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Item 03 - Bonds
MEMO TO: FROM: MEETING DATE: SUBJECT: RECOMMENDATION: rm 0 I.... HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL ROGER NELSON, CITY MANAGER //W/ MAY 3, 2005 ORDINANCE AUTHORIZING THE SALE OF COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION City Council to consider approving an ordinance providing for issuance of City of Grapevine, Texas Combination Tax and Revenue Certificates of Obligation, Series 2005, in the aggregate principal amount of $3,225,000; levying a tax in payment thereof; prescribing the form of said certificates; approving the official statement; and enacting other provisions relating thereto. BACKGROUND: At the May 3, 2005 City Council meeting a representative of the First Southwest Company, the City's Financial Advisor, will present bids for the sale of $3,225,000 of Combination Tax and Revenue Certificates of Obligation. Funding from the sale of the certificates will be used as follows: Purchase of vehicles and equipment authorized in the FY 2005 City Budget and issuance costs $2,725,000 Implementation of the City-wide "Way Finding" program and issuance costs 500,000 $3,225,000 A copy of the approved vehicle and equipment list is included in the Council packet. The City Council previously approved publication of required notices for this sale at the Council meeting of April 5, 2005. Notices were published in accordance with law on April 11 and April 18, 2005. A copy of the official statement summary for this sale is included in the Council packet. The complete official statement and the draft sale ordinance are available in the City Secretary's Office. Staff recommends acceptance of the First Southwest Company's recommendation and approval of the ordinance for sale. WAG/cjc H: A G M B o n d S a l e5-3-2005 April 27, 2005 (4:17PM) CAPITAL EQUIPMENT ACQUISITION PLAN FY 2004-05 Proposed Operating Budget I CMO - IT 150 replacement PCs and Thin Client technology a $1,000 50,000 50 replacement 17" monitors @ $140 7,000 I Wide Area Network replacements routers, switches and converters 76,000 100 Windows 2000 licenses a $200 20,000 50 Office 2004 licenses a $600 30,000 5 replacement Laser Jet printers$1,200 6,000 10 replacement Desk Jet printers a $150 1,500 10 replacement Palm devices @ $250 2,500 7 replacement servers $3,000 21,000 ADMIN SVCS - Personnel I Times -2 I al size 7 -tier rotary cabinet with 4 pair ofshelf'support beams 3,743 ADMIN SVCS - Purchasing I scanner 300 PUB WKS - Facilities Svcs i replacement service van 26,500 POLICE - Uniform Ops 18 replacement full-size patrol sedans Go) 441,000 5 replacement motorcycles a $18,000 90,000 2 replacement K-9 vehicles a $29,000 58,000 I replacement pursuit vehicle 24,500 POLICE - CID 8 replacement full-size sedans a $20,000 160,000 POLICE - Technical Svcs .27 replacement patrol car mobile video systems a $6,500 175,500 2 replacement motorcycle radios a $4,200 8,400 9 replacement mobile computers @ 6,030 54,270 FIRE - Operations 51 replacement sets ofbunker gear protective clothing @ $942 48,042 Replacement fire hoses and nozzles 32,000 Replacement SCBA gmr(self-contained breathing apparatus) 24,000 3 replacement ambulances @ $145,000 435,000 • 1 additional thermal imaging camera 17,000 FIRE - Emergency Mgmt Shutters for Emc!Z-SZ Management Center 7,500 PARKS - Senior Cents 1 additional PC for the front counter area 1,000 Replacement PCs and printers in Lab Center 17,000 PARKS - Park Maintenance 12 replacement crew trucks @ $20,000 40,000 .2 replacement pickup trucks @ $18,000 36,000 I replacement small backhoe 40,000 i replacement 60,000 GV W dump track 78,000 PARKS - CAC • 2 replacement Precor C956HR treadmills @ $5,582 11,164 12 replacement Precor C846ilk recumbent bikes @ $2,665 5,330 I replacement Prceor C846iU upright bike 2,665 I replacement,.or546icrosstmincr 4,345 PUB WKS - En ineerin 1 replacement pickup cock 18,000 PUB WKS - Streets .2 replacement pickup trucks @ $18,000 36,000 I replacement 60,000 GVW dump truck 80,000 I replacement 1 -tan service cock 32,000 t additional Low Boy trailer 40,000 1 additional demolition end dump trailer 35,000 1 additional cock and trailer 88,000 I PUB WKS - Traffic i replacement full-size sedan 21,091 DEVL SVC - Bldg Insp 13 replacement 4doorutility vehicles $23,000 69,000 replacement pickup true 18,000 PUBWKS-SDUS 11 replacement pickup truck 18,000 I PUB WKS - Water Treatment 11 replacement utility cart 5,500 I PUB WKS - WW Collection I replacement pickup truck 18,000 PUB WKS - WW Treatment 12 replacement utility carts @ $5,500 11,000 1 additional PC & software with digital imaging capability2,000 GOLF - Course Maintenance 11 replacement triplex greens mower with groomers 28,500 1 replacement greens topdresser 10,500 1 replacement utility vehicle 15,900 jI replacement turfsweeper for greens 8,250 TOTAL OF EQUIPMENT ACQUISITIONS $ 2,610,000 Add: Additional Projects 11-15-04 closing costs 15,000 Lift for fleet Smices 100,000 sigm 500,000 3,225,000 .w PRELIMINARY OFI'ICIAL STATEMENT Ratings: Moody's: "Applied For" Dated April 15, 2005 S&P: "Applied For" " ("Other Information — NEW ISSUE - Book -Entry -Only Ratings" herein) In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "TAX MATTERS - Tax Exemption" herein for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations. v THE CERTIFICATES WILL NOT BE DESIGNATED AS "OUALMIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $3,225,000 CITY OF GRAPEVINE, TEXAS a (Tarrant County) A a COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATIONS, SERIES 2005 Dated Date: May 1, 2005 Due: February 15, as shown below 0 PAYMENT TERMS... Interest on the $3,225,000 City of Grapevine, Texas, Combination Tax and Revenue Certificates of Obligations, Series 2005 (the "Certificates") will accrue from May 1, 2005 (the "Dated Date"), will be payable August 15 and February 15 of each year Z commencing February 15, 2006, and will be calculated on the basis of a 360 -day year consisting of twelve 30 -day months. The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant X ° to the Book -Entry -Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or o integral multiples thereof. No physical delivery of the Certificates will be made to the owners thereof. Principal of and interest on the }, Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the b participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See "THE CERTIFICATES - Book - v 13 Entry -Only System" herein. The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas (see "THE ' CERTIFICATES - Paying Agent/Registrar"). a! r <n AUTHORITY FOR ISSUANCE ... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas (the "State") 79 y particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance adopted by the City Council and F" = constitute direct obligations of the City of Grapevine, Texas (the "City"), payable from a combination of (i) the levy and collection of a y direct and continuing ad valorem tax, levied within the limits prescribed by law, on all taxable property within the City, and (ii) a limited o .2 pledge (not to exceed $1,000) of surplus revenues of the City's Waterworks and Sewer System, as provided in the ordinance authorizing the Certificates (the "Ordinance") (see "THE CERTIFICATES - Authority for Issuance"). s PURPOSE ... Proceeds from the sale of the Certificates will be used for the purpose of (i) acquisition of vehicles and equipment for various R City departments; (u) acquisition, construction and installation of vintage signage in various locations throughout the City to implement the .0 Citywide "Way Finding Program" approved by the City Council (items (i) and (ii), collectively, the "Project"); and (iii) paying for i5 professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the 8 Certificates. ° a y MATURITY SCHEDULE CUSIPtr1 Prefix: 388622 :? CUSIP CUSIP SAmount Maturity Rate Yield Suffix Amount Maturi Rate Yield Suffix(1) v s ti = $ 365,000 2006 $ 490,000 2011 J 425,000 2007 165,000 2012 a 3 440,000 2008 170,000 2013 460,000 2009 115,000 2014 ° 475,000 2010 120,000 2015 % N (Accrued Interest from May 1, 2005 to be added) N (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. N REDEMPTION... The Certificates are not subject to optional redemption prior to maturity, but may be subject to mandatory sinking fund : redemption if the purchaser designates a portion of the Certificates as a "Term Certificate." .s LEGALITY... The Certificates are offered for delivery when, as and if issued and received by the Initial Purchaser and subject to the S47y o approving opinion of the Attorney General of Texas and the opinion of Vinson & Elkins L.L.P., Bond Counsel, Dallas, Texas (see Appendix C, "Form of Bond Counsel's Opinion"). b .y DELIVERY... It is expected that the Certificates will be available for delivery through The Depository Trust Company on June 8, 2005. P 0 .Fi SEALED BIDS DUE TUESDAY, MAY 3, 200'5, AT 11:00 AM, CDT This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. For purposes of compliance with Rule 15c 2-12 of the Securities and Exchange Commission (the "Rule'), this document constitutes an Official Statement of the Issuer with respect to the Certificates that has been "deemed final" by the City as of its date exceptfor the omission ofno more than the information permitted by the Rule. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the representation, promise or guarantee of the Financial Advisor. 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 stall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described herein since the date hereof. See "OTHER INFORMATION - Continuing Disclosure of Information" for a description of the City's undertaking to provide certain information on a continuing basis. Neither the City nor its Financial Advisors make any representation as to the accuracy, completeness, or adequacy of the information supplied by the Depository Trust Company for use in this Official Statement. The Certificates are exempt from registration with the Securities and Exchange Commission and consequently have not been registered therewith. The registration, qualification, or exemption of the Certificates in accordance with applicable securities law provisions of the jurisdiction in which these securities have been registered or exempted should not be regarded as a recommendation thereof. TABLE OF CONTENTS PRELLvIINARY OFFICIAL STATEMENT SUMMARY.............................................................3 CITY OFFICIALS, STAFF AND CONSULTANTS .....5 ELECTED OFFICIALS ................................................... 5 SELECTED ADMINISTRATIVE STAFF ............................. 5 CONSULTANTS AND ADVISORS....................................5 INTRODUCTION............................................................6 THE CERTIFICATES..................................................... 6 TAX INFORMATION...................................................10 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT .......................................... 13 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY......................................................14 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY ................................................ 15 TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY.........................................................15 TABLE 5 - TEN LARGEST TAXPAYERS ....................... 15 TABLE 6 - TAX ADEQUACY.......................................16 TABLE 7 - ESTIMATED OVERLAPPING DEBT ..............16 DEBT INFORMATION.................................................17 TABLE 8 - PRO -FORMA GENERAL OBLIGATION DEBT SERVICE REQuiREMENTS................................. 17 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION.................................................... 17 TABLE 10 - COMPUTATION OF SELF-SUPPORTING DEBT18 TABLE 11 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS ........................................ 18 TABLE 12 - OTHER OBLIGATIONS .............................. 18 FINANCIAL INFORMATION ..................................... 14 TABLE 13 - CHANGES IN NET ASSETS ...................... 19 TABLE 13A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY .......................... :....... 20 TABLE 14 - MUNICIPAL SALES TAX HISTORY ........... 21 FINANCIAL POLICIES ................................................ 21 TABLE 15 - CURRENT INVESTMENTS ......................... 23 TAX MATTERS............................................................. 24 OTHER INFORMATION ............................................. 25 RATINGS.................................................................. 25 LITIGATION.............................................................. 26 REGISTRATION AND QUALIFICATION OF CERTIFICATES FORSALE ........................................................ 26 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS ................................. 26 LEGAL MATTERS ...................................................... 26 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION ................................................. 26 CONTINUING DISCLOSURE OF INFORMATION ............. 27 INITIAL PURCHASER OF THE CERTIFICATES ............... 28 FINANCIAL ADVISOR ................................................ 28 FORWARD-LOOKING STATEMENTS DISCLAIMER....... 28 CERTIFICATION OF THE OFFICIAL STATEMENT .......... 29 APPENDICES GENERAL INFORMATION REGARDING THE CITY ........ A EXCERPTS FROM THE ANNUAL FINANCI.AL REPORT.. B FORM OF BOND COUNSEL'S OPINION ........................ C The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement. OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Certificates to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY ..................................... The City of Grapevine, Texas (the "City') is a political subdivision and municipal corporation of the State, located in Tarrant County, Texas. The City covers approximately 35.8 square miles (see "INTRODUCTION - Description of City"). THE CERTIFICATES ..................... The Certificates are issued as $3,225,000 Combination Tax and Revenue Certificates of Obligations, Series 2005. The Certificates are issued as serial securities maturing February 15, 2006 through February 2015, unless the Initial Purchaser designates one or more maturities as a Term Certificate (see "THE CERTIFICATES — Description of the Certificates"). PAYMENT OF INTEREST .............. Interest on the Certificates accrues from May 1, 2005, and is payable February 15, 2006, and each February 15 and August 15 thereafter until maturity (see "THE CERTIFICATES - Description of the Certificates"). AUTHORITY FOR ISSUANCE.......... The Certificates are issued pursuant to the general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an Ordinance passed by the City Council of the City (see "THE CERTIFICATES - Authority for Issuance"). SECURITY FOR THE CERTIFICATES ......................... The Certificates constitute direct obligations of the City payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $1,000) of surplus revenues of the City's Waterworks and Sewer System (see "THE CERTIFICATES - Security and Source of Payment"), REDEMPTION ............................... The Certificates are not subject to optional redemption prior to maturity. The Certificates may be subject to mandatory sinking fund redemption if the purchaser designates a portion of the Certificates as a "Term Certificate." TAxExEMPTiON ............................ In the opinion of Bond Counsel, the interest on the Certificates will be excludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "TAX MATTERS - Tax Exemption" for a discussion of the opinion of Bond Counsel, including a description of the alternative minimum tax consequences for corporations. USE OF PROCEEDS .................. Proceeds from the sale of the Certificates will be used for the purpose of (i) acquisition of vehicles and equipment for various City departments; (ii) acquisition, construction and installation of vintage signage in various locations throughout the City to implement the Citywide "Way Finding Program" approved by the City Council (items (i) and (ii), collectively, the "Project"); and (iii) paying for professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. RATINGS ...................................... The presently outstanding tax supported debt of the City is rated "Al" by Moody's Investors Service, Inc. ("Moody's") and "AA-" by Standard & Poor's Ratings Group, a division of McGraw-Hill ("W"). The City also has issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P through insurance by various commercial insurance companies. Applications for contract ratings on the Certificates have been made to both Moody's and S&P. The results of their determinations will be provided as soon as possible. Boox-ENTRY-ONLY SYSTEM...... The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book -Entry -Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates (see "THE CERTIFICATES - Book -Entry -Only System"). PAYMENT RECORD ..................... The City has not defaulted on its tax -supported debt since 1932 when all defaults were corrected without refunding. (1) Source: The City of Grapevine. Preliminary numbers. (2) Source: Tarrant County Appraisal District. (3) Projected, includes the Certificates. (4) Collections for part year only, through April 1, 2005. For additional information regarding the City, please contact: Fred Werner Director of Finance City of Grapevine 200 South Main Grapevine, Texas 76051 (817) 410-3111 4 David K. M edanich Laura Alexander First Southwest Company 777 Main Street, Suite 1200 Fort Worth, Texas 76102 (817)332-9710 % of Total Tax Collections 99.10% 99.20% 99.40% 99.70% 96.28%(4) SELECTED FINANCIAL INFORMATION Ratio Funded Fiscal Per Capita Per Capita Tax Debt to Year Estimated Taxable Taxable Funded Funded Taxable Ended City Assessed Assessed Tax Tax Assessed 9/30 Population (t) Valuation (2) Valuation Debt Debt Valuation 2001 44,390 $ 4,372,544,371 $ 98,503 $ 156,815,000 $ 3,533 3.59% 2002 45,500 4,773,863,018 104,920 157,940,000 3,471 3.31% 2003 46,400 4,766,361,580 102,723 157,645,000 3,398 3.31% 2004 46,684 4,880,107,595 104,535 148,300,000 3,177 3.04% 2005 47,036 5,352,933,433 113,805 142,245,000 (3) 3,024 2.66% (1) Source: The City of Grapevine. Preliminary numbers. (2) Source: Tarrant County Appraisal District. (3) Projected, includes the Certificates. (4) Collections for part year only, through April 1, 2005. For additional information regarding the City, please contact: Fred Werner Director of Finance City of Grapevine 200 South Main Grapevine, Texas 76051 (817) 410-3111 4 David K. M edanich Laura Alexander First Southwest Company 777 Main Street, Suite 1200 Fort Worth, Texas 76102 (817)332-9710 % of Total Tax Collections 99.10% 99.20% 99.40% 99.70% 96.28%(4) $3,225,000 COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Bids Due Tuesday, May 3, 2005, at 11:00 AM CDT The following ratings have been assigned: PREPARED BY: First Southwest Company Investment Bankers Since 1946 Underlying FSA Credit Insured Rating Moody's Investors Service, Inc. "Aaa" "Al" Standard & Poor's Rating Group "AAA" "AA-" A Division of McGraw-Hill, Inc. PREPARED BY: First Southwest Company Investment Bankers Since 1946 Global Credit Research s New Issue f 29 APR 2005 New Issue: Grapevine (City of) TX MOODY'S ASSIGNS Al RATING TO CITY OF GRAPEVINE (TX) $3.2 MILLION COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATIONS, SERIES 20,015 RATING AFFIRMATION AFFECTS $147.1 MILLION IN OUTSTANDING PARITY DEBT, INCLUDING CURRENTISSUE Municipality TX Moody's Rating ISSUE RATING Combination Tax and Revenue Certificates of Obligation, Series 2005 Al Sale Amount $3,225,000 Expected Sale Date 05/03/05 Rating Description Limited Tax NEW YORK, Apr 29, 2005 -- Moody's Investors Service has assigned an Al rating to the City of Grapevine's upcoming sale of $3,225,000 Combination Tax and Revenue Certificates of Obligations, Series 2005. Simultaneously, Moody's affirms the Al rating on the City's $147 million in outstanding parity debt. Factors contributing to the assignment and affirmation include a sizable tax base that continues to expand despite financial hardship experienced by major taxpayers, a manageable debt position, and a history of deficit spending that has diminished reserves. Proceeds from the sale of bonds will be used to purchase vehicles and equipment for various City departments; and for the acquisition, construction and installation of vintage signage in various locations throughout the City. The obligations are secured by a limited ad valorem tax pledge and a limited pledge of surplus net revenues of the City's water and sewer system. DIVERSIFICATION OF TAX BASE FAVORS GROWTH Situated in northeast Tarrant County (general obligation rating Aaa), the City of Grapevine is a suburban community located within the Dallas/Ft. Worth metropolitan area. Two-thirds of the Dallas/Fort Worth International Airport, including all terminal buildings, is located within the City. Assessed values (AV) in the City experienced some softness in the past two years as growth was tempered by losses at major airlines including America Airlines and Delta following the events of September 11th. After growing at an annual average rate of 8.1 % between fiscal years 2000 and 2002, the AV reflected a 0.2% decline in FY 2003 and a modest 2.4% increase in FY 2004. The tax base has rebounded significantly in fiscal 2005, expanding 9.7% to a sizable $5.35 billion. This increase in taxable values is mainly attributable to the recovery of the airline industry and new development in the proximity of the $300 million Gaylord Texan Resort and Convention Center that opened in April 2004. The resort and convention center reports 64% occupancy rates since opening, indicating the viability of the hotel despite competition from downtown Ft. Worth and Dallas. Other commercial properties recently added to the tax base include a Walmart Super Center and Sam's Wholesale Club. City officials report new residential construction has slowed down, but reappraisal of existing single- family homes remains healthy. For fiscal year 2006, officials conservatively project a 3% increase in taxable values. Moody's believes diversification of the tax base through new commercial construction and ongoing reappraisal of existing residential properties offsets uncertainty in assessed valuation growth provided by airline operations. DECLINING RESERVES WITH HEAVY RELIANCE ON SALES TAX As a result of consecutive operational deficits, the City has reduced its General Fund balance from $7.7 million or 20.8% of revenues in fiscal 2001 to $4.5 million or 11.5% of revenues in fiscal 2004. While the City did plan on reducing general fund reserves between fiscal years 2001 and 2003, the subsequent 25% reduction in fund balance at the end of fiscal 2004 was not anticipated. Additionally, the undesignated reserve decreased from $5.4 million in fiscal 2003 or 13.7% of revenues to a narrow $3 million or 7.6% of revenues in fiscal 2004. This level of reserve is well below the City's informal policy of maintaining 60 days of operations in undesignated general fund reserve. Officials attribute the $1.5 million deficit in fiscal 2004 to overspending in both health insurance claims and overtime expenses in the Fire Department, as well as to unanticipated maintenance and repairs in Lake Grapevine Park and lower than projected revenue collections. Although officials plan to align expenditures to revenue in the next budget cycle and to maintain the current level of reserves by fiscal year-end 2005, the use of reserves in fiscal 2004 to fund operating expenditures remains an issue of concern. Furthermore, the City heavily relies on sales tax collections, an economically cyclical revenue source, to finance operations. In fiscal 2004, sales tax receipts provided 35% of the City's operating funds while property tax revenues contributed 33%. After a 6.9% decline in sales tax collections in fiscal 2002, receipts rebounded in fiscal 2003, increasing 7.4% to $16 million. The increase was even larger in fiscal 2004 with sales tax receipts climbing 12.1 % to almost $18 million due to the expansion of the City's base of retail offerings and favorable activity at the Gaylord Texan Resort. For fiscal year-end 2005, officials anticipate a subsequent increase to $19.1 million despite an approximated $300,000 audit adjustment reported by the State's Comptroller. Moody's considers the narrow level of reserves to be inadequate given the City's heavy reliance on sales tax as the primary operating revenue. In addition, Moody's believes consecutive declines in reserves and the use of them to finance operating losses is not consistent with prudent financial management. If these practices continue in place, a downward action on the Al rating may be reasonable. HIGH DEBT LEVEL WITH RAPID PAYOUT Including this issue, the City's direct and overall debt ratios are somewhat elevated at 2.8% and 6.2% respectively, both expressed as a percent of assessed valuation. However, the City's debt profile benefits from an above-average rate of principal repayment with 67.3% retired in ten years. Officials anticipate issuing approximately $2.3 million in Certificates of Obligations in June 2005 to fund the construction of cabins and docks on the shores of Grapevine Lake. Additionally, the City has $5.2 million in authorized but unissued general obligation debt for street improvements that officials anticipate issuing in November 2005. Moody's believes the City's debt profile will remain moderately high over the medium term; however, projected assessed valuation growth and rapid retirement of principal will mitigate further upward pressure on the debt ratios. KEY STATISTICS: 2004 Estimated Population: 47,036 2005 Full Valuation: $5.35 billion 2005 Full Valuation per Capita: $113,805 Direct Debt Burden: 2.8% Overall Debt Burden: 6.2% Payout of Principal (10 years): 67.3% FY 2004 General Fund balance: $4.5 million (11.5% of General Fund revenues) Post -Sale Parity Debt Outstanding: $147.6 million City of Grapevine Per Capita Income as % of State (2000 Census): 160.8% Analysts Maria Erickson Analyst Public Finance Group Moody's Investors Service Nora Wittstruck Backup Analyst Public Finance Group Moody's Investors Service Contacts Journalists: (212) 553-0376 Research Clients: (212) 553-1653 © Copyright 2005, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved. Publication date: 27 -Apr -2005 Reprinted from RatingsDirect Summary: Grapevine, Texas Primary Credit Analyst(s): Wendy Wipperman, Dallas (1) 214-871-1421; wendy_wipperman@standardandpoors.com Secondary Credit Analyst(s): Theodore Chapman, Dallas (1) 214-871-1401; theodore_chapman@standardandpoors.com Rationale Standard & Poor's Ratings Services assigned its 'AA-' rating, and stable outlook, to Grapevine, Texas' series 2005 combination tax and revenue certificates of obligation. The rating reflects the city's: • Expanding and diversifying substantial property tax base, coupled with a competitive property tax rate; • Moderating overall debt burden, coupled with limited future capital needs; • Historically strong financial performance and adequate financial position; and • High wealth and income levels, which are boosted by its participation in the Dallas -Fort Worth MSA. The city's moderately concentrated economic base, which, while deep, is heavily dependent on Dallas -Fort Worth International Airport and related industries, is an offsetting factor. The city's limited -tax pledge and a limited pledge of the surplus revenues of the city's water and sewer system secure the certificates. Officials will use certificate proceeds to finance the acquisition of vehicles and equipment and fund the acquisition and installation of vintage signage. Grapevine, with an estimated population of 46,000, is centrally located between Dallas, Texas and Fort Worth, Texas. City residents have easy transportation access throughout the entire MSA. Dallas -Fort Worth International Airport -- two-thirds of which is within Grapevine's corporate city limits -- has greatly influenced the city's development. The airport's presence contributes substantial direct and indirect employment, sales and hotel tax revenues, and industrial and commercial real property taxes. While the nationwide economic downturn and the events of Sept. 11, 2001, affected most of these revenue sources, airport volume has stabilized. Assessed value (AV) declined by a nominal 0.2% in fiscal 2003 but has since rebounded; AV increased by 2.4% and 9.7% in fiscals 2004 and 2005, respectively, to a substantial $5.353 billion. The construction of the Gaylord Texan resort, a 1,500 -room destination hotel and convention center on Lake Grapevine with an AV of $113 million, contributed to an increase in commercial real estate values in fiscal 2005. Other significant commercial development includes Grapevine Mills Mall, a regional outlet mall, and Hass Pro Shop, a sporting goods store. Tax base concentration is moderate: The 10 leading taxpayers m account for 22% of total AV. American Airlines Inc., the leading taxpayer, accounts for 5.9% of total AV. Grapevine Mills L.P., a regional shopping mall, is the second leading taxpayer, accounting for 3.5% of taxable AV. Delta Airlines, the city's third leading taxpayer with 2.8% of taxable AV, recently announced plans to make significant reductions to its flight operations from Dallas -Fort Worth International Airport. Airport officials expect American Airlines and other carriers to pick up some of Delta's farmer routes. Property tax base concentration in the airline industry has declined to 8.7% of total AV in fiscal 2005 from 19.0% in 2002. The city's median household income levels are high and exceed state and national levels by 66% and 64%, respectively. Property wealth levels are a high $113,805 per capita. Per capita retail sales are an above-average 133% of the national average due, in part, to Dallas - Fort Worth International Airport's presence within Grapevine's corporate city limits. City unemployment rates, which are low, averaged 3% in 2004, well below state and national rates. Outlook The stable outlook reflects the expectation that despite recent airline industry reductions in operations, the economic and property tax bases will remain stable. The stable outlook also reflects Standard & Poor's expectation that the city will rebuild its general fund reserves within the parameters of its minimum fund balance policy and that the city's long-term capital requirements will remain moderate. Finances/Debt Finances Grapevine closed fiscal 2003 at essentially a break-even position while it maintained a stable 36 cents per $100 of AV property tax rate, which was among Tarrant County's and the Dallas -Fort Worth consolidated MSA's lowest rates, providing the city with significant revenue -raising flexibility. The city closed fiscal 2004 with a $443,000 operating deficit before transfers due to revenue shortfalls in fines and interest earnings and increased insurance claims. City officials transferred $1.10 million into the street maintenance and capital replacement fund from the general fund, which decreased the general fund balance to $4.56 million, or 11.5% of expenditures, at fiscal year-end 2004, which was below the minimum fund balance policy. The unreserved general fund balance totaled $3.02 million, or an adequate 7.6% of expenditures, at fiscal year-end 2004. City officials have adopted a policy of maintaining a minimum general fund balance of 16.4% of expenditures, or 60 days' operations. In fiscal 2004, the city council amended the parks department budget due to the city's lease of U.S. Army Corps of Engineers parkland at Lake Grapevine and its assumption of operating and maintenance of the park facilities. Consequently, parks department fiscal 2004 expenditures increased by roughly $543,000 over the original budget. Fiscal 2004 sales tax revenues exceeded fiscal 2003 collections by $1.9 million, or a substantial 12% increase. The October 2003 opening of a Wal-Mart Stores Inc. supercenter and a Sam's Club in Grapevine contributed to the healthy sales tax growth. The city council adopted a low 36.35 cents per $100 of AV property tax rate in the fiscal 2005 adopted budget, including a $341,000 contribution to the general fund balance. Management budgeted a 7.9% increase in sales tax revenues in fiscal 2005 over the fiscal 2004 budget, which was supported by the recent addition of several large retailers and the opening of the 1,500 -room Gaylord Opryland Texas hotel and conference center in April 2004. Fiscal 2005 year-to-date sales tax revenues are slightly below budget; and city officials are projecting to close the year with a $200,000-$300,000 shortfall in sales tax revenues. Management believes expenditure savings should offset the projected sales tax budget shortfall. Debt Overall net debt is a high $5,634 per capita; but it has decreased to a moderate 5% of market value. The debt burden is almost entirely attributable to Grapevine-Colleyville Independent School District ('AA -'SPUR GO debt rating); net direct debt, however, accounted for a low 1.6% of market value. Debt levels should moderate because both the city and school district are approaching buildout. Debt service costs are a high 25.3% of fiscal 2004 total expenditures, which is in-line with historical levels; self-supporting revenue streams, however, somewhat offset the high carrying charges. The city's manageable five-year capital plan consists almost entirely of street and quality -of -life projects. The city has $5.3 million of authorized, but unissued, GO bonds remaining, which it plans to issue in early fiscal 2006. Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web -based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2005 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Prepared by: OP I First Southwest Company in Investment Bankers Since 1946 777 Main Street Suite 1200 Fort Worth, Texas 76102 (817)332-9710 BE Vj 01 JXAjj IL $3,225,000 CITY OF GRAPEVINE, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 SELLING TUESDAY, MAY 3, 2005, AT 11:00 AM, CDT ACCOUNT MANAGER First Southwest Company Wells Fargo Brokerage Services, LLC Morgan Keegan & Company, Inc. A.G. Edwards & Sons, Inc. TRUE INTEREST COST 3.521801% 3.590142% 3.593019% 3.642355% CIO r— Q1 N 00 00 00 M tr) 00 (f) 00 CO O� 110 .-i O m D1 a\ Cr a\ N N N 00 06 4 N N O� h N N W � ("1 00 00000 a1 N dN d h F-� M N N O O 00 00 01 i O� h CT h - C/1 N n vZ n 00 cn •� O N "' N O N ' 7j J' v> ani > o rci N viPI> ani o ani a3 N N H N E- p cz cd cc3 o O O O N to OU p N Q a D O Qj U N (OJ Cj aj GoO U cn Z.,� U)L)E" U J � rn � U� U cn W U GC O it N cc3 at >C 03 ?G cn c� cn c� cn w cn al m U iG �+ n 03 cn 03 as iG cn cz vi cd GI rii pG N SC N X' >C J{ DC N DC >C N iC DC N N N > �,y CCi ++ S� N � ct3 N f, "" 3� O i"'' O �J 3-+ M C> F, U"' V] � U" cct J cci ccS � U" N 14,� CS3 s.. U cd �-. C-5 c 4-a c `U LJ ® 4 cn N 4 cn . � O O O O O O O O O � O v ® U U U CIO o U U cn U U cn o U U CIS O U U c/� O O 0 0 O 0 O 0 0 0 0 0 O O O o O O O p 0 0 0 0 O p 0 0 0 0 0 O O p O p 0 p O •�= O p O •� Cj n 0 O .y 0 >O 0 O O •� to LN f�1 cn d O 9 O O ai 00 b0 O> '-+ O O vi ai 00 bA O O O cz 00 bU '= 00 v V) > cri �D 4 i c� M \O = oo N 0 O t cn c i h W Oo " O -M c,4' = d O h DD - .%�� M O h 47 fl O M �U £�N �O c s9 �O c�s0 tri! s90 c�0 T, Ri d O' � (J o PRELIMINARY OFFICIAL S'T'A'T'EMENT Dated April 15, 2005 NEW ISSUE - Book -Entry -Only Ratings: Moody's: "Applied For" S&P: "Applied For" ("Other Information — Ratings" herein) In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "TAX MATTERS - Tax Exemption" herein for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations. THE CERTIFICATES WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $3,225,000 CITY OF GRAPEVINE, TEXAS (Tarrant County) COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATIONS, SERIES 2005 Dated Date: May 1, 2005 Due: February 15, as shown below PAYMENT TERMS... Interest on the $3,225,000 City of Grapevine, Texas, Combination Tax and Revenue Certificates of Obligations, Series 2005 (the "Certificates") will accrue from May 1, 2005 (the "Dated Date"), will be payable August 15 and February 15 of each year commencing February 15, 2006, and will be calculated on the basis of a 360 -day year consisting of twelve 30 -day months. The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book -Entry -Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See "THE CERTIFICATES - Book - Entry -Only System" herein. The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas (see "THE CERTIFICATES - Paying Agent/Registrar"). AUTHORITY FOR ISSUANCE ... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas (the "State") particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance adopted by the City Council and constitute direct obligations of the City of Grapevine, Texas (the "City"), payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax, levied within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $1,000) of surplus revenues of the City's Waterworks and Sewer System, as provided in the ordinance authorizing the Certificates (the "Ordinance") (see "THE CERTIFICATES - Authority for Issuance"). PURPOSE ... Proceeds from the sale of the Certificates will be used for the purpose of (i) acquisition of vehicles and equipment for various City departments; (ii) acquisition, construction and installation of vintage signage in various locations throughout the City to implement the Citywide "Way Finding Program" approved by the City Council (items (i) and (ii), collectively, the "Project"); and (iii) paying for professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. MATURITY SCHEDULE CUSIP Amount Maturity Rate Yield Suffixal, $ 365,000 2006 425,000 2007 440,000 2008 460,000 2009 475,000 2010 CUSIP... Prefix: 388622 CUSIP Amount Maturity Rate Yield Suffix�1� $ 490,000 2011 165,000 2012 170,000 2013 115,000 2014 120,000 2015 (Accrued Interest from May 1, 2005 to be added) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. REDEMPTION... The Certificates are not subject to optional redemption prior to maturity, but may be subject to mandatory sinking fund redemption if the purchaser designates a portion of the Certificates as a "Term Certificate." LEGALITY... The Certificates are offered for delivery when, as and if issued and received by the Initial Purchaser and subject to the approving opinion of the Attorney General of Texas and the opinion of Vinson & Elkins L.L.P., Bond Counsel, Dallas, Texas (see Appendix C, "Form of Bond Counsel's Opinion"). DELIVERY... It is expected that the Certificates will be available for delivery through The Depository Trust Company on June 8, 2005. P 0 .� SEALED BIDS DUE TUESDAY, MAY 3, 2005, AT 11:00 AM, CDT This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. For purposes of compliance with Rule 15c 2-12 of the Securities and Exchange Commission (the 'Rule'), this document constitutes an Oficial Statement of the Issuer with respect to the Certificates that has been "deemed f nal" by the City as of its date except for the omission of no more than the information permitted by the Rule. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the representation, promise or guarantee of the Financial Advisor. 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 stall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described herein since the date hereof. See "OTHER INFORMATION - Continuing Disclosure of Information" for a description of the City's undertaking to provide certain information on a continuing basis. Neither the City nor its Financial Advisors make any representation as to the accuracy, completeness, or adequacy of the information supplied by the Depository Trust Company for use in this Official Statement. The Certificates are exempt from registration with the Securities and Exchange Commission and consequently have not been registered therewith. The registration, qualification, or exemption of the Certificates in accordance with applicable securities law provisions of the jurisdiction in which these securities have been registered or exempted should not be regarded as a recommendation thereof. TABLE OF CONTENTS PRELIMINARY OFFICIAL STATEMENT SUMMARY..... ........................ ............... ........ ......... 3 CITY OFFICIALS, STAFF AND CONSULTANTS ..... 5 ELECTED OFFICIALS...................................................5 SELECTED ADMINISTRATIVE STAFF... ....... .................. 5 CONSULTANTS AND ADVISORS....................................5 INTRODUCTION............................................................6 THE CERTIFICATES.....................................................6 TAX INFORMATION...................................................10 TABLE I - VALUATION, EXEMPTIONS AND GENERAL 25 OBLIGATION DEBT..........................................13 26 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY FORSALE ........................................................ CATEGORY...................................................... 14 TABLE 3 - VALUATION AND GENERAL OBLIGATION PUBLIC FUNDS IN TEXAS ................................. DEBT HISTORY ................................................ 15 TABLE 4 - TAX RATE, LEVY AND COLLECTION AUTHENTICITY OF FINANCIAL DATA AND OTHER HISTORY.........................................................15 INFORMATION ................................................. TABLE 5 - TEN LARGEST TAXPAYERS ....................... 15 TABLE 6 - TAX ADEQUACY.......................................16 INITIAL PURCHASER OF THE CERTIFICATES ............... TABLE 7 - ESTIMATED OVERLAPPING DEBT .............. 16 DEBT INFORMATION.................................................17 TABLE H - PRO -FORMA GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS.................................17 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION....................................................17 TABLE 10- COMPUTATION OF SELF-SUPPORTING DEBT 18 TABLE 11 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS ........................................ 18 TABLE 12 - OTHER OBLIGATIONS .............................. 18 FINANCIAL INFORMATION ..................................... 19 TABLE 13 — CHANGES IN NET ASSETS ...................... 19 TABLE 13A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY .................................. 20 TABLE 14 - MUNICIPAL SALES TAX HISTORY ........... 21 FINANCIAL POLICIES ................................................ 21 TABLE 15 -CURRENT INVESTMENTS. ....... ........... .... 23 TAXMATTERS............................................................. 24 OTHER INFORMATION ............................................. 25 RATINGS.................................................................. 25 LITIGATION.............................................................. 26 REGISTRATION AND QUALIFICATION OF CERTIFICATES FORSALE ........................................................ 26 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS ................................. 26 LEGAL MATTERS..... .............. ........ ................. ....... 26 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION ................................................. 26 CONTINUING DISCLOSURE OF INFORMATION. ..... ...... 27 INITIAL PURCHASER OF THE CERTIFICATES ............... 28 FINANCIAL ADVISOR ................................................ 28 FORWARD-LOOKING STATEMENTS DISCLAIMER....... 28 CERTIFICATION OF THE OFFICIAL STATEMENT .......... 29 APPENDICES GENERAL INFORMATION REGARDING THE CITY ........ A EXCERPTS FROM THE ANNUAL FINANCIAL REPORT.. B FORM OF BOND COUNSEL'S OPINION ........................ C The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement. OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Certificates to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY ..................................... The City of Grapevine, Texas (the "City') is a political subdivision and municipal corporation of the State, located in Tarrant County, Texas. The City covers approximately 35.8 square miles (see "INTRODUCTION - Description of City"). THE CERTIFICATES ..................... The Certificates are issued as $3,225,000 Combination Tax and Revenue Certificates of Obligations, Series 2005. The Certificates are issued as serial securities maturing February 15, 2006 through February 2015, unless the Initial Purchaser designates one or more maturities as a Term Certificate (see "THE CERTIFICATES — Description of the Certificates"). PAYMENT OF INTEREST .............. Interest on the Certificates accrues from May 1, 2005, and is payable February 15, 2006, and each February 15 and August 15 thereafter until maturity (see "THE CERTIFICATES - Description of the Certificates"). AUTHORITY FOR ISSUANCE.......... The Certificates are issued pursuant to the general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an Ordinance passed by the City Council of the City (see "THE CERTIFICATES - Authority for Issuance"). SECURITY FOR THE CERTIFICATES ......................... The Certificates constitute direct obligations of the City payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax le -tied, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $1,000) of surplus revenues of the City's Waterworks and Sewer System (see "THE CERTIFICATES - Security and Source of Payment"). REDEMPTION ............................... The Certificates are not subject to optional redemption prior to maturity. The Certificates may be subject to mandatory sinking fund redemption if the purchaser designates a portion of the Certificates as a "Term Certificate." TAxExEMPTION ............................ In the opinion of Bond Counsel, the interest on the Certificates will be excludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "TAX MATTERS - Tax Exemption" for a discussion of the opinion of Bond Counsel, including a description of the alternative minimum tax consequences for corporations. USE of PROCEEDS .................. Proceeds from the sale of the Certificates will be used for the purpose of (i) acquisition of vehicles and equipment for various City departments; (ii) acquisition, construction and installation of vintage signage in various locations throughout the City to implement the Citywide "Way Finding Program" approved by the City Council (items (i) and (ii), collectively, the "Project"); and (iii) paying for professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. RATINGS.. .................................... The presently outstanding tax supported debt of the City is rated "Al" by Moody's Investors Service, Inc. ("Moody's") and "AA-" by Standard & Pool's Ratings Group, a division of McGraw-Hill ("S&P"). The City also has issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P through insurance by various commercial insurance companies. Applications for contract ratings on the Certificates have been made to both Moody's and S&P. The results of their determinations will be provided as soon as possible. BOOK -ENTRY -ONLY SYSTEM...... The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book -Entry -Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates (see "THE CERTIFICATES - Book -Entry -Only System"). PAYMENT RECORD ..................... The City has not defaulted on its tax -supported debt since 1932 when all defaults were corrected without refunding. SELECTED FINANCIAL INFORMATION Ratio Funded Fiscal Per Capita Per Capita Tax Debt to Year Estimated Taxable Taxable Funded Funded Taxable % of Ended City Assessed Assessed Tax Tax Assessed Total Tax 9{30 Population (l) Valuation (2) Valuation Debt Debt Valuation Collections 2001 44,390 $ 4,372,544,371 $ 98,503 $ 156,815,000 $ 3,533 3.59% 99.10% 2002 45,500 4,773,863,018 104,920 157,940,000 3,471 3.31% 99.20% 2003 46,400 4,766,361,580 102,723 157,645,000 3,398 3.31% 99.40% 2004 46,684 4,880,107,595 104,535 148,300,000 3,177 3.04% 99.70% 2005 47,036 5,352,933,433 113,805 142,245,000 (3) 3,024 2.66% 96.28% (4) (1) Source: The City of Grapevine. Preliminary numbers. (2) Source: Tarrant County Appraisal District. (3) Projected, includes the Certificates. (4) Collections for part year only, through April 1, 2005. For additional information regarding the City, please contact: Fred Werner David K. M edanich Director of Finance Laura Alexander City of Grapevine First Southwest Company 200 South Main 777 Main Street, Suite 1200 Grapevine, Texas 76051 Fort Worth, Texas 76102 (817)410-3111 (817)332-9710 4 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS Councilmember, Place 4 Roy Stewart 9 Years May, 2005 Construction Company Owner Councilmember, Place 6 (1) Previously served 13 years as Mayor and Councilmember. SELECTED ADMINISTRATIVE STAFF Name Length of Term Roger Nelson City Council Service Expires Occupation William D. Tate 17 Years � May, 2006 Attomey-at-Law Mayor Director of Finance 8 Years Linda Huff Ted R. Ware 26 Years May, 2005 Commercial Contractor Mayor Pro Tem C. Shane Wilbanks 20 Years May, 2006 Personnel Director Councilmember, Place 1 Sharron Spencer 20 Years May, 2006 Retired Sales Representative Councilmember, Place 2 Clydene Johnson 10 Years May, 2007 Independent Insurance Agent Councilmember, Place 3 Darlene Freed 7 Years May, 2007 Commercial Real Estate Agent Councilmember, Place 4 Roy Stewart 9 Years May, 2005 Construction Company Owner Councilmember, Place 6 (1) Previously served 13 years as Mayor and Councilmember. SELECTED ADMINISTRATIVE STAFF Name Position Length of Service Roger Nelson City Manager 8 Years(i) Bruno Rumbelow Assistant City Manager 8 Years Bill Gaither Administrative Services Director 9 Years Fred Werner Director of Finance 8 Years Linda Huff City Secretary 18 Years (Z) (1) 9 years with City; 8 years in present position. (2) 22 years with City; 18 years in present position. CONSULTANTS AND ADVISORS Auditors........................................................................................................................................................Deloitte & Touche LLP Fort Worth, Texas BondCounsel................................................................................................................................................ Vinson & Elkins L.L.P. Dallas, Texas Financial Advisor...................................................................................................................................... First Southwest Company Fort Worth, Texas 5 OFFICIAL STATEMENT RELATING TO $3,225,000 CITY OF GRAPEVINE, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $3,225,000 City of Grapevine, Texas, Combination Tax and Revenue Certificates of Obligations, Series 2005 (the "Certificates"). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance to be adopted on the date of sale of the Certificates except as otherwise indicated herein. There follows in this Official Statement a description of the Certificates and certain information regarding the City of Grapevine, Texas (the "City"), and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City's Financial Advisor, First Southwest Company, Fort Worth, Texas. DESCRIPTION OF THE CITY ... The City is a political subdivision and municipal corporation of the State of Texas (the "State"), duly organized and existing under the laws of the State, including the City's Home Rule Charter. The City first adopted its Home Rule Charter in 1965. The City operates under the Council/Manager form of government with a City Council comprised of the Mayor and six Councihnembers. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are: public safety (police and fire protection), highways and streets, electric, water and sanitary sewer utilities, health and social services, culture -recreation, public transportation, public improvements, planning and zoning, and general administrative services. The 2000 Census population for the City was 42,059, and the 2005 estimated population is 47,036. The City covers approximately 35.8 square miles. THE CERTIFICATES DESCRIPTION OF THE CERTIFICATES ... The Certificates are dated May 1, 2005, and mature on February 15 in each of the years and in the amounts and bear interest at per annum rates as shown on the cover page hereof. Interest will be computed on the basis of a 360 -day year of twelve 30 -day months, and will be payable on August 15 and February 15, commencing February 15, 2006. The definitive Certificates will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially 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 Certificates will be made to the owners thereof. Principal of and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See "THE CERTIFICATES - Book -Entry -Only System" herein. AUTHORITY FOR ISSUANCE ... The Certificates are being issued pursuant to the Constitution and general laws of the State, particularly Subchapter C of Chapter 271, Local Government Code, as amended, and an Ordinance passed by the City Council. SECURITY AND SOURCE OF PAYMENT ... The Certificates are secured by and payable from a separate annual ad valorem tax levied, within the limits prescribed by law, on all taxable property within the city at a rate sufficient to provide for the payment of the Certificates when due Additionally, the Certificates are payable from and secured by a limited pledge (not to exceed $1,000) of surplus net revenues of the City's Waterworks and Sewer System, as provided in the Ordinance authorizing the Certificates. TAx RATE LIMITATION ... All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City adopts the constitutionally authorized maximum tax rate of $2.50 per $I00 Taxable Assessed Valuation. Administratively, the Attorney General of Texas will permit allocation of $1.50 of the $2.50 maximum tax rate for all tax supported debt service, as calculated at the time of issuance. REDEMPTION ... The Certificates are not subject to optional redemption prior to maturity. The Certificates may be subject to mandatory sinking fund redemption if the purchaser designates a portion of the Certificates as a "Term Certificate." DEFEASANCE ... The Ordinance provides that the City may discharge its obligations to the registered owners of any or all of the Certificates to pay principal, interest and redemption price thereon in any manner permitted by law. Under current Texas law, such discharge may be accomplished either (i) by depositing with the Comptroller of Public Accounts of the State of Texas a sum of money equal to the principal of, premium, if any, and all interest to accrue on the Certificates to maturity or date of redemption or (ii) by depositing with an eligible place of payment (paying agent) for obligations of the City amounts sufficient to provide for the payment and/or redemption of the Certificates; provided that such deposits may be invested and reinvested only in (a) direct noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the City adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; and (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the City adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent. The foregoing obligations may be in book entry form, and shall mature and/or bear interest payable at such times and in such amounts as will be sufficient to provide for the scheduled payment and/or redemption of the Certificates. If any of such Certificates are to be redeemed prior to their date of maturity, provision must have been made for giving notice of redemption as provided in the Ordinance. BooK-ENTRY-ONLY SYSTEM ... This section describes how ownership of the Certificates are to be transferred and how the principal of and interest on the Certificates are to be paid to and credited by DTC while the Certificates are registered in its nominee 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 City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Certificates), 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. DTC will act as securities depository for the Certificates. The Certificates 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 Certificates, 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 between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, LSCC, 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 Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("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 Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Certificates, except in the event that use of the book -entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates 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 Certificates 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 Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners, The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the bond documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Certificates within an issue are being redeemed, DTC's practice is to determine by lot the amount of interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the Paying Agent/Registrar, 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, the Paying Agent/Registrar, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. USE OF CERTAIN TERMS IN OTHER SECTIONS OF THIS OFFICIAL STATEMENT. In reading this Official Statement it should be understood that while the Certificates 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 Certificates, 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 Ordinance will be given only to DTC. Information concerning DTC and the Book -Entry -Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City or the Financial Advisor. EFFECT OF TERMINATION OF BOOK -ENTRY -ONLY SYSTEM. In the event that the Book -Entry -Only System is discontinued by DTC or the use of the Book -Entry -Only System is discontinued by the City, printed Certificates will be issued to the respective holders and the Certificates will be subject to transfer, exchange and registration provisions as set forth in the Ordinance and summarized under "THE CERTIFICATES - Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR ... The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas. In the Ordinance, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Certificates are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Certificates. Upon any change in the Paying Agent/Registrar for the Certificates, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Certificates by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. PAYMENT ... Interest on the Certificates shall be paid to the registered owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (defined below), and such interest shall be paid (i) by check sent United States Mail, first class postage prepaid to the address of the registered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner. Principal of the Certificates will be paid to the registered owner at their stated maturity upon presentation to the designated payment/transfer office of the Paying Agent/Registrar. If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office of the Paying Agent/ Registrar is located are authorized to close, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. TRANSFER, EXCHANGE AND REGISTRATION ... In the event the Book -Entry -Only System should be discontinued, printed Certificates will be delivered to the registered owners and thereafter the Certificates may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall 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 registration, exchange and transfer. Certificates may be assigned by the execution of an assignment form on the respective Certificates or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Certificates will be delivered by the Paying Agent/Registrar, in lieu of the Certificates being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Certificates issued in an exchange or transfer of Certificates will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Certificates to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Certificates registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate designated amount as the Certificates surrendered for exchange or transfer. See "THE CERTIFICATES - Book -Entry -Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Certificates. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Certificate called for redemption, in whole or in part, within 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 Certificate. RECORD DATE FOR INTEREST PAYMENT ... The record date ("Record Date") for the interest payable on the Certificates on any interest payment date means the close of business on the last business day of the month preceding such interest payment date. In the event of a non payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Certificate appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. CERTIFICATEHOI,DERS' REMEDIES ... The Ordinance establishes as "Event of Default" (i) the failure to make payment of principal of or interest on the Certificates when due, and (ii) default in the performance or observance of any other covenant, agreement, or obligation of the City, the failure of which materially, adversely affects the rights of the Owner, including but limited to, their prospect or ability to be repaid in accordance with the Ordinance, and the continuation thereof for a period of 60 days after notice of such default is given by any Owner to the City. Under State law there is no right to the acceleration of maturity of the Certificates. Although a registered owner of Certificates could presumably obtain a judgment against the City if a default occurred in the payment of principal of or interest on any such Certificates, such judgment could not be satisfied by execution against any property of the City. Such registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as it becomes due. The enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The Ordinance does not provide for the appointment of a trustee to represent the interests of the bondholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors. 9 TAX INFORMATION An VALOREM TAx LAW ... The appraisal of property within the City is the responsibility of the Tarrant Appraisal District (the "Appraisal District"), Excluding agricultural and open -space land, which may be taxed on the basis of productive capacity, the Appraisal District is required under the Property Tax Code to appraise all property within the Appraisal District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law fiuther limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property, or (2) the sum of (a) 10% of the appraised value of the property for the last year in which the property was appraised for taxation times the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to the Texas Property Tax Code (the "Property Tax Code"), for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ("Article VIII") and State law provide for certain exemptions from property taxes, the valuation of agricultural and open -space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Article VIII, Section 1-b, and State law, the governing body of a political subdivision, at its option, may grant: (1) An exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; and (2) An exemption of up to 20% of the market value of residence homesteads; the minimum exemption under this provision is $5,000. In the case of residence homestead exemptions granted under, Article VIII, Section 1-b, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Article VIII, Section 2, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000. Under Article VIII and State law, the governing body of a county, municipality or junior college district, may freeze the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older to the amount of taxes imposed in the year such residence qualified for such exemption. Also, upon receipt of a petition signed by five percent of the registered voters of the county, municipality or junior college district, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads of persons 65 years of age or who are disabled. Upon providing for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead and to a surviving spouse living in such homestead who is disabled or is at least 55 years of age. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may not be repealed or rescinded. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open -space land (Section 1-d-1), including open -space land devoted to farm or ranch purposes or open -space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Sections 1-d and 1-d-1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VIII, Section 1-J, provides for "freeport property" to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. 