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Home My WebLink About2002 Trophy Club MUD #2_OS Series 2002To Table of Contents NEW ISSUE -BOOK -ENTRY -ONLY Ratings: Moody's: "Aaa" (See "MUNICIPAL BOND RATING AND INSURANCE" herein OFFICIAL STATEMENT Dated June 6, 2002 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. The District has designated the Bonds as "Qualified Tax -Exempt Obligations". See "TAX MATTERS - Qualified Tax -Exempt Obligations for Financial Institutions" herein. $3,510,000 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO.2 (A Political Subdivision of the State of Texas Located in Denton County) UNLIMITED TAX BONDS, SERIES 2002 Dated Date: June 1, 2002 Due: September 1, as shown below The Bonds described above (the "Bonds") are obligations solely of Trophy Club Municipal Utility District No. 2 (the "District") 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. Interest on the Bonds will accrue from June 1, 2002 and is payable March 1, 2003, and each September 1 and March 1 thereafter until the earlier of maturity or redemption, and will be calculated on the basis of a 360 -day year of twelve 30 -day months. The Bonds will be issued in fully registered form only, without coupons, in denominations of $5,000 or any integral multiple thereof, and when issued, will be registered in the name of Cede & Co., as registered owner and nominee for the Depository Trust Company ("DTC"), New York, New York, acting as securities depository for the Bonds until DTC resigns or is discharged. The Bonds initially will be available to purchasers in book -entry form only. So long as Cede & Co., as the paying agent to DTC, is the registered owner of the Bonds, principal of and interest on the Bonds will be payable by the paying agent to DTC, which will be solely responsible for making such payment to the beneficial owners of the Bonds. The initial paying agent/registrar for the Bonds shall be The Bank of New York Trust Company of Florida, N.A., Dallas, Texas (the "Paying Agent"). !� Financial Guaranty Insurance F' GIC:, Company FGIC is a registered service mark used by Financial Guaranty Insurance Company, a private company not affiliated with any U.S. Government agency. STATED MATURITY SCHEDULE(a) (Due September 1) Stated Principal Rate Yield Stated Principal Rate Yield Maturity Amount DA DA Maturity Amount jya 2004 $105,000 5.500 2.300 2013 $165,000 4.250 4.350 2005 110,000 5.500 2.800 2014 170,000 4.350 4.450 2006 115,000 5.500 3.100 2015 180,000 4.450 4.550 2007 120,000 5.500 3.400 2016 190,000 4.550 4.650 2008 125,000 5.500 3.700 2017 200,000 4.700 4.750 2009 135,000 5.500 3.875 2018 210,000 4.800 4.850 2010 140,000 5.500 4.000 **** ***** ***** ***** 2011 150,000 4.000 4.100 2023 275,000 5.000 5.050 2012 155,000 4.100 4.200 $460,000 4.95% Term Bond due September 1, 2020, Price to Yield 4.95% $505,000 5.00% Term Bond due September 1, 2022, Price to Yield 5.00% (a) After requesting competitive bids for purchase of the Bonds, the District has accepted the lowest bid to purchase the Bonds, bearing interest as shown, at a price of 100% of par plus accrued interest to the date of delivery, resulting in a true interest rate to the District of 4.8295%. The initial reoffering yields were supplied to the District by the Purchasers. The initial reoffering yields shown on the cover page will produce compensation to the Purchasers of approximately $24,415.75, after paying an insurance premium of $41,400.00. The Payment of the principal of and interest on the Bonds when due will be insured by a municipal bond insurance policy to be issued by Financial Guaranty Insurance Company ("Financial Guaranty") simultaneously with the delivery of the Bonds. (See "BOND INSURANCE" herein.) The District reserves the right to redeem, prior to maturity, in integral multiples of $5,000, those Bonds maturing on and after September 1, 2013, in whole or from time to time in part, on September 1, 2012, 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 Term Bonds maturing September 1, 2020 and September 1, 2022 are subject to mandatory sinking fund redemption, as described herein. See "THE BONDS - Redemption" herein. The Bonds, when issued, will constitute valid and legally binding obligations of the District and will be payable from the proceeds of an annual ad valorem tax, without legal limitation to rate or amount, levied against taxable property within the District. THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS DESCRIBED HEREIN. See "INVESTMENT CONSIDERATIONS " herein. Bond purchasers are encouraged to read this entire Official Statement prior to making an investment decision. The Bonds are offered by the Initial Purchaser subject to prior sale, when, as and if issued by the District and accepted by the Initial Purchaser, subject, among other things to the approval of the Initial Bonds by the Attorney General of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton L.L.P. Dallas, Texas, Bond Counsel. Delivery of the Bonds through DTC is expected on or about June 27, 2002, in Dallas, Texas. 1 TABLE OF CONTENTS TABLE OF CONTENTS 2 USE OF INFORMATION IN THE OFFICIAL STATEMENT 3 SALE AND DISTRIBUTION OF THE BONDS 3 Award of the Bonds 3 Issue Prices and Marketability 3 Securities Laws 3 MUNICIPAL BOND RATINGS 4 BOND INSURANCE 5 OFFICIAL STATEMENT SUMMARY 4 THE DISTRICT 5 THE BONDS 5 INVESTMENT CONSIDERATIONS 6 SELECTED FINANCIAL INFORMATION 7 OFFICIAL STATEMENT 8 INTRODUCTION 8 THE BONDS 8 General Description 8 Redemption 8 DTC Redemption Provision Termination of Book -Entry -Only System Authority for Issuance Source of and Security for Payment Payment Record Flow of Funds and Investment of Funds Defeasance of Outstanding Bonds Paying Agent/Registrar Issuance of Additional Debt Legal Investment and Eligibility to Secure Public Funds in Texas Specific Tax Covenants Additional Covenants Remedies in Event of Default Approval of the Bonds No -Litigation Certificate No Material Adverse Change Amendments to the Bond Order BOOK -ENTRY -ONLY SYSTEM Use of Certain Terms in Other Sections of this Official Statement USE AND DISTRIBUTION OF BOND PROCEEDS INVESTMENT CONSIDERATIONS General 10 10 11 11 11 11 12 12 12 13 13 13 13 14 14 14 14 14 16 16 16 16 Factors Affecting Taxable Values and Tax Payments16 Tax Collections 17 Consolidation 18 Annexation 18 Alteration of Boundaries 18 Registered Owners' Remedies 18 Bankruptcy Limitation to Registered Owners' Rights 18 The Effect of the Financial Institutions Act of 1989 on Tax Collections of the District 18 Marketability 19 Continuing Compliance with Certain Covenants 19 Future Debt 19 Litigation 19 LOCATION MAP 21 THE DISTRICT 22 Creation of the District 22 General 22 Management of the District 22 Location 23 Population 23 Topography and Drainage 23 Shopping and Commercial Facilities 23 Fire Protection 24 Police Protection 24 Schools 24 Other Community Services 24 Status of Development of the District 24 THE DEVELOPER 26 Role of a Developer 26 Description of the Developers 27 THE DISTRICT'S SYSTEM 27 General 27 Description of the Water System 27 Description of the Wastewater System 27 WATER SUPPLY CONTRACT 27 MASTER DISTRICT CONTRACT 28 WASTEWATER TREATMENT PLANT CAPACITY AGREEMENT 28 INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE DISTRICT 28 Current Investments 29 TAX DATA 30 District Bond Tax Rate Limitation 30 Maintenance Tax 30 Overlapping Taxes 30 TAXING PROCEDURES 30 Authority to Levy Taxes 30 Property Tax Code and County -Wide Appraisal District 30 Valuation of Property for Taxation 31 District and Taxpayer Remedies 32 Levy of Taxes 32 Collection of Taxes 32 District's Rights in the Event of Tax Delinquencies 33 LEGAL MATTERS 33 Legal Opinions 33 Litigation 33 No -Litigation Certificate 33 No Material Adverse Change 33 TAX MATTERS 33 Opinion 33 Federal Income Tax Accounting Treatment of Original Issue Discount 34 Collateral Federal Income Tax Consequences 35 State, Local and Foreign Taxes 35 Qualified Tax -Exempt Obligations for Financial Institutions 35 CONTINUING DISCLOSURE OF INFORMATION 36 Annual Reports 36 Material Event Notices 36 Availability of Information from SID and MSRB 36 Limitations and Amendments 37 Compliance with Prior Agreements 37 FINANCIAL ADVISOR 37 OFFICIAL STATEMENT 37 Experts 37 Updating the Official Statement During Underwriting Period 38 Certification as to Official Statement 38 Official Statement "Deemed Final" 38 Annual Audits 38 Forward -Looking Statements Disclaimer 38 Conclusion 39 Financial Information of the Issuer General Information Regarding Town of Trophy Club, Texas and Denton County Form of Legal Opinion of Bond Counsel The Issuer's General Purpose Audited Financial Statements for the Year Ended September 30, 2001 Municipal Bond Insurance Policy Specimen Appendix A Appendix B Appendix C Appendix D Appendix E The cover page, subsequent pages hereof and the schedules and appendices attached hereto, are part of this Official Statement. 2 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 representations 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 by the District. This Official Statement does not alone constitute, and is not authorized by the District for use in connection with, an offer to sell or the solicitation of any offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. All of the summaries of the statutes, orders, contracts, records, and engineering and other related reports set forth in the Official Statement are made subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions, and reference is made to such documents, copies of which are available from the Financial Advisor, upon the payment of reasonable duplication costs. This Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions, or matters of opinion, or as to the likelihood that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this "Official Statement" nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or the other matters described herein since the date hereof. However, the District has agreed to keep this "Official Statement" current by amendment or sticker to reflect material changes in the affairs of the District, and to the extent that information actually comes to its attention, other matters described in the "Official Statement" until delivery of the Bonds to the Initial Purchaser and thereafter only as specified in "OFFICIAL STATEMENT -Updating the Official Statement During Underwriting Period" and "CONTINUING DISCLOSURE OF INFORMATION." NEITHER THE DISTRICT NOR THE FINANCIAL ADVISOR MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK -ENTRY -ONLY SYSTEM OR ANY INFORMATION REGARDING THE INSURER OR ITS POLICY, AS DESCRIBED UNDER "MUNICIPAL BOND RATING AND INSURANCE" HEREIN. SALE AND DISTRIBUTION OF THE BONDS Award of the Bonds After requesting competitive bids for the Bonds, the District accepted the bid resulting in the lowest true interest rate, which bid was tendered by A.G. Edwards and Sons, Inc. (the "Initial Purchaser") bearing the lowest interest rates shown on the cover page hereof, at a price of 100% of the par value thereof plus accrued interest to the date of delivery which resulted in a true interest cost rate of 4.8295% as calculated pursuant to Texas Government Code Chapter 1204, as amended (the "IBA" method). The initial reoffering yields were supplied to the District by the Purchasers. The initial reoffering yields shown on the cover page will produce compensation to the Purchasers of approximately $65,815.75, after paying an insurance premium of $41,400.00. Issue Prices and Marketability The delivery of the Bonds is conditioned upon the receipt by the District of a certificate executed and delivered by the Initial Purchaser on or before the date of delivery of the Bonds stating the prices at which a substantial amount of the Bonds of each maturity has been sold to the public. For this purpose, the term "public" shall not include any person who is a bond house, broker or similar person acting in the capacity of underwriter or wholesaler. Otherwise, the District has no understanding with the Initial Purchaser regarding the reoffering yields or prices of the Bonds. Information concerning reoffering yields or prices is the responsibility of the Initial Purchaser. The prices and other terms with respect to the offering and sale of the Bonds may be changed from time -to time by the Initial Purchaser after the Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Bonds into investment accounts. In connection with the offering of the Bonds, the Initial Purchaser may over - allot or effect transactions which stabilize or maintain the market prices or the Bonds at levels above those which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The District has no control over trading of the Bonds in the secondary market. Moreover, there is no guarantee that a secondary market will be made in the Bonds. In such a secondary market, the difference between the bid and asked price of utility district bonds may be greater than the difference between the bid and asked price of bonds of comparable maturity and quality issued by more traditional municipal entities, as bonds of such entities are more generally bought, sold or traded in the secondary market. Securities Laws No registration statement relating to the offer and sale of the Bonds has been filed with the Securities and Exchange 3 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. MUNICIPAL BOND RATINGS Moody's Investors Service, Inc. ("Moody's") has assigned a municipal bond rating of "Aaa" to the Bonds with the understanding that, concurrently with the delivery of the Bonds, a municpal bond insurance policy will be issued by Financial Guaranty Insurance Company ("Financial Guaranty"). Moody's has assigned an underlying rating of `Baal" to the Bonds. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective view of such company, and the District makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings 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 ratings may have an adverse effect on the market price of the Bonds. BOND INSURANCE The following information regarding municipal bond insurance on the Bonds was provided by Financial Guaranty. Concurrently with the issuance of the Bonds, Financial Guaranty Insurance Company ("Financial Guaranty') will issue its Municipal Bond New Issue Insurance Policy for the Bonds (the "Policy"). The Policy unconditionally guarantees the payment of that portion of the principal of and interest on the Bonds, which has become due for payment, but shall be unpaid by reason of nonpayment by the issuer of the Bonds (the "Issuer"). Financial Guaranty will make such payments to State Street Bank and Trust Company, N.A., or its successor as its agent (the "Fiscal Agent"), on the later of the date on which such principal and interest is due or on the business day next following the day on which Financial Guaranty shall have received telephonic or telegraphic notice, subsequently confirmed in writing, or written notice by registered or certified mail, from an owner of Bonds or the Paying Agent of the nonpayment of such amount by the Issuer. The Fiscal Agent will disburse such amount due on any Bond to its owner upon receipt by the Fiscal Agent of evidence satisfactory to the Fiscal Agent of the owners right to receive payment of the principal and interest due for payment and evidence, including any appropriate instruments of assignment, that all of such owners rights to payment of such principal and interest shall be vested in Financial Guaranty. The term "nonpayment" in respect of a Bond includes any payment of principal or interest made to an owner of a Bond, which has been recovered from such owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competent jurisdiction. The Policy is non -cancelable and the premium will be fully paid at the time of delivery of the Bonds. The Policy covers failure to pay principal of the Bonds on their respective stated maturity dates or dates on which the same shall have been duly called for mandatory sinking fund redemption, and not on any other date on which the Bonds may have been otherwise called for redemption, accelerated or advanced in maturity, and covers the failure to pay an installment of interest on the stated date for its payment. This Official Statement contains a section regarding the ratings assigned to the Bonds and reference should be made to such section for a discussion of such ratings and the basis for their assignment to the Bonds. Reference should be made to the description of the Issuer for a discussion of the ratings, if any, assigned to such entity's outstanding parity debt that is not secured by credit enhancement. The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. Financial Guaranty is a wholly owned subsidiary of FGIC Corporation (the "Corporation"), a Delaware holding company. The Corporation is a subsidiary of General Electric Capital Corporation ("GE Capital"). Neither the Corporation nor GE Capital is obligated to pay the debts of or the claims against Financial Guaranty. Financial Guaranty is a monoline financial guaranty insurer domiciled in the State of New York and subject to regulation by the State of New York Insurance Department. As of December 31, 2001, the total capital and surplus of Financial Guaranty was approximately $1.002 billion. Financial Guaranty prepares financial statements on the basis of both statutory accounting principles and generally accepted accounting principles. Copies of such financial statements may be obtained by writing to Financial Guaranty at 125 Park Avenue, New York, New York 10017, Attention: Communications Department (telephone number: 212-312-3000) or to the New York State Insurance Department at 25 Beaver Street, New York, New York 10004-2319, Attention: Financial Condition Property/Casualty Bureau (telephone number: 212-480-5187). OFFICIAL STATEMENT SUMMARY The following material is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. 4 The Issuer Location Status of Development The Developer Description Redemption Source of Payment THE DISTRICT 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 Natural Resource Conservation Commission (the "TNRCC"). See 'THE DISTRICT - General." The District, a political subdivision of the State 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 834.46 acres. See "THE DISTRICT - Location." Of the approximate 834.46 acres encompassed by the District, approximately 806.96 acres are developable. Development of the District began in 1980; and as of April, 2002, approximately 580 acres (approximately 71% of the developable acreage) within the District had been developed with utility facilities. Additionally, major water and wastewater trunkline facilities have been constructed to serve to "buildout" of the District. The construction of additional water distribution, wastewater collection and storm drainage facilities will be necessary before single family homes or other improvements can be constructed on the Platted Acreage. The District is being developed as a mixed-use development, and as of April, 2002 development included seven single family residential subdivisions, multifamily condominiums, a small shopping center, parks, schools, a daycare facility and a church. See "THE DISTRICT — Status of Development." There are currently two active developers within the District: 1) Beck Properties and 2) Terra Land Development Co. Beck currently owns and is actively marketing 28 developed single- family lots and no single-family lots which have been platted but not yet developed with utility facilities. Terra is currently developing a 23.5361 -acre, 46 lot residential development. See "THE DEVELOPERS" and "THE DISTRICT —Status of Development." THE BONDS The Bonds in the aggregate principal amount of $3,510,000 mature in varying amounts on September 1 of each year as set forth on the cover of this Official Statement. Interest accrues from June 1, 2002 at the rates per annum set forth on the cover page hereof and is payable March 1, 2003 and each September 1 and March 1 thereafter until maturity or earlier redemption. The Bonds are offered in fully registered form in integral multiples of $5,000 for any one maturity. See "THE BONDS - General Description." Bonds maturing on and after September 1, 2013 are subject to redemption in whole or from time to time in part at the option of the District on September 1, 2012, and on any date thereafter, at par plus accrued interest from the most recent interest payment date to the date of redemption. In addition, the Term Bonds maturing September 1, 2020 and September 1, 2022 are subject to mandatory sinking fund redemption, as described herein. See "THE BONDS — Redemption" herein. Principal and interest on the Bonds are payable from the proceeds of a continuing direct annual ad valorem tax levied upon all taxable property within the District, which under Texas law is not limited as to rate or amount. The Bonds are obligations solely of Trophy Club Municipal Utility District No. 2 and are not obligations of the Town of Trophy Club, Texas; Denton County, Texas; the State of Texas; or any entity other than the District. See "THE BONDS - Source of and Security for Payment.". 