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Home My WebLink AboutItem 02 - General Obligation Bonds and Certificates of ObligationITEM s :6 MMMMMOMMMMMMOM MEMO TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: ROGER NELSON, CITY MANAGEPAO//? MEETING DATE: JANUARY 7, 2003 SUBJECT: ORDINANCE AUTHORIZING THE SALE OF GENERAL OBLIGATION BONDS AND CERTIFICATES OF OBLIGATION RECOMMENDATION: City Council to consider approving an ordinance for the sale of $16,040,000 of General Obligation Improvement and Refunding Bonds, Series 2003; and, authorizing the sale of $3,220,000 of Combination Tax and Revenue Certificates of Obligation, Series 2003. BACKGROUND: At the January 7, 2003 City Council meeting a representative of the First Southwest Company, the City's financial advisor, will present bids for the sale of two types of debt obligations. The first is for $16,040,000 of General Obligation and Improvement and Refunding Bonds. The second is for $3,220,000 of Combination Tax and Revenue Certificates of Obligation. Funds from the General Obligation and Refunding Bond sale will be used for the following purposes: Roadway Improvements (Dove East Extension) $ 5,000,000 Refinancing of General Obligation Bonds, Series 1993 10,745,000 Issuance Costs 295.000 Total $16,040,000 The Dove East Bonds represent the fourth sale of bonds authorized by the voters in the December 1998 bond election. A balance of $5,245,000 remains in the debt authorized, but that has not been issued, from the 1998 election. The Refunding bonds are to be used to refinance $10,745,000 of bonds which were issued in 1993 at a rate of 4.7 — 5.1 %. It is anticipated that the new rate will be less than 4.2%, resulting in an approximate net present value savings of $438,000 over the remaining life of the bonds. January 2, 2003 (10:29AM) Funds from the Combination Tax and Revenue Certificates of Obligation sale will be used for the purchase of vehicles and equipment which are authorized in the 2003 Budget and for two parcels of real property as follows: Authorized Vehicles and Equipment (FY 2003 Budget) $1,618,107 Bronto Fire Apparatus $951,210 Main Street Parking Lot $368,000 GTE Building (402 South Barton Street) 215,000 Issuance Costs 67,683 Total Certificates of Obligation $3,220,000 A copy of the official statements prepared for this sale are included in your packet. The draft sale ordinances are available in the City Secretary's Office, Staff recommends acceptance of the First Southwest Company's recommendation and approval of the ordinances authorizing the sale. WAG/cjc HAGMGO&COSale1-2003 January 2, 2003 (10:29AM) U U S c o r c .2 ,3 c _ PRELNIINARY OFFICLAL STATEMENT Dated December 26, 2002 NEW ISSUE - Book -Entry -Only Ratings: Moody's: Applied For S&P: Applied For (see "Other Information— Ratings" herein) In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law and the Bonds are not private activity bonds. See "Tax Exemption" herein for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations. THE BONDS WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $16,040,000* CITY OF GRAPEVINE, TEXAS (Tarrant County) GENERAL OBLIGATION REFUNDING AND IMPROVEMENT BONDS, SERIES 2003 Dated Date: January 1, 2003 Due: February 15, as shown below PAYhtEn r TERMS ... Interest on the $16,040,000* City of Grapevine, Texas General Obligation Refunding and Improvement Bonds, Series 2003 (the "Bonds") will accrue from January 1, 2003 (the "Dated Date"), will be payable February 15 and August 15 of each year, commencing August 15, 2003, and will be calculated on the basis of a 360 -day year consisting of twelve 30 -day months. The definitive Bonds 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 Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds 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 Bonds. See "The Bonds and Certificates - Book -Entry -Only System" herein. The initial Paying Agent/Registrar is Bank One, National Association, Austin, Texas (see "The Bonds and Certificates - Paying Agent/Registrar"). AUTHORITY FOR ISSUANCE ... The Bonds are issued pursuant to the Constitution and general laws of the State of Texas (the "State"), including particularly Texas Government Code, Chapters 1207 and 1331, as amended, Section 9.26 of the City's Home Rule Charter, and are direct obligations of the City of Grapevine (the "City"), payable from a continuing ad valorem tax levied on all taxable property within the City, within the limits prescribed by law, as provided in the ordinance authorizing the Bonds (the "Bond Ordinance") (see "The Bonds and Certificates - Authority for Issuance"). PURPOSE ... Proceeds from the sale of the Bonds will be used to refund a portion of the City's outstanding General Obligation Refunding and Improvement Bonds, Series 1993 (the "Refunded Bonds") in order to lower the overall debt service requirements of the City. See "Schedule I - Schedule of Refunded Bonds". Additionally, the proceeds from the sale of the Bonds will be used for (i) constructing, improving and widening streets and thoroughfares and related utility relocation;, drainage, landscaping, sidewalk and signalization improvements, and acquiring land and interest in land and (ii) to pay the costs of issuance related to the sale of the Bonds. Amount Maturity Rate $ 1,625,000 2004 1,505,000 2005 1,550,000 2006 1,615,000 2007 1,660,000 2008 1,715,000 2009 1,225,000 2010 1,290,000 2011 610,000 2012 235,000 2013 MATURITY SCHEDULE* Yield Amount Maturity $ 245,000 2014 255,000 2015 265,000 2016 275,000 2017 290,000 2018 305,000 2019 320,000 2020 335,000 2021 350,000 2022 370,000 2023 (Accrued Interest from January 1, 2003 to be added) Rate Yield OPTIONAL REDEMPTION ... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2014, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2013, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Bonds and Certificates - Optional Redemption"). SEPARATE ISSUES ... The Bonds are being offered by the City concurrently with the "City of Grapevine, Texas, Combination Tax and Revenue Certificates of Obligation, Series 2003" (the "Certificates"), under a common Preliminary Official Statement, and such Bonds and Certificates are hereinafter sometimes referred to collectively as the "Obligations". The Bonds and Certificates are separate and distinct securities offerings being issued and sold independently except for the common Preliminary Official Statement, and while the Obligations share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. LEGALITY ... The Bonds are offered for delivery when, as and if issued and received by the Underwriters 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 Opinions"). Certain legal matters will be passed upon for the Underwriters by Locke Liddell & Sapp LLP, Dallas, Texas, Counsel for the Underwriters. DELIVERY... It is expected that the Bonds will be available for delivery through The Depository Trust Company on February 11, 2003. COASTAL SECURITIES * Preliminary, subject to change. SWS SECURITIES SAMCO CAPITAL MARKETS THIS PAGE LEFT BLANK INTENTIONALLY a t) c a r c �O T E c� PRELINILNARY OFFICIAL STATEMENT Dated December 26, 2002 NEW ISSUE - Book -Entry -Only Ratings: Moody's: Applied For S&P: Applied For (see "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 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 53,220,000* CITY OF GRAPEVINE, TEXAS (Tarrant County) COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2003 Dated Date: January 1, 2003 Due: February 15, as shown below PAYMENT TERMS ... Interest on the 53,220,000* City of Grapevine, Texas Combination Tax and Revenue Certificates of Obligation, Series 2003 (the "Certificates") will accrue from January 1, 2003 (the "Dated Date"), will be payable August 15 and February 15 of each year, commencing August 15, 2003, 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, premium, if any, 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 Bonds and Certificates - Book -Entry -Only System" herein. The initial Paying Agent/Registrar is Bank One, National Association, Austin, Texas (see "The Bonds and 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 (the Certificate of Obligation Act of 1971), as amended, Section 9.26 of the City's Home Rule Charter and constitute direct Obligation 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, within the limits prescribed by law, on all taxable property within the City, and (ii) a pledge of surplus net revenues (not to exceed S 1,000) of the City's Water and Sewer System (the "System"), as provided in the ordinance authorizing the Certificates (the "Certificate Ordinance") (see "The Bonds and Certificates - Authority for Issuance"). PURPOSE ... Proceeds from the sale of the Certificates will be used to (i) acquire building in downtown Grapevine for municipal purposes; (ii) acquire land and parking lot in downtown Grapevine; (iii) acquire equipment and vehicles for police department; (iv) acquire equipment and fire truck for fire department; (v) acquire equipment and a vehicle for public works department; (vi) acquire equipment and vehicles for utility department; (vii) acquire equipment and golf carts for City golf course; (viii) acquire computers, hardware, software and related equipment for various City departments; and (ix) pay costs of issuance of the Certificates. Amount Maturity Rate $ 500,000 2004 515,000 2005 540,000 2006 270,000 2007 265,000 2008 230,000 2009 NIATURITY SCHEDULE * Yield Amount Maturity Rate Yield 245,000 2010 190,000 2011 115,000 2012 115,000 2013 115,000 2014 120,000 2015 (Accrued Interest from January 1, 2003 to be added) Optional Redemption ... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2014, in whole or in part in principal amounts of 55,000 or any integral multiple thereof, on February 15, 2013, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Bonds and Certificates - Optional Redemption"). SEPARATE ISSUES ... The Certificates are being offered by the City concurrently with the "City of Grapevine, Texas, General Obligation Refunding and Improvement Bonds, Series 2003" (the "Bonds"), and such Certificates and Bonds are hereinafter sometimes referred to collectively as the "Obligation". The Certificates and Bonds are separate and distinct securities offerings being issued and sold independently except for the common Preliminary Official Statement, and, while the Obligation share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. LEGALrrY ... The Certificates are offered for delivery when, as and if issued and received by the Underwriters 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 Opinions"). Certain legal matters will be passed upon for the Underwriters by Locke Liddell & Sapp LLP, Dallas, Texas, Counsel for the Underwriters. DELIVERY ... It is expected that the Certificates will be available for delivery through The Depository Trust Company on February 11, 2003. COASTAL SECURITIES * Preliminary, subject to change. SWS SECURITIES SATMCO CAPITAL MARKETS TRIS PAGE LEFT BLANK INTENTIONALLY This Preliminary 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 Preliminary Off cial Statement, and, ifgiven or made, such other information or representations must not be relied upon. Certain information set forth herein has been provided by sources other than the City that the City believes is reliable, but the City makes no representation as to the accuracy of such information. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of the Preliminary Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the 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. THE BONDS AND THE CERTIFICATES ARE E,YEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR E,YEMPTION OF THE BONDS AND 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. NEITHER THE CITY NOR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE LNFORMATION CONTAINED IN THIS PRELIMINARY OFFICIAL STATEMENT REGARDI NG THE DEPOSITORY TRUST COMPANY OR ITS BOOK -ENTRY -ONLY SYSTEM, AS SUCH INFORMATION HAS BEEN FURNISHED BY THE DEPOSITORY TRUST COMPANY. IN CONNECTION WITH THE OFFERING OF THE BONDS AND THE CERTIFICATES, THE UNDERWRITERS MAY OVER -ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AND/OR THE CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAYBE DISCONTINUED AT ANY TIME. The Underwriters have provided the following sentence for inclusion in this Preliminary Official Statement. The Underwriters have reviewed the information in this Preliminary Official Statement in accordance with, and as part of, its responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. TABLE OF CONTENTS PRELIMINARY OFFICIAL STATEMENT SUNLNIARY.......6 CITY OFFICIALS, STAFF AND CONSULTANTS .................9 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL ELECTED OFFICIALS..............................................................9 OBLIGATION DEBT....... .... ................................. SELECTED ADMINISTRATIVE STAFF......................................9 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CONSULTANTS AND ADVISORS.............................................9 CATEGORY................................................................ INTRODUCTION........................................................................ i0 PLAN OF FINANCING .... .......... ................ -........ ,,.... ..... ........ ...10 THE BONDS AND CERTIFICATES ........................................ Al TAX INFORNIATION.................................................................16 31 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL Al OBLIGATION DEBT....... .... ................................. 19 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY................................................................ 20 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY.................................................................... 21 TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY .21 TABLE - TEN LARGEST TAXPAYERS...............................21 31 TABLE 6 - TAX ADEQUACY................................................22 TABLE 7 - ESTIMATED OVERLAPPING DEBT......................22 32 DEBT INFORMATION..............................................................23 TABLE 8 - PRO -FORMA GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS. ...... ............. __ 23 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION..............................................................23 TABLE 10 - COMPUTATION OF SELF-SUPPORTING DEBT... 24 TABLE 1 I - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS ................................................. 24 TABLE 12 - OTHER OBLIGATIONS......................................24 FINANCL4L INFORNIATION..................................................25 TABLE 13 - GENERAL FUND REVENUES AND EXPENDITURE HISTORY................................................................... 25 TABLE 14 - MUNICIPAL SALES TAX HISTORY ................... 26 TABLE 15 - CURRENT INVESTMENTS ................................... 28 TAX NIATTERS.......................................................................... 28 OTHER INFORMATION.......................................................... 31 RATINGS.............................................................................. Al LITIGATION. _ ................. ......... _ ........... ......... __ ... 31 REGISTRATION AND QUALIFICATION OF BONDS AND CERTIFICATES FOR SALE .......................................... 31 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS ....................................................... 31 LEGAL MATTERS................................................................. 31 AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION........................................................... 32 CONTINUING DISCLOSURE OF INFORMATION ..................... 32 FINANCIAL ADVISOR........................................................... 33 FORWARD-LOOKING STATEMENTS DISCLAIMER.. ...... ___ 33 VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS ............................ ............................ 34 UNDERWRITING................................................................... 34 APPROVAL OF PRELIMINARY OFFICIAL STATEMENT.......... 34 SCHEDULE OF REFUNDED BONDS ........................ Schedule I APPENDICES GENERAL INFORMATION REGARDING THE CITY" ................. A EXCERPTS FROM THE ANNUAL FINANCIAL REPORT.......... B FORM OF BOND COU'NSEL'S OPINIONS ................................ C The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Preliminary Official Statement, PRELIMINARY OFFICIAL STATEMENT SUMMARY I r�lThis summary is subject in all respects to the more complete information and definitions contained or incorporated in this Preliminary Official Statement. The offering of the Bonds and Certificates to potential investors is made only by means of this entire Preliminary Official Statement. No person is authorized to detach this summary from this Preliminary Official Statement or to otherwise use it without the entire Preliminary Official Statement. THE CITY ..................................... The City of Grapevine, Texas is a political subdivision and municipal corporation of the State, located in Tarrant County, Texas. The City covers approximately 33 square miles (see "Introduction - Description of City"). THE BONDS .................................. The $16,040,000* General Obligation Refunding and Improvement Bonds, Series 2003 are to mature on February 15 in the years 2004 through 2023 (see "The Bonds and Certificates - Description of the Bonds"). THE CERTIFICATES ..................... The $3,220,000* Combination Tax and Revenue Certificates of Obligation, Series 2003 are to mature on February 15 in the years 2004 through 2015 (see "The Bonds and Certificates - Description of the Certificates"). PAYMENT OF INTEREST .............. Interest on the Obligation accrues from January 1, 2003, aid is pa yable August 15, 2003, and each August 15 and February 15 thereafter until maturity or prior redemption (see "The Bonds and Certificates - Description of the Bonds and Certificates"). AUTHORITY FOR ISSUANCE.......... The Bonds are issued pursuant to the general laws of the State, including particularly Chapters 1207 and 1331, Texas Government Code, as amended, Section 9.26 of the City's Home Rule Charter, and the Bond Ordinance passed by the City Council of the City (see "The Bonds and 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 (the Certificate of Obligation Act of 1971), as amended, Section 9.26 of the City's Home Rule Charter and a Certificate Ordinance passed by the City Council of the City (see "The Bonds and Certificates - Authority for Issuance"). SECURITY FOR THE BONDS .......... The Bonds constitute direct obligations of the City, payable from a direct and continuing ad valorem tax levied, within the limit prescribed by law, on all taxable property located within the City (see "The Bonds and Certificates - Security and Source of Payment"). 