10 The City and the other taxing bodies within its territory may agree to jointly create tax increment financing zones, under which the tax values on property in the zone are "frozen" at the value of the property at the time of creation of the zone. The difference between any increase in the assessed valuation of taxable real property in the TIF in excess of the base value of taxable real property in the TIF is known as the "Incremental Value," and during the existence of the TIFs, taxes levied by the City against the Incremental Value in the TIFs are restricted to paying project and financing costs within the TIFs and are not available for the payment of other obligations of the City, including the Certificates. The City also may enter into tax abatement agreements to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. EFFECTIVE TAX RATE AND ROLLBACK TAX RATE ... Section 26.05 of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60a' day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Furthermore, Section 26.05 provides that the City Council may not adopt a tax rate that exceeds the lower of the rollback tax rate or 103 per cent of the effective tax rate until a public hearing is held on the proposed tax rate following a notice of such public hearing (including the requirement that notice be posted on the City's website if the City owns, operates or controls an internet website and public notice be given by television if the City has free access to a television channel) and the City Council has otherwise complied with the legal requirements for the adoption of such tax rate. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. Under the Property Tax Code, the City must annually calculate and publicize its "effective tax rate" and "rollback tax rate." If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. "Effective tax rate" means the rate that will produce last year's total tax levy (adjusted) from this year's total taxable values (adjusted). "Adjusted" means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. "Rollback tax rate" means the rate that will produce last year's maintenance and operation tax levy (adjusted) from this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this year's debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY ASSESSMENT AND TAX PAYMENT ... Property within the City is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1. PENALTIES AND INTEREST ... Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: After July, penalty remains at 12%, and interest increases at the rate of I% each month. In addition, if an account is delinquent in July, up to a 20% attorney's collection fee is added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no 11 Cumulative Cumulative Month Penalty Interest Total February 6% 1 % 7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12 6 18 After July, penalty remains at 12%, and interest increases at the rate of I% each month. In addition, if an account is delinquent in July, up to a 20% attorney's collection fee is added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no 11 additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. CITY APPLICATION OF TAX CODE ... The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $60,000. The City has granted an additional exemption of 20% of the market value of residence homesteads with a minimum exemption of $5,000. See Table 1 for a listing of the amounts of the exemptions described above. The City has not adopted the tax freeze for citizens who are disabled or are 65 years of age or older, which became a local option and subject to local referendum on January 1, 2004. Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; does not tax lease value on personal use vehicles; and the City contracts with the Grapevine-Colleyville Independent School District for the collection of its taxes. The City does not permit split payments, and discounts are not allowed. The City does not tax freeport property. The City does not collect the additional one-half cent sales tax for reduction of ad valorem taxes. TAX ABATEMENT POLICY... The City does not have a tax abatement policy. TAX INCREMENT FINANCE ZONES.. The City has established the Tax Increment Financing Reinvestment Zone Number One, comprised of approximately 175 acres in the northeast area of the City. The tax increment base for the Reinvestment Zone Number One established on January 1, 1996 was $7,647,325. As of September 30, 2004, the Reinvestment Zone Number One Taxable Assessed Value is $200,573,412. The project for which the Zone was created was completed on October 31, 1997. The City has additionally established the Tax Increment Financing Reinvestment Zone Number Two, comprised of approximately 121.817 acres in the northeast area of the City. The tax increment base for the Reinvestment Zone Number Two established on January 1, 1998 was $744,866. As of September 30, 2004, the Reinvestment Zone Number Two Taxable Assessed Value is $257,214,332. As of September 30, 2004, approximately $100% of permanent improvements have been made to Reinvestment Zone Number Two. 12 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT 2004./05 Market Valuation Established by Tarrant Appraisal District Less Exemptions/Reductions at 100% Market Value: Residence Homestead Exemptions Over 65 Years of Age Disabled Exemptions Veterans Exemptions Pollution Control Exemptions Solar/'Wind Power Exemptions Freeport Exemptions Open -Space Land Use Reductions Prorated Absolutes Nominal Value Reductions 2004/05 Taxable Assessed Valuation $ 6,382,715,129 $ 361,762,592 59,272,871 902,500 1,174,800 61,488 9,774 550,697,849 55,759,683 116,736 23,403 1,029,781,696 2004/05 Incremental Taxable Assessed Value of Real Property within Reinvestment Zone Number One 2004/05 Incremental Taxable Assessed Value of Real Property within Reinvestment Zone Number Two 2004/05 Taxable Assessed Valuation available for General Fund Obligations and Debt of City City Funded Debt Payable from Ad Valorem Taxes (t) General Obligation Bonds (as of 4-1-05) $ 67,220,000 Certificates of Obligation (as of 4-1-05) 72,525,000 Equipment Acquisition Notes (as of 4-1-05) 1,490,000 The Certificates 3,225,000 Funded Debt Payable from Ad Valorem Taxes Less Self -Supporting Debt: Combination Tax and Tax Increment Reinvestment Zone Revenue Certificates of Obligation (as of4-1-05)121 Lake Enterprise Notes and Certificates of Obligation (as of 4-1-05) (3) Net Funded Debt Payable From Ad Valorem Taxes Interest and Sinking Fund as of April 1, 2005 Ratio Total Funded Debt to Taxable Assessed Valuation .................................................. 2005 Estimated Population - 47,036 Per Capita Taxable Assessed Valuation - $113,805 Per Capita Total Funded Debt - $3,071 $ 5,352,933,433 (194,333,372) (256,469,466) $ 4,902,130,595 $ 144,460,000 52,735,000 5,256,818 $ 86,468,182 $ 6,235,583 2.70% (1) This statement of indebtedness does not include currently outstanding $26,299,660 Waterworks and Sewer System (the "System") revenue bonds, as these bonds are payable solely from the net revenues of the System, as defined in the ordinances authorizing such bonds. (2) The self-supporting amount is a projection of debt by the City based on actual historical payments from the Tax Increment Reinvestment Zone Funds. The amount of self-supporting debt is based on the percentage of revenue support as shown in Table 10. There is no guarantee that these payments will continue in the future. If the payments are not made from the revenues in the future, the difference will have to be paid with ad valorem taxes. (3) Certificate and Note debt in the amounts shown for which repayment is provided from revenues of the Lake Enterprise Fund. The amount of self-supporting debt is based on the percentages of revenue support as shown in Table 10. It is the City's current policy to provide these payments from Fund revenues; this policy is subject to change in the future. In the event the payments are not made from Fund revenues, the City will be required to levy an ad valorem tax in an amount sufficient to make such payments. 13 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY 14 Taxable Appraised Value for Fiscal Year Ended September 30, 2005 2004 2003 % of °% of % of Category Amount Total Amount Total Amount Total Real, Residential, Single -Family $ 2,052,562,907 32.16% $ 1,964,374,887 33.09% $ 1,848,342,618 31.72% Real, Residential, Multi -Family 280,451,216 4.39% 287,029,406 4.83% 252,912,480 4.34% Real, Vacant Lots Tracts 105,098,629 1.65% 106,298,853 1.79% 100,697,189 1.73°% Real, Acreage (Land Only) 115,957,997 1.82% 126,583,447 2.13% 138,891,577 2.38°% Real, Farm and Ranch Improvements 2,417,897 0.04% 2,382,927 0.04% 2,353,699 0.04% Real, Commercial 1,439,927,013 22.56°% 1,254,791,876 21.14% 1,198,547,815 20.57°% Real, Industrial 40,705,402 0.64% 14,652,926 0.25°% 14,825,922 0.25°% Real and Tangible Personal, Utilities 237,407,049 3.72°% 166,164,616 2.80°% 147,113,035 2.52°% Real, Mobile Homes 7,817,281 0.12% 8,176,799 0.14% 8,173,982 0.14% Tangible Personal, Business - 0.00°% - 0.00°% - 0.00% Tangible Personal, Commercial 1,939,745,844 30.39% 1,849,545,899 31.15% 1,966,523,825 33.75% Tangible Personal, Industrial 143,245,651 2.24°% 136,629,168 2.30% 138,115,671 2.37°% Tangible Personal, Mobile Homes - 0.00°% - 0.00°% - 0.00% Tangible Personal, Other 165,093 0.00% 1,000,000 0.02% - 0.00°% Real Property, Inventory 17,213,150 0.27% 19,338,550 0.33% 10,141,975 0.17% Total Appraised Value Before Exemptions $ 6,382,715,129 100.00°% $ 5,936,969,354 100.00°% $ 5,826,639,788 100.00% Adjustments (52,543,460) (52,070,988) Less: Total Exemption/Reductions (1,029,781,696) (1,004,318,299) (1,008,207,220) Taxable Assessed Value $ 5,352,933,433 $ 4,880,107,595 $ 4,766,361,580 Taxable Appraised Value for Fiscal Year Ended September 30, 2002 2001 %of %of Category Amount Total Amount Total Real, Residential, Single -Family $ 1,673,214,512 30.17% $ 1,522,401,913 29.49°% Real, Residential, Multi -Family 200,728,832 3.62% 151,579,484 2.94°% Real, Vacant Lots Tracts 104,297,996 1.88% 109,952,787 2.13°% Real, Acreage (Land Only) 171,706,596 3.10% 165,569,051 3.21°% Real, Farm and Ranch Improvements 2,160,035 0.04°% 2,441,498 0.05% Real, Commercial 1,086,095,366 19.59°% 932,109,580 18.06°% Real, Industrial 14,530,371 0.26°% 10,891,084 0.21% Real and Tangible Personal, Utilities 102,859,092 1.85% 88,123,888 1.71°% Real, Mobile Homes 9,059,623 0.16°% 4,239,290 0.08% Tangible Personal, Business - 0.00% - 0.00% Tangible Personal, Commercial 2,126,886,729 38.35% 2,127,859,776 41.22°% Tangible Personal, Industrial 46,334,087 0.84% 40,389,885 0.78% Tangible Personal, Mobile Homes - 0.00°% - 0.00°% Tangible Personal, Other 111,976 0.00% 146,674 0.00% Real Property, Inventory 7,290,582 0.13% 6,679,162 0.13°% Total Appraised Value Before Exemptions $ 5,545,275,797 100.00°i6 $ 5,162,384,072 100.00°% Adjustments (86,019,171) Less: Total Exemption/Reductions (685,393,608) (789,839,701) Taxable Assessed Value $ 4,773,863,018 $ 4,372,544,371 NOTE: Valuations shown are certified taxable assessed values reported by the Tarrant Appraisal District to the State Controller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. 14 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY (1) Source: The City of Grapevine. (2) Source: Tarrant Appraisal District. (3) Projected, includes the Certificates. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal 2004/05 % of Total Taxable Ratio Fiscal Assessed Distribution Taxable Tax Debt Tax Debt Funded Year General Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 9/30 Population (I) Valuation (Z) Per Capita of Year Valuation Capita 2001 44,390 $ 4,372,544,371 $ 98,503 $ 156,815,000 3.59% $ 3,533 2002 45,500 4,773,863,018 104,920 157,940,000 3.31% 3,471 2003 46,400 4,766,361,580 102,723 157,645 000 3.31% 3,398 2004 46,684 4,880,107,595 104,535 148,300,000 3.04% 3,177 2005 47,036 5,352,933,433 113,805 142,245,000 (3) 2.66% 3,024 (3) (1) Source: The City of Grapevine. (2) Source: Tarrant Appraisal District. (3) Projected, includes the Certificates. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal 2004/05 % of Total Taxable Taxable Year Assessed Distribution Valuation Valuation Commercial Airline Ended Tax General Interest and 3.46% % Current % Total 9/30 Rate Fund Sinking Fund Tax Levy Collections Collections 2001 $ 0.37500 $ 0.189641 $ 0.185359 $ 16,333,571 98.80% 99.10% 2002 0.36600 0.135924 0.230076 17,431,826 98.39% 99.20% 2003 0.36600 0.148900 0.217100 17,662,726 98.60% 99.40% 2004 0.36600 0.123700 0.242300 18,043,645 99.00% 99.70% 2005 0.36350 0.141560 0.221940 19,251,256 96.30% 96.28% (1) Collections for part year only, through April 1, 2005. TABLE 5 - TEN LARGEST TAXPAYERS Name of Taxpayer American Airlines Inc. Grapevine Mills Ltd. Partnership Delta Airlines/Atlantic Southeast Airlines Verizon/GTE Gaylord Texan Resort & Conv. Cit. CAE Simuflite General Electric Capital Corp Quest Communications Corp. Oncor Electric Delivery Co. United Parcel Services Co. GENERAL OBLIGATION DEBT LIMITATION ... No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter (see "THE CERTIFICATES — Tax Rate Limitation"). 15 2004/05 % of Total Taxable Taxable Assessed Assessed Nature of Property Valuation Valuation Commercial Airline $ 313,758,237 5.86% Regional Shopping Mall 185,084,296 3.46% Commercial Airline 151,545,340 2.83% Telecommunication 149,230,493 2.79% Hotel 113,083,186 2.11% Simuflite Training School 88,525,738 1.65% Financial Service Corp 57,844,570 1.08% Telecommunication 42,721,429 0.80% Electric Service 40,395,043 0.75% Parcel Service 40,357,279 0.75% $ 1,182,545,611 22.09% GENERAL OBLIGATION DEBT LIMITATION ... No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter (see "THE CERTIFICATES — Tax Rate Limitation"). 15 TABLE 6 - TAX ADEQUACY (1) 2005 Principal and Interest Requirements $ 11,165,169 $0.2107 Tax Rate at 99.00% Collection Produces $ 11,165,844 Average Annual Principal and Interest Requirements, 2005 - 2026 $ 5,440,283 $0.1027 Tax Rate at 99.00% Collection Produces $ 5,442,488 Maximum Principal and Interest Requirements, 2005 $ 11,165,169 $0.2107 Tax Rate at 99.00% Collection Produces $ 11,165,844 (1) Includes the Certificates, less self-supporting debt. TABLE 7 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ("Tax Debt") was developed from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional Tax Debt since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional Tax Debt, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the City. Total Direct and Overlapping Funded Debt $ 264,986,740 Ratio of Direct and Overlapping Funded Debt to Taxable Assessed Valuation ............................................... 4.95% Per Capita Overlapping Funded Debt................................................................................ $ 5,633.70 (1) Includes the Certificates, less self-supporting debt. 16 2004/05 City's Taxable 2004,'05 Total Estimated Overlapping Assessed Tax Funded % Funded Debt Taxing Jurisdiction Value Rate Debt Applicable 4!1/2005 City of Grapevine $ 5,352,933,433 $ 0.3635 $ 86,468,182 Ql 100.00% $ 86,468,182 Carroll Independent School District 4,411,336,158 1.9030 161,484,219 5.38% 8,687,851 Coppell Independent School District 5,751,081,057 1.7350 119,534,548 0.48% 573,766 Dallas County 129,617,491,048 0.2039 202,247,395 0.01% 20,225 Dallas County Community College District 134,404,944,574 0.0778 106,935,000 0.01% 10,694 Dallas County Hospital District 129,617,491,048 0.2540 - 0.01% - Grapevine-Colleyville Independent School District 13,159,000,737 1.7010 231,900,813 67.47% 156,463,479 Tarrant County 111,228,762,367 0.2725 175,615,000 5.24% 9,202,226 Tarrant County Hospital District 111,228,762,367 0.2353 1,190,000 5.24% 62,356 Tarrant County Junior College District 111,228,762,367 0.1394 66,755,000 5.24% 3,497,962 Total Direct and Overlapping Funded Debt $ 264,986,740 Ratio of Direct and Overlapping Funded Debt to Taxable Assessed Valuation ............................................... 4.95% Per Capita Overlapping Funded Debt................................................................................ $ 5,633.70 (1) Includes the Certificates, less self-supporting debt. 16 DEBT INFORMATION TABLE S - PRO -FORMA GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS Fiscal I ... I .... $ 1,512,789 Interest and Sinking Fund Tax Levy ........................................... 9,946,675 Penalty and Interest........................................................ 65,000 Budgeted Transfers 121 ......................................................... Less Estimated Investment Income .................................................. 