 2002 Combination Tax Bonds Due During Fiscal Principal Due 1-Interest Due Mar Years Ending Sep 1/Sep 1 Total 2012 155,000 118,667 273,667 2013 165,000 112,313 277,313 2014 170,000 105,300 275,300 2015 180,000 97,905 277,905 2016 190,000 89,895 279,895 2017 200,000 81,250 281,250 2018 210,000 71,850 281,850 2019 225,000 61,770 286,770 2020 235,000 50,632 285,632 2021 245,000 39,000 284,000 2022 260,000 26,750 286,750 2023 275,000 13,750 288,750 $ 2,510,000 $ 869,082 $ 3,379,082 46 LONG-TERM DEBT SERVICE REQUIREMENTS - BY YEAR SEPTEMBER 30,2011 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-6 CHANGES IN LONG-TERM BONDED DEBT YEAR ENDED SEPTEMBER 30,2011 Interest rate Date interest payable Maturity date Bonds outstanding at beginning of year Retirements of principal Bond Issue Bonds outstanding at end of fiscal year Retirements of interest Series 1997 Combination Tax 3.25-5.9% 3/1 & 9/1 9/1/98 to 9/1/2011 Series 2002 Series 2003 Series 2003 Series 2005 Series 2010 Combination Combination Unlimited Combination Combination Tax Tax Tax Total Tax 4.00-5.50% 3/1 & 9/1 9/1/2023 Tax 3.10-4.25% 3/1 & 9/1 9/1/2023 3.25% 3/1 & 9/1 9/1/2011 2.97-4.20% 3/1 & 9/1 9/1/2023 3/1 &9/1 9/1/2031 $ 380,000 $ 2,660,000 $ 895,000 $ 245,000 $ 2,055,000 $ 2,000,000 $ 8,235,000 (380,000) (150,000) (55,000) (245,000) (285,000) (1,115,000) $ 2,510.000 $ 840,000 $ $ 1,770,000 $ 2,000,000 $ 7,120,000 18,620 $ 124,668 $ 35,278 $ 7,963 $ 78,660 $ 114,371 $ 379,560 Paying agent's name & city: All series Bank of New York Mellon P.O. Box 2320 Dallas, Texas 75221-2320 Bond Authority Amount authorized by voters Amount issued General Obligation Bonds $ 27,094,217 (23,325,000) Remaining to be issued $ 3,769,217 The general obligation bonds were authorized on October 7, 1975 Debt Service Fund cash and cash equivalents balance as of Setember 30,2011 Average annual debt service payment (principal & interest) for remaining term of debt: $ 107,847 $ 481,709 47 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 GENERAL FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30, 2011 Amounts Percent of total revenue REVENUE AND OTHER FINANCING SOURCES 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 1,311,296 $ 1,491,564 $ 1,283,705 $ 1,002,608 $ 909,495 18.6% 26.2% 21.1% 20.3% 21.0% Water and wastewater charges 5,323,244 3,919,084 3,721,868 3,678,859 3,151,144 75.5% 68.8% 61.3% 74.5% 72.8% Utility Fees 165,600 80,500 515,200 --2.3% 1.4% 8.5% 0.0% 0.0% Inspection and tap fees 8,560 5,775 4,975 22,550 32,900 0.1% 0.1% 0.1% 0.5% 0.8% Interest earned 5,534 6,171 20,755 69,447 106,168 0.1% 0.1% 0.3% 1.4% 2.5% Capital lease proceeds/Contractual Obligations --330,000 49,432 -0.0% 0.0% 5.4% 1.0% 0.0% Miscellaneous and other 240,830 191,498 199,780 116,295 131,124 3.4% 3.4% 3.3% 2.4% 3.0% Total revenue and other financing sources 7,055,065 5,694,592 6,076,283 4,939,191 4,330,831 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Water operations 2,271,490 1,882,511 1,811,385 1,934,792 1,638,294 32.2% 33.1% 29.8% 39.2% 37.8% Administrative 1,042,073 993,986 1,297,613 905,052 835,590 14.8% 17.5% 21.4% 18.3% 19.3% Transfers out and debt service 1,130,123 558,000 383,009 --16.0% 9.8% 6.3% 0.0% 0.0% Contribution to Trophy Club Fire Dept 770,123 876,521 783,736 902,353 725,764 10.9% 15.4% 12.9% 18.3% 16.8% Wastewater operations 598,465 711,382 999,388 500,224 480,798 8.5% 12.5% 16.4% 10.1% 11.1% Capital outlay 515,884 --29,379 442,782 7.3% 0.0% 0.0% 0.6% 10.2% Wastewater collection systems 277,775 308,798 294,869 409,948 402,482 3.9% 5.4% 4.9% 8.3% 9.3% Miscellaneous ---45,457 135,121 0.0% 0.0% 0.0% 0.9% 3.1% Information systems 123,605 182,658 175,698 187,908 124,987 1.8% 3.2% 2.9% 3.8% 2.9% Total expenditures 6,729,538 5,513,856 5,745,698 4,915,113 4,785,818 95.4% 96.8% 94.6% 99.5% 110.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections $ 325,527 $ 180,736 $ 330,585 $ 24,078 $ (454,987) 4.6% 3.2% 5.4% 0.5% -10.5% Excess (deficiency) of revenues over (under) expenditures Total active retail water and/or wastewater connections 3,554 3,361 3,161 3,092 2,827 48 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 TSI-7 DEBT SERVICE FUND COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS SEPTEMBER 30,2011 TSI - 7 COMPARATIVE SCHEDULES OF REVENUES AND OTHER FINANCING SOURCES AND EXPENDITURES AND OTHER FINANCING USES - FIVE YEARS - CONTINUED Amounts Percent of total revenue REVENUE 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Ad valorem property taxes $ 771,631 $ 740,420 $ 1,100,115 $ 1,302,763 $ 1,325,143 57.9% 52.9% 73.4% 96.1% 94.8% Penalties and interest 6,018 -11,885 --0.5% 0.0% 0.8% 0.0% 0.0% Transfers in 554,100 653,000 383,009 --41.6% 46.7% 25.5% 0.0% 0.0% Interest earned 985 4,848 4,105 23,326 43,456 0.1% 0.3% 0.3% 1.7% 3.1% Miscellaneous and other -1,000 -29,379 29,379 0.0% 0.1% 0.0% 2.2% 2.1% Total revenue 1,332,734 1,399,268 1,499,114 1,355,468 1,397,978 100.0% 100.0% 100.0% 100.0% 100.0% EXPENDITURES Principal retirement 1,115,000 1,055,000 1,025,000 975,000 945,000 83.7% 75.4% 68.4% 71.9% 67.6% Interest and fiscal charges 382,019 311,570 352,194 390,565 425,838 28.7% 22.3% 23.5% 28.8% 30.5% Total expenditures 1,497,019 1,366,570 1,377,194 1,365,565 1,370,838 112.3% 97.7% 91.9% 100.7% 98.1% Excess (deficiency) of revenues over (under) expenditures $ (164,285) $ 32,698 $ 121,920 $ (10,097) $ 27,140 -12.3% 2.3% 8.1% -0.7% 1.9% 49 [This page is intentionally left blank.] Financial Advisory Services Provided By: SWS SOUTHWEST GROUP SECURITIES •' Building what you value. INVESTMENT BANKERS TAB 7 Purchase Contract $2,355,000 Trophy Club Municipal Utility District No. 1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 February 14, 2012 Board of Directors Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 Ladies and Gentlemen: The undersigned, First Southwest Company (the "Underwriter"), offers to enter into the following agreement with Trophy Club Municipal Utility District No. 1 (the "Issuer") which, upon the Issuer's written acceptance of this offer (the or this "Contract"), will be binding upon the Issuer and upon the Underwriter. This offer is made subject to the Issuer's written acceptance hereof on or before 10:00 p.m. Central time, on the date hereof, and, if not so accepted, will be subject to withdrawal by the Underwriter upon notice delivered to the Issuer at any time prior to the acceptance hereof by the Issuer. Terms not otherwise defined in this Contract shall have the same meanings set forth in the Bond Order (as defined herein) or in the Official Statement (as defined herein). 1. Purchase and Sale of the Bonds. Subject to the terms and conditions and in reliance upon the representations, warranties and agreements set forth herein, the Underwriter hereby agrees to purchase from the Issuer, and the Issuer hereby agrees to sell and deliver to the Underwriter, all, but not less than all, of the Issuer's $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are to be issued, secured and sold under the provisions of an order (the "Order") adopted by the Board of Directors of the Issuer on December 20, 2011, and shall have the terms and features (including those with respect to price and rates) as set forth in the Pricing Certificate (as defined in the Order)(the Order and the Pricing Certificate are jointly referred to herein as the "Bond Order"). The Pricing Certificate shall be executed on behalf of the Issuer by the representative of the Issuer (the "Pricing Officer") named in the Order and shall be dated the date hereof. The principal amount of the Bonds to be issued, the dated date therefor, the maturities, redemption provisions, yields and interest rates per annum are set forth in Schedule I attached hereto. The Bonds shall otherwise have such terms and provisions as set forth and described in the Official Statement referred to below. The purchase price for the Bonds shall be $2,470,257.70 (representing the principal amount of the Bonds, plus an original issue premium of $136,075.20 and less an underwriting discount of $20,817.50) plus interest accrued on the Bonds from March 1, 2012, to the date of Closing (as hereinafter defined). 77641135.2/08013523 Delivered to the Issuer herewith as a good faith deposit is a corporate check of the Underwriter payable to the order of the Issuer in the amount of $23,550. In the event the Issuer accepts this Contract, such check shall be held uncashed by the Issuer until the time of Closing, at which time such check shall be returned uncashed to the Underwriter. In the event that the Issuer does not accept this Contract, such check will be immediately returned to the Underwriter. Should the Issuer fail to deliver the Bonds at the Closing, or should the Issuer be unable to satisfy the conditions of the obligations of the Underwriter to purchase, accept delivery of and pay for the Bonds, as set forth in this Contract (unless waived by the Underwriter), or should such obligations of the Underwriter be terminated for any reason permitted by this Contract, such check shall immediately be returned to the Underwriter. In the event that the Underwriter fails (other than for a reason permitted hereunder) to purchase, accept delivery of and pay for the Bonds at the Closing as herein provided, such check shall be cashed and the amount thereof retained by the Issuer as and for fully liquidated damages for such failure of the Underwriter, and, except as set forth in Sections 8 and 10 hereof, no party shall have any further rights against the other hereunder. The Underwriter and the Issuer understand that in such event the Issuer's actual damages may be greater or may be less than such amount. Accordingly, the Underwriter hereby waives any right to claim that the Issuer's actual damages are less than such amount, and the Issuer's acceptance of this Contract shall constitute a waiver of any right the Issuer may have to additional damages from the Underwriter. The Underwriter hereby agrees not to stop or cause payment on the check to be stopped unless the Issuer has breached any of the terms of this Contract. 2. Public Offering. The Underwriter agrees to make a bona fide public offering of all of the Bonds at a price not to exceed the public offering prices set forth on page ii of the Official Statement and may subsequently change such offering prices without any requirement of prior notice. The Underwriter may offer and sell Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the public offering prices stated on page ii of the Official Statement; provided that on or before the Closing, the Underwriter shall execute and deliver to McCall, Parkhurst & Horton L.L.P., Dallas, Texas ("Bond Counsel") an issue price certificate for the Bonds prepared by Bond Counsel verifying the initial offering prices to the public at which the Underwriter reasonably expected to sell or in fact sold a substantial amount of each stated maturity of the Bonds to the public. 3. The Official Statement. (a) Preliminary Official Statement. The Issuer previously has delivered, or caused to be delivered, copies of a Preliminary Official Statement, dated February 7, 2012, relating to the Bonds (the "Preliminary Official Statement"), to the Underwriter for its use in determining interest in the Bonds. The Issuer confirms that it has not prepared any document for dissemination to potential customers in connection with any offering of the Bonds (and will not do so without the consent of the Underwriter prior to the availability of the final Official Statement described below), except the Preliminary Official Statement. The Issuer prepared the Preliminary Official Statement for use by the Underwriter in connection with the public offering, sale and distribution of the Bonds. The Issuer hereby ratifies and approves the use by the Underwriter of the Preliminary Official Statement prior to the date hereof, and until the availability of the final Official Statement, in connection with the public offering of the Bonds. The Issuer hereby represents and warrants that it deemed the Preliminary Official Statement final, within the meaning of Rule 15c2-12 issued by the United States Securities and Exchange 77641135.2/08013523 2 Commission under the Securities Exchange Act of 1934 (the "Rule"), as of its date, except for the omission of information specified in Section (b)(1) of the Rule, as permitted by Section (b)(1) of the Rule. The Issuer hereby confirms that it does not object to the distribution of the Preliminary Official Statement in electronic form. (b) Final Official Statement. The Issuer shall prepare and provide, or cause to be provided, to the Underwriter as soon as practicable after the date of the Issuer's acceptance of this Contract (but, in any event, not later than within seven business days after the Issuer's acceptance of this Contract and in sufficient time to accompany any confirmation that requests payment from any customer) a final Official Statement which is complete as of the date of its delivery to the Underwriter, in such quantity and formats as the Underwriter shall request, and in any event in a "designated electronic format" (as defined in MSRB Rule G-32), in order for the Underwriter to comply with Section (b)(4) of the Rule and the rules of the Municipal Securities Rulemaking Board (the "MSRB"). Such final Official Statement shall be substantially in form of the Preliminary Official Statement, with only such changes therein as shall have been accepted by the Underwriter or as shall be permitted by the Rule or the rules of the MSRB. Such final Official Statement, including the cover page, all exhibits, appendices, maps, pictures, diagrams, reports and statements included or incorporated therein or attached thereto, and any amendments and supplements thereto that may be authorized for use with respect to the Bonds, is herein referred to as the "Official Statement." The Issuer hereby authorizes the Underwriter to use the Official Statement and the information contained therein in connection with the public offering and the sale of the Bonds. The Issuer hereby confirms that it does not object to the distribution of the Official Statement in electronic form. If, for any reason, the Issuer is unable or otherwise fails to deliver the final Official Statement to the Underwriter in compliance with this paragraph, the Issuer shall deliver the Preliminary Official Statement, including all amendments and supplements thereto, to the Underwriter in a "designated electronic format" at least one business day before the date of the Closing. The Issuer additionally shall provide, or cause to be provided, to the Underwriter on or before the date of the Closing (and, in any event, not later than within five business days of the date of the Closing) a copy of the fully executed Escrow Agreement (defined herein) in a "designated electronic format". (c) If, after the date of this Contract to and including the date the Underwriter is no longer required to provide an Official Statement to potential customers who request the same pursuant to the Rule (the earlier of (i) 90 days from the "end of the underwriting period", as defined in the Rule, and (ii) the time when the Official Statement is available to any person from the MSRB, but in no case less than 25 days after the "end of the underwriting period" for the Bonds), the Issuer becomes aware of any fact or event which might or would cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading, or if it is necessary to amend or supplement the Official Statement to comply with law, the Issuer will notify the Underwriter (and for the purposes of this clause provide the Underwriter with such information as the Underwriter may from time to time request), and if, in the reasonable opinion of the Underwriter, such fact or event requires preparation and publication of a supplement or amendment to the Official Statement, the Issuer will prepare and furnish, at the Issuer's sole expense, in such quantity and in formats as the Underwriter shall request, and in a "designated electronic format", in order for the Underwriter to comply with Section (b)(4) of the Rule and the rules of the MSRB, copies of either amendments or supplements to the Official Statement so that the statements in the Official 77641135.2/08013523 3 Statement as so amended and supplemented will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or so that the Official Statement will comply with law; provided, however, that for all purposes of this Contract and any certificate delivered by the Issuer in accordance herewith, the Issuer makes no representations with respect to the descriptions in the Preliminary Official Statement or the Official Statement of The Depository Trust Company, New York, New York ("DTC"), or its book-entry-only system. If such notification shall be subsequent to the Closing, the Issuer shall furnish such legal opinions, certificates, instruments and other documents as the Underwriter may reasonably request to evidence the truth and accuracy of such supplement or amendment to the Official Statement. Additionally, if amendments are made to the Escrow Agreement during the period described above, the Issuer will prepare and provide, or cause to be provided, at the Issuer's sole expense, to the Underwriter a copy of the amendment or amendments to the Escrow Agreement in a "designated electronic format". (d) The Underwriter hereby agrees to timely file the Official Statement and the Escrow Agreement (and any supplements or amendments thereto) with the MSRB in the format prescribed by the MSRB. Unless otherwise notified in writing by the Underwriter, the Issuer can assume that the "end of the underwriting period" for purposes of the Rule is the date of the Closing. 4. Representations, Warranties, and Covenants of the Issuer. The Issuer hereby represents and warrants to and covenants with the Underwriter that: (a) The Issuer is a conservation and reclamation district, a body corporate and politic and governmental agency of the State of Texas (the "State"), created as a municipal utility district pursuant to Article 16, Section 59 of the Texas Constitution by Order of the Texas Commission on Environmental Quality, the successor in interest to the Texas Water Commission, and the Issuer operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended, and has full legal right, power and authority pursuant to the Constitution and general laws of the State, including Chapter 1207 of the Texas Government Code, as amended (the "Act"), and at the date of the Closing will have full legal right, power and authority under the Act (i) to adopt the Order and to make the delegations set forth therein and take the actions authorized thereby, (ii) to enter into, execute and deliver the Pricing Certificate, this Contract, any escrow or deposit agreement pertaining to the discharge of the obligations of the Issuer that are being refunded by the Bonds (the "Escrow Agreement"), and all documents required hereunder and thereunder to be executed and delivered by the Issuer (this Contract, the Escrow Agreement and the Bond Order, which contains the Undertaking (as defined in Section 6(i)(2) hereof), are hereinafter referred to as the "Issuer Documents"), (iii) to sell, issue and deliver the Bonds to the Underwriter as provided herein, and (iv) to carry out and consummate the transactions described in the Issuer Documents and the Official Statement, and the Issuer has complied, and will at the Closing be in compliance, in all material respects with the terms of the Act and the Issuer Documents as they pertain to such transactions; (b) By all necessary official action of the Issuer prior to or concurrently with the acceptance of this Contract, the Issuer has duly authorized all necessary action to be taken by it for the (i) adoption of the Order and the issuance and sale of the Bonds, 77641135.2/08013523 4 (ii) approval of the Preliminary Official Statement and the Official Statement, (iii) approval, execution and delivery of, and the performance by the Issuer of the obligations on its part contained in, the Bonds and the Issuer Documents and (iv) consummation by the Issuer of all other transactions described in the Official Statement, the Issuer Documents and any and all such other agreements and documents as may be required to be executed, delivered and/or received by the Issuer in order to carry out, give effect to, and consummate the transactions described herein and in the Official Statement, and the Pricing Officer shall have executed and delivered the Pricing Certificate in accordance with the Order and the Act; (c) The Issuer Documents constitute legal, valid and binding obligations of the Issuer, enforceable in accordance with their respective terms, subject to principles of sovereign immunity of political subdivisions, bankruptcy, insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors' rights; the Bonds, when issued, delivered and paid for, in accordance with the Bond Order and this Contract, will constitute legal, valid and binding obligations of the Issuer entitled to the benefits of the Bond Order and enforceable in accordance with their terms, subject to principles of sovereign immunity of political subdivisions, bankruptcy, insolvency, reorganization, moratorium and other similar laws, and principles of equity relating to or affecting the enforcement of creditors' rights. Upon the issuance, authentication and delivery of the Bonds as aforesaid, the Bond Order will provide, for the benefit of the holders, from time to time, of the Bonds, for the levy and collection of an annual ad valorem tax, levied without limit as to rate or amount, for the payment of the Bonds; (d) The Issuer is not in breach of or default in any material respect under any applicable constitutional provision, law or administrative regulation of the State or the United States or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Issuer is a party or to which the Issuer is, or any of its property or assets are, otherwise subject, and no event has occurred and is continuing which constitutes or with the passage of time or the giving of notice, or both, would constitute a default or event of default by the Issuer under any of the foregoing; and the execution and delivery of the Bonds and the Issuer Documents and the adoption of the Order and compliance with the provisions on the Issuer's part contained therein, will not conflict with or constitute a breach of or default under any constitutional provision, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Issuer is a party or to which the Issuer is, or to which any of its property or assets are, otherwise subject, nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Issuer to be pledged to secure the Bonds or under the terms of any such law, regulation or instrument, except as provided by the Bonds and the Bond Order; (e) All authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matters which are required for the due authorization of, which would constitute a condition precedent to, or the absence of which would materially adversely 77641135.2/08013523 5 affect the due performance by the Issuer of its obligations under the Issuer Documents and the Bonds, have been duly obtained, except for (i) such approvals, consents and orders as may be required under the Blue Sky or securities laws of any jurisdiction in connection with the offering and sale of the Bonds and (ii) the opinion of the Attorney General of the State approving the Bonds as required by law and the registration of the Bonds by the Comptroller of Public Accounts of the State (which Attorney General approval and Comptroller of Public Accounts registration shall have been duly obtained or effected on or before the date of Closing); (f) The Bonds and the Bond Order conform to the descriptions thereof contained in the Official Statement under the captions "PLAN OF FINANCING" and "THE BONDS"; the proceeds of the sale of the Bonds will be applied generally as described in the Official Statement under the caption "SOURCES AND USES OF FUNDS" and will be used for the purposes described in the Official Statement under the subcaption "PLAN OF FINANCING - Purpose"; and the Undertaking (as defined in Section 6(i)(2) hereof) conforms to the description thereof contained in the Official Statement under the caption "CONTINUING DISCLOSURE OF INFORMATION"; (g) There is no litigation, action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, public board or body, pending or, to the best knowledge of the Issuer, threatened against the Issuer, (i) contesting the due organization and valid corporate existence of the Issuer or the titles of its officers to their respective offices, (ii) affecting or seeking to prohibit, restrain or enjoin the sale, issuance or delivery of the Bonds or the levy, assessment and/or collection of ad valorem taxes pledged to the payment of principal of and interest on the Bonds pursuant to the Bond Order, (iii) in any way contesting or affecting the validity or enforceability of the Bonds or the Issuer Documents, (iv) contesting the exclusion from gross income of interest on the Bonds for federal income tax purposes, (v) contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement or any supplement or amendment thereto, or (vi) contesting the powers of the Issuer or any authority for the issuance of the Bonds, the adoption of the Order or the execution and delivery of the Issuer Documents, nor, to the best knowledge of the Issuer, is there any basis therefor, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Bonds or the Issuer Documents; (h) As of the date thereof, the Preliminary Official Statement did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (i) At the time of the Issuer's acceptance hereof and (unless the Official Statement is amended or supplemented pursuant to paragraph (c) of Section 3 of this Contract) at all times subsequent thereto during the period up to and including the date of Closing, the Official Statement does not and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; 77641135.2/08013523 6 (j) If the Official Statement is supplemented or amended pursuant to paragraph (c) of Section 3 of this Contract, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto during the period up to and including the date of Closing, the Official Statement as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (k) The Issuer will apply, or cause to be applied, the proceeds from the sale of the Bonds as provided in and subject to all of the terms and provisions of the Bond Order and will not take or omit to take any action which action or omission will adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Bonds; (1) The Issuer will furnish such information and execute such instruments and take such action in cooperation with the Underwriter as the Underwriter may reasonably request, at no expense to the Issuer, (A) to (y) qualify the Bonds for offer and sale under the Blue Sky or other securities laws and regulations of such states and other jurisdictions in the United States as the Underwriter may designate and (z) determine the eligibility of the Bonds for investment under the laws of such states and other jurisdictions and (B) to continue such qualifications in effect so long as required for the distribution of the Bonds (provided, however, that the Issuer will not be required to qualify as a foreign corporation or to file any general or special consents to service of process under the laws of any jurisdiction) and will advise the Underwriter immediately of receipt by the Issuer of any notification with respect to the suspension of the qualification of the Bonds for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; (m) The financial statements of, and other financial information regarding, the Issuer contained in the Official Statement fairly present the financial position of the Issuer as of the dates and for the periods therein set forth, the audited financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and the other financial information has been determined on a basis substantially consistent with that of the Issuer's audited financial statements included in the Official Statement. Prior to the Closing, the Issuer will not take any action within or under its control that will cause any adverse change of a material nature in such financial position, results of operations or condition, financial or otherwise, of the Issuer from that described in the Official Statement. Except as may be described in the Official Statement, the Issuer is not a party to any litigation or other proceeding pending or, to its knowledge, threatened which, if decided adversely to the Issuer, would have a materially adverse effect on the financial condition of the Issuer; (n) Prior to the Closing, the Issuer will not offer or issue any bonds, notes or other obligations for borrowed money or incur any material liabilities (except in the ordinary course of business), direct or contingent, payable from or secured by any of the ad valorem tax revenues which will secure the Bonds without the prior approval of the Underwriter, such approval not to be unreasonably withheld; 77641135.2/08013523 7 (o) Any certificate, signed by any official of the Issuer authorized to do so in connection with the transactions described in this Contract, shall be deemed a representation and warranty by the Issuer to the Underwriter as to the statements made therein; (p) The Issuer has not been notified of any listing or proposed listing by the Internal Revenue Service to the effect that the Issuer is a bond issuer whose arbitrage certificates may not be relied on; (q) The Issuer, to the extent heretofore requested in writing by the Underwriter, has delivered to the Underwriter true, correct, complete and legible copies of all information, applications, reports or other documents of any nature whatsoever submitted to any rating agency for the purpose of obtaining a rating for the Bonds and to any municipal bond insurance company for the purpose of obtaining a municipal bond insurance policy for the Bonds and, in each instance, true, correct, complete and legible copies of all written correspondence or other written communications relating thereto; and (r) To the best knowledge and belief of the Issuer, the Official Statement contains information, including financial information and operating data, as required by the Rule. During the last five years, the Issuer has complied in all material respects with all continuing disclosure agreements made by it in accordance with the Rule. 5. Closing. (a) At 10:00 a.m. Central time, on March 5, 2012, or at such other time and date as shall have been mutually agreed upon by the Issuer and the Underwriter (the "Closing"), the Issuer will, subject to the terms and conditions hereof, deliver the initial Bonds to The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the "Paying Agent/Registrar"), as delivery agent for the Underwriter, duly executed and authenticated, together with the other documents hereinafter mentioned, and the Paying Agent/Registrar, as delivery agent for the Underwriter, will, subject to the terms and conditions hereof, accept such delivery and the Underwriter will pay the purchase price of the Bonds as set forth in Section 1 of this Contract in immediately available funds to the order of the Issuer. Payment for the Bonds as aforesaid shall be made at the offices of the Paying Agent/Registrar, or such other place as shall have been mutually agreed upon by the Issuer and the Underwriter. (b) Delivery of the Bonds in definitive form shall be made through DTC, utilizing the book-entry-only form of issuance. The definitive Bonds shall be delivered in definitive fully registered form, bearing CUSEP numbers without coupons, with one Bond for each maturity of the Bonds, registered in the name of Cede & Co., all as provided in the Bond Order, and shall be made available to the Underwriter at least one business day before the Closing for purposes of inspection at the offices of DTC or, if the Bonds are to be held in safekeeping for DTC by the Paying Agent/Registrar pursuant to DTC's FAST system, at the designated payment office of the Paying Agent/Registrar. In addition, the Issuer and the Underwriter agree that there shall be a preliminary Closing held at such place as the Issuer and the Underwriter shall mutually agree, commencing at least 24 hours prior to the Closing; provided, however, that such preliminary Closing shall not be required if Bond Counsel provides a complete Transcript of Proceedings acceptable to counsel for the Underwriter at least 24 hours prior to the Closing. 