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, within the limits prescribed by law, on all taxable property within the City, and (ii) a pledge of surplus net revenues (not to exceed $1,000) of the System (see "The Bonds and Certificates - Security and Source of Payment"). REDEMPTION ............................... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2014, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2013, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Bonds and Certificates - Optional Redemption"). The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2014, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2013, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Bonds and Certificates - Optional Redemption"). TAxExEMPTION ............................ In the opinion of Bond Counsel, the interest on the Bonds and Certificates will be excludable from gross income for federal income tax purposes under existing law and the Bonds and 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. *Preliminary, subject to change. USE of PROCEEDS ........................ Proceeds from the sale of the Bonds will be used to refund a portion of the City's outstanding General Obligation Refunding and Improvement Bonds, Series 1993 (the "Refunded Bonds") in order to lower the overall debt service requirements of the City. See "Schedule I - Schedule of Refunded Bonds". Additionally, the proceeds from the sale of the Bonds will be used for street improvements and to pay the costs of issuance related to the Bonds. ............ ........................... I ...... ,...... Proceeds from the sale of the Certificates will be used to (i) acquire building in downtown Grapevine for municipal purposes; (ii) acquire land and parking lot in downtown Grapevine; (iii) acquire equipment and vehicles for police department; (iv) acquire equipment and fire truck for fire department; (v) acquire equipment and a vehicle for public works department; (vi) acquire equipment and vehicles for utility department; (vii) acquire equipment and golf carts for City golf course; (viii) acquire computers, hardware, software and related equipment for various City departments; and (ix) pay costs of issuance of the Certificates. RATINGS ...................................... The presently outstanding tax supported debt of the City is rated "A1" by Moody's Investors Service, Inc. ("Moody's") and "A+" by Standard & Poor's Ratings Services, A Division of The McGraw-Hill Companies, Inc. ("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 Obligations have been made to Moody's and S&P (see "Other Information - Ratings"). BOOK -ENTRY -ONLY SYSTEM ...................................... The definitive Bonds and 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 Bonds and Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds and Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds and 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 Bonds and Certificates (see "The Bonds and 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 Ended City Assessed Assessed Tax Tax Assessed 9(30 Population (l) Valuation (2) Valuation Debt Debt Valuation 1999 39,190 $ 3,994,671,130 $ 101,931 $ 103,132,152 $ 2,632 2.58% 2000 39,523 4,089,979,800 103,484 143,995,000 3,643 3.52% 2001 44,390 4,372,544,371 98,503 156,815,000 3,533 3.59% 2002 45,500 4,859,882,189 106,811 157,940,000 3,471 3.25% 2003 46,400 4,818,432,568 103,846 158,330,000 (3) 3,412 3.29% (1) Source: The City of Grapevine. (2) Source: Tarrant County Appraisal District (3) Projected, includes the Bonds and Certificates. Excludes the Refunded Bonds. For additional information regarding the City, please contact: Fred Werner David K. Medanich Director of Finance or 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 8 % of Total Tax Collections 100.32% 99.77% 99.10% 99.09% N.A. CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS 9 Length of Term City Council Service Expires Occupation William D. Tate 14 Years M May, 2003 Attomey-at-Law Mayor Ted R. Ware 23 Years May, 2005 Commercial Contractor Mayor Pro Tem C. Shane Wilbanks 17 Years May, 2003 Personnel Director Councilmember, Place 1 Sharron Spencer 17 Years May, 2003 Retired Sales Representative Councilmember, Place 2 Ciydene Johnson 7 Years May, 2004 Independent Insurance Agent Councilmember, Place 3 Darlene Freed 4 Years May, 2004 Commercial Real Estate Agent Councilmember, Place 4 Roy Stewart 6 Years May, 2005 Construction Company Owner Councilmember, Place 6 (1) Previously served 12 years as Mayor and Councilmember. SELECTED AD UNISTRATIVE STAFF Name Position Length of Service Roger Nelson City Manager 5 YearsM Bruno Rumbelow Assistant City Manager 5 Years Bill Gaither Administrative Services Director 6 Years Fred Werner Director of Finance 5 Years Linda Huff City Secretary 15 Years (2) (1) 7 years with City; 5 years in present position. (2) 20 years with City; 15 years in present position. CONSULTANTS AND ADVISORS Auditors........................................................................................................................................................Deloitte & Touche LLP Fort Worth, Texas BondCounsel................................................................................................................................................ Vinson & Elkins L.L.P. Dallas, Texas FinancialAdvisor...................................................................................................................................... First Southwest Company Fort Worth, Texas 9 PRELIMINARY OFFICIAL STATEMENT V uV RELATING TO $16,040,000* $3,220,000* GENERAL OBLIGATION REFUNDING COMBINATION TAX AND REVENUE AND IMPROVEMENT BONDS, SERIES 2003 CERTIFICATES OF OBLIGATION, SERIES 2003 INTRODUCTION This Preliminary Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $16,040,000* City of Grapevine, Texas, General Obligation Refunding and Improvement Bonds, Series 2003 (the "Bonds") and $3,220,000* City of Grapevine, Texas, Certificates of Obligation, Series 2003 (the "Certificates"). Capitalized terms used in this Preliminary Official Statement have the same meanings assigned to such terms in the Bond Ordinance and Certificate Ordinance to be adopted on the date of sale of the Bonds and Certificates (collectively, "the Ordinances") which will authorize the issuance of the Bonds and Certificates, respectively, except as otherwise indicated herein. There follows in this Preliminary Official Statement descriptions of the Bonds and Certificates and certain information regarding 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, Dallas, Texas. DESCRIPTION OF THE CITY ... The City is a political subdivision and municipal corporation of 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 Councilmembers. 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 2003 estimated population is 46,400. The City covers approximately 33 square miles. PLAN OF FINANCING PURPOSE .... Proceeds from the sale of the Bonds will be used to refund a portion of the City's outstanding General Obligation Refunding and Improvement Bonds, Series 1993 (the "Refunded Bonds") in order to lower the overall debt service requirements of the City. Additionally, the proceeds from the sale of the Bonds will be used for (i) constructing, improving and widening streets and thoroughfares and related utility relocation;, drainage, landscaping, sidewalk and signalization improvements, and acquiring land and to pay the costs of issuance related to the Bonds. See "Schedule I - Schedule of Refunded Bonds" for a detailed listing of the Refunded Bonds and their call date at par. Proceeds from the sale of the Certificates will be used to (i) acquire building in downtown Grapevine for municipal purposes; (ii) acquire land and parking lot in downtown Grapevine; (iii) acquire equipment and vehicles for police department; (iv) acquire equipment and fire truck for fire department; (v) acquire equipment and a vehicle for public works department; (vi) acquire equipment and vehicles for utility department; (vii) acquire equipment and golf carts for City golf course; (viii) acquire computers, hardware, software and related equipment for various City departments; and (ix) pay costs of issuance of the Certificates. REFUNDED BONDS ... The principal and interest due on the Refunded Bonds are to be paid on the scheduled interest payment dates and the respective redemption dates of such Refunded Bonds, from funds to be deposited pursuant to a certain Escrow Agreement (the "Escrow Agreement") between the City and Bank One, National Association (the "Escrow Agent"). The Ordinance provides that from the proceeds of the sale of the Bonds received from the Underwriters, together with other funds of the City, the City will deposit with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Bonds on their respective redemption dates. Such funds will be held by the Escrow Agent in a special escrow account (the "Escrow Fund") and used to purchase direct obligations of the United States of America (the "Federal Securities"). Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Bonds, Grant Thornton LLP, certified public accountants, a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriters thereof the mathematical accuracy of the schedules that demonstrate the Federal Securities will mature and pay interest in such amounts which, together with uninvested funds, if any, in the Escrow Fund, will be sufficient to pay, when due, the principal of and interest on the Refunded Bonds. Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds (see "Other Information— Verification of Arithmetical and Mathematical Computations"). * Preliminary, subject to change. 10 By deposit of the Federal Securities and cash, if necessary, with the Escrow Agent pursuant to the Escrow Agreement, the City will have effected the defeasance of all the Refunded Bonds in accordance with the law. It is the opinion of Bond Counsel that as a result of such defeasance and in reliance upon the report of Grant Thornton LLP, certified public accountants, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the Federal Securities and any cash held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding bonds of the City payable from taxes nor for the purpose of applying any limitation on the issuance of debt. The City has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully available funds, of any additional amounts required to pay the principal of and interest on the Refunded Bonds, if for any reason, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund be insufficient to make such payment. SOURCES AND USE OF PROCEEDS ... The proceeds from the sale of the Bonds and Certificates, together with funds contributed by the City, will be applied as follows: Sources: Par Amount Uses: Reoffering Premium Accrued Interest Transfers from Prior Issue Debt Service Fund Original Issue Discount Deposit to Escrow Fund Deposit to Project Fund Deposit to Interest and Sinking Fund Costs of Issuance (i) Total Uses of Funds (1) Including Underwriters' Discount and Insurance Premium The Bonds The Certificates THE BONDS AND CERTIFICATES DESCRIPTION OF THE BONDS AND CERTIFICATES ... The Bonds are dated January 1, 2003, and mature on February 15 in each of the years and in the amounts shown on the cover pages. Interest on the Bonds will be computed on the basis of a 360 -day year of twelve 30 -day months, and will be payable on February 15 and August 15 of each year, commencing August 15, 2003 until maturity or prior redemption. The Certificates are dated January 1, 2003, and mature on February 15 in each of the years and in the amounts shown on page 3 hereof. Interest on the Certificates 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 of each year, commencing August 15, 2003 until maturity or prior redemption. The definitive Bonds and 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 Bonds and Certificates will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds and 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 Bonds and Certificates. See 'Book -Entry - Only System" herein. AUTHORITY FOR ISSUANCE ... The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, particularly, Texas Government Code, Chapters 1207 and 1331, Section 9.26 of the City's Home Rule Charter, and the Bond Ordinance passed by the City Council. A portion of the Bonds being issued were approved at an election held on December 5, 1998 (see "Table 11 — Authorized But Unissued Bonds" herein). The Certificates are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, Section 9.26 of the City's Home Rule Charter, and a Certificate Ordinance passed by the City Council. 11 SECURITY AND SOURCE OF PAYMENT .. . The Bonds ... The principal of and interest on the Bonds is payable from a continuing direct annual ad valorem tax levied by the City, within the limits prescribed by law, upon all taxable property in the City. The Certificates ...All taxable property within the City is subject to a continuing direct annual ad valorem tax levied by the City sufficient to provide for the payment of principal of and interest on all obligations payable in whole or in part from ad valorem taxes, which tax must be levied within limits prescribed by law. Additionally, the Certificates are payable from and secured by a pledge of surplus net revenues (not tot exceed $1,000) of the System, as provided in the Certificate 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 sufficient to provide for the payment of principal of and interest on all ad valorem tax debt within the limits prescribed by law. 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 $100 Taxable Assessed Valuation. OPTIONAL REDEMPTION ... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 15, 2014, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2013, or any date thereafter, at a price equal to the principal amount of the Bonds called for redemption plus accrued interest to the fixed date for redemption. If less than all of the Bonds are to be redeemed, the City shall determine the maturity or maturities and amounts thereof to be redeemed. If less than all the Bonds of any maturity are to be redeemed, the City shall direct the Paying Agent/Registrar (or DTC while the Bonds are in Book -Entry -Only form) to call by lot the Bonds, or portions thereof, within such maturity or maturities and in such principal amounts for redemption. If a Bond (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Bond (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2014, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2013, or any date thereafter, at a price equal to the principal amount of the Certificates called for redemption plus accrued interest to the fixed date for redemption. If less than all of the Certificates are to be redeemed, the City shall determine the maturity or maturities and amounts thereof to be redeemed. If less than all the Certificates of any maturity are to be redeemed, the City shall direct the Paying Agent(Registrar (or DTC while the Certificates are in Book -Entry -Only form) to call by lot the Certificates, or portions thereof, within such maturity or maturities and in such principal amounts for redemption. If a Certificate (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Certificate (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. NOTICE of REDEMPTION ... Not less than 30 days prior to a redemption date for the Obligations, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Obligations to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE OBLIGATIONS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY OBLIGATION OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH OBLIGATION OR PORTION THEREOF SHALL CEASE TO ACCRUE. DEFEASANCE ... The Ordinances provide that the City may discharge its obligations to the registered owners of any or all of the Obligations, 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 such Obligations to maturity or 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 such Obligations; provided that such deposits may be invested and reinvested only in (a) direct 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 obligations, 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 obligations to refund the 12 Obligations, as applicable, 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 Obligations, as the case may be. If any of such Obligations are to be redeemed prior to their respective dates of maturity, provision must have been made for giving notice of redemption as provided in the Ordinance. Upon such deposit as described above, such Obligations shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of Obligations have been made as described above, all rights of the City to initiate proceedings to call such Obligations for redemption or take any other action amending the terms of such Obligations are extinguished; provided, however, that the right to call such Obligations for redemption is not extinguished if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call such Obligations for redemption; (ii) gives notice of the reservation of that right to the owners of such Obligations immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Obligations. Because