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Home My WebLink About$3,134.997.85 Unlimited Tax Refunding Bonds Series 2005NEW ISSUE-BOOK-ENTRY-ONLY Ratings: Moody's: "Aaa' (See "MUNICIPAL BOND RATING and BOND INSURANCE herein) OFFICIAL STATEMENT Dated May 26,2005 In the opinion of bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date hereof, subject to the matters described under "TAX MATTERS" herein, including the alternative minimum tax on corporations. Tile Drsrr~cr nas desrgnalcd rhe Bonds as Qual~fied Tax-Exempt Oblrgalrons' See 'TAX MATTERS - Qoabhed Tax-Exempr Obl~galrons lor Fmancral Ir1s1rlulrons' herenn $3,134,997.85 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 (A Polltical Subdivision of the State of Texas Located in Denlon County.Tcxas) UNLIMITED TAX REFUNDING BONDS, SERIES 2005 Dated Date: June I, 2005 Due: September 1, as shown on inside cover The Trophy Club Municipal Utility District No. 2 (the "District" or "Issuer") $3,134,997.85 Unlimited Tax Refunding Bonds. Series 2005, which are being issued in part as Current Interest Bonds ("CIBs") and in part as Capital appreciation Bonds ("CABS") (collectively, the "Bonds") are being issued pursuant to the Constitution and general laws of the State of Texas (the "State"), parlicularly Chapter 1207, Texas Government Code, as amended, and an order (the "Order") adopted by the Board of Directors (the "Board). (See "THE BONDS - Authority for Issuance" herein.) The Bonds are obligations solely of Trophy Club Municipal Utility District No. 2 and are not obligations of the State of Texas; Denton County, Texas; the Town of Trophy Club, Texas; or any entity other than the District. lnterest on the ClBs will accrue from June 1. 2005 (the "Dated Date") and will be oavable on March 1 and Seotember 1 or each year, commencng September 1, 2005, untll tne earLer of matdnty or ;edempton, indwt~~ oe calcu ated on the bas~s of a 360-day year of twelve 30-day months Interest on the CABS VII l accrete from the oate tney are n,t~ally oe lvercd, compounded semiannually on s arch 1 and September 1 of each year (each as "Accretion Date") commencing ~eptember 1, 2005, and will be payable only upon maturity. The ClBs 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 accreted interest payable upon maturity (the "Maturity Value"), or any integral multiple thereof for a Maturity Value. The Bonds 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. acting as securities depository for the Bonds until DTC resigns or is discharged. The Bonds initially will be avaiiable to ourchasers in book-entrv form onlv. So lona as Cede & Co.. as the oavina aoent to DTC. is the reoistered owner of the Bonds. .,-u brncpa~ of and interesl'on tne ~onos will hk pa,abe oy in; paylng agent to DTC wnich mi.1 bc Coe respons~ole for makng such payment to tne bcnefcal owners of tnc Bonos Tne tntt a paylng agenuregistrar for the Bonds snal oe JPMorgan Chase Bank[National Association, Dallas. Texas (the "Paying Agent"). . Proceeds from the sale of the Bonds are being used lo refund the 2006 through 2013 maturities of the District's Unlimited Tax Refunding Bonds. Series 1995 in order to (1) reduce the annual debt service payments, thus reducing the required annual tax rate and (2) pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) The CABS are not subject to redemption prior to their maturity. The District reserves the right to redeem, prior to maturity, in integral multiples of $5.000, those ClBs maturing on and after September 1, 2014, in whole or from time to time in part, on September 1, 2013, 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. In addition, the Bonds maturing on September 1. 2020 and September 1, 2023 (the 'Term Bonds") are subject to mandatory sinking fund redemption provisions as further described herein. (See "THE BONDS - Redemption" herein.) Payment of the principal of and interest on the Bonds when due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation ("Ambac Assurance") simultaneously with the delivery of the Bonds. (See "BOND INSURANCE herein.) mbac STATED MATURITY SCHEDULE (On Inside Cover Page) JIIC 6onds art ulfered fcr ocliaery. ,./llerl, as arru dissuco and rcccivcd by rile Unutrr/rrler and suu]ecl 10 ltle approvlrly op.n.on oflllc Aftorrley General ofllle Slate ui Texas artd rr~t approdo1 01 cenain lcgal rnallers McCall, Parkrlursl 8 hodon L.L.P.. Dsllas Texas. Bono Counscl Trlt regal opsnron of Bond Courlsel tvill be pr.riled orr, or n4r accompany 10e Bonds. Cenarrr rnallers .,/!I1 oe passed @on lor llle U~ldenvrrler oy Furbrrqhl 8 Jat*/orsk~ LLP , Dallas. Texas as counse to the Underwriter. Delivery of the Bonds through DTC is expecied on or about June 28, 2005, in Dallas, Texas FIRST SOUTHWEST COMPANY STATED MATURITY SCHEDULE' (Due September 1) Base CUSIP - 897060 "' $3,134,997.85 UNLIMITED TAX REFUNDING BONDS. SERIES 2005 $59.997.85 Capital Appreciation Bonds Maturity Original Initial Offering Date Principal Yield to Maturity Price per $5,000 CUSlP Seotember 1 Amount MaturitV Value in Maturitv Value 2006 $59,997.85 2.970% $235,000.00 $4,829.75 CM 9 (Interest to accrete from the Date Of Delivery) [See 'SCHEDULE I -SCHEDULE OF ACCRETED VALLES OF PREMIUM CAPITA.. APPRECIAT ON BOhDS ('CABS') hcreln for a laole of lhe accreleo values of lnc CABS (per $5 000 Mal~r I/ Val~c) al cerlalrl per od c dates ] Stated 2007 2008 2009 2010 201 1 201 2 2013 2014 2015 201 6 2017 201 8 **.. $3,075.000.00 Current Interest Bonds* Principal Rate Yield Amount y& $245.000.00 3.000 2.900 250,000.00 3.000 3.000 260,000.00 3.250 3.050 265,000.00 3.250 3.200 285,000.00 3.500 3.300 290.000.00 3.500 3.450 295,000.00 3.500 3.570 100,000.00 4.000 3.730'~' 105,000.00 4.000 3.830'~' 105,000.00 4.000 3.930'" 110,000.00 4.000 3.980'~' 115,000.00 ,.*. 4.000 .+.. 4.040 *..* CUSlP Suffixl") CN 7 CP 2 CQ 0 CR 8 CS 6 CT 4 CU 1 cv 9 CW 7 CX 5 CY 3 cz 0 **.. $ 245,000.00 4.000% Term Bond due September 1. 2020 Price to Yield 4.125% DA 4") $ 405,000.00 4.200% Term Bond due September 1,2023 Price to Yield 4.300% DB 2''' (Interest Accrues form Dated Date) "" CUSlP is a registered trademarl( of the American Bakers Assciaton. CUSIP data herein is rovided b Standard and Poor's CUSlP Service Bureau, a divis~on of The McGraw-HiN Companies. InC. Th~s data is not intengd to creai a database and does not serve in any way as a substitute for the CUSlP Services. ''' Yield calculated to caN date. September 1, 2013. I! TABLE OF CONTENTS ............................................ Other Community Services 16 ............................ TABLE OF CONTENTS ........................................................ iii Slatus of Development of the District 16 I ISF OF INFORMATION IN THE OFFICIAL STATEMENT ..... iv THE DEVELOPER ................................................................ 18 - ......... . ~ .................................... OFFICIAL STATEMENT SUMMARY jv THE DISTRICT ...................................................................... IV ............................................................................ THE BONDS V ........ ........................ INVESTMENT CONSIDERATIONS .. vi ................................ SELECTED FINANCIAL INFORMATION vi Purpose ............................................................................ I Refunded Bonds .............................................................. I SOURCES AND USES OF FUNDS ........................................ 2 THE BONDS ............................................................................. 2 ......................................................... General Description 2 .................................................................... Redemption 2 .......................... ............... DTC Redemption Provision .. 3 .......................... Termination of Book-Entry-Only System 4 Authority for Issuance Source of and Securitv for Pavment ................................. 5 Payment Record .............................................................. 5 . Legally ............................................................... 5 Flow of F~nos and lnvcslmenl of Funos ................... 5 Defeasance of O~tstandng Bonds ............................. 5 Paying AgenlrReg.s!rar ......................................... 6 lss~ance of Ado! ona Deoi ..................................... 6 SDEC~~C Tax Covenants ........................................ 6 ~dditional Covenants ....................................................... 6 Remedies in Event of Default ........................................... 6 ............. No Material Adverse Change ........................................... 7 .................................................... MUNICIPAL BOND RATING 7 BOND INSURANCE .................................... ... .......................... 7 BOOK-ENTRY-ONLY SYSTEM ............................................ 8 Use of Certain Terms in Other Sections of this Official Statemen 0 INVESTMENT C ................................. .... 0 .......................................................................... General 10 .... Factors Affecting Taxable Values and Tax Payments 10 Tax Collections ............................................................... 1 ...... Bankruptcy Limitation to Registered Owners' Rights 12 The Effect of the Financial Institutions Act of 1989 on 12 12 12 12 12 LOCATI~N MAP .................................................................... 13 ....................................................................... THE DISTRICT 14 ................................................... Creation of the District 14 ....................................................... Role of a Developer 18 Description of the Developers .......... ... ................ 18 .................................................. THE DISTRICT'S SYSTEM 18 .......................................................................... General 18 ................................... Description of the Water System 18 Description of the Wastewater System .......................... 18 WATER SUPPLY CONTRACT ........................ .. ........... 18 ................. iE DISTRICT ...... Officer and Authorizet ................................................................ LEGAL MATTERS 23 ............................................................... Legal Opinions 23 TAX ..................................... . State Local and Foreign Taxes 25 Qualified Tax-Exempt Obligations for Financial .................................................................. Institutions 26 ................ CONTINUING DISCLOSURE OF INFORMATION 26 Annual Reports ........... Material Event Notices Availability of lnformati ........................................ Limitations and Amendments 27 27 27 27 27 ......................................................................... Period 28 ................................. Official Statement "Deemed Final" 28 ....................... Forward-Looking Statements Disclaimer 28 28 28 29 29 29 29 . . Underwrit~ng .......................... .. .................................. 29 .................................... ..... Concluding Statement .... 30 Schedule of Refunded Bonds Financial lnformation of the lss General Information Regarding The cover page. subsequent pages hereo iii USE OF INFORMATION IN THE OFFICIAL STATEMENT No dealer, broker, salesman, or other person has been authorized to give any information, or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized bv the lssuer. This Official Statement is not lo be used in connection with an offer to sell or tne soiclal~on ofan offer to buy in any slate :n vrh:ch such offer or solic~tation is nor qua1 fea lo do so or to any person lo unom t is un awfu to make such offer or so ic~lation. Any ~nforrnat~on or expression of op.nort Iiereh contained arc suo:ect to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Issuer or other matters described herein since the date hereof. NEITHER THE DISTRICT NOR ITS FINANCIAL ADVISOR MAKES ANY REPRESENTATION OR WARRANTY WlTH RESPECT TO THE INFORMATION CONTAINED IN THlS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY ("DTC) OR ITS BOOK-ENTRY-ONLY SYSTEM OR INFORMATION UNDER THE CAPTION "BOND INSURANCE REGARDING AMBAC ASSURANCE CORPORATION. ("AMBAC ASSURANCE) AND ITS FINANCIAL GUARANTY INSURANCE POLICY, AS SUCH INFORMATION HAS BEEN FURNISHED BY DTC AND AMBAC ASSURANCE, RESPECTIVELY. TrtE UhDERWRlTER HAS PROV.DED TrlE FOLLOVVING SENTENCE FOR INCLUSION N ThlS OFFICIAL STATEhlEhT. THE UhDERvVRTER rlAS REVIEWED ThE INFORMATlOh lh THIS OFFlC AL STATEhlEhT IN ACCORDANCE W TH. AhD AS PART OF. TS RESPONStB LlTlES TO hVESTORS UNDER THE FEDERAL SECLR TIES LAWS AS APPL ED TO THE FACTS AND C~RCUMSTANCES OF THIS TRANSACTION, BUT THE UNDERWRITER DOES NOT-GUARANTEE THE ACCURACY OR THE COMPLETENESS OF SUCH INFORMATION THE BONDS ARE EXEMPT FROM REGISTRATION WlTH 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 JURISDICTIONS IN WHICH THESE SECURITIES HAVE BEEN REGISTERED. QUALIFIED. OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WlTH THlS OFFERING. THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKFT'PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DiSCONTlNUED AT ANY TIME. OFFICIAL STATEMENT SUMMARY The fo lowlng material s q~al fied In Is enurety by tne more delaleo information and inanctal slalements appearing elsewhere 'r~ l111s Offcial Slalement. The offerlng of tne Bonds lo ~otential nvestors 's made onlv bv means of lhls enire Offic~a Statemenl. No person is authorized to detach-this summary from this Official Statement or td oiherwise use it without the entire Official Statement THE DISTRICT The Issuer Trophy Club Municipal Utility District No. 2 (the "District") formed by the merger and consolidation on August 3, 1990, of Denton County Municipal Utility District No. 2 and Denton County Municipal Utility District No. 3, and operates as a municipal utility district pursuant to the provisions of Article XVI. Section 59 of the Texas Constitution and Chapters 49 and 54 of the Texas Water Code, as amended. The District is subject to the continuing supervision of the Texas Commission on Environmental Qualitv (the "TCECYI lsuccessor lo the Texas Natural Resources Conservatton Cornn~~sston or -TNRCC") Tile ~~slrtcl's purpose s to provldc water 8 wastewater serv ces lo customers w th~n IS boundartes See THE DISTRICT - General " Location The District, a political subdivision of the Slate of Texas, is located in the far southeastern quadrant of Denton County. Texas near the southern shore of Lake Grapevine, and just east of the Town of Roanoke, Texas and is entirely within the boundaries of the Town of Trophy Club. Texas. The District consists of approximately 982.29 acres. See "THE DISTRICT - Location." Status of Development Development of the District began in 1980 and approximately 580 acres (approximately 71% of the develooable acreaoel of the District have been develooed with water, sanitary sewer and dralnage lac 111,s. ~hea'evelopeo area ~ncludes ine follov,~"~. stng e-famlly suodiis ons know as The <no11 The Lakes (1-3). Lakestde. V~lage Uest (A 8 B). Eagles Rioge. Fox Poinle, an0 The Developer Hogan's Glen-Waters; a 'mixed use development including single-family,multi-family. office, commercial retail, schools, and churches; and amenity improvements. The residential development, known as "Trophy Club" is a country club development featuring a 36-hole golf course, clubhouse, golf shop, swimming pool and tennis courls, and two mixed-use parks totaling approximately 23 acres. The District's purpose is to provide water 8 wastewater services to customers within the district's boundaries. There are currently two active developers within the District: 1) Beck Properties and 2) Terra Land Development Co. See "THE DISTRICT -Status of Development" and "THE DEVELOPERS'' herein. THE BONDS Description Paying AgenVRegistra! Redemption Source of Payment Payment Record Authority for Issuance Use of Proceeds Municipal Bond Insurance Municipal Bond Rating Qualified Tax-Exempt Obligations Book-Entry-Only System Issuance of Additional Debt Bond Counsel Underwriter's Counsel Delivery General Counsel Financial Advisor Engineer Paying AgenURegistrar The Bonds mature in varying amounts on September 1 of each year as set forth on the inside cover of this ORicial Statement. lnterest on the ClBs will acclue from June 1. 2005 (the "Dated Date") and will be payable on March 1 and September 1 or each year, commencing September 1. 2005, until the earlier of maturity or 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, compounded semiannually on March 1 and September 1 of each year (each as "Accretion Date") commencing September 1, 2005, and will be payable only upon maturity. The ClBs 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 wiil 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 accreted interest payable upon maturity (the "Maturity Value"), or any integral multiple thereof for a Maturity Value. (See 'THE BONDS -General Description" herein.) The initial Paying AgenVRegistrar for the Bonds is JPMorgan Chase Bank. National Association, Dallas. Texas The CABS are not subject to redemption prior to their maturity. The District reserves the right to redeem, prior to maturity, in integral multiples of $5.000, those ClBs maturing on and after September 1. 2014, in whole or from time to time in part, on September 1. 2013, 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. In addition, the Bonds maturing on September 1. 2020 and September 1. 2023 (the "Term Bonds") are subject to mandatory sinking fund redemption provisions as further described herein. (See "THE BONDS - Redemption" herein.) The District has never defaulted in the timely payment of principal of or interest on its outstanding obligations. The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, including particularly Chapter 1207. Texas Government Code, as amended, and an order (the "Order") adopted by the Board of Directon (the 'Board") of the District. (See "THE BONDS -Authority for Issuance" herein. Proceeds from the sale of the Bonds are being used to refund the 2006 through 2013 maturities of the Districfs Unlimited Tax Refunding Bonds. Series 1995 in order to (1) reduce the annual debt service payments, thus reducing the required annual tax rate and (2) pay the costs related to the issuance of the Bonds. (See "PLAN OF FINANCING - Purpose" herein.) Payment of the principal of and interest on the Bonds when due wiil be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation ("Ambac Assurance") simultaneously with Ule delivery of the Bonds. (See "BOND INSURANCF herein.) Moody's Investors Service. Inc. ("Moody's") has assigned a rating of "Aaa" to the Bonds with the understanding, that concurrently with the delivery of the Bonds, a financial guaranty insurance policy wiii be issued by Ambac Assurance. The Issuer received an underlying rating of "Baal" on the Bonds. An explanation of the significance of a rating may be obtained from the company furnishing the rating. (See "MUNICIPAL BOND RATING' herein.) The IssLer .ntenos to util zc itle Boon-E~itq-On y System oi Tne De~osilory Tnst Company hew Yorn, Nen Yorn relat ng to ine melnou ano I ming of payment and lnc metnoo an0 transfer re~atlng lo tne Certlfcatus (See 'Boor(-EhTRY-Oh-Y SYSTEhl' hereln.) The District does not anticipate the issuance of additional debt within the next twelve months. McCall. Parkhurst 8 Horton L.L.P., Dallas, Texas Fulbright 8 Jaworski L.L.P.. Dallas, Texas When issued, anticipated on or about June 28. 2005 The Liston Law firm. Rowlett. Texas Southwest Securities, Dallas. Texas. Carter B Burgess. Fort Worth. Texas. JPMorgan Chase Bank. National Association, Dallas. Texas. v INVESTMENT CONSIDERATIONS The purchase and ownership of the Bonds involve certain investment considerations and all prospective purchasers are urge examine carefully the Official Statement, including particularly the section captioned "INVESTMENT CONSIDERATIONS." ! respect to the investment security of the Bonds. SELECTED FINANCIAL INFORMATION 2004 Net Taxable Assessed Valuation $304.437.31 1 la' Gross Debt Principal Outstanding (after issuance of the Bonds) $8.004.998 Ratio of Gross Debt Principal to 2004 Assessed Valuation 2004-2005 Tax Rate Maintenance & Operation Debt Service Fire Protection Total Debt Service Fund Balance as of April 15.2005 Average Percentage of Current Tax Collection -Tax Years 1996-2004 Average Percentage of Total Tax Collection -Tax Years 1996-2004 Projected Maximum Annual Debt Service Requirement of the Bonds and The Outstanding Bonds ("Projected Maximum Requirement") (2006) Tax Rate Required to Pay Projected Maximum Requirement Based Upon Current Net Taxable Assessed Valuation at 99% collections Number of connections as of September 30.2004 Estimated population as of March 31. 2005 ''I As certified by the Denton Central Appraisal District. (See "TAXING PROCEDURES" herein.) rhe remainder of this page is intentionally leff blank] $0.241751$100 A.V. OFFICIAL STATEMENT relating to $3,134,997.85 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 (A Political Subdivision of the State of Texas Located in Denton County, Texas) UNLIMITED TAX REFUNDING BONDS, SERIES 2005 INTRODUCTION Tns 0ff:cal Slalemenl prov des ccnaln nformauon in connection villi !he iss~ancc by ltle Troplly CI..D Rlunlcipa Utility D~slrlcl No. 2 (tne -D'slr~cl" or * ssuer") of Is 53,134,99785 Un im~ted Tax Ref.~naing Bonds. Serles 2005 1lne -0onos'). The Bonds are issued pursuant to a bond order (the "Order") adopted by the Board of Directors (the "Board) of the District on the date of the sale of the Bonds, and pursuant to the Conslitution and general laws of the State of Texas, parlicularly Chapter 1207 of the Texas Governmenl Code, as amended. Unless otherwise indicated, capitalized terms used in this Official Statement have the same meaning assigned to such terms in the Order. Incluaed in lhls Offc~al Slalemenr are descrlpllons of !he Bonds In2 Oroer, llle Slall~s of Dcveopmenl ar~d cenaln lnformal on aboul lne D~strlct ano 11s finances AL- DESCR PT ONS OF DOCJRlEhTS CONTAlhED hERE N ARE SJhlhlARIES OhLY AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO EACH SUCH DOCUMENT. Copies of such documents may be obtained from the District or its Financial Advisor. PLAN OF FINANCING Purpose The proceeds of the Bonds are being used to refund the 2006 through 2013 maturities of the District's Unlimited Tax Refunding Bonds. Series 1995 (the "Refunded Bonds") in order to (1) reduce the annual debt selvice payments. thus reducing the required annual tax rate. (see "Schedule I - Schedule of Refunded Bonds"), and (2) pay the cosls related to the issuance of the Bonds. Refunded Bonds The Refunded Bonds, a description and identification of which appears in Schedule I, and interest due thereon, are to be paid on their scheduled interest payment and maturity dates or dates of redemption from funds deposited with JPMorgan Chase Bank. National Association, Dallas, Texas (the "Escrow Agent") or its successor, pursuant to 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 to the Underwriter, the Dislrict will deposit with the Escrow Agent an amount, together with other lawfully available funds, which when added lo the investmenl earnings thereon will be sufficient to accom~lish the discharqe and final uavment of the Refunded Bonds. Such funds will be held by the Escrow Aqent in a special escrow account (the '~scrow Fund) and used to purchase direct obligations of the Uniled States-of America andother lawful defeasance securities (the "Escrowed Securities5L Under the Escrow Aareement, the Escrow Fund is irrevocablv ~ledaed to the payment of principal df and interest on the ~ef"nded Bonds. Such maturing principal of and interest on the ~icrowed Securities will not be available to pay the debt service on the Bonds. McGladrey & Pullen. LLP. Cerlified Public Accountants, will verify the mathematical accuracy of schedules provided by Southwest Securities at the time of delivery of the Bonds to the Underwriter and that the Escrowed Securilies will mature at such times and yield interest in amounts, together with uninvested funds, if any, in the Escrow Fund, to provide sufficient funds to pay the principal of and interest on the Refunded Bonds as the same will become due by reason of stated maturity or earlier redemption. By the deposit of the Escrowed Securities and cash with the Escrow Agent pursuant to the Escrow Agreement, the District will have effected the defeasance of the Refunded Bonds pursuant to the terms of Chapter 1207 and the order authorizing the issuance of the Refunded Bonds. It is the opinion of Bond Counsel that, as a result of such defeasance and in reliance upon the report of McGladrey & Pullen. LLP, the Refunded Bonds will no longer be payable from ad valorem taxes but will be payable solely from the principal of and interest on the Escrowed Securities and cash held for such purpose by the Escrow Agent, and that the Refunded Bonds will be defeased and thus will not be included in or considered to be indebtedness of the District for the purpose of a limitation on indebledness or taxation or for any other purpose. The District has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfullv available funds, of additional funds in the amount required topay the principal of andinterest on the Refunded Bonds should, fir any reason, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund be insufficient to make such payments. SOURCESANDUSESOFFUNDS The proceeds from the sale of the Bonds will be applied approximately as follows: Sources of Funds Par Amount Accrued Interest 8,292.94 Net Premium 167,484.00 Issuer Contribution from interest & Sinking Fund 61.798.75 Total Sources of Funds $3322523-54 Uses of Funds SLG Purchase Cash Deposit Costs of Issuance (including Bond Insurance) Underwriter's Discount Accrued lnterest Deuosit to I&S Fund Contingency Total Uses of Funds THE BONDS General Description The Bonds will be dated June 1. 