77641135.2/08013523 8 6. Closing Conditions. The Underwriter has entered into this Contract in reliance upon the representations, warranties and agreements of the Issuer contained herein, and in reliance upon the representations, warranties and agreements to be contained in the documents and instruments to be delivered at the Closing and upon the performance by the Issuer of its obligations hereunder, both as of the date hereof and as of the date of the Closing. Accordingly, the Underwriter's obligations under this Contract to purchase, to accept delivery of and to pay for the Bonds shall be conditioned upon the performance by the Issuer of its obligations to be performed hereunder and under such documents and instruments at or prior to the Closing, and shall also be subject to the following additional conditions, including the delivery by the Issuer of such documents as are enumerated herein, in form and substance reasonably satisfactory to the Underwriter: (a) The representations and warranties of the Issuer contained herein shall be true, complete and correct on the date hereof and on and as of the date of the Closing, as if made on the date of the Closing; (b) The Issuer shall have performed and complied with all agreements and conditions required by this Contract to be performed or complied with by it prior to or at the Closing; (c) At the time of the Closing, (i) the Issuer Documents and the Bonds shall be in full force and effect and shall not have been amended, modified or supplemented, and the Official Statement shall not have been supplemented or amended, except in any such case as may have been agreed to by the Underwriter; and (ii) all actions of the Issuer required to be taken by the Issuer shall be performed in order for Bond Counsel and Underwriter's Counsel to deliver their respective opinions referred to hereafter; (d) At the time of the Closing, all official action of the Issuer relating to the Bonds and the Issuer Documents shall be in full force and effect and shall not have been amended, modified or supplemented; (e) At or prior to the Closing, the Order shall have been duly adopted by the governing body of the Issuer in accordance with law, the Pricing Officer shall have duly executed and delivered the Pricing Certificate pursuant to the Order and the Issuer shall have duly executed and delivered and the Paying Agent/Registrar shall have duly authenticated the Bonds; (f) At the time of the Closing, there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or in the revenues or operations of the Issuer, from that set forth in the Official Statement that in the reasonable judgment of the Underwriter, is material and adverse and that makes it, in the reasonable judgment of the Underwriter, impracticable to market the Bonds on the terms and in the manner described in the Official Statement; (g) The Issuer shall not currently be in default with respect to the payment of principal or interest when due on any of its outstanding obligations for borrowed money; 77641135.2/08013523 9 (h) All steps to be taken and all instruments and other documents to be executed, and all other legal matters in connection with the transactions described in this Contract shall be reasonably satisfactory in legal form and effect to the Underwriter; (i) At or prior to the Closing, the Underwriter shall have received copies of each of the following documents: (1) The Official Statement approved by the Board of Directors or a designated official of the Issuer, and each supplement or amendment thereto, if any, and the reports and audits referred to or appearing in the Official Statement; (2) The Bond Order with such supplements or amendments as may have been agreed to by the Underwriter, which shall include an undertaking of the Issuer which satisfies the requirements of section (b)(5)(i) of the Rule (the "Undertaking"); (3) The approving opinion of Bond Counsel with respect to the Bonds, in substantially the form and substance attached to the Official Statement as Appendix C; (4) A supplemental opinion of Bond Counsel addressed to the Underwriter, substantially to the effect that: (i) the Order has been duly adopted by the Issuer and the Pricing Certificate has been duly executed by the Pricing Officer pursuant to the Order, and both of the foregoing documents are in full force and effect; (ii) the Bonds are exempted securities under the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act or to qualify the Bond Order under the Trust Indenture Act; and (iii) such firm was not requested to participate, and did not take part, in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information under the captions and subcaptions "PLAN OF FINANCING", "THE BONDS" (excluding the information under the subcaptions "Default and Remedies" and "Payment Record" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS", "CONTINUING DISCLOSURE OF INFORMATION" (excluding the information under the subcaption "Compliance with Prior Agreements"), and the subcaptions "Legal Matters" (except for the last two sentences of the second paragraph thereof), "Registration and Qualification of Bonds for Sale" and "Legal .2/08013523 10 Investments and Eligibility to Secure Public Funds in Texas" under the caption "OTHER PERTINENT INFORMATION" in the Official Statement, and such firm is of the opinion that the information relating to the Bonds and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds, such information conforms to the provisions of the Bond Order; The supplemental opinion of Bond Counsel will also state that the Underwriter is entitled to rely upon the opinion of Bond Counsel delivered in accordance with the provisions of Section 6(i)(3) of this Contract. (5) An opinion, dated the date of the Closing and addressed to the Underwriter, of counsel for the Underwriter, to the effect that: (i) the Bonds are exempted securities under the 1933 Act and the Trust Indenture Act and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act and the Bond Order need not be qualified under the Trust Indenture Act; and (ii) based upon their participation at conferences at which the Official Statement was discussed, but without having undertaken to determine independently the accuracy, completeness or fairness of the statements contained in the Official Statement, such counsel has no reason to believe that the Official Statement, as of its date, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for any financial, forecast, technical and statistical statements and data included in the Official Statement and the information regarding DTC and its book-entry system, in each case as to which no view need be expressed); (6) A certificate, dated the date of Closing, of appropriate officials of the Issuer, to the effect that (i) the representations and warranties of the Issuer contained herein are true and correct in all material respects on and as of the date of Closing as if made on the date of Closing; (ii) no litigation or proceeding or tax challenge against the Issuer is pending or, to the best of such persons' knowledge, threatened in any court or administrative body nor, to such persons' knowledge, is there a basis for litigation which would (a) contest the right of the members or officials of the Issuer to hold and exercise their respective positions, (b) contest the due organization and valid existence of the Issuer, (c) contest the validity, due authorization and execution of the Bonds or the Issuer Documents, (d) attempt to limit, enjoin or otherwise restrict or prevent the Issuer from functioning and levying and/or collecting ad valorem taxes or pledging such taxes to the payment of the Bonds and making payments on the Bonds pursuant to the Bond Order, (e) contest the accuracy, completeness or the fairness of the Preliminary Official Statement or the Official Statement, or (f) contest the redemption of the Refunded Bonds; (iii) the Order was duly adopted by the Issuer, is in full force and effect 77641135.2/08013523 11 and has not been modified, amended or repealed, and the Pricing Certificate and this Contract have been duly executed and delivered by the Pricing Officer and are in full force and effect and have not been modified, amended or repealed; (iv) to the best of such persons' knowledge, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which made, not misleading in any respect as of the time of Closing, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the date of the Closing does not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading, and (v) there has not been any materially adverse change in the financial condition of the Issuer since September 30, 2010, the latest date as of which audited financial information is available; (7) A certificate of the Issuer in form and substance satisfactory to Bond Counsel and counsel to the Underwriter setting forth the facts, estimates and circumstances in existence on the date of the Closing, which establish that it is not expected that the proceeds of the Bonds will be used in a manner that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"), and any applicable regulations (whether final, temporary or proposed) issued pursuant to the Code; (8) Any other certificates and opinions required by the Bond Order for the issuance thereunder of the Bonds; (9) Evidence satisfactory to the Underwriter that the Bonds have been rated "AA-" or better by Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business, without regard to credit enhancement, and that such rating is in effect as of the date of Closing; (10) An executed copy of the Escrow Agreement; (11) A certificate or report of either the paying agent for the Refunded Bonds or the Issuer's financial advisor verifying the sufficiency of the Bond proceeds and other cash on hand, if applicable, to pay the principal of and interest on the Refunded Bonds on the scheduled redemption date thereof; (12) An opinion or certificate, dated on or prior to the date of Closing, of the Attorney General of the State, approving the Bonds as required by law, and the registration certificate of the Comptroller of Public Accounts of the State; and (13) Such additional legal opinions, certificates, instruments and other documents as the Underwriter or counsel to the Underwriter may reasonably request to evidence the truth and accuracy, as of the date hereof and as of the date of the Closing, of the Issuer's representations and warranties contained herein and of the statements and information contained in the Official Statement and the due 77641135.2/08013523 12 performance or satisfaction by the Issuer on or prior to the date of the Closing of all the respective agreements then to be performed and conditions then to be satisfied by the Issuer. (j) Immediately following the Closing, the Issuer shall return the corporate check of the Underwriter delivered to the Issuer pursuant to Section 1 hereof. All of the opinions, letters, certificates, instruments and other documents mentioned above or elsewhere in this Contract shall be deemed to be in compliance with the provisions hereof if, but only if, they are in form and substance reasonably satisfactory to the Underwriter. If the Issuer shall be unable to satisfy the conditions to the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds contained in this Contract, or if the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds shall be terminated for any reason permitted by this Contract, this Contract shall terminate and neither the Underwriter nor the Issuer shall be under any further obligation hereunder, except that the respective obligations of the Issuer and the Underwriter set forth in Sections 1 (with respect to the good faith check), 4, 8 and 10 hereof shall continue in full force and effect. 7. Termination. The Underwriter shall have the right to cancel its obligation to purchase the Bonds if, between the date of this Contract and the date of the Closing, the market price or marketability of the Bonds shall be materially adversely affected, in the sole judgment of the Underwriter, reasonably exercised, by the occurrence of any of the following: (a) legislation shall be enacted by or introduced in the Congress of the United States or recommended to the Congress for passage by the President of the United States, or the Treasury Department of the United States or the Internal Revenue Service or any member of the Congress or favorably reported for passage to either House of the Congress by any committee of such House to which such legislation has been referred for consideration, a decision by a court of the United States or of the State or the United States Tax Court shall be rendered, or an order, ruling, regulation (final, temporary or proposed), press release, statement or other form of notice by or on behalf of the Treasury Department of the United States, the Internal Revenue Service or other governmental agency shall be made or proposed, the effect of any or all of which would be to impose, directly or indirectly, federal income taxation upon revenues or other income of the general character to be derived by the Issuer pursuant to the Bond Order, or upon interest received on obligations of the general character of the Bonds or the interest on the Bonds as described in the Official Statement, or other action or events shall have transpired which may have the purpose or effect, directly or indirectly, of changing the federal income tax consequences of any of the transactions described herein; (b) legislation introduced in or enacted (or resolution passed) by the Congress or an order, decree, or injunction issued by any court of competent jurisdiction, or an order, ruling, regulation (final, temporary, or proposed), press release or other form of notice issued or made by or on behalf of the Securities and Exchange Commission, or any other governmental agency having jurisdiction of the subject matter, to the effect that obligations of the general character of the Bonds, including any or all underlying arrangements, are not exempt from registration under or other requirements of the 1933 Act, or that the Bond Order is not exempt from qualification under or other requirements 77641135.2/08013523 13 of the Trust Indenture Act, or that the issuance, offering, or sale of obligations of the general character of the Bonds, including any or all underlying arrangements, as described herein or in the Official Statement or otherwise, is or would be in violation of the federal securities law as amended and then in effect; (c) any state blue sky or securities commission or other governmental agency or body in any jurisdiction in which more than ten percent (10%) of the Bonds have been offered and sold shall have withheld registration, exemption or clearance of the offering of the Bonds as described herein, or issued a stop order or similar ruling relating thereto; (d) a general suspension of trading in securities on the New York Stock Exchange or any other national securities exchange, the establishment of minimum prices on any such exchange, the establishment of material restrictions (not in force as of the date hereof) upon trading securities generally by any governmental authority or any national securities exchange, or a general banking moratorium declared by federal, State of New York, or State officials authorized to do so; (e) the New York Stock Exchange or other national securities exchange or any governmental authority shall impose, as to the Bonds or as to obligations of the general character of the Bonds, any material restrictions not now in force, or increase materially those now in force, with respect to the extension of credit by, or the charge to the net capital requirements of, underwriters and/or broker-dealers; (f) any amendment to the federal or State Constitution or action by any federal or state court, legislative body, regulatory body, or other authority materially adversely affecting the tax status of the Issuer, its property, income securities (or interest thereon), or the validity or enforceability of the assessment, levy or collection of the ad valorem taxes pledged to pay the principal of and interest on the Bonds; (g) any event occurring, or information becoming known which, in the reasonable judgment of the Underwriter, makes untrue in any material respect any statement or information contained in the Official Statement, or has the effect that the Official Statement contains any untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (h) there shall have occurred since the date of this Contract any materially adverse change in the affairs or financial condition of the Issuer, except for changes which the Official Statement discloses are expected to occur, if any; (i) there shall have occurred (whether or not foreseeable) any (a) new material outbreak of hostilities involving the United States (including, without limitation, an act of terrorism) or (b) new material other national or international calamity or crisis including, but not limited to, an escalation of hostilities that existed prior to the date hereof, or (c) material financial crisis or adverse change in the financial or economic conditions affecting the United States government or the securities markets in the United States; 77641135.2/08013523 14 (j) any fact or event shall exist or have existed that, in the Underwriter's reasonable judgment, requires or has required an amendment of or supplement to the Official Statement; (k) there shall have occurred or any notice shall have been given of any intended review for possible downgrade, downgrading, suspension, withdrawal or negative change in credit watch status by any national rating service that as of the date of this Contract has published a rating on the Issuer's debt obligations (or has been asked to furnish a rating on the Bonds) that are secured in a like manner as the Bonds (including any rating to be accorded the Bonds); (1) the purchase of and payment for the Bonds by the Underwriter, or the resale of the Bonds by the Underwriter, on the terms and conditions herein provided shall be prohibited by any applicable law, governmental authority, board, agency or commission; provided, however, that such prohibition occurs after the date of this Contract and is not caused by the action, or failure to act, of the Underwriter; or (m) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred and shall be continuing at the date of Closing. With respect to the conditions described in subsections (e) and (1) above, such conditions shall not apply to any current, pending or proposed law or government inquiry or investigation as of the date of execution of this Contract which would permit the Underwriter to invoke its termination rights hereunder. 8. Expenses. (a) The Underwriter shall be under no obligation to pay, and the Issuer shall pay, any expenses incident to the performance of the Issuer's obligations hereunder, including, but not limited to, (i) the cost of preparation and printing of the Bonds, the Preliminary Official Statement and the Official Statement; (ii) the fees and disbursements of Bond Counsel and counsel to the Issuer, if any; (iii) the fees and disbursements of the Financial Advisor to the Issuer; (iv) the fees and disbursements of the Paying Agent/Registrar for the Bonds, the Escrow Agent, the paying agent for the Refunded Bonds and any engineers, accountants and other experts, consultants or advisers retained by the Issuer; (v) the fees of the Attorney General of the State; and (vi) the fees for bond ratings. (b) The Underwriter shall pay (i) the cost of preparation and printing of this Contract, the Blue Sky Survey and Legal Investment Memorandum, if any; (ii) all advertising expenses in connection with the public offering of the Bonds; and (iii) all other expenses incurred by the Underwriter in connection with the public offering of the Bonds, including the fees and disbursements of counsel retained by the Underwriter. 9. Notices. Any notice or other communication to be given to the Issuer under this Contract may be given by delivering the same in writing to its address set forth above, Attention: Mr. Robert Scott, District Manager, and any notice or other communication to be given to the Underwriter under this Contract may be given by delivering the same in writing to First Southwest Company, 325 N. St. Paul, Suite 800, Dallas, Texas 75201 Attention: Jim Sabonis. 77641135.2/08013523 15 10. Parties in Interest. This Contract shall constitute the entire agreement between the Issuer and the Underwriter and is made solely for the benefit of the Issuer and the Underwriter (including successors or assigns of the Underwriter) and no other person shall acquire or have any right hereunder or by virtue hereof. This Contract may not be assigned by the Issuer. All of the Issuer's representations, warranties and agreements contained in this Contract shall remain operative and in full force and effect, regardless of (i) any investigations made by or on behalf of the Underwriter and (ii) delivery of and payment for the Bonds pursuant to this Contract. All of the Issuer's representations and warranties contained in this Contract shall remain operative and in full force and effect, regardless of any termination of this Contract. 11. Effectiveness. This Contract shall become effective upon the acceptance hereof by the Issuer and shall be valid and binding at the time of such acceptance. 12. Choice of Law. This Contract shall be governed by and construed in accordance with the laws of the State. 13. Severability. If any provision of this Contract shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions because it conflicts with any provisions of any Constitution, statute, rule of public policy, or any other reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions of this Contract invalid, inoperative or unenforceable to any extent whatever. 14. Business Day. For purposes of this Contract, "business day" means any day on which the New York Stock Exchange is open for trading. 15. Section Headings. Section headings have been inserted in this Contract as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Contract and will not be used in the interpretation of any provisions of this Contract. 16. Counterparts. This Contract may be executed in several counterparts each of which shall be regarded as an original (with the same effect as if the signatures thereto and hereto were upon the same document) and all of which shall constitute one and the same document. 17. No Personal Liability. None of the members of the Board of Directors, nor any officer, agent or employee of the Issuer, shall be charged personally by the Underwriter with any liability, or be held liable to the Underwriter under any term or provision of this Contract, or because of execution or attempted execution, or because of any breach or attempted or alleged breach of this Contract. 18. Status of the Underwriter. The Issuer acknowledges and agrees that (i) the purchase and sale of the Bonds pursuant to this Contract is an arm's-length commercial transaction between the Issuer and the Underwriter, (ii) in connection therewith and with the discussions, undertakings and procedures leading up to the consummation of this transaction, the Underwriter is and has been acting solely as a principal and is not acting as the agent or fiduciary of the Issuer, (iii) the Underwriter has not assumed an advisory or fiduciary responsibility in favor of the Issuer with respect to the offering contemplated hereby or the discussions, 77641135.2/08013523 16 undertakings and procedures leading thereto (regardless of whether the Underwriter has provided other services or is currently providing other services to the Issuer on other matters) and the Underwriter has no obligation to the Issuer with respect to the offering contemplated hereby except the obligations expressly set forth in this Contract, and (iv) the Issuer has consulted its own legal, financial and other advisors to the extent it has deemed appropriate. The Issuer recognizes that the Underwriter expects to profit from the acquisition and potential distribution of the Bonds. 19. Entire Agreement. This Contract represents the entire agreement between the Issuer and the Underwriter with respect to the preparation of the Preliminary Official Statement and the Official Statement, the conduct of the offering, and the purchase and sale of the Bonds. [Remainder of page left blank intentionally] 77641135.2/08013523 17 If the Issuer agrees with the foregoing, please sign the enclosed counterpart of this Contract and return it to the Underwriter. This Contract shall become a binding agreement between the Issuer and the Underwriter when at least the counterpart of this Contract shall have been signed by or on behalf of each of the parties hereto. Very truly yours, FIRST SOUTHWEST COMPANY, the Underwriter By: Gary S. Utkov, SVP / Authorized Officer ACCEPTANCE: ACCEPTED AND AGREED TO at 8:33 a.m./p.m. Central Time on February 1*1 2012. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 [Signature page of Purchase Contract relating to Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012] Schedule I $2,355,000 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds Series 2012 Dated Date: March 1, 2012 (Interest to accrue from the Dated Date) Maturity Date Principal Interest Initial (September 1) Amount Rate Yield 2013 $ 185,000 2.00 % 0.60 % 2014 190,000 2.00 0.75 2015 195,000 2.00 0.97 2016 200,000 2.50 1.10 2017 205,000 2.50 1.23 2018 210,000 2.50 1.41 2019 225,000 2.50 1.63 2020 225,000 3.00 1.86 2021 230,000 3.00 2.08* 2022 240,000 3.00 2.17* 2023 250,000 3.00 2.28* * Yield shown is yield to first call date, September 1, 2020. Optional Redemption. The Issuer reserves the right, at its option, to redeem Bonds having stated maturities on and after September 1, 2021, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on September 1, 2020 or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. 77641135.2/08013523 Schedule I TAB 8 ESCROW AGREEMENT Trophy Club Municipal Utility District No. 2 Unlimited Tax Bonds Series 2002 THIS ESCROW AGREEMENT, dated as of March 5, 2012 (herein, together with any amendments or supplements hereto, called the "Agreement") is entered into by and between the Trophy Club Municipal Utility District No. 1 (herein called the "Issuer") and The Bank of New York Mellon Trust Company, N.A., as escrow agent (herein, together with any successor in such capacity, called the "Escrow Agent"). The addresses of the Issuer and the Escrow Agent are shown on Exhibit A attached hereto and made a part hereof. WITNESSETH: WHEREAS, the Issuer heretofore issued and there presently remain outstanding the obligations (the "Refunded Obligations") described in Exhibit B attached hereto and made a part hereof; and WHEREAS, the Refunded Obligations are scheduled to mature in such years, bear interest at such rates, and be payable at such times and in such amounts as are set forth in Exhibit C hereto; and WHEREAS, the Issuer has received the Sufficiency Certificate of The Bank of New York Mellon Trust Company, N.A., as paying agent/registrar of the Refunded Obligations (the "PAIR Certificate") relating to the Refunded Obligations, attached hereto as Exhibit D and made a part hereof; and WHEREAS, when firm banking arrangements have been made for the payment of principal, redemption premium, if any, and interest to the maturity or redemption dates of the Refunded Obligations, then the Refunded Obligations shall no longer be regarded as outstanding except for the purpose of receiving payment from the funds provided for such purpose; and WHEREAS, Chapter 1207, Texas Government Code tf Chapter 1207"), authorizes the Issuer to issue refunding bonds and to deposit the proceeds from the sale thereof, and any other available funds or resources, directly with any paying agent for the Refunded Obligations, or a trust company or commercial bank that does not act as a depository for the Issuer, and such deposit, if made before such payment dates and in sufficient amounts, shall constitute the making of firm banking and financial arrangements for the discharge and final payment of the Refunded Obligations; and WHEREAS, Chapter 1207 further authorizes the Issuer to enter into an escrow agreement with any such paying agent for any of the Refunded Obligations, or a trust company or commercial bank that does not act as a depository for the Issuer, with respect to the safekeeping, investment, administration and disposition of any such deposit, upon such terms and conditions as the Issuer and such paying agent, trust company or commercial bank may agree, provided that such deposits may be invested only in obligations described in Section 1207.062 of Chapter 1207, which obligations may be in book entry form, and which shall mature and/or bear interest payable at such times and in such amounts as will be sufficient to provide for the scheduled payment of principal, redemption premium, if any, and interest on the Refunded Obligations when due; and WHEREAS, the Escrow Agent is the paying agent for the Refunded Obligations (the "Paying Agent") and this Agreement constitutes an escrow agreement of the kind authorized and required by said Chapter 1207; and WHEREAS, Chapter 1207 makes it the duty of the Escrow Agent to comply with the terms of this Agreement and timely make available to the places of payment for the Refunded Obligations the amounts required to provide for the payment of the principal of and interest on such obligations when due, and in accordance with their terms, but solely from the funds, in the manner, and to the extent provided in this Agreement; and WHEREAS, the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Refunding Bonds") have been issued, sold and delivered for the purpose, among others, of obtaining the funds required to provide for the payment of the principal of and redemption premium, if any, on the Refunded Obligations at their respective maturity dates or dates of redemption and the interest thereon to such dates; and WHEREAS, the Issuer desires that, concurrently with the delivery of the Refunding Bonds to the purchasers thereof, certain proceeds of the Refunding Bonds, together with certain other available funds of the Issuer, if applicable, shall be deposited to the credit of the Escrow Fund created pursuant to the terms of this Agreement; and WHEREAS, the cash balances from time to time on deposit in the Escrow Fund and Escrowed Securities, if any, which shall mature and the interest thereon shall be payable at such times and in such amounts so as to provide moneys which together with such cash balances will be sufficient to pay interest on the Refunded Obligations as it accrues and becomes payable and the principal of the Refunded Obligations on their maturity dates or dates of redemption; and WHEREAS, to facilitate the payment of the principal of, redemption premium, if any, and interest on the Refunded Obligations, and to facilitate receipt and transfer of proceeds of Escrowed Securities, particularly those in book entry form, the Issuer desires to establish the Escrow Fund at the corporate trust office of the Escrow Agent; and NOW, THEREFORE, in consideration of the mutual undertakings, promises and agreements herein contained, the sufficiency of which hereby are acknowledged, and to secure the full and timely payment of principal of, redemption premium, if any, and the interest on the Refunded Obligations, the Issuer and the Escrow Agent mutually undertake, promise, and agree for themselves and their respective representatives and successors, as follows: 2 ARTICLE I DEFINITIONS AND INTERPRETATIONS 3 Section 1.01. Definitions. Unless the context clearly indicates otherwise, the following terms shall have the meanings assigned to them below when they are used in this Agreement: "Code" means the Internal Revenue Code of 1986, as amended, or to the extent applicable the Internal Revenue Code of 1954, together with any other applicable provisions of any successor federal income tax laws. "Escrow Fund" means the fund created pursuant to Section 3.01 of this Agreement to be administered by the Escrow Agent pursuant to the provisions of this Agreement. "Escrowed Securities" means , subject to any restrictions set forth in any order, ordinance or resolution of the Issuer authorizing the issuance of the Refunded Obligations, the obligations permitted by Section 1207.062 of Chapter 1207 deposited into the Escrow Fund pursuant to Article IV of this Agreement. Section 1.02. Other Definitions. The terms "Agreement", "Issuer", "Escrow Agent", "Refunded Obligations", "Refunding Bonds", "PA/R Certificate" and "Paying Agent", when they are used in this Agreement, shall have the meanings assigned to them in the preamble to this Agreement. Section 1.03. Interpretations. The titles and headings of the articles and sections of this Agreement have been inserted for convenience and reference only and are not to be considered a part hereof and shall not in any way modify or restrict the terms hereof. This Agreement and all of the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to achieve the intended purpose of providing for the refunding of the Refunded Obligations in accordance with applicable law. ARTICLE II DEPOSIT OF FUNDS AND ESCROW SECURITIES Section 2.01. Deposits in the Escrow Fund. Concurrently with the sale and delivery of the Refunding Bonds the Issuer shall deposit, or cause to be deposited, with the Escrow Agent, for deposit in the Escrow Fund, the sum of $2,411,156.25 to be applied to pay the principal of and interest on the Refunded Obligations on their redemption date. Such amount shall be held uninvested unless the Issuer otherwise directs pursuant to Section 4.02 hereof. The Escrow Agent shall, upon the receipt thereof, acknowledge such receipt to the Issuer in writing. ARTICLE III CREATION AND OPERATION OF ESCROW FUND 4 Section 3.01. Escrow Fund. The Escrow Agent has created on its books a special trust fund and irrevocable escrow to be known as the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Escrow Fund"). The Escrow Agent hereby agrees that upon receipt thereof it will irrevocably deposit to the credit of the Escrow Fund the funds described in Section 2.01 hereof. Such deposit, all proceeds therefrom, and all cash balances from time to time on deposit therein (a) shall be the property of the Escrow Fund, (b) shall be applied only in strict conformity with the terms and conditions of this Agreement, and (c) are hereby irrevocably pledged to the payment of the principal of, redemption premium, if any, and interest on the Refunded Obligations, which payment shall be made by timely transfers of such amounts at such times as are provided for in Section 3.02 hereof. When the final transfers have been made for the payment of such , of redemption premium, if any, and interest on the Refunded Obligations, any balance then remaining in the Escrow Fund shall be transferred to the Issuer, and the Escrow Agent shall thereupon be discharged from any further duties hereunder. Section 3.02. Payment of Principal, Redemption Premium, if any, and Interest. The Escrow Agent is hereby irrevocably instructed to transfer from the cash balances from time to time on deposit in the Escrow Fund and make available to the Paying Agent for the Refunded Obligations, the amounts required to pay the principal of and interest on the Refunded Obligations at their redemption date and interest thereon to such redemption date. Section 3.03. Sufficiency of Escrow Fund. The Issuer represents that the cash balance, and Escrowed Securities, if any, on deposit from time to time in the Escrow Fund will be at all times sufficient to provide moneys for transfer to the Paying Agent at the times and in the amounts required to pay the interest on the Refunded Obligations as such interest comes due and the principal of and the redemption premium, if any, on the Refunded Obligations as the Refunded Obligations mature or are subject to redemption, all as more fully set forth in Exhibit E attached hereto and made a part hereof. If, for any reason, at any time, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund shall be insufficient to transfer the amounts required by each Paying Agent for the Refunded Obligations to make the payments set forth in Section 3.02 hereof, the Issuer shall timely deposit in the Escrow Fund, from any funds that are lawfully available therefor, additional funds in the amounts required to make such payments. Notice of any such insufficiency shall be given as promptly as practicable as hereinafter provided, but the Escrow Agent shall not in any manner be responsible for any insufficiency of funds in the Escrow Fund or the Issuer's failure to make additional deposits thereto. Section 3.04. Trust Fund. The Escrow Agent shall hold at all times the Escrow Fund, any Escrowed Securities and all other assets of the Escrow Fund, wholly segregated from all other funds and securities on deposit with the Escrow Agent; it shall never allow Escrowed Securities or any other assets of the Escrow Fund to be commingled with any other funds or securities