the order does not contractually limit such investments, registered owners may be deemed to have consented to defeasance with such other investments notwithstanding the fact that such investments may not be for the same investment quality as those currently permitted under Texas law. BOOK -ENTRY -ONLY SYSTEM ... This section describes how ownership of the Obligations are to be transferred and how the principal of, premium, if any, and interest on the Obligations are to be paid to and credited by DTC while the Bonds or 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 Preliminary 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 Obligations, 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 Obligations), 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 Preliminary Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Bonds and Certificates (collectively the "Obligations"). The Obligations 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 security certificate will be issued for each maturity of the Bonds and Certificates, as set forth on the cover page and page 3 hereof, 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, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for the Obligations on DTC's records. The ownership interest of each actual purchaser of each Obligation ("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 13 Owner entered into the transaction. Transfers of ownership interests in the Obligations 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 on ��certificates representing their ownership interests in Obligations, except in the event that use of the book -entry system for the Obligations is discontinued. To facilitate subsequent transfers, all Obligations 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 Obligations 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 Obligations; DTC's records reflect only the identity of the Direct Participants to whose accounts such Obligations 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 Obligations may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Obligations, such as redemptions, defaults, and proposed amendments to the Obligation documents. For example, Beneficial Owners of Obligations may wish to ascertain that the nominee holding the Obligations for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/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 Obligations within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Obligations 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 Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Obligations will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or 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], Paying Agent/Registrar or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying AgentRegistrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Obligations at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Obligation certificates are required to be printed and delivered. The City may decide to discontinue use of the system of book -entry transfers through DTC (or a successor securities depository). In that event, Obligation certificates will be printed and delivered for the Obligations. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. USE OF CERTAIN TERMS IN OTHER SECTIONS OF THIS PRELIMINARY OFFICIAL STATEMENT. In reading this Preliminary Official Statement it should be understood that while the Obligations are in the Book -Entry -Only System, references in other sections of this Preliminary Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Obligations, 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 Ordinances 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. a PAYING AGENT/REGISTRAR ... The initial Paying Agent/Registrar is Bank One, National Association, Austin, Texas. In the Bond Ordinance and Certificate Ordinance, the City retains the right to replace the Paying Agent/Registrar. The City covenants 14 to maintain and provide a Paying Agent/Registrar at all times until the Obligations, as the case may be, 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 Obligations. Upon any change in the Paying Agent/Registrar for the Obligations, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Obligations affected by the changes by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Interest on the Obligations 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 (hereinafter defined), 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 Obligations will be paid to the registered owner at their stated maturity or earlier redemption, 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 Obligations 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. In the event the Book Entry Only System is discontinued and printed certificates are issued to the registered owners, the City and the Paying Agent/Registrar shall not be required to transfer or exchange any Obligation called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transferability shall not be applicable to an exchange by the registered owner of the uncalled balance of an Obligation. TRANSFER, EXCHANGE AND REGISTRATION . .. In the event the Book -Entry -Only System should be discontinued, the Obligations 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. Obligations may be assigned by the execution of an assignment form on the respective Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Obligations will be delivered by the Paying Agent/Registrar, in lieu of the Obligations 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 Obligations issued in an exchange or transfer of Obligations 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 Obligations to be canceled, and the written instrument of transfer or request for exchange duty executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Obligations 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 principal amount as the Obligations surrendered for exchange or transfer. See "Book -Entry -Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Obligations. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Obligation 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 an Obligation. RECORD DATE FOR INTEREST PAYMENT ... The record date ("Record Date") for the interest payable on the Bonds and Certificates on any interest payment date means the close of business on the last business day of the month next preceding. 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 registered owner of a Bond or Certificate to be paid on the Special Payment Date that appears 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. BONDHOLDERS' REMEDIES ... The respective Ordinances establish as "events of default" (i) the failure to make payment of principal of, redemption premium, if any, or interest on any of Bonds or Certificates, as applicable, when due and payable; or (ii) default in the performance or observance of any other covenant, agreement, or obligation of the City, which default materially and adversely affects the rights of the Owners, including but not limited to their prospect or ability to be repaid in accordance with the respective Ordinances, and the continuation thereof for a period of sixty days after the 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 Obligations upon the failure of the City to observe any covenant under the ordinance authorizing the issuance of such Obligation. Although a registered owner could presumably obtain a judgment against the City if a default occurred in the payment of the principal of or interest on any such Obligations, 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 Obligations as they become due. The enforcement of such remedy may be difficult and time consuming and a registered owner could be required to enforce such 15 remedy on a periodic basis. The respective Ordinances do not provide for the appointment of a trustee to represent the interest of the registered owners upon any failure of the City to perform in accordance with the terms of such Ordinances, 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 Ordinances and the Bonds and Certificates are qualified with respect to the customary rights of debtors relative to their creditors. TAX INFORMATION An VALOREM TAx LAW ... The appraisal of property within the City is the responsibility of the Tarrant County 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 further 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 V.T.C.A., 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 Section 1-b, Article VIII, 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 Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article VIII, 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. 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. 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. To date, the City has ~~ created two tax increment financing districts ("TIFDs") within the boundaries of the City. See "Tax Increment Financing Zone" 16 below. The difference between any increase in the assessed valuation of taxable real property in the TIFD in excess of the base value of taxable real property in the TIFD is known as the "Incremental Value", and during the existence of the TIFDs, taxes levied by the City against the Incremental Value in the TIFDs are restricted to paying project and financing costs within the TIFDs and are not available for the payment of other obligations of the City, including the Bonds and 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 tum 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 60`s 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 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 i of each year and the final installment due on August 1. 17 After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 15% 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 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 taw 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; minimum exemption of $5,000. See Table 1 for a listing of the amounts of the exemptions described above. 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. TA.Y 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 57,647,325. As of 1-1-02 the Reinvestment Zone Number One Taxable Assessed Value is $206,207,211. The project 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 1-1-02 the Reinvestment Zone Number Two Taxable Assessed Value is $62,009,703. As of September 30, 2002 approximately $90,000,000 of permanent improvements has been made to Reinvestment Zone Number Two. 18 PENALTIES AND INTEREST ... Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: a A 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 1% each month. In addition, if an account is delinquent in July, a 15% 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 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 taw 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; minimum exemption of $5,000. See Table 1 for a listing of the amounts of the exemptions described above. 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. TA.Y 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 57,647,325. As of 1-1-02 the Reinvestment Zone Number One Taxable Assessed Value is $206,207,211. The project 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 1-1-02 the Reinvestment Zone Number Two Taxable Assessed Value is $62,009,703. As of September 30, 2002 approximately $90,000,000 of permanent improvements has been made to Reinvestment Zone Number Two. 18 TABLE 1 - VALUATION, EXEiv moNs AN -D GENERAL OBLIGATION DEBT 2002/03 Market Valuation Established by Tarrant Appraisal District Less Exemptions/Reductions at I00% Market Value: Residence Homestead Exemptions Over 65 Years of Age/Disabled Disabled Exemptions Veterans Exemptions Pollution Control Exemptions Solar/Wind Power Exemptions Freeport Exemptions Open -Space Land Use Reductions Prorated Absolutes Nominal Value Reductions 2002/03 Taxable Assessed Valuation $ 5,826,639,788 $ 327,182,706 51,353,818 762,383 1,112,555 38,199 9,774 569,905,541 57,282,406 550,476 9,362 1,008,207,220 2002/03 Incremental Taxable Assessed Value of Real Property within Reinvestment Zone Number One 2002/03 Incremental Taxable Assessed Value of Real Property within Reinvestment Zone Number Two 2002/03 Taxable Assessed Valuation available for General Fund Obligations and Debt of City City Funded Debt Payable from Ad Valorem Taxes ip General Obligation Bonds (as of 12/1/02) $ 66,750,000 Certificates of Obligation (as of 12/1/02) 78,285,000 Equipment Acquisition Notes (as of 12/1/02) 2,160,000 The Bonds 16,040,000 The Certificates 3,220,000 Funded Debt Payable from Ad Valorem Taxes Less Self -Supporting Debt: (3) Combination Tax and Tax Increment Reinvestment Zone Revenue Certificates of Obligation (as of 12/1/02) Net Funded Debt Payable From Ad Valorem Taxes Interest and Sinking Fund as of September 30, 2002 Ratio Total Funded Debt to Taxable Assessed Valuation ................................................. . 2003 Estimated Population - 46,400 Per Capita Taxable Assessed Valuation - $103,846 Per Capita Total Funded Debt - $3,587 $ 4,818,432,568 (198,559,886) (61,264,817) $ 4,558,607,865 S 166,455,000 56,465,000 $ 109,990,000 $ 2,204,991 3.45% (1) This statement of indebtedness does not include currently outstanding $29,931,456 system revenue bonds, as these bonds are payable solely from the net revenues of the Waterworks and Sewer System (the "System"), as defined in the ordinances authorizing the system revenue bonds. (2) Excludes the Refunded Bonds. (3) 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 for with ad valorem taxes. 19 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY Category Real, Residential, Single -Family Real, Residential, Multi -Family Real, Vacant Lots Tracts Real, Acreage (Land Only) Real, Farm and Ranch Improvements Real, Commercial Real, Industrial Real and Tangible Personal, Utilities Real, Mobile Homes Tangible Personal, Business Tangible Personal, Commercial Tangible Personal, Industrial Tangible Personal, Mobile Homes Tangible Personal, Other Real Property, Inventory Total Appraised Value Before Exemptions Adjustments Less: Total Exemption/Reductions Taxable Assessed Value Category Real, Residential, Single -Family Real, Residential, Multi -Family Real, Vacant Lots Tracts Real, Acreage (Land Only) Real, Farm and Ranch Improvements Real, Commercial Real, Industrial Real and Tangible Personal, Utilities Real, Mobile Homes Tangible Personal, Business Tangible Personal, Commercial Tangible Personal, Industrial Tangible Personal, Mobile Homes Tangible Personal, Other Real Property, Inventory Total Appraised Value Before Exemptions Adjustments Less: Total Exemption/Reductions Taxable Assessed Value Taxable Appraised Value for Fiscal Year Ended September 30 2003 2002 2001 % of % of Amount % of Amount % of Amount Total Amount Total Amount Total $ 1,848,342,618 31.72% $ 1,673,214,512 30.17% $ 1,522,401,913 29.49% 252,912,480 4.34% 200,728,832 3.62% 151,579,484 2.94% 100,697,189 1.73% 104,297,996 1.88% 109,952,787 2.13% 138,891,577 2.38% 171,706,596 3.10% 165,569,051 3.21% 2,353,699 0.04% 2,160,035 0.04% 2,441,498 0.05% 1,198,547,815 20.57% 1,086,095,366 19.59% 932,109,580 18.06% 14,825,922 0.25% 14,530,371 0.26% 10,891,084 0.21% 147,113,035 2.52% 102,859,092 1.85% 88,123,888 1.71% 8,173,982 0.14% 9,059,623 0.16% 4,239,290 0.08% - 0.00% - 0.00% - 0.00% 1,966,523,825 33.75% 2,126,886,729 38.35% 2,127,859,776 41.22% 138,115,671 2.37% 46,334,087 0.84% 40,389,885 0.78% - 0.00% - 0.00% - 0.00% - 0.00% 111,976 0.00% 146,674 0.00% 10,141,975 0.17% 7,290,582 0.13% 6,679,162 0.13% $ 5,826,639,788 100.00% $ 5,545,275,797 100.00% S 5,162,384,072 100.00% (1,008,207,220) (685 393,608) (789,839,701) $ 4,818,432,568 $ 4,859,882,189 $ 4,372,544,371 Taxable Appraised Value for Fiscal Year Ended September 30, 2000 1999 % of % of Amount Total Amount Total $ 1,429,819,700 30.03% S 1,324,311,480 33.12% 129,208,574 2.71% 117,908,272 2.95% 78,468,029 1.65% 72,832,010 1.82% 144,983,152 3.05% 144,782,450 3.62% 3,191,100 0.07% 3,879,434 0,10% 756,002,113 15.88% 572,358,423 14.32% 9,795,363 0.21% 8,731,223 0.22% 76,908,376 1.62% 66,444,170 1.66% 141,400 0.00% 152,200 0.00% - 0.00% - 0.00% 2,089,790,810 43.90% 1,646,479,365 41.18% 27,055,281 0.57% 26,974,631 0.67% 3,120,287 0.07% 3,187,135 0.08% 3,768,771 0.08% 3,723,954 0.09% 8,389,970 0.18% 6,450,400 0.16% S 4,760,642,926 100.00% $ 3,998,215,147 100.00% 348,874,464 (670,663,126) (352,418,481) S 4,089,979,800 S 3,994,671,130 NOTE. Valuations shown are certified taxable assessed values reported by the Tarrant County 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. 20 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY (1) Source: The City of Grapevine. (2) Source: Tarrant County Appraisal District. (3) Projected, includes the Bonds and Certificates. Excludes the Refunded Bonds. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Year Distribution Ratio Fiscal Interest and % Current Taxable Tax Debt Tax Debt Funded Year 1999 $ 0.38500 S 0.218736 Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 9/30 Population (1) Valuation (2) Per Capita of Year Valuation Capita 1999 39,190 $ 3,994,671,130 $ 101,931 $ 103,132,152 2.58% $2,632 2000 39,523 4,089,979,800 103,484 143,995,000 3.52% 3,643 2001 44,390 4,372,544,371 98,503 156,815,000 3.59% 3,533 2002 45,500 4,859,882,189 106,811 157,940,000 3.25% 3,471 2003 46,400 4,818,432,568 103,846 158,330,000 (3) 3.29% 3,412 (1) Source: The City of Grapevine. (2) Source: Tarrant County Appraisal District. (3) Projected, includes the Bonds and Certificates. Excludes the Refunded Bonds. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Year Distribution Ended Tax General Interest and % Current % Total 9/30 Rate Fund Sinking Fund Tax Levy Collections Collections 1999 $ 0.38500 S 0.218736 $ 0.166264 $ 13,935,727 99.13% 100.32% 2000 0.38000 0.201983 0.178017 15,371,388 99.41% 99.77% 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% (t) 99.09%", 2003 0.36600 0.148900 0.217100 17,635,463 In Process of Collection (1) Preliminary numbers furnished by City officials. TABLE 5 - TEN LARGEST TAXPAYERS 2002/03 % of Total Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation American Airlines Inc. Commercial Airline S 404,890,143 8.40% Grapevine Mills Ltd. Partnership Regional Shopping Mall 190,774,885 3.96% Delta Airlines Inc. Commercial Airline 121,440,144 2.52% GTE Directories Real Estate 108,533,958 2.25% GE Capital Services Simuflite Training School 107,612,820 2.23% Opryland Hotel Hotel 66,861,118 1.39% Atlantic Southwest Airlines Commercial Airline 48,504,115 1.01% United Parcel Services Co. Parcel Service 44,073,742 0.91% Quest Communications Corp. Telecommunication 42,721,429 0.89% Industrial Property Holding Lp Real Estate 37,258,600 0.77% $ 1,172,670,954 24.34% GENERAL OBLIGATION DEBT LU IITATION ... No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter (see "The Bonds and Certificates — Tax Rate Limitation"). 21 TABLE 6 - TAX ADEQUACY M n7l", 2003 Principal and Interest Requirements $ 10,969,489 $0.2300 Tax Rate at 99.00% Collection Produces $ 10,971,571 Average Annual Principal and Interest Requirements, 2003 - 2026 $ 6,264,145 $0.1314 Tax Rate at 99.00% Collection Produces $ 6,268,106 Maximum Principal and Interest Requirements, 2004 $ 12,698,619 $0.2663 Tax Rate at 99.00% Collection Produces $ 12,703,171 (1) Includes the Bonds and Certificates, less self-supporting debt. Excludes the Refunded Bonds. 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. (1) Includes the Bonds and Certificates, less self-supporting debt and Refunded Bonds. 22 2002/03 Net City's Taxable 2002/03 Total Estimated Overlapping Assessed Tax Funded % Funded Debt Taxing Jurisdiction Value Rate Debt Applicable 12/1,2002 "3 City of Grapevine S 4,818,432,568 $ 0.3660 $ 109,990,000 UI 100.00% S 109,990,000 Carroll Independent School District 4,129,748,520 1.9350 172,449,083 5.38% 9,277,761 Coppell Independent School District 3,420,395,257 0.6486 127,639,980 0.48% 612,672 Dallas County 126,261,793,442 0.1960 156,282,395 0.01% 15,628 Dallas County Community College District 130,932,366,627 0.0600 - 0.01% 0 Dallas County Hospital District 126,261,793,442 0.2540 - 0.01% 0 Grapevine-Colleyville Independent School District 12,196,358,521 1.6597 250,415,813 67.47% 168,955,549 Tarrant County 100,261,880,573 0.2725 163,415,000 5.24% 8,562,946 Tarrant County Hospital District 100,261,880,573 0.2324 3,665,000 5.24% 4,239,160 Tarrant County Junior College District 100,261,880,573 0.1394 80,900,000 5.24% 192,046 Total Direct and Overlapping Funded Debt S 301,845,762 Ratio of Direct and Overlapping Funded Debt to Taxable Assessed Valuation ............................................... 6.26% Per Capita Overlapping Funded Debt................................................................................ $ 6,505.30 (1) Includes the Bonds and Certificates, less self-supporting debt and Refunded Bonds. 22 DEBT INFORMATION TABLE 8 - PRO -FORMA GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS Fiscal Year Total Less TIF Total Debt °/ of Ended Outstanding Debt W The Bonds (a) The Certificates M Debt Self -Supporting Less TIF Principal 9.'30 Principal Interest Principal Interest Principal Interest Requirements Requirements Requirements Retired 2003 S 6,855,000 S 7,725,364 S - S 356,376 $ - $ 66,486 S 15,345,678 $ 4,376,189 $ 10,969,489 2004 7,335,000 7,143,048 1,625,000 548,373 500,000 99,353 17,060,458 4,361,839 12,698,619 2005 7,605,000 6,755,711 1,505,000 501,423 515,000 84,128 16,775,971 5,083,559 11,692,412 2006 7,460,000 6,355,024 1,550,000 455,598 540,000 68,303 16,232,209 5,072,579 11,159,631 2007 7,550,000 5,961,811 1,615,000 408,123 270,000 56,153 15,946,921 5,080,626 10,866,295 27.20% 2008 7,775,000 5,571,010 1,660,000 357,338 265,000 47,863 15,775,135 5,083,698 10,691,438 2009 7,850,000 5,174,043 1,715,000 301,623 230,000 39,713 15,040,665 5,087,704 9,952,961 2010 8,115,000 4,774,673 1,225,000 249,499 245,000 31,209 14,364,171 5,092,610 9,271,561 2011 7,830,000 4,356,305 1,290,000 200,730 190,000 22,815 13,677,035 5,093,023 8,584,013 2012 7,750,000 3,976,916 610,000 162,730 115,000 16,715 12,499,646 5,114,129 7,385,518 55.57% 2013 8,295,000 3,580,650 235,000 145,830 115,000 12,115 12,256,480 5,135,360 7,121,120 2014 8,745,000 3,150,225 245,000 136,108 115,000 7,458 12,276,333 5,156,323 7,120,010 2015 9,095,000 2,689,485 255,000 125,666 120,000 2,550 12,165,151 5,180,118 6,985,034 2016 9,140,000 2,214,376 265,000 114,418 - 11,733,793 5,201,774 6,532,019 2017 5,550,000 1,827,538 275,000 102,331 7,754,869 2,591,176 5,163,693 81.27% 2018 4,955,000 1,547,706 290,000 89,333 6,882,039 2,591,939 4,290,100 2019 5,245,000 1,275,739 305,000 75,346 6,901,086 2,597,814 4,303,272 2020 3,510,000 1,039,291 320,000 60,343 4,929,634 2,602,404 2,327,230 2021 3,720,000 841,588 335,000 44,291 4,940,879 2,606,194 2,334,685 2022 2,460,000 662,019 350,000 27,250 3,499,269 2,608,894 890,375 94.28% 2023 2,075,000 533,744 370,000 9,250 2,608,744 2,608,744 - 2024 2,200,000 411,838 - - 2,611,838 2,611,838 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% $ 145,925,000 S 77,996,095 S 16,040,000 S 4,471,975 S 3.720.000 S 554,857 S 222,687,638 $ 77,900,456 S 144,787.183 (1) "Outstanding Debt" includes lease/purchase obligations and self-supporting debt. Excludes the Refunded Bonds. (2) Average life of the issue - 6.910 years. Interest on the Bonds has been calculated at a TIC rate of 4.019% for purposes of illustration. (3) Average life of the issue - 4.799 years. Interest on the Certificates has been calculated at a TIC rate of 3.566% for purposes of illustration. TABLE 9 - INTEREST AND SINIQNG FUND BUDGET PROJECTION Tax Supported Debt Service Requirements, Fiscal Year Ending 9/30/2003 .............................. S 11,809,510 111 Interest and Sinking Fund Balance as of 9/30/02 ................................. S 2,204,990 Interest and Sinking Fund Tax Levy ........................................... 9,471,057 Penalty and Interest........................................................ 65,000 Budgeted Transfers(2)......................................................... 2,148,454 Estimated Investment Income .................................................. 125,000 14,014,501 Estimated Balance, 9/30/2003................................................................. S 2,204,991 (1) Excludes TIF self-supporting debt service. (2) Includes Golf Course user fees. 23 TABLE 10 - COMPUTATION OF SELF-SUPPORTING DEBT BeginningFund Balance, 9-30-02(".........................................................................................................................................$ 5,675,988 Projected Net Tax Increment Reinvestment Zone Revenue Available for Debt Service........................................................ 5,914,389 Requirements for Tax Increment Reinvestment Zone Certificates.......................................................................................... 4,376,189 ProjectedFund Balance, 9-30-03..............................................................................................................................................S 7,214,188 Percentage of Tax Increment Reinvestment Zone Revenue Certificates Self-Supporting...................................................... 100.00% (1) Unaudited. TABLE 11 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS Amount Amount Date Amount Previously Being Unissued Purpose Authorized Authorized Issued Issued Balance Street Improvements 12/5/1998 $ 30,245,000 $ 20,000,000 $ 5,000,000 $ 5,245,000 ANTICIPATED ISSUANCE OF GENERAL OBLIGATION DEBT ... The City does not anticipate the issuance of additional general obligation debt within the next six months. TABLE 12 - OTHER OBLIGATIONS The City has no unfunded debt outstanding as of September 30, 2002. 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".) (The remainder of this page left blank intentionally.) 24 FINANCIAL INFORMATION TABLE 13 - GENERAL FUND REVENUES AND EXPENDITURE HISTORY (1) Unaudited. Preliminary numbers provided by City officials. 25 Fiscal Year Ended September 30, Revenues 2002 2001 2001 2000 1999 1998 Taxes $ 27,165,580 $ 29,239,672 $ 27,051,303 S 25,160,401 S 23,365,424 Licenses and Permits 1,536,786 1,146,428 1,494,428 1,163,306 1,246,991 Intergovernmental 217,614 4,381,910 182,863 190,189 216,171 Charges for Services 5,009,819 2,984,179 3,003,353 2,693,057 2,522,115 Fines and Forfeitures 2,101,526 2,149,638 2,360,028 1,850,076 1,599,870 Interest and Miscellaneous 792,073 876,507 776,140 687,619 865,135 Total Revenues S 36,823,398 $ 40,778,334 S 34,868,115 $ 31,744,648 $ 29,815,706 Expenditures General Government $ 11,686,622 $ 10,510,527 S 5,683,237 $ 5,625,351 S 4,792,874 Public Safety 15,532,602 17,640,884 15,404,767 13,245,400 12,098,657 Culture and Recreation 5,184,010 5,737,648 5,183,727 4,519,957 4,021,478 Public Works 4,772,777 6,067,277 5,657,648 5,062,397 4,188,152 Total Expenditures S 37,176,011 S 39,956,336 S 31,929,379 S 28,453,105 $ 25,101,161 Excess (deficiency) of Revenues Over Expenditures S (352,613) S 821,998 S 2,938,736 S 3,291,543 S 4,714,545 Other Financing Sources Budgeted Transfers In S 300,000 $ 400,000 S - S 13,090 S 14,170 Budgeted Transfers Out (1,753,450) (1,295,979) (2,098,598) (1,900,345) (5,610,764) Total Transfers S (1,453,450) S (895,979) $ (2,098,598) S (1,887,255) S (5,596,594) Net Increase (Decrease) S (1,806,063) S (73,981) S 840,138 S 1,404,288 S (882,049) Other Miscellaneous Adjustments - - - - Residual Equity Transfer 262,087 - 1,172 79,788 - Beginning Fund Balance 7,658,665 7,732,646 6,891,336 5,407,260 6,289309 Ending Fund Balance S 6,114,689 S 7,658,665 $ 7,732,646 S 6,891,336 S 5,407,260 (1) Unaudited. Preliminary numbers provided by City officials. 25 q TABLE 14 - MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act, V.A.T.C.S., 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 and Certificates. 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 Ended 9/30 1998 1999 2000 2001 2002 FINAiNCLAL POLICIES Basis of Accounting ... The City's accounting records of the governmental fund revenues and expenditures are recognized on the modified accrual basis. Revenues are recognized in the accounting period in which they are available and measurable. Expenditures are recognized in the accounting period in which the fund liability occurred, if measurable, except for unmatured interest on general long-term debt. Proprietary Fund revenues and expenses are recognized on the full accrual basis. Revenues are recognized in the accounting period in which they are earned and become measurable. Expenses are recognized in the accounting period in which they are incurred. 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 bond 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. 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. 26 % of Equivalent of Total Ad Valorem Ad Valorem Per Collected Tax Levy Tax Rate Capita $ 10,556,089 80.11% $ 0.3245 $ 278 13,058,268 93.70% 0.3269 333 14,340,693 93.29% 0.3506 363 16,048,266 98.25% 0.3670 362 14,939,771 85.70% 0.3074 328 Basis of Accounting ... The City's accounting records of the governmental fund revenues and expenditures are recognized on the modified accrual basis. Revenues are recognized in the accounting period in which they are available and measurable. Expenditures are recognized in the accounting period in which the fund liability occurred, if measurable, except for unmatured interest on general long-term debt. Proprietary Fund revenues and expenses are recognized on the full accrual basis. Revenues are recognized in the accounting period in which they are earned and become measurable. Expenses are recognized in the accounting period in which they are incurred. 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 bond 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. 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. 26 INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council of the City. Both state law and the City's investment policies are subject to change. LEGAL LwEST:4mENTS ... Under Texas law, the City is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies 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 of and interest on which are unconditionally 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 guaranteed or insured by the Federal Deposit Insurance Corporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amount provided by law for City deposits, (8) certificates of deposit and share certificates issued by a state or federal credit union domiciled in the State of Texas that 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 the clauses (1) through (6) or in any other manner and amount provided by law for City deposits, (9) 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, (10) bankers' acceptances with the remaining term of 270 days or less, if the short- term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio 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, (13) no-load mutual funds registered with the Securities and Exchange Commission that: have an average weighted maturity of less than two years; invest exclusively in obligations described in the preceding clauses; 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; provided, however, that the City is not authorized to invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in such no-load mutual funds, and (14) guaranteed investment contracts secured by obligations of the United States of America or its agencies and instrumentalities, other than the prohibited obligations described below. 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 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. LwESTMENT POLICIES ... Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that 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. 27 ADDITIONAL PROVISIONS ... Under Texas law the City is additionally required to: (1) annually review its adopted policies and strategies; (2) 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; (3) 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; (4) perform an annual audit of the management controls on investments and adherence to the City's investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) 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; (7) restrict the investment in non -money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service to no more than 15% of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; and (8) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. TABLE 15 - CURRENT I.NVESTMENTS As of September 30, 2002, the City's investable funds were invested in the following categories: (The Remainder of This Page Left Blank Intentionally.) 28 Book Market Description Percent Value Value Government Securities 13.42% $ 11,405,795 $ 11,477,914 TexPool 86.58% 73,566,013 73,618,964 100.00% $ 84,971,808 S 85,096,878 (The Remainder of This Page Left Blank Intentionally.) 28 TAX MATTERS Tax ExEmrriON ... In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on the Obligations is excludable from gross income for federal income tax purposes under existing law and (ii) the Obligations are not "private activity bonds" under the Internal Revenue Code of 1986, as amended (the "Code"), and interest on the Obligations 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 Obligations, 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 City has covenanted in the respective Ordinances that it will comply with these requirements. Bond Counsel's opinion will assume continuing compliance with the covenants of the Ordinances pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Obligations for federal income tax purposes and, in addition, will rely on representations by the City, the City's Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the City, the City's Financial Advisor and the Underwriters, respectively, which Bond Counsel has not independently verified. If the City should fail to comply with the covenants in the respective Ordinances or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Obligations could become taxable from the date of delivery of the Obligations, 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 Obligations, is included in a corporation's "adjusted current earnings," ownership of the Obligations 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 Obligations, received or accrued during the year. Except as stated above, and as stated below in "Tax Accounting Treatment of Original Issue Discount Obligations", 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 Obligations. Prospective purchasers of the Obligations 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 Obligations. 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 Internal Revenue Service (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 Obligations. 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 of the Obligations may not have a right to participate in such audit. Public awareness of any future audit of the Obligations could adversely affect the value and liquidity of the Obligations during the pendency of the audit regardless of the ultimate outcome of the audit. 29 TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT OBLIGATIONS ... The initial public offering price for certain of the respective Obligations may be less than the principal amount thereof (the "Original Issue Discount Obligations"). In such case, Bond Counsel, under existing law and based upon the assumptions hereinafter stated, will render an opinion to the effect M„ n that: (a) The difference between (i) the amount payable at the maturity of each Original Issue Discount Obligation, and (ii) the initial offering price to the public of such Original Issue Discount Obligation constitutes original issue discount with respect to such Original Issue Discount Obligation in the hands of any owner who has purchased such Original Issue Discount Obligation in the initial public offering of the Obligations; 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 Obligation equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Obligation continues to be owned by such owner. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Obligation prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Obligation 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 Obligation 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 Obligations under the caption "Tax Exemption" generally applies, except as otherwise provided below, to original issue discount on an Original Issue Discount Obligation held by an owner who purchased such Obligation at the initial offering price in the initial public offering of the Obligations, and should be considered in connection with the discussion in this portion of the Preliminary Official Statement.) In rendering the foregoing opinion, Bond Counsel will assume, in reliance upon certain representations of the Underwriters, that (a) the Underwriters have purchased the Obligations for contemporaneous sale to the public and (b) all of the Original Issue Discount Obligations 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 Obligations 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 Obligation 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 Obligations 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 Obligation 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 Obligation. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Obligations 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 Obligations 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 Obligations 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 Obligations. 30 OTHER INFORMATION RATINGS The presently outstanding tax supported debt of the City is rated "Al" by Moody's and "A+" 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 organization 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 Obligations. 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 BONDS AND CERTIFICATES FOR SALE The sale of the Bonds and 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 Bonds and Certificates have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds or Certificates been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Bonds or Certificates under the securities laws of any jurisdiction in which the Bonds and Certificates may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds and 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 Obligations 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. With respect to investment in the Obligations by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Obligations be assigned a rating of "A" or its equivalent as to investment quality by a national rating agency. See "OTHER INFORMATION - Ratings" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Obligations are legal investments for state banks, savings banks, trust companies with at capital of one million dollars or more, and savings and loan associations. The Obligations are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Obligations are legal investments for various institutions in those states. LEGAL MATTERS The City will famish a complete transcript of proceedings incident to the authorization and issuance of the Bonds and Certificates, including the approving legal opinion of the Attorney General of the State of Texas to the effect that each Initial Obligation is a valid and binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel to the effect that the Bonds and Certificates issued in compliance with the provisions of the Bond Ordinance and Certificate Ordinance are valid and legally binding obligations of the City and the interest on such Bonds and Certificates is excludable from gross income for federal income tax purposes under existing law and the Bonds and Certificates are not private activity bonds, subject to the matters described under "Tax Matters" herein. A form of such opinion is attached hereto as Appendix C. Bond Counsel did not take part in the preparation of the Preliminary 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 Bonds and Certificates in the Preliminary Official Statement under the captions "Plan of Financing" (except under the subcaption "Sources and Uses of Proceeds"), "The Bonds and Certificates" (except for the subcaption "Book -Entry -Only System"), "Tax Matters" and "Continuing Disclosure of Information" (except for under the subcaption "Compliance with Prior Undertakings") and the subcaptions "Legal Investments and Eligibility to Secure Public Fund in Texas", and "Legal Matters" under the caption "Other Information" and is of the opinion that the information relating to the Bonds and Certificates and the Bond Ordinance and Certificate Ordinance contained therein fairly and accurately describe the provisions thereof. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds and Certificates are contingent on the sale and delivery of the Bonds and Certificates. The legal opinion will accompany the Bonds and Certificates deposited with DTC or will be printed on the Bonds and Certificates in the event of the discontinuance of the Book -Entry -Only System. Certain legal matters will be passed upon for the Underwriters by Locke Liddell & Sapp LLP, Dallas, Texas, Counsel to the Underwriters. 31 AUTHENTICITY OF FINANCIAL DATA AND OTHER LNFORNLATION 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 Preliminary 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. CONTINUING DISCLOSURE OF INFORIMATION In the Bond Ordinance and the Certificate Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds and Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds or 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 Preliminary 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 2002. 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 of Texas and approved by the State of Texas 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 unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix 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 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. 0. Box 2177, Austin, Texas 78768- 2177, and its telephone number is 512/476-6947. 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 Bonds and Certificates, if such event is material to a decision to purchase or sell Bonds and 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 Bonds or Certificates; (7) modifications to rights of holders of the Bonds or Certificates; (8) Bond or Note calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds or Certificates; and (11) rating changes. (Neither the Bonds, the Certificates nor the respective Ordinances make any provision for debt service reserves or liquidity enhancement.) 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 LNFORmATION FROM NRMSIRs AND Sm ... The City has agreed to provide the foregoing information only to NRMSIRs and the SID. The information will be available to holders of Bonds and 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. LINUTATIONS AND A ENDMENTS ... 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 32 usefulness to a decision to invest in or sell Bonds or 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 Bonds or Certificates, or both, 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 Bonds or 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 outstanding Bonds or Certificates, as the case may be, 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 Bonds or Certificates, as the case may be. 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 Bonds or Certificates in the primary offering thereof. 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 in all material respects with all continuing disclosure agreements made by it in accordance with SEC Rule 15c2-12. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Obligations. The Financial Advisor's fee for services rendered with respect to the sale of the Obligations is contingent upon the issuance and delivery of the Obligations. 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 Obligations, 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 Preliminary Official Statement. The Financial Advisor has reviewed the information in this Preliminary Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities taws 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 Preliminary 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' 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 Preliminary 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' 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 judgements 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 Preliminary Official Statement will prove to be accurate. 33 VERIFICATION OF ARITIiMIETICAL AND MATHEMATICAL COMPUTATIONS The arithmetical accuracy of certain computations included in the schedules provided by First Southwest Company on behalf of the City relating to (a) computation of forecasted receipts of principal and interest on the forecasted payments of principal and interest to redeem the Refunded Bonds and (b) computation of the yields of the Refunding Bonds and the restricted Federal Securities were verified by Grant Thornton, LLP, certified public accountants. Such computations were based solely on assumptions and information supplied by First Southwest Company on behalf of the City. Grant Thornton, LLP has restricted its procedures to verifying the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information on which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the City, at an underwriting discount of S . The Underwriters have agreed, subject to certain conditions, to purchase the Certificates from the City, at an underwriting discount of S The Underwriters will be obligated to purchase all of the Obligations if any Obligations are purchased. The Obligations to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Obligations into investment trusts) at prices lower than the public offering prices of such Obligations, and such public offering prices may be changed, from time to time, by the Underwriters. APPROVAL OF PRELIMINARY OFFICIAL STATEMENT The Ordinances will also approve the form and content of this Preliminary Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Bonds and Certificates by the Underwriters. /s/ WILLIAM D. TATE Mayor City of Grapevine, Texas ATTEST: /s/ LINDA HUFF City Secretary 34 Schedule I SCHEDULE OF REFUNDED BONDS General Obligation Refunding and Improvement Bonds, Series 1993 Original Maturity Interest Principal Dated Date Date Rate Amount 9/1/1993 2/15/2004 4.70% $ 1,335,000 2/15/2005 4.80% 1,230,000 2/15/2006 4.90% 1,290,000 2/15/2007 5.00% 1,370,000 2/15/2008 5.10% 1,435,000 2/15/2009 5.10% 1,515,000 2/15/2010 5.10% 1,040,000 2/15/2011 5.10% 1,105,000 2/15/2012 5.10% 425,000 The 2004- 2012 maturities will be redeemed prior to original maturity on March 19, 2003 at par, plus accrued interest, if any. APPENDIX A GENERAL INFORMATION REGARDING THE CITY THE CiT ... The City is a political subdivision of the State of Texas incorporated in 1907 and operates as a home -rule City under the general laws of the State of Texas 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 ofthe 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. PopuLAnoN ... 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 1992 31,400 City Estimate 1980 11,801 U.S. Census 1993 31,902 City Estimate 1981 15,245 Grapevine Community Profile 1994 32,727 City Estimate 1982 16,183 Grapevine Community Profile 1995 33,211 City Estimate 1983 18,121 Grapevine Community Profile 1996 34,950 City Estimate 1984 19,405 Grapevine Community Profile 1997 36,000 City Estimate 1985 22,002 Grapevine Community Profile 1998 37,946 City Estimate 1986 24,493 Grapevine Community Profile 1999 39,190 City Estimate 1987 25,853 Grapevine Community Profile 2000 39,523 U.S. Census 1988 27,132 City Estimate 2001 44,390 City Estimate 1989 27,257 City Estimate 2002 45,500 City Estimate 1990 29,202 U.S. Census 2003 46,400 City Estimate 1991 30,300 City Estimate Ecohonncs ... 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 bepefit 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 $2.0 million in annual hotel/motel tax revenue. RNPLOY'VIENT ... The labor market in the City continues to be strong. Employment figures furnished by Texas Employment Commission are: A - I October Annual Annual Annual Annual Annual 2002 2001 2000 1999 1998 1997 Labor Force 22,436 22,001 21,757 21,309 20,796 20,096 Employed 21,752 21,509 21,393 20,956 20,430 19,705 Unemployed 684 492 364 353 366 391 Percent of Unemployed 3.05% 2.24% 1.67% 1.66% 1.76% L95% A - I NLAJOR EMPLOYERS Commercial Permits Residential Permits Total Estimated „„amu Number of Company Product Employees Dallas/Fort Worth International Airport Airport 33,000 Grapevine/Colleyville Independent School District School District 1,656 United Parcel Service Parcel Service 1,218 GTE Directory Corporation Yellow Pages Directory 1,200 Baylor Medical Center Health Services 874 Hyatt Regency Hotel Hotel 815 City of Grapevine City Government 474 D/FW Hilton Hotel Hotel 380 Super Shuttle Airport Shuttle Service 320 SimuFlite Training International Pilot Training 260 Embassy Suites Hotel 250 Trencor Heavy Equipment Manufacturing 180 Source: City of Grapevine, Department of Development Services, 364,294,642 89 BAN ING 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 of Bank of America. Also located in the City is a branch of the Omni Federal Credit Union. Source: City of Grapevine, Finance Department. BUILDING PERINUTS ... 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 1998 35 S 85,231,406 228 S 37,995,929 263 S 123,227,335 1999 32 59,920,763 185 21,026,688 217 80,947,451 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 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 18 -hole golf course and has plans for a 9 -hole expansion. T&1NSPORTATION... 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. A-2 HOTEL AND CONVENTION FACILITIES... There are three 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. 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. EDUCATION. . . 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: 1982 3,646 1992 9,459 1983 3,732 1993 10,878 1984 4,037 1994 10,957 1985 4,675 1995 11,316 1986 5,617 1996 12,373 1987 6,107 1997 12,893 1988 6,604 1998 13,319 1989 7,156 1999 13,159 1990 7,984 2000 13,615 1991 8,706 2001 14,276 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 APPENDIX B EXCERPTS FROM THE CITY OF GRAPEVINE, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2001 The information contained in this Appendix consists of excerpts from the City of Grapevine, Texas Annual Financial Report for the Year Ended September 30, 2001, 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. INDEPENDENT AUDITORS' REPORT The Honorable Mayor and Members of the City Council of the City of Grapevine, Texas: We have audited the accompanying general purpose financial statements of the City of Grapevine, Texas ("City"), as of and for the year ended September 30, 2001, as listed in the table of contents. These general purpose financial statements are the responsibility of the City's management. Our responsibility is to express an opinion on these general purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the general purpose financial statements referred to above present fairly, in all material respects, the financial position of the City as of September 30, 2001, and the results of its operations and the cash flows of its proprietary fund types for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the general purpose financial statements, the City changed its policy for capitalization of fixed assets as of June 25, 2001. As discussed in Note 10, beginning in fiscal year 2001, the City implemented Government Accounting Standards Board Statement No. 33 and recorded capital contributions to proprietary funds as revenue rather than as additions to contributed capital. Our audit was conducted for the purpose of forming an opinion on the general purpose financial statements taken as a whole. The combining and individual fund and account group financial statements and schedules listed in the foregoing table of contents are presented for purposes of additional analysis and are not a required part of the general purpose financial statements. This additional information is the responsibility of the City's management. Such additional information has been subjected to the auditing procedures applied in our audit of the general purpose financial statements and, in our opinion, is fairly presented in all material respects when considered in relation to the general purpose financial statements taken as a whole. January 4, 2002 -1- GENERAL PURPOSE FINANCIAL STATEMENTS -2- CITY OF GRAPEVINE TEXAS COMBINED BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUPS AND DISCRETELY PRESENTED COMPONENT UNITS SEPTEMBER 30, 2001 WITH COMPARATIVE TOTALS FOR SEPTEMBER 30, 2000 ASSETS AND OTHER DEBITS Cash and investments Receivables (net of uncollectible amounts of $I47,769): Accounts Pledges Taxes Accrued interest Due from other funds Due from primary government Due from component unit Due from other governments Inventories, at cost Prepaid items Restricted assets: Cash and investments Property, plant and equipment (net of accumulated depreciation, where applicable) Water storage rights (net of accumulated amortization) Deferred charges (net of accumulated amortization) Amount available in Debt Service Fund Amount to be provided for retirement of general long-term debt TOTAL ASSETS AND OTHER DEBITS Governmental Fund Types Proprietary Fund Types_ Special Debt Capital Internal General Revenue Service Proiecis Enterprise Service $ 5,660,291 $7,622,896 $7,381,370 $46,131,673 $ 8,501,481 $ 5,085,364 795,137 540,987 2,322,513 189,740 350,583 222,181 9,213 5,461 10,935 5,097 21,966 18,836 918,533 3,046,237 123,747 3,199 734 279,637 134,907 43,253 210,539 21,112,199 1,805,479 70,673,889 7,864,321 334,661 707,313 $10,918,100 $8,336,344 $7,614,486 $46,136,770 $103,674,756 $15,453,916 The accompanying notes are an integral part of these financial statements. -3- Ell