5 Payment Record The District has never defaulted in the timely payment of principal of or interest on its outstanding obligations. Authority for Issuance Bonds Authorized but Unissued Use of Proceeds Municipal Bond Insurance Municipal Bond Rating Qualified Tax -Exempt Obligations Book -Entry -Only System Issuance of Additional Debt Bond Counsel General Counsel Special Counsel Financial Advisor Engineer Paying Agent/Registrar The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, including particularly Article XVI, Section 59 of the Texas Constitution, Chapter 49 and Chapter 54 of the Texas Water Code, as amended, an approving order of the Texas Natural Resource Conservation Commission, and an order (the "Bond Order") adopted by the Board of Directors (the "Board") of the District. See "THE BONDS - Authority for Issuance" herein. The Bonds were authorized at elections held on April 4, 1981 and October 29, 1988 by Denton County MUD #2 and #3. After the sale of the Bonds, $5,740,000 bonds will remain authorized but unissued (See "APPENDIX A — TABLE 17" herein). Proceeds from the sale of the Bonds will be used to finance the following projects in the District: 1) wastewater treatment plant (WWTP) expansion, 2) two million gallon (mg) ground storage tank installation, 3) 21 -inch water line additional capacity reimbursement, 4) WWTP connection charges, and 5) reimbursement of engineering fees and bond issuance costs related to projects. See "USE AND DISTRIBUTION OF BOND PROCEEDS." The Payment of the principal of and interest on the Bonds when due will be insured by a municipal bond insurance policy to be issued by Financial Guaranty Insurance Company ("Financial Guaranty") simultaneously with the delivery of the Bonds. (See "BOND INSURANCE" herein.) Moody's Investors Service, Inc. ("Moody's") has assigned a municipal bond rating of "Aaa" to the Bonds with the understanding that, concurrently with the delivery of the Bonds, a municpal bond insurance policy will be issued by Financial Guaranty. Moody's has assigned an underlying rating of "Baal" to the Bonds. An explanation of the significance of a rating may be obtained from the company furnishing the rating. (See "MUNICIPAL BOND RATINGS" herein.) The District has designated the Bonds as "qualified tax-exempt obligations" pursuant to section 265(b) of the Internal Revenue Code of 1986, as amended, and will represent that the total amount of tax-exempt bonds (including the Bonds) issued by it during calendar year 2000 is not reasonably expected to exceed $10,000,000. See "TAX MATTERS - Qualified Tax -Exempt Obligations for Financial Institutions" herein. The Issuer intends to utilize the Book -Entry -Only System of The Depository Trust Company, New York, New York relating to the method and timing of payment and the method and transfer relating to the Bonds. (See "BOOK -ENTRY -ONLY SYSTEM" herein.) The District does not anticipate the issuance of additional debt within the next twelve months. McCall, Parkhurst & Horton L.L.P., Dallas, Texas Law Office of Pamela Harrell Liston, Rowlett, Texas Whitaker, Chalk, Swindle & Sawyer, L.L.P., Fort Worth, Texas (FDIC lawsuit) SWS Securities, Dallas, Texas. Carter & Burgess, Fort Worth, Texas. The Bank of New York Trust Company of Florida, N.A., Dallas, Texas INVESTMENT CONSIDERATIONS The purchase and ownership of the Bonds involve certain investment considerations and all prospective purchasers are urged to examine carefully the Official Statement, including particularly the section captioned "INVESTMENT CONSIDERATIONS," with respect to the investment security of the Bonds. 6 SELECTED FINANCIAL INFORMATION 2001 Taxable Assessed Valuation $255,019,864 Gross Debt Principal Outstanding (after issuance of the Bonds) $7,780,000 Ratio of Gross Debt to 2000 Assessed Valuation 3.05% 2001-2002 Tax Rate Debt Service $0.1911 Maintenance & Operation 0.1743 Total $0.3654 Debt Service Fund Balance as of September 30, 2001 $203,825 Average Percentage of Current Tax Collection — Tax Years 1996-2001 98.53% Average Percentage of Total Tax Collection — Tax Years 1996-2001 99.16% Average Annual Debt Service Requirement (2003-2023) Of the Bonds and the Outstanding Bonds ("Average Requirement") $540,891 Tax Rate Required to Pay Projected Average Requirement Based Upon Current Taxable Assessed Valuation at 97% Collections $0.219/$100 A.V. Maximum Annual Debt Service Requirement (2011) of the Bonds and The Outstanding Bonds ("Maximum Requirement") $789,980 Tax Rate Required to Pay Projected Maximum Requirement Based Upon Current Taxable Assessed Valuation at 97% collections $0.319/$100 A.V. Number of connections as of April 30, 2002 1,420 Estimated population as of April 30, 2002 4,200 (a) la As certified by the Denton Central Appraisal District. See "TAXING PROCEDURES" herein. (b) Amount includes the "Value at Maturity" of the CABs for maturities 2002 and 2003 of the Series 1995 Bonds. [The remainder of this page is intentionally left blank.] 7 OFFICIAL STATEMENT relating to $3,510,000 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO.2 (A Political Subdivision of the State of Texas Located in Denton County, Texas) UNLIMITED TAX BONDS, SERIES 2002 INTRODUCTION This Official Statement provides certain information in connection with the issuance by the Trophy Club Municipal Utility District No.2 (the "District" or "Issuer") of its $3,510,000 Unlimited Tax Bonds, Series 2002 (the "Bonds"). The Bonds are issued pursuant to a bond order (the "Bond 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 Constitution and general laws of the State of Texas, particularly Chapters 49 and 54 of the Texas Water Code, as amended, and the approving order of the Texas Natural Resource Conservation Commission (the "Commission"). Unless otherwise indicated, capitalized terms used in this Official Statement have the same meaning assigned to such terms in the Bond Order. Included in this Official Statement are descriptions of the Bonds, the Bond Order, the Status of Development and certain information about the District and its finances. ALL DESCRIPTIONS OF DOCUMENTS CONTAINED HEREIN ARE SUMMARIES ONLY AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO EACH SUCH DOCUMENT. Copies of such documents may be obtained from the District or Financial Advisor. THE BONDS General Description The $3,510,000 Trophy Club Municipal Utility District No.2 Unlimited Tax Bonds, Series 2002 will bear interest from June 1, 2002 and will mature on September 1 of the years and in the principal amounts, and will bear interest at the rates per annum, set forth on the cover page hereof. Interest on the Bonds will accrue from June 1, 2002 and is payable March 1, 2003, and each September 1 and March 1 thereafter until the earlier of maturity or redemption, and will be calculated on the basis of a 360 -day year of twelve 30 -day months. The Bonds will be issued in fully registered form only, without coupons, in denominations of $5,000 or any integral multiple thereof. The initial paying agent for the Bonds shall be The Bank of New York Trust Company of Florida, N.A., 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 institutions generally in the city in which Designated Payment / 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, the Bonds will be registered and delivered only to Cede & 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." Redemption Optional Redemption: The Bonds maturing on or after September 1, 2013, are subject to redemption prior to maturity at the option of the District, in whole or from time to time in part, on September 1, 2012, and on any date thereafter, ata redemption price equal to the principal amount thereof plus accrued interest from the most recent interest payment date to the date fixed for redemption. 8 Mandatory Sinking Fund Redemption: The Bonds maturing September 1, 2020 and September 1, 2022 (collectively, the "Term Bonds") are subject to mandatory sinking fund redemption in part prior to their stated maturity, and will be redeemed by the Issuer at a redemption price equal to the principal amount thereof plus interest accrued thereon to the redemption date, on the date and in the principal amounts shown in the following schedule: Term Bond Due September 1, 2020 Redemption Date Principal Amount September 1, 2019 $225,000 September 1, 2020* 235,000 * Represents Maturity Term Bond Due September 1, 2022 Redemption Date Principal Amount September 1, 2021 $245,000 September 1, 2022* 260,000 Approximately forty-five (45) days prior to the mandatory redemption date, the Paying Agent/Registrar shall select by lot the numbers of the Term Bonds to be redeemed. Any Term Bonds not selected for prior redemption shall be paid on the date of their Stated Maturity. The principal amount of said Bonds maturing in 2020 and 2022 to be redeemed pursuant to the operation of such mandatory redemption provision shall be reduced, at the option of the District, by the principal amount of said Bonds of the respective maturity which, at least 45 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 Bonds plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, (2) shall have been purchased and cancelled by the Paying Agent/Registrar 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 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 Bonds 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 Bond to be redeemed at its address as it appeared on the 45th calendar day prior to such redemption date and to major securities depositories and bond information services. ANY NOTICE OF REDEMPTION SO MAILED TO THE REGISTERED OWNERS WILL BE DEEMED TO HAVE BEEN DULY GIVEN IRRESPECTIVE OF WHETHER ONE OR MORE OF THE REGISTERED OWNERS FAILED TO RECEIVE SUCH NOTICE. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the Bonds or portion thereof which are to be redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. The Bonds of a denomination larger than $5,000 may be redeemed in part ($5,000 or any multiple thereof). Any Bond to be partially redeemed must be surrendered in exchange for one or more new Bonds of the same maturity for the unredeemed portion of the principal of the Bonds so surrendered. In the event of redemption of less than all of the Bonds, the particular Bonds to be redeemed shall be selected by the District, if less than all of the Bonds of a particular maturity are to be redeemed, the Paying Agent is required to select the Bonds of such maturity to be redeemed by lot. The Paying Agent/Registrar and the Issuer, so long as a Book -Entry -Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Bonds or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the Beneficial Owner, will not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the Issuer will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book -Entry -Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the Beneficial Owners. Any such selection of Bonds to be redeemed will not be governed by the Bond Ordinance and will not be conducted by the Issuer or the Paying Agent/Registrar. Neither the Issuer nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or Beneficial Owners of the selection of portions of the Bonds for redemption. (See "BOOK -ENTRY -ONLY SYSTEM" herein. 9 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 Bond 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 premised on any such notice. Redemption of portions of the Bonds by the Master District will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book -Entry Only System, a redemption of such Bonds held for the account of DTC Participants in accordance with its rules or other agreements with DTC Participants and then Direct Participants and Indirect Participants may implement a redemption of such Bonds and such redemption will not be 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 -Entry -Only System The District is initially utilizing the book -entry -only system of the DTC. See "BOOK -ENTRY -ONLY SYSTEM." In the event that the Book -Entry -Only System is discontinued by DTC or the District, the following provisions will be applicable to the Bonds. Payment: Principal of the Bonds will be payable at maturity to the registered owners as shown by the registration books maintained by the Paying Agent upon presentation and surrender of the Bonds to the Paying Agent at the designated office for payment of the Paying Agent/Registrar in Dallas, Texas (the "Designated Payment/Transfer Office"). Interest on the Bonds will be payable by check or draft, dated as of the applicable interest payment date, sent by the Paying Agent by United States mail, first class, postage prepaid, to the registered owners at their respective addresses shown on such records, or by such other method acceptable to the Paying Agent requested by registered owner at the risk and expense of the registered owner. If the date for the payment of the principal of or interest on the Bonds shall be a Saturday, Sunday, legal holiday or day on which banking institutions in the city where the Designated Payment/Transfer Office of the Paying Agent is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not a Saturday, Sunday, legal holiday or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the original date payment was due. Registration: The Bonds may be transferred and re -registered on the registration books of the Paying Agent only upon presentation and surrender thereof to the Paying Agent/Registrar at the Designated Payment/Transfer Office. A Bond also may be exchanged for a Bond or Bonds of like maturity and interest and having a like aggregate principal amount or maturity amount, as the case may be, upon presentation and surrender at the Designated Payment/Transfer Office. All Bonds surrendered for transfer or exchange must be endorsed for assignment by the execution by the registered owner or his duly authorized agent of an assignment form on the Bonds or other instruction of transfer acceptable to the Paying Agent. Transfer and exchange of Bonds will be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such transfer or exchange. A new Bond or Bonds, in lieu of the Bond being transferred or exchanged, will be delivered by the Paying Agent/Registrar to the registered owner, at the Designated Payment/Transfer Office of the Paying Agent/Registrar or by United States mail, first-class, postage prepaid. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the denominations of $5,000 or any integral multiple thereof. Limitations on Transfer of Bonds: Neither the District nor the Paying Agent shall be required to make any transfer, conversion or exchange to an assignee of the registered owner of the Bonds (i) during the period commencing on the close of business on the 15th calendar day of the month preceding each interest payment date (the "Record Date") and ending with the opening of business on the next following principal or interest payment date or (ii) with respect to any Bond called for redemption, in whole or in part, within forty-five (45) days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Bond. Replacement Bonds: If a Bond is mutilated, the Paying Agent will provide a replacement Bond in exchange for the mutilated bond. If a Bond is destroyed, lost or stolen, the Paying Agent will provide a replacement Bond upon (i) the filing by the registered owner with the Paying Agent of evidence satisfactory to the Paying Agent of the destruction, loss or theft of the Bond and the authenticity of he registered owner's ownership and (ii) the furnishing to the Paying Agent of indemnification in an amount satisfactory to hold the District and the Paying Agent harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Bond must be borne by the registered owner. The provisions of the Bond 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. 10 Authority for Issuance The Bonds were authorized at elections held on April 4, 1981 and October 29, 1988. The District was formerly known as Denton County Municipal Utility District No.2 and Denton County Municipal Utility District No.3, under which entity names the bonds were voted. After the sale of the Bonds, $5,740,000 in District bonds will remain authorized but unissued. The Bonds are issued by the District pursuant to the terms and provisions of the Bond Order; an approving order of the Commission, and the Constitution and general laws of the State, particularly Article XVI, Section 59 of the Texas Constitution and Chapters 49 and 54 of the Texas Water Code, as amended.. 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 Pledge: The Board covenants in the Bond Order that, while any of the Bonds are outstanding and the District is in existence, it will levy and assess a continuing ad valorem tax upon each $100 valuation of taxable property within the District at a rate from year to year sufficient, full allowance being made for anticipated delinquencies, together with revenues and receipts from other sources which are legally available for such purposes, to pay interest on the Bonds as it becomes due, to provide for the payment of principal of the Bonds when due or the redemption price at any earlier required redemption date, to pay when due any other contractual obligations of the District payable in whole or in part from taxes, and to pay the expenses of assessing and collecting such tax. The Board additionally covenants in the Bond 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 "Interest 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. Annexation: Under Texas law, the territory 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. 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). The District 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. Payment Record The District has never defaulted. Flow of Funds and Investment of Funds The Bond Order creates an Interest and Sinking Fund and a Construction Fund. Each fund shall be kept separate and apart from all other funds of the District. The Interest 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. Interest and Sinking Fund: The Bond Order establishes the Interest and Sinking Fund to be used to pay principal and interest on and Paying Agent fees in respect to the Bonds. The Bond Order requires that the District deposit to the credit of the Interest and Sinking Fund (i) from the delivery of the Bonds to the initial purchaser, the amount received from proceeds of the Bonds representing accrued interest, (ii) District ad valorem taxes (and penalties and interest thereon) levied to pay debt service requirements on (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 Bond Order requires that the Interest and Sinking Fund be applied solely to provide for the payment of the principal or redemption price of and interest on the Bonds when due, and to pay fees to the Paying Agent when due. 11 Construction Fund: The Construction Fund is the capital improvements fund of the District. The Bond Order requires the District to deposit to the credit of the Construction Fund the balance of the proceeds of the Bonds remaining after the deposits to the Debt Service Fund provided in the Bond Order. The Construction Fund may be applied solely to (i) pay the costs necessary or appropriate to accomplish the purposes for which the Bonds are issued, (ii) pay the costs of issuing the Bonds and (iii) the extent the proceeds of the Bonds and investment income attributable thereto are in excess of the amounts required to acquire and construct water, wastewater and drainage facilities as approved by the Commission, then in the discretion of the District to transfer such unexpended proceeds or income to the Interest and Sinking Fund. Defeasance of Outstanding Bonds The Order provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money sufficient to make such payment or (2) Defeasance Securities, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The Order provides that "Defeasance Securities" means (1) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (2) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, 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 firm 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. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the Bonds for redemption is not extinguished if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorize. Paying Agent/Registrar Principal of and semiannual interest on the Bonds will be paid by The Bank of New York Trust Company of Florida, N.A., Dallas, Texas, the initial Paying Agent/Registrar (the "Paying Agent"). The Paying Agent must be a bank, trust company, financial institution or other entity duly qualified and equally authorized to serve and perform the duties as paying agent and registrar for the Bonds. Provision is made in the Bond Order for the District to replace the Paying Agent by a resolution of the District giving notice to the Paying Agent of the termination of the appointment, stating the effective date of the termination and appointing a successor Paying Agent. If the Paying Agent is replaced by the District, the new Paying Agent shall be required to accept the previous Paying Agent's records and act in the same capacity as the previous Paying Agent. Any successor paying agent/registrar selected by the District shall be subject to the same qualification requirements as the Paying Agent. The successor paying agent/registrar, if any, shall be determined by the Board of Directors and written notice thereof, specifying the name and address of such successor paying agent/registrar will be sent by the District or the successor paying agent/registrar to each Registered Owner by first-class mail, postage prepaid. Record Date The record date for payment of the interest on Bonds on any regularly scheduled interest payment date is defined as the fifteenth (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 facilities for which the District was created, with the approval of the Commission and, in the case of bonds payable from taxes, the District's voters. Following the issuance of the Bonds, $5,740,000 unlimited tax bonds authorized by the District's voters will remain unissued. In addition, voters may authorize the issuance of additional bonds or other contractual obligations secured by ad valorem taxes. The District also has 12 the right to enter into certain other obligations including the issuance of revenue bonds and notes, bond anticipation notes and tax anticipation notes without voter approval. Neither Texas law nor the Bond Order imposes a limitation on the amount of additional debt which may be issued by the District. Any additional debt issued by the District may dilute the security of the Bonds. See "INVESTMENT CONSIDERATIONS." 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: "All bonds, notes, and other obligations issued by a district shall be legal and authorized investments for all banks, 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 deposits 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 entities 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. Specific Tax Covenants In the Bond 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 covenant if it has received a written opinion of a nationally recognized bond counsel to the effect that failure to comply with such covenant will not adversely affect the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. Additional Covenants The District has additionally covenanted in the Bond Order that it will keep accurate records and accounts and employ an independent certified public accountant to audit and report on its financial affairs at the close of each fiscal year, such audits to be in accordance with applicable law, rules and regulations and open to inspection in the office of the District. Remedies in Event of Default The Bond Order provides that, in addition to all other rights and remedies of any owner of Bonds provided by the laws of the State of Texas, in the event the District defaults in the observance or performance of any covenant in the Bond Order including payment when due of the principal of and interest on the Bonds, any Bond owner may apply for a writ of mandamus from a court of competent jurisdiction requiring the Board of Directors or other officers of the District to observe or perform such covenants. The Bond Order provides no additional remedies to a Bond owner. Specifically, the Bond Order does not provide for an appointment of a trustee to protect and enforce the interests of the Bond owners or for the acceleration of maturity of the Bonds upon the occurrence of a default in the District's obligations. Consequently, the remedy of mandamus is a remedy, which may have to be enforced from year to year by the Bond owners. Under Texas law, no judgment obtained against the District may be enforced by execution of a levy against the District's public purpose property. The Bond owners themselves cannot foreclose on property within the District or sell property within the District in order to pay principal of or interest on the Bonds. In addition, the enforceability of the rights and remedies of the Bond owners may be limited by federal bankruptcy laws or other similar laws affecting the rights of creditors of political subdivisions. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified to the customary rights of debtors relative to their creditors 13 Approval of the Bonds The Attorney General of Texas must approve the legality of the Bonds prior to their delivery. The Attorney General of Texas does not pass upon or guarantee the quality of the Bonds as an investment, nor does he pass upon the adequacy or accuracy of the information contained in this Official Statement. No -Litigation Certificate The District will furnish to the Initial Purchaser a certificate, dated as of the date of delivery of the Bonds, executed by both the President and Secretary of the Board, to the effect that no litigation of any nature has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Bonds; restraining or enjoining the issuance, execution or delivery of the Bonds; affecting the provisions made for the payment of or security for the Bonds; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the Bonds; or affecting the validity of the Bonds. No Material Adverse Change The obligations of the Initial Purchaser 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. Amendments to the Bond Order The District may without the consent of or notice to any Bond owners amend the Bond Order in any manner not detrimental to the interest of the Bond owners, including the curing of an ambiguity, inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the owners of a majority in principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Bond Order, except that, without the consent of the owners of all of the Bonds affected, no such amendment, addition, or rescission may (1) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof or the rate of interest thereon, change the place or places at, or the coin or currency in which, any Bond or the interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission. In addition, a state, consistent with federal law, may in the exercise of its police powers make such modifications in the terms and conditions of contractual covenants relating to the payment of indebtedness of its political subdivisions as are reasonable and necessary for attainment of an important public purpose. 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 to be reliable, but takes no responsibility for the accuracy or completeness thereof. The District cannot and does not give any assurance the (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participant, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company ("DTC"), New York, New York, will act initially as securities depository for the Bonds. The Bonds will be issued as fully -registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Bonds in the aggregate principal amount of such 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 transactions in deposited securities, through electronic computerized book -entry transfers and pledges in 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 14 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 ("Indirect 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 Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct or Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book -entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co., or such other DTC nominee, do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent and request that copies of notices be provided directly to them. Redemption notices shall be sent to Cede & Co. If less than all of the Bonds within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as made by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Issuer or Agent, 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 District. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered. The District may decide to discontinue use of the system of book -entry transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered in accordance with the Bond Order. 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 Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book -Entry -Only 15 System, and (ii) except as described above, notices that are to be given to registered owners under the Bond Resolution will be given only to DTC. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that the District believes to be reliable, but the District 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 to be given to registered owners under the Bond Ordinance will be given only to DTC. USE AND DISTRIBUTION OF BOND PROCEEDS Proceeds from the sale of the Bonds will be used to finance the following projects in the District: 1) wastewater treatment plant (WWTP) expansion, 2) two million gallon (mg) ground storage tank installation, 3) 21 -inch water line additional capacity reimbursement, 4) WWTP connection charges, and 5) reimbursement of engineering fees and bond issuance costs related to projects. The presently estimated use and distribution of Bond proceeds is set forth below. Of the proceeds to be received from the sale of the Bonds, $3,360,000 is estimated to be required for construction costs and $150,000 is estimated to be required for non - construction costs. CONSTRUCTION COSTS A. District Items 1. WWTP Expansion $1,284,900 2. Ground Storage Tank (2 mg) 761,000 3. Master District Connection Charges (850 connections) 807,900 4. Water Line Reimbursement 100,000 5. Contingencies (10.0% of items 1 & 2) 204,000 6. Engineering (9.0% of Items 1, 2 & 5)) 201.600 TOTAL CONSTRUCTION COSTS $3.360.000 NON -CONSTRUCTION COSTS 1. Legal Fees (1.5%) $ 52,650 2. Fiscal Fees (1.4274%) 50,100 3. Bond Insurance Costs 7,875 4. Bond Application Report Costs 30,600 5. TNRCC Bond Proceeds Fee (.25% of BIR) 8.775 TOTAL NON -CONSTRUCTION COSTS $ 150.000 TOTAL BOND ISSUE REQUIREMENT $3.510.000 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 tax, 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 16 be significantly affected by factors such as interest rates, credit availability, construction costs, energy availability and the prosperity and demographic characteristics of the urban center toward which the marketing of lots is directed. Decreased levels of construction activity 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. Lenders have been selective in recent years in making real estate loans in the Houston area because of the negative impact to their real estate portfolios. Interest rate levels may affect the ability of a landowner with undeveloped property to undertake and complete development activities within the District. Because of the numerous and changing factors affecting the availability of funds, the District is unable to assess the future availability of such funds for continued development and construction within the District. In addition, the success of development within the District and growth of District's taxable property values are, to a great extent, a function of the Dallas/Fort Worth metropolitan and regional economics. Competition: The demand for single-family homes in the District, could be affected by competition 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 Dallas/Fort 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. Developers Under No Oblioation to the District: There is no commitment from, or obligation of, any developers to proceed at any particular rate or according to any specified plan with the development of land or the construction of homes in the District, and 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 Taxpayers." Impact on District Tax Rates: Assuming no further development, the value of the land and improvements currently within the District will be the major determinant of the ability or willingness of District property owners to pay their taxes. The 2001 assessed valuation of the District (see "FINANCIAL STATEMENT") is $255,019,864. After issuance of the Bonds the projected maximum annual debt service requirement will be $804,963 (2011) and the projected average annual debt service requirement will be $550,205 (2003 through 2023, inclusive). Assuming no increase or decrease from the 2001 assessed valuation and no use of funds on hand, a tax rate of $0.326 per $100 assessed valuation at a 97% collection rate would be necessary to pay the projected maximum annual debt service requirement of $804,963 and a tax rate of $0.223 per $100 assessed valuation at a 97% collection rate would be necessary to pay the projected average annual debt service requirement of $550,205. The District's 2001 debt service tax rate is $0.1911 per $100 assessed valuation. See "APPENDIX A — TABLES 4 and 5" herein. Tax Collections The District's ability to make debt service payments may be adversely affected by its inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the District constitutes a lien in favor of the District on a parity with the liens of all other state and local taxing authorities on the property against which taxes are levied, and such lien may be enforced by foreclosure. The District's ability to collect ad valorem taxes through such foreclosure may be impaired by (a) cumbersome, time-consuming and expensive collection procedures, (b) a bankruptcy court's stay of tax collection procedure against a taxpayer, or (c) market conditions limiting the proceeds from a foreclosure sale of taxable property. While the District has a lien on taxable property within the District for taxes levied against such property, such lien can be foreclosed only in a judicial proceeding. Because ownership of the land within the District is highly fragmented among a number of taxpayers, attorneys fees, and other costs of collecting any such taxpayer's delinquencies could substantially reduce the net proceeds to the District from a tax foreclosure sale. Finally, any bankruptcy court with jurisdiction over the bankruptcy proceedings initiated by or against a taxpayer within the District pursuant to the Federal Bankruptcy Code could stay any attempt by the District to collect delinquent ad valorem taxes against such taxpayer. 17 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 territory 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) upon satisfying certain conditions, annex additional territory; and 2) exclude land subject to taxation within the District that is not served by District facilities if the District simultaneously annexes land of equal acreage and value that may be practicably served by District facilities. No representation is made concerning the likelihood that the District would effect any change in its boundaries. Registered Owners' Remedies Bond owners are entitled under Texas Law to seek a writ of mandamus to compel the District to perform its 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 affecting the rights of creditors of political subdivisions such as the District. Texas law requires a municipal utility district such as the District to obtain the approval of the TNRCC 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 1989" ("FIRREA"), enacted on August 9, 1989, contains certain provisions which affect the time for protesting property valuations, the fixing of tax liens, and the collection of penalties and interest on delinquent taxes on real property owned by the Federal Deposit Insurance Corporation ("FDIC") when the FDIC is acting as the conservator or receiver of an insolvent financial institution. Under FIRREA real property held by the FDIC is still subject to ad valorem taxation, but such act states (i) that no real property of the FDIC shall be subject to foreclosure or sale without the consent of the FDIC and no involuntary liens shall attach to such property, (ii) the FDIC shall not be liable for any penalties or fines, including those arising from the failure to pay any real or personal property tax when due and (iii) notwithstanding failure of a person to challenge an appraisal in accordance with state law, such value shall be determined as of the period for which such tax is imposed. There has been little judicial determination of the validity of the provisions of FIRREA or how they are to be construed and reconciled with respect to conflicting state laws. However, certain recent federal court decisions have held that the FDIC is not liable for statutory penalties and interest authorized by State property tax law, and that although a lien for taxes may exist against real property, such lien may not be foreclosed without the consent of the FDIC, and no liens for penalties, fines, 18 interest, attorneys fees, costs of abstract and research fees exist against the real property for the failure of the FDIC or a prior property owner to pay ad valorem taxes when due. It is also not known whether the FDIC will attempt to claim the FIRREA exemptions as to the time for contesting valuations and tax assessments made prior to and after the enactment of FIRREA. Accordingly, to the extent that the FIRREA provisions are valid and applicable to any property in the District, and to the extent that the FDIC attempts to enforce the same, these provisions may affect the timeliness of collection of taxes on property, if any, owned by the FDIC in the District, and may prevent the collection of penalties and interest on such taxes. 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 secondary 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 MATTERS." Future Debt The District has reserved in the Bond Order the right to issue the remaining $5,740,000 authorized but unissued unlimited tax bonds and such additional bonds as may hereafter be approved by both the Board of Directors and voters of the District. All of the remaining unlimited tax bonds, which have heretofore been authorized by the voters of the District may be issued by the District from time to time for qualified purposes, as determined by the Board of Directors of the District, subject to the approval of the Attorney General of the State of Texas and the TNRCC. 