2005 (the "Dated Date"). The Bonds are stated to mature on September 1 in the years and in the principal amounts set forth on the inside cover page hereof. lnterest on the ClBs will accrue from June 1, 2005 (the "Dated Date") and will be payable on March 1 and September 1 or each year, commencing September 1, 2005, until the earlier of malurity or redemption, and will be calculated on the basis of a 360-day year of twelve 30-day months. lnterest on the CABS will accrete from the date they are initially delivered, compounded semiannually on March 1 and September 1 of each year (each as "Accretion Date") commencing September 1. 2005, and will be payable only upon maturity. The ClBs 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 wilt 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 accreted interest payable upon maturily (the "Maturity Value"), or any integral multiple thereof for a Maturity Value. The initial paying agent for the Bonds shall be JPMorgan Chase Bank, National Association. Dallas, Texas ("Paying Agent"). The principal of and interest on 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 debt due the United States of America. If the specified date for any payment of principal (or Redemption Price) of or interest on the Bonds is a Saturday. Sunday, or legal holiday or equivalent for banking inslitutions generally in the city in which Designated Payment 1 Transfer Office is located. such payment may be made on the next succeeding day which is not one of the foregoing days without additional interest and with the same force and effect as if made on the specified date for such payment. Initially, Ihe Bonds will be registered and delivered only to Cede 8 Co.. the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. No physical delivery of the Bonds will be made to the beneficial owners. Principal of and interest on the Bonds will be payable by the Paying Agent to Cede & Co.. which will distribute the amounts paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See 'DTC and Book Entry." Yield on Capital Appreciation Bonds The approximate yields of the CABs as set forth on the inside front cover page oilhis Official Statemenl are the approximate yields based upon the initial offering prices therefor set forth on the inside front cover page of this Official Statement. Such offering prices include 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. Because of the initial premium paid on certain of the CABs, the approximate oHering yield on such CABS is lower than the bond interest rates thereon. 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 flucluations in the secondary market than securities Ulat pay interest on a periodic basis. Redemption Optional Redemption: The CABS are not subject to redemption prior to their maturity. The ClBs maturing on or after September 1. 2014, are subject to redemption prior to maturily at the option of the District, in whole or from time to time in part. on September 1. 2013, and on any date thereafter, at a redemption price equal to the principal amount thereof plus accrued interest from the mas1 recent interest payment date to the date fixed for redemption. Mandatow Sinkino Fund Redemption: The Bonds maturing September 1. 2020 and September 2023 (collectively. the "Term Bonds") are subject to mandatory sinking fund redemption in part prior to their stated maturities, and will be redeemed by the lssuer at the redemption prices equal to the principal amounts thereof plus interest accrued thereon to the redemption dates, on the dates and in the principal amounts shown in the following schedule: Term Bond Due Term Bond Due September 1.2020 September 1, 2023 Redemption Date Principal Amount Redemption Date Princioal Amount Seotember 1.2019 $120.000.00 September 1.2021 $130.000.00 ~e~tember 1.2020' 125.000.00 ~e'~tember 1, 2022 135.000.00 September 1. 2023' 140.000.00 * Represents Maturity Approximately forty-five (45) days prior to the mandatory redemption date, the Paying AgenVRegistrar shall select by lot the numbers of the Term Bonds to be redeemed. Any Term Bond not selected for prior redemption shall be paid on the date of its Stated Maturity. The principal amount of the Term Bonds for a given Stated Maturity required to be redeemed pursuant to the operation of such mandatory redemption provisions shall be reduced, at the option of the District, by the principal amount of Term Bonds of like Stated Maturity which, at least 50 days prior to the 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 AgenVRegistrar for cancellation (2) shall have been purchased and canceled by the Paying AgenVRegistrar at the request of the District at a price not exceeding the principal amount of such Bonds plus accrued interest to the date of purchase, or (3) shall have been redeemed pursuant to the optional redemption provisions set forth above and not theretofore credited against a mandatory redemption requirement. Notice of Redemption: At least 30 calendar days prior to the date fixed for any redemption of ClBs or portions thereof prior to maturity a written notice of such redemption shall be sent by the Paying Agent by United States mail, first-class postage prepaid, at least 30 calendar days prior to the date fixed for redemption, to the Registered Owner of each CIB to be redeemed at its address as it aooeared on the 45th calendar day orior to such redemption date and to maior securities deoositories and bond lnformallon sekfces ANY hOTlCE OF REDE~~PT ON SO MAILED TO ThE REGISTERED OWhERS WI~L BE DEEMED TO HAVE BEEh DLLY GIVEN IRRESPECTVE OF WHETHER ONE OR MORE OF TriE REGISTERED OWhERS FAILED TO RECEIVE SUCH NOTICE. By the date fixed for any such redemption, due provision shall be made with the Paying AgenVRegistrar for the payment of the required redemption price for the ClBs 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 ClBs or portion thereof whlch 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 AgenVRegistrar out of the funds provided for such payment. The ClBs of a denomination larger than $5.000 may be redeemed in part ($5.000 or any multiple thereof). Any CIB to be partially redeemed must be surrendered in exchange for one or more new ClBs of the same maturity for the unredaemed portion of the principal of the ClBs so surrendered. In the event of redemption of less than all of the CIBs. the particular ClBs to be redeemed shall be selected by the District, if less than all of the ClBs of a particular maturity are to be redeemed, the Paying Agent is required to select the ClBs of such maturity to be redeemed by lot. The Paying AgenVRegistrar and the lssuer, 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 ponioris oi me Bonds by the .ssuer rv:ll red~cc tne oursia~~~n~ prlnclpi. amount of such Borids lleld-by DTC. In such event. DTC mav moemenr, throJon is Book-Entrv-Onlv Svsrem, a redemption of such Bonos tield for the accoLnl of DTC oanicioants in . . accordance with its ries or other agreem&ts'with DTC participants and then DTC participants and indirect pakicip&ts 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 Bond Ordinance and will not be conducted by the lssuer or the Paying AgenVRegistrar. Neither the lssuer nor the Paying AgenVRegistrar 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. DTC Redemption Provision The Paying Agent and the District, 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 Order or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC Participant, as herein defined, or of any Direct Participant or Indirect Participant, as herein defined, to notify the beneficial owner, shall not affect the validity of the redemption of Bonds called for redemption or any other action 3 premised on any such notice. Redemption of portions of the Bonds by the District will reduce the outstanding principal amoun of such Bonds held by DTC. In such event, DTC may implement. through its Book-Entry Only System, a redemption of suck Bonds held for the account of DTC Participants in accordance with its rules or other agreements with DTC Participants and ther Direct Participants and Indirect Participants may implement a redemption of such Bonds and such redemption will not b~ conducted by the District or the Paying Agent. Neither the District nor the Paying Agent 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 Direct Participants, Indirect Participants, or beneficial owners of the selection of portions of the Bonds for redemption. Termination of Book-Entryonly 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. Pavment: Principal of the Bonds 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 designaled office for payment of the Paying AgenVRegistrar in Dallas. Texas (the "Designated Paymentrrransfer Office"). Interest on the Bonds will be payable by check or drafl, 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 Paymenflransfer OAce 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. Reatstfar on The Bonds rnay be lransferreo anu rc-regtstcred on tne regtslrattnn ooohs of lhc Paying Agent onl) upon prcsentallon and surrender tnercof to the PavtnQ AsenLRcotsrrar a1 Ine D2s anated Pavrnentrrransfer Ofrce A Bonn also ma$ be ercnanocd lor a Bond or Bonds of like maturi$ aid .iterest and having a likeaggregateprincipal amount or maturity amount, as the case Gy be. upon presentation and surrender at the Designated Paymentrrransfer 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 instruclion of lransfer 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 govemmental 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 AgenVRegistrar to the registered owner, at the Designated Paymentrrransfer Office of the Paying AgenURegistrar 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 aHer the receipt of the Bonds to be canceled in the exchange or transfer and the denominations of $5.000 or any integral multiple thereof. 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 during the period commencing on the close of business on the 15lh 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. Reolacement 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, losl or stolen. the Paving Agent will ~rovide a replacement Bond upon (i) the filina bv the reaistered owner --- with the Paying ~~em of evidence safisfactory to the Paying kgent of the'destruction, loss & theft'of the B&d2and theauthenticity of he reqistered owner's owners hi^ and lii) the furnishina to the Pavino Aaent of indemnification in an amount satisfactow to hold the ~2~ ~istris and the Paying ~~ent'harml&s. All expen;es and char~esassociated with such indemnity and with the preparation. execution and delivery of a replacement Bond must be bome 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. Authority for Issuance The bonds are being issued pursuant to the Constitution and general laws of the Slate of Texas, particularly Chapter 1207, Texas Government Code, as amended, and the Order. Source of and Security for Payment The Bonds are payable as to principal and interest from the proceeds of an annual ad valorem tax, without legal limit as to rate or amount, levied against taxable property within the District. Tax Pledae: The Board covenanls 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 lax 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 and interest on the Bonds when due, 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 its "lnterest and Sinking Fund for the Bonds. The Bonds are obligations solely of the District and are not obligations of the Town of Trophy Club. Texas; Denton County, Texas; the State of Texas; or any political subdivision or entity other than the District. Abolition: Under Texas law, if a district is located wholly in two or more municipalities and in 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 City 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 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). Payment Record The District has never defaulted. Legality The Bonds are offered when, as and if issued, subject to the approval by the Attorney General of the State of Texas and the rendering of an opinion as to legality by McCall, Parkhurst 8 Horton L.L.P.. Dallas, Texas. The legal opinion of Bond Counsel will accompany the global certificates to be deposited with DTC or will be printed on the Bonds should the Book-Entry-Only System be discontinued. A form of the legal opinion of Bond Counsel appears in Appendix C attached hereto. Flow of Funds and Investment of Funds The Order creates an lnterest and Sinking Fund. This fund shall be kept separate and apart from all other funds of the District. The lnterest and Sinking Fund shall constitute a trust fund, which shall be held in trust for the benefit of the holders of the Bonds. Any cash balance in any fund must be continuously secured 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 Order establishes the lnterest and Sinking Fund to be used to pay principal and interest on and Paying Agent fees in respect to the Bonds. The Order requires that the District deposit to the credit of the lnterest and Sinking Fund (i) from the delivery of the Bonds to the Underwriter. the amount received from proceeds of the Bonds representing accrued interest on the CIBs, (ii) District ad valorem taxes (and penalties and interest thereon) levied to pay debt service requirements on (or fees and expenses of the Paying Agent with respect of) the Bonds, and (iii) such other funds as the Board shall, at its option, deem advisable. The Order requires that the lnterest and Sinking Fund be applied solely to provide for the payment of the principal of and interest on the Bonds when due, and to pay fees to the Paying Agent when due. 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 (I) 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, and (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 Rrm not less than AAA or its equivalent. 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. 5 Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After fin banking and financial arrangements for the discharge and final payment of the Bonds have been made as described above, all rights o the District to take any other action amending the terms of the Bonds are extinguished. Paying AgentlRegistrar Principal of and semiannual interest on the Bonds will be paid by JPMorgan Chase Bank. National Association. Dallas, Texas the initial Paying AgenURegistrar (the "Paying Agent"). The Paying Agent must be a bank, trust company, financial institution 01 other entity duly qualified and equally authorized to serve and periorm 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 tht Paying Agent of the termination of the appointment, stating the effective date of the termination and appointing a success01 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 agentlregistral selected by the District shall be subject to the same qualification requirements as the Paying Agent. The successor pay in^ agentlregistrar, if any, shall be determined by the Board of Directors and written notice thereof, specifying the name and address of such successor paying agentlregistrar will be sent by the District or the successor paying agentlregistrar to each Registerec Owner by first-class mail, postage prepaid. Record Date The record date for payment of the interest on Bonds on any regularly scheduled interesl payment date is defined as the fifteenth (15th) day of the month (whether or not a business day) preceding such interest payment date. Issuance of Additional Debt The District may issue bonds necessary to provide those improvements and facililies for which the Districl was created, with the approval of the TCEQ and, in the case of bonds payable from taxes, the District's voters. In addition, voters may authorize the issuance of additional bonds or other contractual obligations secured by ad valorem taxes. The District also has the righl to enter into certain other obligations including the issuance of revenue bonds and notes, bond anticipation notes and tax anticipation notes without voter approval. NeilherTexas law nor the Order imposes a limitation on the amount of additional debt which may be issued by the Districl. Any additional debt issued by the District may dilute the security of the Bonds. Currently the District has no plans to issue additional debt within the next twelve months. (See "INVESTMENT CONSIDERATIONS - Future Debt" herein.) 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 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 covenanl ii 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 lo be in accordance with applicable law, rules and regulations and open to inspection in the office of the District. Remedies in Event of Default In the event the District defaults in the obselvance 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 courl of competent jurisdiction requiring the Board of Directors or other officers of the Dislrict to observe or petform such covenants. The Order provides no additional remedies to a Bond owner. Specifically, the Order does not provide lor 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 Districl's obligations. Consequently, the remedy of mandamus is a remedy, which may have to be enforced from year to year by the Bond owners. 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 properly 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. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified to the customaty rights of debtors relative to their creditors G No Material Adverse Change The obligations of the Underwriter to take and pay for the Bonds, and of the District to deliver the Bonds, are subject to the condition that, up to the time of delivery of and receipt of payment for the Bonds, there shall have been no material adverse change in the condition (financial or otherwise) of the District from that set forth or contemplated in the Preliminary Official Statement. MUNICIPAL BOND RATING Moody's Investors Service. Inc. ("Moody's") has assigned a rating of "Aaa" to the Bonds with the understanding, that concurrently with the delivery of the Bonds, a financial guaranty insurance policy will be issued by Ambac Assurance. The Issuer received an underlying rating of "Baal" on the Bonds. An explanation of the significance of a rating may be obtained from the company furnishing the rating. The rating reflects only the respective view of such company, 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 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 Issue has purchased a Financial Guaranty lnsurance Policy with respect to the Bonds from Ambac Assurance Corporation ("Ambac Assurance'y. The following information has been furnished by Ambac Assurance for use in this OKicial Statement. Such information has not been independently verified by the District or the Underwriter and is not guaranteed as to completeness or accuracy by the District or the Underwriter and is not to be construed as a representation of the Issuer or the Underwriter. Reference is made to Appendix E for a specimen of the insurance policy of Ambac Assurance. Payment Pursuant to Financial Guaranty lnsurance Policy Ambac Assurance has maoe a commilmcnt lo ssue a fnaric~al guaranty InsLrance policy (the "Fnanc~al Guaranty nsurancc Pol~cy") relatina to lne Bonds effect ve as of !he dale of ssuanco of ine Bonos -rider the tens of the Fnancal G~aranw Irls~rance Po IW, ~mbac Assurance will pay to The Bank of New York, in New York. New York or any successor thereto (the "lnsur&ice Trustee") that portion of the principal of and interest on the Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as such tens are defined in the Financial Guaranty lnsurance Policy). Ambac Assurance will make such payments to the lnsurance Trustee on the later of the date on which such principal and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Paying AgenURegistrar. The insurance will extend for the term of the Bonds and, once issued, cannot be canceled by Ambac Assurance. The Financial Guaranty lnsurance Policy will insure payment only on staled maturity dates and on mandatoly sinking fund installment dates, in the case of principal, and on stated dates for payment, in the case of interest. If the Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Bonds. Ambac Assurance will remain obligated to pay principal of and interest on outstanding Bonds on the originally scheduled interest and principal payment dates including mandatoly sinking fund redemption dates. In the event of any acceleration of the principal of the Bonds, the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration. In the event the Paying AgenVRegistrar has notice that any payment of principal of or interest on an [Obligation] which has become Due for Payment and which is made to a Holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. The Financial Guaranty lnsurance Policy does not insure any risk other than Nonpayment, as defined in the Policy. Specifically. the Financial Guaranty Insurance Policy does not cover. 1. payment on acceleration, as a result of a call for redemption (other than mandatoly sinking fund redemption) or as a result of any other advancement of maturity. 2. payment of any redemption, prepayment or acceleration premium. 3. nonpayment of principal or interest caused by the insolvency or negligence of any Trustee . Paying Agent or Bond Registrar, if any. If it becomes necessaly to call upon the Financial Guaranty lnsurance Policy, payment of principal requires surrender of Bonds to the lnsurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty lnsurance Policy. Payment of interest pursuant to the Financial Guaranty lnsurance Policy requires proof of Holder entitlement to interest payments and an appropriate assignment of the Holdefs right to payment to Ambac Assurance. 7 Upon payment of the insurance benePs. Ambac Assurance will become the owner of the [Obligation], appurtenant coupon, if any. right to payment of principal or interest on such [Obligation] and will be fully subrogaled to the surrendering Holder's rights to paymer Ambac Assurance Corporation Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled stock insurance corporation regulated by tl Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states. the District Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin Islands, with admitled assets approximately $8,585,000,000 (unaudited) and statutory capital of approximately $5,251,000,000 (unaudited) as March 31, 2005. Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency resew Standard 8 Poor's Credit Markets Services, a Division of The McGraw-Hill Companies. Moody's Investors Service and Fit( Ratings have each assigned a triple-A financial strength rating to Ambac Assurance. Ambac Assurance has obtained a ruling from the Internal Revenue Selvice to the effect that the insuring of an [obligation] by Amk Assurance will not affect the treatment for federal income tax purposes oi interest on such [obligation] and that insurance proceer representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in i financial guaranty insurance policy shall be treated for federal income tax purposes in the same manner as if such payments wet made by the Obligor of the Bonds. Ambac Assurance makes no representalion regarding the Bonds or the advisability of investing in the Bonds and makes n representation regarding, nor has it participated in the preparation of, the Oficial Statement other than the information supplied t: Ambac Assurance and presented under the heading "BOND INSURANCE. Available Information The parent company of Ambac Assurance. Ambac Financial Group. Inc. (the "Company"), is subject to the informational requirement of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statement and other information with the Securities and Exchange Commission (the "SEC"). These reports, proxy statements and othe information can be read and copied at the SEC's public reference room at 450 Fifth Street. N.W.. Washington. D.C. 20549. Please ca the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains an internet site a iittD:liwww.sec.qov that contains reports, proxy and information statements and other information regarding companies that file eleclronically with the SEC, including the Company . These reports, proxy slatemenls and other information can also be read at the offices of the New York Stock Exchange, Inc. (the 'NYSE"), 20 Broad Street. New York. New York 10005. Copies of Ambac Assurance's financial statemenls prepared in accordance with statutory accounting standards are available from Ambac Assurance. The address of Ambac Assurance's administrative offices and its telephone number are One State Street Plaza, 19Ih lo or. New York, New York 10004 and (212) 668-0340. Incorporation of Certain Documents by Reference The following documents filed by the Company with the SEC (File No. 1-10777) are incorporated by reference in this Official Statement: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31.2004 and filed on March 15,2005; 2. The Company's Current Report on Form 8-K dated April 5,2005 and filed on April 11.2005; 3. The Company's Current Report on dated and filed on April 20.2005; 4. The Company's Current Report on-K dated May 3.2005 and filed on May 5.2005; and 5. The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31.2005 and filed on May 10. 