EXHIBIT 1 (Continued) Fiduciary Fund Types Account Groups Totals Component Totals Trust General General (Memorandum Only) Unit/ (Memorandum Only) and Agency Fixed Long -Term Primary Government Heritage Reporting Entity Fund Assets Debt 2001 2000 Foundation 2001 2000 $145,416 $ 80,528,491 $ 81,736,479 $ 201,269 $ 80,729,760 $ 84,791,180 3,848,377 3,955,980 3,848,377 4,252,732 684,282 684,282 568,812 572,764 436,623 572,764 436,623 39 71,547 185,581 71,547 185,581 918,533 190,377 918,533 190,377 113,019 3,800,000 3,800,000 3,169,984 3,015,962 3,169,984 3,015,962 283,570 254,466 283,570 254,466 388,699 134,812 1,236 389,935 136,048 22,917,678 18,592,459 22,917,678 18,592,459 $ 51,655,676 130,193,886 113,846,032 1,546,416 131,740,302 117,914,056 334,661 351,750 334,661 351,750 707,313 552,742 707,313 552,742 $ 7,331,468 7,331,468 7,367,380 7,331,468 7,367,380 137,986,102 137,986,102 129,772,860 220,925 138,207,027 133,817,326 $145,455 $51,655,676 $145,317,570 5389,253,073 $364,193,503 $2,654,128 $391,907,201 $376,340,513 -4- CITY OF GRAPEVINE, TEXAS COMBINED BALANCE SHEET - ALL FUND TYPES AND ACCOUNT GROUPS AND DISCRETELY PRESENTED COMPONENT UNITS SEPTEMBER 30, 2001 WITH COMPARATIVE TOTALS FOR SEPTEMBER 30, 2000 The accompanying notes are an integral part of these financial statements Governmental Fund Types Proprietary Fund Types Special Debt Capital Internal LIABILITIES General Revenue Service Proiects Enterprise Service Accounts payable $ 1,057,574 $1,040,386 $ 2,352 $ 1,510,888 $ 1,159,335 $ 261,382 Contracts and retainage payable 279,872 Developer deposits 1,493,297 Accrued and other liabilities 931,975 101,132 345,610 539,872 Accrued bond interest payable 65,307 32,822 Due to other fiords 742,533 176,000 Due to IDC Due to primary government Current portion of notes payable 19,943 Payable from restricted assets: Accounts payable 902,548 50,648 Retainage payable 222,254 Accrued bond interest payable 222,120 Revenue bonds payable 1,819,060 Certificates of obligation 1,177,547 Customer deposits 702,492 General obligation bonds payable Certificates of obligation, net of current portion 7,029,390 Notes payable Compensated absences Revenue bonds payable, net of current portion 35,101,456 Deferred revenues 1,269,886 41,370 215,359 104,054 TOTALLIABI ITIFS 3,259,435 1,925,421 283,018 3,388,111 40,507,697 9,254,782 EOUITY AND OTHER CREDITS Investment in general fixed assets Contributed capital 31,606,601 2,497,832 Retained earnings: Reserved for revenue bond reserve fund 2,958,632 Unreserved 28,601,826 3,701,302 Fund balances: Reserved for encumbrances 150,707 2,250 Reserved for inventory 3,199 Reserved for child safety 24,398 Reserved for prepaid items 134,907 43,253 Reserved for debt service 7,331,468 Reserved for trust assets Reserved for capital projects 42,748,659 Unreserved - Designated for ratemaking expenditures 205,038 Unreserved - Undesignated 7,140,416 6,365,420 Total equity and other credits 7,658,665 6,410,923 7,331,468 42,748,659 63,167,059 6,199,134 TOTAL LIABILITIES, EQUITY AND OTHER CREDITS $10,918,100 $8,336,344 $7,614,486 $46,136,770 $103,674,756 $15,453,916 The accompanying notes are an integral part of these financial statements go EXHIBIT 1 (Concluded) Fiduciary Fund Types Account Groups Totals Component Totals Trust General General (Memorandum Only) Unit/ (Memorandum Only) and Agency Fixed Long -Term Primary Government Heritage Reporting Entity Fund Assets Debt 2001 2000 Foundation 2001 2000 $ 275 $ 5,032,192 $ 6,048,319 $ 232,247 $ 5,264,439 $ 6,261,300 279,872 428,388 279,872 428,388 1,493,297 1,094,619 1,493,297 1,094,619 1,918,589 1,462,072 17,315 1,935,904 1,713,236 98,129 370,825 98,129 370,825 918,533 190,377 918,533 190,377 118,981 118,981 113,019 118,981 113,019 - 3,800,000 19,943 1,155,000 19,943 1,155,000 953,196 131,543 953,196 131,543 222,254 175,559 222,254 175,559 222,120 108,849 222,120 108,849 1,819,060 1,567,044 1,819,060 1,567,044 1,177,547 1,177,547 702,492 691,488 702,492 691,488 $ 75,600,000 75,600,000 72,680,000 75,600,000 72,680,000 67,458,120 74,487,510 58,600,000 74,487,510 58,600,000 737,500 737,500 10,327,500 220,925 958,425 10,571,966 1,521,950 1,521,950 1,387,740 1,521,950 1,387,740 35,101,456 30,175,516 35,101,456 30,175,516 1,630,669 4,949,463 400,848 2,031,517 5,518,275 119,256 145,317,570 204,055,290 191,657,321 871,335 204,926,625 196,734,744 $51,655,676 51,655,676 44,717,864 1,546,416 53,202,092 48,785,888 34,104,433 34,809,837 34,104,433 34,809,837 2,958,632 2,720,834 2,958,632 2,720,834 32,303,128 27,429,648 32,303,128 27,429,648 152,957 66,409 152,957 95,342 3,199 1,168 3,199 1,168 24,398 61,036 24,398 61,036 178,160 15,000 178,160 16,236 7,331,468 7,367,380 7,331,468 7,367,380 26,199 26,199 24,442 26,199 24,442 42,748,659 43,322,268 42,748,659 43,322,268 205,038 205,038 205,038 205,038 13,505,836 11,795,258 236,377 13,742,213 14,766,652 26,199 51,655,676 185,197,783 172,536,182 1,782,793 186,980,576 179,605,769 $145,455 $51,655,676 $145,317,570 $389,253,073 $364,193,503 $2,654,128 $391,907,201 $376,340,513 �Z CITY OF GRAPEVINE TEXAS COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - ALL GOVERNMENTAL FUND TYPES, EXPENDABLE TRUST FUND AND DISCRETELY PRESENTED COMPONENT UNITS YEAR ENDED SEPTEMBER 30, 2001 WTM COMPARATIVE TOTALS FOR YEAR ENDED SEPTEMBER 30, 2000 REVENUES: Taxes Licenses and permits Intergovernmental Charges for services Fines and forfeits Interest and miscellaneous Total revenues EXPENDITURES: Current: General government Public safety Culture and recreation Public works Capital outlay Debt service: Principal Interest and fiscal charges Intergovernmental payment Total expenditures Excess (deficiency) of revenues over expenditures OTHER FINANCING SOURCES (USES): Proceeds from certificates of obligations Proceeds from general obligation bonds Property acquisition Proceeds from bank note Proceeds from sale of fixed assets Operating transfers in Operating transfers out Total other financing sources (uses) Excess (deficiency) of revenues and other sources over expenditures and other uses Fund balances at beginning of year Residual equity transfer Fund balances at end of year Governmental Fund Types 6,177,804 Special Debt Capital General Revenue Service Proiects $29,239,672 $ 3,970,383 $11,475,087 1,146,428 4,381,910 156,200 14,057,776 2,984,179 4,289,833 8,915,000 2,149,638 7,815,282 876,507 359,333 447,077 $ 3,095,545 40,778,334 8,775,749 11,922,164 3,095,545 6,177,804 2,752 17,640,884 5,737,648 7,962,308 6,067,277 4,332,723 1,582,700 14,057,776 8,915,000 7,815,282 39,956,336 9,545,008 16,733,034 14,057,776 821,998 (769,259) (4,810,870) (10,962,231) 4,246,532 4,385,000 1,261,588 7,000,000 143,400 400,000 178,000 389,958 2,545,061 (1,295,979) (1,928,135) (288,905) (895,979) 2,639,797 4,774,958 10,517,744 (73,981) 1,870,538 7,732,646 4,411,263 129,122 $ 7,658,665 $ 6,410,923 The accompanying notes are an integral part of these financial statements. -7- (35,912) (444,487) 7,367,380 43,322,268 (129,122} $ 7,331,468 $ 421748,659 EXHIBIT 2 Fiduciary Totals Component Totals Fund Type (Memorandum Only) Units/ (Memorandum Onlv) Expendable Primary Government Heritage Reporting Entity Trust 2001 2000 Foundation 2001 2000 5,657,648 $ 44,685,142 $41,512,737 5,657,648 $ 44,685,142 $41,512,737 11,408,458 1,146,428 1,494,428 13,444,784 1,146,428 1,494,428 3,357,I52 4,538,110 230,558 3,357,152 4,538,110 230,558 6,424,341 7,274,012 6,492,978 $ 865,298 8,139,310 7,064,552 3,800,000 2,149,638 2,360,028 3,800,000 2,149,638 2,360,028 $18,981 4,797,443 3,620,372 95,001 4,892,444 3,726,498 18,981 64,590,773 55,711,101 960,299 65,551,072 56,388,801 -8- 6,180,556 5,683,237 6,180,556 5,683,237 17,640,884 15,404,767 17,640,884 15,404,767 17,224 13,717,180 11,674,133 521,465 14,238,645 11,981,431 6,067,277 5,657,648 6,067,277 5,657,648 19,973,199 11,408,458 3,361,903 23,335,102 13,444,784 8,915,000 3,357,I52 8,915,000 3,357,152 7,815,282 6,424,341 7,815,282 6,424,341 3,800,000 3,800,000 17,224 80,309,378 63,409,736 3,883,368 84,192,746 65,753,360 1,757 (15,718,605) (7,698,635) (2,923,069) (18,641,674) (9,364,559) 9,893,120 31,584,768 9,893,120 31,584,768 7,000,000 7,665,001 7,000,000 7,665,001 3,800,000 7,600,000 143,400 143,400 3,513,019 2,636,254 157,883 3,670,902 2,636,254 (3,513,019) (2,780,754) (3,513,019) (2,780,754) - 17,036,520 42,905,269 157,883 17,194,403 46,705,269 1,757 1,317,915 35,206,634 (2,765,186) (1,447,271) 37,340,710 24,442 62,857,999 27,651,365 3,001,563 65,859,562 28,518,852 $26,199 $ 64,175,914 $62,857,999 $ 236,377 $ 64,412,291 $65,859,562 -8- CITY OF GRAPEVINE TEXAS COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL - GENERAL, BUDGETED SPECIAL REVENUE AND DEBT SERVICE FUNDS YEAR ENDED SEPTEMBER 30, 2001 General Fund Variance Favorable Budget Actual (Unfavorable) Taxes $ 29,096,418 $ 29,239,672 $ 143,254 Licenses and permits 1,419,274 1,146,428 (272,846) Intergovernmental 4,480,762 4,381,910 (98,852) Charges for services 2,980,522 2,984,179 3,657 Fines and forfeits 2,119,200 2,149,638 30,438 Interest and miscellaneous 781,575 876,507 94,932 Total revenues 40,877,751 40,778,334 (99,417) EXPENDITURES: Current: General government 6,228,574 6,177,804 50,770 Public safety 17,743,241 17,640,884 102,357 Culture and recreation 5,754,446 5,737,648 16,798 Public works 6,087,815 6,067,277 20,538 Capital outlay 4,332,723 4,332,723 - Debt service: Principal Interest and fiscal charges Total expenditures 40,146,799 39,956,336 190,463 Excess (deficiency) of revenues over expenditures 730,952 821,998 91,046 OTHER FINANCING SOURCES (USES): Proceeds from issuance of debt Operating transfers in 400,000 400,000 Operating transfers out (1,295,979) (1,295,979) - Total other financing sources (uses) (1,295,979) (895,979) 400,000 Excess (deficiency) of revenues and other sources over expenditures and other uses Fund balances at beginning of year Fund balances at end of year $ (565,027) (73,981) $ 491,046 7,732,646 $ 7,658,665 The accompanying notes are an integral part of these financial statements. EXHIBIT 3 Budgeted Special Revenue Fund Budgeted Debt Service Fund Variance Variance Favorable Favorable Budget Actual (Unfavorable) Budget Actual (Unfavorable) $ 3,946,000 $ 3,970,383 $ 24,383 $ 7,399,845 $ 7,433,176 $33,331 764,167 2,760,850 1,996,683 35,000 60,596 25,596 4,745,167 6,791,829 2,046,662 7,006,013 6,980,630 25,383 7,006,013 6,980,630 25,383 (2,260,846) (188,801) 2,072,045 (1,057,958) (1,057,958) - (1,057,958) (1,057,958) - $ (3,318 804 (1,246,759) $ 2,072,045 1,574,402 $ 327,643 130,000 183,465 53,465 7,529,845 7,616,641 86,796 7,880,000 7,880,000 - 4,356,346 4,354,538 1,808 12,236,346 12,234,538 1,808 (4,706,501) (4,617,897) 88,604 4,385,000 4,385,000 389,958 389,958 4,774,958 4,774,958 $ 68,457 157,061 1,612,591 $ 1,769,652 -10- $ 88,604 CI'T'Y OF GRAPEVINE TEXAS EXHIBIT 4 COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS - ALL PROPRIETARY FUND TYPES YEAR ENDED SEPTEMBER 30, 2001 WITH COMPARATIVE TOTALS FOR SEPTEMBER 30, 2000 OPERATING REVENUES: Charges for services Total operating revenues OPERATING EXPENSES. Personnel services Insurance premiums Claims expense Maintenance, materials and supplies Depreciation and amortization Sundry charges Total operating expenses Operating income (loss) NON-OPERATING REVENUES (EXPENSES): Interest on investments Interest and fiscal agent charges Other - net Total non-operating revenues (expenses) Income before contributions and operating transfers Contributions Operating transfer in Operating transfer out Net income before cumulative effect of change in accounting policy Cumulative effect of change in accounting policy Net income Add depreciation on contributed assets Retained earnings at beginning of year Residual equity transfer in Residual equity transfer out Retained earnings at end of year Enterprise $17,896,014 17,896,014 3,422,495 5,881,510 1,637,990 3,379,260 14,321,255 3,574,759 1,384,094 (2,873,587) 127,459 (1,362,034) 2,212,725 2,262,486 4,475,211 193,099 (70,906) (191,546) 4,404,305 1,553 705,420 26,450,733 3,699,749 $ 31,560,458 $ 3,701,302 The accompanying notes are an integral part of these financial statements. -II- 4,668,310 3,897,053 (262,452) 4,405,858 3,897,053 705,420 698,826 30,150,482 25,852,308 39,890 (337,595) S 35,261,760 $ 30,150,482 Totals Internal (Memorandum Only) Service 2001 2000 $8,581,987 $26,478,001 $23,337,586 8,581,987 26,478,001 23,337,586 681,602 4,104,097 3,584,526 1,443, 311 1,443,311 1,145,070 2,576,292 2,576,292 2,272,076 507,070 6,388,580 5,698,088 1,640,726 3,278,716 3,208,591 2,020,453 5,399,713 3,782,383 8,869,454 23,190,709 19,690,734 (287,467) 3.287,292 3,646,852 451,761 1,835,855 1,988,092 (14,356) (2,887,943) (1,616,793) 17,810 145,269 (265,598) 455,215 (906,819) 105,701 167,748 2,380,473 3,752,553 25,351 2,287,837 18,705 18,705 170,000 (18,705) (18,705) (25,500) 193,099 (70,906) (191,546) 4,404,305 1,553 705,420 26,450,733 3,699,749 $ 31,560,458 $ 3,701,302 The accompanying notes are an integral part of these financial statements. -II- 4,668,310 3,897,053 (262,452) 4,405,858 3,897,053 705,420 698,826 30,150,482 25,852,308 39,890 (337,595) S 35,261,760 $ 30,150,482 0 CITY OF GRAPEVINE TEXAS COMBINED STATEMENT OF CASH FLOWS ALL PROPRIETARY FUND TYPES YEAR ENDED SEPTEMBER 30, 2001 WITH COMPARATIVE TOTALS FOR SEPTEMBER 30, 2000 EXHIBIT 5 The accompanying notes are an integral part of these financial statements. -12- Totals Internal (Memorandum Onlv) Enterprise Service 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Operating income (loss) $ 3,574,759 $ (287,467) $ 3,287,292 $ 3,646,852 Adjustments to reconcile operating income to net cash provided by (used in) operating activities: Depreciation and amortization 1,637,990 1,640,726 3,278,716 3,208,592 (Increase) decrease in receivables 622,889 (148,225) 474,664 (696,770) Decrease in water storage rights 17,089 17,089 17,089 (Increase) decrease in inventories 791 (27,864) (27,073) (45,369) Increase (decrease) in accounts payable and accrued liabilities 1,049,506 279,919 1,329,425 286,523 Increase in retainage payable related to capital recovery fees 46,695 46,695 (247,173) Increase (decrease) in due to other funds 4 101,000 101,004 75,004 Increase in customer deposits received 11,005 11,005 10,426 (Increase) decrease in deferred charges (154,571) (154,571) 70,913 Increase in prepaid expenses (87,635) (87,635) (44,223) (Gain)/loss on disposal of capital assets (20,100) (20,100) 1,812 Net cash provided by operating activities 6,786,057 1,470,454 8,256,511 6,283,676 CASH FLOWS FROM INVESTING ACTIVITIES - Interest received on investments 1,428,543 263,684 1,692,227 1.736,289 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Revenue bond proceeds 6,745,000 2,371,880 9,116,880 5,635,000 Principal paid on revenue bonds (1,250,000) (1,155,000) (2,405,000) (3,115,000) Interest and related fees paid on long-term debt (2,873,587) (2,873,587) (1,675,953) Acquisition and construction of capital assets (6,084,615) (4,447,615) (10,532,230) (5,569,253) Sale of capital assets 2,875 Net cash used in capital and related financing activities (3,463,202) (3,230,735) (6,693,937) (4,722,331) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: Operating transfers out (18,705) (18,705) (25,500) Operating transfers in 18,705 18,705 170,000 Residual equity transfer - (297,705) Net cash provided by (used in) noncapital financing activities - - - (153,205) Net increase (decrease) in cash and cash equivalents 4,751,398 (1,496,597) 3,254,801 3,144,429 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 24,862,282 8,387,440 33,249,722 30,105,293 CASH AND CASH EQUIVALENTS - END OF YEAR $ 29,613,680 $ 6,890,843 $ 36,504,523 $ 33,249,722 NONCASH ITEMS - Contributed capital received $ 2,262,486 $ 25,351 $ 2,287,837 $ 2,141,946 The accompanying notes are an integral part of these financial statements. -12- CITY OF GRAPEVINE, TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Grapevine ("City") is a municipal corporation incorporated under Article XI of the Texas Constitution (Home Rule Amendment). The City operates under a Council -Manager form of government and provides such services as are authorized by its charter to advance the welfare, health, safety and convenience of its citizens. a. Reporting Entity The City of Grapevine's general purpose financial statements include the separate governmental entities that are controlled by or are dependent on the City. The determination to include separate governmental entities is based on the criteria of Governmental Accounting Standards Board (GASB) Statement 14. GASB Statement 14 defines the reporting entity as the primary government and those component units for which the primary government is financially accountable. To be financially accountable, a voting majority of the component unit's board must be appointed by the primary government, and either (a) the primary government must be able to impose its will, or (b) the primary government may potentially benefit financially or be financially responsible for the component unit. Blended component units, although legally separate entities, are, in substance, part of the government's operations and so data from these units are combined with data of the primary government. Discretely presented component units, on the other hand, are reported in a separate column in the combined financial statements to emphasize it is legally separate from the government. Based on these criteria, the financial information of the following entities has been blended or discretely presented within the financial statements. Individual financial statements are not available for the discretely presented component entities. Blended Component Unit Grapevine Tax Increment Financing District Reinvestment Zone Number One and Two (the "TIFS") were formed to finance and make public improvements, under the authority of the Tax Increment Financing Act. The TIFS are governed by two separate nine member board of directors, of which five members are appointed by the City Council. The chairman of the board is also designated by the City Council. Financial statements of the TIFS are available from the City. Discretely Presented