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 following statement was received by the District's Financial Advisor from the District's Special Counsel, Whitaker, Chalk, Swindle & Sawyer, L.L.P. This firm serves as special counsel to the District only on certain specific matters about which we have been consulted by the District, and there may be matters of a legal nature affecting the District about which we have not been consulted. As of May 15, 2002, this firm is handling the following legal matter for the District. On October 18, 2000, after several years of correspondence, meetings, and negotiations, the Federal Deposit Insurance Corporation (FDIC) filed suit against the District, as Case Number 4:00 -CV -1969-Y in the United States District Court for the Northern District of Texas, Fort Worth, Texas, styled Federal Deposit Insurance Corporation in its capacity as Manaaer of the FSLIC Resolution Fund, the successor to Gibraltar Savings Association. Plaintiff. vs. Trophy Club Municipal Utility District No. 2 Defendant. As originally filed, the suit by the FDIC seeks recovery of $4,813,343, plus interest, attorney's fees and court cost, less any amounts that the District can show were paid to Gibraltar Savings Association on such claims. The suit also seeks injunctive relief and writs from the court to compel the District to issue and sell bonds to pay the amount owed to FDIC. The management of the District is responding to the litigation vigorously. The District filed a Defendant's Original Answer, Counterclaim, and Demand for Jury Trial on January 18, 2001, denying the claims by the FDIC, and pursuing a counterclaim against the FDIC for the court to declare the rights of the parties under the written documents at issue in the suit and seeking recovery of attorney's fees and costs incurred by the District. A court-ordered settlement conference was held in April 2001 and a formal non-binding mediation conference was conducted in June 2001, but both were unsuccessful in resolving the disputes. Pre-trial discovery in the suit was completed in early November 2001 and both sides filed motions for summary judgment about the end of November. The Court has not yet ruled on the motions for summary judgment. By an Order signed April 17, 2002, the Court has recently set this case for a jury trial during the month of January 2003, and also ordered that another formal non-binding mediation conference be held during the month of December 2002. 19 From the pre-trial discovery, motions, and Joint Pre -Trial Order, it appears that the FDIC's claim has now been reduced to about $1,900,000 plus interest, attorney's fees, and court costs, or a total claim of about $2,500,000. The District is still denying any liability to the FDIC on the basis that the case was not timely filed under applicable statutes of limitation, that Gibraltar itself first breached the contract on which it is bringing the suit, and other defenses. The resolution of these claims will depend on the court's ruling on the pending motions for summary judgment and on the jury's findings of fact and the court's rulings on the legal issues in a trial, if needed. Based on information presently known to us, it is our opinion that this matter may have a material effect on the financial statements of the District, and that significant legal fees and expenses will be incurred by the District from time to time to continue to respond to the FDIC's litigation and to pursue the District's counterclaim. However, it is also our opinion that the issues involved may be resolved in an out-of-court settlement during further settlement conferences or during the non-binding mediation to be held in December 2002. We currently believe the maximum range of exposure to the District is probably about $2,500,000. This is consistent with our opinion to the District's auditors last year, which stated a risk range of $2,000,000 to $3,000,000 before any discovery was conducted. Except for the proceeding described above, this firm is not aware of and has not been engaged to give substantial attention to or represent the District in connection with any pending or threatened litigation, claim, or assessment or any unasserted claim or assessment considered probable of assertion involving potential losses or gains whose expected effect upon the financial statements of the District would be more than $1,000 individually or in the aggregate, as of May 15, 2002. The District may issue additional unlimited tax bonds to defer the cost of the above -referenced litigation, should it be unsuccessful in its defense of this claim and/or its counter counterclaim. [The remainder of this page is intentionally left blank.] 20 OENTO LOCATION MAP t,2 NORTH LAKE SARTONVILLE ALLEN PARKER COLLIN CO aLLAS CO GRAPEVINE KELLER SOH SAGINAW LAKE UE WORTH BUND LAKESI HALTOOM SETT I ENr /VIILAGETHWE Nlll GOLLEYVILLE ROCK AL4+F L WATAUGA BEDFORD IKCHNLAND HHIILLLSS� EULES L.7811 ESOUITE EOOECLIF VILLAGE FOREST mr ,a-PANTEGO DALWORTHINGTOS ARLINGTON RILL KEN G44RRUUEE!!!! tto IELD 3 iA�NI C0 y EVERMAN �'••.„FL EBORNE CROWLEY — _—.BURLE56N! 1 GON10LELL SEAGOVILLE V1 __ly+c_N_u cT NALPYAN Lb I' 3111U CEDAR MILL VENUS' ALVARADO 21 WAXAHACHIE atuS 00----'—_—..� MIS CO Com` �FNNIR �`1 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 Water Commission (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 834.46 acres of which 806.96 acres are developable. Of the 806.96 developable acres, approximately 578.13 have been fully developed, including approximately 1400 single-family lots and 67 condominium units, a small shopping center, three (3) large parks (including 2 currently under development), three (3) schools, a church and a daycare. There are approximately 225 acres remaining for residential development. The District has experienced a steady increase in the number of houses built (in excess of 80 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, and tennis courts. 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 Texas Natural Resources Conservation Commission, 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. Name James C. Thomas Jim Budarf Carol Borges Kevin Carr Lynn Hale Consultants Tax Assessor/Collector Position President Vice -President Secretary/Treasurer Director Director Term Expires Mav 2004 2004 2006 2004 2006 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 Manaaer Ms. Cathy Morgas serves as District Manager for the District. Ms. Morgas has been with the District since 1991 and assumed District Manager responsibilities in May 2000. She 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 six months and earlier served ten years and seven months as District Manager. Engineer The District's consulting engineer is Carter & Burgess(the "Engineer"). 22 Auditor Rutledge Crain & Company, PC has served as the District's independent auditor since August 1997. Financial Advisor SWS Securities serves as the District's financial advisor (the "Financial Advisor') since. The fee for services rendered in connection with the issuance of the Bonds is based on the percentage of the Bonds actually issued, sold and delivered and, therefore, such fee is contingent upon the sale and delivery of the Bonds. The Financial Advisor has been authorized by the Board to submit a bid for the purchase 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. Leaal Counsels The District employs Cowles & Thompson, Dallas, Texas and Whitaker, Chalk, Swindle & Sawyer, L.L.P. as legal counsels for various matters, not related to the sale of the Bonds. 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 Westlake. 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 4,200 based on 2.96 persons for each of the 1,420 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 the District has a major grocery store chain outlet, a bank, a drug store, several service businesses such as a dry cleaners, fast food outlets, and a beauty shop. Additionally there are several more businesses and professional offices located at the primary entrance to the Town of Trophy Club, less than 1 mile from the majority of the District's residents. There are additional shopping facilities in Roanoke, about two (2) miles west of the District and numerous shopping facilities 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. 23 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 fighter/paramedics, 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 $.0725 maintenance tax assessment in MUDs No. 1 and 2 with an annual budget of approximately $653,000. 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 6-8), 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, AT&T, 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 facilities for soccer, baseball, softball, basketball, and tennis as well as playground amenities. The Town is currently constructing a new 10 -acre park with additional sports venues. 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 & B), Eagles Ridge, Fox Pointe, and Hogan's Glen -Waters; a mixed use development including single-family, multi -family, office, commercial retail, schools, and churches; and amenity improvements. The following development breakdown information is as of May 2002: 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, 1,357 completed and occupied single-family homes, 116 completed and unoccupied single-family homes, 24 single-family homes under construction and 72 vacant developed single-family homes. Of the 72 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 -Family Development: 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 Development: Office development in the District presently consists of 1,920 square feet of professional offices. Retail / Commercial Development: A 13.96 acre shopping center (Trophy Club Plaza) and additional retail/commercial 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. Amenity Development: Recreational facilities within the District include the Trophy Club Country Club (including a 36 -hole golf course, club house, golf shop, swimming pool, tennis courts, and equestrian center), a mixed-use park of approximately 13 24 acres (including ball fields, playgrounds, tennis courts, green space, and soccer fields), a 10 acre baseball park currently under development, and a community swimming pool park anticipated to be ready for use by the spring of 2003. Undeveloped Acreaae: The District contains approximately 227 undeveloped but developable acres, a portion of which 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 remainder of this page is intentionally left blank.] 25 The following chart more completely describes the status of development within the District as of April 2002. Single Family Homes Complete Complete Vacant Total Total and and Under Developed Subdivision Acreage Lots Occupied Unoccupied Construction Lots A. Single Family The Knoll 23.5361 46 0 0 0 46 The Lakes (1-3) 144.8800 339 268 24 19 28 Lakeside 31.7850 111 102 9 0 0 Village West A & B 113.6400 382 351 31 0 0 Eagles Ridge 27.7996 62 40 6 2 14 Fox Pointe 11.9896 36 20 8 3 5 Hogan's Glen -Waters 7.6770 15 1 0 0 14 Section 10 53.0500 136 124 11 0 1 Section 11 56.4300 151 135 12 0 4 Section 12 43.9800 68 60 5 0 3 Section 13 26.1430 129 116 10 0 3 Total Single Family 540.9100 1,475 1,217 116 24 118 B. Multifamily Quorum Condominiums 5.3459 1 Total Multifamily 5.3459 1 C. Office/Commercial/Retail Trophy Club Plaza 13.9600 3 Total Office/Comrcl/Retail 13.9600 3 D. Other Medlin Middle School 16.9420 N/A Beck Intermediate School 8.6350 N/A Lakeview Elementary School 15.0000 N/A Iven Glen School? 1.0500 N/A Baptist Church 4.0000 N/A Total Other 45.6270 N/A E. Undeveloped Land Role of a Developer 228.61 1 Total 834.46 1,480 THE 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 marketing program, planning and scheduling building schedules, securing necessary governmental approvals and permits for development, arranging for the construction of roads and the installation of utilities (including, in some cases water, sewer, and drainage facilities in the utility district) pursuant to the rules of the TNRCC, and selling improved lots or commercial reserves to builders, other developers or third parties. Ordinarily, the developer pays one hundred percent (100%)of the 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 26 platting of all lots as well as street construction and building inspection. While a landowner or developer is required by the TNRCC 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 other 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 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 Supply: The present water supply is provided from two sources: (i) four ground wells which provide approximately 1,000,000 gallons per day, and (ii) a 21 inch water line which is capable of delivering 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 Facility: The present facility provides 2,420,000 gallons ground storage with pumping/chlorination capacity of 10,000,000 gallons per day. Preliminary site work and piping systems are in place for an additional 2,000,000 -gallon ground storage tank that is anticipated to be constructed following the sale of the 2002 bond issue (this issue). The total water plant capacity, once construction of the new ground storage tank and demolition of the 420,000 -gallon storage tank is complete, will be 4,000,000 gallons of ground storage. Description of the Wastewater System Wastewater Treatment Plant Facility: The wastewater treatment plant system has a permitted treatment /discharge capacity of 1,400,000 gallons per day from the Texas Natural Resources Conservation Commission under TPDES Permit No. 11593-001. The Districts have applied for a major amendment to authorize an increase in the discharge of treated domestic wastewater from an annual average flow not to exceed 1,400,000 gallons per day to an annual average flow not to exceed 1,750,000 gallons per day. A portion of the funds resulting from the sale of the 2002 bond issue (this issue) will go towards the cost of a major renovation to the wastewater treatment plant in order to achieve the increase in permitted discharge. Although the permit authorizes the discharge of wastewater to the adjacent tributary leading to Lake Grapevine, the plant effluent is currently pumped to various holding ponds within the community and is re -used for irrigating the 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 d/b/a/ 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 Gibraltar to the City. MUD No. 1 and Gibraltar mutually agreed to 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 -foot 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 27 No.1 fronted the total cost of relocating the line and was subsequently reimbursed by MUD No. 2 for their then current ownership portion. Gibraltar declined to participate in the cost of relocating the 15,000 -foot section of the line. 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 new Master District Contract supercedes the original contract dated 12/1/1982 and is in effect as an interim agreement until such time MUD No. 2 pays MUD No. 1 for an additional share of central water and sewer system facilities. This share is included in the "2002 Bond Issue". Upon payment by MUD No. 2, the Master District shall convert from the interim term contract to a full (non -interim) 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 and/or renovation of facilities will be overseen by the Master District Board, which consists of 3 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. The Contract may be terminated by any party as of September 30, 2005, so long as notice to terminate is submitted in writing to all parties by September 30,2003. After September 30, 2005, this Contract may be terminated by any party as of September 30 of any 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. Joint central plant facilities to be constructed or substantially renovated as a result of the sale of the 2002 bonds (this issue) include wastewater treatment plant renovations and a new two (2) million gallon ground storage tank in the central water plant. WASTEWATER TREATMENT PLANT CAPACITY AGREEMENT A portion of the proceeds of the MUD No. 1 Series 1991 bonds were used to provide funds for MUD No. 1's portion of the 3676 connections added by an expansion of the wastewater plant that occurred in 1984. Of the 3676 total connections, MUD No. 1 was allocated 3,382 connections and 294 connections were allocated to MUD No. 2. In its capacity as Master District, MUD No. 1 entered into an agreement commencing September 1991 with MUD No. 2, whereby MUD No.1 granted MUD No. 2 an exclusive and irrevocable option for seven years to acquire ownership of additional capacity in the wastewater treatment plant totaling 1,082 connections, or any portion thereof. MUD No. 2 agreed to pay MUD NO. 1 the construction price per connection, as approved by the TNRCC, plus the net effective interest on the bonds, from the delivery date of the bonds to the date of payment for such additional capacity by MUD No. 2 less any revenue credited to MUD No. 2. Upon funding of the 2002 bond issue (this issue), MUD No. 2 will purchase all remaining connections currently held by MUD No.1 for the benefit of MUD No. 2. Approximately 800 connections will be purchased at that time. 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 preserve principal and maintain liquidity, while securing a competitive yield on its portfolio. 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 of Texas and are guaranteed or 28 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 (1), and are placed through a primary government securities dealer or a financial institution doing business in the State 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-1 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 stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (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 firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The District may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance, or resolution. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar -weighted maturity allowed for pooled fund groups. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the District's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and probable income to be derived." At least quarterly the District's investment officers must submit an investment report to 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. Current Investments As of December 31, 1999 the District's funds were invested as shown in the table that follows. The District does not currently 29 own, nor does it anticipate the inclusion of long-term securities or derivative products in its portfolio. Fund and Investment Type Percentage Amount of Portfolio TexPool $697,425 92.25% Cash on Hand (Depository Bank) 58,587 7.75% Total Investments $756,012 100.00% TAX DATA District Bond Tax Rate Limitation The District's tax rate for debt service on the Bonds 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 District'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 August 8, 1980, 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 2001 maintenance and operations tax of $0.1743/$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 and/or 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 (see "RISK FACTORS - Future Debt" herein) and to pay the expenses of assessing and collecting such taxes. The District agrees in the Bond Order to levy such a tax from year-to-year as described more fully herein under "THE BONDS - Source of and Security for Payment." Under Texas law, the Board is also authorized to levy and collect an ad valorem tax for the operation and maintenance of the District and its water and wastewater system and for the payment of certain contractual obligations, if authorized by its voters. See " TAX RATE LIMITATION" herein." Property Tax Code and County -Wide Appraisal District The Texas Property Tax Code (the "Property Tax Code") specifies the taxing procedures of all political subdivisions of the State of Texas, including the District. Provisions of the Property Tax Code are complex and are not fully summarized herein. The Property Tax Code requires, among other matters, county -wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within the county and an appraisal review board with responsibility for reviewing and equalizing the 30 values established by the appraisal district. The board of directors of the appraisal district selects a chief appraiser to manage the appraisal offices of the appraisal district. The Denton County Appraisal District (the "DCAD") has the responsibility for appraising property 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. General: Except for certain exemptions provided by Texas law, all property with a tax situs in the District is subject to taxation by the District; however, no effort is made by the District to collect taxes on tangible or intangible personal property not devoted to commercial or industrial use. Principal categories of exempt property 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. 