65,000 12,815,440 Year Total Less TIF Lake Enterprise Total Debt % of Ended Outstanding Debt (I) The Certificates (3) Debt Self -Supporting Self -Supporting Less TIF Principal 9/30 Principal Interest Principal Interest Requirements Requirements Requirements Requirements Retired 2005 $ 9,630,000 $ 7,214,723 $ - $ - $ 16,844,723 $ 5,083,559 $ 595,996 $ 11,165,169 2006 9,440,000 6,801,131 365,000 158,967 16,241,131 5,072,579 595,746 10,572,806 2007 9,400,000 6,331,792 425,000 105,900 15,731,792 5,080,626 599,016 10,052,150 2008 9,690,000 5,868,929 440,000 88,600 15,558,929 5,083,698 601,318 9,873,913 2009 9,800,000 5,409,461 460,000 70,600 15,209,461 5,087,704 453,959 9,667,799 32.26% 2010 9,580,000 4,950,091 475,000 51,900 14,530,091 5,092,610 456,315 8,981,166 2011 9,305,000 4,476,893 490,000 32,600 13,781,893 5,093,023 457,851 8,231,019 2012 8,475,000 4,055,435 165,000 19,500 12,530,435 5,114,129 458,553 6,957,754 2013 8,680,000 3,638,403 170,000 12,800 12,318,403 5,135,360 463,288 6,719,756 2014 9,120,000 3,209,538 115,000 7,100 12,329,538 5,156,323 462,040 6,711,175 62.64% 2015 9,455,000 2,762,373 120,000 2,400 12,217,373 5,180,118 464,885 6,572,370 2016 9,375,000 2,297,035 - - 11,672,035 5,201,774 466,790 6,003,471 2017 5,775,000 1,919,113 7,694,113 2,591,176 472,638 4,630,299 2018 5,245,000 1,634,056 6,879,056 2,591,939 472,428 3,814,690 2019 5,545,000 1,348,627 6,893,627 2,597,814 476,044 3,819,769 86.45% 2020 3,825,000 1,097,760 4,922,760 2,602,404 - 2,320,356 2021 4,050,000 884,738 4,934,738 2,606,194 - 2,328,544 2022 2,810,000 688,800 3,498,800 2,608,894 - 889,906 2023 2,440,000 542,869 2,982,869 2,608,744 - 374,125 2024 2,200,000 411,838 2,611,838 2,611,838 - - 96.76% 2025 2,335,000 282,588 2,617,588 2,617,588 - 2026 2,475,000 145,406 2,620,406 2,620,406 - - 100.00% S 148,650,000 S 65,971,596 $ 3,225,000 $ 550,367 $ 214,621,596 $ 87,438,494 $ 7,496,865 $ 119,686,236 (1) "Outstanding Debt" includes lease/purchase obligations and self-supporting debt. (2) Average life of the issue - 5.673 years. Interest on the Certificates has been calculated at the average rate of 4.00% for purposes of illustration. TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION Tax Supported Debt Service Requirements, Fiscal Year Ending 9/30/2005 .............................. $ 11,165,169 111 Interest and Sinking Fund Balance as of 9/30:/2004 ........................ I ... I .... $ 1,512,789 Interest and Sinking Fund Tax Levy ........................................... 9,946,675 Penalty and Interest........................................................ 65,000 Budgeted Transfers 121 ......................................................... 1,225,976 Estimated Investment Income .................................................. 65,000 12,815,440 Estimated Balance, 9/30/2005................................................................. $ 1,650,271 (1) Excludes TIF self-supporting debt service. (2) Includes Golf Course user fees. 17 TABLE 10 - COMPUTATION OF SELF-SUPPORTING DEBT Tax Increment Reinvestment Zone Beginning Fund Balance, 9-30-04 ....................................................................... $ 10,203,293 Projected Net Tax Increment Reinvestment Zone Revenue Available for Debt Service ........................ 9,465,976 Requirements for Tax Increment Reinvestment Zone Certificates ....................................... I . 5,083,559 Projected Fund Balance, 9-30-05 ................................................................. $ 14,585,710 Percentage of Tax Increment Reinvestment Zone Revenue Certificates Self -Supporting ....................... 100.00% Lake Enterorise Fund (1) Revenue Available for Debt Service from Lake Enterprise Fund, Fiscal Year Ended 9-30-04 ................. $ 521,634 Less: Revenue Bond Requirements, 2004 Fiscal Year ................................................. - Balance Available for Other Purposes............................................................ $ 521,634 System General Obligation Bond Requirements, 2005 Fiscal Year ....................................... 595,996 Balance.................................................................................... $ (74,362) Percentage of Lake Enterprise Certificates, Self -Supporting ......................................... 100.00% (1) While Net Lake Enterprise Revenue Available September 30, 2004 is not sufficient to pay all of the Fiscal Year 2005 debt service requirements, sufficient revenues from the Lake Enterprise Fund have been budgeted for Fiscal Year 2005 such that the System Bond Requirements are expected to be 100% self-supporting. TABLE 11 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS Amount Date Amount Previously Unissued Purpose Authorized Authorized Issued Balance Street Improvements 12/5/1998 $ 30,245,000 $ 24,997,314 $5,247,686 ANTICIPATED ISSUANCE OF GENERAL OBLIGATION DEBT ... The City anticipates the issuance of approximately $2,300,000 Certificates of Obligation in June of 2005 and anticipates issuing the remaining balance of voted general obligation debt in the first quarter of Fiscal Year 2006. TABLE 12 - OTHER OBLIGATIONS The City has no unfunded debt outstanding as of September 30, 2004 PENSION FUND ... The City provides pension benefits for all of its full-time employees through the Texas Municipal Retirement System ("TMRS"), a State-wide administered pension plan. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. (For more detailed information concerning the retirement plan, see Appendix B, "Excerpts from the City's Annual Financial Report".) 18 FINANCIAL INFORMATION TABLE 13 - CHANGES IN NET ASSETS (1) (1) In fiscal year ended September 30, 2003, the City implemented Government Accounting Standards Board Statement No. 34 ("GASB 34"). 19 Fiscal Year Ended September 30, Revenues: 2004 2003 Program Revenues Charges for Services $ 13,266,501 $ 13,518,121 Operating Grants and Contributions 1,813,067 1,893,118 Capital Grants and Contributions 597,366 1,108,954 General Revenues Property Taxes 23,599,775 22,768,284 Hotel Occupancy Taxes 4,931,201 3,380,659 Sales Taxes 17,975,926 16,040,397 Mixed Beverage Taxes 685,801 578,218 Franchise Fees 5,210,589 4,944,789 Investment Earnings 619,869 1,106,609 Miscellaneous 28,788 155,158 Gain (Loss) on Sale/Retirement of Fixed Assets - (58,080) Total Revenues $ 68,728,883 $ 65,436,227 Expenses: General Government $ 12,382,413 $ 13,062,473 Public Safety 17,597,695 16,366,353 Culture and Recreation 16,090,083 14,069,760 Public Works 10,363,172 14,342,030 Interest on Long -Term Debt 7,682,256 7,603,547 Total Expenses $ 64,115,619 $ 65,444,163 Increase in Net Assets before Transfers $ 4,613,264 $ (7,936) Transfers - - Changes in Net Assets $ 4,613,264 $ (7,936) Net Assets - October 1 27,856,441 27,864,377 Net Assets - September 30 $ 32,469,705 $ 27,856,441 (1) In fiscal year ended September 30, 2003, the City implemented Government Accounting Standards Board Statement No. 34 ("GASB 34"). 19 TABLE 13A - GENERAL FUND REVENUES AND EXPENDITURE HISTORY Expenditures General Government $ Fiscal Year Ended September 30, $ Revenues 2004 2003 2002 2001 2000 Taxes $ 29,941,926 $ 28,715,417 $ 27,165,580 $ 29,239,672 $ 27,051,303 Licenses and Permits 1,263,663 1,482,165 1,536,786 1,146,428 1,494,428 Intergovernmental 112,859 129,428 217,614 4,381,910 182,863 Charges for Services 5,593,257 5,784,270 5,009,819 2,984,179 3,003,353 Fines and Forfeitures 1,961,990 2,046,991 2,101,526 2,149,638 2,360,028 Interest and Miscellaneous 902,365 1,119,469 809,259 876,507 776,140 Total Revenues $ 39,776,060 $ 39,277,740 $ 36,840,584 $ 40,778,334 $ 34,868,115 Expenditures General Government $ 12,897,174 $ 12,168,352 $ 11,686,622 $ 10,510,527 $ 5,683,237 Public Safety 16,167,628 15,846,568 15,532,602 17,640,884 15,404,767 Culture and Recreation 5,991,741 5,673,980 5,184,010 5,737,648 5,183,727 Capital Outlay 60,881 80,649 - - - Public Works 5,101,265 4,770,722 4,772,777 6,067,277 5,657,648 Total Expenditures $ 40,218,689 $ 38,540,271 $ 37,176,011 $ 39,956,336 $ 31,929,379 Excess (Deficiency) of Revenues Over Expenditures $ (442,629) $ 737,469 $ (335,427) $ 821,998 $ 2,938,736 Other Financing Sources Budgeted Transfers In $ - $ 304,000 $ 300,000 $ 400,000 $ - Budgeted Transfers Out (1,101,261) (1,068,765) (1,753,450) (1,295,979) (2,098,598) Total Transfers $ (1,101,261) $ (764,765) $ (1,453,450) $ (895,979) $ (2,098,598) Net Increase (Decrease) $ (1,543,890) $ (27,296) $ (1,788,877) $ (73,981) $ 840,138 Other Miscellaneous Adjustments - - - Residual Equity Transfer - - 262,087 - 1,172 Beginning Fund Balance 6,104,579 6,131,875 7,658,665 7,732,646 6,891,336 Ending Fund Balance $ 4,560,689 $ 6,104,579 $ 6,131,875 $ 7,658,665 $ 7,732,646 20 TABLE 14 - MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act, Texas Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Bonds. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. Fiscal Year % of Equivalent of Ended Total Ad Valorem Ad Valorem Per 9/30 Collected Tax Levy Tax Rate Capita 2001 $ 16,048,266 98.25% $ 0.3670 $ 362 2002 14,939,771 85.70% 0.3129 328 2003 16,040,397 90.81% 0.3365 346 2004 17,975,926 99.62% 0.3684 385 2005 �i� 7,413,323 38.51% 0.1385 158 (1) Earned through April 1, 2005. FINANCIAL POLICIES Basis of Accounting ... The accounting policies of the City conform to generally accepted accounting principles for governmental entities as promulgated by the Government Accounting Standards Board. The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All governmental funds and expendable trust funds are accounted for using a current financial resources measurement focus. With this measurement focus., only current assets and current liabilities generally are included on the combined balance sheet. Operating statements of these funds present increases (revenues and other financing u sources) and decreases (expenditures and other financing uses) in net current assets. All proprietary funds are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the combined balance sheet. Fund equity is segregated into contributed capital and retained earnings components. Proprietary fund -type operating statements present increases (revenues) and decreases (expenses) in net total assets. The modified accrual basis of accounting is used by all governmental funds types, expendable trust funds and agency funds. Under the modified accrual basis of accounting revenues are recognized when susceptible to accrual (i.e., when they become both measurable and available). "Measurable" means collectible within the current period of soon enough thereafter to be used to pay liabilities of the current period. Expenditures are generally recorded when the related fund liability is incurred. However, principal of and interest on general long-term debt are recorded as fund liabilities when due or when amounts have been accumulated in the debt service fund for payments to be made early in the following year. Major revenue sources which have been treated as susceptible to accrual under the modified basis of accounting include property taxes, charges for services, intergovernmental revenues, and investment of idle funds. The accrual basis of accounting is utilities by proprietary funds types. Under this method, revenue is recorded when earned and expenses are recorded at the time liabilities are incurred. The City reports deferred revenue on its combined balance sheet. Deferred revenues arise when a potential revenue does not meeting both the "measurable" and "available" criteria for recognition in the current period. Deferred revenues also arise when resources are received by the government before it has a legal claim to them, as when grant monies are received prior to the incurrence of qualified expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the government has a legal claim to the resources, the liability for deferred revenue is removed from the combined balance sheet and revenue is recognized. Fund Balances ... It is the City's policy regarding the General Fund and Enterprise Funds that working capital resources should be maintained at a minimum of 10% of the Fund's operating expenditure budget. The City maintains its various debt service funds in accordance with the covenants of the Ordinances. Use of Bond Proceeds... The City's policy is to use bond proceeds for capital expenditures only. Such revenues are never to be used to fund normal City operations. 21 Budgetary Procedures... The City Charter establishes the fiscal year as the twelve-month period beginning each October 1. Each year between May and July, the City Manager analyzes and then after review, submits a budget of estimated revenues and expenditures to the City Council. Subsequently, the City Council will hold work sessions to discuss and amend the budget to coincide with their direction of the City. Various public hearings may be held to comply with state and local statutes. The City Council will adopt a budget prior to September 30. If the Council fails to adopt a budget then the budget presented to the Council by the City Manager becomes the adopted budget. During the fiscal year, budgetary control is maintained by the monthly review of departmental appropriation balances. Actual operations are compared to the amounts set forth in the budget. Departmental appropriations that have not been expended lapse at the end of the fiscal year. Therefore, funds that were budgeted and not used by the departments during the fiscal year are not available for their use unless appropriated in the ensuing fiscal year's budget. INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council. Both state law and the City's investment policies are subject to change. LEGAL INVESTMENTS. Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (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 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 City 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) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than "A" or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City's name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least "A-1" or ?- 1" or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least "A-1" or ?-1" or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no -loan 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 (13) no-Ioad 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 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 City 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 City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 806-1 et. seq.) or with the State Security Board to provide for the investment and management of its public funds or other funds under its control for a term of up to two years but the City retains ultimate responsibility as fiduciary of its assets. The City 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. 