of the Escrow Agent; and it shall hold and dispose of the assets of the Escrow Fund only as set forth herein. Uninvested cash, Escrowed Securities and other assets of the Escrow Fund shall always be maintained by the Escrow Agent as trust funds for the benefit of the owners of the Refunded Obligations; and a special account thereof shall at all times be maintained on the books of the Escrow Agent. The owners of the Refunded Obligations shall be entitled to the same preferred claim and first lien upon uninvested cash, Escrowed Securities, the proceeds thereof, and all other assets of the Escrow Fund to which they are entitled as owners of the Refunded Obligations. The amounts received by the Escrow Agent under this Agreement shall not be considered as a banking deposit by the Issuer, and the Escrow Agent shall have no right to title with respect thereto except as a constructive trustee and Escrow Agent under the terms of this Agreement. The amounts received by the Escrow Agent under this Agreement shall not be subject to warrants, drafts or checks drawn by the Issuer or, except to the extent expressly herein provided, by the Paying Agent. Section 3.05. Security for Cash Balances. Cash balances from time to time on deposit in the Escrow Fund shall, to the extent not insured by the Federal Deposit Insurance Corporation or its successor, be continuously secured by a pledge of direct obligations of, or obligations unconditionally guaranteed by, the United States of America, having a market value at least equal to such cash balances. ARTICLE IV LIMITATION ON INVESTMENTS Section 4.01. General Limitations. Except as provided in Sections 3.01, 3.02 and 4.02 hereof, the Escrow Agent shall not have any power or duty to invest or reinvest any money held hereunder, or to make substitutions of Escrowed Securities, or to sell, transfer or otherwise dispose of Escrowed Securities. Section 4.02. Investments and Substitutions. At the discretion and upon the written request of the Issuer, the Escrow Agent shall invest cash balances in the Escrow Fund, make substitutions of Escrowed Securities or redeem Escrowed Securities and reinvest the proceeds thereof or hold such proceeds as cash, together with other moneys or securities held in the Escrow Fund provided that the Issuer delivers to the Escrow Agent the following: (1) an opinion by an independent certified public accountant that after such investment, substitution or reinvestment the principal amount of the securities in the Escrow Fund (which shall be noncallable, not pre-payable obligations described in Section 1207.062 of Chapter 1207, subject to any restrictions set forth in any order, ordinance or resolution of the Issuer authorizing the issuance of the Refunded Obligations), together with the interest thereon and other available moneys in the Escrow Fund, will be sufficient to pay, without further investment or reinvestment, as the same become due, the principal of, interest on and premium, if any, on the Refunded Obligations which have not previously been paid; and (2) an unqualified opinion of nationally recognized municipal bond counsel to the effect that (a) such investment, substitution or reinvestment will not cause the Refunded Obligations to be "arbitrage bonds" within the meaning of Section 103 of the Code or the regulations thereunder in effect on the date of such substitution or reinvestment, or otherwise make the interest on the Refunded Obligations or the Refunding 5 Bonds subject to federal income taxation, and (b) such investment, substitution or reinvestment complies with the Constitution and laws of the State of Texas and with all relevant documents relating to the issuance of the Refunded Obligations. Any balance in the Escrow Fund set forth in the opinion of the independent certified public account as not necessary to pay, without further investment or reinvestment, as the same become due, the principal of, interest on and premium, if any, on the Refunded Obligations which have not previously been paid shall be transferred to the Issuer. The Escrow Agent shall have no responsibility or liability for loss or otherwise with respect to investments made at the direction of the Issuer. Section 4.03. Arbitrage. The Issuer hereby covenants and agrees that it shall never request the Escrow Agent to exercise any power hereunder or permit any part of the money in the Escrow Fund or proceeds from the sale of Escrowed Securities to be used directly or indirectly to acquire any securities or obligations if the exercise of such power or the acquisition of such securities or obligations would cause any Refunding Bonds or Refunded Obligations to be an "arbitrage bond" within the meaning of the Code. ARTICLE V APPLICATION OF CASH BALANCES Section 5.01. In General. Except as provided in Sections 3.02 and 4.02, no withdrawals, transfers, investments or reinvestment shall be made of cash balances in the Escrow Fund. ARTICLE VI RECORDS AND REPORTS Section 6.01. Records. The Escrow Agent will keep books of record and account in which complete and correct entries shall be made of all transactions relating to the receipts, disbursements, allocations and application of the money and Escrowed Securities deposited to the Escrow Fund and all proceeds thereof, and such books shall be available for inspection at reasonable hours and under reasonable conditions by the Issuer and the owners of the Refunded Obligations. Section 6.02. Reports. While this Agreement remains in effect, the Escrow Agent annually shall prepare and send to the Issuer a written report summarizing all transactions relating to the Escrow Fund during the preceding year, including, without limitation, credits to the Escrow Fund as a result of interest payments on or maturities of Escrowed Securities and transfers from the Escrow Fund for payments on the Refunded Obligations or otherwise, together with a detailed statement of all Escrowed Securities and the cash balance on deposit in the Escrow Fund as of the end of such period. 6 ARTICLE VII CONCERNING THE PAYING AGENT AND ESCROW AGENT Section 7.01. Representations. The Escrow Agent hereby represents that it has all necessary power and authority to enter into this Agreement and undertake the obligations and responsibilities imposed upon it herein, and that it will carry out all of its obligations hereunder. Section 7.02. Limitation on Liability and Indemnification. (a) The liability of the Escrow Agent to transfer funds for the payment of the principal of, redemption premium, if any, and interest on the Refunded Obligations shall be limited to the cash balances and proceeds of Escrowed Securities from time to time on deposit in the Escrow Fund. Notwithstanding any provision contained herein to the contrary, neither the Escrow Agent nor the Paying Agent shall have any liability whatsoever for the insufficiency of funds from time to time in the Escrow Fund or any failure of the obligors of the Escrowed Securities to make timely payment thereon, except for the obligation to notify the Issuer as promptly as practicable of any such occurrence. (b) The recitals herein and in the proceedings authorizing the Refunding Bonds shall be taken as the statements of the Issuer and shall not be considered as made by, or imposing any obligation or liability upon, the Escrow Agent. The Escrow Agent is not a party to the proceedings authorizing the Refunding Bonds or the Refunded Obligations and is not responsible for nor bound by any of the provisions thereof (except as a place of payment and paying agent and/or a Paying Agent/Registrar therefor). In its capacity as Escrow Agent, it is agreed that the Escrow Agent need look only to the terms and provisions of this Agreement. (c) The Escrow Agent makes no representations as to the value, conditions or sufficiency of the Escrow Fund, or any part thereof, or as to the title of the Issuer thereto, or as to the security afforded thereby or hereby, and the Escrow Agent shall not incur any liability or responsibility in respect to any of such matters. (d) It is the intention of the parties hereto that the Escrow Agent shall never be required to use or advance its own funds or otherwise incur personal financial liability in the performance of any of its duties or the exercise of any of its rights and powers hereunder. (e) The Escrow Agent shall not be liable for any action taken or neglected to be taken by it in good faith in any exercise of reasonable care and believed by it to be within the discretion or power conferred upon it by this Agreement, nor shall the Escrow Agent be responsible for the consequences of any error of judgment; and the Escrow Agent shall not be answerable except for its own action, neglect or default, nor for any loss unless the same shall have been through its negligence or willful misconduct. (f) Unless it is specifically otherwise provided herein, the Escrow Agent has no duty to determine or inquire into the happening or occurrence of any event or contingency or the performance or failure of performance of the Issuer with respect to arrangements or contracts with 7 others, with the Escrow Agent's sole duty hereunder being to safeguard the Escrow Fund, to dispose of and deliver the same in accordance with this Agreement. If, however, the Escrow Agent is called upon by the terms of this Agreement to determine the occurrence of any event or contingency, the Escrow Agent shall be obligated, in making such determination, only to exercise reasonable care and diligence, and in event of error in making such determination the Escrow Agent shall be liable only for its own willful misconduct or its negligence. In determining the occurrence of any such event or contingency the Escrow Agent may request from the Issuer or any other person such reasonable additional evidence as the Escrow Agent in its discretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and in this connection may make inquiries of, and consult with, among others, the Issuer at any time. (g) To the extent permitted by law, the Issuer agrees to indemnify the Escrow Agent for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 7.03. Compensation. (a) Concurrently with the sale and delivery of the Refunding Bonds, the Issuer shall pay to the Escrow Agent, as a fee for performing the services hereunder and for all expenses incurred or to be incurred by the Escrow Agent in the administration of this Agreement, the amount set forth in Exhibit F attached hereto and made a part hereof, the sufficiency of which is hereby acknowledged by the Escrow Agent. In the event that the Escrow Agent is requested to perform any extraordinary services hereunder, the Issuer hereby agrees to pay reasonable fees to the Escrow Agent for such extraordinary services and to reimburse the Escrow Agent for all expenses incurred by the Escrow Agent in performing such extraordinary services, and the Escrow Agent hereby agrees to look only to the Issuer for the payment of such fees and reimbursement of such expenses. The Escrow Agent hereby agrees that in no event shall it ever assert any claim or lien against the Escrow Fund for any fees for its services, whether regular or extraordinary, as Escrow Agent, or in any other capacity, or for reimbursement for any of its expenses. (b) The Paying Agent is the place of payment (paying agent) for the Refunded Obligations. The Issuer covenants to timely pay for all future paying agency services of the Paying Agent for the Refunded Obligations in accordance with the paying agent fee schedule now in effect through the final payment of the Refunded Obligations, the sufficiency of which is hereby acknowledged by the Paying Agent. Additionally, the Paying Agent agrees to look only to the Issuer for the payment of such fees and reimbursement of such expenses, and for the benefit of the registered owners of the Refunded Obligations, to perform the services as Paying Agent without regard to the future payment of such fees and expenses. The Paying Agent hereby agrees that in no event shall it ever assert any claim or lien against the Escrow Fund for any fees for its services, whether regular or extraordinary, as Paying Agent, or in any other capacity, or for reimbursement for any of its expenses. 8 (c) Upon receipt of the aforesaid specific sums stated in subsections (a) and (b) of this Section 7.03 for Escrow Agent fees, expenses, and services, the Escrow Agent shall acknowledge such receipt to the Issuer in writing. Section 7.04. Successor Escrow Agents. (a) If at any time the Escrow Agent or its legal successor or successors should become unable, through operation or law or otherwise, to act as escrow agent hereunder, or if its property and affairs shall be taken under the control of any state or federal court or administrative body because of insolvency or bankruptcy or for any other reason, a vacancy shall forthwith exist in the office of Escrow Agent hereunder. In such event the Issuer, by appropriate action, promptly shall appoint an Escrow Agent to fill such vacancy. If no successor Escrow Agent shall have been appointed by the Issuer within 60 days, a successor may be appointed by the owners of a majority in principal amount of the Refunded Obligations then outstanding by an instrument or instruments in writing filed with the Issuer, signed by such owners or by their duly authorized attorneys-in-fact. If, in a proper case, no appointment of a successor Escrow Agent shall be made pursuant to the foregoing provisions of this section within three months after a vacancy shall have occurred, the owner of any Refunded Obligation may apply to any court of competent jurisdiction to appoint a successor Escrow Agent. Such court may thereupon, after such notice, if any, as it may deem proper, prescribe and appoint a successor Escrow Agent. (b) Any successor Escrow Agent shall be: (i) a corporation, bank or banking association organized and doing business under the laws of the United States or the State of Texas; (ii) be authorized under such laws to exercise corporate trust powers; (iii) be authorized under Texas law to act as an escrow agent; under Chapter 1207 (iv) have a combined capital and surplus of at least $5,000,000; and (v) be subject to the supervision or examination by Federal or State authority. (c) Any successor Escrow Agent shall execute, acknowledge and deliver to the Issuer and the Escrow Agent an instrument accepting such appointment hereunder, and the Escrow Agent shall execute and deliver an instrument transferring to such successor Escrow Agent, subject to the terms of this Agreement, all the rights, powers and trusts of the Escrow Agent hereunder. Upon the request of any such successor Escrow Agent, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Escrow Agent all such rights, powers and duties. (d) The Escrow Agent at the time acting hereunder may at any time resign and be discharged from the trust hereby created by giving not less than sixty (60) days' written notice to the Issuer and publishing notice thereof, specifying the date when such resignation will take effect, in a newspaper printed in the English language and with general circulation in New York, New York, such publication to be made once at least three (3) weeks prior to the date when the resignation is to take effect. No such resignation shall take effect unless a successor Escrow Agent shall have been appointed by the owners of the Refunded Obligations or by the Issuer as herein provided and such successor Escrow Agent shall be a paying agent for the Refunded Obligations or a trust company or commercial bank that does not act as a depository for the Issuer 9 and shall have accepted such appointment, in which event such resignation shall take effect immediately upon the appointment and acceptance of a successor Escrow Agent. (e) Under any circumstances, the Escrow Agent shall pay over to its successor Escrow Agent proportional parts of the Escrow Agent's fee and, if applicable, its Paying Agent's fee hereunder. Section 7.05. Notice of Redemption of Refunded Obligations. The Escrow Agent, by its execution hereof, as Paying Agent for the Refunded Obligations, hereby agrees to provide notice of redemption of the Refunded Obligations as required under the terms of the order of the Issuer authorizing the issuance of the respective Refunded Obligations, including notices required to be delivered to each registered securities depository and to any national information service that disseminates redemption notices. Section 7.06. Acknowledgment of Notice of Redemption. The Escrow Agent, by its execution hereof, as Paying Agent for the Refunded Obligations, acknowledges receipt of written notice of the redemption of the Refunded Obligations, as required by the proceedings that authorized the issuance of the Refunded Obligations, and agrees to provide or cause to be provided notice of defeasance and redemption of such Refunded Obligations as required by the proceedings that authorized the issuance of such Refunded Obligations. ARTICLE VIII MISCELLANEOUS Section 8.01. Notice. Any notice, authorization, request, or demand required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when mailed by registered or certified mail, postage prepaid addressed to the Issuer or the Escrow Agent at the address shown on Exhibit A attached hereto. The United States Post Office registered or certified mail receipt showing delivery of the aforesaid shall be conclusive evidence of the date and fact of delivery. Any party hereto may change the address to which notices are to be delivered by giving to the other parties not less than ten (10) days prior notice thereof. Prior written notice of any amendment to this Agreement contemplated pursuant to Section 8.08 and immediate written notice of any incidence of a severance pursuant to Section 8.04 shall be sent to Moody's Investors Service, Attn: Public Finance Rating Desk/Refunded Bonds, 99 Church Street, New York, New York 10007, and Standard & Poor's Corporation, Attn: Municipal Bond Department, 25 Broadway, New York, New York 10004. Section 8.02. Termination of Responsibilities. Upon the taking of all the actions as described herein by the Escrow Agent, the Escrow Agent shall have no further obligations or responsibilities hereunder to the Issuer, the owners of the Refunded Obligations or to any other person or persons in connection with this Agreement. Section 8.03. Binding Agreement. This Agreement shall be binding upon the Issuer and the Escrow Agent and their respective successors and legal representatives, and shall inure 10 solely to the benefit of the owners of the Refunded Obligations, the Issuer, the Escrow Agent and their respective successors and legal representatives. Section 8.04. Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. Section 8.05. Texas Law Governs. This Agreement shall be governed exclusively by the provisions hereof and by the applicable laws of the State of Texas. Section 8.06. Time of the Essence. Time shall be of the essence in the performance of obligations from time to time imposed upon the Escrow Agent by this Agreement. Section 8.07. Effective date of Agreement. This Agreement shall be effective upon receipt by the Escrow Agent of the funds described in Section 2.01, together with the specific sums stated in subsection (a) of Section 7.03 for Escrow Agent fees, expenses, and services. Section 8.08. Amendments. This Agreement is made for the benefit of the Issuer, the Escrow Agent and the holders or owners from time to time of the Refunded Obligations, and it shall not be repealed, revoked, altered or amended without the written consent of all such holders or owners and the written consent of the Escrow Agent and the Issuer; provided, however, that the Issuer and the Escrow Agent may, without the consent of, or notice to, such holders or owners and as shall not be inconsistent with the terms and provisions of this Agreement amend this Agreement to cure any ambiguity or formal defect or omission in this Agreement; but provided further that no amendment to or alteration of this Agreement shall conflict with the requirements for firm banking and financial arrangements in accordance with Chapter 1207. No such amendment shall adversely affect the rights of the holders of the Refunded Obligations. No amendment shall be effective unless the same shall be in writing and signed by the parties thereto. Section 8.09. Counterparts. This Agreement may be executed in one or more counterparts, each and all of which shall be deemed an original for all purposes, and all counterparts shall together constitute one and the same instrument. (Execution Page Follows) 11 EXECUTED as of the date first written above. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. By_ Name: Title: S-1 EXECUTED as of the date first written above. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By_ President, Board of Directors THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. Name Title Associate s-i INDEX TO EXHIBITS Exhibit A Addresses of the Issuer and the Escrow Agent Exhibit B Schedule of Refunded Obligations Exhibit C Schedule of Debt Service on Refunded Obligations Exhibit D Sufficiency Certificate of Refunded Obligation Paying Agent Exhibit E Escrow Fund Cash Flow Exhibit F Escrow Agent Fees EXHIBIT A ADDRESSES OF THE ISSUER AND THE ESCROW AGENT ISSUER Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 Attn: District Manager ESCROW AGENT The Bank of New York Mellon Trust Company, N.A. 2001 Bryan Street, 11th Floor Dallas, Texas 75201 Attn: Corporate Trust Services EXHIBIT B SCHEDULE OF REFUNDED OBLIGATIONS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002 Maturity Date Interest Rate 1%) Principal Amount ($) Principal Amount to be Refunded* ($) Redemption Date CUSIP 2013 4.25 165,000 165,000 September 1, 2012 897060BE8 2014 4.35 170,000 170,000 September 1, 2012 897060BF5 2015 4.45 180,000 180,000 September 1, 2012 897060BG3 2016 4.55 190,000 190,000 September 1, 2012 897060BH1 2017 4.70 200,000 200,000 September 1, 2012 897060BJ7 2018 4.80 210,000 210,000 September 1, 2012 897060BK4 2020 4.95 460,000 460,000 September 1, 2012 897060BM0 2022 5.00 505,000 505,000 September 1, 2012 897060BP3 2023 5.00 275,000 275,000 September 1, 2012 897060BQ1 *Redemption at the price of par plus accrued interest to the date of redemption. EXHIBIT C SCHEDULE OF DEBT SERVICE ON REFUNDED OBLIGATIONS SERIES 2002 REFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13,2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 56,156.25 56,156.25 09/30/2013 165,000 4.250% 112,312.50 277,312.50 09/30/2014 170,000 4.350% 105,300.00 275,300.00 09/30/2015 180,000 4.450% 97,905.00 277,905.00 09/30/2016 190,000 4.550% 89,895.00 279,895.00 09/30/2017 200,000 4.700% 81,250.00 281,250.00 09/30/2018 210,000 4.800% 71,850.00 281,850.00 09/30/2019 225,000 4.950% 61,770.00 286,770.00 09/30/2020 235,000 4.950% 50,632.50 285,632.50 09/30/2021 245,000 5.000% 39,000.00 284,000.00 09/30/2022 260,000 5.000% 26,750.00 286,750.00 09/30/2023 275,000 5.000% 13,750.00 288,750.00 2,355,000 806,571.25 3,161,571.25 ESCROW REQUIREMENTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (20021 Period Principal Ending Interest Redeemed Total 09/01/2012 56,156.25 2,355,000.00 2,411,156.25 56,156.25 2,355,000.00 2,411,156.25 EXHIBIT D SUFFICIENCY CERTIFICATE OF REFUNDED OBLIGATION PAYING AGENT (Omitted at this point as it is included elsewhere in the transcript.) EXHIBIT E ESCROWED FUND CASH FLOW $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Unlimited Tax Bonds. Series 2002 (2002") - Allocation of Global Present Value Other Net Escrow to 03/05/2012 Date Cash Flows Receipts @ 0.0000000% 03/05/2012 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 Escrow Cost Summary Purchase date 03/05/2012 Purchase cost of securities 2,411,156.25 Target for yield calculation 2,411,156.25 EXHIBIT F ESCROW AGENT FEES (See attached) BNY MELLON CORPORATE TRUST Fee Schedule Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Acceptance Fee None A one-time charge covering the Bank Officer's review of governing documents, communication with members of the closing party, including representatives of the issuer, investment banker(s) and attorney(s), establishment of procedures and controls, set-up of trust accounts and tickler suspense items and the receipt and disbursement/investment of bond proceeds. This fee is payable on the closing date. An annual charge covering the normal paying agent duties related to account administration and bondholder services. Our pricing is based on the assumption that the bonds are DTC-eligible/book-entry only. If the bonds are certificated or physical, then we will have to charge an additional $1000 per year as a paying agent. This fee is payable annually, in advance. The Escrow Agent Fee covers the consideration of documents and the normal administrative duties of the escrow agent according to the governing documents. For a full year or partial year escrow the fee is $750 per year. Should the escrow account or depository account be open for less than two months, then we will reduce our fee to $375. Should we not open an escrow, depository or similar account, we will not charge for such services. This fee is payable on the closing date. Pricing for Call or Redemptions of Bonds Per Call $300 Call Pricing includes distribution of the call notice to holders of record, redemption processing, and notification to EMMA. Any publication expenses (i.e. Bond Buyer, regional periodical, financial periodicals, etc.) for the call notice will be billed to the Issuer at cost. Extraordinary Services/Misc Fees At Appraisal The charges for performing extraordinary or other services not contemplated at the time of the execution of the transaction or not specifically covered elsewhere in this schedule will be commensurate with the service to be provided and may be charged in BNY Mellon's sole discretion. If it is contemplated that the Trustee hold and/or value collateral or enter into any investment contract, forward purchase or similar or other agreement, additional acceptance, administration and counsel review fees will be applicable to the agreement governing such services. If the bonds are converted to certificated form, additional annual fees will be charged for any applicable tender agent and/or registrar/paying agent services. Additional information will be provided at such time. Should this transaction terminate prior to closing, all out-of-pocket expenses incurred, including legal fees, will be billed at cost. If all outstanding bonds of a series are defeased or called in full prior to their maturity, a termination fee may be assessed at that time. Annual Paying Agent Administration Fee $500 Escrow Agent Fee: $750 2001 Bryan - 1P Floor Dallas, TX 75201 BNY MELLON CORPORATE TRUST 2001 Bryan -IT Floor Dallas, TX 75201 These extraordinary services may include, but are not limited to, supplemental agreements, consent operations, unusual releases, tender processing, sinking fund redemptions, failed remarketing processing, the preparation of special or interim reports, custody of collateral, a one-time fee to be charged upon termination of an engagement. Counsel, accountants, special agents and others will be charged at the actual amount of fees and expenses billed, UCC filing fees, money market sweep fees, auditor confirmation fees, wire transfer fees, transaction fees to settle third-party trades and reconcilement fees to balance trust account balances to third- party investment provider statements Annual fees include one standard audit confirmation per year without charge. Standard audit confirmations include the final maturity date, principal paid, principal outstanding, interest cycle, interest paid, cash and asset information, interest rate, and asset statement information. Non-standard audit confirmation requests may be assessed an additional fee. Periodic tenders, sinking fund, optional or extraordinary call redemptions will be assessed at $300 per event. FDIC or other governmental charges will be passed along to you as incurred. Terms and Disclosures Terms of Proposal Final acceptance of the appointment under the Indenture is subject to approval of authorized officers of BNYM and full review and execution of all documentation related hereto. Please note that if this transaction does not close, you will be responsible for paying any expenses incurred, including Counsel Fees. We reserve the right to terminate this offer if we do not enter into final written documents within three months from the date this document is first transmitted to you. Fees may be subject to adjustment during the life of the engagement. Customer Notice Required by the USA Patriot Act To help the US government fight the funding of terrorism and money laundering activities, US Federal law requires all financial institutions to obtain, verify, and record information that identifies each person (whether an individual or organization) for which a relationship is established. What this means to you: When you establish a relationship with BNYM, we will ask you to provide certain information (and documents) that will help us to identify you. We will ask for your organization's name, physical address, tax identification or other government registration number and other information that will help us to identify you. We may also ask for a Certificate of Incorporation or similar document or other pertinent identifying documentation for your type of organization. We thank you for your assistance. TAB 9 SIGNATURE IDENTIFICATION AND AUTHORITY CERTIFICATE OF ESCROW AGENT I, the undersigned officer of The Bank of New York Mellon Trust Company, N. A. (the "Bank"), which is the Escrow Agent appointed by Trophy Club Municipal Utility District No. 1 (the "Issuer"), in connection with the execution and delivery of an Escrow Agreement (the "Escrow Agreement") dated as of March 5, 2012 between the Issuer and the Bank hereby certify as follows: 1. The Bank is a national banking association duly organized under the banking laws of the United States of America and has full power and authority to enter into and perform the obligations of the Escrow Agent under the Escrow Agreement. 2. The Escrow Agreement has been duly executed and attested on behalf of the Bank by one or more of the persons named below whose offices appear set opposite their names; said persons were at the time of executing the Escrow Agreement and are now, duly elected, qualified and acting incumbents of their respective offices; and the signatures appearing after each of said persons' names is the true and correct specimen of such person's genuine signature: Name Office Signature Caresse Tankersley Associate / V, 3. The foregoing officers of the Bank, by virtue of the authority delegated to them as set forth in Exhibit A, are authorized to execute and deliver on behalf of the Escrow Agreement and such other and further documents as may be necessary or incidental to the acceptance and performance of the duties set forth within. IN WITNESS WHEREOF, the undersigned Bank has caused this certificate to be executed and its seal affixed on February 27. 