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. Residential Homestead Exemptions: 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 has not granted any residential homestead exemptions from ad valorem taxation for 1998 or any prior years. 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 for 1998 and thereafter. 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, either for replacement cost or the market data method of valuation may be used, whichever is appropriate. Certain land may be appraised at less than market value under the Property Tax Code. Increases in the appraised value of residence homesteads are limited to 10 percent annually regardless of the market value of the property. Upon application of a landowner, land which qualifies as "open -space land" is appraised based on the category of land, using accepted income capitalization methods applied to the average net income derived from the use of the land for agriculture and hunting or recreational leases. Upon application of a landowner, land which qualifies as "timber land" is appraised using accepted income capitalization methods applied to the average net income derived from the use of the land for production of timber. Land which qualifies as an aesthetic management zone, critical wildlife management zone, or streamside management zone or is being regenerated for timber production for 10 years after harvest is valued at one-half that amount. In the case of both open space and timber land valuations, if the use of land changes, an additional tax is generally imposed on the land equal to the difference between the taxes imposed on the land for each of the five (5) years preceding the year in which the change of use occurs and the tax that would have been imposed had the land been taxed on the basis of market value in each of those years, plus interest at an annual rate of seven percent (7%) calculated from the dates on which the differences would have become due. There are also special appraisal methods for agricultural land owned by individuals whose primary occupation and income are farming and for recreational, park, and scenic land. Also, houses or lots held for sale by a developer or builder which remain unoccupied, are not leased or rented and produce no income are required to be assessed at the price for which they would sell as a unit to a purchaser who would continue the owner's business, upon application of the owner. 31 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 appraisal roll has been appraised. Any owner who has timely filed notice with the Appraisal Review Board may appeal the final determination by the Appraisal Review Board of the owner's protest by filing suit in Texas district court. Prior to such appeal, however, the owner must pay the tax due on the amount of value of the property involved that is not in dispute or the amount of tax paid in the prior year, whichever is greater, but not to exceed the amount of tax due under the order from which the appeal is taken. In the event of such suit, the value of the property is determined by the court, or a jury if requested by any party. Additionally, the District is entitled to challenge certain matters before the Appraisal Review Board, including the level of appraisal of certain category of property, the exclusion of property from the appraisal records, or the grant in whole or in part of a partial exemption, or a determination that land qualifies for a special use appraisal (agricultural or timber classification, for example). The District may not, however, protest a valuation of individual property. Levy 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 first month of delinquency, one percent (1%) for each month thereafter to July 1, and 12% total if any taxes are unpaid on July 1. Delinquent taxes also accrue interest at the rate of 1% per month during the period they remain outstanding. In addition, where a district engages an attorney for collection of delinquent taxes, the Board may impose a further penalty not to exceed fifteen percent 15% on all taxes unpaid on July 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. Taxes levied by the District are a personal obligation of the owner of the property on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of each state and local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units (see "TAX DATA - Overlapping Taxes"). 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. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two years of foreclosure) or by bankruptcy proceedings which restrict the collection of taxpayer debts. See "INVESTMENT CONSIDERATIONS - Tax Collections and Foreclosure Remedies". Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. 32 District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property on January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the District is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within two years after the purchaser's deed issued at the foreclosure sale is filed in the county records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. See "INVESTMENT CONSIDERATIONS - General - Tax Collections and Foreclosure Remedies." LEGAL MATTERS Legal Opinions Issuance of the Bonds is subject to the approving legal opinion of the Attorney General of Texas to the effect that the initial Bonds are valid and binding obligations of the District payable from the proceeds of an annual ad valorem tax levied, without legal limit as to rate or amount, upon all taxable property within the District. Issuance of the Bonds is also subject to the legal opinion of McCall, Parkhurst & Horton L.L.P. ("Bond Counsel"), based upon examination of a transcript of the proceedings incident to authorization and issuance of the Bonds, to the effect that the Bonds are valid and binding obligations of the District payable from the sources and enforceable in accordance with the terms and conditions described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors' rights or the exercise of judicial discretion in accordance with general principles of equity. Bond Counsel's, legal opinion will also address the matters described below under "TAX MATTERS." Such opinions will express no opinion with respect to the sufficiency of the security for or the marketability of the Bonds. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds are based upon a percentage of Bonds actually issued, sold and delivered, and therefore, such fees are contingent upon the sale and delivery of the Bonds. The legal opinion to be delivered concurrently with the delivery of the Bonds expresses the professional judgment of the attorney rendering the opinion as to the legal issue explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. In connection with the transaction described in this Official Statement, Bond Counsel represents only the District. Litigation With the exception of the case detailed herein under "INVESTMENT CONSIDERATIONS —Litigation" on page 19, in the opinion of the District's Counsel, 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 (either city, state or federal) which, if decided adversely to the District would have a material adverse effect on the financial condition of the District. No -Litigation Certificate The District will furnish to the Initial Purchaser a certificate, dated as of the date of delivery of the Bonds, executed by both the President and Secretary of the Board, to the effect that no litigation of any nature, except as disclosed in this Official Statement, has been filed or is then pending or threatened, either in state or federal courts, contesting or attacking the Bonds; restraining or enjoining the issuance, execution or delivery of the Bonds; affecting the provisions made for the payment of or security for the Bonds; in any manner questioning the authority or proceedings for the issuance, execution, or delivery of the Bonds; or affecting the validity of the Bonds. No Material Adverse Change The obligations of the Initial Purchaser 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 Official Statement. TAX MATTERS Opinion 33 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 Internal 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 B — "Form of Bond Counsel's Opinion." 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 Bond 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 to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that 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 Internal 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 Internal Revenue Service would agree with the opinion of Bond Counsel. If an audit is commenced, under current procedures the Internal 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 Issue Discount The initial public offering price to be paid for one or more maturities of the Bonds (the "Original Issue Discount Bonds") may be less than the 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 Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The "stated redemption price at maturity" means the sum of all payments to be made on the Bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under Existing Law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income Under Existing Law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bond and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (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 Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors 34 with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. Collateral Federal Income Tax Consequences The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, 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. Interest 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. Interest 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 discount" is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. State, Local and Foreign Taxes Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. Qualified Tax -Exempt Obligations for Financial Institutions Section 265(a) of the Code provides, in pertinent part, that interest paid or incurred by a taxpayer, including a "financial institution," on indebtedness incurred or continued to purchase or carry tax-exempt obligations is not deductible 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 public in the ordinary course of such person's trade or business which is subject to federal or state supervision as a financial institution. 35 The District has designated the Bonds as "qualified tax-exempt obligations" within the meaning of section 265(b) of the Code. In furtherance of that designation, the 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 obligations." CONTINUING DISCLOSURE OF INFORMATION The offering of the Bonds qualifies for an exemption from Rule 15c2-12 (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 Bond Order has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The Issuer is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Issuer will be obligated to provided certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information 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 Official 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 fiscal year of the District, and must file each audit report with the TNRCC 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 TNRCC 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 will provide this information to the SID within six months after the end of each of its fiscal years ending in or after 2002. The Issuer may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12 (the "Rule"). The updated information will include audited financial statements for the Issuer, if the Issuer commissions an audit and it is completed by the required time. If audited financial statements cannot be provided, the Issuer will provide unaudited financial statements until the audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in the Issuer's annual financial statements, or such other accounting principles as the Issuer may be required to employ from time to time pursuant to state law or regulation. The Issuer's current fiscal year end is September 30. Accordingly, it must provide updated information by the last day in March in each year, unless the Issuer changes its fiscal year. If the Issuer changes its fiscal year, it will notify any SID of the change. Material Event Notices The Issuer will also provide timely notices of certain events to certain information vendors. The Issuer will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. Neither the Bonds nor the Ordinance make any provision for debt service reserves, credit enhancement or liquidity enhancement. In addition, the Issuer will provide timely 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 Issuer will provide each notice described in this paragraph to any SID and the Municipal Securities Rulemaking Board ("MSRB"). Availability of Information from SID and MSRB The Issuer has agreed to provide the foregoing information only to any SID and 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. 36 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, and its telephone number is 512/476-6947. Limitations and Amendments The Issuer has agreed to update information and to provide notices of material events only as described above. The Issuer has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The Issuer makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Issuer disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the Issuer to comply with its agreement. The Issuer may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Issuer, if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Issuer (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The Issuer may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the Issuer amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided. Compliance with Prior Agreements The Issuer has not previously made a continuing disclosure agreement in accordance with the Rule. FINANCIAL ADVISOR SWS 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 conducted 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. The Issuer has permitted SWS Securities, Inc. the option to bid on the Bonds. SWS Securities, Inc. may submit a bid for the Bonds, either independently or as a member of a syndicate organized to submit a bid for the Bonds. OFFICIAL STATEMENT Experts In approving this Official Statement, the District has relied upon the following experts in addition to the Financial Advisor. The Enaineer: Some of information contained in the Official Statement relating to engineering matters has been provided by Carter & Burgess, Inc, and has been included in reliance upon the authority of said firm as experts in the field of civil engineering. Appraisal District: 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 Assessor/Collector: The information contained in this Official Statement relating to tax collection rates, and principal taxpayers has been provided by the Denton County Tax Assessor/Collector in reliance upon her authority as an expert in the field of tax assessing and collecting. 37 Updating the Official Statement During Underwriting Period If, subsequent to the date of the Official Statement to and including the date the Initial Purchaser is no longer required to provide an Official Statement to potential customers who request the same pursuant to Rule 15c2-12 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 after the "end of the underwriting period"), the District learns or is notified by the Initial Purchaser 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 Initial Purchaser a supplement to the Official Statement which corrects such representation to the reasonable satisfaction of the Initial Purchaser, unless the Initial Purchaser elects to terminate its obligation to purchase the Bonds as described below. See "DELIVERY OF THE BONDS AND ACCOMPANYING DOCUMENTS — Delivery" herein. The obligation of the District to update or change the Official Statement will terminate when the District delivers the Bonds to the Initial Purchaser (the "end of the underwriting period" within the meaning of the Rule), unless the Initial Purchaser provides written notice the District that less than all of the Bonds have been sold to ultimate customers on or before such date, in which case the obligation to update or change the Official Statement will extend for an additional period of time of 25 days after all of the Bonds have been sold to ultimate customers. In the event the Initial Purchaser provides written notice to the District that less than all of the Bonds have been sold to ultimate customers, the Initial Purchaser agrees to notify the District in writing following the occurrence of the "end of the underwriting period" as defined in the Rule. Certification as to Official Statement The District, acting by and through its Board of Directors in its official capacity in reliance upon the experts listed above, hereby certifies, as of the date hereof, that to the best of its knowledge and belief, the information, statements and descriptions pertaining to the District and its affairs herein contain no untrue statements of a material fact and do not omit to state any material fact necessary to make the statements herein, in light of the circumstances under which they were made, not misleading. The information, description and statements concerning entities other than the District, including particularly other governmental entities, have been obtained from sources believed to be reliable, but the District has made no independent investigation or verification of such matters and makes no representation as to the accuracy or completeness thereof. All changes in the affairs of the District and other matters described in the Official Statement subsequent to the delivery of the Bonds and all information with respect to the resale of the Bonds are the responsibility of the Initial Purchaser. 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. 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 with the Commission within 135 days after the close of the fiscal year. Copies of each audit report must also be filed in the office of the District. 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. Forward -Looking Statements Disclaimer The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. The District's actual results could differ materially from those discussed in such forward-looking statements. 