Component Unit Grapevine Heritage Foundation (the "Foundation") is a Texas non-profit corporation governed by a seven member board of directors appointed by City Council, which includes a City Council member and the Director of the City's Convention and Visitor's Bureau. The Foundation's operating budget is subject to the approval of the City Manager. The City is financially accountable for the Foundation. -13- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 The accounting and reporting policies of the City relating to the funds and account groups included in the accompanying financial statements conform to generally accepted accounting principles applicable to state and local governments. The following represents the more significant accounting and reporting policies and practices used by the City. b. Basis of Presentation - Fund Accounting The accounts of the City are organized on the basis of funds or account groups, each of which is considered to be a separate accounting entity. The operations of each fund are accounted for by providing a separate set of self -balancing accounts which comprise its assets, liabilities, retained earnings/fund balances, revenues and expenses/expenditures. The various funds are summarized by type in the financial statements. The following fund types and account groups are used by the City. GOVERNMENTAL FUND TYPES Governmental Fund Types are those through which most governmental functions of the City are financed. The acquisition, use and balances of the City's expendable financial resources and the related liabilities (except those accounted for in Proprietary and Fiduciary Funds) are accounted for through Governmental Fund Types. The following are the City's governmental fund types. General Fund - The General Fund is the general operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. Special Revenue Funds - The Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than expendable trust or major capital projects) that are legally restricted to expenditures for specified purposes. Debt Service Fund - The Debt Service Fund is used to account for the accumulation of resources for, and the payment of, general long-term debt principal, interest and related costs. Capital Project Funds - Capital Project Funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by the proprietary fund types). Financing is provided primarily by the sale of general obligation bonds. Enterprise Funds - Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. Internal Service Funds - The Internal Service Funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost -reimbursement basis. -14- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 I D ; _ al►1_� M�•__ Trust and Agency Funds - Fiduciary funds are used to account for assets held by the City in a trustee capacity or as an agent. The Agency Fund is custodial in nature and does not involve measurement of results of operations. The City's Trust Fund consists of an Expendable Trust Fund which is accounted for and reported in a manner similar to governmental funds, i.e., the measurement focus is upon determination of changes in financial position, rather than upon net income determination. ACCOUNT GROUPS Account groups are used to establish accounting control and accountability for the City's general fixed assets and general long-term debt. The following are the City's account groups: General Fixed Assets Account Group - This account group is established to account for all fixed assets of the City, other than those accounted for in the proprietary fund types. General Long -Term Debt Account Group - This account group is established to account for all long-term debt of the City except that accounted for in the proprietary fund types. Measurement Focus/Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The Governmental Fund Types and the Expendable Trust Fund use a financial resources measurement focus and are accounted for using the modified accrual basis of accounting. The Agency Fund is also accounted for using the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recorded when susceptible to accrual, i.e., both measurable and available. Measurable means the amount of the transaction can be deternuned and available means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Expenditures represent a decrease in net financial resources and, other than interest on general long-term debt, are recorded when the fund liability is incurred, if measurable. Interest on general long-term debt is recorded when due. In applying the susceptible to accrual concept to intergovernmental revenue the legal and contractual requirements of the numerous individual programs are used as guidance. Generally, monies must be expended on a specific purpose or project before any amounts will be paid to the City; therefore, revenues are recognized based upon the expenditures recorded. Property, sales and occupancy taxes are recognized as revenue as earned, when measurable and available. Licenses and permits, franchise taxes, charges for services, fines and miscellaneous revenues (except earnings on investments) are recorded as revenues when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned since they are measurable and available. -15- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 The Proprietary Fund Types are accounted for on a cost of services or "capital maintenance" measurement focus, using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred. The City has elected to apply Financial Accounting Standards Board pronouncements issued only before November 30, 1989 for its proprietary funds. d. Budgetary Data The City follows these procedures in establishing budgetary data reflected in the financial statements: (1) Prior to August 1, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing the following October 1. The operating budget includes proposed expenditures and the means of financing them. (2) Public hearings are conducted to obtain taxpayer comments (3) Prior to September 15, the budget is legally enacted through passage of an ordinance (4) The City Manager is authorized to transfer budgeted amounts between departments within any fund; however, any revisions that alter the total expenditures of any fund must be approved by the City Council, after public hearings. Total expenditures may not exceed appropriations at the individual fund level. (5) Budgets are legally adopted for the General Fund, Occupancy Tax Fund (a special revenue fund) and the Debt Service Fund and Enterprise Funds. Budgetary control is maintained at the fund level. (6) Budgets for the General, Occupancy Tax Special Revenue and Debt Service Funds are adopted on a basis consistent with generally accepted accounting principles. Budget amounts are as amended by the City Council and adjusted for transfers of budgeted amounts between departments within any fund, authorized by the City Manager. Amendments made during the year were not significant. Budget appropriations lapse at the end of each fiscal year. (7) Budgetary data for the Capital Projects Funds and certain special revenue funds have not been presented in the accompanying general purpose financial statements, as such funds are budgeted over the life of the respective project and not on an annual basis. Accordingly, formal budgetary integration of these funds is not employed and comparison of actual results of operations to budgetary data for such funds is not presented. e. Transactions Between Funds The General Fund charges the Water and Sewer Enterprise Fund, the Golf Enterprise Fund, the Capital Lease Fund and the Occupancy Tax Fund an administrative fee (fee in lieu of taxes). The fee is calculated based upon predetermined percentages of certain revenue accounts. The fee is recorded as charges for services by the General Fund and is included in sundry charges by the Enterprise Funds and other operations by the Occupancy Tax Fund. -16- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 The Internal Service Funds record revenues for charges for services from the General Fund, Water and Sewer Enterprise Fund, the Golf Enterprise Fund and the Occupancy Tax Fund. The respective funds record the related charges as expenditures or expenses. - f. Encumbrances Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of funds are recorded in order to reserve that portion of the applicable appropriation, is employed in the governmental funds. Encumbrances lapse at year-end and are reported as reservations of fund balances because they do not constitute expenditures or liabilities since the commitments will be honored during the subsequent year. g. Cash and Investments Cash consists of demand deposits (principally interest-bearing accounts) and certificates of deposit which are carried at cost. Investments are stated at fair value, in accordance with GASB Statement 31. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties. The City considers quoted market prices at September 30, 2000 to be the fair value of investments. For purposes of the statement of cash flows, the Proprietary Fund Types consider all highly liquid investments (including restricted assets) with a maturity of three months or less when purchased to be cash equivalents. h. Inventories Inventories are valued at cost on a first -in, first -out basis. Inventories in the General Fund are recorded using the consumption method (i.e., recorded as an expenditure when used). i. Property, Plant and Equipment - Enterprise Funds Property, plant and equipment owned by the Enterprise Funds are stated at cost or at estimated fair market value at the date purchased or contributed. Depreciation has been provided on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are as follows: Buildings Water and sewer system Improvements other than buildings Machinery and equipment -17- 20 - 50 years 33 - 50 years 20 - 40 years 4 - 10 years CITY OF GRAPEVINE TEXAS NO NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 Deferred Charges - Water and Sewer Enterprise Fund Deferred charges consist of expenses incurred in connection with the issue of certain outstanding revenue bonds. Such charges are amortized on a straight-line basis over the lives of the respective bonds. k. General Fixed Assets General fixed assets have been acquired for general governmental purposes. Assets purchased are recorded as expenditures in the Governmental Fund Types and capitalized at cost in the General Fixed Assets Account Group. In the case of gifts or contributions, such assets are recorded in the General Fixed Assets Account Group at estimated fair market value at the time received. Generally, infrastructure assets consisting of certain improvements other than buildings, including roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems, have not been capitalized. Such assets normally are immovable and of value only to the City; therefore, the purpose of stewardship for these items is satisfied without recording these assets. No depreciation has been provided on general fixed assets. Constructed assets financed with externally restricted proceeds of tax-exempt debt includes capitalized interest only to the extent that interest cost exceeds interest earned on related interest- bearing investments acquired with proceeds of the related tax-exempt borrowing. As of June 25, 2001, the City changed its policy for capitalization of fixed assets to $5,000. This resulted in a reduction in general fixed assets of $1,982,000 for the year ended September 30, 2001. 1. Vacation and Sick Pay City employees are granted vacation and sick pay in varying amounts up to a specified maximum. In the event of termination, employees are reimbursed for accumulated vacation days up to the maximum limit. No reimbursement is made for accumulated sick leave on termination of employment. The long-term portion of accrued vacation pay is recorded in the General Long - Term Debt Account Group. The City does not accrue sick pay, but records such expense when paid. m. Reserves Retained earnings have been reserved for the excess of restricted assets over related liabilities to the extent such restricted assets were accumulated from revenues; i.e., restricted assets which were obtained in total or in part from the proceeds of bond sales do not require a reservation of retained earnings. n. Water Storage Rights Water storage rights represent rights in the Federal Reservoir at Lake Grapevine purchased through a long-term contract with the federal government (Note 5) and are recorded at cost, with -18- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 amortization being recorded using the straight-line method over the initial term of the contract of 40 years. o. Unbilled Charges Unbilled utility service charges of the Water and Sewer Enterprise Fund are estimated and recorded as receivables, net of estimated uncollectibles at year-end. p. Long -Term Debt Long-term liabilities expected to be financed from the Governmental Fund Types are accounted for in the General Long -Term Debt Account Group. Other long-term debt is accounted for in the fund which is expected to repay such obligations. q. Capital Recovery and Impact Fees The City records capital recovery and impact fees received in excess of the cost of physical connection to the Water and Sewer system as contributed capital. Corresponding cash is recorded as a restricted asset for future expansion of the Water and Sewer system. In June, 1990, state law abolished capital recovery fees and established impact fees. The methodology used for impact fees is more stringent, but the objective of the fee and the accounting for the fee are the same. Comparative Data Comparative data for the prior year have been presented in the accompanying general purpose financial statements in order to provide an understanding of changes in the City's financial position and operations. However, complete comparative data (i.e., presentation of prior year totals by fund type in each of the statements) have not been presented since their inclusion would make the statements unduly complex and difficult to read. S. Total Columns on Combined Statements Total columns on the combined Statements are captioned "Memorandum Only" to indicate that they are presented only to facilitate financial analysis. Data in these columns do not present financial position, results of operations or cash flows in conformity with generally accepted accounting principles. Neither is such data comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data. 2. CASH AND INVESTMENTS Substantially all operating cash and investments are maintained in consolidated cash and investments accounts. Investment income relating to consolidated investments is allocated to the individual funds monthly based on each fund's pro rata share of total consolidated cash and investments. Legal provisions generally permit the City to invest in obligations of the United States or its agencies and instrumentalities; direct obligations of the State of Texas or its agencies; certificates of deposit; the State Treasurers investment pool; and repurchase agreements. During the year ended September 30, 2001, the City did not own any types of securities other than those permitted by statute. -19- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 The components of the City's cash and investments (at fair value) at September 30, 2001, were as follows: Unrestricted Restricted Total Cash and certificates of deposit $ 2,974,673 $ 2,974,673 Investments 5,072,844 5,072,844 Investment pools 72,480,974 $ 22,917,678 95,398,652 Total cash and investments $ 80,528,491 $ 22,917,678 $103,446,169 At September 30, 2001, the carrying amount of the City's cash deposits was $2,974,673 and the bank balance was $4,091,761. Of the bank balance, $200,000 was covered by federal depository insurance and the remainder was collateralized by depository institution assets held by the City's agent in the City's name. At September 30, 2001, all of the City's investments, which consisted of $3,243,475 in Federal Home Loan Bank Securities, $1,028,900 in Sallie Mae Securities, $500,000 in Federal National Mortgage Association Securities and $300,469 in U. S. Treasury Bonds, were held by the City or its agent in the City's name. The City invests in the State Treasurer's investment pool ("Texpool") which is administered by the State of Texas Treasurer's Office. These approved pooled investments of $95,398,652 are carried at fair value, which is the same as the value of the pool shares, and may be liquidated as needed. Such investments are uncategorized for risk. 3. PROPERTY TAX The City's property tax is levied each October 1, on the assessed value listed as of the prior January 1 for all real property located in the City. The appraisal of property within the City is the responsibility of the Tarrant County Appraisal District as required by legislation passed by the Texas Legislature. The Appraisal District is required under such legislation to assess all property within the Appraisal District on the basis of 100% of its appraised value and is prohibited from applying any assessment ratios. The assessed value upon which the fiscal 2001 levy was based was approximately $4,372,544,371. The value of property within the Appraisal District must be reviewed every five years; however, the City may, at its own expense, require annual reviews of appraised values. The City may challenge appraised values established by the Appraisal District through various appeals and, if necessary, legal action. General property taxes are limited by the Texas Constitution to $2.50 per $100 of assessed valuation. The combined tax rate to finance general governmental service and debt service for the year ended September 30, 2001, was $.375 per $100 of assessed valuation. Property taxes attach as an enforceable lien on property as of January 1 following the levy date. Taxes are due by January 31, following the levy date. Current tax collections for the year ended September 30, 2001, were 98.8% of the tax levy. Property taxes levied for 2001 are recorded as receivables, net of estimated uncollectibles. The