2005. Ail documents subsequently filed by the Company pursuant to the requirements of the Exchange Act alter the date of this Official Statement will be available for inspection in the same manner as described above in "Available Information". 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 believes the source of such information lo be reliable, but takes no responsibility for the accuracy or completeness (hereof. The District cannot and does not give any assurance the (1) DTC will distribute payments oi 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 OKicial Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures oi DTC to be iollowed 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 Bond certificate will be issued for 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 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 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 transaclions in deposited securilies, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. 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, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation. MBS Clearing Corporation, and Emerging Markets Clearing Corporation. (NSCC. GSCC. MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc.. the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. 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 ("lndirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. 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 each Bond ("Beneficial Owner") is in turn to be recorded on the Direct and lndirect Participanls' 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 lndirect 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 lndirecl Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates 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 represenlative 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 lndirect 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 lndirect Participants, and by Direct Participants and lndirect 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 nolices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bonds 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. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect lo Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures. DTC mails an Omnibus Proxy to the City as soon as possible afler 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 City or the Paying AgenVRegistrar, on the payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing insl~ctions and customaly 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 AgentiRegistrar, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and inlerest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying AgenVRegistrar, 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 Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City or Paying AgentiRegistrar. Under such circumstances, in the event that a successor depository is not obtained. Bond certificates are required to be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable, but the City takes 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 lo be given to registered owners under the Ordinance will be given only lo 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, or any other political subdivision except the District. The Bonds are payable from a continuing, direct, annual ad valorem lax, without legal limitations as to rate or amount, on all taxable property within the District. See "THE BONDS - Source of Payment." 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. 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 rafes, credit availability, construction cosls, 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 would 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 construclion within the Dislrict. 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 DallaslFort Worth metropolitan and regional economics. Compelition: The demand for singie-family homes in the District, could be affected by competilion from other residential developments including other residential developments located in other utility districts located near the District. In addition to competition for new home sales from other developments, there are numerous previously owned homes in more established neighborhoods closer to downtown DallasIFort Worth that are for sale. Such homes could represent additional competition for homes proposed to be sold within the District. The competitive position of the developer in the sale of developed lots and of prospective builders in the construction of single- family residential houses within the District is affected by most of the factors discussed in this section. Such a competitive position is directly related to the growth and maintenance of taxable values in the District and tax revenues to be received by the District. The District can give no assurance that building and marketing programs in the District by the developer will be implemented or, if implemented. will be successful. Develooers Ihldcr No Obl~oarion to thr, Drsrrrcf: There is no cornmllrrlent from, or obligal~on of. any developers to proceed at any panlc:.lar rate or accorong to ally speclted pan wirn the development of and or the constr~cton of homes n the D!srricl, an0 there is no restriction on any landowner's right to sell its land. Failure to construct taxable improvements on developed lots and tracts and failure of landowners to develop their land would restrict the rate of growth of taxable value in the District. The District is also dependent upon developers and the other principal taxpayers for the timely payment of ad valorem taxes, and the District cannot predict what the future financial condition of either will be or what effect, if any, such financial conditions may have on their ability to pay taxes. See 'THE DEVELOPERS and "SELECTED FINANCIAL INFORMATION - Principal Taxpayerr." lmoact 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 2004 net taxable assessed valuation of the District (see "FINANCIAL STATEMENT") is $304,437,311, After issuance of the Bonds the projected maximum annual debt service requirement (2006-2023) will be $728,605 (2011). Assuming no increase or decrease from the 2004 assessed valuation and no use of funds on hand. a tax rate of $0.24175 per $100 assessed valuation at B 99% collection rate would be necessary to pay the projected maximum annual debt service requirement of $728.605. The District's 2004 debt service tax rate is $0.22534 per $100 assessed valuation. See "APPENDIX A-TABLES 4 and 5" herein. Tax Collections The DistricCs ability lo 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 lhe 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 Dislrict 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 lhe 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 districts and, in connection therewith, to provide for the consolidation of its water and wastewater systems with the water and wastewater system(s) of the district(s) with which it is consolidating. The revenues of the consolidated system may be pledged equally to all first lien bonds of the consolidating districts. No representation is made that the District will consolidate its water and wastewater system with any other district. Annexation Under Texas law, the terrilory within the District may be annexed by the Town of Trophy Club (the "City") without the consent of the District or its residents. If annexation by the City did occur, the District would be abolished within 90 days after annexation. When the District is abolished, the City must assume the assets, functions, and obligations of the District (including the Bonds). No representation is made concerning the likelihood of annexation or the ability of the City to make Debt Service Payments on the Bonds should annexation occur. Alteration of Boundaries In certain circumstances, under Texas law the District may alter its boundaries to: 1) uoon satisfvin~ certain conditions, annex additional territory; and 2) exclude land subject to taxatio" within the District that is not &wed by~iitrict facilities if the District simultaneouslv annexes land of eoual acreaoe and value that mav be ~racticablv served bv District facilities. No reoresentation . . is made concerning the likelihood chat the ~istrict would effect any change in its t;oundaries: Registered Owners' Remedies Bond owners are entitled under Texas Law to seek a writ of mandamus to compel the District to perform iis obligations under the Bond Order. Such remedy would have to be exercised upon each separate default and could prove costly, time-consuming and difficult to enforce. Further, there is no trust indenture or trustee, and all legal actions to enforce such remedies would have to be taken at the initiative of, and be financed by, Bond owners. The Bond Order does not provide for acceleration of maturity of the Bonds upon any default. Bankruptcy, reorganization and other similar laws affecting the enforcement of creditor's rights generally may also limit the rights and remedies of the Bond owners and the enforceability of the Bonds. See "THE BONDS - Remedies in Event of Default." 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 aifecting 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. 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 1983 ("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 FDlC is acting as the conservator or receiver of an insolvent financial institution. Under FIRREA real property held by the FDlC is still subject to ad valorem taxation, but such act states (i) that no real property of the FDlC shall be subject to foreclosure or sale without the consent of the FDlC and no involuntary liens shall attach to such property. (ii) the FDlC 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 little judicial determination of the validity of the provisions of FIRREA or how they are to be construed and reconciled with respect to conflicting stale laws. However, certain recent federal court decisions have held that the FDlC is not liable for statutory penallies 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 FDlC or a prior property owner to pay ad valorem taxes when due. It is also not known whether the FDlC 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 FDlC attempts to enforce the same, these provisions may affect the timeliness of collection of taxes on property, if any, owned by the FDlC in the District, and may prevent the collection of penalties and interest on such taxes. Marketability The District has no understanding with the Initial Purchaser regarding the reoffering yields or prices of the Bonds and has no control over trading of the Bonds in the secondaly market. Moreover. there is no assurance that a secondary market will be made in the Bonds. If there is a secondary market. the difference between the bid and asked price for the Bonds may be greater than the difference between the bid and asked price of bonds of comparable maturity and quality issued by more traditional issuers as such bonds are more generally bought, sold or traded in the secondary market. Continuing Compliance with Certain Covenants The Bond 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." 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 "LEGAL MAnERS." Future Debt All of the remaining unlimited tax bonds, in the amount of $4,540,000, 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. In the opinion of the District's engineer, the remaining authorization should be sufficient to complete ultimate development within the District. At this time no future bond issues are anticipated. Litigation The District is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court. agency or other administrative body which, if decided adversely to the District, would have a material adverse effect on the financial condition of the District. LOCATION MAP THE DISTRICT Creation of the District Trophy Club Municipal Utility District (MUD) No. 2 of Denton County. Texas is the resulting entity from a consolidation in August 1990 of Denton County Municipal Utility District No. 2 and Denton County Municipal Utility District No. 3. Denton County MUD No. 2 was created by the Texas Commission on Environmental Quality (the "Commission") on May 20. 1980 for the purpose of providing water, sewer and drainage facilities and other authorized services to the area within the District. Creation of the District was confirmed by the electorate of the District at an election held on August 9, 1980. Denton County MUD No. 3 was created by the Commission on May 20, 1980 for similar purposes as Denton County MUD No. 2. Creation of the district was confirmed by the electorate of the District at an election held on August 9. 1980. Trophy Club MUD No. 2 is subject to ongoing supervision of the Texas Natural Resources Conservation Commission (successor to the Commission), and operates as a municipal utility district pursuant to the provisions of Article XVI. Section 59 of the Texas Constitution. Chapters 49 and 54 of the Texas Water Code, as amended, and other applicable state laws. General The District is comprised of 982.29 acres, which consists of an 82.3-acre golf course and 21.62 acres of amenities leaving 878.37 acres developable. Of the 878.37 developable acres, approximately 756.82 acres have been fully developed, including approximately 1.380 single-family connections and 45 multi-family connections, three (3) schools, a church and a daycare facility. Presently, there are 121.55 acres remaining for residential development. The District has experienced a steady increase in the number of houses built (in excess of 40 homes per year) during the past several years. The residential development, known as "Trophy Club is a country club development featuring a 27-hole golf course, clubhouse, golf shop. swimming pool, tennis courts and equestrian center. The District's purpose is to provide water 8 wastewater services to customers within the district's boundaries. Management of the District Board of Directors The District is governed by a board, consisting of five directors, which has control over and management supervision of all affairs of the District. Directors are elected and serve four-year staggered terms and 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 facilities plans are submitted to the Texas Water commission for review and approval. Teml Name Exoires Mav Jim Budarf President 2008 Kevin Carr Vice-president 2008 Carol Borges Secretaryrlreasurer 2006 Lynn Hale Director 2006 James C. Thomas Director 2008 All of the directors are residents and homeowners of the District. The District has no full-time employees but maintains permanent ofices within the district where all services are provided and controlled. Consultants Tax Assessor/Coiiecfor Land and improvements in the District are being appraised by the Denton County Appraisal District. The Tax Assessor/Collector is appointed by the Board of Directors of the District. The Denton County Tax Assessor/Collector currently serves the District in this capacity under contract. District blanaoer Mr. Walter Fitzpatrick was an elected Director of Trophy Club MUD No. 2 from 1995 through 2002 and assumed District Manager responsibilities for the District in February 2003. He also serves as manager for Trophy Club MUD No. 1 and Trophy Club Master District Joint Venture. District Finance Director Mr. Roger Unger has served as Finance Director for the District for one year and earlier served almost eleven years as District Manager. The District employs the following consulting engineers for various District projects: Carter 8 Burgess (the "Engineer"), Freese 8 Nichols. Inc.. and Camp. Dresser & McKee. Inc. Rutledge Crain & Company, PC has sewed as the District's independent auditor since August 1997. Financial Advisor Southwest Securities serves as the District's financial advisor (the "Financial Advisor"). The fee for services rendered in connection with the issuance of the Bonds is based on the percentage of the Bonds ac<ually issued, sold and delivered and. therefore, such fee is contingent upon the sale and delivery of the Bonds. Bond Counsel The District has engaged McCall. Parkhurst & Horton L.L.P.. Dallas. Texas, as Bond Counsel in connection with the issuance of the District's Bonds. The fees of Bond Counsel are contingent upon the sale of and delivery of the Bonds. Leqal Counsels The DisMct employs The Liston Law Firm as general legal counsel for the District. Location The District is located in the far southeastern quadrant of Denton County near the southern shore of Lake Grapevine, and just east of the Town of Roanoke. Texas and is entirely within the boundaries of the Town of Trophy Club. The original limits of the District described an area wholly outside of an incorporated city and wholly within the extraterritorial jurisdiction of the Town of Westlake. In January 1985, the voters of Trophy Club Municipal Utility District No. 1 and the District incorporated the Trophy Club development into the Town of Trophy Club, Texas, except for the area within the Town of Roanoke. The District is directly adjacent to and accessible from State Highway 114, north of and approximately midway between Dallas and Fort Worth. The District is approximately 27 miles from downtown Dallas, 25 miles from downtown Fort Worth, 17 miles from Denton. 11 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 Highway 35W (see "LOCATION MAP" herein. Population The population of the District is estimated to be approximately 4.685 based on 2.96 persons for each of the 1.583 existing homes and townhouses. Topography and Drainage Terrain within the District consists of gently rolling hills and flatlands which had previously been in cultivation. The area drains to the east and north to Lake Grapevine. The lowest elevation is in the flowline of Marshall Creek at its exit from the District at approximately 575 mean sea level (MSL) elevation. The land gently rises to the west and south to a high elevation of 620 MSL. Flood hazard areas along Marshall Creek cover approximately 25 acres. The majority of this flood prone area is confined to the proposed greenways, proposed neighborhood parks, and the existing equestrian center. Where development occurs in flood prone areas, finished floor elevations are established at 1.5 feet above the 100-year storm surface elevation. Shopping and Commercial Facilities A recently constructed shopping center within Trophy Club MUD No. 2 has a major grocery store chain outlet, a bank, a drug store, several service businesses, fast food outlets, and a beauty shop. Additionally there are several more businesses and professional offices located in the Town, at the primary entrance to the Town of Trophy Club. There are addilional shopping facilities in Roanoke, about two (2) miles west of the District and numerous shopping iacilities 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 Trophy Club Municipal Utility District No. 1 operates a fire department with four emergency response vehicles, which are housed and maintained in a six-bay station constructed in 1990. The operation is staffed with nine full time fire fighterlparamedics, one Captain, a Fire Chief, a fire inspector, and several volunteer fire fighters. This department serves the entire community and is currently financed by a combination of a $0.10886 maintenance tax assessment in the District and a $0.10886 maintenance tax assessment in MUD No. 1 and approximately $75,000 of reserves. with an annual budget of $786.734. Police Protection Twenty-four hour security is provided by the Town of Trophy Club Police Department Schools The District is located in the Northwest Independent School District. Lakeview and Beck Elementary Schools (grades K-5) and Medlin Middle School (grades 6-8) are located in Trophy Club. Northwest Middle School (grades 64, and Northwest High School (grades 9-12) are both located in Justin. Texas, about 8.4 miles from the center of the District. School bus transportation is provided by the school district and is available to students living at least two miles from campus or those without a continuous walkway connecting their home and the campus. Other Community Services The District, in partnership with Trophy Club Municipal Utility District No. 1, operates under a Master District concept to provide water, sanitary sewer and storm drainage services to residents of the District. The District offices jointly with Trophy Club Municipal Utility District No. 1 and the Town of Trophy Club in a permanent operations office at the main water plant at 100 Municipal Drive. Trophy Club, Texas 76262. Garbage and trash collection along with recycling is currently provided to residents of the District by contract between Trinity Waste Services and the Town of Trophy Club, with pickups twice weekly. Other utilities serving the District are TXU Energy. Southwestern Bell Communications. MCI Telecommunications. IONEX. ATBT. World Com. Sage Telecom, Birch Telecom, and Charter Cable Company. The U.S. Postal Service provides mail service to each occupied house in Trophy Club. Recreational opportunities in Trophy Club are afforded by Lake Grapevine, which lies two miles north and east of the District and its surrounding parks. Trophy Club has several community parks including facililies for soccer, baseball, softball, basketball, and tennis as well as playground amenities. The Town recently completed construction of a new 10-acre park with additional sports venues and a community swimming complex. Trophy Club Country Club is operated by Cobblestone Golf Group, Inc. as a private membership club and provides a 36-hole golf course, tennis, swimming, clubhouse, and golf shop. Status of Development of the District Development of the District began in 1980 and approximately 580 acres (approximately 71% of the developable acreage) of the District have been developed with water, sanitary sewer and drainage facilities. The developed area includes the following: single-family subdivisions know as The Knoll. The Lakes (1-3), Lakeside, Village West (A 8 B). Eagles Ridge. Fox Pointe, and Hogan's Glen-Waters: a mixed use development including single-family, multi-family, oftice, commercial retail, schools, and churches; and amenity improvements. The following development breakdown information is as of April 2005: Residential Development: Approximately 580 acres within the District have been developed with utility facilities to serve seven single-family residential subdivisions including 1.475 developed single family lots, 1.217 completed and occupied single-family homes. 116 completed and unoccupied single-family homes, 24 single-family homes under construction and 118 vacant developed single-family homes. Of the 118 vacant developed single-family lots. 28 lots are owned by Beck Properties. 46 lots are owned by Terra Land Development Co., approximately 11 are owned by individuals and the remaining 33 lots are owned by various home builders who have purchased the lots, but not yet begun construction of a home on such lot. See "THE DEVELOPERS." Multi-Familv Develooment: The District contains one townhouse complex. Quorum Condominiums, totaling 67 units and 5.3459 acres. According to management of Quorum Condominiums, the units were 85% occupied. Office Develo~ment: Office development in the District presently consists of 1.920 square feet of professional offices. Retail 1 Commercial Develooment: A 13.96 acre shopping center (Trophy Club Plaza) and additional retaillcommercial development provide approximately 40.000 square feet of space occupied by the following businesses: Bank of America, Blockbuster Video. Trophy Club Cleaners, Wells Fargo Bank. Great Clips, Walgreens. Tom Thumb Grocery. Starbucks, Art 'N' Frame Gallerie, Hot 'N' Greamy Donuts, Radio Shack. GNC. Hong Kong Express. Subway and Colorful Nails. Amenitv Develoornent: Recreational facilities within the Oistrict include the Trophy Club Country Club (including a 36-hole golf course, club house, golf shop, swimming pool and tennis courts, two mixed-use parks tolaling approximately 23 acres (including ball fields, playgrounds, tennis courts, green space, and soccer fields). Undevelooed Acreaoe: The District conlains approximalely 228.61 acres of undeveloped land. 121.55 acres of which are developable. A portion of this acreage has not been provided with utilities. If developed, it is anticipated that the cost of utility facilities to serve such acreage would be financed by the developer(s). The following chart more completely describes the status of development within the Districl as of April 2005 Single Family Homes Complete Complete Vacant Total Total and and Under Developed Subdivision Acreaqe - Lots Occupied Unoccupied Construction Lots A Single Family The Knoll 23.5361 46 5 1 7 33 The Lakes (1-3) 144.8800 339 339 0 0 0 Lakeside 31.7850 111 111 0 0 0 Village West A & B 113.6400 382 382 0 0 0 Eagles Ridge 27.7996 62 48 6 5 3 Fox Pointe 11.9896 36 35 0 0 1 Hogan's Glen-Waters 7.6770 15 1 0 3 11 Section 10 53.0500 136 135 0 0 1 Section 11 56.4300 151 148 0 0 3 Section 12 43.9800 129 116 10 0 3 Section 13 26.1430 68 60 5 0 3 Total Single Family 540.9100 1.475 1,380 22 15 58 B. Multifamily Quorum Condominiums 5.3459 1 Total Multifamily 5.3459 1 Trophy Club Plaza 13.9600 Total OfFicelComrcllRetail 13.9600 0. Other Medlin Middle School 16.9420 NIA Beck Intermediate School 8.6350 NIA Lakeview Elementary School 15.0000 NIA lven Glen Elementary School? 