38 The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. Conclusion The Bond Order will also approve the form and content of this Official Statement, and any addendum, supplement or amendment thereto, and authorize its further use in the offering of the Bonds by the Underwriter. /s/ Carol Boroes Secretary, Board of Directors Trophy Club Municipal Utility District No.2 1st James C. Thomas 39 President, Board of Directors Trophy Club Municipal Utility District No.2 APPENDIX A FINANCIAL INFORMATION OF THE ISSUER (This appendix contains quantitative financial information and operating data with respect to the Issuer. The information is only a partial representation and does not purport to be complete. For further and more complete information, reference should be made to the original documents, which can be obtained from various sources, as noted.) FINANCIAL INFORMATION OF THE ISSUER ASSESSED VALUATION 2001 Actual Market Value of Taxable Property Less Exemptions: Local Optional Over -65 Disabled and Deceased Veterans' Productivity Loss 10% Value Cap Loss Total Exempt Property 2001 Net Taxable Assessed Valuation (100% of Actual) (a) $1,800,000 166,500 216,231 1,238,864 1,731,678 TABLE 1 $ 260,173,137 5.153.273 $ 255,019,864 (a) (a) See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. Does not include net taxable value of $6,117,057 for property currently under review. Source: Issuer GENERAL OBLIGATION BONDED DEBT (As of June 1, 2002) General Obligation Debt Principal Outstanding: Unlimited Tax Refunding Bonds, Series 1995 Unlimited Tax Bonds, Series 2002 (the "Bonds") Total General Obligation Debt Principal Outstanding: General Obligation Interest and Sinking Fund Balance as of 4-30-02 Ratio of General Obligation Debt to 2001 Net Assessed Valuation 2001 Net Assessed Valuation (b) Population Estimates: 2000 - 3,800; Current (Estimate) - Per Capita 2001 Net Assessed Valuation - Per Capita General Obligation Debt - TABLE 2 4,270,000 (a) 3,510,000 7,780,000 592,985 3.05% 255,019,864 4,200 $60,719 $1,852 (a) Includes the "Value at Maturity" of the CABS for 2002 and 2003 maturities (b) See "TAXING PROCEDURES" in the Official Statement for a description of the Issuer's taxation procedures. OTHER OBLIGATIONS TABLE 3 On October 18, 2000, the Federal Deposit Insurance Corporation (as successor to a defunct financial institution) filed suit against MUD2 to recover principal, interest, attorney fees and courts costs less any amounts that MUD2 can verify were paid to the lender. The FDIC has asked the court of jurisdiction to compel MUD2 to issue and sell bonds sufficient to settle its claims. Management is contesting the FDIC's claim and believes the maximum cost to settle this dispute may be approximately $2,500.000. See "INVESTMENT CONSIDERATIONS - Litigation" on pages 19-20 of the Official Statement for more detailed information regarding this pending litigation. A-1 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS TABLE 4 The Bonds Fiscal Year Current Total Combined 30 -Sep Debt Service Principal Interest Total Debt Service 2002 $ 502,070 $ $ - $ - $ 502,070 2003 502,070 214,272 214,272 716,342 2004 502,070 105,000 171,418 276,418 778,488 2005 501,670 110,000 165,643 275,643 777,313 2006 500,150 115,000 159,593 274,593 774,743 2007 507,480 120,000 153,268 273,268 780,748 2008 508,050 125,000 146,668 271,668 779,718 2009 507,105 135,000 139,793 274,793 781,898 2010 504,605 140,000 132,368 272,368 776,973 2011 515,313 150,000 124,668 274,668 789,980 2012 513,438 155,000 118,668 273,668 787,105 2013 510,000 165,000 112,313 277,313 787,313 2014 170,000 105,300 275,300 275,300 2015 180,000 97,905 277,905 277,905 2016 190,000 89,895 279,895 279,895 2017 - 200,000 81,250 281,250 281,250 2018 210,000 71,850 281,850 281,850 2019 225,000 61,770 286,770 286,770 2020 235,000 50,633 285,633 285,633 2021 - 245,000 39,000 284,000 284,000 2022 260,000 26,750 286,750 286,750 2023 275,000 13,750 288,750 288,750 $ 6.074.02Q $ 3.510.000 $ 2.276.769 $ 5.786.769 $ 11.860.789 TAX ADEQUACY TABLE 5 2001 Assessed Valuation Maximum Annual Debt Service Requirements (Fiscal Year Ending 9-30-11) Indicated Maximum Interest and Sinking Fund Tax Rate at 97% collections Note: Above computation is exclusive of investment earnings, delinquent tax collections and penalties and interest on delinquent tax collections. INTEREST AND SINKING FUND MANAGEMENT INDEX Interest and Sinking Fund Balance, Fiscal Year Ended September 30, 2001 FY 2001 Interest and Sinking Fund Tax Levy of $0.1911 at 98% Collections Produces Total Available for Debt Service Less: General Obligation Debt Service Requirements, Fiscal Year Ending 9-30-02 Estimated Surplus at Fiscal Year Ending 9-30-02(b) $ 255,019,864 $ 789,980 $ 0.31935 TABLE 6 $ 203,825 477.596 $ 681,421 502,070 $ 179,351 (a) Does not include delinquent tax collections, penalties and interest on delinquent tax collections or investment earnings. A-2 PROJECTED GENERAL OBLIGATION PRINCIPAL REPAYMENT SCHEDULE TABLE 7 (Includes the Bonds) Principal Repayment Schedule Bonds Percent of Fiscal Year Outstanding The Unpaid at Principal Ending 9/30 Bonds Bonds Total End of Year Retired (%) 2002 $ 280,000 (a) $ - $ 280,000 $ 7,500,000 3.60% 2003 280,000 (a) - 280,000 7,220,000 7.20% 2004 280,000 105,000 385,000 6,835,000 12.15% 2005 295,000 110,000 405,000 6,430,000 17.35% 2006 310,000 115,000 425,000 6,005,000 22.81% 2007 335,000 120,000 455,000 5,550,000 28.66% 2008 355,000 125,000 480,000 5,070,000 34.83% 2009 375,000 135,000 510,000 4,560,000 41.39% 2010 395,000 140,000 535,000 4,025,000 48.26% 2011 430,000 150,000 580,000 3,445,000 55.72% 2012 455,000 155,000 610,000 2,835,000 63.56% 2013 480,000 165,000 645,000 2,190,000 71.85% 2014 170,000 170,000 2,020,000 74.04% 2015 180,000 180,000 1,840,000 76.35% 2016 190,000 190,000 1,650,000 78.79% 2017 200,000 200,000 1,450,000 81.36% 2018 210,000 210,000 1,240,000 84.06% 2019 225,000 225,000 1,015,000 86.95% 2020 235,000 235,000 780,000 89.97% 2021 245,000 245,000 535,000 93.12% 2022 260,000 260,000 275,000 96.47% 2023 275,000 275,000 100.00% $ 4,270,000 $ 3,510,000 $ 7,780,000 (a) Represents the Value at Maturity of CABs. FUND BALANCES (As of April 30, 2002 General Fund Debt Service Fund Other (Master District) TAXABLE ASSESSED VALUATION FOR TAX YEARS 1994-2001 TABLE 8 $ 163,026 592,985 77,043 Total $ 756,011 TABLE 9 Tax Net Taxable Change From Preceding Year Year Assessed Valuation Amount ($1 Percent (%1 1995 $ 86,493,000 N/A N/A _1996 106,241,000 19,748,000 22.83% 1997 128,934,824 22,693,824 21.36% 1998 148,612,986 19,678,162 15.26% 1999 180,122,026 31,509,040 21.20% 2000 218,040,873 37,918,847 21.05% 2001 255,019,864 36,978,991 16.96% Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas and the Denton Central Appraisal District A-3 CLASSIFICATION OF ASSESSED VALUATION TABLE 10 Cateaory % of % of % of % of % of 2001 Total 2000 Total 1999 Total 1998 Total 1997 Total Land - Homesite $ 45,010,438 17.30% $ 39,265,340 17.63% $ 28,713,123 15.67% $ 24,052,035 15.91% $ 20,921,859 15.99% Land - Non Homesite 12,032,572 4.62% 13,606,726 6.11% 14,117,620 7.71% 9,535,396 6.31% 11,288,245 8.63% Land - Timber 219,404 0.08% 219,404 0.10% 40,612 0.02% 40,612 0.03% 40,612 0.03% Improvements - Homesite 189,767,212 72.94% 164,501,948 73.86% 136,189,497 74.34% 114,975,389 76.08% 95,289,450 72.84% Improvements - Non Homesite 7,957,515 3.06% 851,753 0.38% 1,421,589 0.78% 1,600,694 1.06% 1,525,651 1.17% Personal Property 5,185,996 1.99% 4,288,832 1.93% 2,718,607 1.48% 928,856 0.61% 1,758,159 1.34% Total Appraised Value $ 260,173,137 100.00% $ 222,734,003 100.00% $ 183,201,048 100.00% $ 151,132,982 100.00% $ 130,823,976 100.00% Less Exemptions: Optional Over -65 $ 1,800,000 $ 1,400,000 $ 1,030,685 $ 871,232 $ 675,000 Disabled and Deceased Veterans' 166,500 129,000 114,000 84,500 79,500 Productivity Loss 216,231 216,231 39,152 39,181 39,124 Homestead Cap Adjustment 1,238,864 1,216,101 170,216 99,703 - Total Exempt Property 1,731,678 1,731,798 1,724,969 1,425,380 1,095,528 Total Exemptions $ 5,153,273 $ 4,693,130 $ 3,079,022 $ 2,519,996 $ 1,889,152 Net Taxable Assessed Valuation $ 255,019,864 $ 218,040,873 $ 180,122,026 $ 148,612,986 $ 128,934,824 Net Taxable Value Under Review $ 6,117,057 $ 4,907,214 $ 1,549,395 $ 374,810 $ 1,856,118 Source: Denton Central Appraisal District Note: Assessed Valuations may change during the year due to various supplements and protests, and valuations on a later date or in other tables of this Official Statement may not match those shown on this table. A-4 PRINCIPAL TAXPAYERS 2001-2002 TABLE 11 Name Regency Centers LP Randall's Food Markets TC Quorum Beck Property Trophy Club LP TXU Electric Co. Clubcorp Golf Texas LP Trophy Lake Ltd. Dress Custom Homes LP Fontanes, Juan & Susan Darling Homes Inc. Total Based on a 2001 Net Taxable Assessed Valuation of Type of Property Land / Improvements Retail Grocery Sore Land / Improvements Golf Course Electric Utility Land / Improvements Residential Development Land / Improvements Residential Development $ 255,019,864 2001 Net Taxable Assessed Valuation $ 9,096,043 2,675,951 2,402,382 2,062,467 1,955,780 1,755,584 1,365,458 1,138, 794 1,069,370 984,020 $ 24.505.849 % of Total 2001 Assessed Valuation 3.57% 1.05% 0.94% 0.81% 0.77% 0.69% 0.54% 0.45% 0.42% 0.39% 9.61% Source: Texas Municipal Report published by the Municipal Advisory Council of Texas and the Denton Central Appraisal District. PROPERTY TAX RATES AND COLLECTIONS (a) (a) (b) (c) Tax Year 1996 1997 1998 1999 2000 2001 Net Taxable Assessed Valuation $ 106,241,000 128,934,824 148,612,986 180,122, 026 218, 040, 873 255,019,864 Tax Tax Rate Levy(b) TABLE 12 % Collections(`) Fiscal Year Current Total Ended $ 0.5297 572,076 97.70% 0.4485 593,466 99.38% 0.3992 600,710 99.01% 0.3654 667,046 99.30% 0.3654 830,099 99.09% 0.3654 954,194 96.70% 98.16% 9-30-97 99.96% 9-30-98 99.39% 9-30-99 100.29% 9-30-00 99.80% 9-30-01 97.38% 9-30-02 See "TAXING PROCEDURES - Levy and Collection of Taxes" in the body of the Official Statement for a complete discussion of the District's provisions. Excludes penalties and interest. Current year collections are as of March 30, 2002. Source: Texas Municipal Report published by the Municipal Advisory Council of Texas, the Denton Central Appraisal District and the Issuer TAX RATE DISTRIBUTION General Fund I & S Fund TOTAL 2001-02 2000-01 $0.1743 $0.1144 0.1911 0.2510 $0.3654 $0.3654 1999-00 1998-99 $0.0935 $0.1092 0.2719 0.2900 $0.3654 $0.3992 Sources: Texas Municipal Report published by the Municipal Advisory Council of Texas A-5 1997-98 $0.1211 0.3274 $0.4485 1996-97 $0.0826 0.4471 $0.5297 TABLE 13 DIRECT AND OVERLAPPING DEBT DATA INFORMATION TABLE 14 Taxing Bodv, Denton County Northwest Independent School District Town of Trophy Club Total Net Overlapping Debt Trophy Club MUD #2 As of 01-01-02 01-01-02 02-01-02 06-01-02 Total Gross Direct and Overlapping Debt Ratio of Direct and Overlapping Debt to 2001 Assessed Valuation Ratio of Direct and Overlapping Debt to 2001 Actual Value Per Capita Direct and Overlapping Debt Gross Debt $ 139,412,570 116,871,993 4,950,000 $ 261,234,563 7,780,000 $ 269,014,563 Source: Texas Municipal Reports published by the Municipal Advisory Council of Texas. ASSESSED VALUATION AND TAX RATE OF OVERLAPPING ENTITIES Governmental Entity Denton County Northwest Independent School District Town of Trophy Club 2001 Net Taxable Assessed Valuation $ 1,198,745,758 2,851,910,178 489,796,790 Overlappina 0.96% 9.34% 100.00% 100.00% 2001 % of Actual Tax Rate 100% $ 0.25193 100% 1.83481 100% 0.44051 Amount Overlapping $ 1,338,361 10,915,844 4,950,000 $ 17,204,205 7,780,000 $ 24,984,205 9.80% 9.60% $5,949 TABLE 15 Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and Denton Central Appraisal District. AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS OF OVERLAPPING GOVERNMENTAL ENTITIES Taxing Bodv Denton County Northwest I S D Town of Trophy Club Source: Date of Authorization 11-05-91 01-16-99 02-24-01 02-24-01 07-15-00 Purpose Road & Bridge Road School Building Stadium Street Improvements Amount Authorized $ 34,000,000 85,320,000 $ 119,320,000 $ 162,700,000 19,500,000 $ 182,200,000 $ 6,260,000 Issued To Date $ 28,875,000 24,600,000 $ 53,475,000 $ 75,000,000 $ 75,000,000 $ 3,000,000 Unissued $ 5,125,000 60,720,000 $ 65,845,000 $ 87,700,000 19,500,000 $ 107,200,000 $ 3,260,000 Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. AUTHORIZED BUT UNISSUED DIRECT GENERAL OBLIGATION BONDS Date of Taxina Bodv Authorization Trophy Club MUD #2 (a) Denton Co MUD #2 04-04-81 Denton Co MUD #3 04-04-81 Denton Co MUD #3 10-29-88 (a) Purpose Water and Sewer Water and Sewer Water and Sewer Amount Previously Authorized Issued $ 6,450,000 $ 1,870,000 5,800,000 3,630,000 2,500,000 $ 14,750,000 $ 5,500,000 Issued This Series $ 3,510,000 $ 3,510,000 The District 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. Authorization elections for the Bonds were held under those entity names. Source: Most recent Texas Municipal Reports published by The Municipal Advisory Council of Texas and the Issuer. A-6 TABLE 16 TABLE 17 Unissued $ 1,070,000 2,170,000 2,500,000 $ 5,740,000 GENERAL FUND COMBINED STATEMENT OF REVENUES AND EXPENDITURES AND CHANGES IN FUND BALANCES TABLE 18 Fiscal Year Ended September 30 2001 2000 1999 1998 1997 Revenues: AV Taxes, Penalties & Interest $ 260,056 $ 172,850 $ 164,076 $ 161,277 $ 87,958 Interest 8,501 8,101 22,291 23,072 11,709 Miscellaneous 6,487 6,508 13,368 8,453 20,435 Total Revenues $ 275,044 $ 187,459 $ 199,735 $ 192,802 $ 120,102 Expenditures: Current: Administration/General Government $ 18,537 $ 67,651 $ 263,432 $ 116,487 $ 315,272 Professional Fees 70,947 - - Contract Services 9,436 Purchased Services for Resale 40,295 - - Contribution to Trophy Club / Westlake DPS 140,954 158,741 - Capital Outlay 83,144 - - 20,100 Total Expenditures $ 363,313 $ 226.392 $ 263.432 $ 116.487 $ 335,372 Excess (Deficit) of Revenues Over (Under) Expenditures Fund Balance - October 1 Fund Balance - September 30 $ (88,269) $ (38,933) $ (63,697) $ 76,315 $ (215,270) 53,332 92,265 155,962 79,648 $ (34 937) (a) $ 53 332 $ 92.265 $ 155.963 294,918 79.648 (a) Following delivery of the Bonds, the District will immediately reimburse its cash on hand from the bond proceeds resulting in a Fund Balance of approximately $134,000. This deposit will replace funds associated with the project that were used to pay up -front engineering and site preparation costs. Source: The Issuer's Audited Financial Statements MASTER DISTRICT WATERWORKS AND SEWER SYSTEM OPERATING EXPERIENCE TABLE 19 Fiscal Year Ended September 30 2001 2000 1999 1998 Revenues Water & Sewer Service $ 2,411,228 $ 2,410,546 $ 2,097,499 $ 2,043,813 Tap Fees $ 63,217 $ 64,403 $ 94,455 $ 83,981 Other 110,421 113,001 52,459 48,575 Total Revenues $ 2,584,866 $ 2,587,950 $ 2,244,413 $ 2,176,369 Expenses Water & Sewer Purchased $ 711,276 $ 753,487 $ 610,959 $ 611,062 Other 1,829,224 1,503,595 1,338,672 1,261,998 Capital Outlay 529,809 107,433 158,088 409,634 Total Expenses $ 3,070,309 $ 2,364,515 $ 2,107,719 $ 2,282,694 Available for Debt Service Customer Count(a) Water / Sewer MUD No.1 Water / Sewer MUD No.2 Total $ (485,443) $ 223,435 $ 136,694 $ (106,325) 1,252 1,383 2,635 1,231 1,259 2,490 1,211 1,216 2,427 1,179 1,055 2,234 (a) Note: Trophy Club Master District Joint Venture began operations on October 1, 2000. Amounts presented for 1997 through 2000 are pro forma and are compiled from information for the Master District as a fund of Trophy Club Municipal Utility District No.1 for the period. A-7 WATER SERVICE RATES TABLE 20 (Monthly Billing) Rates Effective August 1, 2002 GOLF COURSE IRRIGATION WATER TO THE LAKES Single -Family Homes Administrative Fee (Does not include water usage) 0 to 6,000 gallons 6,000 to 12,000 gallons 12,000 to 25,000 gallons Over 25,000 gallons Commercial (Includes Clubs and Golf Courses) Administrative Fee (Does not include water usage) 0 to 6,000 gallons 6,000 to 12,000 gallons 12,000 to 25,000 gallons Over 25,000 gallons Multi -Family Administrative Fee (Times Number of Units in Complex) $ 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 Over 300,000 gallons per month SEWER SERVICE RATES (Monthly Billing) Rates Effective August 1, 2002 Single -Family Homes Administrative Fee (Does not include sewer usage) 0 to 6,000 gallons 6,000 to 12,000 gallons 12,000 gallons per month maximum for residential Sewer Only Customers Over 12,000 gallons per month Commercial (Includes Clubs) Administrative Fee (Does not include sewer usage) 0 to 6,000 gallons 6,000 to 12,000 gallons Over 12,000 gallons per month $11.00 2.00 per 1,000 gallons 2.15 per 1,000 gallons 2.25 per 1,000 gallons 2.35 per 1,000 gallons $11.00 2.00 per 1,000 gallons 2.15 per 1,000 gallons 2.25 per 1,000 gallons 2.35 per 1,000 gallons 11.00 $ 1,000.00 (minimum/month) 2.35 per 1,000 gallons Multi -Family Administrative Fee (Times Number of Units in Complex) $ Plus: Billing at Single -Family Home Rates A-8 TABLE 21 $11.00 2.00 per 1,000 gallons 2.15 per 1,000 gallons 2.15 per 1,000 gallons $11.00 2.00 per 1,000 gallons 2.15 per 1,000 gallons 2.15 per 1,000 gallons 11.00 OTHER FEES TABLE 22 Rates / Fees Effective August 1, 2002 Tap Fees Standard will include 3/4 inch (District side) by 5/8 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 $ 1,000.00 Sewer Inspection Fee 150.00 Maintenance and Repair (charge to video sewer line to determine condition) 150.00 Effluent Charge: (sold to Trophy club County Club and discharged on course lakes) 0.20 per 1,000 gallons Stand -By Charge 6.00 per month Disconnection / Reconnection Fee (due to non-payment of bill) 25.00 during regular hours Disconnection / Reconnection Fee (due to non-payment of bill) 65.00 after regular hours Disconnection / Reconnection Fee (temporarily, at customer request) 10.00 each to dis/re connect Returned Checks 15.00 Confidentiality Request 5.00 on-time charge Same -Day Service 25.00 Accuracy Reading Fee 25.00 Security Deposits Builders 75.00 Residential Owners 40.00 Residential Lessees 100.00 Construction Meters Price equal to cost of meter Other Customers Price equal to two months avg. bill Storm Drain Assessment 1.00 per month A-9 APPENDIX B GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS GENERAL INFORMATION REGARDING THE TOWN OF TROPHY CLUB AND DENTON COUNTY, TEXAS TOWN OF TROPHY CLUB General The Town of Trophy Club (the "Town"), incorporated in January of 1985 is Texas's first premiere planned residential and country -club community. The Town is located in the southern portion of the 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 7,600. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas, U.S. Census Report and Issuer's Website. Population: EL ?ASG ANAEMIC. • LU PEOC) MIDLAND • MAP OF rlRAS WOW NG LOCATLCO VF NMI OF TROPHY LIUB • WI HITA MAMMA FALLS i #MLLAS *Wm FORT WORTH TYLER •• SAN ANGELO • DEL RIO WACO • AuSnN • PEAUMONT • SAN ANYONQ HOUSTON • LAREDO CORPUS CHRISTI @ROWI4 VILLE Census Town of Denton Report Trophy Club County 1980 N/A 143,126 1990 3,922 273,525 2000 6,350 423,976 Current Population Est. 7,600 444,900 Sources: United States Bureau of the Census, Texas Municipal Reports, Sales and Marketing Magazine, 2001 Survey of Buying Power and the Town of Trophy Club B-1 Leading Employers in the Town of Trophy Club: Employer Trophy Club Country Club Tom Thumb Town of Trophy Club Ivy Glen Bank of America Blockbuster Texas National Bank Quizmo's Beck Properties Source: Information from the Issuer Education Type of Business Country Club Retail Grocery Municipal Government Daycare Financial Institution Video Rental / Sales Financial Institution Delicatessen Real Estate Development Number of Employees (2001) 122 90 68 29 9 9 6 6 5 The Town of Trophy Club is served by the Northwest Independent School District (the "NISD"). NISD covers approximately 232 square miles in Denton, Tarrant and Wise Counties. In addition to serving the Town, NISD also serves the communities of Aurora, Avondale, Drop, New Fairview, Haslet, Justin, Marshall Creek, Newark, Northlake, Rhome and Roanoke. Northwest 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 gifted/talented students as well as students achieving below grade level, and all are equipped with computers and full cafeteria service. NISD expects to serve an estimated 6,000 students in the 2002-2003 school year. Source: Information from Northwest Independent School District DENTON COUNTY 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 2001 estimated population for the County is 444,900. Source: Latest Texas Municipal Report published by the Municipal Advisory Council of Texas Leading Employers Denton County: 2001 Employer University of North Texas, Denton Lewisville Independent School District Frito-Lay American Airlines Peterbilt Motors Co. Denton Independent School District Xerox Corporation Boeing Electronics, Corinth Denton State School Texas Woman's University Denton County Federal Express City of Denton Denton Regional Medical Center Medical Center of Lewisville Source: Denton County website Type of Business State University Public Education Food Distribution Maintenance Base and Engineering Center Diesel Truck Manufacturing Public Education Office Equipment Electronics Mental health, mental retardation facility State University County Government Package Processing and Delivery Municipal Government Health Care Acute care hospital B-2 Number Employees 5,500 4,600 2,200 2,000 1,994 1,648 1,628 1,583 1,384 1,384 1,327 1,200 1,200 1,000 750 Labor Force Statistics Civilian Labor Force Total Employed Total Unemployed % Unemployed % Unemployed (Texas) % Unemployed (United States) Denton County April 2002 264,347 