22 INVESTMENT POLICIES ... Under Texas law, the City is required to invest its funds pursuant to 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 includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar -weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each funds' 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, City investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." At least quarterly the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, 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 strategy statements and (b) state law. No person may invest City funds without express written authority from the City Council. ADDITIONAL PROVISIONS ... Under Texas law the City is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt an order or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the said order or resolution, (3) require any investment officers' with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Council; (4) require the registered principal of firms seeking to sell securities to the City to: (a) receive and review the City'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; (5) perform an annual audit of the management controls on investments and adherence to the City's investment policy; (6) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (8) restrict the investment in mutual funds in the aggregate to no more than 15% of the City's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt services, and to invest no portion of bond proceeds, reserves and funds held for debt service in mutual funds; (9) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements; and (10) at least annually review, revise, and adopt a list of qualified brokers that are authorized to engage in investment transactions with the City. TABLE 15 - CURRENT INVESTMENTS As of April 1, 2005, the City's investable funds were invested in the categories listed above. As of such date, 38% of the City's portfolio will mature within six months. The market value of the investment portfolio was approximately 99.5% of its purchase price. Book Market Description Percent Value Value Government Securities 37.92% $ 25,813,368 $ 25,693,377 TexPool/Logic 62.08% 42,261,854 42,261,854 100.00% $ 68,075,222 $ 67,955,231 23 TAX MATTERS TAX EXEMPTION ... In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on the Certificates is excludable from gross income for federal income tax purposes under existing law and (ii) the Certificates are not "private activity bonds" under the Internal Revenue Code of 1986, as amended (the "Code"), and interest on the Certificates will not be subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. The Code imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Certificates, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of proceeds and the source of repayment, limitations on the investment of proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of proceeds be paid periodically to the United States, and requirement that the issuer file an information report with the Internal Revenue Service (the "Service"), The City has covenanted in the Ordinance that it will comply with these requirements. Bond Counsel's opinion will assume continuing compliance with the covenants of the Ordinance pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Certificates for federal income tax purposes and, in addition, will rely on representations by the City, the City's Financial Advisor and the Initial purchasers of the Certificates with respect to matters solely within the knowledge of the City, the City's Financial Advisor and the initial purchasers of the Certificates, respectively, which Bond Counsel has not independently verified. If the City should fail to comply with the covenants in the Ordinance or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless of the date on which the event causing such taxability occurs. The Code also imposes a 20% alternative minimum tax on the "alternative minimum taxable income" of a corporation, if the amount of such alternative minimum tax is greater than the amount of the corporation's regular income tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation, regulated investment company, REIT, REMIC or FASIT), includes 75% of the amount by which its "adjusted current earnings" exceeds its other "alternative minimum taxable income." Because interest on tax-exempt obligations, such as the Certificates, is included in a corporation's "adjusted current earnings," ownership of the Certificates could subject a corporation to alternative minimum tax consequences. Under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. Except as stated above, and as stated below in "Tax Accounting Treatment of Original Issue Discount Certificates", Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of, receipt of interest on, or disposition of, the Certificates. Prospective purchasers of the Certificates should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations, and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the U.S. may be subject to the "branch profits tax" on their effectively -connected earnings and profits including tax-exempt interest such as interest on the Certificates. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Bond Counsel's opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel's knowledge of facts as of the date hereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel's attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel's opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent Bond Counsel's legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer and the Owners may not have a right to participate in such audit. 24 TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT CERTIFICATES ... The initial public offering price for certain of the Certificates may be less than the principal amount thereof (the "Original Issue Discount Certificates"). In such case, Bond Counsel, under existing law and based upon the assumptions hereinafter stated, will render an opinion to the effect that: (a) The difference between (i) the amount payable at the maturity of each Original Issue Discount Certificate, and (ii) the initial offering price to the public of such Original Issue Discount Certificate constitutes original issue discount with respect to such Original Issue Discount Certificate in the hands of any owner who has purchased such Original Issue Discount Certificate in the initial public offering of the Certificates; and (b) Such initial owner 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 Certificate equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Certificate continues to be owned by such owner. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Certificate prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Certificate 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 Certificate was held by such initial owner) is includable in gross income. (Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the Certificates under the caption "Tax Exemption" generally applies, except as otherwise provided below, to original issue discount on an Original Issue Discount Certificate held by an owner who purchased such Certificate at the initial offering price in the initial public offering of u the Certificates, and should be considered in connection with the discussion in this portion of the Official Statement.) In rendering the foregoing opinion, Bond Counsel will assume, in reliance upon certain representations of the initial purchaser, that (a) the initial purchaser has purchased the Certificates for contemporaneous sale to the public and (b) all of the Original Issue Discount Certificates have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm's-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof. Neither the City nor Bond Counsel warrants that the Original Issue Discount Certificates will be offered and sold in accordance with such assumptions. Certain of the representations of the initial purchaser, upon which Bond Counsel will rely in rendering the foregoing opinion, will be based on records or facts the initial purchaser had no reason to believe were not correct. Under existing law, the original issue discount on each Original Issue Discount Certificate 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 semi-annual anniversary dates of the date of the Certificates 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 Certificate for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Certificate. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Certificates 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 Certificates should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Certificates 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 Certificates. OTHER INFORMATION RATINGS The presently outstanding tax -supported debt of the City is rated "Al" by Moody's and "AA-" by S&P. The City also has issues outstanding which are rated "Aaa" by Moody's and "AAA" by S&P through insurance by various commercial insurance companies. Applications for contract ratings on this issue have been made to Moody's and S&P. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City 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 they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgment of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Certificates. 25 LITIGATION It is the opinion of the City Attorney and City Staff that there is no pending litigation against the City that would have a material adverse financial impact upon the City or its operations. REGISTRATION AND QUALIFICATION OF CERTIFICATES FOR SALE The sale of the Certificates has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Certificates have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Certificates are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. In addition, various provisions of the Texas Finance Code provide that, subject to a prudence standard, the Certificates are legal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loan associations. General Considerations. For political subdivisions in Texas that have adopted investment policies and guidelines in accordance with the Public Funds Investment Act (Government Code, Chapter 2256), the Certificates may have to be assigned a rating of "A" or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds and other public funds. The City has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Certificates for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Certificates for such purposes. The City has made no review of laws in other states to determine whether the Certificates are legal investments for various institutions in those states. LEGAL MATTERS The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Certificates, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Certificate and to the effect that the Certificates are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Certificates will be excludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "TAX MATTERS" herein for a description of the opinion of Bond Counsel, including a discussion of alternative minimum tax consequences for corporations. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Certificates, or which would affect the provision made for their payment or security, or in any manner questioning the validity of said Certificates will also be furnished. Bond Counsel did not take part in the preparation of the Notice of Sale and Bidding Instructions, the Official Bid Form or the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information describing the Certificates in the Official Statement to verify that such description conforms to the provisions of the Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Certificates is contingent on the sale and delivery of the Certificates. The legal opinion of Bond Counsel will accompany the Certificates deposited with DTC or will be printed on the Certificates in the event of the discontinuance of the Book -Entry -Only System. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from City records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. 26 CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide 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 City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under Tables numbered 1 through 6 and 8 through 15 and in Appendix B. The City will update and provide this information within six months after the end of each fiscal year ending in or after 2005. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to any state information depository ("SID") that is designated by the State and approved by and approved by the staff of the United States Securities and Exchange Commission (the "SEC"). The City 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 updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the City will provide audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix B or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify each NRMSIR and the SID of the change. The Municipal Advisory Council of Texas ("MAC") has been designated by the State of Texas and approved by the SEC staff as a qualified SID. 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. The MAC has also received SEC approval to operate, and has begun to operate, a "central post office" for information filings made by municipal issuers, such as the City. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filings. The central post office can be accessed and utilized at www.DisclosureUSEA.com ("DisclosureUSA"). The City may utilize DisclosureUSA for the filing of information relating to the Certificates. MATERIAL, EVENT NOTICES ... The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates: (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 Certificates; (7) modifications to rights of holders of the Certificates; (8) Certificate calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates; and (11) rating changes. In addition, the City will provide timely notice of any failure by the City to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board ("MSRB"). AVAILABILITY OF INFORMATION FROM NRMSIRS AND SID ... The City has agreed to provide the foregoing information only to NRMSIRs and the SID. The information will be available to holders of Certificates 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. LIMITATIONS AND AMENDMENTS ... The City has agreed to update information and to provide notices of material events only as described above. The City 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 City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Certificates at any future date. The City 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 of Certificates may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Certificates 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 (ii) either (a) the holders of a majority in aggregate principal amount of the 27 outstanding Certificates consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Certificates in the primary offering of the Certificates. If the City so amends the agreement, it has agreed to 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 financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS ... The City has compiled with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. INITIAL PURCHASER OF THE CERTIFICATES After requesting competitive bids for the Certificates, the City accepted the bid of (the "Initial Purchaser of the Certificates") to purchase the Certificates at the interest rates shown on the cover page of the Official Statement at a price of par plus a cash premium (if any) of $ . The Initial Purchaser of the Certificates can give no assurance that any trading market will be developed for the Certificates after their sale by the City to the Initial Purchaser of the Certificates. The City has no control over the price at which the Certificates are subsequently sold and the initial yield at which the Certificates will be priced and reoffered will be established by and will be the responsibility of the Initial Purchaser of the Certificates. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. First Southwest Company may submit a bid for the Certificates, either independently or as a member of a syndicate organized to submit a bid for the Certificates. First Southwest Company, in its capacity as Financial Advisor, has relied on the opinion of Bond Counsel and has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Certificates, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor to the City has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. FORWARD-LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City'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 City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. 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. 