1.0500 NIA Baptist Church 4.0000 NIA Total Other 45.6270 NIA E. Undeveloped Land 228.61 1 Total 834.46 1,480 - P THE DEVELOPER Role of a Developer In general, the activities of a landowner or developer within a municipal utility district, such as the District, include, among other activities, purchasing land within the future district, petitioning for creation of the district, designing the development, defining a 1 marketing program, planning and scheduling building schedules, securing necessary governmental approvals and permits for I development, arranging for the construction of roads and the installation of utilities (including, in some cases water, sewer, and i drainage facilities in the utility district) pursuant to the rules of the TCEQ, and selling improved lots or commercial reserves to builders, other developers or third parties. Ordinarily, the developer pays one hundred percent (10O%)of Ule costs of paving and amenity design and construction while the utility districts finance the costs of the water supply and distribution, wastewater collection and drainage facilities. Trophy Club Municipal Utility District No. 2 has a policy in place requiring developers to pay 100% of all development costs with no reimbursement. The Town of Trophy Club oversees the development and platting of all lots as well as street construction and building inspection. While a landowner or developer is required by the TCEQ to pave streets and pay for its allocable portion of the costs of utilities to be financed by the district through a specific bond issue. if any, a developer is generally under no obligation to a district to undertake development activities with respect to olher property it owns within a district. Furthermore, there is no restriction on a developer's right to sell any or all of the land, which the developer owns within a district. In addition, the developer is ordinarily the major taxpayer within the district during the early stages of development. In Trophy Club Municipal Utility District No. 2 the developer is a minority landowner and taxpayer when compared to the number of resident homeowners within the District. Description of the Developers Beck Properties is the primary developer in the District. In addition to Beck Properties. Terra Land Development Co. is currently developing and marketing a 23.5361-acre. 46-lot residential development. THE DISTRICT'S SYSTEM General The following information describes generally the water, sewer and drainage systems for the entire Trophy Club project, including those facilities located in the District and Trophy Club Municipal Utility District No. 1. Hereinafter. Trophy Club Municipal Utility District No. 1 and Trophy Club Municipal Utility District No. 2 are referred to as "MUD No. 1" and "MUD No. 2". MUD No. 2 in partnership with MUD No. 1 manages the operation of the District facilities under a Master District concept. All financial transactions relating to water and sewer operations are included in the financial statements of the Master District, a portion of which is included in APPENDIX A as TABLE 19. Specific information regarding water and sewer rates and other fees within the District is included in APPENDIX A. TABLES 20 -22. Description of the Water System Sources of Water Suppill: 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 8,000,000 gallons per day of treated water from the City of Fort Worth facilities. (See "WATER SUPPLY CONTRACT" herein). Currently the District contracts with the City of Fort Worth on behalf of the Trophy Club development. for water service in excess of that produced by the four wells. Current maximum usage is some 5,000,000 gallons per day (of which 3,700,000 is Fort Worth water). These sources, when combined, provide water, which complies with the quality requirements of the Texas Department of Health and needs only chlorination at the water plant. Water Plant Facilifv: The present facility provides 4,000,000 gallons ground slorage with pumpingichlorination capacity of 10,000,000 gallons per day. Description of the Wastewater System Wasre.varer Trealrnenr Plan1 Faoldy The wasrev,aier lreatmenr planl syslenl has a perm Ired rrealmerlt d~scnarge capaclly of 1.7fi0.000 gal oris per day from lne Tcxas Comni~ss 011 on Envrronmenral Ouady under TPDES Perm11 ho 11593-001 Altho~gh 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 and is re-used for irrigating !he golf course. WATER SUPPLY CONTRACT The charge to the Master District for the purchase of the City of Fort Worth's water is presently $1.55 per 1.000 gallons. To finance MUD No. 1's share of the cost of the original water storage facility payable to the City and provide for use of the water supply throughout the Trophy Club project, MUD No. 1 entered into a contract with Gibraltar Savings Association dlblal Trophy Club dated August 21. 1979. Under the terms of such contract Gibraltar agreed to fund all money required to be paid by MUD No. 1 to the City. Gibraltar also retained a right to a portion of the water made available through these facilities. MUD No. 1 repaid its proportionate share of the advances made by Gibrallar to the City. MUD No. 1 and Gibraltar mutually agreed to 18 cooperate in establishing a central water system to serve the entire Trophy Club project by using MUD No. 1 as a "Master District". Subsequently Gibraltar and MUD No. 1 entered into such contract including all successors to Gibraltar. MUD No. 2 as a successor to Gibraltar became a party to this Master District Contract. In October 2000 MUD No. 1 and MUD No. 2 renegotiated the Master District Contract as an agreement between the two districts only. In 1991, a 15.000-loot section of the 21-inch line had to be relocated due to road construction at a cost of 1.1 million dollars. MUD No. 1 financed its portion plus all uncommitted capacity in the relocated line through a bond issue sold in 1991. MUD No. 1 fronted the total cost of relocating the line and was subsequently reimbursed by MUD No. 2 for its current ownership portion. MASTER DISTRICT CONTRACT On December 1. 1982. MUD No. 1 entered into a written Contract for the Provision, Operation and Maintenance of Water Supply and Waste Disposal Facilities with Gibraltar Savings Association as the then principal developer of Trophy Club (the "Contract"). Under the terms of the Contract. MUD No. 1 agreed to construct, operate, and maintain the central water supply and wastewater treatment facilities to serve the entire Trophy Club project, including MUD No. 2 and other land to the north and northwest of MUD No. 1 which is part of the Trophy Club project, but not yet developed or included in a municipal utility district. On October 4. 2000, MUD No. 1 and MUD No. 2 renegotiated this contract between MUD No. 2 and MUD No. 1. They are currently operating under the new Master District Contract. The Contract contains provisions regarding the policies and procedures to be used in the planning, financing, and operation of the joint facilities. In general, the Contract provides that the entity holding title to district facilities under the previous Master District Contract will continue to hold title to those facilities. All future construction andlor renovation of facilities will be overseen by the Master District Board, which consists of 5 members each from MUD No. 1 and MUD No. 2. All new construction of central plant facilities will be shared equally by MUD No. 1 and MUD No. 2 while new construction specific to an individual MUD will be paid for by that MUD. This Contract may be terminated by any party as of September 30 of any odd-numbered year by written notice to all other parties delivered at least two (2) years in advance. This Contract may be terminated at any other time or upon shorter notice only upon consent of both districts. At this time, no notice of termination has been submitted nor is termination expected. 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 Directors. Both state law and the District's investment policies are subject to change. The District's goal in its investment policy is to presewe principal and maintain liquidity, while securing a competitive yield on its portlolio. Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Directors. 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 obligation, 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; (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 that are issued by a state or national bank domiciled in the State of Texas, a savings bank domiciled in the State of Texas, or a state or federal credit union domiciled in the State oi 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. (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (I), and are placed through a primary government securities dealer or a financial institution doing business in the Slate of Texas, (9) 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-I or the equivalent by at least one nationally recognized credit rating agency. (10) 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. (11) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average slated 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 (12) no- load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating fim 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 lnvestment Advisers Act of 1940 (15 U.S.C. Section 80b-I et seq.) or with the Slate 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. All District funds must be invested consistent with a formally adopted "lnvestment Strategy Statement" that specifically addresses each fund's investment. Each lnvestment 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 probable income to be derived.'' At least quarterly the District's investment officers must submit an investment report lo the Board of Directors detailing: (1) the investment position of the District. (2) that all investment officers jointly prepared and signed the report. (3) the beginning market value, and any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and 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 Directors. Under Texas law, the District is additionally required to: (1) annually review its adopted policies and strategies, (2) require any investment officers with personal business relationships or family relationships with firms seeking to sell securities to the District to disclose the relationship and file a statement with the Texas Ethics Commission and the District. (3) require the registered principal of firms seeking to sell securities to the District to: (a) receive and review the District's investment policy. (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the District's investment policy. (5) 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 repurchase agreement. (6) restrict the investment in non-money market 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 and (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. lnvestment Ofticer and Authorized Investments The District's Finance Director or other person designated by the Board of Directors of the District shall be the investment officer and invest District funds in legally authorized and adequately secured investments in accordance with generally accepted accounting procedures and provisions of the Public Funds Investment Act. Authorized investments shall include: Certificates of Deposit, Federal Agency Discount Notes, Investment Pools, Treasury Bills and Demand Accounts in Local Banking Institutions. lnvestment Reports Cash flow statements shall be prepared monthly for every designated fund. All receipts and disbursements shall be in the statement with individual line items that are specific to each designated fund. On a quarterly basis, the investment officer will submit to the Board of Directors a written report of investment transactions for ell funds. The report will describe in delail the investment position of the District on the date of the report and list in detail the transactions for the quarter. The investment officer will confirm that the par value of approved securities is of an adequate amount to protect the District's uninsured deposits in the depository bank or other uninsured investments. All investment reports shall specifically address whether current investment results have been affected by risks and shall explain the actions the investment officer has taken to conlrol or correct such risks, specifically: All investment shall be legal investments. lnvestments shall be made in a prudent manner. . The financial condition of institutions with which investments are placed shall be considered. All investments over the insured amounts shall be secured by a pledge of approved securities. Current Investments As of April 15. 2005 all the District's funds in the amount of $869.744 were invested in Local Checking Accounts and TexPool. The District does not currently own, nor does it anticipate the inclusion of long-term securities or derivative products in its portfolio. TAX DATA District Bond Tax Rate Limitation The District's tax rate for debt service on the Bond5 is legally unlimited as to rate or amount. Maintenance Tax The Board of Directors of District has the statutory authority to levy and collect an annual ad valorem tax for planning. constructing, acquiring, or maintaining or repairing or operating the Districi's improvements, if such maintenance 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. At an election held on October 7. 1975, voters within the District authorized a maintenance tax not to exceed $0.25/$100 assessed valuation. As shown in APPENDIX A. TABLE 13 - "TAX RATE DISTRIBUTION." the District levied a 2004 maintenance and operations tax of $0.0148/$100 assessed valuation. 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 andlor general purposes is not included in these figures. See APPENDIX A -TABLES 14-16 for information on overlapping taxing entities. TAXING PROCEDURES Authority to Levy Taxes The Board is 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 which are now outstanding (see "INVESTMENT CONSIDERATIONS - Future Debt" herein) and to pay the expenses of assessing and collecting such taxes. The District aqrees in the Order to levv such a tax from year-to-year as described more fully herein under "THE BONDS - Source of and ~ecu-rity for Payment". ~nde;~exas law, the 0oard is also authorized lo levy and collect an ad valorem tax for the operation and maintenance of the District and its water and wastewater svstem and for the payment of certain contractual obliqations, if . . - authorized by its voters. (See "TAX DATA" 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 Properly 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 responsibilily for recording and appraising property for all taxing unils within the county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The board of direclors of the appraisal district selects a chief appraiser to manage the appraisal offices of the appraisal district. The Denton County Appraisal District (the "DCAD) has the responsibility for appraising properly for all taxing units within Denton County, including the District. Such appraisal values are subject to review and change by the Denton County Appraisal Review Board (the "Appraisal Review Board"). The appraisal roll as approved by the Appraisal Review Board must be used by the District in establishing its tax roll and tax rate. 21 @!&?& 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 include: property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain non-profit cemeteries; farm products owned by the producer; and certain property owned by charitable, religious, scientific. literary, student housing, veterans, youth, development or fraternal organizations. Goods, wares, ores and merchandise (other than oil, gas or petroleum products) that are acquired in or imported into the state and forwarded out of state within 175 days thereafter are also exempt (Freeport Property). Property owned by a disabled veteran or by the spouse or certain children of a deceased disabled veteran or a veteran who died while on active duty has been granted an exemption from $5.000 up to $12,000 of assessed value. The District does grant a Freeport Property exemption, but at this time has no such property within its boundaries. Residential Homestead Exemotions: The Board may exempt up to 20% of the market value of residential homesteads from ad valorem taxation. Such exemption would be in addition to any other applicable exemptions provided by law. However, if ad valorem taxes have previously been pledged for the payment of debt, then the Board may continue to levy and collect taxes against the exempted value of the homesteads until the debt is discharged if the cessation of the levy would impair the obligation of the contract by which the debt was created. The Board does not grant this exemption. Also exempt, if approved by the Board or through a process of petition and referendum by the District's voters, are residential homesteads of certain persons who are disabled or at least 65 years old, to the extent of $3.000 of appraised value or more. The District is authorized by statute to disregard such exemptions for the elderly and disabled if granting the exemptions would impair the District's obligation to pay tax supported debt incurred prior to adoption of the exemptions by the District. The Board has granted such elderly and disabled exemptions in the amount of $25,000 of assessed valuation. Tax Abatement: Denton 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. None of the area within the District has been designated as a reinvestment zone to date and the District does not expect any area within the District to be so designated in the foreseeable future. Valuation of Property for Taxation Generally, all taxable property in the District must be appraised by the Denton County 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 of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. 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 ownefs 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. 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 appraisai 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 appraisai (agricultural or timber classification, for example). The District may not, however, protest a valuation of individual property. Levy 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 at an election held for such purpose, determines to transfer the collection of taxes to the DCAD or another taxing unit, the District is responsible for the levy and collection of its taxes. Collection of Taxes Taxes are due on receipt of the tax bill and become delinquent after January 31 of the following year. However, a person over 65 is entitled by law to pay current taxes on his residential homestead in installments or to defer taxes without penalty during the time he owns and occupies the property as his residential homestead. 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 firsl month of delinquency, one percent (1%) for each month thereafter to July 1, and 12% total if any taxes are unpaid on Juiy 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. In addition, where a districl engages an attorney for colieclion of delinquent taxes, the Board may impose a further penalty not to exceed fifteen percent 15% on ail taxes unpaid on Juiy 1 in lieu of recovering attorney's fees. 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 obligalion 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 Slate of Texas and each local taxing unit, including the District, having power to tax the property. The Districl'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 lax, or both. In tiling 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 wilhin 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 CONSiDERATlONS -General -Tax Collections and Foreclosure Remedies" herein.) LEGAL MATTERS Legal Opinions Legal matters incident to the authorization, issuance and sale of the Bonds are subject to the approving opinion of the Attorney General of the State of Texas and McCall. Parkhurst 8 Horton L.L.P., Bond Counsel, whose opinion will accompany the Bonds. In its capacity as Bond Counsel. McCall. Parkhurst & Horton L.L.P. has reviewed the information appearing in this Official Statement under the captions "PLAN OF FINANCING." 'THE BONDS" (exclusive of the information in the subcaption "Payment Record). "LEGAL MATTERS (exclusive of the last sentence of the first paragraph thereof), "TAX MATTERS," "CONTINUING DISCLOSURE OF INFORMATION" (exclusive of the information in the subcaption "Compliance With Prior Agreements"), and "OTHER MATTERS - Registration and Qualification of Bonds for Sale, and Legal Investments and Eligibility to Secure Public 23 Funds in Texas" to determine whether such information accurately summarizes the material and documents referred to therein and is correct as to matters of law. Such firm has not, however, independently verified any of the factual information contained in this Official Statement nor has it conducted an investigation of the affairs of the Issuer for the purpose of passing upon the accuracy or completeness of this Official Statement. No person is entitled to rely upon such fin's limited participation as an assumption of responsibility for, or an expression of opinion of any kind with regard to the accuracy or completeness of any of the information contained herein. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds are contingent on the sale and delivery of the Bonds. The legal opinions of Bond Counsel will be printed on the definitive Bonds or will accompany the global certificates deposited with DTC and the form of such opinion is attached hereto as Appendix C. Certain legal matters will be passed upon for the Underwriter by Fulbright & Jaworski L.L.P., Dallas. Texas, counsel for the Underwriter. The legal opinion 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 periormance 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. No Material Adverse Change The obligations of the Underwriter to take and pay for the Bonds, is subject to the condition that, up to the time of delivery of and receipt of payment for the Bonds, there shall have been no material adverse change in the condition (financial or otherwise) of the District from that selforlh or contemplated in the Official Statement. TAX MATTERS Opinion On the date of initial delivery of the Bonds. McCall. Parkhurst & Horton L.L.P., Dallas, Texas Bond Counsel, will render its opinion that, in accordance with statutes, regulations, published ruling sand 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 lnternal Revenue Code of 1986 (the "Code"). Except as stated above, Bond Counsel 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 Bond Counsel's Opinion" herein.) In rendering its opinion, Bond Counsel will rely upon (a) certain information and representations of the District, including information and representations contained in the District's federal tax certificate, and (b) covenants of the District contained in the Order relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the property financed or refinanced therewith. Although it is expected that the Bonds will qualify as tax-exempt the status of the Bonds could be affected by future events. However, future events beyond the control of the District, as well as the failure to observe the aforementioned representations or covenants, could cause the interest on the Bonds to become taxable retroactively to the date of issuance. Bond Counsel's opinion represents its legal judgment 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. The Existing Law is subject lo 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 such 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 lnternal Revenue Service by the District with respect to the bonds or property financed with the proceeds of the Bonds. No assurances can be given as to whether or not the Internal Revenue Service will commence an audit of the Bonds, or as to whether the lnternal Revenue Service would agree with the opinion of Bond Counsel. If an audit is commenced. under current procedures the lnternal Revenue Service is likely to treat the District 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 lssue Discount The initial public offering price to be paid for one or more maturities of the Bonds (the "Original lssue Discount Bonds") may be less than lhe principal 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. In such event, the difference between (i) "stated redemption price at maturity" of each Original lssue Discount Bond. and (ii) the initial offering price to the public of such Original lssue Discount Bond would constitute original issue discount. The "stated redemption price at maturily" 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 lssue 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 lssue 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 lssue Discount Bond prior to stated maturity. however, the amount realized by such owner in excess of the basis of such Original lssue 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 lssue Discount Bond was held by such initial owner) is includable in gross income Under Existing Law, the original issue discount on each Original lssue 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 anniversiry dates of the date of the Bond and ratably within each such six-month period)>nd the accrued amount is added to an initial owner's basis for such Orioinal lssue Discount Bond for ourooses of determinina the amount of oain or loss recoonized bv such owner upon the redemption, sale or other disposition thereif. The amount to be added to basisfor each accruaiperiod is equal to (i) 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 (ii) the amounts payable as current interest during such accrual period on such Bond. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original lssue 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 lssue 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 lssue 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 lssue 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, owners of an interest in a FASIT. individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with Subchapter C earnings and profits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. 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 BONDS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS. lnterest on the Bonds will be includable as an adjustment for "adjusted earnings and profits" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Section 55 of the Code imposes a tax equal to 20 percent for corporations, or 26 percent for non-corporate taxpayers (28 percent for taxable excess exceeding $175.000), of the taxpayer's "alternative minimum taxable income." if the amount of such alternative minimum tax is greater than the taxpayer's regular income tax for the taxable year. lnterest on the Bonds may be subject to the "branch profits tax" imposed by Section 884 of the Code on the effectively- connected earnings and profits of a foreign corporation doing business in the United States. 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 obligations. A "market discount bond" is one which is acquired by the holder at a purchase price which is less than the stated redemption price or, in the case of an obligation issued at an original issue discount, the "revised issue price" (i.e.. a market discount). The "accrued market discounl" 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 by such taxpayer in determining 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 which is a "financial institution" allocable to tax-exempt obligations, other than "private activity bonds.'' which are designated by an "qualified small issuer" as "qualified tax-exempt obligations." A "qualified small issuer" is any governmental issuer (together with any 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 referring to any corporation described in section 585(a)(2) of the Code, or any person accepting deposits from the pubiic in the ordinary course of such person's trade or business which is subject to federal or state supervision as a financiai institution. The District has designated the Bonds as "qualified tax-exempt obiigations" within the meaning of section 265(b) of the Code. In furtherance of that designation, the District will covenant to take such action, which would assure or to refrain from such action which 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 (or, in the case of discount bonds, the amount payable at maturity) exceeds $10,000,000, then such obligations might fail to satisfy the $10,000,000 limitation and the obligations would not be "qualified tax-exempt obiigations." CONTINUING DISCLOSURE OF INFORMATION The ofiering of the Bonds qualifies for an exemption from Rule 15~2-12 (the "Rule") of the Securities and Exchange Commission regarding the District's continuing disclosure obligations because the District has less than $10,000,000 in aggregate amount of outstanding obligations and no person other than the District is committed by contract or other arrangement with respect to the payment of the Bonds. In accordance with such exemption, the District in the Order has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The lssuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the lssuer wili be obligated to provided certain updated financiai information and operating data annually, and timeiy notice of specified material events, to certain information vendors. This informalion will be available to securities brokers and others who subscribe to receive the information from the vendors. Annual Reports The District will provide certain financial information and operating data, which is customarily prepared by the District and is publicly available to the appropriate state information depository ("SID"). The financial information and operating data with respect to the District of the general type included in this Ofticial Statement in Appendix A. Tables 1. 12 and 13 will be provided. Under Texas Law. the District must keep its fiscal records in accordance with generally accepted accounting principals, must have its financial accounts and records audited by a certified public accountant within 120 days after the close of each fiscai year of the District, and must file each audit report with the TCEQ within 135 days after the close of the fiscal year. The District's fiscal records and audit reports are available for public inspection during regular business hours, and the District and the TCEQ are required by law to provide a copy of the District's audit reports to any member of the public within a reasonable time on request, upon payment of applicable copying charges. Requests for copies should be addressed to the District 100 Municipal Drive. Trophy Club, Texas 76262. The District wiil provide this information to the SID within six months afler the end of each of its fiscal years ending in or afler 2005. The lssuer mav orovide uodated information in full text or mav incomorate bv reference certain other ~ubiiclv available documents. as permitted by &C Rule 15~2.12 (the "Rule"). The updated .;formation will'include audited financial'statements for the lssuer, ifthe lssuer commissions an audit and it is comoleted bv the reouired time. If audited financial statements cannot be orovlded. the lssuer wili provide unaudited financial statemeAts until ihe audiied financiai statements become available. Any such'financialstatements wiil be prepared in accordance with the accounting principles described in the lssuer's annual financial statements, or such other accounting principles as the lssuer may be required to employ from time to time pursuant to state law or regulation. The lssuer'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 lssuer changes its fiscal year. if the lssuer changes its fiscal year, it will notify any SiD of the change. Material Event Notices The lssuer wiil also provide timely notices of certain events to cefiain information vendon. The lssuer will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision lo purchase or sell Bonds: (1) principal and interest uavment delinauencies: (21 non-uavment relaled defaults: (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) "'nscheduied draws 06 credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidi<providers. or their failure to oerform: (6) adverse tax ooinions or events affectina the tax-exemot status of the Bonds: (71 modilications to riahts of holden of the ~dnds; (8) ~dnd calls; (9) d&easances: (10) release, substitution, or'sale of property secuh~~repayment of the Bonds; and (1 1) rating changes. Neither the Bonds nor the Order makes any provision for debt service reserves or liquidity enhancement. In addition, the lssuer wiil provide timeiy notice of any failure by the issuer to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports". The lssuer wiil provide each notice described in this paragraph to any SID and either each NRMSIR or the Municipal Securities Ruiemaking Board ("MSRB"). 26 Availability of Information The lssuer has agreed to provide the foregoing financial information and operating data only to the NRMSlRs and the SID and. with respect to material event notices, to the SID and either each NRMSIR or the MSRB. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID, and has been qualified as a SID by the staff of the SEC. The address of the Municipal Advisory Council is 600 West 8th Street. P.O. Box 2177. Austin. Texas 78768-2177. Its telephone number is 5121476.6947 and its email address is mac@rnactexas.com. The Municipal Advisory Council has also received SEC approval to operate, and has begun to operate, a "central post office" for information filings made by municipal issuers, such as the City. A municipal issuer may submit its information filings with the central post office, which then transmits the filed information to the NRMSlRs and the appropriate SID. This central post office can be accessed and utilized at w.DisclosureUSA.orq ("DisclosureUSA"). The City may utilize DisclosureUSA for the filing of information relating to the Bonds unless the SEC has withdrawn the interpretive advice in its letter to the Municipal Advisory Council dated September 7, 2004. Limitations and Amendments The lssuer has agreed to update information and to provide notices of material events only as described above. The lssuer has not agreed to provide other information that may be relevant or material to a complete presentalion of its financial results of operations. condition, or prospects or agreed to update any information that is provided, except as described above. The lssuer makes no represenlation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The lssuer 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 holden or beneficial owners of Bonds may seek a writ of mandamus to compel the lssuer to comply wilh its agreement The lssuer 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 lssuer, if the agreement, as amended, would have permitted an undelwriter 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 holden of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the lssuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The lssuer 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 underwliter from lawfully purchasing or selling Bonds in the primaly offering of the Bonds giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the lssuer 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 During the past five year;, the lssuer has complied wilh all continuing disclosure agreements made by it in accordance wilh the Ruie. FINANCIAL ADVISOR Southwest Securities is employed as Financial Advisor to the District to assist in the issuance of the Bonds. In this capacity, the Financial Advisor has compiled certain data relating to the Bonds that is contained in this Official Statement. The Financial Advisor has not independently verified any of the data contained herein or conducked a detailed investigation of the affairs of the District to determine the accuracy or completeness of this Official Statement. Because of their limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fee of the Financial Advisor for services with respect to the Bonds is contingent upon the issuance and sale of the Bonds. In the normal course of business, the Financial Advisor may from time to time sell investment securities to the District for the investment of debt proceeds or other funds of the District, upon the request of the District. OFFICIAL STATEMENT Experts In approving this Official Statement, the District has relied upon the following experts in addition to the Financial Advisor. The Enqineer: Some of information contained in the Official Statement relating to engineering matters has been provided by Carter 8 Burgess. Inc, and has been included in reliance upon the authority of said firm as experts in the field of civil engineering. Aooraisal The information contained in this Official Statement relating to the certified assessed valuation of property in the District and has been provided by the Denton County Appraisal District, in reliance upon their authority as experts in the field of appraising and tax assessing. Tax AssessorlCollector: The information contained in this Official Statement relating to tax collection rates, and principal taxpayers has been provided by the Denton County Tax Assessor1Collector in reliance upon her authority as an expert in the field of tax assessing and collecting. Updating the Official Statement During Underwriting Period If, subsequent to the date of the Official Statement 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 Rule 15~2-I2 of the federal Securities Exchange Act of 1934 (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 a nationally recognized repository but in no case less than 25 days afler the "end of the underwriting period"), the District learns or is notified by the Underwriter of any adverse event which causes any of the key representations in the Official Statement to be materially misleading, the District will promptly prepare and supply to the Underwriter a supplement to the Official Statement which corrects such representation to the reasonable satisfaction of the Underwriter, unless the Underwriter elects to terminate its obligation to purchase the Bonds as described above. Official Statement "Deemed Final" For purposes of compliance with Rule 15c(2)-12 of the Securities Exchange Commission, this document, as the same may be supplemented or corrected by the District from time-to-time, may be treated as an Official Statement with respect to the Bonds described herein "deemed final" by the District as of the date hereof (or of any such supplement or correction) except for the omission of certain information referred to in the succeeding paragraph. The Official Statement, when further supplemented by adding information specifying the interest rates and certain other information relating to the Bonds, shall constitute a "FINAL OFFICIAL STATEMENT" of the District with respect to the Bonds, as that term is defined in Rule 15c(2)-12. 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 Districl's expectations, hopes, intentions, or strategies regarding the future. Readerj 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 fr0.m 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 lo 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. OTHER MATTERS Legal Investment and Eligibility to Secure Public Funds in Texas The following is quoted from Section 49.186 of the Texas Water Code, and is applicable to the District: I "All bonds, notes, and other obligations issued by a district shall be legal and authorized investments for all banks, 1 trust companies, building and loan associations, savings and loan associations, insurance companies of all kinds and types, fiduciaries, and trustees, and for all interest and sinking funds and other public funds of the State of Texas and all agencies, subdivisions, and instrumentalities of the state including all counties, cities, towns, villages, school districts and all other kinds and types of districts, public agencies, and bodies politic." For the Bonds to be eligible investments for municipalities, political subdivisions or public agencies of Texas, the Public Funds Investment Act. V.T.C.A.. Government Code, Chapter 2256, provides a rating of "A or its equivalent as to investment quality must be assigned by a national rating agency. Pursuant to the Public Funds Collateral Act (Chapter 2257. Texas Government Code). the Bonds are eligible to secure deposils of public funds of the State of Texas or any political subdivision or public agency of the State of Texas and are lawful and sufficient security for those deposits to the extent of their market value. No representation is made that the Bonds will be acceptable to public enlities to secure their deposits or will be acceptable to such institutions for investment purposes. No representation is made concerning 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. No representation is made concerning the eligibility of the Bonds to secure public funds or their legality as investments by institutions in states other than Texas. Registration and Qualification of Bonds for Sale No registration statement relating to the offer and sale of the Bonds has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities laws of any other jurisdiction. The District assumes no responsibility for registration of the Bonds under the securities laws of any other jurisdiction in which the Bonds, may be offered. sold or otherwise transferred. This disclaimer of responsibility for registration or 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 or qualification provisions in such other jurisdiction. Annual Audits Under Texas Law, the District must keep its fiscal records in accordance with generally accepted accounting principles, must have its financial accounts and records audited by a certified or permitted public accountant within 120 days after the close of each fiscal year of the District, and must file each audit report wilh TCEQ within 135 days after the close of the fiscal year. Copies of each audit report must also be filed in the ofiice of the Districl. The District's fiscal records and audit reports are available for public inspection during regular business hours, and the District is required by law to provide a copy of the District's audit reports to any Registered Owner or other member of the public within a reasonable time on request, upon payment of charges prescribed by the Texas General Services Commission. GASB 34 In June 1999, the Governmental Accounting Standards Board issued Statement No. 34. "Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments." The objective of this Statement is to enhance the clarity and usefulness of the general-purpose external financial reports of state and local governments to the citizenry, legislative and oversight bodies, and investors and creditors. The District implemented GASB 34 beginning wilh its fiscal year ending September 30. 2004. While adoption of this Statement may alter the presentation of the Districrs financial information, District management does not believe that adoption of GASB 34 will have any malerial adverse impact on the District's financial position, results of operation, or cash flows. Verification of Arithmetical and Mathematical Calculations McGladrey & Pullen. LLP, a firm of independenl certiiied public accountanls, upon delivery of the Bonds, will deliver to the City ils report indicating that they have examined the mathematical accuracy of computations prepared by Southwest Securities relating to the sufficiency of the anticipated receipts from ihe Escrowed Securities and on the Bonds. The reDort of McGladrev & Pullen will include the statement that the scoDe of their enaaaement was limited to verilvina the mathematical accuracy oi the compulations contained in such schedules provided to them and Gat they have no obligation to update their report because of events occurring, or data or information coming to their anenlion, subsequent to the date of their report. The report will be relied upon by Bond Counsel in rendering its opinion with respect to the exemption from Federal income taxes of interest on the Bonds and with respect to the defeasance of the Refunded Bonds. Underwriting Tne Lrioemr~ier has agreed. s1.b eci lo ccrtalrt conollons, lo purcnase [It? Bonds from the suer ai a prlce ol $3.277.97.1 31 trenrcsenllno [lie onnc~oal amount of lhe Bonus of 53 134 997 85. olus an or~alnal 1ssi.e oremtLm of 5167 000 JO on [he Ca~lial \, < , . . Appreciation ~onds, plus a net original issue premium of $483.60 on the current lnteresi Bonds, less an underwriter's discbunt of $24,507.54), plus accrued interest on the ClBs 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 Bonds are purchased. The Bonds may be offered and sold to certain dealers 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 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. 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. This 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 statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. Is1 Jim Buda!f President, Board of Directors Trophy Club Municipal Utility District No. 2 Is1 Carol Boroes Secretary. Board of Directors Trophy Club Municipal Utility District No. 2 SCHEDULE I SCHEDULEOFREFUNDEDBONDS TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 Unlimited Tax Refunding Bonds, Series 1995 (callable 9-1-05 @par) Original Original Maturity ~ated Date {September 11 May 1.1995 2006 Principal Principal Interest Amount to be Rates - Refunded 5.700% $ 310.000.00 '" Term Bond SCHEDULE II SCHEDULE OF ACCRETED VALUES OF PREMIUM CAPITAL APPRECIATION BONDS ("CABS") CABS Delivery Date : June 28,2005 Dated: June I, 2005 Maturity Accreted Value 09-01-06 Date APPENDIX A FINANCIAL INFORMATION OF THE ISSUER (This appendix contains quantitative financial information and operating data with respect Lo 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 2004 Actual Market Value of Taxable Pro~ertv (100% of ~ctual)'~' $ 308,901,881 Less Exemptions: Local Optional Over-65 Disabled and Deceased Veterans' Productivity Loss 10% Value Cap Loss Total Exempt Property 2004 Net Taxable Assessed Valuation '" See "TAXING PROCEDURES" in the Official Statement for a description of the issuer's taxation procedures. Does not include net taxable value of $3,641,988 for property currently under review. GENERAL OBLIGATION BONDED DEBT TABLE 2 General Obligation Debt Principal Outstanding (As of May 1,2005): Unlimited Tax Refunding Bonds. Series 1995 (Excludes the Refunded Bonds) $ 295.000 Unlimited Tax Bonds. Series 2002 3,405,000 Unlimited Tax Bonds. Series 2003 1,170.000 Total General Obligalion Debt Principal Outstanding: $ 4,870.000 Current Issue General Obligation Debt Principal Unlimited Tax Refunding Bonds. Series 2005 (the "Bonds") $ 3,134,998 Total General Obligation Debl Principal Outstanding Following the Issuance of the Bonds: 8.004.998 General Obligation Interest and Sinking Fund Balance as of 4-15-05 $ 553,284 Ratio of General Obligation Debt Principal to 2004 Net Assessed Valuation 2.63% 2004 Net Taxable Assessed ~aluation'~' $ 304.437.31 1 Population Estimates: 2000 - 3.800; Current (Estimate) - Per Capita 2004 Net Assessed Valuation - Per Capita General Obligation Debt Principal - '"I See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. OTHER OBLIGATIONS TABLE 3 -None- GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 4 Less Prior Debt Service Fiscal Year Current Total on Refunded The Bonds Combined Seot30 Debt Service Bonds Princioal interest - Total Debt Service 2005 $ 862.902.50 S 95.075.00 S - S 27,643.13 $ 27.643.13 5 795.470.63 2006 863.832.50 500,150.00 59.997.85 285.574.65 345.572.50 709.255.00 2007 868.150.00 507.480.00 245.000.00 110.572.50 355.572.50 716.242.50 2008 865.432.50 508.050.00 250.000.00 103.222.50 353.222.50 710.605.00 2009 870.925.00 507.105.00 260.000.00 95.722.50 355.722.50 719.542.50 2010 864.125.00 504.605.00 265.000.00 87.272.50 352.272.50 711.792.50 201 1 880.257.50 515.312.50 285.000.00 78.660.00 363.660.00 728.605.00 TAX ADEQUACY TABLE 5 2004 Assessed Valuation S 304,437,311 Maximum Annual Debt Service Requirements for 2006 - 2023 (Fiscal Year Ending 9-30-11) 5 728,605 Indicated Maximum Interest and Sinking Fund Tax Rate at 99% collections $ 0.241 75 - Note: Above computation is exclusive ofinvestment earnings, delinquent tax collections and penalties and interest on delinquent tax collections. INTEREST AND SINKING FUND MANAGEMENT INDEX TABLE 6 Interest and Sinking Fund Balance. Fiscal Year Ended September 30.2004 FY 2004 interest and Sinking Fund Tax Levy of 50.22534 at 100% Collections Produces Amount Transfered from Cash Surplus in Construction Fund Revenue from MUD #l for Water Plant Renovation Debt Service Contribution Revenue from City of Roanoke for Annual Water Line Payment Total Available