252,252 12,095 4.6% 5.6% 5.7% Source: Texas Workforce Commission, Labor Market Information Department. Estimated Retail Sales Statistics ($000,$) Denton Year County 2001 $5,124,640 2000 5,501,681 1999 3,180,028 1998 2,853,148 1997 2,632,353 1996 2,376,981 1995 2,068,617 1994 2,243,289 State of Texas $288,535,506 263,430,625 189,976,641 176,771,820 170,864,051 165,526,050 153,303,008 142,854,877 April 2001 264,968 259,209 5,759 2.2% 4.0% 4.2% Source: Sales & Marketing Magazine, Survey of Buying Power 1994-2001. Figures represent estimates as of January 1 of each year given. Estimated Total Effective Buying Income (EBI) Year 2001 2000 1999 1998 1997 1996 1995 1994 Denton Total Effective Buying Income ($000) $9,338,442 8,627,101 7,988,953 6,911,926 6,294,683 5,877,466 6,368,568 5,838,246 County Median Household EBI 49,146 47,952 46,069 43,635 41,613 40,471 46,100 43,711 State of Texas Total Effective Buying Income ($000) $373,707,911 345,952,116 326,986,186 306,018,615 285,732,128 271,027,180 295,243,928 276,963,985 Median Household EBI $37,636 35,942 34,084 33,190 31,923 30,747 34,851 33,402 Source: Sales & Marketing Magazine, Survey of Buying Power 1994-2001. Figures represent estimates as of January 1 of the year noted. Agriculture The Texas Almanac designates cattle, horses, poultry, hay and wheat as the principal sources of agricultural income. Cash receipts from farm marketings are as follows: Crops Livestock and Livestock Products AG Cash Receipts Total 2nnn $13,129,000 $24,709,200 $89,257,440 1999 $19,360,000 $33,861,000 $102,784,350 19.9.8 1997 $23,692,000 $22,329,000 $33,044,000 $42,139,000 $99,987,400 $107,100,000 Source: Texas Utilities Electric Company Agriculture Income Evaluation, 1996 through 1999. Government payments not included B-3 APPENDIX C FORM OF LEGAL OPINION OF BOND COUNSEL Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. McCALL, 600 CONGRESS AVENUE 1250 ONE AMERICAN CENTER AUSTIN, TEXAS 78701-3248 Telephone: 512 478-3805 Facsimile: 512 472-0871 LAW OFFICES PARKHURST & HORTON L.L.P. 717 NORTH HARWOOD STREET 700 N. ST. MARY'S STREET NINTH FLOOR 1225 ONE RIVERWALK PLACE DALLAS, TEXAS 75201-6587 Telephone: 214 754-9200 Facsimile: 214 754-9250 SAN ANTONIO, TEXAS 78205-3503 Telephone: 210 225-2800 Facsimile: 210-225-2984 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 UNLIMITED TAX BONDS, SERIES 2002 IN THE AGGREGATE PRINCIPAL AMOUNT OF $3,510,000 AS BOND COUNSEL FOR TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 (the "District") of the bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which bear interest from the dates specified in the text of the Bonds, until maturity or redemption, at the rates and payable on the dates specified in the text of the Bonds all in accordance with the order of the Board of Directors of the District adopted on June 6, 2002, authorizing the issuance of the Bonds (the "Order"). WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution and laws of the State of Texas, and a transcript of certified proceedings of the District, and other pertinent instruments authorizing and relating to the issuance of the Bonds, including one of the executed Bonds (Bond Number R-1). BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered, and that, assuming due authentication, Bonds issued in exchange therefor will have been duly delivered, in accordance with law, and that said Bonds, except as may be limited by laws applicable to the District relating to bankruptcy, reorganization and other similar matters affecting creditors' rights, constitute valid and legally binding obligations of the District, payable from ad valorem taxes to be levied and collected by the District upon taxable property within the District, which taxes the District has covenanted to levy in an amount sufficient to pay the interest on and the principal of the Bonds. Such covenant to levy taxes is subject to the right of a city, under existing Texas law, to annex all of the territory within the District; to take over all properties and assets of the District; to assume all debts, liabilities, and obligations of the District, including the Bonds; and to abolish the District. THE DISTRICT reserves the right to issue additional bonds which will be payable from taxes. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not specified "private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we assume compliance by the District with certain representations and covenants regarding the use and investment of the proceeds of the Bonds. We call your attention to the fact that failure by the District to comply with such 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. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Bonds will be (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 884 of the Code, and (c) included in the passive investment income of a Subchapter S corporation and subject to the tax imposed by Section 1375 of the Code. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE HAVE ACTED AS BOND COUNSEL for the District for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on such Bonds for federal income tax purposes, and for no other reason or purpose. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on bonds executed by officials of the District as to the current outstanding indebtedness of, and assessed valuation of taxable property within, the District. Our role in connection with the District's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. Respectfully, APPENDIX D EXCERPTS FROM THE DISTRICT'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001 (Independent Auditor's Report, General Financial Statements and Notes to the Financial Statements - not intended to be a complete statement of the Issuer's financial condition. Reference is made to the complete Annual Financial Report for further information.) RUTLEDGE CRAIN & COMPANY, PC CERTIFIED PUBLIC ACCOUNTANTS 2401 Garden Park Court, Suite B Arlington, Texas 76013 INDEPENDENT AUDITORS' REPORT To the Board of Directors Trophy Club Municipal Utility District No. 2 Trophy Club, Texas We have audited the accompanying general purpose financial statements of Trophy Club Municipal Utility District No. 2 (the "District"), as of September 30, 2001 and for the year then ended. These general purpose financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on the general purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general purpose financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the general purpose financial statements referred to above present fairly, in all material respects, the financial position of Trophy Club Municipal Utility District No. 2, as of September 30, 2001, and the results of its operations for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was made for the purpose of forming an opinion on the general purpose financial statements taken as a whole. The accompanying supplemental information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the general purpose financial statements of Trophy Club Municipal Utility District No. 2. Such information has been subjected to the auditing procedures applied in the audit of the general purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the general purpose financial statements taken as a whole. December 20, 2001 Metro (817) 265-9989 1 Members: American Institute of Certified Public Accountants Texas Society of Certified Public Accountants Fax (817) 861-9623 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 COMBINED BALANCE SHEET ALL FUND TYPES AND ACCOUNT GROUPS SEPTEMBER 30, 2001 (with Comparative Totals for September 30, 2000) ASSETS AND OTHER DEBITS Assets: Cash Investments Receivables ( net of allowances for uncollectibles): Taxes Other governments Government loan receivable Restricted assets: General fixed assets Governmental Fund Types General Debt Service Fund Fund 2,301 $ 18,333 50,004 184,363 2,500 5,484 15,666 39,333 Other Debits: Amount available in debt service fund Amount to be provided for retirements of general long-term debt -- -- Total Assets and Other Debits $ 109,804 $ 208,180 LIABILITIES, EQUITY AND OTHER CREDITS Liabilities: Accounts payable Due to other governments Deferred revenue Capital leases payable Provision for litigation loss Total Liabilities 6,462 96,961 41,318 144,741 4,355 4,355 Equity and other credits: Investment in general fixed assets Fund balances (deficit): Unreserved, undesignated (34,937) 203,825 Total equity (deficit) and other credits (34,937) 203,825 Total Liabilities, Equity & Other Credits The accompanying notes are an integral part of this statement. $ 109,804 $ 208,180 Account Groups General General Long - Fixed Assets Term Debt 6,206,518 $ 6,206,518 $ 6,206,518 203,825 6,521,232 $ 6,725,057 $ 4,225,057 2,500,000 6,725,057 6,206, 518 -- 6,206,518 $ 6,725,057 EXHIBIT A-1 Totals (Memorandum Only) September 30, September 30, 2001 2000 20,634 $ 25,367 234,367 151,115 7,984 6,313 15,666 417 39,333 45,820 6,206,518 6,123,374 203,825 114,676 6,521,232 6,347,448 $ 13,249,559 $ 12,814,530 $ 6,462 $ 5,608 96,961 5,710 45,673 49,706 4,225,057 4,462,124 2,500,000 2,000,000 6,874,153 6,523,148 6,206,518 6,123,374 168,888 168,008 6,375,406 6,291,382 13,249,559 $ 12,814,530 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 COMBINED STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES ALL GOVERNMENTAL FUND TYPES YEAR ENDED SEPTEMBER 30, 2001 (With comparative Totals for Year Ended September 30, 2000) EXHIBIT A-2 Totals Governmental Fund Types (Memorandum Only) General Debt Service September 30, September 30, Fund Fund 2001 2000 Revenues: Ad valorem taxes, penalties and interest $ 260,056 $ 571,320 $ 831,376 $ 675,492 Interest 8,501 20,535 29,036 28,202 Miscellaneous 6,487 -- 6,487 6,508 Total revenues 275,044 591,855 866,899 710,202 Expenditures: Current: Administration 18,537 18,537 50,741 Professional fees 70,947 70,947 9,808 Contract services 9,436 9,436 7,102 Purchased services for resale 40,295 40,295 -- Contribution to Trophy Club/VVestlake DPS 140,954 140,954 158,741 Capital outlay 83,144 83,144 Debt service: Principal 280,000 280,000 285,000 Interest and fiscal charges -- 222,706 222,706 222,600 Total expenditures 363,313 502,706 866,019 733,992 Excess (deficiency) of revenues over (under) expenditures (88,269) 89,149 880 (23,790) Fund balances, October 1 53,332 114,676 168,008 191,798 Fund balances (deficit), September 30 $ (34,937) $ 203,825 $ 168,888 $ 168,008 The accompanying notes are an integral part of this statement. TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - BUDGET (GAAP BASIS) AND ACTUAL GENERAL FUND YEAR ENDED SEPTEMBER 30, 2001 Revenues: Ad valorem taxes, penalties and interest Interest Miscellaneous Total revenues Expenditures: Current: Administration Professional fees Contract services Purchased services for resale Contribution to Trophy Club/Westlake DPS Budget $ 198,049 $ 9,465 3,000 210,514 Capital outlay Total expenditures Excess (deficiency) of revenues over (under) expenditures Fund balances, October 1 Fund balances (deficit), September 30 $ The accompanying notes are an integral part of this statement. c 19,800 16,800 7,500 154,205 198,305 12,209 53,332 65,541 $ Actual 260,056 $ 8,501 6,487 275,044 18,537 70,947 9,436 40,295 140,954 83,144 363,313 (88,269) 53,332 (34,937) $ EXHIBIT A-3 Variance Favorable (Unfavorable) 62,007 (964) 3,487 64,530 1,263 (54,147) (1,936) (40,295) 13,251 (83,144) (165,008) (100,478) (100,478) TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity Trophy Club Municipal Utility District No. 2 (the District) was created from the combination of two predecessor districts. These predecessor districts were the Denton County Municipal Utility District No. 2 and No. 3 (D C MUDs). The D C MUDs were created by an order of the Texas Natural Resources Conservation Commission (TNRCC) (formerly the Texas Water Commission) on May 20, 1980 and October 9, 1979, respectively, and confirmed by the electorate of the D C MUDs in elections held on August 9, 1980. The Board of Directors of 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 of 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 all transactions after 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 conformity with generally accepted accounting principles (GAAP) as applied to government units. For financial reporting purposes, management has considered all potential component units. The decision to include a potential component unit in the reporting entity was made by applying the criteria set forth in GAAP. The criteria used are as follows: Financial Accountability - The primary government is deemed to be financially accountable if it appoints a voting majority of the organization's governing body and (1 ) it is able to impose its will on that organization or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. Additionally, the primary government may be financially accountable if an organization is fiscally dependent on the primary government regardless of whether the organization has a separately elected governing board, a governing board appointed by a higher level of government or a jointly appointed board. Accordingly, the District has no potential component units which meet this definition. Trophy Club Master District Joint Venture Trophy Club Municipal Utility District No. 1 holds legal title to the central water supply system and the central waste disposal system. The proportionate allocation of costs and related beneficial usage rights in the major assets is estimated as follows: Water plant and wells Twenty-one inch water line Elevated tank Original treatment plant and land First expanded treatment plant Second expanded treatment plant Administration building (A) The District 27.14% 40.00% 56.01 % 32.86% 32 86% 22,70% (C) 0.00% MUD 1 40.91 % 60.00% 43.99% 67.14% 67.14% 77.30% 23,38% (B) Future Development 31 .95% 0.00% 0.00% 0.00% 0.00% 0.00% 76.62% (A) The District has not paid for its full shares. (B) The developer's original intent was for five districts. (C) The District does not acknowledge any portion of the cost of the administration building as being its responsibility. Pursuant to the provisions of the New Master District Contract dated October 4, 2000, the Master District is managed as a joint venture of the District and MUD1 whereby representatives of the boards of directors of the District and MUD1 serve on the Master District board of directors. Accordingly the financial statements of the Master District have been 6 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 removed from those of MUD1 effective October 1, 2000 and are presented separately. Agreements exist between the District and MUD1 that compensate MUD1 for water and sewer plant capacity and out of district sales as approved and required by the TNRCC. Based upon this arrangement, all financial transactions relating to water and sewer operations are included in the financial statements of the Master District joint venture. A summary of the Master District financial statements for the year ended September 30, 2001 follows: Total assets $ 2,208,638 Total liabilities (1,006,724) Total equity $ 1,201,914 Total revenue, including other sources $ 2,805,245 Total expenditures (3,070,309) Excess of revenues over (under) expenditures (265,064) Plus capital expenditures 360,353 Net revenue (loss) before capital expenditures $ 95,289 The Master District Joint Venture financial statements are available at the Districts administrative offices. Trophy Club / Westlake Deoartment of Public Safety Joint Venture Effective October 1, 1999, the District entered into a joint venture in participation with MUD1, the Town of Trophy Club (the "Trophy Club Entities") and the City of Westlake, Texas. Each of the Trophy Club Entities made contributions of assets with related long-term liabilities to the Trophy Club/Westlake Department of Public Safety Joint Venture ("DPS"). Each entity is obligated to contribute a prorata share of DPS' operating budget based upon the relationship of their respective assessed real and personal property values (police protection — Town of Trophy Club and Town of Westlake; fire protection — Trophy Club Entities and Town of Westlake with certain adjustments). The initial term of the venture is for five years duration and renews annually for another five year term until notice of withdrawal by a venturer. Upon termination of the venture, the Trophy Club Entities are entitled to have contributed assets with related debt returned to them. The agreement determining the appointment of the venture's board of directors precludes any single entity from imposing its will on the operations of the venture. Each of the entities provided equipment to be used by DPS, Certain equipment contributed is encumbered by debt. DPS is responsible for making operating lease payments in amounts sufficient to make required payments to creditors. The following is a summary of financial position and results of operations for DPS as of and for the year ended September 30, 2001: Total assets $ 753,624 Total liabilities (255,855) Total equity $ 497,769 Total revenue $ 2,105,190 Total expenditures (2,417,801) Net revenue (loss) $ (312,611) The District's share of DPS "true -up" expense (paid after September 30, 2001) was $35,140, 7 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 B. Measurement Focus, Basis of Accounting and Basis of Presentation The accounts of the District are organized and operated on the basis of funds and account groups. A fund is an independent fiscal and accounting entity with a self -balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance - related legal and contractual provisions. The minimum number of funds are maintained consistent with legal and managerial requirements. Account groups are a reporting device to account for certain assets and liabilities of the governmental funds not recorded directly in those funds. The District utilizes governmental fund types to account for the District's activities and to prepare its financial statements. Governmental fund types use the flow of current financial resources measurement focus and the modified accrual basis of accounting. Under the modified accrual basis of accounting revenues are recognized when susceptible to accrual (Le., when they are "measurable and available"). "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to pay liabilities of the current period. The District considers all revenues available if they are collected within 60 days after year end. Expenditures are recorded when the related fund liability is incurred, except for unmatured interest on general long-term debt which is recognized when due, and certain compensated absences and claims and judgments which are recognized when the obligations are expected to be liquidated with expendable available financial resources. Those revenues susceptible to accrual are ad valorem taxes, interest revenue and charges for services. Penalties and interest on property taxes and miscellaneous revenue are recorded when received, as they are generally not measurable until received. The District reports deferred revenue on its combined balance sheet. Deferred revenues arise when a potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period. Governmental funds include the following fund types: The general fund is the District's primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. Debt service funds account for the servicing of general long-term debt not being financed by proprietary or nonexpendable trust funds. Account Groups include the following: The general fixed assets account group is used to account for all fixed assets of the District. The general long-term debt account group is used to account for general long-term debt and certain other liabilities of the District. C. Assets, Liabilities and Equity 1. Deposits and Investments 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 of acquisition. State statutes authorize the District to invest in (1) obligations of the United States or its agencies and instrumentalities; (2) direct obligations of the State of Texas or its agencies; (3) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States; (4) obligations of states, agencies, counties, cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than A or its equivalent; (5) certificates of deposit by state and national banks domiciled in this state that are (A) guaranteed or insured by the Federal Deposit Insurance Corporation, or its successor; or, (B) secured by obligations that are described by (1) - (4); or, (6) fully collateralized direct repurchase agreements having a defined termination date, secured by obligations described by (1), pledged with third party selected or approved by the District, and placed through a primary government securities dealer. 