2012. The Bank of New York Mellon Trust Company, N.A. Dallas, Texas as Escrow Agent Title: Associate [BANK SEAL] Exhibit A - Evidence of Delegation of Authority THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. I, the undersigned, Barbara J. Parrish, Assistant Secretary of The Bank of New York Mellon Trust Company, N.A., a national banking association organized under the laws of the United States (the "Association") and located in the State of California, with a trust office located at 2001 Bryan Street, Dallas, Texas, DO HEREBY CERTIFY that the following individuals are duly appointed and qualified Officers of the Association: Officer Title Signing Authority Michelle Baldwin Vice President A, C2, J, N, P2 Rosalyn Y. Davis Vice President A, C2, J, N, P2 Michael K. Herberger Vice President A, C2, J,N, PI Elizabeth Power Vice President A, C2, J, N, P2 Cathleen M. Sokolowski Vice President A, CI, J, N, PI Shannon Straty Vice President A, C2, J, N, P2 Rick Adler Senior Associate A, C5, J, N, P2 Tony Hongnoi Senior Associate A, C5,J,N,P2 Gulnaar Murthy Senior Associate A, C5, J, N, P2 Jason Stephens Senior Associate A, C2, J, N, PI Deirdre A. Wilson Senior Associate A, C5, J, P2 Erin L. Fitzpatrick Associate A, C3, J, N Caresse L. Tankersley Associate A, C3, J, N I further certify that as of this date they have been authorized to sign on behalf of the Association in discharging or performing their duties in accordance with the limited signing powers provided under Article V, Section 5.3 of the By-Laws of the Association and the paragraphs indicated above of the signing authority resolution of the Board of Directors of the Association. Attached hereto are true and correct copies of excerpts of the By-Laws of the Association and the signing authority resolution, which have not been amended or revised since October 15,2009 and are in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of The Bank of New York Mellon Trust Company, N.A. this 26th day January 2012. Barbara J. Parrish, Assistant Secretary Extracts from By-Laws of The Bank of New York Mellon Trust Company, N.A. As Amended through October 15, 2009 ARTICLE V SIGNING AUTHORITIES Section 5.1 Real Property. Real property owned by the Association in its own right shall not be deeded, conveyed, mortgaged, assigned or transferred except when duly authorized by a resolution of the Board. The Board may from time-to-time authorize officers to deed, convey, mortgage, assign or transfer real property owned by the Association in its own right with such maximum values as the Board may fix in its authorizing resolution. Section 5.2. Senior Signing Powers. Subject to the exception provided in Section 5.1, the President and any Executive Vice President is authorized to accept, endorse, execute or sign any document, instrument or paper in the name of, or on behalf of, the Association in all transactions arising out of, or in connection with, the normal course of the Association's business or in any fiduciary, representative or agency capacity and, when required, to affix the seal of the Association thereto. In such instances as in the judgment of the President, or any Executive Vice President may be proper and desirable, any one of said officers may authorize in writing from time-to-time any other officer to have the powers set forth in this section applicable only to the performance or discharge of the duties of such officer within his or her particular division or function. Any officer of the Association authorized in or pursuant to Section 5.3 to have any of the powers set forth therein, other than the officer signing pursuant to this Section 5.2, is authorized to attest to the seal of the Association on any documents requiring such seal. Section 5.3. Limited Signing Powers. Subject to the exception provided in Section 5.1, in such instances as in the judgment of the President or any Executive Vice President, may be proper and desirable, any one of said officers may authorize in writing from time-to-time any other officer, employee or individual to have the limited signing powers or limited power to affix the seal of the Association to specified classes of documents set forth in a resolution of the Board applicable only to the performance or discharge of the duties of such officer, employee or individual within his or her division or function. Section 5.4. Powers of Attorney. All powers of attorney on behalf of the Association shall be executed by any officer of the Association jointly with the President, any Executive Vice President, or any Managing Director, provided that the execution by such Managing Director of said Power of Attorney shall be applicable only to the performance or discharge of the duties of said officer within his or her particular division or function. Any such power of attorney may, however, be executed by any officer or officers or person or persons who may be specifically authorized to execute the same by the Board of Directors. Section 5.5. Auditor. The Auditor or any officer designated by the Auditor is authorized to certify in the name of, or on behalf of the Association, in its own right or in a fiduciary or representative capacity, as to the accuracy and completeness of any account, schedule of assets, or other document, instrument or paper requiring such certification. SIGNING AUTHORITY RESOLUTION Pursuant to Article V, Section 5.3 of the By-Laws Adopted October 15, 2009 RESOLVED that, pursuant to Section 5.3 of the By-Laws of the Association, authority be, and hereby is, granted to the President or any Executive Vice President, in such instances as in the judgment of any one of said officers may be proper and desirable, to authorize in writing from time-to- time any other officer, employee or individual to have the limited signing authority set forth in any one or more of the following paragraphs applicable only to the performance or discharge of the duties of such officer, employee or individual within his or her division or function: (A) All signing authority set forth in paragraphs (B) through (I) below except Level C which must be specifically designated. (Bl) Individuals authorized to accept, endorse, execute or sign any bill receivable; certification; contract, document or other instrument evidencing, embodying a commitment with respect to, or reflecting the terms or conditions of, a loan or an extension of credit by the Association; note; and document, instrument or paper of any type, including stock and bond powers, required for purchasing, selling, transferring, exchanging or otherwise disposing of or dealing in foreign currency, derivatives or any form of securities, including options and futures thereon; in each case in transactions arising out of, or in connection with, the normal course of the Association's business. (B2) Individuals authorized to endorse, execute or sign any certification; disclosure notice required by law; document, instrument or paper of any type required for judicial, regulatory or administrative proceedings or filings; and legal opinions. (CI) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in excess of $500,000,000 with single authorization for all transactions. (C2) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in excess of $500,000,000*. (C3) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $500,000,000. (C4) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount in excess of $100,000,000 but not to exceed $500,000,000*. (C5) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $100,000,000. (C6) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $10,000,000. (C7) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $5,000,000. (C8) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $1,000,000. (C9) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $250,000. (C10) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $50,000. (Cll) Authority to accept, endorse, execute or sign or effect the issuance of any cashiers, certified or other official check; draft; order for payment of money; check certification; receipt; certificate of deposit; money transfer wire; and internal transfers resulting in a change of beneficial ownership; in each case, in an amount up to $5,000. *Dual authorization is required by any combination of senior officer and/or Sector Head approved designee for non-exempt transactions. Single authorization required for exempt transactions. (Dl) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $1,000,000. (D2) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $250,000. (D3) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $50,000. (D4) Authority to accept, endorse, execute or sign any contract obligating the Association for the payment of money or the provision of services in an amount up to $5,000. (E) Authority to accept, endorse, execute or sign any guarantee of signature to assignments of stocks, bonds or other instruments; certification required for transfers and deliveries of stocks, bonds or other instruments; and document, instrument or paper of any type required in connection with any Individual Retirement Account or Keogh Plan or similar plan. (F) Authority to accept, endorse, execute or sign any certificate of authentication as bond, unit investment trust or debenture trustee and on behalf of the Association as registrar and transfer agent. (G) Authority to accept, endorse, execute or sign any bankers acceptance; letter of credit; and bill of lading. (H) Authority to accept, endorse, execute or sign any document, instrument or paper of any type required in connection with the ownership, management or transfer of real or personal property held by the Association in trust or in connection with any transaction with respect to which the Association is acting in any fiduciary, representative or agency capacity, including the acceptance of such fiduciary, representative or agency account. (11) Authority to effect the external movement of free delivery of securities and internal transfers resulting in changes of beneficial ownership. (12) Authority to effect the movement of securities versus payment at market or contract value. (J) Authority to either sign on behalf of the Association or to affix the seal of the Association to any of the following classes of documents: Trust Indentures, Escrow Agreements, Pooling and Servicing Agreements, Collateral Agency Agreements, Custody Agreements, Trustee's Deeds, Executor's Deeds, Personal Representative's Deeds, Other Real Estate Deeds for property not owned by the Association in its own right, Corporate Resolutions, Mortgage Satisfactions, Mortgage Assignments, Trust Agreements, Loan Agreements, Trust and Estate Accountings, Probate Petitions, responsive pleadings in litigated matters and Petitions in Probate Court with respect to Accountings, Contracts for providing customers with Association products or services. (N) Individuals authorized to accept, endorse, execute or sign internal transactions only, (i.e., general ledger tickets); does not include the authority to authorize external money movements, internal money movements or internal free deliveries that result in changes of beneficial ownership. (PI) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in excess of $10,000,000. (P2) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $10,000,000. (P3) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $5,000,000. (P4) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $1,000,000. (P5) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $250,000. (P6) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $100,000. (P7) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $50,000. (P8) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $25,000. (P9) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $10,000. (P10) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $5,000. (Pll) Authority to approve the payment of valid expenses as incurred to meet the obligations of the Association, excluding salary and other employee directed benefit payments; in each case, in an amount up to $3,000. RESOLVED, that any signing authority granted pursuant to this resolution may be rescinded by the President or any Executive Vice President and such signing authority shall terminate without the necessity of any further action when the person having such authority leaves the employ of the Association. TAB 10 CERTIFICATE OF NOTICE OF REDEMPTION AND SUFFICIENCY I, the undersigned authorized officer of The Bank of New York Mellon Trust Company, N.A. (the "Bank"), acting on behalf of the Bank, hereby certify as follows: 1. The Bank is the paying agent/registrar for the following series of obligations (the "Outstanding Obligations"): Trophy Club Municipal Utility District No. 1, Unlimited Tax Bonds, Series 2002 2. The Bank, as paying agent/registrar for the Outstanding Obligations hereby acknowledges receipt of the Notice of Redemption attached hereto as Exhibit A setting forth the maturity dates and principal amounts of the Outstanding Obligations to be refunded and redeemed (the "Redeemed Obligations"). 3. The Bank will cause notice of redemption to be furnished to the registered holders of the Redeemed Obligations at least 30 days prior to the date of redemption, in accordance with the order authorizing the Redeemed Obligations. 4. The Bank understands that the Redeemed Obligations described in the attached Notice of Redemption have been called for redemption on September 1, 2012 (the "Redemption Date). 5. The Bank acknowledges that the total amount due on the Redemption Date for the Redeemed Obligations is $2,411,156.25, representing principal in the amount of $2,355,000.00, plus accrued interest of $56,156.25 to the Redemption Date. 6. The Bank hereby acknowledges and represents that it will not demand the payment of or collect future fees or expenses, if any, from funds to be provided to it for the payment of the principal of and interest on the Redeemed Obligations, and agrees to look to the issuer of such Redeemed Obligations for the payment of such fees and expenses and to continue to provide services as paying agent/registrar for the life of the Redeemed Obligations with the remedy for nonpayment being solely an action for amounts owing under the paying agent/registrar agreement with the issuer. [Remainder of page intentionally left blank] Executed this February 27, 2012 THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. EXHIBIT A NOTICE OF DEFEASANCE/REDEMPTION Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on September 1 in each of the following years, aggregating $2,355,000 in principal amount. Maturity Date Principal Amount ($) Interest Rate (%) Redemption Date CUSIP* 2013 165,000 4.25 September 1,2012 897060BE8 2014 170,000 4.35 September 1,2012 897060BF5 2015 180,000 4.45 September 1,2012 897060BG3 2016 190,000 4.55 September 1,2012 897060BH1 2017 200,000 4.70 September 1,2012 897060BJ7 2018 210,000 4.80 September 1,2012 897060BK4 2020 460,000 4.95 September 1,2012 897060BM0 2022 505,000 5.00 September 1, 2012 897060BP3 2023 275,000 5.00 September 1,2012 897060BQ1 Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust P.O. Box 396 East Syracuse, New York 13057 By Overnight or Courier The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust 111 Sanders Creek Parkway East Syracuse, New York 13057 In person The Bank of New York Mellon Trust Company, N.A. Global Corporate Trust Corporate Trust Window 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. Dated: March 5, 2012 Trophy Club Municipal Utility District No. 1 TAB 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 March 5, 2012 The Bank of New York Mellon Trust Company, N. A. 2001 Bryan Street, 8th Floor Dallas, Texas 75201 Re: Trophy Club Municipal Utility District No. 2 Unlimited Tax Refunding Bonds, Series 2002 (the "Series 2002 Bonds") Ladies and Gentlemen: Pursuant to the order adopted on December 20, 2011 by the Board of Directors of the Trophy Club Municipal Utility District No. 1 (the "District") authorizing the issuance of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Order"), the District has exercised the option to redeem all of the Series 2002 Bonds as shown below: The District has defeased and will redeem the Series 2002 Bonds maturing on September 1 in the years 2013 through 2018, 2020, 2022 and 2023 in the aggregate principal amount of $2,355,000 on September 1, 2012 (the "Refunded Obligations") at the redemption price equal to the principal amount of the 2002 Refunded Bonds plus accrued interest to the date of redemption as set forth in the attached Notice of Defeasance and Redemption. Enclosed is a copy of the order authorizing the Refunded Obligations (the "Refunded Obligations Order") and the Notices of Defeasance and Redemption with respect to the Refunded Obligations. As Paying Agent/Registrar for the Refunded Obligations, you are hereby requested to give the notices of defeasance and redemption of the Refunded Obligations in the manner required by the Refunded Obligations Order: The Paying Agent/Registrar will cause a written notice of such redemption to be sent at least 30 days prior to the date of redemption by United States mail, first- class postage prepaid, to the Registered Owner of each Refunded Obligation to be redeemed. Thank you for your attention to this matter. Very truly yours, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By: ^A~^t-L^~^~ District Manager Signature Page to Notice of Redemption Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 NOTICE OF DEFEASANCE/REDEMPTION Trophy Club Municipal Utility District No. 1 Notice is hereby given that the following obligations of Trophy Club Municipal Utility District No. 1 (the "District") have been defeased and called for redemption prior to their scheduled maturities, at a price of par and accrued interest to the date of redemption, to-wit: TROPHY CLUB MUNICD7AL UTHJTY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002, all outstanding obligations maturing on September 1 in each of the following years, aggregating $2,355,000 in principal amount. Maturity Date Principal Amount ($1 Interest Rate (%) Redemption Date CUSP?* 2013 165,000 4.25 September 1,2012 897060BE8 2014 170,000 4.35 September 1,2012 897060BF5 2015 180,000 4.45 September 1,2012 897060BG3 2016 190,000 4.55 September 1,2012 897060BH1 2017 200,000 4.70 September 1,2012 897060BJ7 2018 210,000 4.80 September 1,2012 897060BK4 2020 460,000 4.95 September 1,2012 897060BM0 2022 505,000 5.00 September 1,2012 897060BP3 2023 275,000 5.00 September 1,2012 897060BQ1 Due provision for the payment of the above-described obligations has been made with The Bank of New York Mellon Trust Company, N.A., (the "Bank"), the paying agent for said obligations, and said obligations shall be presented for payment either in person or by mail, at the following address: First Class/ Registered/Certified Mail By Overnight or Courier In person The Bank of New York Mellon Trust The Bank of New York Mellon Trust The Bank of New York Mellon Trust Company, N.A. Company, N.A. Company, N.A. Global Corporate Trust Global Corporate Trust Global Corporate Trust P.O. Box 396 111 Sanders Creek Parkway Corporate Trust Window East Syracuse, New York 13057 East Syracuse, New York 13057 101 Barclay Street 1ST Floor East New York, New York 10286 Interest on the redeemed obligations shall cease to accrue thereon after their redemption date. In compliance with section 3406 of the Internal Revenue Code of 1986, as amended, payors making certain payments due on debt securities may be obligated to deduct and withhold a portion of such payment from the remittance to any payee who has failed to provide such payor with a valid taxpayer identification number. To avoid the imposition of this withholding tax, such payees should submit a certified taxpayer identification number when surrendering the Bonds for redemption. * The CUSIP Numbers have been assigned to this issue by the CUSIP Service Bureau and are included solely for the convenience of the owners of the Bonds. The District and Paying Agent shall not be responsible for the selection or the correctness of the CUSIP numbers set forth herein or as printed on any Bond. Dated: March 5, 2012 Trophy Club Municipal Utility District No. 1 TAB 12 FEDERAL TAX CERTIFICATE 1. In General. 1.1. The undersigned is the District Manager of the Trophy Club Municipal Utility District No. 1 (the "Issuer"). 1.2. This Certificate is executed for the purpose of establishing the reasonable expectations of the Issuer as to future events regarding the Issuer's Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"). The Bonds are being issued pursuant to an order of the Issuer (the "Order") adopted on the date of sale of the Bonds. The Order is incorporated herein by reference. 1.3. To the best of the undersigned's knowledge, information and belief, the expectations contained in this Federal Tax Certificate are reasonable. 1.4. The undersigned is an officer of the Issuer delegated with the responsibility, among others, of issuing and delivering the Bonds. 1.5. The undersigned is not aware of any facts or circumstances that would cause him to question the accuracy of the representations made by First Southwest Company (the "Underwriter") in the Issue Price Certificate attached hereto as Exhibit "D", and by Southwest Securities, Inc. (the "Financial Advisor") in Subsections 2.2 and 5.3 of this Certificate and with respect to the Schedules attached hereto as Exhibit "E". 2. The Purpose of the Bonds and Useful Lives of Projects. 2.1. The purpose for the issuance of the Bonds, as more fully described in the Order, is to establish an Escrow Fund (the "Escrow Fund") pursuant to an Escrow Agreement (the "Escrow Agreement") between the Issuer and an escrow agent to refund the outstanding obligations of the Issuer as listed in Exhibit "B" to the Escrow Agreement (the "Outstanding Bonds") and to pay the related expenses of issuing the Bonds. The Escrow Agreement is included in the transcript for the Bonds and incorporated herein by reference. 2.2. The Financial Advisor has represented that the Issuer will realize a present value debt service savings (determined without regard to administrative expenses) in connection with the issuance of the Bonds and the refunding of the Outstanding Bonds. The Outstanding Bonds will be redeemed on the earliest date on which the Outstanding Bonds can be redeemed. The proceeds deposited to the Escrow Fund will not exceed the amount required to pay the principal of and interest on the Outstanding Bonds and will not be reinvested. Accordingly, after taking into account proceeds used to pay costs of issuance and accrued interest, the Issuer expects that "excess gross proceeds" within the meaning of section 1.148-10(c) of the Treasury Regulations will not exceed one percent of the sale proceeds of the Bonds. 2.3. The Bonds are the first advance refunding of the Outstanding Bonds, which were originally issued by the Issuer after December 31, 1985. 2.4. The proceeds of the Outstanding Bonds were used to provide for the financing of a wastewater treatment plant expansion; ground storage installation; 21-inch water line additional capacity and waste water treatment plant connection charges (the "Outstanding Projects"). The Outstanding Projects remain in service and have not been sold or otherwise disposed of by the Issuer. 2.5. The Issuer expects that 120 percent of the aggregate useful lives of the Outstanding Projects, on the later of the date that the Outstanding Projects were placed in service or the date of issuance of the Outstanding Bonds, will exceed 18 years. 2.6. Other than members of the general public, the Issuer expects that throughout the lesser of the term of the Bonds, or the useful lives of the Outstanding Projects, the only user of the Outstanding Projects will be the Issuer or the Issuer's employees and agents. The Issuer will be the manager of the Outstanding Projects. The Issuer does not expect to enter into long-term sales of output from the Outstanding Projects and sales of output will be made on the basis of generally-applicable and uniformly applied rates. The Issuer may apply different rates for different classes of customers, including volume purchasers, which are reasonable and customary. In no event will the proceeds of the Bonds or facilities financed therewith be used for private business use in an amount greater than $15 million. 2.7. Except as stated below, the Issuer expects not to sell or otherwise dispose of property constituting the Outstanding Projects prior to the earlier of the end of such property's useful life or the final maturity of the Bonds. The Order provides that the Issuer will not sell or otherwise dispose of the Outstanding Projects unless the Issuer receives an opinion of nationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Bonds. 2.8. For purposes of Subsection 2.7 hereof, the Issuer has not included the portion of the Outstanding Projects comprised of personal property that is disposed in the ordinary course at a price that is expected to be less than 25 percent of the original purchase price. The Issuer, upon any disposition of such property, will transfer the receipts from the disposition of such property to the general operating fund and expend such receipts within six months for other governmental programs. 3. Yields. 3.1. The issue price of the Bonds included in the Form 8038-G, is based on the Issue Price Certificate attached hereto. 3.2. The Issuer has not entered into any qualified guarantee or qualified hedge with respect to the Bonds. The yield on the Bonds will not be affected by subsequent unexpected events, except to the extent provided in section 1.148-4(h)(3) of the Treasury Regulations when and if the Issuer enters into a qualified hedge or into any transaction transferring, waiving or modifying any right that is part of the terms of any Bond. The Issuer will consult with nationally recognized bond counsel prior to entering into any of the foregoing transactions. 4. Transferred Proceeds, Excess Proceeds and Disposition Proceeds. 4.1. As of the date of this Certificate, all of the amounts received from the sale of the Outstanding Bonds and the investment earnings thereon have been expended. 4.2. The Issuer has no reason to believe nor has any expectation that a device has been or will be employed in connection with the issuance of the Bonds to obtain a material financial advantage (based on arbitrage) apart from savings attributable to lower interest rates. All of the proceeds of the Bonds, other than an amount, if any, which is less than one percent of the sale proceeds of the Bonds, will be used either to pay costs of issuance of the Bonds or to pay principal and interest on the Outstanding Bonds. 2 5. Debt Service Fund. 5.1. The Order creates a special Debt Service Fund solely for the benefit of the Bonds (the "Debt Service Fund"). Other than as described herein, money deposited in the Debt Service Fund will be used to pay the principal of and interest on the Bonds (the "Bona Fide Debt Service Portion"). The Bona Fide Debt Service Portion constitutes a fund that is used primarily to achieve a proper matching of revenues and debt service within each bond year. Such portion will be completely depleted at least once each year except for an amount not in excess of the greater of (a) one-twelfth of the debt service on the Bonds for the previous year, or (b) the previous year's earnings on such portion of the Debt Service Fund. Amounts deposited in the Debt Service Fund constituting the Bona Fide Debt Service Portion will be spent within a thirteen-month period beginning on the date of deposit, and any amount received from the investment of money held in the Debt Service Fund will be spent within a one-year period beginning on the date of receipt. 5.2. A portion of the funds on deposit in the Debt Service Fund, not otherwise used to pay debt service on the Bonds within thirteen months, will be held in trust for the benefit of the holders of the Bonds (the "Reserve Portion"). If on any interest payment or maturity date, sufficient amounts are not available to make debt service payments on the Bonds, the Issuer is required to use such money constituting the Reserve Portion in an amount sufficient to make such payments. The present value of the investments deposited to the Reserve Portion of the Debt Service Fund and allocable to the Bonds and to the unrefunded portion of the issue of obligations of which the Outstanding Bonds are part that will be invested at a yield higher than the yield on such bonds will not, as of any date, exceed an aggregate amount which equals the lesser of (a) 10 percent of the stated principal amount (or, in the case of a discount, the issue price) of the Bonds, (b) 1.25 of the average annual debt service on the Bonds, or (c) maximum annual debt service on the Bonds. 5.3. Based on the representation of the Financial Advisor, the amount on deposit in the Reserve Portion of the Debt Service Fund should be maintained as a balance allocable to the Bonds in the Debt Service Fund consistent with accepted standards of prudent fiscal management for similar governmental bodies and in order to provide a reserve against periodic fluctuations in the amount and timing of payment of ad valorem taxes to the Issuer. 5.4. Any money deposited in the Debt Service Fund and any amounts received from the investment thereof that accumulate and remain on hand therein after thirteen months from the date of deposit of any such money or one year after the receipt of any such amounts from the investment thereof shall constitute a third and separate portion of the Debt Service Fund. The yield on any investments allocable to the portion of the Debt Service Fund exceeding of the sum of (a) the Bona Fide Debt Service Portion, (b) the Reserve Portion and (c) an amount equal to the lesser of five percent of the sale and investment proceeds of the Bonds or $ 100,000 will be restricted to a yield that does not exceed the yield on the Bonds. 6. Invested Sinking Fund Proceeds, Replacement Proceeds. 6.1. The Issuer has, in addition to the moneys received from the sale of the Bonds, certain other moneys that are invested in various funds which are pledged for various purposes. These other funds are not available to accomplish the purposes described in Section 2 of this Certificate. 6.2. Other than the Debt Service Fund, there are, and will be, no other funds or accounts established, or to be established, by or on behalf of the Issuer (a) which are reasonably expected to be used, or to generate earnings to be used, to pay debt service on the Bonds, or (b) which are reserved or pledged as collateral for payment of debt service on the Bonds and for which there is reasonable assurance that amounts 3 therein will be available to pay such debt service if the Issuer encounters financial difficulties. Accordingly, there are no other amounts constituting "gross proceeds" of the Bonds, within the meaning of section 148 of the Code. 7. Other Obligations. There are no other obligations of the Issuer, that (a) are sold at substantially the same time as the Bonds, i.e., within 15 days of the date of sale of the Bonds, (b) are sold pursuant to a common plan of financing with the Bonds, and (c) will be payable from the same source of funds as the Bonds. 8. Federal Tax Audit Responsibilities. The Issuer acknowledges that in the event of an examination by the Internal Revenue Service (the "Service") to determine compliance of the Bonds with the provisions of the Code as they relate to tax-exempt obligations, the Issuer will respond, and will direct its agents and assigns to respond, in a commercially reasonable manner to any inquiries from the Service in connection with such an examination. The Issuer understands and agrees that the examination may be subject to public disclosure under applicable Texas law. 9. Record Retention and Private Business Use. The Issuer has covenanted in the Order that it will comply with the requirements of the Code relating to the exclusion of the interest on the Bonds under section 103 of the Code. The Service has determined that certain materials, records and information should be retained by the issuers of tax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under section 103 of the Code. ACCORDINGLY, THE ISSUER SHALL TAKE STEPS TO ENSURE THAT ALL MATERIALS, RECORDS AND INFORMATION NECESSARY TO CONFIRM THE EXCLUSION OF THE INTEREST ON THE BONDS UNDER SECTION 103 OF THE CODE ARE RETAINED FOR THE PERIOD BEGINNING ON THE ISSUE DATE OF THE OUTSTANDING BONDS OR, IN THE CASE OF A SEQUENCE OF REFUNDINGS, THE ISSUE DATE OF THE OBLIGATIONS ORIGINALLY FINANCING THE OUTSTANDING PROJECT AND ENDING THREE YEARS AFTER THE DATE THE BONDS ARE RETIRED. The Issuer acknowledges receipt of the letters attached hereto as Exhibit "B" which discusses limitations related to private business use and Exhibit "C" which, in part, discusses specific guidance by the Service with respect to the retention of records relating to tax-exempt bond transactions. The Issuer also acknowledges that Exhibit "C" does not constitute an opinion of Bond Counsel as to the proper record retention policy applicable to any specific transaction. 10. Rebate to United States. The Issuer has covenanted in the Order that it will comply with the requirements of the Code, including section 148(f) of the Code, relating to the required rebate to the United States. Specifically, the Issuer will take steps to ensure that all earnings on gross proceeds of the Bonds in excess of the yield on the Bonds required to be rebated to the United States will be timely paid to the United States. The Issuer acknowledges receipt of the memorandum attached hereto as Exhibit "A" which discusses regulations promulgated pursuant to section 148(f) of the Code. This memorandum does not constitute an opinion of Bond Counsel as to the proper federal tax or accounting treatment of any specific transaction. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 4 DATED as of March 5,2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 Bv: ^M^TjU^^ District Manager Trophy Club Municipal Utility District No. 1, Unlimited Tax Refunding Bonds, Series2012 The undersigned represents that, to the best of the undersigned's knowledge, information and belief, the representations contained in Subsections 2.2 and 5.3 of this Federal Tax Certificate and the Schedules attached hereto as Exhibit "E" are, as of March 5, 2012, accurate and complete. We understand that the foregoing information will be relied upon by the Issuer with respect to certain of the representations set forth in this Federal Tax Certificate and by McCall, Parkhurst & Horton L.L.P. (i) in connection with rendering its opinion to the Issuer that interest on the Bonds is excludable from gross income thereof for income tax purposes, and (ii) for purposes of completing the IRS Form 803 8-G. The undersigned is certifying only as to facts in existence on the date hereof. Nothing herein represents the undersigned's interpretation of any laws or the application of any laws to these facts. SOUTHWEST SECURITIES, INC. By:! Trophy Club Municipal Utility District No. 1, Unlimited Tax Refunding Bonds, Series 2012 Exhibit "A' LAW OFFICES MCCALL, PARKHURST & HORTON LLP. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET SUITE 1800 SUITE 900 SUITE 1525 AUSTIN, TEXAS 78701-3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (512) 478-3805 FACSIMILE: (512) 472-0871 TELEPHONE: (214) 754-9200 FACSIMILE: (214) 754-9250 TELEPHONE: (210) 225-2800 FACSIMILE: (210)225-2984 January 1, 2006 ARBITRAGE REBATE REGULATIONS© The arbitrage rebate requirements set forth in section 148(f) of the Internal Revenue Code of 1986 (the "Code") generally provide that in order for interest on any issue of bonds1 to be excluded from gross income (i.e., tax-exempt) the issuer must rebate to the United States the sum of, (1) the excess of the amount earned on all "nonpurpose investments" acquired with "gross proceeds" of the issue over the amount which would have been earned if such investments had been invested at a yield equal to the yield on the issue, and (2) the earnings on such excess earnings. On June 18, 1993, the U.S. Treasury Department promulgated regulations relating to the computation of arbitrage rebate and the rebate exceptions. These regulations, which replace the previously-published regulations promulgated on May 15, 1989, and on May 18, 1992, are effective for bonds issued after June 30,1993. This memorandum was prepared by McCall, Parkhurst & Horton L.L.P. and provides a general discussion of these arbitrage rebate regulations. This memorandum does not otherwise discuss the general arbitrage regulations, other than as they may incidentally relate to rebate. This memorandum also does not attempt to provide an exhaustive discussion of the arbitrage rebate regulations and should not be considered advice with respect to the arbitrage rebate requirements as applied to any individual or governmental unit or any specific transaction. Any tax advice contained in this memorandum is of a general nature and is not intended to be used, and should not be used, by any person to avoid penalties under the Code. McCall, Parkhurst & Horton L.L.P. remains available to provide legal advice to issuers with respect to the provisions of these tax regulations but recommends that issuers seek competent financial and accounting assistance in calculating the amount of such issuer's rebate liability under section 148(f) of the Code and in making elections to apply the rebate exceptions. Effective Dates 1 In this memorandum the word "bond" is defined to include any bond, note, certificate, financing lease or other obligation of an issuer. Copyright 2006 by Harold T. Flanagan, McCall, Parkhurst & Horton L.L.P. All rights reserved. The regulations promulgated on June 18,1993, generally apply to bonds delivered after June 30, 1993, although they do permit an issuer to elect to apply the rules to bonds issued priorto that date. The temporary regulations adopted by the U.S. Treasury Department in 1989 and 1992 incorporated the same effective dates which generally apply for purposes of section 148(f) of the Code. As such, the previous versions of the rebate regulations generally applied to bonds issued between August 1986 and June 30,1993 (or, with an election, to bonds issued priorto August 15,1993). The statutory provisions of section 148(f) of the Code, other than the exception for construction issues, apply to all bonds issued after August 15,1986, (for private activity bonds) and August 31, 1986, (for governmental public purpose bonds). The statutory exception to rebate applicable for construction issues generally applies if such issue is delivered after December 19, 1989. The regulations provide numerous transitional rules for bonds sold priorto July 1,1993. Moreover, since, under prior law, rules were previously published with respect to industrial development bonds and mortgage revenue bonds, the transitional rules contained in these regulations permit an issuer to elect to apply certain of these rules for computing rebate on pre- 1986 bonds. The regulations provide for numerous elections which would permit an issuer to apply the rules (other than 18-month spending exception) to bonds which were issued prior to July 1, 1993 and remain outstanding on June 30, 1993. Due to the complexity of the regulations, it is impossible to discuss in this memorandum all circumstances for which specific elections are provided. If an issuer prefers to use these final version of rebate regulations in lieu of the computational method stated under prior law (e.g., due to prior redemption) or the regulations, please contact McCall, Parkhurst & Horton L.L.P. for advice as to the availability of such options. Future Value Computation Method The regulations employ an actuarial method for computing the rebate amount based on the future value of the investment receipts (i.e., earnings) and payments. The rebate method employs a two-step computation to determine the amount of the rebate payment. First, the issuer determines the bond yield. Second, the issuer determines the arbitrage rebate amount. The regulations require that the computations be made at the end of each five-year period and upon final maturity of the issue (the "computation dates"). THE FINAL MATURITY DATE WILL ACCELERATE IN CIRCUMSTANCES IN WHICH THE BONDS ARE OPTIONALLY REDEEMED PRIOR TO MATURITY. AS SUCH, IF BONDS ARE REFUNDED OR OTHERWISE REDEEMED, THE REBATE MAY BE DUE EARLIER THAN INITIALLY PROJECTED. In order to accommodate accurate record-keeping and to assure that sufficient amounts will be available for the payment of arbitrage rebate liability, however, we recommend that the computations be performed at least annually. Please refer to other materials provided by McCall, Parkhurst & Horton L.L.P. relating to federal tax rules regarding record retention. Under the future value method, the amount of rebate is determined by compounding the aggregate earnings on all the investments from the date of receipt by the issuer to the computation date. Similarly, a payment for an investment is future valued from the date that the payment is made to the computation date. The receipts and payments are future valued at a discount rate equal to the yield on the bonds. The rebatable arbitrage, as of any computation date, is equal to the excess of the (1) future value of all receipts from investments (i.e., earnings), over (2) the future value of all payments. McCall, Parkhurst & Horton L.L.P. - Page 2 The following example is provided in the regulations to illustrate how arbitrage rebate is computed under the future value method for a fixed-yield bond: "On January 1, 1994, City A issues a fixed yield issue and invests all the sale proceeds of the issue ($49 million). There are no other gross proceeds. The issue has a yield of 7.0000 percent per year compounded semiannually (computed on a 30 day month/360 day year basis). City A receives amounts from the investment and immediately expends them for the governmental purpose of the issue as follows: Date Amount 2/1/1994 $ 3,000,000 4/1/1994 5,000,000 6/1/1994 14,000,000 9/1/1994 20,000,000 7/1/1995 10,000,000 City A selects a bond year ending on January 1, and thus the first required computation date is January 1, 1999. The rebate amount as of this date is computed by determining the future value of the receipts and the payments for the investment. The compounding interval is each 6-month (or shorter) period and the 30 day month/360 day year basis is used because these conventions were used to compute yield on the issue. The future value of these amounts, plus the computation credit, as of January 1, 1999, is: Date Receipts (Payments) FY (7.0000 percent) 01/1/1994 ($49,000,000) ($69,119,339) 02/1/1994 3,000,000 4,207,602 04/1/1994 5,000,000 6,932,715 06/1/1994 14,000,000 19,190,277 09/1/1994 20,000,000 26,947,162 01/1/1995 (1,000) (1,317) 07/1/1995 10,000,000 12,722,793 01/1/1996 (1,000) (1.229) Rebate amount (01/01/1999) $878.664" General Method for Computing Yield on Bonds In general, the term "yield," with respect to a bond, means the discount rate that when used in computing the present value of all unconditionally due payments of principal and interest and all of the payments for a qualified guarantee produces an amount equal to the issue price of the bond. The term "issue price" has the same meaning as provided in sections 1273 and 1274 of the Code. That is, if bonds are publicly offered (i.e., sold by the issuer to a bond house, broker or similar person acting in the capacity of underwriter or wholesaler), the issue price of each bond is determined on the basis of the initial offering price to the public (not McCall, Parkhurst & Horton L.L.P. - Page 3 to the aforementioned intermediaries) at which price a substantial amount of such bond was sold to the public (not to the aforementioned intermediaries). The "issue price" is separately determined for each bond (i.e., maturity) comprising an issue. The regulations also provide varying periods for computing yield on the bonds depending on the method by which the interest payment is determined. Thus, for example, yield on an issue of bonds sold with variable interest rates (i.e., interest rates which are reset periodically based on changes in market) is computed separately for each annual period ending on the first anniversary of the delivery date that the issue is outstanding. In effect, yield on a variable yield issue is determined on each computation date by "looking back" at the interest payments for such period. The regulations, however, permit an issuer of a variable-yield issue to elect to compute the yield for annual periods ending on any date in order to permit a matching of such yield to the expenditure of the proceeds. Any such election must be made in writing, is irrevocable, and must be made no later than the earlier of (1) the fifth anniversary date, or (2) the final maturity date. Yield on a fixed interest rate issue (i.e., an issue of bonds the interest rate on which is determined as of the date of the issue) is computed over the entire term of the issue. Issuers of fixed-yield issues generally use the yield computed as of the date of issue for all rebate computations. Such yield on fixed-yield issues generally is recomputed only if (1) the issue is sold at a substantial premium, may be retired within five years of the date of delivery, and such date is earlier than its scheduled maturity date, or (2) the issue is a stepped-coupon bond. In such cases, the regulations require the issuer to recompute the yield on such issues by taking into account the early retirement value of the bonds. Similarly, recomputation may occur in circumstances in which the issuer or bondholder modify or waive certain terms of, or rights with respect to, the issue or in sophisticated hedging transactions. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL. PARKHURST & HORTON LLP. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. For purposes of determining the principal or redemption payments on a bond, different rules are used for fixed-rate and variable-rate bonds. The payment is computed separately on each maturity of bonds rather than on the issue as a whole. In certain circumstances, the yield on the bond is determined by assuming that principal on the bond is paid as scheduled and that the bond is retired on the final maturity date for the stated retirement price. For bonds subject to early redemption or stepped-coupon bonds, described above, or for bonds subject to mandatory early redemption, the yield is computed assuming the bonds are paid on the early redemption date for an amount equal to their value. Premiums paid to guarantee the payment of debt service on bonds are taken into account in computing the yield on the bond. Payments for guarantees are taken into account by treating such premiums as the payment of interest on the bonds. This treatment, in effect, raises the yield on the bond, thereby permitting the issuer to recover such fee with excess earnings. The guarantee must be an unconditional obligation of the guarantor enforceable by the bondholder for the payment of principal or interest on the bond or the tender price of a tender bond. The guarantee may be in the form of an insurance policy, surety bond, irrevocable letter or line of credit, or standby purchase agreement. Importantly, the guarantor must be legally entitled to full reimbursement for any payment made on the guarantee either immediately or McCall, Parkhurst & Horton L.L.P. - Page 4 upon commercially reasonable repayment terms. The guarantor may not be a co-obligor of the bonds or a user of more than 10 percent of the proceeds of the bonds. Payments for the guarantee may not exceed a reasonable charge for the transfer of credit risk. This reasonable charge requirement is not satisfied unless it is reasonably expected that the guarantee will result in a net present value savings on the bond (i.e., the premium does not exceed the present value of the interest savings resulting by virtue of the guarantee). If the guarantee is entered into after June 14, 1989, then any fees charged for the nonguarantee services must be separately stated or the guarantee fee is not recoverable. The regulations also treat certain "hedging" transactions in a manner similarto qualified guarantees. "Hedges" are contracts, e.g., interest rate swaps, futures contracts or options, which are intended to reduce the risk of interest rate fluctuations. Hedges and other financial derivatives are sophisticated and ever-evolving financial products with which a memorandum, such as this, can not readily deal. IN SUCH CIRCUMSTANCES. ISSUERS ARE ADVISED TO CONSULT McCALL. PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Earnings on Nonpurpose Investments The arbitrage rebate provisions apply only to the receipts from the investment of "gross proceeds" in "nonpurpose investments." For this purpose, nonpurpose investments are stock, bonds or other obligations acquired with the gross proceeds of the bonds for the period prior to the expenditure of the gross proceeds for the ultimate purpose. For example, investments deposited to construction funds, reserve funds (including surplus taxes or revenues deposited to sinking funds) or other similar funds are nonpurpose investments. Such investments include only those which are acquired with "gross proceeds." For this purpose, the term "gross proceeds" includes original proceeds received from the sale of the bonds, investment earnings from the investment of such original proceeds, amounts pledged to the payment of debt service on the bonds or amounts actually used to pay debt service on the bonds. The regulations do not provide a sufficient amount of guidance to include an exhaustive list of "gross proceeds" for this purpose; however, it can be assumed that "gross proceeds" represent all amounts received from the sale of bonds, amounts earned as a result of such sale or amounts (including taxes and revenues) which are used to pay, or secure the payment of, debt service for the bonds. The total amount of "gross proceeds" allocated to a bond generally can not exceed the outstanding principal amount of the bonds. The regulations provide that an investment is allocated to an issue for the period (1) that begins on the date gross proceeds are used to acquire the investment, and (2) that ends on the date such investment ceases to be allocated to the issue. In general, proceeds are allocated to a bond issue until expended for the ultimate purpose for which the bond was issued or for which such proceeds are received (e.g., construction of a bond-financed facility or payment of debt service on the bonds). Deposit of gross proceeds to the general fund of the issuer (or other fund in which they are commingled with revenues or taxes) does not eliminate or ameliorate the Issuer's obligation to compute rebate in most cases. As such, proceeds commingled with the general revenues of the issuer are not "freed-up" from the rebate obligation. An exception to this commingling limitation for bonds, other than private activity bonds, permits "investment earnings" (but not sale proceeds or other types of gross proceeds) to be considered spent when deposited to a commingled fund if those amounts are reasonably McCall, Parkhurst & Horton L.L.P. - Page 5 expected to be spent within six months. Other than for these amounts, issuers may consider segregating investments in order to more easily compute the amount of such arbitrage earnings by not having to allocate investments. Special rules are provided for purposes of advance refundings. These rules are too complex to discuss in this memorandum. Essentially, the rules relating to refundings, however, do not require that amounts deposited to the escrow fund to defease the prior obligations of the issuer be subject to arbitrage rebate to the extent that the investments deposited to the escrow fund do not have a yield in excess of the yield on the bonds. Any loss resulting from the investment of proceeds in an escrow fund below the yield on the bonds, however, may be recovered by combining those investments with investments deposited to other funds, e.g., reserve or construction funds. The arbitrage regulations also provide an exception to the arbitrage limitations for the investment of bond proceeds in tax-exempt obligations. As such, investment of proceeds in tax exempt bonds eliminates the Issuer's rebate obligation. A caveat; this exception does not apply to gross proceeds derived allocable to a bond, which is not subject to the alternative minimum tax under section 57(a)(5) of the Code, if invested in tax-exempt bonds subject to the alternative minimum tax, i.e., " private activity bonds." Such "AMT-subject" investment is treated as a taxable investment and must comply with the arbitrage rules, including rebate. Earnings from these tax-exempt investments are subject to arbitrage restrictions, including rebate. Similarly, the investment of gross proceeds in certain tax-exempt mutual funds are treated as a direct investment in the tax-exempt obligations deposited in such fund. While issuers may invest in such funds for purposes of avoiding arbitrage rebate, they should be aware that if "private activity bonds" are included in the fund then a portion of the earnings will be subject to arbitrage rebate. Issuers should be prudent in assuring that the funds do not contain private activity bonds. The arbitrage regulations provide a number of instances in which earnings will be imputed to nonpurpose investments. Receipts generally will be imputed to investments that do not bear interest at an arm's-length (i.e., market) interest rate. As such, the regulations adopt a "market price" rule. In effect, this rule prohibits an issuer from investing bond proceeds in investments at a price which is higher than the market price of comparable obligations, in order to reduce the yield. Special rules are included for determining the market price for investment contracts, certificates of deposit and certain U.S. Treasury obligations. For example, to establish the fair market value of investment contracts a bidding process between three qualified bidders must be used. The fair market value of certificates of deposit which bear a fixed interest rate and are subject to an early withdrawal penalty is its purchase price if that price is not less than the yield on comparable U.S. Treasury obligations and is the highest yield available from the institution. In any event, a basic "common sense" rule-of-thumb that can be used to determine whether a fair market value has been paid is to ask whether the general funds of the issuer would be invested at the same yield or at a higher yield. An exception to this market price rule is available for United States Treasury Obligations - State or Local Government Series in which case the purchase price is always the market price. Reimbursement and Working Capital McCall, Parkhurst & Horton L.L.P. - Page 6 The regulations provide rules for purposes of determining whether gross proceeds are used for working capital and, if so, at what times those proceeds are considered spent. In general, working capital financings are subject to many of the same rules that have existed since the mid-1970s. For example, the regulations generally continue the 13-month temporary period. By adopting a "proceeds-spent-last" rule, the regulations also generally require that an issuer actually incur a deficit (i.e., expenditures must exceed receipts) for the computation period (which generally corresponds to the issuer's fiscal year). Also, the regulations continue to permit an operating reserve, but unlike prior regulations the amount of such reserve may not exceed five percent of the issuer's actual working capital expenditures for the prior fiscal year. Another change made by the regulations is that the issuer may not finance the operating reserve with proceeds of a tax-exempt obligation. Importantly, the regulations contain rules for determining whether proceeds used to reimburse an issuer for costs paid prior to the date of issue of the obligation, in fact, are considered spent at the time of reimbursement. These rules apply to an issuer who uses general revenues for the payment of all or a portion of the costs of a project then uses the proceeds of the bonds to reimburse those general revenues. Failure to comply with these rules would result in the proceeds continuing to be subject to federal income tax restrictions, including rebate. To qualify for reimbursement, a cost must be described in an expression (e.g., resolution, legislative authorization) evidencing the issuer's intent to reimburse which is made no later than 60 days after the payment of the cost. Reimbursement must occur no later than 18 months after the later of (1) the date the cost is paid or (2) the date the project is placed in service. Except for projects requiring an extended construction period or small issuers, in no event can a cost be reimbursed more than three years after the cost is paid. Reimbursement generally is not permitted for working capital; only capital costs, grants and loans may be reimbursed. Moreover, certain anti-abuse rules apply to prevent issuers from avoiding the limitations on refundings. IN CASES INVOLVING WORKING CAPITAL OR REIMBURSEMENT, ISSUERS ARE ADVISED TO CONTACT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. Rebate Payments Rebate payments generally are due 60 days after each installment computation date. The interim computation dates occur each fifth anniversary of the issue date. The final computation date is on the latest of (1) the date 60 days after the date the issue of bonds is no longer outstanding, (2) the date eight months after the date of issue for certain short-term obligations (i.e., obligations retired within three years), or (3) the date the issuer no longer reasonably expects any spending exception, discussed below, to apply to the issue. On such payment dates, other than the final payment date, an issuer is required to pay 90 percent of the rebatable arbitrage to the United States. On the final payment date, an issuer is required to pay 100 percent of the remaining rebate liability. Failure to timely pay rebate does not necessarily result in the loss of tax-exemption. Late payments, however, are subject to the payment of interest, and unless waived, a penalty of 50 percent (or, in the case of private activity bonds, other than qualified 501 (c)(3) bonds, 100 McCall, Parkhurst & Horton L.L.P. - Page 7 percent) of the rebate amount which is due. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Rebate payments are refundable. The issuer, however, must establish to the satisfaction of the Commissioner of the Internal Revenue Service that the issuer paid an amount in excess of the rebate and that the recovery of the overpayment on that date would not result in additional rebatable arbitrage. An overpayment of less than $5,000 may not be recovered before the final computation date. Alternative Penalty Amount In certain cases, an issuer of a bond the proceeds of which are to be used for construction may elect to pay a penalty, in lieu of rebate. The penalty may be elected in circumstances in which the issuer expects to satisfy the two-year spending exception which is more fully described under the heading "Exceptions to Rebate." The penalty is payable, if at all, within 60 days after the end of each six-month period. This is more often than rebate. The election of the alternative penalty amount would subject an issuer, which fails the two-year spend-out requirements, to the payment of a penalty equal to one and one-half of the excess of the amount of proceeds which was required to be spent during that period over the amount which was actually spent during the period. The penalty has characteristics which distinguish it from arbitrage rebate. First, the penalty would be payable without regard to whether any arbitrage profit is actually earned. Second, the penalty continues to accrue until either (1) the appropriate amount is expended or (2) the issuer elects to terminate the penalty. To be able to terminate the penalty, the issuer must meet specific requirements and, in some instances, must pay an additional penalty equal to three percent of the unexpended proceeds. Exceptions to Rebate The Code and regulations provide certain exceptions to the requirement that the excess investment earnings be rebated to the United States. a. Small Issuers. The first exception provides that if an issuer (together with all subordinate issuers) during a calendar year does not issue tax-exempt bonds2 in an aggregate face amount exceeding $5 million, then the obligations are not subject to rebate. Only issuers with general taxing powers may take advantage of this exception. Subordinate issuers are those issuers which derive their authority to issue bonds from the same issuer, e.g., a city and a health facilities development corporation, or which are controlled by the same issuer, e.g., a state and the board of a public university. In the case of bonds issued for public school capital expenditures, the $5 million cap may be increased to as much as $15 million. For purposes of measuring whether bonds in the calendar year exceed these dollar limits, current refunding 2 For this purpose, "private activity bonds" neither are afforded the benefit of this exception nor are taken into account for purposes of determining the amount of bonds issued. McCall, Parkhurst & Horton L.L.P. - Page 8 bonds can be disregarded if they meet certain structural requirements. Please contact McCall, Parkhurst & Horton L.L.P. for further information. b. Spending Exceptions. Six-Month Exception. The second exception to the rebate requirement is available to all tax-exempt bonds, all of the gross proceeds of which are expended during six months. The six month rule is available to bonds issued after the effective date of the Tax Reform Act of 1986. See the discussion of effective dates on page two. For this purpose, proceeds used for the redemption of bonds (other than proceeds of a refunding bond deposited to an escrow fund to discharge refunded bonds) can not be taken into account as expended. As such, bonds with excess gross proceeds generally can not satisfy the second exception unless the amount does not exceed the lesser of five percent or $100,000 and such de minimis amount must be expended within one year. Certain gross proceeds are not subject to the spend-out requirement, including amounts deposited to a bona fide debt service fund, to a reserve fund and amounts which become gross proceeds received from purpose investments. These amounts themselves, however, may be subject to rebate even though the originally expended proceeds were not. The Code provides a special rule for tax and revenue anticipation notes (i.e., obligations issued to pay operating expenses in anticipation of the receipt of taxes and other revenues). Such notes are referred to as TRANs. To determine the timely expenditure of the proceeds of a TRAN, the computation of the "cumulative cash flow deficit" is important. If the "cumulative cash flow deficit" (i.e., the point at which the operating expenditures of the issuer on a cumulative basis exceed the revenues of the issuer during the fiscal year) occurs within the first six months of the date of issue and must be equal to at least 90 percent of the proceeds of the TRAN, then the notes are deemed to satisfy the exception. This special rule requires, however, that the deficit actually occur, not that the issuer merely have an expectation that the deficit will occur. In lieu of the statutory exception for TRANs, the regulations also provide a second exception. Under this exception, 100 percent of the proceeds must be spent within six months, but before note proceeds can be considered spent, all other available amounts of the issuer must be spent first ("proceeds-spent-last" rule). In determining whether all available amounts are spent, a reasonable working capital reserve equal to five percent of the prior year's expenditures may be set aside and treated as unavailable. 18-Month Exception. The regulations also establish a non-statutory exception to arbitrage rebate if all of the gross proceeds (including investment earnings) are expended within 18 months after the date of issue. Under this exception, 15 percent of the gross proceeds must be expended within a six-month spending period, 60 percent within a 12-month spending period and 100 percent within an 18-month spending period. The rule permits an issuer to rely on its reasonable expectations for computing investment earnings which are included as gross proceeds during the first and second spending period. A reasonable retainage not to exceed five percent of the sale proceeds of the issue is not required to be spent within the 18-month period but must be expended within 30 months. Rules similar to the six-month exception relate to the definition of gross proceeds. Two Year Exception. Bonds issued after December 19, 1989 (i.e., the effective date of the Omnibus Reconciliation Act of 1989), at least 75 percent of the net proceeds of which are to be used for construction, may be exempted from rebate if the gross proceeds are spent McCall, Parkhurst & Horton L.L.P. - Page 9 within two years. Bonds more than 25 percent of the proceeds of which are used for acquisition or working capital may not take advantage of this exception. The exception applies only to governmental bonds, qualified 501(c)(3) bonds and private activity bonds for governmentally- owned airports and docks and wharves. The two-year exception requires that at least 10 percent of the available construction proceeds must be expended within six months after the date of issue, 45 percent within 12 months, 75 percent within 18 months and 100 percent within 24 months. The term "available construction proceeds" generally means sale proceeds of the bonds together with investment earnings less amounts deposited to a qualified reserve fund or used to pay costs of issuance. Under this rule, a reasonable retainage not to exceed five percent need not be spent within 24 months but must be spent within 36 months. The two-year rule also provides for numerous elections which must be made not later than the date of issuance of the bonds. Once made, the elections are irrevocable. Certain elections permit an issuer to bifurcate bond issues, thereby treating only a portion of the issue as a qualified construction bond; and, permit an issuer to disregard earnings from reserve funds for purposes of determining "available construction proceeds." Another election permits an issuer to pay the alternative penalty amount discussed above in lieu of rebate if the issuer ultimately fails to satisfy the two-year rule. Issuers should discuss these elections with their financial advisors priorto issuance of the bonds. Of course, McCall, Parkhurst & Horton L.L.P. remains available to assist you by providing legal interpretations thereof. Debt Service Funds. Additionally, an exception to the rebate requirement, whether or not any of the previously discussed exceptions are available, applies for earnings on "bona fide debt service funds." A "bona fide debt service fund" is one in which the amounts are expended within 13 months of the accumulation of such amounts by the issuer. In general, most interest and sinking funds (other than any excess taxes or revenues accumulated therein) satisfy these requirements. For private activity bonds, short term bonds (i.e., have a term of less than five years) or variable rate bonds, the exclusion is available only if the gross earnings in such fund does not exceed $100,000, for the bond year. For other bonds issued after November 11, 1988, no limitation is applied to the gross earnings on such funds for purposes of this exception. Therefore, subject to the foregoing discussion, the issuer is not required to take such amounts into account for purposes of the computation. FOR BONDS ISSUED AFTER THE EFFECTIVE DATE OF THE TAX REFORM ACT OF 1986 WHICH WERE OUTSTANDING AS OF NOVEMBER 11, 1988, OTHER THAN PRIVATE ACTIVITY BONDS, SHORT TERM BONDS OR VARIABLE RATE BONDS, A ONE-TIME ELECTION MAY BE MADE TO EXCLUDE EARNINGS ON "BONA FIDE DEBT SERVICE FUNDS" WITHOUT REGARD TO THE $100,000, LIMITATION. THE ELECTION MUST BE MADE IN WRITING (AND MAINTAINED AS PART OF THE ISSUER'S BOOKS AND RECORDS) NO LATER THAN THE LATER OF MARCH 21, 1990, OR THE FIRST DATE A REBATE PAYMENT IS REQUIRED. Conclusion McCall, Parkhurst & Horton L.L.P. hopes that this memorandum will prove to be useful as a general guide to the arbitrage rebate requirements. Again, this memorandum is not intended as an exhaustive discussion nor as specific advice with respect to any specific transaction. We advise our clients to seek competent McCall, Parkhurst & Horton L.L.P. - Page 10 financial and accounting assistance. Of course, we remain available to provide legal advice regarding all federal income tax matters, including arbitrage rebate. If you have any questions, please feel free to contact either Harold T. Flanagan or Stefano Taverna at (214) 754-9200. McCall, Parkhurst & Horton L.L.P. - Page 11 EXHIBIT "B' LAW OFFICES MCCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701-3248 TELEPHONE: (512) 478-3805 FACSIMILE: (512) 472-0871 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75201-6587 TELEPHONE: (214) 754-9200 FACSIMILE: (214) 754-9250 700 N. ST. MARY'S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (210) 225-2800 FACSIMILE: (210) 225-2984 November 1, 2011 Certain Federal Income Tax Considerations for Private Business Use of Bond-Financed Facilities This memorandum provides a general discussion of those types of contractual arrangements which give rise to private business use, and to what extent that use rises to a prohibited level. Generally, in order for bonds issued by governmental units to be tax- exempt, no more than a de minimis amount of the proceeds of the bonds or the facilities financed with such proceeds may be used by non-governmental users. That is, there may be no more than an incidental use by persons, other than state or local governments. Too much private business use can cause the bonds to become taxable. Private business use for this purpose can be direct or can result from indirect benefits being conveyed to a private person by contractual arrangement. The following discussion describes, in general terms, those types of arrangements which need to be scrutinized. We hope that this general guideline will be useful to you in interacting with private parties regarding the use of bond proceeds or bond-financed facilities. While the statements contained herein are not intended as advice with regard to any specific transaction, McCall, Parkhurst & Horton L.L.P. remains available should you have questions about these rules. If you have any specific questions or comments, please feel free to contact Stefano Taverna or Harold T. Flanagan at (214) 754-9200. I. Private Business Use Arrangements that involve use in a trade or business by a nongovernmental person of bond proceeds or facilities financed with bond proceeds may cause a "private business use" problem. Bond-financed facilities may be used by a variety of people with differing consequences under these rules. For example, students, teachers, employees and the general public may use bond-financed facilities on a non-exclusive basis without constituting private business use. More problematic, however, is use of bond-financed facilities by groups such as managers, lessees (e.g., book store owners), persons providing services (e.g., food or cleaning), seminar groups, sports and entertainment groups, and even alumni associations. The benefits also may be considered to pass to a private person where the right to the output produced by the facility is transferred. For this purpose, the federal government is considered a non-governmental person. Use by an organization organized under section 501 (c)(3) of the Internal Revenue Code in a trade or business unrelated to the exempt purpose of such organization also is considered use by a private person. The term "use" includes both actual and beneficial use. As such, private business use may arise in a variety of ways. For example, ownership of a bond-financed facility by a non-governmental person is private business use. The leasing of a bond-financed facility by a non-governmental person can also cause a private business use problem. Along the same line, management of such facilities by a non-governmental person can cause a problem with private business use, absent compliance with the management contract rules discussed below. Essentially, such use can occur in connection with any arrangement in which the non­ governmental user has a preference to benefit from the proceeds or the facilities. Therefore, any arrangement which results in a non-governmental person being the ultimate beneficiary of the bond financing must be considered. 1. Sales and Leases. The sale of a bond-financed facility to a non­ governmental person would cause a private business use problem if that facility involved the use of more than 10 percent of the bond proceeds. Since state law often prohibits a governmental issuer from lending credit, this circumstance generally does not occur. Leases, however, also could be a problem because such arrangements grant a possessory interest in the facility which results in the lessee receiving a right to use the facility which is superior to members of the general public. 