for Debt Service Less: General Obligation Debt Service Requirements. Fiscal Year Ending 9-30-05 Estimated Surplus at Fiscal Year Ending 9-30-05 '" la' Sources of cash surplus is as follows: TCEO approved transfer from Construciion Account following completion of project. "' Does not include delinquent tax collections, penaities and interest on delinquent lax collections or Investment earnings. PROJECTED GENERAL OBLIGATION PRINCIPAL REPAYMENT SCHEDULE TABLE 7 (Includes fhe Bonds) Principal Repayment Schedule Fiscal Year Outstanding The Endins 9130 Bonds's' Bonds Iotal 2005 $ 445.000.00 $ $ 445.000.00 2006 160.000.00 59.997.85 Ib' 219.997.85 2007 165.000.00 245,000.00 410,000.00 2008 170.000.00 250.000.00 420.000.00 2009 185,000.00 260,000.00 445,000.00 2010 190,000.00 265.000.00 455.000.00 201 1 205.000.00 285.000.00 490,000.00 2012 210,000.00 290.000.00 500.000.00 2013 225,000.00 295.000.00 520,000.00 2014 230,000.00 100,000.00 330,000.00 2015 240.000.00 105,000.00 345.000.00 2016 255,000.00 105,000.00 360,000.00 2017 270,000.00 110,000.00 380.000.00 2018 280.000.00 115,000.00 395.000.00 2019 300.000.00 120.000.00 420.000.00 2020 310.000.00 125.000.00 435,000.00 2021 325.000.00 130,000.00 455,000.00 2022 345.000.00 135,000.00 480.000.00 2023 360.000.00 140.000.00 500.000.00 $ 4.870.000.00 $ 3,134.997.85 $ 8,004,997.85 la' Excludes the Refunded Bonds. '*) Represents original principal amount of capital appreciation bonds. Bonds Unpaid at End of Year $ 7,559,397.85 7.340.000.00 6,930.000.00 6,510,000.00 6,065,000.00 5,610.000.00 5,120,000.00 4,620,000.00 4.100.000.00 3.770.000.00 3.425.000.00 3,065,000.00 2.685.000.00 2,290,000.00 1,870,000.00 1.435.000.00 980.000.00 500.000.00 Percent of Principal Retired (%) 5.56% 8.31 % 13.43% 18.68% 24.23% 29.92% 36.04% 42.29% 48.78% 52.90% 57.21% 61.71% 66.46% 71.39% 76.64% 82.07% 87.76% 93.75% 100.00% FUNDBALANCES TABLE 8 (As of April 15, 2005) General Fund lnleresl8 Sinking Fund TAXABLE ASSESSED VALUATION FOR TAX YEARS 1998-2004 TABLE 9 Tax Year - 1998 Net Taxable Assessed Valuation 148.612.986 Change From Preceding Year Amount 1% Percent (%) 13,678,162 15.26% Sources: Texas Municipal Report published by the Municipal Adviso~y Council of Texas and the Denton Central Appraisal District CLASSIFICATION OF ASSESSED VALUATlOh TABLE 10 Land - Homesile Land - Non Homesite Land - AG Market Improvements - Homesite Improvements - Non Homeite Personal Property Total Appraised Vaiue % of % of % of % of % of 2004 - Total - 2003 Total - 2002 - Total - 2001 - Total - 2000 Total Less Exemptions: Optlonal Over-65 $ 2,450,000 $ 2,325,000 $ 1,975,000 $ 1,800,000 5 1,400,000 D~sabled and Deceased Veterans' 185.571 156,200 154.000 166.500 129.000 3. Producl~vlty Loss 40,642 256.346 216,260 216.231 216.231 A Homestead Cap Ad~ustmenl 75,430 441.848 679.648 1.238.864 1,216,101 Total Exempt Property 1,712,927 1,748,115 1,735,087 1,731.678 1,731,798 Talal Exempllons 3 4,464,570 $ 4,927,509 $ 4,759.995 5 5,153,273 5 4,693,130 Net Taxable Assessed Valuation $ 304,437,311 $ 293,698.192 $ 276,417,531 5 255,019,864 $ 218,040,873 Net Taxable Value Under Revlew $ 3,641,986 5 13,793,556 5 8,393,832 $ 6.1 17.057 5 4,907.214 Source: Denton Cenlral Appraisal District Note: Assessed Valuafions may change during the year due to various supplernenls andpmlesls, and valuations on a laler dale or in other tables olthis Ofiicial Slalernenl may POI match those shown on this table. PRINCIPAL TAXPAYERS 2004-2005 TABLE 11 % of Total 2004 2004 Net Taxable Assessed Name Type of Property Assessed Valuation Valuation Regency Centers LP Real Estate Development Company $ 9.789.852 3.22% Terra i Knoll Ltd. Real Estate Development Company 2.462.768 0.81% ONCOR Electric Delivery Company Electric Utility 1.954.500 0.64% TC Quorum Land I Improvements 1,773,930 0.58% Clubcorp Golf Texas LP Golf Course Management 1,636,496 0.54% Beck Property Trophy Club LP Golf Course 1.459.733 0.48% I 8 L Development Company Real Estate Development Company 1.202.270 0.39% Harrell Cuslom Homes Homebuilder 1.065.006 0.35% Ziegler. Kurt 8 Dianne Land I Improvements 904.998 0.30% Sunnyside Properties Ltd. PIS Real Estate Development Company 853.429 0.28% Total uYki Based on a 2001 Net Taxable Assessed Valuation of 5 304,437.31 1 Source: Texas Municipal Reporl published by the Municipal Advisory Council of Texas and the Denlon Central Appraisal District. PROPERTY TAX RATES AND COLLECTIONS~'~ TABLE 12 Tax yeaJ 1996 1997 1998 1999 2000 2001 2002 2003 2004'~' Net Taxable Assessed Valuation 5 106.241.000 128.934.824 148,612,986 180.122.026 218,040,873 255,019,864 276.417.531 293,698,192 304.437.31 1 Tax Rate - $ 0.5297 0.4485 0.3992 0.3654 0.3654 0.3654 0.3400 0.3390 0.3490 Tax & 572.076 593.466 600,710 667.046 830.099 966.807 939.820 1,057,427 1,062,486 % ~o~~ections"~ Current - Total 97.70% 98.16% 99.38% 99.96% 99.01% 99.39% 99.30% 100.29% 99.09% 99.80% 98.86% 99.66% 97.62% 97.10% 99.64% 100.60% 98.33% 98.48% Fiscal Year Ended - 9-30-97 9-30-98 9-30-99 9-30-00 9-30-01 9-30-02 9-30-03 9-30-04 9-30-05 '"' See "TAXING PROCEDURES - Levy and Colleclion of Taxes8'in the body of the Oiiicial Statement for a complete discussion of the District's provisions. '" Includes penallies and interest. "' Current year collections are as of March 31, 2005. Source: Texas Municipal Report publislied by the Municipal Advisory Council of Texas, the Denton Central Appraisal District and the Issuer TAX RATE DlSTRlBUTiON TABLE 13 2o04-05 2o03-04 2o02-03 2o01-02 2000-01 1999-00 General Fund $0.01480 $0.01210 $0.05590 $0.10180 $0.06990 $0.02320 1 8 S Fund 0.22534 0.21930 0.17220 0.19110 0.25100 0.27190 Fire Protection 0.10B86 0.10760 0.11190 0.07250 0.04/150 0.07030 TOTAL $0.34900 $0.33900 $0.34000 $0.36540 $0.36540 $0.36540 Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas DIRECT AND OVERLAPPING DEBT DATA INFORMATION TABLE 14 Gross Debt Taxina Body Princieal Overlappinq Denlon County 05-01-05 $ 181,727.571 0.94% Northwest independent School District 05-01-05 217,809,084 5.64% Town of Trophy Club 05-01-05 6.400.000 51.51% Total Net Overlapping Debt S 405,935,655 Trophy Club MU0 K 06-21-05 8.004.998 100.00% Total Gross Direct and Overlapping Debt $ 413.941.653 Ratio of Direct and Overlapplng Debt to 2004 Assessed Valuation Ratio of Direct and Overlapping Debt lo 2004 Actual Value Per Capita Direct and Overlapplng Debt Amount Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas. ASSESSED VALUATION AND TAX RATE OF OVERLAPPING ENTiTlES TABLE IS 2004 Net Taxable 2004 Governmental Entity Denton County Assessed Valuation %of Actual $35.027.486.208 100% $ 0.25480 Northwest lndkpendent School District 4,788,106,772 100% 1.81930 Town of Trophy Club 562,433,607 100% 0.43050 Source: Most recent Texas Municipal Reporls published by The Municipal Advisory Council of Texas and Denton Cenlral Appraisal District. AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS OF OVERLAPPING GOVERNMENTAL ENTITIES TABLE 16 Date of Amount Issued Taxino Body Authorization Pumose Authorized Unissued Denton County 01-16-99 Road $ 85.320.000 $ 62,480.627 $ 22.839.373 05-15-04 Road 186,970,000 31.450.000 155,520.000 05-15-04 Countv Ofiices 17.900.000 17,900,000 05-15-04 Equipment 2,000.000 2.000.000 $ 292.190.000 S 93.930.627 S 198.259.373 Northwest i S D 02-24-01 School Building $162.700.000 $161,973,814 5 726.186 I" Town ofTrophy Club 07-15-00 Street lmprovemenls $ 6,260,000 $ 3,000,000 $ 3.260.000 I"' AS a maner of law, this remaining amounl is considered lo have been issued. Source: Most recenl Texas Municipai Reports published by The Municipal Advisory Council of Texas and the Issuer. AUTHORIZED BUT UNISSUED DIRECT GENERAL OBLIGATION BONDS TABLE 17 Date of Amount Previously Issued Taxinq Body Authorization Authorized issued This Series Unissued Trophy Club MUD #2'" Denton Co MUD #2 04-04-81 Water and Sewer 6,450,000 6.450.000 Denton Co MUD #3 04-04-81 Water and Sewer 5,800,000 3,760,000 2.040.000 Denlon Co MUD #3 10-29-88 Water and Sewer 2.500.000 2,500.000 $ 8.300.000 $ 3,760,000 $ - $ 4,540.000 ''I The District is the resulting enlily from a consoiidalion in August 1990 of Denlon County Municipal Uliiity Districl No.2 and Denlon County Municipai Ulilily Dislrict No.3. Authorizalion elections for /he Bonds were held under lhose entity names. Source: Most recenl Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. GENERAL FUND COMBINED STATEMENT OF REVENUES AND EXPENDITURES AND CHANGES IN FUND BALANCES TABLE 18 Fiscal Year Ended September 30 2004 - - 2003 2002 - 2001 - 2000 Revenues: AV Taxes. Penalties 8 Interest S 377,089 5 495.350 S 461.437 5 260,056 S 172.850 Interest 2.641 1.321 4,450 6.501 8,101 Miscellaneous 31.952 90.052 6.487 6.508 Total Revenues S 411.682 5 496.671 S 555.939 S 275.044 S 167.459 Expenditures: Current: AdminislrationiGeneral Government S 396,074 5 335.235 S 20.553 S 18,537 5 67.651 Pmlessional Fees 14,085 210.001 127.202 70.947 Contract Services 9.891 9.422 8.851 9.436 . Purchased Services lor Resale 40,295 Contribution to Trophy Club I Westlake DPS 224,395 140.954 158,741 Capilal Outlay 1.070.427 83.144 Total Expenditures S 420.050 S 1.825.085 S 380.801 S 363,313 5 226.392 Other Financing Revenues (Expenses) Bond Proceeds S - S 1.199.000 S - S - S Translen In (Out) 169.000) I" Excess (Oelicit) of Revenues Over (Under) Expenditures S (77.368) 5 70,586 5 175.138 S (88.269) S (38.933) Fund Balance - October 1 210.788 140,202 (34.936) 53.332 92.265 Fund Balance - September 30 m 133.42[) 210788 B 3 5353.332 I" These funds were lransiemd la the Oislricl's lnleresl and Sinking Fund lo pay deb1 service as part of a policy of lile Disliicl lo mainlain a level lax rale using excess monies imm lhe General Fund. For kcal year end 2005 no lransier is expecled. Source: The Isruefs Audiled Financial Slalemenls MASTER DISTRICT WATERWORKS AND SEWER SYSTEM OPERATING EXPERIENCE TABLE 19 Revenues Water B Sewer Service Standby Fees Inspection and Tap Connection Fees tnlerest Miscellaneous Tola1 Revenues Expenditures: -1 Water 8 Sewer Purchased Administrative Water Operations Wastewater Operations Wastewater Collection System Storm Sewer Other Capital Outlay Total Expenses Excess (deliciency) orrevenues over (under) expenses Other Financing Sources (Uses): Fund Balance October 1 Fiscal Year Ended September 30 2004 - 2003 2002 - - 2001 Fund Balance September 30 5 489.912 5 762.616 5 489.912 Customer Count Wateri SewerMUD No.1 1,282 1.275 1.271 1.252 Water1 Sewer MUD No.2 1.470 1.467 1.434 1.363 Total 2.752 2.742 2.705 2.635 I"' Nole: Tmphy Club Masler Disliicl Joint Venlore began operalions on Oclabei 1, 2000 A-7 WATER SERVICE RATES TABLE 20 (Monthlv BillinqJ -. Rates Effective November 1.2004 RETAIL RATES BASED ON 518" METER Single-Family Homes Administrative Fee (Does not include water usage) $11.50 0 to 6,000 gallons 6,000 to 12.000 gallons 12.000 to 25,000 gallons Over 25.000 gallons 2.05 per 1,000 gallons 2.50 per 1.000 gallons 2.70 per 1,000 gallons 2.80 per 1.000 gallons Commercial (Includes Clubs and Golf Courses) Administrative Fee (Does not include water usage) $11.50 0 to 6.000 gallons 6,000 to 12.000 gallons 12.000 to 25.000 gallons Over 25.000 gallons 2.05 per 1.000 gallons 2.50 per 1.000 gallons 2.70 per 1.000 gallons 2.80 per 1,000 gallons Multi-Family Administrative Fee (Times Number of Units in Complex) $ 11.50 Plus: Single Meter (Billed at Single-Family Home Rates) Multiple Meters (Each Meter Billed at Single-Family Home Rates) GOLF COURSE IRRIGATION WATER TO THE LAKES First 300.000 gallons per month $ 1.000.00 (minimum/month) Over 300.000 gallons per month 2.60 per 1,000 gallons Note: Out of District water rates are determined by contract SEWER SERVICE RATES TABLE 21 (Monthly Billing) Rates Effective November 1, 2004 Single-Family Homes Administrative Fee (Does not include sewer usage) $11.50 -. 0 to 6.000 gallons 2.05 per 1,000 gallons 6,000 to 12.000 gallons 2.45 per 1.000 gallons 12.000 gallons per month maximum for residential Sewer Only Customers Over 12.000 gallons per month 2.45 per 1,000 gallons Commercial (Includes Clubs) Administrative Fee (Does not include sewer usaqe) $11.50 0 to 6.000 gallons 6.000 to 12,000 gallons Over 12,000 gallons per month 2.05 per 1.000 gallons 2.45 per 1.000 gallons 2.45 per 1.000 gallons Multi-Family Administrative Fee (Times Number of Units in Complex) 5 11.50 Plus: Billing at Single-Family Home Rates OTHER FEES TABLE 22 Rates I Fees Effective November 1,2004 Tap Fees Standard will include 314 inch (District side) by 518 inch (customer side) Larger than standard is actual cost to District of larger line plus 20% Fire Line Tap Fee = $30.00 per inch of diameter of the fire line Sewer Inspection Fee Maintenance and Repair (charge to video sewer line to determine condition) Effluent Charge: (sold to Trophy Club County Club and discharged on course lakes) Stand-By Charge Disconnection I Reconnection Fee (due to non-payment of bill) Disconnection I Reconnection Fee (due to non-payment of bill) Disconnection I Reconnection Fee (temporarily, at customer request) Returned Checks Confidentiality Request Same-Day Service Accuracy Reading Fee Security Deposits Builders Residential Owners Residential Lessees Construction Meters Other Customers Storm Drain Assessment Temporaty Water Service Deposit Installation/Meter Hook-up Fee Sale of Water 0.30 per each 1,000 gallons 6.00 per month 25.00 during regular hours 100.00 after regular hours 10.00 each to dislre connect after first dislre connect 5.00 on-time charge 25.00 10.00 75.00 40.00 100.00 Price equal to two months avg. bill Price equal to two months avg. bill 1.00 to 3.00 per month 51.875 to $3,000 100.00 2.80 per each 1.000 gallons APPENDIX B GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXEIS 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 County on State Highway 114 approximately 8 miles west of the City of Grapevine. 17 miles south of the City of Denton, 25 miles north of downtown Fort Worth. 27 miles northwest of downtown Dallas, 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 either Trophy Club Municipal Utility District ("MUD") No.1 or Trophy Club MUD No.2. The Town's 2000 Census was 6,350. which is a 61.9% increase over the 1990 Census. The Town's current population estimate is 7,650. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas. U.S. Census Report and Issuer's Website. Population: Current Population Est. 7.650 528,950 Sources: United Stales Bureau of the Census. Texas Municipal Reports. Sales and Marketing Magazine. 2004 Survey of Buying Power and the Town of Trophy Club Leading Employers in the Town of Trophy Club: Number of Emplover Trophy Club Counlry Club Tom Thumb Trophy Club Medical Plaza Town of Trophy Club Christinas Restaurant ivy Glen Walgreens Bank of America Blockbuster Texas National Bank Quizmo's Beck Properties Tvoe of Business Country Club Retail Grocew Hopsilal Municipal Government Mexican Food Restaurant Daycare Drug Store Financial Institution Video Rental / Sales Financial Institution Delicatessen Real Estate Develo~ment Emplovees (2005) 122 90 Source: Information from the lssue~ Education The Town of Trophy Club is sewed by the Northwest lndependent School District (the "NISD"). NlSD covers approximately 232 souare miles in Denton. Tarrant and Wise Counties. in addition to servino the Town. NlSD also sewes the communities of Aurora, Avondale, Drop, New Fairview, Haslet, Justin. Marshall Creek. ~ewa;k, ~orthlake. Rhome and Roanoke. ~orthwest iSD is comprised of eight elementary schools for grades pre-kindergarten through five, three middle schools for grades six, seven and eight, and one high school for grades nine through twelve. All campuses offer enriched curricula with special programs for giftedltalented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. NISD currently sewes an estimated 6,000 students in the 2004-2005 school year. Source: Information from Northwest Independent School District DENTONCOUNTY Denton County (the 'County") is located in north central Texas, encompassing 911 square miles, and was created in 1846 from Fannin County. It is the third largest county of the nine counties comprising the Dallas-fort Worth Consolidated Metropolitan Statistical Area (CMSA). The county is traversed by Interstate Highway 35. United States Highways 77, 377 and 380 and State Highways 114 and 121. The county is divided north and south geographically by the East Cross Timers, which is a narrow strip of woodland that extends from the Red River to the Brazos River around Waco. 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. Lake Lewisville attracts over 3,000,000 visitors annually. Alliance Airport, located in the County has continued to expand. A major NASCAR racetrack was opened in 1997. which has had a positive impact on employment and recreational spending for the area. Several growing urban centers are located in the County, including the cities of Denton. Lewisville, Carrollton and The Colony. The 2000 census was 423.976. which is a 551% increase since 1990. The current estimated population for the County is 528.950. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas Leading Employers Denton County: 2002 ~merican Airlines Denton lndependent School District Horizon Health Denton County Denton State School Peterbiit Motors Co. City of Denton Texas Woman's University Xerox Corporation Boeing Electronics Tvpe of Business State University Public Educalion Food Distribution Maintenance Base and Engineering Center Public Education Health Care Services County Government Mental Health. Mental Retardation Facility Diesel Truck Manufacturing Municipal Government State University Ofice Equipment Electronics Number Emplovees 5.900 Source: Denton County website Labor Force Statistics Civilian Labor Force Denton County March 2005 March 2004 295.922 278.325 Total Employed 282;355 265;985 Total Unemployed 13.567 12,340 % Unemployed 4.6% 4.4% % Unemployed (Texas) 5.5% 6.4% % Unemployed (United States) 5.4% 6.0% Source: Texas Workforce Commission, Labor Market Information Department. Estimated Retail Sales Statistics ($000,~) Denton State of Year - CountV - Texas 2004 $5,823,327 $319,203,499 2003 5,412.691 303.467.993 2002 5.166.964 286.003.615 Source: Sales & Marketing Magazine. Survey of Buying Power 1995-2002. Figures represent estimafes as of January I of each year given. Estimated Total Effective Buying Income (EBI) Denton County State of Texas Total Effective Median Total Effective Median Buying Income Household Buying Income Household Year - ($000) ($000) A 2004 $13,226,965 $53.345 $398.733.71 1 $37,554 Source: Sales & Mariteling Magazine, Survey of Buying Power 1995-2002. Figures represent estimates as of January I of the year noted. APPENDIX C FORM OF LEGAL OPINION OF BOND COUNSEL LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 717 NORTH HARWOOD 700 N. ST. MARY'S STREET 1250 ONE AMERICAN CENTER NINTH FLOOR 1225 ONE RIVERWALK PLACE AUSTIN, TEXAS 78701-3248 Telephone: 512 478-3605 Facsimile: 512 472-0871 ~~ ~ - - - -- DALLAS. TEXAS 75201-6587 SAN ANTONIO. TEXAS 78205-3503 isupnone 212 752.11210 Tr cpoono 210225-2DUU Fscs ml d 2:J 752-5250 Fzc61Z t 213-225-2!!8J TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TkY REFUNDING BONDS, SERIES 2005, DATED JUNE 1,2005 IN THE AGGREGATE PRINCIPAL AMOUNT OF $3,134,997.85 AS BOND COUNSELFORTROPHY CLUB IvlUNICIPAL UTILITY DISTRICT N0.2 (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 ofthe Bonds. Terms used herein and not othenvise defined shall have the meaning given in the Order of tlie District authorizing the issuance and sale of the Bonds (the "Order"). WE HAVE EXtWIINED the Constitution and laws of the State of Texas, certified copies of the proceedings of the D~strict, the Escrow Agreement, dated as ofJune 1,2005, between the District and JPMorgan Chase Bank, Dallas, Texas, as Escrow Agent (the "Escrow Agreement"), and other documents authorizing and relating to the issuance of said Bonds, including one of the executed Bonds (Bond Number R-I), and specimens of Bonds to be authenlicated and delivered in exchange for the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Escrow Agreement has been duly autliorized, executed and delivered by the District and constitutes a binding and enforceable agreement in accordance with its lerms and that the Refunded Bonds. as defined in the Order authorizing the Bonds, in the aggregate principal amount of $3,135,000, being refunded by the Bonds, are outstanding under the resolution authorizing their issuance only ibr tlie purpose ol'receiving the funds provided by, and are secured solely by and payable solely from, the Escrow Agreement and the cash and investments, including the income therefrom, held by the Escrow Agent pursuant to the Escrow Agreement. In rendering this opinion, we have relied upon the verifical~on report of McGladrey Si Pullen, LLP as to the sufficiency of the cash and investments deposited with the Escrow Agent pursuant to the Escrow Agreement for the purpose ofpaying such Refunded Bonds to be retired with the proceeds of the Bonds and tlie interest thereon. BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been aukhorized 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, 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 oFthe District, including the Bonds; and to abolish the District or if the District consolidates with another District. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due For the principal of and interest on tlie Bonds, nor as to any such insurance policies issued in tlie future. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from tlie 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)(j) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have assumed compliance by the District with, certain representations and covenants regarding the use and investment ofthe proceeds ofthe Bonds, and the use of the Property refinanced therewith. We call your attention to tlie fact that failure by the District to comply withsuch representations and covenants may cause the interest on the Bonds to become includable in gross income retroactively to the date of issuance of the Bonds. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to cllange. Such opinions are further based on our knowledge offacts as of the date liereof. 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 (tlie "Service"); rather, such opinions represent our legal judgment based upon our review ofexisting 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 n~les 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 procedl~res the Service is likely to treat the District as the taxpayer. We observe that the District 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 CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as tlie Bonds, is (a) 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, (b) subject to the branch profits tax imposed on foreign corporations by section 554 of the Code, and (c) included in the passive investment income of certain S corporalions that may be subject to the tax imposed by section 1375 of the Code on S corporations with accu~nulated earnings and profits and excess passive investment income. 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. OUR SOLE ENGAGEMENT in connection with the issuance of tlie Bonds is as Bond Counsel for the District, and, in that capacity, we have been engaged by the District for the sole purpose of rendering an opinion witli respect to the legality and validity of the Bonds under the Constitution and laws of tlie State ofTexas, 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. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to tlie financial condition or capabilities of the District, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinio~l and make no comment with respect to the marketability oftlie Bonds and have relied solely on certificates executed by officials of the District as to the current outstanding indebtedness of, and assessed valuation oftaxable property within tlie District. Our role in connection with the District's Official Statement prepared for use in connectio~l witli tlie sale of the Bonds has been limited as described therein. IN EXPRESSING THE AFOREMENTIONED OPINIONS, we have relied on. certain representations, the accuracy ofwhich we have not independently verified, and assume compliancewit11 certain covenants, regarding the use and investment of the proceeds of tlie Bonds and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or upon a failure by tlie District to comply witli such covenants, interest on the Bonds may become i~icludable in gross income retroactively to the date of issuance of the Bonds. T'IE FOREGOING OPINIONS represent our legal judgement based upon a review of existing legal i authorities that we deem relevant to render such opinions and are not a guarantee of a result. ! I # Respecthlly, i 1 a t EXCERPTS FROM THE DISTRICT'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30,2004 (Inrlependenl A-d~lor s Repon. General Financia. Stalements and holes lo lne Fnancal Slalernenls - nor inlended lo be a cornplele sla1erneril of lne ssLer s financial condition. Reference :s made lo the comp.ere Annua Financal Report for f~rlher inlormallon.) RUTLEDGE GRAIN & COMPANY, PC CERTIFIED PUBLIC ACCOUNTANTS 2401 Garden Park Couri. Suiie B Arlingion. Texas 76013 INDEPENDENT AUDITORS' REPORT To the Board oi Directors Trophy Club Munlcipal Utility District No. 2 Trophy Club, Texas We have audited the accompanying iinanciai statements of the governmental activities and each major fund of Trophy Club Municipal Utility District No. 2 (the "Districl"), as oi and for the year ended September 30. 