8 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 Investments are stated at fair value. 2. Receivables and Payables Transactions between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either "intertund receivables/payables" (i.e., the current portion of intertund loans) or "advances to/from other funds." All other outstanding balances between funds are reported as "due to/from other funds." Advances between funds are offset by a fund balance reserve account in applicable governmental funds to indicate they are not available for appropriation and are not expendable available financial resources. Trade accounts receivables are shown net of an allowance for uncollectibles. Trade accounts receivable in excess of ninety days comprise most of the allowance for uncollectibles. 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 property within the District is the responsibility of Denton Appraisal District (Appraisal District) as required by legislation passed by the Texas legislature. The Appraisal District is required under such legislation to assess all property within the Appraisal District on the basis of 100% of its appraised value and is prohibited from applying any assessment ratios. The value of property within the Appraisal District must be reviewed every five years; however, the District may, at its own expense, require annual reviews of appraised values. The District 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 election held August 9, 1980, the electorate of the District authorized the levy of up to $0.25 per $100 valuation for the operations and maintenance of the District. Property taxes attach as an enforceable lien on property as of January 1, following the levy date. Taxes are due by January, 31, following the levy date. Property taxes are recorded as receivables when levied. Following is information regarding the 1998 tax levy: Adjusted taxable values $ 227,175,290 O & M tax levy $0.11440/$100 259,889 I & S tax levy $0.2510/$100 570,210 Total tax levy $0.3654/$100 $ 830,099 3. Fixed Assets Fixed assets used in governmental fund types of the District are recorded in the general fixed assets account group at cost or estimated historical cost if purchased or constructed. Dedicated fixed assets are recorded at their estimated fair value at the date of dedication. Assets in the general fixed assets account group are not depreciated.. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend the assets' lives are not included in the general fixed assets account group. Public domain ("infrastructure") general fixed assets consisting primarily of drainage systems have been capitalized. 4. Organizational Costs The District, in conformance with requirements of the TNRCC, capitalized costs incurred in the creation of the District. The TNRCC requires capitalization as organizational costs for the construction period all costs incurred in the issue and sale of bonds, bond interest and amortized bond premium and discount, tosses on sales of investments, accrued interest on investments purchased, attorney fees and some administrative 9 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 expenses until construction and acceptance or use of the first revenue producing facility has occurred. The District purchased its facilities already completed by the developer. Only those costs funded by bond proceeds were capitalized. 5. Long-term Obligations The District reports long-term debt of governmental funds at face value in the general long-term debt account group. Certain other governmental fund obligations not expected to be financed with current available financial resources are also reported in the general long-term debt account group. For governmental fund types, bond premiums and discounts, as well as issuance costs, are recognized during the current period. Bond proceeds are reported as an other financing source net of the applicable premium or discount. Issuance costs, even if withheld from the actual net proceeds received, are reported as debt service expenditures. 6. Fund Equity Reservations of fund balance represent amounts that are not appropriable or are legally segregated for a specific purpose. Reserved fund balance represents the amount of prepaid items. 7. Memorandum Only -Total Columns Total columns on the general purpose financial statements are captioned as "memorandum only" because they do not represent consolidated financial information and are presented only to facilitate financial analysis. The columns do not present information that reflects financial position, results of operations or cash flows in accordance with generally accepted accounting principles. Interfund eliminations have not been made in the aggregation of this data. 8. Comparative Data/Reclassifications Comparative total data for the prior year have been presented in selected sections of the accompanying financial statements in order to provide an understanding of the changes in the District's financial position and operations. Also, certain accounts presented in the prior year data have been reclassified to in order to be consistent with the current year's presentation. 9. Comparative Data/Reclassifications Comparative total data for the prior year have been presented in selected sections of the accompanying financial statements in order to provide an understanding of the changes in the District's financial position and operations. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year's presentation. II. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary Information Annual budgets are adopted on a basis consistent with generally accepted accounting principles as follows: 1. The Board of Directors adopts an annual budget for the General Fund on the modified accrual basis. The Board of Directors budgets revenues but not expenditures in the Debt Service Fund. 2. The Board of Directors approves all budget appropriations. Any revisions which alter the total appropriations of the General Fund must be approved by the Board of Directors. The level of budgetary responsibility is by total appropriations of the General Fund. 3. All annual appropriations lapse at fiscal year end. 4. No significant amendments to the budget occurred during the year. 10 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 B. Budget/GAAP Reconciliation The budget is adopted on the modified accrual basis of accounting, thus there are no reconciling items between the Budget basis and the GAAP basis of accounting. C. Excess of Expenditures Over Appropriations For the year expenditures exceeded appropriations for the following funds: General Fund III. DETAILED NOTES ON ALL FUNDS AND ACCOUNT GROUPS A. Cash, Cash Equivalents, and Investments Cash $ 177,008 At year end, the District's carrying amount of deposits was $20,634 and the bank balance was $30,672 which was covered by federal depository insurance. 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, or by its trust department or agent but not in the District's name. At year end, the District's investments were as follows: Investments not subject to categorization: Texas Local Government Pool System (TexPool) Investments categorized as cash equivalents Carrying Market Amount Value $ 234 367 $ 234.367 $ 234,3_67 TexPool is an external investment pool operated by the Texas Comptroller of Public Accounts and is not SEC registered. The Texas Interlocal Cooperation Act and 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 fair value of investments in the pool is independently reviewed monthly. At September 30, 2001, the fair value of the position in TexPool approximates fair value of the shares. 11 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 B. Receivables Receivables as of year end, including the applicable allowances for uncollectible accounts, are as follows: General Debt Fund Service Total Property taxes receivable $ 2,500 $ 5,484 $ 7,984 Receivable from other governments $ 15,666 $ $ 15,666 Contract receivables $ 39,333 $ $ 39,333 C. Fixed Assets Activity in the general fixed assets account group for the District was as follows for the year ended September 30, 2001: Balance Balance 9/30/2000 Additions Disposals 9/30/2001 Water system $ 1,764,679 $ $ - $ 1,764,679 Sanitary wastewater system 1,114,645 83,144 - 1,197,789 Drainage system 1,435,438 - 1,435,438 District organization costs 1,808,612 - 1,808,612 Total $ 6,123,374 $ 83.144 $ - $ 6,206,518 D. Interfund Receivables and Payables There were no interfund receivable balances as of September 30, 2001. E. LONG-TERM DEBT 1. Combination Tax and Revenue Bonds The District periodically issues combination tax and revenue bonds for general uses and expansions of the system. This debt for the bonds is recorded in the general long-term debt account group (to be repaid from a combination of property tax revenue and revenues of the water and waste water utility system). Combination bonds are as follows: Water works and sewer system combination unlimited tax and revenue refunding bonds, Series 1995, with interest rates ranging from 4.2% to 6.25%, due through 2013, including related capital appreciation bonds Less unaccreted discount $ 4,270,000 (44.943) Total general long-term debt $ 4 225 057 The series 1995 bonds were issued in two components, serial current interest bonds and capital appreciation bonds. The capital appreciation component of the issue cannot be called prior to maturity. Thus, the total bond issue has been reflected at its face amount, net of the unaccreted discount, which is being accreted over the life of the capital appreciation component of the bonds. The capital appreciation bonds mature as follows: 12 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 Year Endina September 30, 2002 September 30, 2003 2. Changes in General Long -Term Debt During the year, the following changes in general long-term debt occurred: Amount $ 280,000 $ 280,000 Balance Balance 9/30/2000 Additions Payments 9/30/2001 Combination tax & revenue bonds $ 4,550,000 $ Unaccreted (87,886) 3. Debt Service Requirements 42,943 $ (280,000) $ 4,270,000 (44,943) $ 4,462,114 $ 42,943 $ (280,000) $ 4,225,057 The requirements to amortize all bonded debt outstanding as of September 30 summarized below: Year Ending September 30, Principal Interest Total 2002 $ 280,000 $ 222,070 $ 502,070 2003 280,000 222,070 502,070 2004 280,000 222,070 502,070 2005 295,000 206,670 501,670 2006 310,000 190,150 500,150 Thereafter 2 825,000 740,990 3,565,990 Total 4,270,000 $ 1,804,020 $ 6,074,020 Discount (44,943) $ 4,225,057 4. Additional Long-term Debt Disclosure Tax and revenue bonds authorized and unissued as of September 30, 2001 amounted to $9,250,000. The bonds are payable from the proceeds of ad valorem taxes levied upon all property subject to taxation within the District, without limitation as to rate or amount, and are further payable from, and secured by a lien on and pledge of the net revenue to be received from the operation of the District's waterworks and sanitary sewer system. The provisions of the bond resolutions relating to debt service requirements have been met, and the cash allocated for these purposes is sufficient to meet debt service requirements for the year ended September 30, 2001. The outstanding bonds are callable for redemption prior to maturity at the option of the District as follows: Series 1995 -All maturities from 2006 to 2013 are callable in principal increments of $5,000 on or after September 1, 2005 at par plus unpaid accrued interest to the fixed date for redemptions. 13 TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 2 NOTES TO GENERAL PURPOSE FINANCIAL STATEMENTS September 30, 2001 IV. OTHER INFORMATION A. Risk Management The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; injuries to employees; employee health benefits; and other claims of various nature. Commercial insurance is purchased for the risks of loss to which the District is exposed. Any losses reported but unsettled or incurred and not reported, are believed to be insignificant to the District's general purpose financial statements. B. Commitments At September 30, 2001, the District had no specific commitments requiring disclosure. C. Related Party Transactions MUD 1 and its employees process the payment of invoices for the District and the District reimburses MUD 1. No management fee for services performed by MUD 1 employees is assessed. D. 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 adverse effect on the financial condition of the District. On October 16, 2000, the Federal Deposit Insurance Corporation (as successor to a defunct financial institution) filed suit against MUD2 to recover principal, interest, attorney fees and courts costs less any amounts that MUD2 can verify were paid to the lender. The FDIC has asked the court of jurisdiction to compel MUD2 to issue and sell bonds sufficient to settle its claims. Management is assessing the FDIC's claim and believes the maximum cost to settle this dispute may be approximately $2,500,000. The Town of Westlake, Texas has given notice that it intends to withdraw from the Trophy Club/Westlake Department of Public Safety Joint Venture effective December 31, 2002. The District is negotiating with Westlake and the other venturers and has not determined the cost of the dissolution. E. 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. F. Contracts Under the terms of a contract dated September 19, 1991, MUD No. 1 had agreed to hold and sell to MUD2 not less than 1,082 taps for the purchase price paid by MUD 1 plus accumulated interest from the date of purchase at a rate of 6.7989%. The District had an exclusive right to purchase these taps until September 19, 1998, after which the District has the right of first refusal on future purchases of the unused taps. Through September 30, 2001, the District has purchased 590 waste water connections. Under the terms of a contract whereby the District and MUD No. 1 sold an unused portion of the water supply system to the City of Roanoke, Texas, the City of Roanoke will make annual payments to the Master District account of $23,663 including interest through 2006. At September 30, 2001, the District's share (40%) of the receivable was $39,333. 14 APPENDIX E MUNICIPAL BOND INSURANCE POLICY SPECIMEN Financial Guaranty Insurance Company 125 Park Avenue New York, NY 10017 (212) 312-3000 (800) 352-0001 A GE Capital Company Municipal Bond New Issue Insurance Policy Issuer: Bonds: Financial Guaranty Insurance Company ("Financial consideration of the payment of the premium and irrevocably agrees to pay to State Street B "Fiscal Agent"), for the benefit of Bond debt obligations (the "Bonds") which Nonpayment by the Issuer. th ect Exhibit A FGIC. Policy Number: Control Number: 0010001 Premi m: a , `a New York stock insurance company, in tq41 I terms of this Policy, hereby unconditionally and Company, N.A., or its successor, as its agent (the ortion of the principal and interest on the above-described ecome Due for Payment but shall be unpaid by reason of Financial Guaranty will make such payments to the Fiscal Agent on the date such principal or interest becomes Due for Payment or on the Business Day next following the day on which Financial Guaranty shall have received Notice of Nonpayment, whichever is later. The Fiscal Agent will disburse to the Bondholder the face amount of principal and interest which is then Due for Payment but is unpaid by reason of Nonpayment by the Issuer but only upon receipt by the Fiscal Agent, in form reasonably satisfactory to it, of (i) evidence of the Bondholder's right to receive payment of the principal or interest Due for Payment and (ii) evidence, including any appropriate instruments of assignment, that all of the Bondholder's rights to payment of such principal or interest Due for Payment shall thereupon vest in Financial Guaranty. Upon such disbursement, Financial Guaranty shall become the owner of the Bond, appurtenant coupon or right to payment of principal or interest on such Bond and shall be fully subrogated to all of the Bondholder's rights thereunder, including the Bondholder's right to payment thereof. This Policy is non -cancellable for any reason. The premium on this Policy is not refundable for any reason, including the payment of the Bonds prior to their maturity. This Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Bond. As used herein, the term `Bondholder" means, as to a particular Bond, the person other than the Issuer who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof. "Due for Payment" means, when referring to the principal of a Bond, the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity and means, when referring to interest on a Bond, the stated date FGIC is a registered service mark used by Financial Guaranty Insurance Company under license from its parent company, FGIC Corporation. Form 9000 (10/93) Page 1 of 2 Financial Guaranty Insurance Company 125 Park Avenue New York, NY 10017 (212) 312-3000 (800) 352-0001 A GE Capital Company Municipal Bond New Issue Insurance Policy for payment of interest. "Nonpayment" in respect of a Bond means the failure of the Issuer to have provided sufficient funds to the paying agent for payment in full of all principal and interest Due for Payment on such Bond. "Notice" means telephonic or telegraphic notice, subsequently confirmed in writing, or written notice by registered or certified mail, from a Bondholder or a paying age fo . the Bonds to Financial Guaranty. "Business Day" means any day other than a Saturday, Sunday or , . sn hich the Fiscal Agent is authorized by law to remain closed. In Witness Whereof, Financial Guaranty has cau his P ky to be affixed with its corporate seal and to be signed by its duly authorized officer in facsi '1 e effective and binding upon Financial Guaranty by virtue of the countersignature of its duly t1ie resentative. President Effective Date: Authorized Representative State Street Bank and Trust Company, N.A., acknowledges that it has agreed to perform the duties of Fiscal Agent under this Policy. Authorized Officer FGIC is a registered service mark used by Financial Guaranty Insurance Company under license from its parent company, FGIC Corporation. Form 9000 (10/93) Page 2 of 2 Financial Guaranty Insurance Company 125 Park Avenue New York, NY 10017 (212) 312-3000 (800) 352-0001 A GE Capital Company Endorsement To Financial Guaranty Insurance Company Insurance Policy Policy Number: Control Number: 0010001 It is further understood that the term "Nonpayment" in respect includes any payment of principal or interest made to a Bondholder by or on behalf of the issu snd which has been recovered from such Bondholder pursuant to the United States Bankrupt a trustee in bankruptcy in accordance with a final, nonappealable order of a court having compete t juri•ction. NOTHING HEREIN SHALL BE CON D WAIVE, ALTER, REDUCE OR AMEND COVERAGE IN ANY OTHER SECTION OF THE P • . IF FOUND CONTRARY TO THE POLICY LANGUAGE, THE TERMS OF THIS ENDORSEMENT UPERSEDE THE POLICY LANGUAGE. In Witness Whereof, Financial Guaranty has caused this Endorsement to be affixed with its corporate seal and to be signed by its duly authorized officer in facsimile to become effective and binding upon Financial Guaranty by virtue of the countersignature of its duly authorized representative. 1Q,„" President Effective Date: Acknowledged as of the Effective Date written above: Authorized Representative Authorized Officer State Street Bank and Trust Company, N.A., as Fiscal Agent FGIC is a registered service mark used by Financial Guaranty Insurance Company under license from its parent company, FGIC Corporation. Form E-0002 (10/93) Page 1 of 1 Financial Advisory Services Provided By: SWS SECURITIES INVESTMENT BANKERS