2. Management Contracts. Having a private manager will give rise to private business use unless certain terms of the management agreement demonstrate that beneficial use has not been passed to the manager. These factors relate to the compensation arrangements, contract term, cancellation provisions, and the relationship of the parties. The primary focus of these rules is on compensation. In general, compensation must be reasonable and not be based, in whole or in part, on a share of net profits. Compensation arrangements may take one of four forms: (1) periodic fixed fee; (2) capitation fee; (3) per- unit fee; or (4) percentage of fees charged. In general, a periodic fixed fee arrangement, however, is required in which at least 50 percent of annual compensation be based on a predetermined fee. During the initial two year start-up period, compensation may be based on a percentage of fees charged (i.e., gross revenues, adjusted gross revenues or expenses). The term of a management contract, generally, may not exceed five years, including all renewal options, and must be cancelable by the governmental unit at the end of the third year. If per-unit fee compensation is used, the term is limited to three years, with a cancellation option for the governmental unit at the end of two years. Where compensation is based on a percentage of gross revenues, the contract may not extend beyond a term of two years, cancelable by the governmental unit at the end of the first year. In each instance, cancellation may be upon reasonable notice, but must be "without penalty or cause," meaning no covenant not to compete, buy-out provision or liquidated damages provision is allowed. Finally, the manager may not have any role or relationship with the governmental unit that would limit the ability of the governmental unit to exercise its rights under the contract. Any voting power of either party which is vested in the other party, including its officers, directors, shareholders and employees, may not exceed 20 percent. Further, the chief executive officer of either party may not serve on the governing board of the other party. Similarly, the two parties must not be members of the same controlled group or be related persons, as defined in certain provisions of federal tax law. 3. Cooperative Research Agreements. A cooperative research agreement with a private sponsor whereby the private party uses bond-financed facilities may cause a private business use problem. Nevertheless, such use of a bond-financed facility by a non­ governmental person is to be disregarded for purposes of private business use if the arrangement is in one of the following forms. First, the arrangement may be disregarded if the sponsoring party is required to pay a competitive price for any license or other use of resulting technology, and such price must be determined at the time the technology is available. Second, an arrangement may also qualify if a four-part requirement is met: (1) multiple, unrelated industry sponsors must agree to fund university-performed basic research; (2) the university must determine the research to be performed and the manner in which it is to be performed; (3) the university must have exclusive title to any patent or other product incidentally resulting from the basic research; and (4) sponsors must be limited to no more than a nonexclusive, royalty-free license to use the product of any such research. McCall, Parkhurst & Horton L.L.P. - Page 2 4. Output Contracts. In some circumstances, private business use arises by virtue of contractual arrangements in which a governmental unit agrees to sell the output from a bond-financed facility to a non-governmental person. If the non-governmental person is obligated to take the output or to pay for output even if not taken, then private business use will arise. This is because the benefits and burdens of the bond-financed facility are considered as inuring to the non-governmental purchaser. In addition to the general rule, output-type facilities, including electric and gas generation, transmission and related facilities (but not water facilities) are further limited in the amount of private business use which may be permitted. If more than 5 percent of the proceeds are used for output facilities and if more than 10 percent of the output is sold pursuant to an output arrangement, then the aggregate private business use which may result (for all bond issues) is $15,000,000. II. How Much Private Business Use is Too Much? In general, there is too much private business use if an amount in excess of 10 percent of the proceeds of the bond issue are to be used, directly or indirectly, in a trade or business carried on by persons other than governmental units, and other than as members of the general public. All trade or business use by persons on a basis different than that of the general public is aggregated for the 10 percent limit. Private business use is measured on a facility or bond issue basis. On a facility basis, such use is generally measured by relative square footage, fair market rental value or the percentage of cost allocable to the private use. On a bond issue basis, the proceeds of the bond issue are allocated to private and governmental (or public) use of the facility to determine the amount of private business use over the term of the bond issue. Temporary use is not necessarily "bad" (i.e, private use) even though it results in more than 10 percent of the facility being so used. For example, if 100 percent of a facility is used for a period equal to five percent of the term of the bond such use may not adversely impact the bonds. The question is whether the benefits and burdens of ownership have transferred to the private user, as in the case of a sale, lease or management contract. If these benefits and burdens have not transferred, such use may be disregarded for purposes of private business use. In addition, if the private use is considered "unrelated or disproportionate" to the governmental purpose for issuance of the bonds, the private business use test is met if the level of the prohibited private use rises to 5 percent. The "unrelated" question turns on the operational relationship between the private use and use for the governmental purpose. In most cases, a related use facility must be located within or adjacent to the related governmental facility, e.g., a privately-operated school cafeteria would be related to the school in which it is located. Whereas, the use of a bond-financed facility as an administrative office building for a catering company that operates cafeterias for a school system would not be a related use of bond proceeds. Nonetheless, even if a use is related, it is disproportionate to the extent that bond proceeds used for the private use will exceed proceeds used for the related governmental use. III. When are the tests applied to analyze the qualification of a bond? A bond is tested both (1) on the date of issue, and (2) over the term. The tests are applied to analyze the character of the bond on the date of issue, based on how the issuer expects to use the proceeds and the bond-financed property. This is known as the "reasonable expectations" standard. The tests also continuously are applied during the term of the bonds to determine whether there has been a deviation from those expectations. This is known as the "change of use" standard. When tested, bonds are viewed on an "issue-by-issue" basis. Generally, bonds secured by the same sources of funds are part of the same "issue" if they are sold within 15 days of one another. McCall, Parkhurst & Horton L.L.P. - Page 3 IV. What is the reasonable expectations standard? The reasonable expectations standard will be the basis on which McCall, Parkhurst & Horton L.L.P., as bond counsel, will render the federal income tax opinion on the bonds. The statement of expectations will be incorporated into the Federal Tax Certificate, previously referred to as the Federal Tax Certificate. The certificate also will contain information about the amounts to be expended on different types of property, e.g., land, buildings, equipment, in order to compute a weighted useful life of the bond-financed property. Based on the information on useful life, the maximum weighted average maturity of the bonds tested to ensure that is restricted to no more than 120 percent of the useful life of the property being financed or refinanced. V. Change of Use Standard. The disqualified private business use need not exist on the date of issue. Subsequent use by non-governmental persons also can cause a loss of tax-exemption. Post- issuance "change of use" of bond-financed facilities could result in the loss of the tax-exempt status of the bonds, unless certain elements exist which demonstrate the change was unforeseen. For this purpose, a change in use includes a failure to limit private business use subsequent to the date of issuance of the bonds. A reasonable expectation element requires that, as of the date of issue of the bonds, the governmental unit reasonably have expected to use the proceeds of the issue for qualified facilities for the entire term of the issue. To fall within the safe harbor rules which avoid loss of tax-exempt status the governmental unit must assure that no circumstances be present which indicate an attempt to avoid directly or indirectly the requirements of federal income tax law. Finally, the safe harbor requires that the governmental unit take remedial action that would satisfy one of the following provisions: redemption of bonds; alternative use of disposition proceeds of a facility that is financed by governmental bonds; or, alternative use of a facility that is financed by governmental bonds. For purposes of the latter two remedial action provisions, the governmental unit has 90 days from the date of the change of use to satisfy the requirements. In addition, there is an exception for small transactions for dispositions at a loss. VI. Written Procedures. The Internal Revenue Service ("IRS") has initiated an active audit program intended to investigate the compliance of governmental issuers with the private activity bond rules described herein and the arbitrage rules described in the other memorandum provided to you by our firm. In connection with the expansion of this program, auditors and their supervisors have expressed the viewpoint that each governmental issuer should establish written procedures to assure continuing compliance. Moreover, the IRS is asking issuers to state in a bond issue's informational return (such an 8038-G) whether such procedures have been adopted. The federal tax certificate, together with the attached memoranda and bond covenants can be supplemented by standard written practices adopted by the executive officer or legislative bodies of the issuer. Accordingly, our firm is prepared to advise you with respect to additional practices which we believe would be beneficial in monitoring compliance and taking remedial action in cases of change in use. There is no standard uniform practice for all issuers to adopt because each issuer operates in unique fashion. However, if you wish us to assist you in developing practices which might assist you in complying with the viewpoints expressed by the IRS and its personnel, please contact your bond lawyer at McCall, Parkhurst & Horton LLP. Disclosure Under IRS Circular 230: McCall Parkhurst & Horton LLP informs you that any tax advice contained in this memorandum, including any attachments, was not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax McCall, Parkhurst & Horton L.L.P. - Page 4 related penalties or promoting, marketing or recommending to another party any transaction or matter addressed herein. McCall, Parkhurst & Horton L.L.P. - Page 5 Exhibit "C LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET SUITE 1800 SUITE 900 SUITE 1525 AUSTIN, TEXAS 78701-3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: (512) 478-3805 TELEPHONE: (214) 754-9200 TELEPHONE: (210) 225-2800 FACSIMILE: (512) 472-0871 FACSIMILE: (214) 754-9250 FACSIMILE: (210) 225-2984 February 13, 2012 Robert Scott District Manager Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 Re: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Dear Mr. Scott: As you know, Trophy Club Municipal Utility District No. 1 (the "District") will issue the captioned bonds in order to provide for the refunding, in advance of their maturities, of portions of bonds previously issued by the District. As a result of that issuance, the federal income tax laws impose certain restrictions on the investment and expenditure of amounts to be used for the project or to be deposited to the debt service fund for the captioned bonds. The purpose of this letter is to set forth, in somewhat less technical language, those provisions of the tax law which require the timely use of bond proceeds and that investment of these amounts be at a yield which is not higher than the yield on the bonds. Please note that the Form 803 8-G has been prepared based on the information provided by or on your behalf by your financial advisor. Accordingly, while we believe that the information is correct you may wish to have the yield confirmed before your rebate consultant or the paying agent attempt to rely on it. The District has determined that there are no unexpended original and investment proceeds of the outstanding bonds deposited to the construction fund. Generally, the federal tax laws provide that, unless excepted, amounts to be used for the project or to be deposited to the debt service fund must be invested in obligations the combined yield on which does not exceed the yield on the bonds. For this purpose, please refer to line 21 (e) of the Form 803 8-G included in the transcript of proceedings for the yield. Importantly, for purposes of administrative convenience, the bonds, however, have been structured in such a way as to avoid, for the most part, this restriction on investment yield. As such, for analytical purposes only, we have segregated the debt service fund into three separate accounts. This does not require that you segregate monies deposited to the debt service fund into those accounts, but you should keep in mind the limitations imposed on each of those hypothetical accounts. They also contain certain covenants relating to expenditures of proceeds designed to alert you to unintentional failures to comply with the laws affecting expenditures of proceeds and dispositions of property. First, the sale and investment proceeds to be used for the new money project may be invested for up to three years without regard to yield. (Such amounts, however, may be subject to rebate.) Thereafter, they must be invested at or below the bond yield. Importantly, expenditure of these proceeds must be accounted in your books and records. Allocations of these expenditures must occur within 18 months of the later of the date paid or the date the project is completed. The foregoing notwithstanding, the allocation should not occur later than 60 days after the earlier of (1) of five years after the delivery date of the bonds or (2) the date the bonds are retired unless you obtain an opinion of bond counsel. Second, the debt service fund is made up of taxes which are levied annually for the payment of current debt service on all the District's outstanding bonds. Any taxes deposited to the debt service fund which are to be used for the payment of current debt service on the captioned bonds, or any other outstanding bonds, are not subject to yield restriction. By definition, current debt service refers only to debt service to be paid within one year of the date of receipt of the taxes. For the most part, this would be debt service in the current fiscal year. These amounts deposited to the account for current debt service may be invested without regard to any constraint imposed by the federal income tax laws. Third, the debt service fund contains an amount of taxes, which although not expended for debt service within the current year, are necessary to ensure that amounts will be sufficient to pay debt service in the event that taxes are insufficient during that period. This amount, commonly referred to as "coverage," represents a reserve account against periodic fluctuations in the receipt of tax revenues. The Internal Revenue Code permits amounts which are held in reserve for the payment of debt service, in such instances, to be invested without regard to yield restriction if such amounts do not exceed the lesser of (1) 10 percent of the outstanding principal amount of all outstanding bonds, (2) maximum annual debt service on all outstanding bonds, or (3) 125 percent of average annual debt service on all outstanding bonds. Fourth, a portion of the debt service fund is permitted to be invested without regard to yield restriction as a "minor portion." The "minor portion" exception is available for de minimis amounts of taxes deposited to the debt service fund. The maximum amount that may be invested as part of this account may not exceed the lesser of five percent of the principal amount of the bonds or $100,000. Accordingly, you should review the current balance in the debt service fund in order to determine if such balance exceeds the aggregate amount of these three accounts. Additionally, in the future it is important that you be aware of these accounts as additional amounts are deposited to the debt service fund. The amounts which are subject to yield restriction would only be the amounts which are in excess of the sum of (1) the current debt service account, (2) the reserve account, and (3) the "minor portion" account. Moreover, to the extent that additional bonds are issued by the District, whether for new money projects or for refunding, these amounts will change in their proportion. The order contains covenants that require the Issuer to comply with the requirements of the federal tax laws relating to the tax-exempt obligations. The Internal Revenue Service (the "Service") has determined that certain materials, records and information should be retained by the issuers of tax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under the Internal Revenue Code. Accordingly, the Issuer should retain such materials, records and information for the period beginning on the issue date of the outstanding bonds, or, in the case of a sequence of refundings, the issue date of the obligations originally financing the refinanced project and ending three years after the date the captioned bonds are retired. Please note this federal tax law standard may vary from state law standards. The material, records and information required to be retained will generally be contained in the transcript of proceedings for the captioned bonds, however, the Issuer should collect and retain additional materials, records and information to ensure the continued compliance with federal tax law requirements. For example, beyond the transcript of proceedings for the bonds, the Issuer should keep schedules evidencing the expenditure of bond proceeds, documents relating to the use of bond-financed property by governmental and any private parties (e.g., leases and management contracts, if any) and schedules pertaining to the investment of bond proceeds. In the event that you have questions relating to record retention, please contact us. The Service also wants some assurance that any failure to comply with the federal tax laws was not due to an issuer's intentional disregard or gross neglect of the responsibilities imposed on it by the federal tax laws. Therefore, to ensure post-issuance compliance, an issuer should consider adopting formalized written guidelines to help the issuer perform diligence reviews at regular intervals. The goal is for issuers to be able to timely identify and resolve violations of the laws necessary to maintain their obligations' tax-favored status. While the federal tax certificate, together with its attachments, may generally provide a basic written guideline when incorporated in an organizations' operations, the extent to which an organization has appropriate written compliance procedures in place is to be determined on a case-by-case basis Moreover, the Service has indicated that written procedures should identify the personnel that adopted the procedures, the personnel that is responsible for monitoring compliance, the frequency of compliance check activities, the nature of the compliance check activities undertaken, and the date such procedures were originally adopted and subsequently updated, if applicable. The Service has stated that the adoption of such procedures will be a favorable factor that the Service will consider when determining the amount of any penalty to be imposed on an issuer in the event of an unanticipated and non-curable failure to comply with the tax laws. Finally, you should notice that the order contains a covenant that limits the ability of the District to sell or otherwise dispose of bond-financed property for compensation. Beginning for obligations issued after May 15, 1997 (including certain refunding bonds), or in cases in which an issuer elects to apply new private activity bond regulations, such sale or disposition causes the creation of a class of proceeds referred to as "disposition proceeds." Disposition proceeds, like sale proceeds and investment earnings, are tax-restricted funds. Failure to appropriately account, invest or expend such disposition proceeds would adversely affect the tax-exempt status of the bonds. In the event that you anticipate selling property, even in the ordinary course, please contact us. Obviously, this letter only presents a fundamental discussion of the yield restriction rules as applied to amounts deposited to the debt service fund. Moreover, this letter does not address the rebate consequences with respect to the debt service fund and you should review the memorandum attached to the Federal Tax Certificate as Exhibit "A" for this purpose. If you have certain concerns with respect to the matters discussed in this letter or wish to ask additional questions with regards to certain limitations imposed, please feel free to contact our firm. Thank you for your consideration and we look forward to our continued relationship. Very truly yours, McCALL, PARKJTURST & HORTON L.L.P. cc: Gregory C. Schaecher Exhibit "D1 ISSUE PRICE CERTIFICATE The undersigned, as the duly authorized representative of First Southwest Company (the "Underwriter"), with respect to the underwriting of Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds") issued by the Trophy Club Municipal Utility District No. 1 (the "Issuer"), hereby certifies and represents on behalf of the Underwriter, but not in his/her own right, based on the Underwriter's records and information available to it that it believes, after reasonable inquiry, to be accurate and complete as of the date hereof, as follows: (a) The Underwriter has offered all of the Bonds to members of the public in a bona fide initial offering at a price which, on the date of such offering, was reasonably expected by the Underwriter to be equal to the fair market value of such maturity. For purposes of this Issue Price Certificate, the term "public" does not include any bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers (including the Underwriter or members of the selling group or persons that are related to, or controlled by, or are acting on behalf of or as agents for the undersigned or members of the selling group). (b) Other than the obligations maturing in 2021 (the "Retained Maturity or Maturities"), the first price at which a substantial amount (i.e., at least 10 percent) of the principal amount of each maturity of the Bonds was sold to the public is set forth in the Official Statement. In the case of the Retained Maturities, the Underwriter reasonably expected on the offering date to sell a substantial amount (i.e., at least 10 percent) of each Retained Maturity at the initial offering price set forth in the Official Statement. The Official Statement is included in the transcript for the Bonds and is incorporated herein by reference. The Underwriter understands that the representations made in this Issue Price Certificate will be relied upon, by the Issuer with respect to certain of the representations set forth in this Federal Tax Certificate and by McCall, Parkhurst & Horton L.L.P. (i) in connection with rendering its opinion to the Issuer that interest on the Bonds is excludable from gross income thereof for income tax purposes, and (ii) for purposes of completing the IRS Form 803 8-G. The undersigned is certifying only as to facts in existence on the date hereof. Nothing herein represents the undersigned's interpretation of any laws or the application of any laws to these facts. EXECUTED and DELIVERED as of March 5, 2012. FIRST SOUTHWEST COMPANY Title: Sr VP Exhibit "E" SCHEDULES OF FINANCIAL ADVISOR [To be attached hereto] BuMding what you value? SOURCES AND USES OF FUNDS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date 03/01/2012 Delivery Date 03/05/2012 Sources: Bond Proceeds: Par Amount Accrued Interest Premium 2,355,000.00 675.00 136,075.20 2,491,750.20 Uses: Refunding Escrow Deposits: Cash Deposit 2,411,156.25 Other Fund Deposits: Accrued Interest 675.00 Delivery Date Expenses: Cost of Issuance Underwriter's Discount 55,000.00 20,817.50 75,817.50 Other Uses of Funds: Additional Proceeds 4,101.45 2,491,750.20 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 1 SWSI SOUTH WEST GROUP 1 SECURITIES Building what you vakte* SAVINGS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Series 2002 Series 2012 Series 2012 Series 2012 Present Value Refunded Refunding Accrued Refunding to 03/05/2012 Date Debt Service Debt Service Interest Net Cash Flow Savings @ 1.7222694% 09/30/2012 56,156.25 30,375.00 675.00 29,700.00 26,456.25 26,241.01 09/30/2013 277,312.50 245,750.00 245,750.00 31,562.50 30,983.23 09/30/2014 275,300.00 247,050.00 247,050.00 28,250.00 27,268.68 09/30/2015 277,905.00 248,250.00 248,250.00 29,655.00 28,113.86 09/30/2016 279,895.00 249,350.00 249,350.00 30,545.00 28,443.52 09/30/2017 281,250.00 249,350.00 249,350.00 31,900.00 29,178.89 09/30/2018 281,850.00 249,225.00 249,225.00 32,625.00 29,314.95 09/30/2019 286,770.00 258,975.00 258,975.00 27,795.00 24,550.35 09/30/2020 285,632.50 253,350.00 253,350.00 32,282.50 27,991.96 09/30/2021 284,000.00 251,600.00 251,600.00 32,400.00 27,598.00 09/30/2022 286,750.00 254,700.00 254,700.00 32,050.00 26,817.14 09/30/2023 288,750.00 257,500.00 257,500.00 31,250.00 25,683.73 3,161,571.25 2,795,475.00 675.00 2,794,800.00 366,771.25 332,185.30 Savings Summary PV of savings from cash flow 332,185.30 Plus: Refunding funds on hand 4,101.45 Net PV Savings 336,286.75 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 2 SWSiso.ui GROUPlSECU BulUtna SUMMARY OF REFUNDING RESULTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date Delivery Date Arbitrage yield Escrow yield 03/01/2012 03/05/2012 1.722269% Bond Par Amount True Interest Cost Net Interest Cost Average Coupon Average Life 2,355,000.00 1.960767% 2.031656% 2.751679% 6.786 Par amount of refunded bonds Average coupon of refunded bonds Average life of refunded bonds 2,355,000.00 4.880353% 7.007 PV of prior debt to 03/05/2012 @ 1.722269% Net PV Savings Percentage savings of refunded bonds Percentage savings of refunding bonds 2,838,999.35 336,286.75 14.279692% 14.279692% Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 3 SWSi SOUTHWEST group-SECURITIES Building what you vedtte? BOND PRICING $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Bond Component Maturity Date Amount Rate Yield Price Yield to Maturity Premium (-Discount) Takedown Bond Component: 09/01/2013 185,000 2.000% 0.600% 102.072 3,833.20 1.250 09/01/2014 190,000 2.000% 0.750% 103.076 5,844.40 2.500 09/01/2015 195,000 2.000% 0.970% 103.524 6,871.80 3.750 09/01/2016 200,000 2.500% 1.100% 106.115 12,230.00 5.000 09/01/2017 205,000 2.500% 1.230% 106.720 13,776.00 5.000 09/01/2018 210,000 2.500% 1.410% 106.736 14,145.60 5.000 09/01/2019 225,000 2.500% 1.630% 106.109 13,745.25 5.000 09/01/2020 225,000 3.000% 1.860% 108.913 20,054.25 5.000 09/01/2021 230,000 3.000% 2.080% 107.125 C 2.165% 16,387.50 5.000 09/01/2022 240,000 3.000% 2.170% 106.403 C 2.309% 15,367.20 5.000 09/01/2023 250,000 3.000% 2.280% 105.528 C 2.445% 13,820.00 5.000 2,355,000 136,075.20 Dated Date Delivery Date First Coupon 03/01/2012 03/05/2012 09/01/2012 Par Amount Premium Production Underwriter's Discount Purchase Price Accrued Interest 2,355,000.00 136,075.20 2,491,075.20 105.778140% (20,817.50) (0.883970%) 2,470,257.70 104.894170% 675.00 Net Proceeds 2,470,932.70 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD #1:TCMUD_1-2012REF,2012REF) Page 4 CALL PROVISIONS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Call Table: CALL Call Date Call Price 09/01/2020 100.00 Call Provisions Setup Bond Component Call Table Callable Dates Bond Component CALL Any Date Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 5 mo01 SECURITIES: Building tehaf you vaiue? BOND SUMMARY STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date Delivery Date Last Maturity 03/01/2012 03/05/2012 09/01/2023 Arbitrage Yield True Interest Cost (TIC) Net Interest Cost (NIC) All-in TIC Average Coupon 1.722269% 1.960767% 2.031656% 2.326376% 2.751679% Average Life (years) Duration of Issue (years) 6.786 6.227 Par Amount Bond Proceeds Total Interest Net Interest Total Debt Service Maximum Annual Debt Service Average Annual Debt Service 2,355,000.00 2,491,750.20 440,475.00 325,217.30 2,795,475.00 258,975.00 243,261.12 Underwriter's Fees (per $1000) Average Takedown Management Fee Other Fee Total Underwriter's Discount 4.400212 1.000000 3.439490 8.839703 Bid Price 104.894170 Par Average Average Bond Component Value Price Coupon Life Bond Component 2,355,000.00 105.778 2.752% 6.786 2,355,000.00 6.786 Par Value + Accrued Interest + Premium (Discount) - Underwriter's Discount - Cost of Issuance Expense - Other Amounts Target Value TIC 2,355,000.00 136,075.20 (20,817.50) 2,470,257.70 All-in TIC 2,355,000.00 675.00 136,075.20 (20,817.50) (55,000.00) 2,415,932.70 Arbitrage Yield 2,355,000.00 675.00 136,075.20 2,491,750.20 Target Date Yield 03/01/2012 1.960767% 03/05/2012 2.326376% 03/05/2012 1.722269% Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 6 SWSI SOUTHWEST GROuflSECURfTIES Building what you vattwT FORM 8038 STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date Delivery Date 03/01/2012 03/05/2012 Redemption Bond Component Date Principal Coupon Price Issue Price at Maturity Bond Component: 09/01/2013 185,000.00 2.000% 102.072 188,833.20 185,000.00 09/01/2014 190,000.00 2.000% 103.076 195,844.40 190,000.00 09/01/2015 195,000.00 2.000% 103.524 201,871.80 195,000.00 09/01/2016 200,000.00 2.500% 106.115 212,230.00 200,000.00 09/01/2017 205,000.00 2.500% 106.720 218,776.00 205,000.00 09/01/2018 210,000.00 2.500% 106.736 224,145.60 210,000.00 09/01/2019 225,000.00 2.500% 106.109 238,745.25 225,000.00 09/01/2020 225,000.00 3.000% 108.913 245,054.25 225,000.00 09/01/2021 230,000.00 3.000% 107.125 246,387.50 230,000.00 09/01/2022 240,000.00 3.000% 106.403 255,367.20 240,000.00 09/01/2023 250,000.00 3.000% 105.528 263,820.00 250,000.00 2,355,000.00 2,491,075.20 2,355,000.00 Stated Weighted Maturity Interest Issue Redemption Average Date Rate Price at Maturity Maturity Yield Final Maturity 09/01/2023 3.000% 263,820.00 250,000.00 Entire Issue 2,491,075.20 2,355,000.00 6.8230 1.7223% Proceeds used for accrued interest Proceeds used for bond issuance costs (including underwriters' discount) Proceeds used for credit enhancement Proceeds allocated to reasonably required reserve or replacement fund Proceeds used to currently refund prior issues Proceeds used to advance refund prior issues Remaining weighted average maturity of the bonds to be currently refunded Remaining weighted average maturity of the bonds to be advance refunded 675.00 75,817.50 0.00 0.00 0.00 2,411,156.25 0.0000 7.0069 Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 7 SWSi SOUTHWEST GROUP i SECURITIES Building what you value? FORM 8038 STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Refunded Bonds Bond Component Date Principal Coupon Price Issue Price UL Tax Bonds, Series 2002: SERIAL 09/01/2013 165,000.00 4.250% 100.000 165,000.00 SERIAL 09/01/2014 170,000.00 4.350% 100.000 170,000.00 SERIAL 09/01/2015 180,000.00 4.450% 100.000 180,000.00 SERIAL 09/01/2016 190,000.00 4.550% 100.000 190,000.00 SERIAL 09/01/2017 200,000.00 4.700% 100.000 200,000.00 SERIAL 09/01/2018 210,000.00 4.800% 100.000 210,000.00 SERIAL 09/01/2023 275,000.00 5.000% 100.000 275,000.00 TERM 20 09/01/2019 225,000.00 4.950% 100.000 225,000.00 TERM 20 09/01/2020 235,000.00 4.950% 100.000 235,000.00 TERM 22 09/01/2021 245,000.00 5.000% 100.000 245,000.00 TERM22 09/01/2022 260,000.00 5.000% 100.000 260,000.00 2,355,000.00 2,355,000.00 Remaining Last Weighted Call Issue Average Date Date Maturity UL Tax Bonds, Series 2002 09/01/2012 06/27/2002 7.0069 All Refunded Issues 09/01/2012 7.0069 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 8 COST OF ISSUANCE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Cost of Issuance $/1000 Amount Other Cost of Issuance 23.35456 55,000.00 23.35456 55,000.00 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AK) (Finance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 9 SWSl SOUTHWEST GROUP SECURITIES Building what you. uaiue; Building what you. uaiue; UNDERWRITER'S DISCOUNT $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Underwriter's Discount $/1000 Amount Average Takedown Management Fee UW Counsel UW Expenses 4.40021 1.00000 2.54777 0.89172 10,362.50 2,355.00 6,000.00 2,100.00 8.83970 20,817.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 10 AVERAGE TAKEDOWN $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Dated Date 03/01/2012 Delivery Date 03/05/2012 Maturity Par Takedown Takedown Bond Component Date Amount $/Bond Amount Bond Component: 09/01/2013 09/01/2014 09/01/2015 09/01/2016 09/01/2017 09/01/2018 09/01/2019 09/01/2020 09/01/2021 09/01/2022 09/01/2023 185,000 190,000 195,000 200,000 205,000 210,000 225,000 225,000 230,000 240,000 250,000 2. 3. 5. 5. 5. 5. 5. 5. 5. 5. .2500 .5000 .7500 .0000 .0000 .0000 .0000 .0000 .0000 .0000 .0000 231. 475. 731. 1,000. 1,025. 1,050. 1,125. 1,125. 1,150. 1,200. 1,250. .25 .00 .25 .00 .00 .00 .00 .00 .00 .00 .00 2,355,000 4.4002 10,362.