28 CERTIFICATION OF THE OFFICIAL STATEMENT At the time of payment for and delivery of the Certificates, the City will furnish a certificate, executed by proper officers, acting in their official capacity, to the effect that to the best of their knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in its Official Statement, and any addenda, supplement or amendment thereto, on the date of such Official Statement, on the date of sale of said Certificates and the acceptance of the best bid therefore, and on the date of the delivery, were and are true and correct in all material respects; (b) insofar as the City and its affairs, including its financial affairs, are concerned, such Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (c) insofar as the descriptions and statements, including financial data, of or pertaining to entities, other than the City, and their activities contained in such Official Statement are concerned, such statements and data have been obtained from sources which the City believes to be reliable and the City has no reason to believe that they are untrue in any material respect; and (d) there has been no material adverse change in the financial condition of the City since the date of the last audited financial statements of the City. The Ordinance will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Certificates by the Purchaser. ATTEST: LINDA HUFF City Secretary 29 WILLIAM D. TATE Mayor City of Grapevine, Texas THIS PAGE LEFT BLANK INTENTIONALLY APPENDIX A GENERAL INFORMATION REGARDING THE CITY THIS PAGE LEFT BLANK INTENTIONALLY THE CITY ... The City is a political subdivision of the State incorporated in 1907 and operates as a home -rule City under the general laws of the State and a charter approved by the voters in 1965. The City has a Council/Manager form of government in which the mayor and six council members are elected for staggered three-year terms with elections held annually in May. Policy making is the responsibility of, and is vested in, the City Council. The Council delegates the operational authority of the City to the City Manager, who is the chief administrative officer of the City. The City provides all the functions normally associated with a municipality including, but not limited to, public safety (i.e., police and fire personnel and equipment), health inspection and enforcement, water and sewer facilities, streets and drainage facilities and parks and recreational facilities. The City presently employs approximately 497 full-time staff members. POPULATION ... The City has had significant population growth during the past several years. These population estimates are as follows: Year Population Source Year Population Source 1970 7,023 U.S. Census 1993 31,902 City Estimate 1980 11,801 U.S. Census 1994 32,727 City Estimate 1981 15,245 Grapevine Community Profile 1995 33,211 City Estimate 1982 16,183 Grapevine Community Profile 1996 34,950 City Estimate 1983 18,121 Grapevine Community Profile 1997 36,000 City Estimate 1984 19,405 Grapevine Community Profile 1998 37,946 City Estimate 1985 22,002 Grapevine Community Profile 1999 39,190 City Estimate 1986 24,493 Grapevine Community Profile 2000 39,523 U.S. Census 1987 25,853 Grapevine Community Profile 2001 44,390 City Estimate 1988 27,132 City Estimate 2002 45,524 City Estimate 1989 27,257 City Estimate 2003 46,188 City Estimate 1990 29,202 U.S. Census 2004 46,684 City Estimate 1991 30,300 City Estimate 2005 47,036 City Estimate 1992 31,400 City Estimate ECONOMICS ... The proximity of the Dallas/Fort Worth International Airport ("DFW") greatly influences both industrial and residential growth of the City. DFW has been and is expected to continue to be an economic generator of employment, spin-off businesses and tax base, all of which benefit the City and the surrounding area. Approximately 65% of the airport is within the city limits of Grapevine. Several large business operations owe their genesis to DFW including air cargo services, flight kitchens, rent/lease car operations and SimuFlite Training International, a company which provides jet pilot flight training in advanced flight simulators. Seven of the ten largest taxpayers of the City are directly related to DFW either by location or primary business sources. DFW contains approximately 18,000 acres and directly employs some 33,000 personnel. These employees have skills ranging from custodial level to highly trained jet aircraft pilots. A number of these people have purchased homes in the City and conduct their daily business here. DFW has approximately 19,400 parking spaces and is currently expanding parking facilities. Sales tax from parking fees generate about $330,000 in annual income for the City and hotels providing service for travelers at DFW and seminar space for business meetings generate approximately $2 million in annual hotel/motel tax revenue. EMPLOYMENT ... Employment figures furnished by Texas Employment Commission are: Annual Annual Annual Annual Annual Annual 2004 2003 2002 2001 2000 1999 Labor Force 22,598 22,478 22,219 22,001 21,757 21,309 Employed 21,925 21,692 21,476 21,509 21,393 20,956 Unemployed 673 786 743 492 364 353 Percent of Unemployed 2.98% 3.50% 3.34% 2.24% 1.67% 1.66% A - I MAJOR EMPLOYERS Company Dallas/Fort Worth International Airport Gaylord Texan Resort & Convention Center G rap evine/Colleyville Independent School District United Parcel Service Baylor Medical Center Gamestop City of Grapevine D/FW Hilton Hotel SimuFlite Training International Apollo Paper/John Harland Source: City of Grapevine, Department of Development Services. Estimated Number of Product Employees Airport 16,420 Hotel/Convention 1,800 School District 1,576 Parcel Service 1,200 Health Services 1,000 Electronic/Software Distribution 600 City Government 540 Hotel 400 Pilot Training 300 Paper Products 200 BANKING AND FINANCIAL ... Banking facilities for the City are provided by four banks, the Texas Bank of Grapevine, the First State Bank of Grapevine, Frost Bank and a branch of NationsBank of Texas, Independent National Bank, Bank One and Bank of America. Also located in the City is a branch of the Omni Federal Credit Union. Source: City of Grapevine, Finance Department. BUMDING PERMITS... The number and value of building permits issued by the City are: Fiscal Commercial Permits Residential Permits Total Year Number Number Number Total Ended of Dollar of Dollar of Dollar 9/30 Permits Value Permits Value Permits Value 2000 56 $ 84,742,336 211 $ 56,040,989 267 $ 140,783,325 2001 53 364,294,642 89 12,445,025 142 376,739,667 2002 23 21,888,714 183 48,911,056 206 70,799,770 2003 28 34,396,654 158 43,615,909 186 78,012,563 2004 23 32,790,990 186 40,969,517 209 73,760,507 Source: City of Grapevine records. RECREATION ... Located approximately two miles north of the downtown area of the City lies Grapevine Lake. The lake serves as the City reservoir and supplies approximately 50% of the water supply of the City. The lake covers a surface area of approximately 12,740 acres and has a shore line of 146 miles. The lake is 19 miles long and 2.5 miles wide at its widest point. The lake is owned and operated by the U.S. Corps of Engineers and is a major recreation area for swimming, fishing, picnicking and camping and draws some five million visitors each year to the area. The City also has an extensive park system which includes tennis courts, racquetball courts, baseball and softball diamonds, football and soccer fields, a jogging and biking trail, swimming pool and picnic areas. The City also owns and operates an 27 -hole golf course. TRANSPORTATION... The City is in the center of a highway network that includes seven spokes of an extensive highway system; six U.S. highways, seven major state highways and one interstate highway. This network connects the City to all major entrances to both Dallas and Fort Worth, with major highway systems both north/south and east/west, There are 43 motor freight lines providing service to the City and the City is within the Dallas and Fort Worth Commercial Zone for deliveries. Railroad service is offered by the Cotton Belt Railroad and the Southern Pacific Railroad, both with daily switching service. Greyhound/Trailways Bus Lines provides the City with surface bus transportation. HOTEL AND CONVENTION FACILITIES... There are four major hotels in the City and several other hotels and motels adjacent to the City near DFW. The Hyatt Regency DFW is located on the airport and provides 1,450 rooms, one of the largest hotels in Texas. The Hyatt provides more than 130,000 square feet of meeting and convention facilities, five dining facilities, availability to two 18 -hole championship golf courses, tennis courts, heated swimming pool and health spa and jogging trails. A-2 The D/FW Airport Hilton and Executive Conference Center is a 400 -room hotel located 2.5 miles north of DFW offering a 14,400 square foot exhibit hall and ballroom that can accommodate 900 banquet guests. Also provided are three restaurants, tennis courts, racquetball courts, indoor and outdoor swimming pools, steam room, health club and lighted jogging trails. Adjacent to the hotel is the Austin Ranch where horseback riding and other western events are available to hotel guests. The Embassy Suites Conference Center is a 12 -story, 329 -room hotel located just north of DFW Airport. The Embassy Suites offers a 12,640 square foot conference center and ballroom, a 3,432 square foot junior ballroom and 14 other meeting rooms. Also provided is a state-of-the-art fitness center, a heated indoor swimming pool, complimentary, cooked -to -order breakfast and 24-hour in -room dining. The Gaylord Texan on Lake Grapevine is a 1,511 room resort and convention center located just 6 minutes north ofD/FW Airport. The Gaylord Texan provides 400,000 square feet of convention, meeting, exhibit and pre -function space featuring 70 breakout rooms, three ballrooms, 180,000 square -feet of dedicated exhibit space, an 80,000 square foot outdoor event lawn and a 2,500 square foot amphitheater. Other amenities include seven restaurants, the Dallas Cowboys Golf Club, a contemporary Southwestern -style outdoor pool, a 25,000 square foot European spa, salon and fitness center with 13 treatment rooms and a 20 -meter indoor lap pool, w outdoor tennis courts and marina access for recreational water -craft. EDUCATION ... Elementary and secondary education is provided to the City by the Grapevine-Colleyville Independent School District (the "District"). The District provides seventeen campuses, all air conditioned, as follows: 2 High schools 4 Middle schools 11 Elementary schools In addition to the campuses, the District also owns an administration/service center, an auditorium and a complete athletic complex. Historical school enrollment figures are: 1983 3,732 1994 10,878 1984 4,037 1995 11,363 1985 4,675 1996 11,655 1986 5,617 1997 12,398 1987 6,107 1998 12,928 1988 6,604 1999 13,299 1989 7,156 2000 13,369 1990 7,984 2001 13,534 1991 8,710 2002 13,677 1992 9,435 2003 13,619 1993 10,236 2004 13,851 Source: Grapevine-Colleyville Independent School District. Educational opportunities beyond the secondary level are numerous and within easy driving distance of the City. Some of the colleges and universities within a 50 mile radius of the City are as follows: College/University Location Texas Christian University Fort Worth, Texas Texas Wesleyan University Fort Worth, Texas Tarrant County College Fort Worth, Texas University of Texas at Arlington Arlington, Texas University of North Texas Denton, Texas Texas Women's University Denton, Texas Southern Methodist University Dallas, Texas Dallas Baptist University Dallas, Texas Dallas Community College Dallas, Texas University of Dallas Irving, Texas University of Texas at Dallas Richardson, Texas A-3 THIS PAGE LEFT BLANK INTENTIONALLY APPENDIX B EXCERPTS FROM THE CITY OF GRAPEVINE, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2004 The information contained in this Appendix consists of excerpts from the City of Grapevine, Texas Annual Financial Report for the Year Ended September 30, 2004, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information. THIS PAGE LEFT BLANK INTENTIONALLY APPENDIX C FORM OF BOND COUNSEL'S OPINION THIS PAGE LEFT BLANK INTENTIONALLY [Form of Opinion of Bond Counsel] [Closing Date] CITY OF GRAPEVINE, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 WE HAVE represented the City of Grapevine, Texas (the "Issuer"), as its bond counsel in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF GRAPEVINE, TEXAS, COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005, dated May 1, 2005. The Certificates mature, bear interest and may be transferred and exchanged as set out in the Certificates and in the ordinance adopted by the City Council of the Issuer authorizing their issuance (the "Ordinance"). The Certificates are not subject to optional redemption prior to stated maturity. WE HAVE represented the Issuer as its bond counsel for the purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the Issuer, customary certificates of officers, agents and representatives of the Issuer and other public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined executed Certificate No. 1 of this issue. Vinson & Elkins LLP Attorneys at Law Austin Beijing Dallas Trammell Crow Center, 2001 Ross Avenue, Suite 3700 Dubai Houston London Moscow New York Tokyo Washington Dallas, Texas 75201-2975 Tel 214.220.7700 Fax 214.220.7716 www.velaw.com BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and, therefore, the Certificates constitute valid and legally binding obligations of the Issuer; and (B) A continuing ad valorem tax upon all taxable property within the City of Grapevine, Texas, necessary to pay the principal of and interest on the Certificates, has been levied and pledged irrevocably for such purposes, within the limit prescribed by law; in addition, the payment of the principal of and interest on the Certificates is further secured by a limited pledge of $1,000 of the Surplus Revenues, as defined in the Ordinance, derived from Issuer's waterworks and sewer system; and the total indebtedness of the Issuer, including the Certificates, does not exceed any constitutional, statutory or other limitations. THE RIGHTS OF THE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION THAT: (1) Interest on the Certificates is excludable from gross income for federal income tax purposes under existing law; (2) The difference between the amount payable at maturity of each Certificate maturing in each of the years through , inclusive (the "Original Issue Discount Certificates"), and the "issue price," within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") of such Certificates is excludable from gross income for federal income tax purposes as original issue discount under existing law; and (3) The Certificates are not "private activity bonds" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), and interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be included in the "adjusted current earnings" of a corporation (other than an S corporation, regulated investment company, REIT, REMIC or FASIT) for purposes of computing its alternative minimum tax. In providing such opinions, we have relied on representations of the Issuer, the Financial Advisor and the initial purchasers with respect to matters solely within the knowledge of the Issuer, the Financial Advisor and the initial purchasers, respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are -2- determined to be inaccurate or incomplete or the Issuer fails to comply with the foregoing provisions of the Ordinance, interest on the Certificates could become includable in gross income from the date of original delivery, regardless of the date on which the event causing such inclusion occurs. Purchasers of Original Issue Discount Certificates in the initial public offering are directed to the discussion entitled "Tax Accounting Treatment of Original Issue Discount Certificates" set forth in "TAX MATTERS" of the Official Statement prepared for use in connection with the sale of the Certificates for purposes of determining the portion of the original issue discount described in paragraph 2 above which is allocable to the period such Certificates are held by a holder. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Certificates which are not purchased in the initial public offering at the initial offering price may be determined according to rules which differ from those described above and in the Official Statement. Except as stated above, we express no opinion as to any federal, state or local tax _. consequences resulting from the ownership of, receipt of interest on, or disposition of the Certificates. Owners of the Certificates should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the U.S. may be subject to the "branch profits tax" on their effectively -connected earnings and profits (including tax-exempt interest such as interest on the Certificates). The opinions set forth above are based on existing law which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes. -3-