2004, which collectiveiy comprise the District's basic financial statements as listed in the tabie oi contents. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generaliy accepted in the United States of America. Those standards require ihat we plan end perform the eudit to obtain reasonable assurance about whether the financiai statements are iree oi material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financiai statements. An eudit also inciudes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financiai statement presentation. We believe ihat our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in ail material respects, the respective financial position of the governmental activities end each major iund oiTrophy Club Municipal Utility District No. 2 as of September 30. 2004, and the respective changes in financial position thereoiior the year then ended in coniormity with accounting principles generally accepted in the United States of America. As described in Note i E., the District has implemented a new financial reporting model, as required by the provisions of GAS6 Statement No. 34, Basic Financial Statements-and Management's Discussion and Anaiysis-for State end Local Governments, and Statement No. 37. Basic Financial Statements - and Management's Discussion and Analysis -for State and Local Governments - Omnibus. The management's discussion end analysis ant1 budgetary comparison iniormalion on pages 2 through 6, 24 and 25, are not a required part of the basic financiai statements but are supplementary information required by accounting principles generally accepted in the United States oi America. We have applied certain limited procedures, which consisted principaliy of inquiries of management regarding the methods of measurement and presentation oi the supplementary information. However, we did not audit the information end express no opinion on it. Our audit was conducted ior the purpose of forming opinions on the financial statements ihat collectively comprise Trophy Club Municipal Utility District No. 2's basic financial statements. The accompanying supplemental information listed in the tabie of contents is presented for purposes oi additional analysis and are not a required part oithe basic financial statements. The accompanying supplemental information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is ialriy stated in all material respects in relation to the basic financial statements taiten as a whole. - / November 5.2004 Members: Metro (817) 265-9989 Arncricen 1ni;lilule 01 Cerlilled Public Accounfmls Fax (617) 661-9623 Toxoa Sociely ol Cenified Public Accounlanls TROPHY CLUB MUNICIPAL UTiLlTY DISTRICT NO. 2 MANAGEMENTS DISCUSSION AND ANALYSIS September 30,2004 Trophy Club ivtunicipal Utility District No. 2. Texas (the "Districi") 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 ftscai year ended September 30, 2004. 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 fiscai year, the assets of the District exceeded its llabilltles by $448.147. The District has an unrestricted deficit balance of $(1.067,969), and has no unrestricted net assets that may be used to meet the District's ongoing commitments to its citizens and creditors. The District's net assets increased by $75,268 as a result of operations. At the end of the fiscai year, the District's governmental funds reported a combined fund balance of $208,084. For the year ended September 30, 2004, the unreserved iund balance for the General Fund was $133,420, 31% of the total expenditures for the General Fund for 2004. The governmental long-term debt obligations of the District decreased by $41 5,000. Ove~iew of the Financial Statements The MDBA is Intended to introduce the reader to the District's basic financial statements, which are comprised of three components: 1. Government Wide Financlal Statements, 2. Fund Financial Statements, and 3. Notes to those Financial Statements. The report also contains other required supplementary Information In addition to the basic financial statements. Government Wide Financial Statemenk - 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 - (Exhibit A-I) this statement presents information on ail of the District's assets and Ilabilities; 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. 2. The Statement of Activities - (Exhibit A-2) 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 so certain revenue and expense items will result In cash flows In future fiscal periods (such as uncollected taxes or unused vacation leave). In the above statements, the District's operations are presented as Governmenfal Type Activities - where the District's basic activities are reported as administration. Normally, these operations are financed by property taxes. Note: the government wide financial statements are found on pages 7 and 8 of this report. Fund Financlal Statements -A iund Is a grouping of related accounts that is used to maintain control over resources that have been set aside for specific activities or objectives. Fund financlal statements provide detailed information about the most important funds and not about tile city as a whole as in the government-wide linancial statements. The District uses fund accounting to demonstrate compliance with finance related legal requirements which can be categorized as government 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 government activities. But unlike government - wide financlal statements governmental fund financial statements focus on how monies flow into and out of those funds and their resuiting balances at the end of the fiscal year. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS September 30, 2004 Statements of governmental funds provide a detailed short-term view of the District's general government operations and the basic services it provides. Such iniormation can be useful in evaluating a government's short-term iinancing requirements. The District maintains three governmental funds. lniormation is presented separately in the Governmental Fund Balance Sheet and in the Governmental Fund Statement oi Revenues. Expenditures and Changes in Fund Balances for the General Fund, Construction Capital Projects, and Debt Service Funds, ail oi which are considered to be majorfunds. The District adopts annual appropriated budgets for the general and debt service funds. A budgetary comparison statement is provided for each annually budgeted fund to demonstrate compliance with its budget. Notes to the Financial Statements -The notes provide additional information that is essential to a full understanding oi the data presented in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 13-21. Government-wide Financial Analysis The management discussion and analysis highlights the information provided in both the Statement oi Net Assets and Stalement 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 $448.147. Oi this amount $1,418,266 (31646) reflects the Districl'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. Fiscal year 2004 is the District's first year to implement the requirements of GAS6 34; comparative date for the previous year is not available. Table 1 Condensed Statement of Net Assets Governmental Activities Current and other $ 242.450 Capital assets 8,253.266 Total Assets 8,495.71 6 Lono-term Liabilities 8.005.000 . . other Liabilities 42,569 Total Liabilities 8,047,569 Net Assets: Invested in capital Net oi related debt 1,418,266 Restricted 97,850 Unrestricted (1,067,969) Totai net assets $ 448.147 Note: The District did not restate its 2003 financial statements in this first year of implementation of GASB-34. Comparative iniormetion will he provided in future years District operaiional analysis -The foilowing table provides a summary analysis oi the District's operations for the fiscal year ended September 30. 2004. Governmental activities have increased the District's net assets by $75,268 which amounts to a 20% increase in total net assets for the year. As noted above, comparative date will not be presented. TROPHY CLUB MUNiCiPAL UTILITY DISTRICT NO. 2 nIlANAGEtb1ENTS DISCUSSION AND ANALYSIS September 30,2004 Changes in net assets Table 2 Changes in Net Assets Governmental Activities Revenue: General Revenue Ad valorem taxes 5 1,062,183 Unresbicted investment earnings 6,759 Miscellaneous 63,368 Total revenue 1,132.310 Expenses: General government 610.434 interest and fiscal charges 446.608 Totai expenses 1,057,042 Increase (decrease) in net assets $ 75,268 Note: The District did not restate its 2003 financial statements in this first year of implementation of GASB-34. Comparative iniormation will be provided in future years Financial analysis of the District's funds Government Funds -the main focus of the District's governmentai funds is to provide information on the fiow of monies to and from the funds, and to note the unreserved fund balance which is a good indicator of resources available for spending in the near term. The information derived from these funds is highly useiui in assessing the District's financial requirements. The unreserved fund balance may serve as a useful measure of the governments net resources available for use at the fiscai year end. At the end of the fiscai year, the District's governmental funds reporled combined ending fund balances of $208,084, of which 64%, or $133,420, is unreserved and available to the District ior future spending. The remaining iund balance is not available for spending and Is committed to pay debt service. General fund budgetary highlights Revenue: Revenues were $41,226 more than budgeted . The District received a payment from Trophy Club Municipal Utility District ;I ior $31,952 for their proportionate share of the fire department bani( account that had been used as the holding account for fire department funds prior to the Town taking over responsibility for the fire department. - Property tax revenues exceeded the budget by $7,300. interest income exceeded the budget by 51,950. Expenses: Expenses were $39,308 more than budgeted: The District contributed $95,000 to the Master District in order to avert a cash fiow problem. A savings oi$50,179 was achieved in the funding of the fire department as a result of a reorganization that occurred early in the year and some funded positions being vacant during the course of the year. The remainder of the budget accounted for additional savings of approximately $1,500. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 hlANAGEhJENT5 DISCUSSION AND ANALYSIS September 30, 2004 Debt Service: . The debt service revenue exceeded the budget by 58,826 with the majority of the additional revenue occurring in the ad valorem taxes as a result oisuoolementai additions to the taxable valuation that occurred durino the vear. . , -. The debt service expenses were $251 less than budget as a result of lower than anticipated paying agent fees. The District had to transfer $69,000 from its operational accounts to the debt service account in order for the debt servic~ fund to meet ils obligations. . The current fund balance in the debt service iund is approximately $6,500. Overall: . The District's revenue totaled $1,145,740 on expenses of $1 -31 1,266 causing an overall operating deficit of 5165.526. The total iund balance dropped from $373.610 to 5208.084, a reduction of $165.526, approximately a 44% drop. Capital asset and debt administration. The District's investments of capital assets for Its governmental activities as of September 30, 2004 amounted to $8,253,266 net of accumulated depreciation. This represents a broad range of capital assets including, but not limited to, improvements, machinery and equipment, motor vehicles, and water, wastewater treatment, and wastewater collection systems. Table 3 Capital Assets at Year-end Net oi Accumulated Depreciation Governmental Activiw 2004 2003 Equity In joint venture 5 3,051,861 Improvements other than buildings 10,823 Machinery and equipment 16,920 Water system 933.917 Wastewater treatment system 2,026,077 Wastewater collection system 405,056 Organization costs 1,808,612 Const~ction in progress Total Major additions to capital assets lor the Rscai year include the following: Description Amount Governmental Activities Wastewater system Additional Information about capital assets may be found in Notes i D. 4. and I1 8. in the notes to financial statements Debt administration Long-Term Debt - at the end of the current fiscal year the District had $8,005,000 in general obligation bonds, a decrease of 4.9% from the previous fiscal year. All bonds are backed by the iull iaith and credit of the government TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 A,IANAGEMENTS DlSCUSSlON AND ANALYSlS Szptember 30,2004 General debt currently outstanding Table 4 Outstanding Debt at Year-end Governmental Activities 2004 2003 General obligation bonds Economic factors and next year's budgets and rates: General fund fiscal 2005 budgetary highlights Revenue: The District's operational revenue budget decreased by $26,308. Property tax revenue increased by $5,700 due to a slight increase in the tax rate. The payment to the District by Trophy Club Municipal Utility District #I resulting from the closing of the fire department account oi 531.900 will not be repeated. Expenses: The District's operational expense budget decreased by $34,676. Payroll and professional services increased by approximately $2.400. - Operating expenses increased by 557,807 with the majority of the increase, $54.691 in fire department funding The remainder of the budget lines in operating expenses increased by approximately $3,100. The contribution to the Master District of $95,000 is not anticipated to reoccur in fiscal 2005. Overall: The District's operational budget is anticipated to have expenses of $385,374 on revenues of $385,374. Debt Service: - The debt service revenues have increased from $733,113 in fiscal 2004 to $740,447 in fiscal 2005, an increase of $7,334, or a 196 increase. - In fiscal 2004 the debt service budget utilized ail if its reserves plus a transfer of $69,000 from lhe operational account in order to meets iis obligations. it is anticipated that a transfer of $1 23,756 from operationlconstruction accounts of will be required in fiscal 2005 for the debt service account to meet its obligations. Debt service expenditures decreased from 5864,503 to $864,203 as a result of normal annual variances in bond payments. The Districts overall revenue decreased from $1,145,740 in fiscal 2004 to 51,125,821 in fiscal 2005, a 2% decrease. The overall expanses decreased from $131 1,266 in fiscal 2004 to $1,249,577 in fiscal 2005, or a 5% decrease. Requests for information This financial report is designed to provide a general overview of the District's 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. 2, Director of Finance. 100 Municipal Drive, Trophy Club, Texas 76262. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 STATEMENT OF NET ASSETS SEPTElWER 30, 2004 ASSETS Cash Investments Receivables (net of allov~ances ior uncollectibles): Taxes Restricted assets: Contract receivable Capital assets (net of accumulated deprecitlon, where applicable): Equily in joint venture Improvements other than buildings Mact~inery and equipment Water system Sewer treatment system Sewer collection system Infrastructure Tolal Assets LIABILITIES Accounts payable Accrued liabilities Liabilities payable from restricted assets: Noncurrent iiabililles: Due within one year Due in more than one year Total Liabilities NET ASSETS Invested In Capital Assets, Net of Related Debt Restricted For: Debt Sewice Capital Projects Unrestricted Total Net Assets The accompanying notes are an Integral part of this statement Governmental Aclivilles --- TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 STATEIviENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMEER 30, 2004 Net (Expense) Revenue and Changes in Net Assets - . .. . FunctionslPrograms - - . . .- . PRIMARY GOVERNMENT Governmental Activities: General government 610,434 Inlerest on long-term debt and fiscal charges 446,608 Total Governmental Activtlies . . . . .. . . 1,057.042 . -. Total Primary Government $--- 1.057.042 General Revenues: ~d valorem taxes, penallies and interest Unrastricled lnveslment Earnings Miscellaneous income Tolal General Revenues and Transfers Change in Net Assets Net Assets - Beginning Net Assets - Ending Governmental Activities ~ ~~ The accompanying notes are an integral part of this statement. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 BALANCE SHEE7- GOVERNMENTAL FUNDS SEPTEJVSER 30, 2004 EXHIBIT A-3 Debt Total General Se~ice Governmental Fund .... Construction .. Fund - Funds ASSETS Cash lnveslmenls Receivables (net of allowances for uncollectibles): Taxes Contract receivable Total Assets LIABILITIES AND FUND BALANCES Liabilities: AccoUnts payahle Deferred revenue Total Liabllilies Fund Balances: Reserved Fund Balances Unreserved Unreserved, reported In nonrnajor: Debt service funds Capital projects funds Total Fund Balances Total Liabilities and Fund Balances The accompanying notes are an integral part of this statement. 9 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 RECONClLlATlON OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS SEPTEWEER 34 2004 Total fund balances - governmental funds balance sheet Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not reported in ihe funds. Property taxes receivable unavaliable Lo pay for current period expenditures are deferred in the funds. Payables for bond principal which are not due in the current period are not reported in the funds. Payables for bond interest which are not due in the current period are not reported in the funds. Revenue from long term loans which is not due in the current period is deferred in the funds. Equity in joint venture activities is not reported In the funds. Net assets of governmental activities - statement of net assets The accompanying notes are an integral part of this statement. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 STATEMENT OF REVENUES. EXPENDITURES. AND CHANGES IN FUND 2AAVCES - GOVERIVhlENTAL FLhVDS FOR RE YEAR ENDED SEPTEMBER 30, 200' General Fund Revenues: Ad valorem taxes, penallies and interest 5 377.089 Interest 2.641 Miscellaneous . 31.952 Total revenues 4ii.m2 .-.. -. .. Expendilures: Administralion 396.074 Professional iees 14.085 Contracl services 9,891 Capltal outlay - Principal - Interest and liscal charges - Total expenditures .. - 420.050 ......... Excess (deficiency) of revenues over (under) expenditures (8.368) OIher financing sources (uses): Transiers in - Transfers out Total other financing sources (uses) Excess of revenues and olher financing sources over (under) expenditures and other financing uses (T7,368) Fund balances. October 1 210.768 -- Fund balances (deficit), September 30 - 133,420 f'-- The accompanying notes are an integral part of lhis statement Construction _ ..... Debt Service Fund Total Governmental Funds TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES. AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR EIVCJED SEPTEIVIBER 30, 2004 Net change in iund balances - total governmental funds Amounts reported ior govemrnenlal activities in the slatemen! oi activities ("SOA") are different because: Capital outlays are not reported as expenses in the SOA. The depreciation of capital assets used in governmental aclivitles is not reported in ihe funds. The gain or loss on the sale of capital assets Is not reported in the funds. Certain property lax revenues are deferred in the funds. This is the change in these amounts this year. Repayment of bond principal is an expenditure in the funds but is not en expense in the SOA. (Increase) decrease in accrued interest from beginning of period to end of period. Principal received from loans reported in the funds is not recognized in the SOA. Changes in joint venture equity are not reported in the funds. Joint venture contribulions are not an expense in the SOA. Change in net assets of governmental activities -statement of activities The accompanying notes are an integral part of lhis statement. i I TROPHY CLUB MUNICIPAL UTiLiTY DlSTRiCT NO. 2 NOTES TO BASIC FINANCIAL STATEMENTS September 30,2004 I. SUMMARY OF SlGNiFiCANT ACCOUNTING POLICIES The accounting policies, methods and procedures adopted by the Trophy Club Municipai Utility District No. 2 (the "District") coniorm to generaily accepted accounting principles as applicable to governments. The following notes to the Rnanciai statements are an integral part of the basic financial statements. A. Reporting Entity Trophy Club Municipal Utility District No. 2 (the District) was created from the combination of two predecessor districls. These oredecessor districts were the Denton Countv Municipal Utility District No. 2 and No. 3 (D C MUDs). The D C MUDS v,erc cr'ested by an order of he Texas Comm.ssion in Env:r~nmenla~I 0~aI:ty (TCEO) on May 20, 1900 ani Octooer 9. 1979. resoecti~e.~ and confirmed bv the electorare oi Lhe D C MUDS in el?cl:ons nelo on Aua~sr 9. 1980. Tne Board oi Drectors oi .- 7 - ,.- - the D C MUDs held their first meetings on March 12 and July 17, 1980, respectively. The first bonds were sold on December 1, and December 7. 1988, respectively. The District operates pursuant to Article XVi, Chapter 59 of the Texas Constitution and Chapter 54 oi the Texas Water Code, as amended. During 1990. Denton County Municipal Utility District No. 2 and No. 3 entered into an agreement combining the two districts into a single district. The electorate of both D C MUDs affirmed the combination in an election held May 5, 1990. The new combined entity Is the District. The combination was completed August 3, 1990, and ail transactions afler August 3, 1990 are deemed to be transactions of the District. 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 coniormty wilh generally accepted accounting principles (GAAP) as applied to government units. As required by generally accepted accounting principles, these financiai stalemenls present the District only. There are no component units which satisfy requirements for blending within lhe Dish.ict's financial statements or discrete presentation. The proportionate allocation of costs and related beneficial usage rights in the major assets is eslimaled as ioiiows: (A) Future Water plant and wells MUD 2 MUD 1 Oevelopment 59.084b 40.314b 0.005'. Twentv-one inch water line 50.0096 5O.OQ96 0.W76 Elevated tanlt Wasleivnter trealment plant and land Rrst expanded treatment plant Second expanded treatment plant Admlnislrntlon building (A) The developer's original intent was ior five districls. (0) MUD 2 does not actnowledge any portion oi the cost oi the administration building as being their responsibility. Pursuant lo the provisions of the New Master Districl Contract dated October 4, 2000, the Master District is managed as a joint venture oi the District and MUDl whereby representatives of the boards of directors oi the District and MUDl serve on the Master District board oi directors. Accordingly the financial statements oi the Master District have been removed from Lhose of MUD1 effective October 1, 2000 and are presented separately. Agreements exist bekween the Districl and MUDl that compensate MUD1 ior water and sewer plant capacity and out of district sales as approved and required by the TCEQ. TROPHY CLUB MUNlCiPAL UTILITY DISTRICT NO. 2 NOTES TO BASIC FINANCIAL STATEMENT September 30. 2003 Based upon this arrangement. ail financial transactions relating to water and sewer operations are included In the financial statements of the Master District joint venture. A summary oi ihe blaster District financiai statements for the year ended September 30. 2004 follows: Total assets Total liabilities Net assets Total revenue Total expenses Increase (decrease) in net assets The Master District Joint Venture financial statements are available at the District's administrative offices, 8. Government-wide and Fund Financial Statements The government-wide financial statements (i.e. the statement of net assets and the statement of changes in net assets) report information on ail of the nonfiduciary activities of the primary government. For the most part, the effect of interfund activity has been removed from these statements. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. For the most part, the effect of interiund activity has been removed from these statements. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program 1 revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or 1 privileges provided by a glven function or segment and 2) grants and contributions that are restricted to meeting the j operational or capltal requirements of a particular function or segment. Taxes and other ilems not properiy included among program revenues are reported instead as general revenues. C. Measurement Focus. Basis of Accounting, and Financial Siatement Presentation 1 i I The government-wide financial statements are reported using the economic resources measurement focus and the accrual / basis of accounting. Revenues are recorded when earned and expenses are recorded when a iiab~lity is incurred, regardless ' of the timing of related cash flows. Property taxes are recognized as revenues In the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements Imposed by the provider have been met. i i Governmental fund financiai statements are reported using the current financial rssources measurement focus and the 1 modMied accrual basis of accounting. Revenues are recognized as soan as they are boUl measurabie and available. 1 Revenues are considered to be available when they are colleciible within the current period or soon enough thereafter to pay I liabilities of the current period. For this purpose, the District considers revenues to be available if they are collected within 60 / days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures. as well as expenditures related to compensated absences and claims and i judgments, are recorded only when payment is due. I Properly taxes and interest associated with the current fiscal period are ail considered to be susceptible to accrual and so have been recognized as revenues of ihe current fiscal period. Ail other revenue items are considered to be measurabie and avaiiabie only when cash is received by the District. The District reports the foilowing major iunds: I I I The General Fund is the Distr~ct's primary operating fund. It accounts ior all financial resources of the general 1 government, except those required to be accounted for In another fund. 1 I I I i TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO BASIC FINANCIAL STATEMENTS September 30,2004 The Debt Service Fund accounts for the resources accumulated and payments made for principal and interest on long- term debt of governmental funds. The Construction Capital Projects Fund accounts ior expenditures for acquisitionlconstrucllon of Infrastructure and other capltal assets. As a general rule the effect of interiund activity has been eliminated from the government-wide financial statements Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capltal grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include ail taxes, miscellaneous revenue, and interest income. D. Assets, liabilities, and net assets or equity 1. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date oi acquisition. 2. Investments State statutes authorize the Distrlct to invest in (1) obligations of the United States ar its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal of end 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 lo 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 banlcs domiciled in this state that are (A) guaranteed or insured by the Federal Deposit Insurance Corporation, or Its successor; or, (8) 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 (I), pledged with third party selected or approved by the District, and placed through a primary government securities dealer. investments are stated at fair value. 3. Receivables and Payables Transactions between funds that are representative of iendinglborrowing arrangements outstanding at the end of the fiscal year are referred to as eilher "Intarfund receivableslpayables" (i.e., the current portion of interfund loans) or "advances tolfrom other funds." All other outstanding balances between funds are reported as "due tolfmm other funds." Advances between funds are ofbet by a fund balance reserve account in applicable governmental funds to indicate they are not avaliabie for appropriation and are not expendable available Rnancial resources. 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. The appraisal of properiy within the District Is the responslblllty of Denton Appraisal Dlstrict (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 IOOSb of Its appraised value and is prohibited from applying any assessment ratios. The value of property within the Appraisal Distrlct must be reviewed every five years; however, the District may, at its own expense, require annual reviews of appraised values. The Dlstrict may challenge appraised values established by the Appraisal District through various appeals and, if necessary, legal action. Property taxes for the District are not limited as to rate or amount. In an elecllon held October 7, 1975, the electorate of the Dlstrict authorized the levy of up to $0.25 per $100 valuation for the operations and maintenance oi the District. Property taxes attach as an enforceable lien on property as of January I, 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 2003 tax levy: TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO BASIC FlNANClAL STATEMENT September 30,2004 Adjusted taxable values S 31 1.927.021 0 & M tax levy SO.llS661S100 373.250 i8Slnwlevy 50.2193~1/$100 384.177 Totel lnw ley $0.33900/$100 S 757.427 4. Capital Assets Capital assets, which include property, plant, equipment, infrastructure assets (e.g., roads, bridges, sidewalks and similar items), and equity in the Trophy Club Master District Joint Venture are reported in the government-wide financial statements. Capital assets are defined by the District as assets with an initial, individual cost or more than $5,000 (amount not rounded) and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Properiy, plant, and equipment of the primary government, as well as the component units, are depreciated using the straight ilne method over the following estimated useful lives: Improvements other than buildings 20 - 30 years Machinery and equipment 5 - 15 years Vehicles 6-12years Water and wastewater systems 30 years 5. Organizational Costs The District, in conformance with requirements of the TCEQ, capitalized costs incurred in the creation of the District. The TCEQ requires capitalization as organizational costs for the construction period ail 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 iees and some administrative expenses until construction and acceptance or use of the first revenue producing facility has occurred. 6. Long-term Obligations in the government-wide tinanciai statements, long-term debt and other long-term obligations are reported as liabilities in the statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight line method which approximates the effective interest method. Bonds payable are reported net of applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. in the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, even if withheld from the actual net proceeds received, are reported as debt service expenditures. 7. Fund Equity In the fund financial statements, governmental funds report reservations of fund balance represent amounts that are not available ior appropriation or are legally segregated by outside parties for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO BASIC FlNANClAL STATEMENTS Sepfernher 30, 2004 E. Implementation of Governmental Accounting Standards Board Statement 34 and 37 in June 1999 and June 2001, respectively, the GASB issued Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis for State and Local Governments, and Statement No. 37, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments -Omnibus. These statements provide for the most significant change in financial reporting in over twenty years. As a part oi these statements, there is a new reporting requirement regarding the District's infrastructure. 11. DETAILED NOTES ON ALL FUNDS AND ACCOUNT GROUPS A. Cash. Cash Equivalents, and Investments At year end, the District's carrying amount of deposits was $23,514 and the bank balance was $12,472. All of the bank balance was covered by federal depository insurance or by collateral held by the District's agent in the District's name. I investments Investments are categorized into these three categories of credit risk: 1. insured or registered, or securities held by the District or its agent in the District's name. 2. Uninsured and unregistered, with securities held by the counter party's trust department or agent in the District's name. 3. Uninsured and unregistered, with securities held by the counter party's, or by its trust department or agent but not in the District's name. At year end, the District's investments were as follows: Carrying Fair investments not subject to categorization: Texas Local ~overnment Pool system (TexPool) ~LU3*3.55 ~u33.355 TexPool is an external investment pooi operated by the Texas Comptroller of Public Accounts and is not SEC registered. The Texas interlocal Cooperation Act end the Texas Public Investments Act provide for creation of public funds investment pools and permit eligible governmental entities to jointly invest their funds in authorized investments. The iair value of investments in the pooi is independently reviewed monthly. At September 30. 2004, the iair value of the position inTexPool approximates fair value oi the shares. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO BASIC FINANCIAL STATEMENT September 30.2004 8. Capital Assets District capital asset activity for the year ended September 30, 2004 was as ioliows: Balance Completed Balance 9/30/2003 Addiions Rellrem~nls Constmctlon 9/30/2004 GOVERNMENTAL ACTIVITIES: Capitol assets, not being depreciated Construclion in progress Equity In Iolnl venture Orgenizallon costs Total capllal assets not being depreciaiad Capilal assets, being depreciated Improvements other lhan buildings Machinery and equipment Water syslem Waslewaler treatment system Waslewaler coilection system Total capllal sssels being deprecialed Less accumulaled depreciation for: Improvemenls other than butldlnss Machinery and equipment Water system Wnstervater treatment syslam Wastewater collection system Total acmmuiated depreciation Total capital assels being depreciated, nel Total capital nel of accumuiated depreciation Depreciation expense charged to general government activities of the primary government $lQ,3E C. Investment in Joint Venture Pursuant to the provisions of the New Master District Contract dated October 4, 2000, the Trophy Club Master District Joint Venture Is managed as a joint venture of the MUD1 and the District, whereby representatives of the boards of directors of the MUD1 and the District serve on the Master District board of directors. Accordingly the financial statements of the Master District are presented separately. The District records its investment in the Master District in Note Ii 8. above. Contributions to and amounts received from the Master District are reported as revenues and expenditures in thefunds. In the government-wide statement of changes in net assets, contributions and refunds of equity are reflected in the asset. Changes in equity due to operations are reported as program costs or revenues. During the year, the District contributed $95,000 to the Master District which had received less operating revenue that budgeted. The District's share of loss from operations was $(127,562). A summary table of net assets and changes in net assets is presented in the MD&A and at Note A. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO BASlC FINANCIAL STATEMENTS Septsrnber 30, 2004 D. Long-Term Debt 1. The District uses various types of debt to finance long-term capital asset acquisitions: Average Origlnal Year oi nnal Annual lnleresl Balance Purpose Amount Issue Maturity Payment Rate 913012004 Unlimited Tax Refunding Bonds Refunding s 4,5119,522 1995 2013 5 507.500 3.25 - 5.90% s 3.43o.000 Unlimited Tax Bonds Improvements 3,510,000 2002 2023 278.750 4.00 - 5.00% 3,405,000 Operations 1,200,000 2003 2023 69.000 4.00 - 5.000;h 1.170.000 Tolei S 8.005.000 2. During the year, the following changes In long-term debt occurred: Seplember 30. Seplember30, Due Wilhin Description 2003 Additions Reliremenls 2004 One Year Governmental activities: TWrevenue bonds 5 8,420,000 6 - S (415.000) 5 8,005,000 $ @15.000 3. The requirement to amortize all bonds and contractual obligations outstanding as of September 30, 2004 is summarized below: Year Ending September 30, Principal interest Total Total 4. Additional Long-term Debt Disclosure Tax and revenue bonds authorized and unissued as of September 30, 2004 amounted lo $4,540,000. The bonds are payable from the proceeds of ad valorem taxes levied upon ail 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 oi the District's waterworks and sanitaly sewer system. The provisions of the bond resolutions relating to debt sewice requirements have been met, and the cash allocated ior these purposes is suiiicient to meet debt service requirements for the year ended September 30, 2004. TROPHY CLUB MUNlClPAL UTILITY DISTRICT NO. 2 NOES TO EASIC FINANCIAL STATEMENT September 30.2004 - I he oulstanding bonds are callable for redemption prior to maturity at the option of the District as i0liows: Series 1995 -All maturities from 2006 to 2013 are caiiabie in principal increments of 55.000 on or after September I, 2005 at par pius unpaid accrued interest to the fixed date for redemptions. Series 2002-All maturities from 2013 to 2023 are caiiabie in principal iD~rementS of 55,000 on or aiter September I. 201 2 at par pius unpaid accrued interest to the fixed date ior redemptions. Series 2003 -All maturities from 2013 to 2023 are caliable in principal increments of $5.000 on or aiter September I, 2012 at par plus unpaid accrued interest to the fixed date lor redemptions. ill. OTHER INFORMATiON A. Risk Management The District is exposed to various risks of loss related lo lorts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; injuries to employees: employee health benefits: and other claims of various nalure. Commercial insurance is purchased for the rlslcs 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 general purpose financial statements. 8. Commitments At September 30. 2004. the District had no specific commitments requiring disclosure C. Contingent Liabilities The District is an interested party to several administrative hearings at year end. Although the outcome of these matters is not presently determinable, it is the opinion of the District's counsel that resolution of these matters will not have a material advarse efiact on the financial condition of the District. D. Concentration of Credit Risk Property taxes receivable are due from citizens and businesses within the District's boundaries. Risk of loss is immaterial due to wide dispersion of receivables. E. Change in Operations During 2004, Trophy Club Master District Joint Venture ("the District" - which is a joint venture of Trophy Club Municipal Utiiity Districts #I and #2, known as MUDI and MUD2) and the Town of Trophy Club. Texas entered into an agreement for the administration of fire protection services within the boundaries of the Town. MUDI and MUD2 and other deiined areas. The Town amended its 2003-2004 annual budget to provide for fire services. During the year. MUD1 and MUD2 contributed $274,622 and $280.693, respeciiveiy, for the cost to operate the fire department. MUD1 has retained ownership of fire department building and equipment along with liability for related debt. F. Contracls Under the terms of a contract whereby MUD 2 and MUD 1 sold an unused portion of the water supply system to the City of Roanoi~e, Texas, the City of Roanoke will malce annuai payments to the of $11,832, including interest, each to the districts' respective debt service funds through 2006. At September 30, 2004, the District's share (50%) of the receivable was $21,540. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO BASlC FlNANClAL STATEIZlENTS September 30, 2004 G. Prior Period Adjustment In preparing the financial statements for presentation in compliance with GASB-34, the Town has restated the cost basis of ils capital assets as of September 30. 2003 as iollows: 9/30/2003 Reclassiflcations GASB-34 9130/2004 Asset Within the External Additions Restal~d for Description Cost Entity Transfers Deletions GASE-34 Equity in joint ventuer Buildings lmprovemenis other than buildings Machinery and equipment Water system Wastewater treatment system Wastewater collection svstern Drainage system Construction In progress Organization costs External transfers represent contributions of drainage system capital assets to the Town of Trophy, Club or reallacation between Trophy Club Master District Joint Venture, MUD1 and MUD2. APPENDIX E FINANCIAL GUARANTY INSURANCE POLICY SPECIMEN C Financial Guaranty Insurance Poiicy Ambac Assurance Corponrion One Srnrr Sneer Plnw, 15th Flwr New Yock, New Yock LOOM Telephone: (212) 668-0340 Obligor: Policy Number: Ambac Assvmce Corparztion (Ambac), e Wi~co~in srock inrmce cornontion. in considention of rhe mvment of rhe premium 2nd rubircr to ihc cermr of rhir Palic), hcrehy igra ra ply ro The 8mti ul New Yuck. as crurrce, or "lnsumcrTmrur"), ior the benefic oirhe Holdurn. rh~r portion ofthe (rhc 'Obligrrianr") which rha.1 oerornc Duc ior P~ynrmr bur shdl be the nume of Ambac or iu. nominee. The INU~~C~ Tmrec shall diabune inrerat ro a nly upon prcwnnrian to the e Oblignrion and delivery ro rhc char any payment of principal of or incererr an nn her rhnn (i) rbe Obligor or (ii) my pcnon whore oblipriom comrirurr rhe ve providcd sulfrcicnr funds co che mrrcee or paying ogenc for paymenc in full of dl principd of aod inrercsr which are Due far Payrnenr. This Policy is noncancelable. The premium on chis Policy ia nor refundcble for nny mson, including puymenc ofrhe Obligncions prior to rnnturiry. This Policy does nor insure against lorr of any pcepaymenr or other rccelrnrian puymrnr which at my rime may become due in rapKc ormy Obligntion, other chon ar thesalc option ofhbnc, nor againrr my risk orhcr chnn Nonpayment. Io wirness whereof, Amboc hu cnmcd chis Policy ra be afircd with a hrrimile of its corpanre ad and ro be signed by its duly authorized oficcrs in hcrimile ro become rKctive as its original rd md signorura and binding upon Ambac by virruc of the countrnignarure OF its duly nuiharircd reprcsenrariuc. THE BANK OF NEW YORK uknowiedga chnc it hos agreed ro perform the duties of lns-ce Trusrcu under chis Policy. Form No.: 28-0012 (1101) A- FINAL TO: Individuals Listed Below FROM: Dan A. Almon DATE: June 20, 2005 RE: $3,134,997.85 Trophy Club Municipal Utility District No.2 Unlimited Tax Refunding Bonds, Series 2005 Please find attached the closing memorandum for the above captioned Bonds. If you have any questions, give me a call at (214) 859-9452 or Mary Jane Dietz (214) 859-6803 or fax at (214) 859-9475. Distribution to: Name Entity Email Phone Mr. Walter Fitzpatrick Trophy Club MUD No.2 wfitzpatrick@ci.trophyclub.tx.us 682-831-4610 Mr. Roger Unger Trophy Club MUD No.2 runger@ ci.trophyclub.tx.us 682-831-4613 Ms. Renae Gonzales Trophy Club MUD No.2 rgonzales@ ci.trophyclub.tx.us 682-831-4611 Mr. Peter Tart McCall, Parkhurst & Horton L.L.P. ptart@mphlegal.com 214-754-9230 Ms. Tina Ward McCall, Parkhurst & Horton L.L.P. tward@mphlegal.com 214-754-9220 Ms. Joann Smith First Southwest Company josmith@firstsw.com 214-953-4087 Ms. Beverly Knight First Southwest Company bknight@firstsw.com 214-953-4040 Ms. Claire Miazza First Southwest Company cmiazza@firstsw.com 214-953-4040 Ms. Stacey Bald First Southwest Company sbald@firstsw.com 214-953-4040 Ms. Rosalyn Davis JPMorgan Chase Bank, N.A. Rosalyn.davis@jpmorgan.com 214-468-4611 Ms. Danielle Packer Ambac Assurance Corporation dpacker@ambac.com 212-208-3331 1 2 FINAL TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 $3,134,997.85 Unlimited Tax Refunding Bonds, Series 2005 CLOSING MEMORANDUM CLOSING Payment for and delivery of the captioned Bonds is scheduled to occur on Tuesday, June 28, 2005 (the “Closing Date”) at 10:00 A.M. at the offices of JPMorgan Chas Bank, National Association, Dallas, Texas (“JPMorgan”). RECEIPT OF FUNDS 1. On Monday, June 27, 2005, one business day prior to the Closing Date, the District will wire transfer the amount of $61,798.75 to JPMorgan Chase, Houston, Texas, ABA #113 000 609, credit Dallas Issuer Administrative Services, Account # 00103237013, for further credit to Trophy Club Municipal Utility District No. 2 Unlimited Tax Refunding Bonds, Series 2005, Attention Rosalyn Davis, (214-468-4611). This cash contribution by the District represents funds previously deposited to an Interest and Sinking Fund and will be used to pay the interest due on the Redemption Date for the Bonds being refunded. 2. On the Closing Date, First Southwest Company will wire transfer to JPMorgan Chase, Houston, Texas, ABA #113 000 609, credit Dallas Issuer Administrative Services, Account # 00103237013, for further credit to Trophy Club Municipal Utility District No. 2 Unlimited Tax Refunding Bonds, Series 2005, Attention Rosalyn Davis, (214-468-4611), the following amount representing the purchase price for the Bonds. Par Amount of Bonds $3,134,997.85 Plus Net Premium 167,484.00 Plus Accrued Interest 8,292.94 Less Underwriter’s Discount (24,507.54) Total Purchase Price of the Bonds $3,286,267.25 Plus District’s Cash Contribution from I&S Fund 61,798.75 Total Funds Received by BONY $3,348,066.00 DISBURSEMENT OF FUNDS Upon receipt of such funds, the following disbursements are to be made by JPMorgan: 1. By wire transfer transmit the Ambac insurance premium of $40,304.30 to Citibank, N. A. ABA # 021 000 089, AMBAC Assurance Corporation, Account# 40609486, for AMBAC Policy #24112BE, Trophy Club Municipal Utility District No. 2 Unlimited Tax Refunding Bonds, Series 2005, Attn: Danielle Packer (212 208 3331). Upon transmission of the wire of funds to Ambac the Paying Agent/Registrar will notify Bond Counsel of the wire reference number, the time such wire was sent and the amount. Bond Counsel will contact Ambac to obtain release of the municipal bond insurance policy, and upon such release Bond Counsel will contact the Paying Agent/Registrar with regard to disbursement of the funds listed below and the release of the definitive Bonds. 3 FINAL 2. JPMorgan will retain $3,215,247.50 in payment of the following:f Redemption of the Refunded Bonds / SLG Purchase $3,214,447.00 Initial Deposit to the Escrow Fund 0.50 Paying Agent/Registrar Fee on New Bonds (First Year) 300.00 Early Redemption Notice / Call Fee 500.00 $3,215,247.50 3. By wire transfer, transmit the amount of $12,496.47 to TexPool as follows: State Street Bank and Trust Company, Boston, MA, (Attn: Operations 866-891-7665) ABA #011000028 BNF (4200) - TexPool Account # 67573774 RFB (4320) – Location ID # 77385 Participant Name – Trophy Club MUD No. 2 Interest & Sinking Account (OBI # 449, 0613400002) (Such amount Includes accrued interest of $8,292.94, excess cost of issuance of $4,182.27, and additional proceeds of $21.26, which should be expended as part of first interest payment made on the Bonds) 4. By wire transfer, transmit the amount of $46,242.73 to JPMorgan Chase Bank, ABA # 113000609, FAO Southwest Securities, Account # 08805076955, Attention: Angela Burpo Reference: Trophy Club MUD No. 2 Unlimited Tax Refunding Bonds, Series 2005, # 9003-119029. This amount is in payment of Financial Advisory Fee, Electronic Internet Posting/Distribution Fee and Reimbursable Expenses as listed in Exhibit “A” attached hereto. 5. By wire transfer, transmit the amount of $33,775.00 to Colonial BHAM, 1999 Bryan St., Dallas Texas, ABA # 0620-0131-9, Account # 00000-0152-9, for credit to McCall, Parkhurst & Horton L.L.P. Operating Account, for further credit to Client Reference # 3674.005 Trophy Club MUD No. 2 Series 2005 Refunding. This amount is in payment of Bond Counsel fee/expenses and Attorney General fee as listed in Exhibit “A” attached hereto. GOOD FAITH CHECK On the Closing Date, the District is to return via Federal Express or Certified Mail, uncashed, the good faith check in the amount of $31,350.00 to First Southwest Company, Attention: Beverly Knight, 325 N. St. Paul St., Suite 800, Dallas, Texas 75201 (214-953-4040). [Remainder of this page is intentionally left blank] 4 FINAL EXHIBIT A JPMorgan will make disbursements as follows: JPMorgan Payments Via Wire Transfers: Southwest Securities, Attention: Dan Almon Financial Advisory Fee $33,025.00 OS Electronic Internet Posting/Distribution Fee 1,500.00 Refunding Analytics and Calculation Fee 2,400.00 Reimbursable Expenses Moody’s Investors Service, Inc. (Rating Fee) 6,500.00 McGladrey & Pullen, LLP (Verification Fee) 1,500.00 Financial Printing Resource, Inc. (Official Statement Printing) 1,317.73 $46,242.73 McCall, Parkhurst & Horton L.L.P. Attention: Pete Tart (Includes $1,000.00 for A.G. Fee and $750.00 for Expenses) 33,775.00 Sub Total $80,017.73 _______________________________________________________________ Additional costs included in Cost of Issuance as follows: Paying Agent/Registrar and Bond Call Fees retained by JPMorgan upon the initial receipt of funds (see DISBURSEMENT OF FUNDS - Item #2) 800.00 Total Cost of Issuance $80,817.73 Amount Provided for Cost of Issuance $85,000.00 Excess to be Returned to Issuer (See "DISBURSEMENT OF FUNDS – Item #3) $ 4,182.27