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 11 SWS! SOUTHWEST GROUP SECURITIES i'iuildlng what you vaiu&? SERIES 2012 REFUNDING BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Annual Period Debt Ending Principal Coupon Interest Debt Service Service 09/01/2012 30,375.00 30,375.00 09/30/2012 30,375 03/01/2013 30,375.00 30,375.00 09/01/2013 185,000 2.000% 30,375.00 215,375.00 09/30/2013 245,750 03/01/2014 28,525.00 28,525.00 09/01/2014 190,000 2.000% 28,525.00 218,525.00 09/30/2014 247,050 03/01/2015 26,625.00 26,625.00 09/01/2015 195,000 2.000% 26,625.00 221,625.00 09/30/2015 248,250 03/01/2016 24,675.00 24,675.00 09/01/2016 200,000 2.500% 24,675.00 224,675.00 09/30/2016 249,350 03/01/2017 22,175.00 22,175.00 09/01/2017 205,000 2.500% 22,175.00 227,175.00 09/30/2017 249,350 03/01/2018 19,612.50 19,612.50 09/01/2018 210,000 2.500% 19,612.50 229,612.50 09/30/2018 249,225 03/01/2019 16,987.50 16,987.50 09/01/2019 225,000 2.500% 16,987.50 241,987.50 09/30/2019 258,975 03/01/2020 14,175.00 14,175.00 09/01/2020 225,000 3.000% 14,175.00 239,175.00 09/30/2020 253,350 03/01/2021 10,800.00 10,800.00 09/01/2021 230,000 3.000% 10,800.00 240,800.00 09/30/2021 251,600 03/01/2022 7,350.00 7,350.00 09/01/2022 240,000 3.000% 7,350.00 247,350.00 09/30/2022 254,700 03/01/2023 3,750.00 3,750.00 09/01/2023 250,000 3.000% 3,750.00 253,750.00 09/30/2023 257,500 2,355,000 440,475.00 2,795,475.00 2,795,475 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 12 SWS1 SOUTHWEST GROUP 1 SECURITIES Building what you value* SERIES 2012 REFUNDING BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 30,375 30,375 09/30/2013 185,000 2.000% 60,750 245,750 09/30/2014 190,000 2.000% 57,050 247,050 09/30/2015 195,000 2.000% 53,250 248,250 09/30/2016 200,000 2.500% 49,350 249,350 09/30/2017 205,000 2.500% 44,350 249,350 09/30/2018 210,000 2.500% 39,225 249,225 09/30/2019 225,000 2.500% 33,975 258,975 09/30/2020 225,000 3.000% 28,350 253,350 09/30/2021 230,000 3.000% 21,600 251,600 09/30/2022 240,000 3.000% 14,700 254,700 09/30/2023 250,000 3.000% 7,500 257,500 2,355,000 440,475 2,795,475 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 13 SUMMARY OF BONDS REFUNDED $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Maturity Interest Par Call Call Bond Date Rate Amount Date Price UL Tax Bonds, Series 2002, 2002: SERIAL 09/01/2013 4. 4. 4. 4. 4. 4. 5. 4. 4. 5. 5, .250% .350% .450% .550% .700% .800% .000% .950% .950% .000% .000% 165,000.00 170,000.00 180,000.00 190,000.00 200,000.00 210,000.00 275,000.00 225,000.00 235,000.00 245,000.00 260,000.00 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 09/01/2012 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 09/01/2014 09/01/2015 09/01/2016 09/01/2017 09/01/2018 09/01/2023 TERM_20 09/01/2019 09/01/2020 TERM 22 09/01/2021 09/01/2022 2,355,000.00 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 14 SWSI SOUTHWEST GROuplSEGJRITtES tftis&rflru; what tfoit valtMt? SERIES 2002 REFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 56,156.25 56,156.25 09/30/2013 165,000 4.250% 112,312.50 277,312.50 09/30/2014 170,000 4.350% 105,300.00 275,300.00 09/30/2015 180,000 4.450% 97,905.00 277,905.00 09/30/2016 190,000 4.550% 89,895.00 279,895.00 09/30/2017 200,000 4.700% 81,250.00 281,250.00 09/30/2018 210,000 4.800% 71,850.00 281,850.00 09/30/2019 225,000 4.950% 61,770.00 286,770.00 09/30/2020 235,000 4.950% 50,632.50 285,632.50 09/30/2021 245,000 5.000% 39,000.00 284,000.00 09/30/2022 260,000 5.000% 26,750.00 286,750.00 09/30/2023 275,000 5.000% 13,750.00 288,750.00 2,355,000 806,571.25 3,161,571.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 15 Buthditig wHatyott value? SERIES 2002 REFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (2002) Period Annual Ending Principal Coupon Interest Debt Service Debt Service 09/01/2012 56,156.25 56,156.25 09/30/2012 56,156.25 03/01/2013 56,156.25 56,156.25 09/01/2013 165,000 4.250% 56,156.25 221,156.25 09/30/2013 277,312.50 03/01/2014 52,650.00 52,650.00 09/01/2014 170,000 4.350% 52,650.00 222,650.00 09/30/2014 275,300.00 03/01/2015 48,952.50 48,952.50 09/01/2015 180,000 4.450% 48,952.50 228,952.50 09/30/2015 277,905.00 03/01/2016 44,947.50 44,947.50 09/01/2016 190,000 4.550% 44,947.50 234,947.50 09/30/2016 279,895.00 03/01/2017 40,625.00 40,625.00 09/01/2017 200,000 4.700% 40,625.00 240,625.00 09/30/2017 281,250.00 03/01/2018 35,925.00 35,925.00 09/01/2018 210,000 4.800% 35,925.00 245,925.00 09/30/2018 281,850.00 03/01/2019 30,885.00 30,885.00 09/01/2019 225,000 4.950% 30,885.00 255,885.00 09/30/2019 286,770.00 03/01/2020 25,316.25 25,316.25 09/01/2020 235,000 4.950% 25,316.25 260,316.25 09/30/2020 285,632.50 03/01/2021 19,500.00 19,500.00 09/01/2021 245,000 5.000% 19,500.00 264,500.00 09/30/2021 284,000.00 03/01/2022 13,375.00 13,375.00 09/01/2022 260,000 5.000% 13,375.00 273,375.00 09/30/2022 286,750.00 03/01/2023 6,875.00 6,875.00 09/01/2023 275,000 5.000% 6,875.00 281,875.00 09/30/2023 288,750.00 2,355,000 806,571.25 3,161,571.25 3,161,571.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKJPinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 16 SWSlsom GROUPISECU Building Building what you. vakie? SERIES 2002 UNREFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Ending Principal Coupon Interest Debt Service 09/30/2012 155,000 4.100% 3,177.50 158,177.50 155,000 3,177.50 158,177.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUDJ-2012REF,2012REF) Page 17 SERIES 2002 UNREFUNDED BOND DEBT SERVICE $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (2002) Period Ending Principal Coupon Interest Debt Service Annual Debt Service 09/01/2012 09/30/2012 155,000 4.100% 3,177.50 158,177.50 158,177.50 155,000 3,177.50 158,177.50 158,177.50 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKYFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 18 SWSsoui GROUP'SECU Buildinfj Building what you. value? ESCROW REQUIREMENTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Period Principal Ending Interest Redeemed Total 09/01/2012 56,156.25 2,355,000.00 2,411,156.25 56,156.25 2,355,000.00 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 19 SWSi SOUTHWEST GROUPISECURITIES Suficitrig what you oolite? ESCROW REQUIREMENTS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 UL Tax Bonds. Series 2002 (2002) Period Principal Ending Interest Redeemed Total 09/01/2012 56,156.25 2,355,000.00 2,411,156.25 56,156.25 2,355,000.00 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 20 SWS1S0UTHWEST G^ouPiSECURlTSES 8utiding what you value." ESCROW COST $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Purchase Cost of Cash Total Date Securities Deposit Escrow Cost 03/05/2012 2,411,156.25 2,411,156.25 0 2,411,156.25 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 21 Building whatyouprttte? ESCROW COST DETAIL $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Purchase Cost of Cash Total Date Securities Deposit Escrow Cost Global Proceeds Escrow: 03/05/2012 2,411,156.25 2,411,156.25 0 2,411,156.25 2,411,156.25 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 22 Building what you. ttaiuc: ESCROW CASH FLOW $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Unlimited Tax Bonds. Series 2002 (2002) - Allocation of Global Date Other Cash Flows Net Escrow Receipts Present Value to 03/05/2012 @ 0.0000000% 03/05/2012 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 2,411,156.25 Escrow Cost Summary Purchase date Purchase cost of securities 03/05/2012 2,411,156.25 Target for yield calculation 2,411,156.25 Feb 13,2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 23 ESCROW SUFFICIENCY $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Escrow Net Escrow Excess Excess Date Requirement Receipts Receipts Balance 03/05/2012 09/01/2012 2,411,156.25 2,411,156.25 2,411,156.25 (2,411,156.25) 2,411,156.25 2,411,156.25 2,411,156.25 0.00 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 24 Building what you value? ESCROW STATISTICS $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Total Escrow Cost Modified Duration (years) Yield to Receipt Date Yield to Disbursement Date Perfect Escrow Cost Value of Negative Arbitrage Cost of Dead Time Global Proceeds Escrow: 2,411,156.25 2,391,025.77 20,130.48 2,411,156.25 2,391,025.77 0.00 20,130.48 Delivery date Arbitrage yield 03/05/2012 1.722269% Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 25 SWS - SOUTHWEST GROUP SECURITIES Building what you value: PROOF OF ARBITRAGE YIELD $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Present Value to 03/05/2012 Date Debt Service i @ 1.7222694% 09/01/2012 30,375.00 30,121.40 03/01/2013 30,375.00 29,864.23 09/01/2013 215,375.00 209,945.46 03/01/2014 28,525.00 27,568.49 09/01/2014 218,525.00 209,394.19 03/01/2015 26,625.00 25,294.68 09/01/2015 221,625.00 208,753.88 03/01/2016 24,675.00 23,043.54 09/01/2016 224,675.00 208,028.51 03/01/2017 22,175.00 20,356.72 09/01/2017 227,175.00 206,766.86 03/01/2018 19,612.50 17,698.22 09/01/2018 229,612.50 205,432.07 03/01/2019 16,987.50 15,068.79 09/01/2019 241,987.50 212,822.70 03/01/2020 14,175.00 12,360.16 09/01/2020 959,175.00 829,230.29 2,751,675.00 2,491,750.20 Proceeds Summary Delivery date 03/05/2012 Par Value 2,355,000.00 Accrued interest 675.00 Premium (Discount) 136,075.20 Target for yield calculation 2,491,750.20 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKTFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 26 jSWS i SOUTHWEST GROUP'SECURITfES Building what you value*' PROOF OF ARBITRAGE YIELD $2,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13, 2012 Assumed Call/Computation Dates for Premium Bonds Net Present Value (NPV) Bond Component Maturity Date Rate Yield Call Date Call Price to 03/05/2012 @ 1.7222694% SERIAL 09/01/2021 3.000% 2.080% 09/01/2020 100.000 6,728.93 SERIAL 09/01/2022 3.000% 2.170% 09/01/2020 100.000 8,754.29 SERIAL , 09/01/2023 3.000% 2.280% 09/01/2020 100.000 11,306.56 Rejected Call/Computation Dates for Premium Bonds Bond Component Maturity Date Rate Yield Call Date Call Price Net Present Value (NPV) to 03/05/2012 a 1.7222694% Increase to NPV SERIAL SERIAL SERIAL 09/01/2021 09/01/2022 09/01/2023 3.000% 2.080% 3.000% 2.170% 3.000% 2.280% 9,237.13 13,944.30 19,347.20 2,508.20 5,190.01 8,040.64 Feb 13, 2012 10:27 am Prepared by Southwest Securities, Inc. (AKXFinance 6.022 Trophy Club MUD ...:TCMUD_1-2012REF,2012REF) Page 27 TAB 13 600 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701-3248 Telephone: 512 47S-3SOS Facsimile: 512 472-0871 LAW OFFICES MCCALL, PARKHURST & HORTON L.L.R 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75301-6587 Telephone: 214754-9200 Facsimile: 214 754-9250 700 N. ST. MARY S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 Telephone: 210 225-2800 Facsimile: 2I0 225-2S84 March 26, 2012 CERTIFIED MAIL RRR: 7011 2000 0000 8048 7608 Internal Revenue Service Center Ogden,Utah 84201 Re: Information Reporting - Tax-Exempt Bonds Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Ladies and Gentlemen: Pursuant to the requirements of Section 149(e) of the Internal Revenue Code of 1986, enclosed please find an original of Form 803 8-G which is hereby submitted to you for the above-captioned bonds issued March 5, 2012. Sincerely, McCALL, PARKHURST & HORTON L.L.P. Stefano Tavema ST: kg Enclosures cc: Mr. Gregory C. Schaecher Mr. Jeff H. Gulbas Form8038-G (Rev. September 2011) Department of the Treasury Internal Revenue Service Information Return for Tax-Exempt Governmental Obligations • Under Internal Revenue Code section 149(e) • See separate instructions. Caution: If the issue price is under $100,000, use Form 8038-GC. OMB No. 1545-0720 Reporting Authority If Amended Return, check here • • 1 Issuer's name TROPHY CLUB MUNICIPAL UTILTIY DISTRICT NO. 1 Issuer's employer Identification number (EIN) 75-1502727 3a Name of person (other than Issuer) with whom the IRS may communicate about this return (see Instructions) NONE 3b Telephone number of other person shown on i N/A 4 Number and street (or P.O. box If mall Is not delivered to street address) 100 MUNICIPAL DRIVE Room/suite 5 Report number (For IRS Use Only) 6 City, town, or post office, state, and ZIP code TROPHY CLUB, TEXAS 76262 7 Date of Issue 03/05/2012 B Name of Issue UNLIMITED TAX REFUNDING BONDS, SERIES 2012 CUSIP number 897059 FA4 10a Name and title of officer or other employee of the Issuer whom the IRS may call for more Information (see instructions) ROBERT L. SCOTT, DISTRICT MANAGER Part II 10b Telephone number of officer or other employee shown on 10a (682) 831-4610 Type of Issue (enter the issue price). See the instructions and attach schedule. 11 12 13 14 15 16 17 2,491,075 18 11 12 13 14 15 16 17 18 19 20 Education Health and hospital Transportation Public safety Environment (including sewage bonds) Housing Utilities Other. Describe • If obligations are TANs or RANs, check only box 19a If obligations are BANs, check only box 19b If obligations are in the form of a lease or installment sale, check box Part III Description of Obligations. Complete for the entire issue for which this form is being filed. (a) Final maturity date (b) Issue price (c) Stated redemption price at maturity (d) Weighted average maturity (e) Yield 21 09/01/2023 $ 2,491,075 $ 2,355,000 6.82 years 1.7222 % Part IV 22 23 24 25 26 27 28 29 30 Uses of Proceeds of Bond Issue (including underwriters' discount) Proceeds used for accrued interest Issue price of entire issue (enter amount from line 21, column (b)) . . Proceeds used for bond issuance costs (including underwriters' discount). Proceeds used for credit enhancement Proceeds allocated to reasonably required reserve or replacement fund Proceeds used to currently refund prior issues Proceeds used to advance refund prior issues Total (add lines 24 through 28) 24 75,818 25 .0- 26 -0- 27 -0- 28 2,411,156 22 23 I 29 Nonrefunding proceeds of the issue (subtract line 29 from line 23 and enter amount here) 30 675 2,491,075 2,486,974 4,101 Description of Refunded Bonds. Complete this part only for refunding bonds. PartV 31 Enter the remaining weighted average maturity of the bonds to be currently refunded .... • 32 Enter the remaining weighted average maturity of the bonds to be advance refunded 33 Enter the last date on which the refunded bonds will be called (MM/DD/YYYY) • 34 Enter the date(s) the refunded bonds were issued • (MM/DD/YYYY) 06/27/2002 N/A years 7.00 years 09/01/2012 For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 63773S Form 8038-G (Rev. 9-2011) TROPHY CLUB MUNICIPAL UTILTIY DISTRICT NO. 1 EIN: 75-1502727 Form 8038-G (Rev. 9-2011) Page 2 Miscellaneous 35 Enter the amount of the state volume cap allocated to the Issue under section 141(b)(5) .... 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract b Enter the final maturity date of the GIC • c Enter the name of the GIC provider • 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 35 -0-35 Enter the amount of the state volume cap allocated to the Issue under section 141(b)(5) .... 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract b Enter the final maturity date of the GIC • c Enter the name of the GIC provider • 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 7# 36a -0- 35 Enter the amount of the state volume cap allocated to the Issue under section 141(b)(5) .... 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract b Enter the final maturity date of the GIC • c Enter the name of the GIC provider • 37 Pooled financings: Enter the amount of the proceeds of this issue that are to be used to make loans 37 -0- 38a If this issue is a loan made from the proceeds of another tax-exempt issue, check box • • and enter the following information: b Enter the date of the master pool obligation • c Enter the EIN of the issuer of the master pool obligation • d Enter the name of the issuer of the master pool obligation • 39 If the issuer has designated the issue under section 265(b)(3)(B)(i)(lll) (small issuer exception), check box .... 0 40 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box • • 41a If the issuer has identified a hedge, check here • • and enter the following information: b Name of hedge provider • c Type of hedged d Term of hedge • 42 If the Issuer has superintegrated the hedge, check box • • 43 If the issuer has established written procedures to ensure that all nonqualified bonds of this issue are remediated according to the requirements under the Code and Regulations (see instructions), check box • 0 44 If the issuer has established written procedures to monitor the requirements of section 148, check box • 0 46a If some portion of the proceeds was used to reimburse expenditures, check here • D and enter the amount of reimbursement • b Enter the date the official intent was adopted • Signature and Consent Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. 1 further declare that 1 consent to the IRS's disclosure of the issuer's return information, as necessary to process this return, to the person that 1 have authorized above. Robert SCOt t, k krLztf—X—03/05/2012 k District Manager J Signature of issuer's authorized representative Date J Type or print name and title Paid Preparer Use Only Print/Type preparer's name STEFANO TAVERNA Preparer^jjanaJufe' ~j s Date 03/05/2012 Check • if self-employed PTIN P01067358 Paid Preparer Use Only Firm's name • MCCALL, PARKHURST & NORTON L.LV Firm's EIN • 75-0799392 Paid Preparer Use Only Firm's address *• 717 N. HARWOOD, SUITE 900, DALLAS, TX 75201 Phone no. 214-754-9200 Form 8038-G (Rev. 9-2011) cO o JO r- a • • • • • • • ru • U.S. Postal Service™ CERTIFIED MAIL™ RECEIPT (Domestic Mail Only; No Insurance Coverage Provided) For delivery information visit our website at www.usps.com,.. 1 - -.; ;• Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees S §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees / ./ / §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees i ) '''1 1 t ! §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees \ §[j p £ Postmark VP* Postage Certified Fee Return Receipt Fee (Endorsement Required) Restricted Delivery Fee (Endorsement Required) Total Postage & Fees §[j p £ Postmark VP* Sent To _ , Internal Revenue Service Center PS Form 3800, August 2006 See Reverse for Instructions TAB 14 GENERAL AND NO-LITIGATION CERTIFICATE THE STATE OF TEXAS : COUNTIES OF DENTON AND TARRANT : TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 : We, the undersigned officers of said TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 ("District"), hereby certify as follows: 1. That this certificate is executed for and on behalf of said District with reference to the issuance of the proposed TROPHY CLUB MUNICH* AL UTILITY DISTRICT NO. 1, UNLIMITED TAX REFUNDING BONDS, SERIES 2012, dated March 1,2012, in the principal amount of $2,355,000 ("Bonds"). 2. The District is a conservation and reclamation district, a body corporate and politic and governmental agency of the State of Texas, created as a municipal utility district pursuant to Article 16, Section 59, of the Texas Constitution by Order of the Texas Water Commission, the predecessor in interest to the Texas Natural Resource Conservation Commission (collectively, the "Commission"), and the District operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended (the "Act") and was the successor bymerger and consolidation of Trophy Club Municipal Utility DistrictNo. 1 ("Prior MUD l")and Trophy Club Municipal Utility District No. 2 ("Prior MUD 2" and collectively with Prior MUD 1, the "Prior MUDs") by consolidation election of May 9, 2009 (the "Consolidation Election"). No changes in the boundaries of the District has occurred since the Consolidation Election. There have there been no changes in the boundaries of the District subsequent to the most recent date of approval by the Office of the Attorney General of Texas of the District's last issuance of public securities. 3. That no litigation of any nature has ever been filed pertaining to, affecting, questioning, or contesting: (a) the order which authorized said District's proposed Bonds described in paragraph 1 of this certificate; (b) the issuance, execution, delivery, payment, security or validity of said proposed Bonds; (c) the authority of the Board of Directors and the officers of said District to issue, execute and deliver said Bonds; (d) the validity of the corporate existence of said District, or (e) the current tax rolls of said District; and that no litigation is pending pertaining to, affecting, questioning, or contesting the current boundaries of said District. 4. That attached to this certificate and marked Exhibit A is a true, full and correct schedule and statement of the aforesaid Bonds and all presently outstanding tax indebtedness of said District after issuance of the Bonds, and there are no outstanding bonds payable out of ad valorem taxes of the Issuer, other than the District's bonds described in Exhibit A. 5. That none of the revenues or income of said District's Waterworks System and Sewer System (the "System") has been pledged or encumbered to the payment of any debt or obligation of said District or said System, except for the District's $1,100,000 Revenue Note, Series 2012. 6. That each of the funds, including the interest and sinking funds, respectively created for the benefit of said District's aforesaid outstanding ad valorem tax bonds contains the amount now required to be deposited therein. 7. That no municipal consents are required for the issuance of the Bonds because the Town of Trophy Club and the Town of Westlake were incorporated after the creation of the District. 8. That the District has not limited the taxing powers granted to it by the Constitution and laws of the State of Texas, and no procedure for such action has been taken. 9. That the District, on October 7,1975, voted a $0.25 per $100 valuation maintenance tax and has levied at a maintenance tax of $0.11914 per $100 valuation for the 2011-12 fiscal year. 10. That no default exists in connection with any of the covenants or requirements of the Orders or Resolutions which authorized the issuance of the District's outstanding bonds. 11. That the currently effective ad valorem tax appraisal roll of said District (the "Tax Roll") is the Tax Roll prepared and approved during the tax year 2011, being the most recently approved Tax Roll of said District; that the taxable property in said District has been appraised, assessed, and valued as required and provided by the Texas Constitution and Property Tax Code (collectively, "Texas law"); that the Tax Roll for said year has been submitted to the Board of Directors of said District as required by Texas law, and has been approved and recorded by said Board of Directors; and according to the Tax Roll for said year the net aggregate taxable value of taxable property in said District (after deducting the amount of all applicable exemptions required or authorized under Texas law), upon which the annual ad valorem tax of said District has been or will be imposed and levied, is $497,817,696. 12. That the District is in compliance with the rules and regulations of the TCEQ and all information has been filed with the TCEQ as required by law, and is current on all such filings. 13. None of the obligations being refunded by the Bonds (the "Refunded Obligations") have been held in, or purchased for the account of, the interest and sinking fund created and maintained for the benefit of such obligations being so refunded, or purchased with any money collected from any taxes levied for the benefit thereof, and no tax money is available or will be used for the retirement of any of the Refunded Obligations. Attached hereto as Exhibit B is a schedule illustrating the debt service savings to be realized by the Issuer as a result of the refunding of the Refunded Obligations by the issuance of the Bonds. 13. That we the undersigned officers of the District officially executed and signed the Bonds by manually executing the Bonds or by causing facsimiles of our manual signatures to be imprinted or lithographed on each of the Bonds, and we hereby adopt said facsimile signatures, if any, as our own, respectively, and declare that such facsimile signatures, if any, constitute our signatures the same as if we had manually signed each of the Bonds. 14. That the Bonds are substantially in the form, and have been duly executed and signed in the manner, prescribed in the order authorizing the issuance of the Bonds. 15. That at the time we so executed and signed the Bonds we were, and at the time of executing this certificate we are, the duly chosen, qualified and acting officers indicated therein, and authorized to execute same. 16. That no litigation of any nature has been filed or is now pending to restrain or enjoin the issuance or delivery of the Bonds, or which would affect the provision made for their payment or security, or in any manner questioning the proceedings or authority concerning the issuance of the Bonds, and that so far as we know and believe no such litigation is threatened. 17. That neither the corporate existence nor boundaries of the Issuer is being contested, that no litigation has been filed or is now pending which would affect the authority of the officers of the Issuer to issue, execute, sign, and deliver any of the Bonds, and that no authority or proceedings for the issuance of any of the Bonds have been repealed, revoked, or rescinded. 18. That we have caused the official seal of the Issuer to be impressed, or printed, or lithographed on each of the Bonds; and said seal on each of the Bonds has been duly adopted as, and is hereby declared to be, the official seal of the Issuer. 19. Any certificate signed by an official of the District delivered to the Initial Purchaser or the Attorney General of the State of Texas shall be deemed a representation and warranty by the District as to the statements made therein. The Public Finance Division of the Office of the Attorney General of the State of Texas is hereby authorized to date this certificate as of the date of approval of the Bonds and is entitled to rely upon the accuracy of the information contained herein unless notified in writing to the contrary. The Comptroller of Public Accounts is further authorized to register the Bonds upon receipt of the Attorney General approval. After registration, the Bonds, opinions and registration papers shall be delivered to Greg Schaecher at McCall, Parkhurst & Horton L.L.P. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] EXECUTED and delivered this March 5. 2012 MANUAL SIGNATURES NAMES AND OFFICIAL TITLES Jim Moss, President, Board of Directors Kevin Carr, Secretary/Treasurer, Board of Directors DISTRICT SEAL Before me, on this day personally appeared the foregoing individuals, known to me to be the persons whose true and genuine signatures were subscribed to the foregoing instrument in my presence. Given under my hand and seal of office this PM"j) (YfWfri I ^ itary Public LAURIE ELIZABETH SLAGHT **Hkr'f* Not^5u,bJi9'<Sil,ie of Texas V#,ii$* August 23, 2015 General Certificate and No-Litigation Certificate Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 EXHIBIT A PRINCIPAL AMOUNT DESCRIPTION OF ISSUE OUTSTANDING Unlimited Tax Bonds, Series 2002 155,000 Unlimited Tax Bonds, Series 2003 840,000 Unlimited Tax Refunding Bonds, Series 2005 1,770,000 Unlimited Tax Bonds, Series 2010 2,000,000 Public Property Finance Contractual Obligations Series 2004 33,750 Public Property Finance Contractual Obligations Series 2007 201,000 Public Property Finance Contractual Obligations Series 2009 114,234 PROPOSED Unlimited Tax Refunding Bonds, Series 2012 $ 2.355.000 EXHIBIT B PROOF OF DEBT SERVICE SAVINGS SAVINGS 52,355,000 (par-to-par requirement) TROPHY CLUB MUNICIPAL UTILITY DISTRICT #1 (Denton and Tarrant Counties, Texas) Unlimited Tax Refunding Bonds, Series 2012 FINAL NUMBERS: As of February 13,2012 Series 2002 Series 2012 Series 2012 Series 2012 Present Value Refunded Refunding Accrued Refunding to 03/05.^2012 Date Debt Service Debt Service Merest Net Cash Flow Savings % 1.7222694% 09/30/2012 56,156.25 30,375.00 675.00 29,700.00 26.456.25 26,241.01 09600013 277.312.50 245,750.00 245.750.00 31.562.50 30.983.23 0930/2014 275,300.00 247.050.00 247,050.00 28,250.00 27,268.68 09/30/2015 277,905.00 248,250.00 248,250.00 29,655.00 28,113.86 09/30/2016 279,895.00 249,350.00 249,350.00 30.545.00 28.443.52 09/30/2017 281,250.00 249,350.00 249,350.00 31.900.00 29,178.89 09/30/2018 281,850.00 249,225.00 249.225.00 32,625.00 29,314.95 09/30/2019 286,770.00 258,975.00 258,975.00 27,795.00 24.550.35 09/30/2020 285.632.50 253,350.00 253,350.00 32.2S2.50 27.991.96 09i30/2021 284,000.00 251,600.00 251,600.00 32,400.00 27,598.00 09/30/2022 286,750.00 254,700.00 254,700.00 32.050.00 26,817.14 09/30/2023 288,750.00 257,500.00 257,50000 31,250.00 25,683.73 3,161.571.25 2,795,475.00 675.00 2,794,800.00 366,771.25 332,185.30 Sairngs Summary PV of savings from cash flow 332,185.30 Plus: Refunding funds on hand 4,101.45 Net PV Savings 336,286.75 TAB 15 CLOSING CERTIFICATE I, the undersigned President of the Board of Directors of the Trophy Club Municipal Utility District No. 1 (the "Issuer"), hereby certifies as follows: 1. That this certificate is executed for and on behalf of said Issuer with reference to the issuance of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 in the aggregate principal amount of $2,355,000 (the "Bonds"). This certificate is made in accordance with Section [6(j)(6)] of the Purchase Contract by and between the Issuer and the underwriter of the Bonds, First Southwest Company (the "Underwriter") which is dated February 14,2012 (the "Purchase Contract"). Capitalized terms used herein but not defined have the meanings assigned to such terms in the Purchase Contract. 2. That, to my best knowledge and belief: (i) The representations and warranties of the Issuer contained herein are true and correct in all material respects on and as of the date of Closing as if made on the date of Closing. (ii) No litigation or proceeding or tax challenge against the Issuer is pending or, to the best of my knowledge, threatened in any court or administrative body nor, to my knowledge, is there a basis for litigation which would (a) contest the right of the members or officials of the Issuer to hold and exercise their respective positions, (b) contest the due organization and valid existence of the Issuer, (c) contest the validity, due authorization and execution of the Bonds or the Issuer Documents, (d) attempt to limit, enjoin or otherwise restrict or prevent the Issuer from functioning and levying and/or collecting ad valorem taxes or pledging such taxes to the payment of the Bonds and making payments on the Bonds pursuant to the Bond Order (e) contest the accuracy, completeness or the fairness of the Preliminary Official Statement or the Official Statement, or (f) contest the redemption of the Refunded Bonds. (iii) The Order has been duly adopted by the Issuer, is in full force and effect and has not been modified, amended or repealed, and the Pricing Certificate and the Purchase Contract have been duly executed and delivered by the Pricing Officer and are in full force and effect and have not been modified, amended or repealed. (iv) To the best of my knowledge, no event affecting the Issuer has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which made, not misleading in any respect as of the time of Closing, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the date of the Closing does not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. (v) There has not been any materially adverse change in the financial condition of the Issuer since September 30, 2010, the latest date as of which audited financial information is available. SIGNED this March 5, 2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 President, B Signature Page to Closing Certificate Trophy Club Municipal Utility District No. 1 Uiuimited Tax Refunding Bonds, Series 2012 TAB 16 ATTORNEY GENERAL OF TEXAS THIS IS TO CERTIFY that Trophy Club Municipal Utility District No. 1 (the "Issuer") has submitted to me Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond. Series 2012 (the "Bond") in the principal amount of $2,355,000 for approval. The Bond is dated March 1, 2012, numbered T-l, and was authorized by an Order of the Issuer passed December 20, 2011. I have examined the law and such certified proceedings and other papers as I deem necessary to render this opinion. As to questions of fact material to my opinion, I have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials furnished to me without undertaking to verify the same by independent investigation. I express no opinion relating to the official statement or any other offering material relating to the Bond. Based on my examination, I am of the opinion, as of the date hereof and under existing law, as follows: (1) The Bond has been issued in accordance with law and is a valid and binding obligation of the Issuer. (2) In accordance with the provisions of the law, including an Escrow Agreement dated as of March 5, 2012, firm banking arrangements have been made for the discharge and final payment or redemption of the obligations being refunded upon deposit of an amount sufficient to pay said obligations when due. (3) The Bond is payable from the proceeds of an ad valorem tax levied, without limitation as to rate or amount, upon all taxable property within the Issuer. Therefore, the Bond is approved. POST OFFICE BOX 12548, AUSTIN, TEXAS 7871 1-2548 TEL: (512) 463-2100 WWW.TEXASATTORNEYGENERAL.GOV Art Equal Employment Opportunity Employer • Printed on Recycled Paper GREG ABBOTT March 2,2012 Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond, Series 2012 - $2,355,000 - Page 2 - The Comptroller is instructed that she may register the Bond without the cancellation of the underlying securities being refunded thereby No. 53292 Book No. 2012-A MA OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora, fj Bond Clerk [x] Assistant Bond Clerk in the office of the Comptroller of the State of Texas, do hereby certify that, acting under the direction and authority of the Comptroller on the 2nd day of March, 2012, I signed the name of the Comptroller to the certificate of registration endorsed upon the: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond, Series 2012, numbered T-1. dated March 1, 2012, and that in signing the certificate of registration I used the following signature: IN WITNESS WHEREOF I have executed tjiis certificate this the 2nd day of March, 2012. I, Susan Combs, Comptroller of Public Accounts of the State of Texas, certify that the person who has signed the above certificate was duly designated and appointed by me under authority vested in me by Chapter 403, Subchapter H, Government Code, with authority to sign my name to all certificates of registration, and/or cancellation of bonds required by law to be registered and/or cancelled by me, and was acting as such on the date first mentioned in this certificate, and that the bonds/certificates described in this certificate have been duly registered in the office of the Comptroller, under Registration Number 79693. GIVEN under my hand and seal of office at Austin, Texas, this the 2nd day of March, 2012. SUSAN COMBS Comptroller of Public Accounts of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, SUSAN COMBS, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bond, Series 2012 numbered Ti of the denomination of $ 2,355,000, dated March 1, 2012, as authorized by issuer, interest various percent, under and by authority of which said bonds/certificates were registered electronically in the office of the Comptroller, on the 2nd day of March, 2012, under Registration Number 79693. Given under my hand and seal of office, at Austin, Texas, the 2nd day of March, 2012. SUSAN COMBS Comptroller of Public Accounts of the State of Texas TAB 17 600 CONGRESS AVENUE SUITE I8CO AUSTIN, TEXAS 78701-3248 TELEPHONE: 512 478-3305 FACSIMILE: 512 472-0871 LAW OFFICES MCCALL, PARKHURST & HORTON L.L.P. 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75201-6587 TELEPHONE: 214754-9200 FACSIMILE: 214 754-9250 700 N. ST. MARY S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 210225-2800 FACSIMILE: 210225-2984 March 5, 2012 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 UNLIMITED TAX REFUNDING BONDS SERIES 2012 DATED MARCH 1,2012 IN THE AGGREGATE PRINCIPAL AMOUNT OF $2,355,000 AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 (the "District") issuer of the Bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates and mature on the dates, and are subject to redemption, in accordance with the terms and conditions stated in the text of the Bonds. Terms used herein and not otherwise defined shall have the meaning given in the Order of the District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXAMINED the Constitution and laws of the State of Texas, and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number T-l), and specimens of Bonds to be authenticated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District or if the District consolidates with another District. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 5 7(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants regarding the use and investment of the proceeds of the Bonds and the use of the property financed or refinced therewith. We call your attention to the fact that if such representations are determined to be inaccurate or if the Issuer fails to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT THAT the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering our opinions with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. TAB 18 LAW OFFICES MCCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET SUITE I8CO SUITE 900 SUITE 1535 AUSTIN, TEXAS 78701 -3248 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 5i2 47a-3S05 TELEPHONE: 214754-9300 TELEPHONE: 210 225-2800 FACSIMILE: 512 472-OB7I FACSIMILE: 214 754-9250 FACSIMILE: 210225-2984 March 5, 2012 Trophy Club Municipal Utility District No. 1 100 Municipal Drive Trophy Club, Texas 76262 First Southwest Company 325 N. St. Paul Street, Suite 800 Dallas, Texas 725201 Re: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Ladies and Gentlemen: This opinion is provided to you pursuant to the requirements of Section 6(i)(4) of the Purchase Contract, dated February 14, 2012 (the "Purchase Contract"), between First Southwest Company (the "Underwriter") and Trophy Club Municipal Utility District No. 1 (the "Issuer") relating to the purchase of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 , dated March 1, 2012, in the principal amount of $2,355,000 (the "Bonds"). All references in this opinion to instruments and other defined terms shall mean the instruments and other terms as defined in the Purchase Contract. The opinions expressed below are qualified to the extent that the enforceability of any provisions in any of the agreements or documents listed may be subject to and affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally, or by general principles of equity which permit the exercise of judicial discretion. Based upon and subject to the above and foregoing, and our examination of such other information and documents, including provisions of the Constitution and applicable State and federal laws as we believe necessary to enable us to render this opinion, we are of the opinion that: (a) The Order was duly adopted by the governing body of the Issuer and the Pricing Certificate has been duly executed by the Pricing Officer, and the Order and the Pricing Certificate are in full force and effect as of the date of this opinion. (b) The Bonds are exempted securities within the meaning of Section 3(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and it is not necessary, in connection with the offer and sale of the Bonds, to register the Bonds under the 1933 Act or to qualify the Order under the Trust Indenture Act. Insofar as the Official Statement is concerned, our review and examination was limited to the information contained under the captions "PLAN OF FINANCING," "THE BONDS" (except under the subcaptions "Payment Record" and "Default and Remedies" and the second and third sentences under the subcaption "Issuance of Additional Debt"), "TAX MATTERS" and "CONTINUING DISCLOSURE OF INFORMATION" (except under the subcaption "Compliance with Prior Agreements"), and the subcaptions "OTHER PERTINENT INFORMATION"-Registration and Qualification of Bonds for Sale", "OTHER PERTINENT INFORMATION- Legal Investments and Eligibility to Secure Public Funds in Texas", and "OTHER PERTINENT INFORMATION-Legal Matters" (except for the last two sentences of the second paragraph thereof), and we are of the opinion that such descriptions present a fair and accurate summary of the provisions of the laws and instruments therein described and, with respect to the Bonds, such information conforms to the Bond Order. Save and except for the review of the foregoing captions, we have not undertaken to determine independently the accuracy, completeness, or fairness of any other information, data or descriptions contained in the Official Statement, including particularly, but not limited to, the financial and statistical data included therein. In addition, please be advised that the Underwriters are entitled to rely upon the opinion of Bond Counsel delivered in accordance with Section 6(i)(3) of the Purchase Contract. 2 TAB 19 FULBRIGHT Qj>Jaworski L.L.V. Attorneys at Law 2200 Ross Avenue, Suite 2800 • Dallas, Texas 75201-2784 Telephone: 214 855 8000 • Facsimile: 214 855 8200 March 5, 2012 First Southwest Company 325 N. St. Paul, Suite 800 Dallas, Texas 75201 Re: $2,355,000 "Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012", dated March 1, 2012 Ladies and Gentlemen: As the underwriter of the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"), you have requested our review of certain documents and proceedings relating to your purchase of the Bonds from the Trophy Club Municipal Utility District No. 1 (the "District"). In that connection, we have examined the Official Statement of the District relating to the Bonds, dated February 14, 2012 (the "Official Statement"), the Purchase Contract, dated February 14, 2012, between the District and you, the Order (as defined in the Purchase Contract) authorizing the issuance of the Bonds, adopted by the Board of Directors of the District on December 20, 2011, and the Pricing Certificate (as defined in the Order) approved and executed pursuant to the Order on February 14, 2012 (the Order and the Pricing Certificate are hereinafter jointly referred to as the "Bond Order"). In making such examinations, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to the original documents of copies of such documents submitted to us as certified or mechanically reproduced copies. As to questions of fact material to the opinions hereinafter expressed, where such facts have not been independently established, and as to the content and form of documents or writings, we have relied in part and to the extent we deem reasonably appropriate upon the representations and warranties of the District contained in the Purchase Contract and certificates of officers and representatives of the District and public officials. Based upon the foregoing, and having due regard for such legal considerations as we deem relevant, we are of the opinion that the Bonds are exempted securities under the Securities Act of 1933, as amended (the "1933 Act"), and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act and the Bond Order need not be qualified under the Trust Indenture Act. 52019170.1 AUSTIN • BEIJING • DALLAS • DENVER • DUBAI • HONG KONG • HOUSTON • LONDON • LOS ANGELES MINNEAPOLIS • MUNICH • NEW YORK • PITTSBURGH-SOUTHPOINTE • RIYADH • SAN ANTONIO • ST. LOUIS • WASHINGTON DC www.Julbright. com Page 2 of Legal Opinion of Fulbright & Jaworski L.L.P. Re: $2,355,000 "Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012", dated March 1, 2012 In addition, we have participated in conferences with officers and other representatives of the District, Bond Counsel, the financial advisor to the District and your representatives at which the contents of the Official Statement and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Official Statement, on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives of the District), no facts have come to our attention to lead us to believe that the Official Statement, as of its date, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for any financial, forecast, technical and statistical statements and data included in the Official Statement and the information regarding The Depository Trust Company and its book-entry system, in each case as to which no view is expressed). The opinions expressed above are specifically limited to the laws of the State of Texas and of the United States of America in effect on the date hereof. The opinions expressed herein are for the sole benefit of you, and may only be relied upon by you in connection with your purchase of the Bonds from the District. In no manner is our opinion to be relied upon for any reason or purpose other than the purpose for which it is expressly furnished hereunder, nor is our opinion to be relied upon by any other person or persons other than for whom it is expressly intended. 52019170.1 TAB 20 sws GROUP SOUTHWEST SECURITIES Building what you value. FINAL MI3MOIIAKIM »l TO: Individuals Listed Below FROM: Dan A. Almon DATE: February 29, 2012 RE: $2,355,000 Trophy Club Municipal Utility District No.1 Unlimited Tax Refunding Bonds, Series 2012 Please find attached the closing memorandum for the above-captioned Bonds. If you have any questions, contact me at (214) 859-9452 / dalmon(d).swst.com or Mary Jane Dietz (214) 859-6803 / midietz&swstcom or fax at (214) 859-9475. Distribution to: Name Entity Email Phone Number Mr. Robert Scott Trophy Club Municipal Utility District No.1 rscott@ci. trophyclub. tx. us 682-831-4610 Ms. Renae Gonzales Trophy Club Municipal Utility District No.1 rgonzales@ci. trophyclub. tx. us 682-831-4611 Mr. Greg Schaecher McCall, Parkhurst & Horton L.L.P. gschaecher@mphlegal. com 214-754-9292 Mr. Chris Settle Fulbright & Jaworski LLP csettle@fulbright. com 214-855-8179 Ms Caresse Tankersley The Bank of New York Mellon Trust Co. Caresse. tankersley@bnymellon. com 214-468-6019 Ms. Joann Smith First Southwest Company joann.smith@@firstsw.com 214-953-4087 Ms. Beverly Knight First Southwest Company beverly.knight@@firstsw.com 214-953-4040 Ms. Claire Miazza First Southwest Company clalre.miazza@@firstsw. com 214-953-4040 1 FINAL TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO.1 $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 CLOSING MEMORANDUM CLOSING Payment for and delivery of the captioned Bonds is scheduled to occur on Monday, March 5, 2012 (the "Closing Date") at 10:00 A.M. at the offices of The Bank of New York Mellon Trust Company, N.A., Dallas, Texas ("BNYM"). RECEIPT AND DISBURSEMENT OF FUNDS On the Closing Date, First Southwest will wire transfer to BNYM ABA #021 000 018, for credit to GLA #211065, FFC: TAS #441705, Re: Trophy Club Municipal Utility District No.1 Unlimited Tax Refunding Bonds, Series 2012, Attn: Caresse Tankersley (214-468-6543, the following amount representing the purchase price for the Bonds : After retaining the funds noted above, BNYM will make the following disbursements on the Closing Date: 2.. By wire transfer, transmit the amount of $33.622.61 to JPMorgan Chase Bank, ABA # 021000021, FAO Southwest Securities, Account # 08805076955, Attention: Public Finance - Amanda Almanza, Reference: Trophy Club MUD #1 - 2012 UL Tax Ref Bonds, Deal #9003-119743. This amount is to pay Southwest Securities, Inc. for fees and reimbursable cost of issuance expenses as listed in Exhibit "A" attached hereto. 3. By wire transfer, transmit the amount of $20.017.00 to PlainsCapital Bank, 325 N. St. Paul Street, Dallas, Texas, 75201, ABA # 1113-2299-4, Account # 4000001208, for credit to McCall, Parkhurst & Horton L.L.P. Operating Account, for further credit to Client Reference #2667.014 Trophy Club Municipal Utility District. This amount is in payment of Bond Counsel fee and expenses and reimbursement for Attorney General Fee as noted in Exhibit "A" attached hereto. Par Amount of Bonds $2,355,000.00 Plus Premium 136,075.20 Plus Accrued Interest 675.00 Less Underwriters' Discount (20.817.50) Total Purchase Price of the Bonds S2.470.932.70 1. BNYM will retain $2.411.956.25 payment of the following: Cash Deposit for Redemption of the Refunded Obligations Paying Agent/Registrar Fee on New Bonds (First Year) Call Notice Fee ($300 per issue) $2,411,156.25 500.00 300.00 $2 411.956.25 2 FINAL 4. By wire transfer, transmit the remaining amount of $5,336.84 to TexPool as follows: State Street Bank and Trust Company, Boston MA ABA (3400) = 011000028 BNF (4200) = Attn: TexPool #67573774 RFB (4320) = Location ID #77384 Participant Name: Trophy Club MUD 1 For final credit by TexPool as follows: (a) Debt Service Account (OBI (6000) - 449, 0613300003) in the amount of $5,336.84 Debt Service Fund amount represents the items shown below. Accrued Interest $ 675.00 "Use of Funds" Additional Proceeds Amount 4,101.45 Excess Cost of Issuance Funds 560.39 Total $5.336.84 GOOD FAITH CHECK On the Closing Date, on behalf of the District, Southwest Securities (the Trophy Club Municipal Utility District's Financial Advisor) is to return via Overnight Delivery or Courier, uncashed. the Good Faith Check for the Series 2012 Refunding Bonds in the amount of $23.550.00 to Beverly Knight, first Southwest Company, 325 North St. Paul St., Suite 800, Dallas, TX 75201, (214-953-4040). 3 FINAL TROPHY CLUB MUNICIPAL UTILITY DISTRICT N0.1 $2,355,000 Unlimited Tax Refunding Bonds, Series 2012 EXHIBIT A Costs of Issuance Paid via Wire by BONY Southwest Securities (Dan Almon) Financial Advisory Fee $23,550.00 Official Statement Electronic Posting/Distribution Via the Internet 1,500.00 Final OS Printing Fee Reimbursement (Clements Printing) 672.61 S&P Rating Fee Reimbursement 7.900.00 $33,622.61 McCall, Parkhurst & Horton L.L.P. (Leroy Grawunder) Bond Counsel Fee (Including Expenses) 17,662.00 Reimbursement for Attorney General Fee 2.355.00 $20,017.00 Additional Cost of Issuance Paying Agent/Registrar Fee / Bond Call Fees (Item #2) $ 800.00 Excess Cost of Issuance Deposited to l&S Fund (Item #5) 560.39 Total Costs of Issuance $55.000.00 4 TAB 21 ISSUER'S RECEIPT OF PAYMENT The undersigned hereby certifies the following information: (a) This certificate is executed and delivered with reference to the Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012, in the aggregate principal amount of$2,355,000 (the "Bonds"), issued by the Trophy Club Municipal Utility District No. 1 (the "Issuer"). (b) The undersigned is the duly chosen, qualified and acting officer of the Issuer hereinafter indicated. (c) The Bonds have been duly delivered to the purchaser thereof, First Southwest Company, as set forth in the order authorizing the issuance and sale of the Bonds. (d) The Bonds have been paid for in full by said purchaser concurrently with the delivery of this certificate, and the City has received, and hereby acknowledges receipt of, the agreed purchase price for the Bonds. EXECUTED AND DELIVERED this March 5, 2012 Robert Scott District Manager Trophy Club Municipal Utility District No. 1 TAB 22 RECEIPT AND DELIVERY CERTIFICATE The undersigned, authorized representative of The Bank of New York Mellon Trust Company National Association, as Paying Agent/Registrar with respect to Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 (the "Bonds"), in the aggregate principal amount of $2,355,000.00, and as escrow agent (the "Escrow Agent") pursuant to that certain Escrow Agreement dated as of March 5,2012 (the "Escrow Agreement") between the Escrow Agent and Trophy Club Municipal Utility District No. 1 (the "District"), relating to the refunding of the District's Refunded Obligations, as defined in the Escrow Agreement, hereby: 1. Acknowledges (i) receipt from the purchaser of the Bonds, First Southwest Company (the "Purchaser"), of $2,470,932.70, representing the aggregate principal amount of the Bonds, plus a premium of $136,075.20, plus $675.00 accrued interest, less $20,817.50 representing the underwriter's discount, being the purchase price for said Bonds as set forth in the closing memorandum (the "Closing Instructions") prepared by Southwest Securities, Inc., financial advisor to the Trophy Club Municipal Utility District No. 1, and (ii) the disposition of said purchase price in accordance with the Closing Instructions, including the deposit of $2,411,156.25 into the Escrow Fund created under the Escrow Agreement; and 2. Certifies that Bonds No. T-l, registered by the Comptroller of Public Accounts of the State of Texas and representing the aggregate principal amount of said issue of Bonds, was delivered to or upon the order of the Purchaser and duly canceled this date by an authorized officer of the undersigned Paying Agent/Registrar upon delivery of definitive Bonds of said aggregate principal amount to or upon the order of said Purchaser. DATED: March 5, 2012. THE BANK OF NEW YORK MELLON TRUST COMPANY NATIONAL ASSOCIATION as Paying Agent/Registrar TAB 23 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 March 5, 2012 The Bank of New York Mellon Trust Company 2001 Bryan Street 8th Floor Dallas, Texas 75201 Re: Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 Ladies and Gentlemen: The Issuer and the Underwriter of the captioned Bonds have designated your bank as the place, and as their agent, for the delivery and payment of the Bonds. The Bonds, which initially have been issued as a single fully registered Bond payable in installments, will be sent to you in the near future, together with a certified copy of the Order authorizing the issuance of the Bonds. Upon your receipt of the final unqualified approving legal opinion of McCall, Parkhurst & Horton L.L.P., Attorneys at Law, 717 North Harwood Street, Suite 900, Dallas, Texas 75201 as to the validity of the Bonds, you are authorized and directed to deliver the Bonds to the Underwriter thereof, to-wit: FIRST SOUTFIWEST COMPANY, when you have received payment for the Bond, in immediately available funds, in the sum of $2,470,932.70. You are further authorized and directed to cause the proceeds of the above-referenced Bonds to be distributed and deposited, and the Bonds to be delivered to the Purchaser and the closing documents to be dated and distributed, in accordance with the Closing Memorandum prepared by the Issuer's Financial Advisor. Enclosed herewith is one signed copy of each of the General Certificate and Issuer's Receipt of Payment for said Bonds. If any litigation or contest should develop or be filed, or if any event should occur, or any knowledge should come to our attention, which would change or affect the veracity of the statements and representations contained in any of said documents, the undersigned will notify you thereof immediately by telephone. With this assurance you can rely on the absence of any such litigation, contest, event, or knowledge, and on the veracity and currency of each of said documents at the time of delivery of and payment for the Bond, unless you are notified otherwise as aforesaid. After all copies of each of said documents have been dated in accordance with the foregoing instructions, please send all of them to McCall, Parkhurst & Horton. As Escrow Agent for the obligations refunded by the Bonds, you are requested to disburse funds you will receive as Escrow Agent, including the aforementioned purchase price, pursuant to the terms and provisions of the Escrow Agreement between you and the Issuer (the "Escrow Agreement"), as follows: Deposit cash into the Escrow Fund established by the Escrow Agreement in the sum of $2,411,156.25. Sincerely, TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 By: HA^^-j^^^2— District Manager Signature Page to Paying Agent/Registrar Instruction Letter Trophy Club Municipal Utility District No. 1 Unlimited Tax Refunding Bonds, Series 2012 TAB 24 Summary: Trophy Club Municipal Utility District No. 1, Texas; General Obligation Primary Credit Analyst: OmarTabani, Dallas 214-871-1472; omar_tabani@standardandpoors.com Secondary Contact: Russell Bryce, Dallas (1) 214-871-1419; russell_bryce@standardandpoors.com Tabic Of Contents Rationale Outlook Related Criteria And Research www.standardandpoors.com/ratingsdirect Summary: Trophy Club Municipal Utility District No. 1, Texas; General Obligation Credit Profile US$2,355 mil unltd tax rfdg bnds ser 2012 dtd 03/01/2012 due 09/01/2023 Long Term Rating AA-/Stable New Trophy Club Mun Util Dist #1 GO Unenhanced Rating AA-(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services assigned its 'AA-' rating and stable outlook to Trophy Club Municipal Utility District (MUD) No. 1, Texas' series 2012 unlimited-tax general obligation (GO) refunding bonds and affirmed its 'AA-' rating, with a stable outlook, on the district's series 2010 unlimited-tax GO bonds. The rating reflects our opinion of the district's: • Access to Dallas-Fort Worth's deep economy, resulting in, what we consider, very strong income; • Mature development with limited capital needs; and • Sizable property tax base with, what we view as, a low property tax rate, providing it with revenue-raising flexibility. We believe what we consider the district's moderate overall debt somewhat constrains the rating. An unlimited ad valorem tax levied on all taxable property in the MUD secures the series 2012 refunding bonds. Officials intend to use bond proceeds to refund a portion of the district's debt, resulting in an estimated present value savings of $179,000. MUD No. 1 provides water, sewer, and fire protection services to its 2,284-acre service area in the towns of Trophy Club and Westlake, approximately 27 miles northwest of downtown Dallas and 25 miles northeast of downtown Fort Worth. Trophy Club's access to a broader economy has resulted in, what we view as, very strong median household income equal to 200% of the national level. The MUD is mature with approximately 91% of developable land containing utility infrastructure. Development consists of 3,172 occupied homes ranging in price from $200,000 to $1 million; 178 multifamily units; 138 homes under construction; and 72 vacant lots. The district also contains commercial development that includes an office complex and a shopping center. Approximately 195 acres remain undeveloped, 135 acres of which are zoned for residential purposes and 60 acres of which are zoned for commercial purposes. The property tax base remains sizable. Despite a 6% contraction since fiscal 2010, due primarily to an increase in exemptions and protests of appraised values, the tax base has increased by a cumulative 4.6% since fiscal 2008 to $954.6 million in fiscal 2012. Despite its commercial presence, the tax base is diverse with the 10 leading taxpayers Standard & Poors | RatingsDirect on the Global Credit Portal | February 8, 2012 2 Summary: Trophy Club Municipal Utility District No. 1, Texas; General Obligation accounting for 24.6% of assessed value (AV). The MUD is adjacent to Trophy Club Public Improvement District (PID) No. 1. Significant home construction is also occurring in the PID. While land in the PID is not subject to the MUD's property tax levy, the MUD provides water, sewer, and fire protection services to PID residents; this generates additional operating revenue for the MUD. In our opinion, finances are good. The assigned and unassigned general fund balance of $3.33 million at fiscal year-end 2011 equaled, what we view as, a good 57% of expenditures. Water and sewer charges (75%) and property taxes (19%) generated the bulk of fiscal 2011 general fund revenue. The MUD's debt service fund provides debt service liquidity; the fund contained $107,847 at fiscal year-end 2011, or, in our view, a low 12% of the MUD's maximum annual debt service payment scheduled to occur in 2012. Management attributes essentially all revenue in the debt service fund to property taxes. The MUD's property tax rate is, in our view, a very low 17.5 cents per $100 of AV. Monthly combined water and sewer rates are, what we consider, a competitive $67.18 per 8,000 gallons consumed. The MUD's direct debt is, in our opinion, low at less than 1% of AV. In our view, including all overlapping entities, the MUD's overall net debt is a moderate 4.7% of AV. We consider debt amortization front loaded with officials planning to retire 71% of principal over 10 years and 100% by 2031. Management does not intend to issue any additional debt within the next 18 months. Outlook The stable outlook reflects Standard & Poor's opinion that the MUD's mature development will likely limit any significant debt-supported capital needs and that a sizable property tax base will likely allow direct debt and the MUD's property tax rate to remain, what Standard &c Poor's considers, low and manageable. Given the current rating, we do not think we will change the rating within the outlook's two-year period. 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S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. The McGraw-Hill Companies Standard & Poors | RatingsDirect on the Global Credit Portal | February 8, 2012 STANDARD &PO0RS RATINGS SERVICES 500 North Akard Street Lincoln Plaza, Suite 3200 Dallas, TX 75201 tel (214)871-1400 reference no.: 1204014 February 7, 2012 Trophy Club Municipal Utility District #1 100 Municipal Drive Trophy Club, TX 76262 Attention: Mr. Robert L. Scott, District Manager Re: US$2,355,000 Trophy Club Municipal Utility District #1, Texas, Unlimited Tax Refunding Bonds, Series 2012, dated: March 01,2012, due: September 01,2023 Dear Mr. Scott: Pursuant to your request for a Standard & Poor's rating on the above-referenced issuer, we have reviewed the information submitted to us and, subject to the enclosed Terms and Conditions, have assigned a rating of "AA-". Standard & Poor's views the outlook for this rating as stable. A copy of the rationale supporting the rating is enclosed. The rating is not investment, financial, or other advice and you should not and cannot rely upon the rating as such. The rating is based on information supplied to us by you or by your agents but does not represent an audit. We undertake no duty of due diligence or independent verification of any information. The assignment of a rating does not create a fiduciary relationship between us and you or between us and other recipients of the rating. 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If any subsequent changes were made in the final documents, you must notify us of such changes by sending us the revised final documents with the changes clearly marked. To maintain the rating, Standard & Poor's must receive all relevant financial information as soon as such information is available. Placing us on a distribution list for this information would Page|2 facilitate the process. You must promptly notify us of all material changes in the financial information and the documents. Standard & Poor's may change, suspend, withdraw, or place on CreditWatch the rating as a result of changes in, or unavailability of, such information. Standard & Poor's reserves the right to request additional information if necessary to maintain the rating. Please send all information to: Standard & Poor's Ratings Services Public Finance Department Standard & Poor's is pleased to be of service to you. For more information on Standard & Poor's, please visit our website at www.standardandpoors.com. If we can be of help in any other way, please call or contact us at nvpub1icfinance@,standardandpoors.com.Thank you for choosing Standard & Poor's and we look forward to working with you again. Sincerely yours, Standard & Poor's Ratings Services a Standard & Poor's Financial Services LLC business. cm enclosures cc: Mr. Dan A. Almon Mr. Mark M. McLiney Ms. Mary Jane Dietz 55 Water Street New York, NY 10041-0003 STANDARD &POORS RATINGS SERVICES Standard & Poor's Ratings Services Terms and Conditions Applicable To Public Finance Ratings You understand and agree that: General. The ratings and other views of Standard & Poor's Ratings Services ("Ratings Services") are statements of opinion and not statements of fact. A rating is not a recommendation to purchase, hold, or sell any securities nor does it comment on market price, marketability, investor preference or suitability of any security. 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With respect to structured finance ratings not maintained on a confidential or private basis, Ratings Services may publish data aggregated from Confidential Information, excluding data that is specific to and identifies individual debtors ("Relevant Data"), and share such Confidential Information with any of its Relevant Affiliates and Agents for general market dissemination of Relevant Data; you confirm that, to the best of your knowledge, such publication would not breach any confidentiality obligations you may have toward third parties. Ratings Services will comply with all applicable U.S. and state laws, rules and regulations protecting personally-identifiable information and the privacy rights of individuals. Ratings Services acknowledges that you may be entitled to seek specific performance and injunctive or other equitable relief as a remedy for Ratings Services' disclosure of Confidential Information in violation of this Agreement. 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As of the date of this Agreement, (a) neither you nor the issuer (if you are not the issuer) or any of your or the issuer's subsidiaries, or any director or corporate officer of any of the foregoing entities, is the subject of any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury ("OFAC Sanctions"), (b) neither you nor the issuer (if you are not the issuer) is 50% or more owned or controlled, directly or indirectly, by any person or entity ("parent") that is the subject of OFAC Sanctions, and (c) to the best of your knowledge, no entity 50% or more owned or controlled by a direct or indirect parent of you or the issuer (if you are not the issuer) is the subject of OFAC sanctions. For so long as this Agreement is in effect, you will promptly notify Ratings Services if any of these circumstances change. Ratings Services' Use of Confidential and Private Ratings. Ratings Services may use confidential and private ratings in its analysis of the debt issued by collateralized debt obligation (CDO) and other investment vehicles. Ratings Services PF Ratings U.S. (05/17/11) may disclose a confidential or private rating as a confidential credit estimate or assessment to the managers of CDO and similar investment vehicles. Ratings Services may permit CDO managers to use and disseminate credit estimates or assessments on a limited basis and subject to various restrictions; however, Ratings Services cannot control any such use or dissemination. Entire Agreement. Nothing in this Agreement shall prevent you, the issuer (if you are not the issuer) or Ratings Services from acting in accordance with applicable laws and regulations. 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Ratings Services, its affiliates or third party providers, or any of their officers, directors, shareholders, employees or agents shall not be liable to you, your affiliates or any person asserting claims on your behalf, directly or indirectly, for any inaccuracies, errors, or omissions, in each case regardless of cause, actions, damages (consequential, special, indirect, incidental, punitive, compensatory, exemplary or otherwise), claims, liabilities, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in any way arising out of or relating to the rating provided hereunder or the related analytic services even if advised of the possibility of such damages or other amounts except to the extent such damages or other amounts are finally determined by a court of competent jurisdiction in a proceeding in which you and Ratings Services are parties to result from gross negligence, intentional wrongdoing, or willful misconduct of Ratings Services. In furtherance and not in limitation of the foregoing, Ratings Services will not be liable to you, your affiliates or any person asserting claims on your behalf in respect of any decisions alleged to be made by any person based on anything that may be perceived as advice or recommendations. In the event that Ratings Services is nevertheless held liable to you, your affiliates, or any person asserting claims on your behalf for monetary damages under this Agreement, in no event shall Ratings Services be liable in an aggregate amount in excess of US$5,000,000 except to the extent such monetary damages directly result from Ratings Services' intentional wrongdoing or willful misconduct. The provisions of this paragraph shall apply regardless of the form of action, damage, claim, liability, cost, expense, or loss, whether in contract, statute, tort (including, without limitation, negligence), or otherwise. 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In the event that any term or provision of this Agreement shall be held to be invalid, void, or unenforceable, then the remainder of this Agreement shall not be affected, impaired, or invalidated, and each such term and provision shall be valid and enforceable to the fullest extent permitted by law. PF Ratings U.S. (05/17/11) Amendments. This Agreement may not be amended or superseded except by a writing that specifically refers to this Agreement and is executed manually or electronically by authorized representatives of both parties. Reservation of Rights. The parties to this Agreement do not waive, and reserve the right to contest, any issues regarding sovereign immunity, the applicable governing law and the appropriate forum for resolving any disputes arising out of or relating to this Agreement. PF Ratings U.S. (05/17/11)