net receivables collected during 2001 and those considered "available" at year-end are recognized as revenues in 2001. The City considers property taxes available if they are collected within 60 days after -20- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 year-end. Prior year levies were recorded using these same principles. The remaining receivables are reflected as deferred revenues. Under GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, property taxes are an imposed nonexchange revenue. Assets from imposed nonexchange transactions are recorded when the entity has enforceable legal claim to the asset, or when the entity receives resources, whichever comes first. The enforceable legal claim date for property taxes is the assessment date. The assessment date has been designated in the enabling legislation as October 1. -21- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 4. FIXED ASSETS Enterprise Internal A summary of changes in general fixed assets follows: Service Funds Total Land $ 596,720 Balance $ 896,929 Buildings Balance October 1, Improvements other than buildings 5,625,364 September 30, 5,625,364 2000 Additions Retirements 2001 Land and buildings $ 28,602,847 $11,257,370 $ (44,506) $ 39,815,711 Improvements other than buildings 6,906,105 143,310 (62,341) 6,987,074 Machinery and equipment 5,999,252 324,864 (1,811,229) 4,512,887 Construction in progress 3,209,660 310,181 (3,179,837) 340,004 Total $ 44,717,864 $12,035,725 $ (5,097,913) $ 51,655,676 ®tee. A summary of Proprietary Fund Types property, plant and equipment at September 30, 2001, follows: As of June 25, 2001, the City changed its policy for capitalization of fixed assets to $5,000. This resulted in a reduction in general fixed assets of $1,982,000 for the year ended September 30, 2001. W Enterprise Internal Funds Service Funds Total Land $ 596,720 $ 300,209 $ 896,929 Buildings 2,030,961 2,030,961 Improvements other than buildings 5,625,364 5,625,364 Water system 35,162,090 35,162,090 Sewer system 28,909,130 28,909,130 Machinery and equipment 905,600 12,455,186 13,360,786 Construction -in -progress 16,324,015 16,324,015 Total 89,553,880 12,755,395 102,309,275 Less accumulated depreciation (18,879,991) (4,891,074) (23,771,065) Total $ 70,673,889 $ 7,864,321 $ 78,538,210 As of June 25, 2001, the City changed its policy for capitalization of fixed assets to $5,000. This resulted in a reduction in general fixed assets of $1,982,000 for the year ended September 30, 2001. W CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMEN'T'S FISCAL YEAR ENDED SEPTEMBER 30, 2001 5. LONG-TERM LIABILITIES The following is a summary of long-term liability transactions of the City for the year ended September 30, 2001: General Obligation Bonds $8,800,000 Series 1991 General Obligation Bonds due in annual installments of $215,000 to $800,000 through February 15, 2011; interest at 6.25% to 9.25% $8,549,940 Series 1992 General Obligation Refunding Bonds due in annual installments of $42,788 to $1,436,000 through February 1, 2006; interest at 3.80% to 6.15% $4,000,000 Series 1992-A General Obligation Improvement Bonds due in annual installments of $120,000 to $355,000 from February 1, 2012; interest at 4.20% to 6.40% $3,100,000 Series 1992-B General Obligation Bonds due in annual installments of $95,000 to $280,000 from February 15, 1994 to February 15, 2011; interest 5.40% to 8.40% $17,100,000 Series 1993 General Obligation Refunding and Improvement Bonds due in annual installments of $205,000 to $1,730,000 from February 15, 1994 to February 15, 2012; interest at 2.50% to 5.10% $7,210,000 Series 1994 General Obligation Bonds due in annual installments of $175,000 to $595,000 through February 15, 2015; interest at 5.8% to 8.8% $15,945,000 Series 1995 General Obligation Bonds due in annual installments of $435,000 to $1,340,000 through February 15, 2016; interest at 5.0% to 7.0% $9,785,000 Series 1996 General Obligation Bonds due in annual installments of $310,000 to $865,000 from February 15, 2000 through February 15, 2017; interest at 5.0% to 7.00% $30,285,000 Series 1999 General Obligation Refunding Bonds due in annual installments of $809,000 to $3,787,000 from August 15, 1999 to September 30, 2019; interest at 3.35% to 4.875% $7,665,000 Series 2000 General Obligation Bonds due in annual installments of $30,000 to $670,000 from February 15, 2001 through February 15, 2019; interest at 5.35% to 6.35% 7,000,000 Series 2000A General Obligation Bonds due in annual installments of $210,000 to $590,000 from February 15, 2003 through February 15, 2021; interest at 5% to 6.25% Total general obligation bonds -23- Balance Balance October 1, September 30, 2000 Additions Deletions 2001 $ 410,000 $ 410,000 $ - 6,535,000 1,360,000 5,175,000 175,000 175,000 - 310,000 150,000 160,000 13,805,000 575,000 13,230,000 1,105,000 250,000 855,000 6,915,000 535,000 6,380,000 5,475,000 330,000 5,145,000 30,285,000 265,000 30,020,000 7,665,000 30,000 7,635,000 $ 7,000,000 7,000,000 $72,680,000 $ 7,000,000 $4,080,000 575,600,000 CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 Revenue Bonds $13,132,560 Series 1985 Waterworks and Sewer System Refunding and Improvement Revenue Bonds due in annual installments of $187,824 to $1,280,000 through September 1, 2006; interest at 5.25% to 9.87517o $10,435,000 Series 1992 Waterworks and Sewer System Revenue Refunding Bonds due in annual installments of $180,000 to $1,355,000 from September 1, 1993 to September 1, 2010; interest at 2.75% to 6.00% $3,840,000 Series 1995 Waterworks and Sewer System Revenue Bonds due in annual installments of $50,000 to $325,000 through September 1, 2015; interest at 4.98% to 6.9% $2,920,000 Series 1996 Waterworks and Sewer System Revenue Bonds due in annual installments of $80,000 to $235,000 through September 30, 2016; interest at 4.875% to 6.875% $7,370,000 Series 1997 Waterworks and Sewer System Revenue Refunding and Improvements Bonds due in annual installments of $220,000 to $625,000 from September 1,1999 through September 30, 2017; interest at 4.65% to 6.65% $5,875,000 Series 1998 Combination Tax and Revenue Bonds due in annual installments of $170,000 to $465,000 from February 15, 2000 through February 15, 2019; interest at 4.3752% to 4.75%. $7,400,000 Series 1999 Waterworks and Sewer System Revenue Refunding and Improvements Bonds due in annual installments of $582,000 to $603,000 from September 1,1999 through September 1, 2019; interest at 5.35% to 5% 6,745,000 Series 2001 Watesworks and Sewer System Revenue Bonds due in annual installments of $220,000 to $500,000 from September 1, 2002 through September 1, 2021; interest at 4% to 5.125% Total revenue bonds Combination Certificates of Obligation Combination Tax and Tax Increment Reinvestment Zone Revenue Certificates of Obligation, due in annual installments through February 15, 2016; interest at 5% to 7% Combination Tax and Tax Increment Reinvestment Zone Revenue Certificates of Obligation, due in annual installments of $730,000 to 52,475,000 through August 15, 2026; interest at 5.5% to 7% Combination Tax and Revenue Certificates of Obligation, due in in annual installments of $225,000 to $880,000 through February 15, 2021; interest at 4.875% to 5.625°% Combination Tax and Revenue Certificates of Obligation Series 2001, due in annual installments of $105,000 to $350,000 through August 15, 2021; interest at 4.5% to 5.25% Total combination certificates of obligation -24- Balance Balance October 1, September 30, 2000 Additions Deletions 2001 $ 1,477,560 $ 317,044 $ 1,160,516 4,400,000 340,000 4,060,000 3,490,000 160,000 3,330,000 2,570,000 100,000 2,470,000 6,920,000 245,000 6,675,000 5,705,000 175,000 5,530,000 7,180,000 230,000 6,950,000 S 6,745,000 6,745,000 $31,742,560 $ 6,745,000 $1,567,044 $36,920,516 $27,020,000 $1,035,000 $25,985,000 31,580,000 31,580,000 $ 5,508,120 5,508,120 4,385,000 4,385,000 $58,600,000 $ 9,893,120 $1,035,000 $67,458,120 CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 Notes Payable - Governmental Funds $72,500 note payable, secured by land, due in sixteen semi-annual installments of $3,973 for the first installment and 54,350 for each of the remaining fifteen installments, the remaining principal is due in full on May 28, 2006; interest at 12% Note payable to a financial institution with an interest rate of 11.1%, due in annual installments of $1,556,269 to $1,557,715 through May 17, 2003, unsecured Note payable to Denton County, due in annual installments of $150,000 through October 1, 2004 Note payable for property purchase, due on closing date November 2002 Total notes payable - governmental funds Notes Payable and Combination Certificates of Obligation - Internal Service Fund $1,900,000 Series 1997 Equipment Acquisition Notes, due in annual installments of S460,000 to $500,000 from August 15, 1998 through August 15, 2001 $1,700,000 Series 1998 Equipment Acquisition Notes, due in annual installments of 5410,000 to $445,000 from August 15, 1999 through August 15, 2002 Combination Tax and Revenue Certificates of Obligation, due in annual installments of $235,000 to $640,000 through August 15, 2010; interest at 5.25% Combination Tax and Revenue Certificates of Obligation, due in annual installments of $225,000 to $880,000 through February 15, 2021; interest at 4.875% to 5.625% Total notes payable - internal service fund Compensated Absences Notes Payable - Component Unit Notes payable to a financial institution with an interest rate of 817b, due December 2008, secured by land Note payable to a financial institution with an interest rate of 8%, due January 27, 1997, renewed subsequent to December 31, 1996. New note is due in February 2009, secured by land Note payable to a financial institution with an interest rate of 7%, due December 1996, renewed subsequent to December 31, 1996, new note is due December 30, 2001, secured by property Note payable to City of Grapevine with an interest rate of 11.1%, due in annual installments of $1,556,269 to $1,557,715 through May 17, 2003 Total notes payable - component unit -25- Balance Balance October 1, September 30, 2000 Additions Deletions 2001 $ 72,500 $ 72,500 3,800,000 $ 3,800,000 600,000 150,000 450,000 S 215,000 215,000 S 4,472,500 S 215,000 $3,950,000 $ 737,500 $ 500,000 S 500,000 $ - 875,000 430,000 445,000 5,635,000 225,000 5,410,000 $ 2,371,880 2,371,880 S 7,010,000 $ 2,371,880 $ 1,155,000 $ 8,226,880 $ 1,387,740 $ 134,210 $ $ 1,521,950 $ 54,895 $ 4,822 $ 50,073 105,840 7,682 98,158 83,732 11,038 72,694 3,800,000 3,800,000 - $ 4,044,467 $ $3,823,542 $ 220,925 CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 In prior years, the City defeased certain general obligation and revenue bonds by placing the proceeds of new bonds in an irrevocable trust to provide all future debt service payments on the old bonds. Accordingly, the trust accounts and the defeased bonds are not included in the City's financial statements. At September 30, 2001, the following, general obligation and revenue bonds were considered defeased: General Obligation Bonds Plan Description - The City provides pension benefits for all of its full-time employees through a non- traditional, joint contributory hybrid, defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), one of 745 administered by TMRS, an agent multiple -employee retirement system. Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have -26- Series 1984 $ 305,000 Series 1985 360,000 Series 1991 6,020,000 Series 1992A 2,840,000 Series 1992B 1,985,000 Series 1993 1,340,000 Series 1994 4,875,000 Series 1995 7,625,000 Series 1996 4,000,000 $ 29,350,000 Revenue Bonds Series 1980 $ 750,000 The annual requirements to amortize all debt outstanding as of September 30, 2001, are as follows: Bonds Notes Payable General Combination General Land Obligation Revenue Bonds Obligation and Other Total Year ending September 30: 2002 $ 8,516,868 $ 4,742,458 $ 5,974,309 $1,349,600 $158,700 $ 20,741,935 2003 8,249,759 4,746,140 5,925,351 892,263 373,700 20,187,213 2004 8,220,118 4,745,754 5,920,700 833,662 158,700 19,878,934 2005 7,623,731 4,742,439 6,328,304 736,375 8,700 19,439,549 2006 7,491,356 4,740,986 5,911,106 737,500 81,200 18,962,148 Thereafter 67,024,651 36,527,348 89,686,867 2,743,400 195,982,266 Total 107,126,483 60,245,125 119,746,637 7,292,800 781,000 295,192,045 Less interest 31,526,483 23,324,609 49,916,637 1,437,800 43,500 106,249,029 Total principal $ 75,600,000 $ 36,920,516 $ 69,830,000 $5,855,000 $737,500 $188,943,016 6. EMPLOYEES' RETIREMENT SYSTEM Plan Description - The City provides pension benefits for all of its full-time employees through a non- traditional, joint contributory hybrid, defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), one of 745 administered by TMRS, an agent multiple -employee retirement system. Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have -26- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (100%, 150% or 200%) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contributions rate and City matching percent had always been in existence and if the employee's salary had always been the average of his salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer -financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with 10 or more years of service or with 20 years of service regardless of age. A member is vested after 10 years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Contributions - The contribution rate for the employees is 7%, and the City matching ratio is currently 2 to 1, both as adopted by the governing body of the City. Under the state law governing TMRS, the actuary annually determines the City contribution rate. This rate consists of the normal cost contribution rate and the prior service contribution rate, both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to the City matching percent, which are the obligation of the City as of an employee's retirement date, not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfy the obligation of the City to each employee at the time his/her retirement becomes effective. The prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the remainder of the plan's 25 -year amortization period. When the City periodically adopted updated service credits and increases in annuities in effect, the increased unfunded actuarial liability is to be amortized over a new 25 -year period. The unfunded actuarial liability is being amortized over the 25 -year period, which began January 1997 and is currently open. The unit credit actuarial cost method is used for determining the City contribution rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance to budget for it, there is a one-year delay between the actuarial valuation that is the basis for the rate and the calendar year when the rate goes into effect (i.e., December 31, 1999 valuation is effective for rates beginning January 2001). The City of Grapevine is one of 745 municipalities having the benefit plan administered by TMRS. Each of the 745 municipalities have an annual, individual actuarial valuation performed. All assumptions for the -27- -28- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 December 31, 2000 valuations are contained in the 2000 TMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P. O. Box 149153, Austin, Texas 78714-9153. Actuarial Valuation Date December 31, 2000 December 31, 1999 December 31. 1998 Actuarial Value of Assets $ 40,059,757 $ 33,794,977 $ 30,650,184 Actuarial Accrued Liability $44,740,181 $43,130,716 $38,386,829 Percentage Funded 80.5 % 78.4% 79.8 % Unfunded (over -funded) Actuarial Accrued Liability (UAAL) $ 9,680,424 $ 9,335,739 $ 7,736,645 Annual Covered Payroll $21,279,010 $19,066,500 $17,143,963 UAAL as a Percentage of Covered Payroll 44.7% 49.0% 45.1 % Net Pension Obligation (NPO) at the Beginning of Period $ - $ _ $ - A.nnual Pension Cost: Annual required contribution (ARC) $ 4,444,729 $ 4,077,081 $ 2,156,456 Interest on NPO Adjustment to the ARC $ 4,444,729 $ 4,077,081 $ 2,156,456 Contributions Made $ 4,444,729 $ 4,077,081 $ 2,156,456 Increase in NPO _ NPO at the end of the period $ - $ - $ - Actuarial Assumptions December 31, 2000 December 31, 1999 December 31, 1998 Actuarial Cost Method Unit Credit Unit Credit Unit Credit Amortization Method Level Percent of Payroll Level Percent of Payroll Level Percent of Payroll Remaining Amortization Period 25 Years 25 Years 25 Years Asset Valuation Method Amortized Cost Market Related Market Related Investment Rate of Return 8% 8% 8% Projected Salary Increases None None None Includes Inflation At None None None Cost -of -Living Adjustments None None None -28- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 7. INDIVIDUAL INTERFUND BALANCES At September 30, 2001, the respective interfund balances consisted of the following: Due From General Fund $ 918,533 Debt Service 4,385,000 Heritage Foundation Internal Service - Fleet Special Revenue - Grant Internal Service - Insurance Special Revenue - CV&B $5,303,533 Operating transfers for the year ended September 30, 2001, were as follows: Operating transfers out: Transfer From General Fund General Fund Special Revenue Fund CV&B Fund Special Revenue Fund CV&B Fund Special Revenue Fund CV&B Fund Special Revenue Fund CV&B Fund Special Revenue Fund CV&B Fund Special Revenue Fund - Storm Drainage Capital Projects - Maintenance Capital Projects - Streets Internal Service - Insurance Total operating transfers out Transfer To Capital Projects - Maintenance Capital Projects - Recreation Debt Service Capital Projects - General Facilities General Fund Special Revenue Fund - Township Revitalization Special Revenue Fund - Other Capital Projects - Maintenance Capital Projects - Streets Capital Projects - Maintenance Internal Service - Lease -29- Due To $ 4,385,000 66,000 124,000 110,000 618,533 $ 5,303,533 Amount $ 959,534 336,445 389,958 90,000 400,000 88,000 90,000 870,177 38,905 250,000 18,705 $ 3,531,724 Residual equity transfers in: Transfer From Capital Projects - General Facilities Total residual equity transfers in 8. WATER AND SEWER CONTRACTS Transfer To Amount Special Revenue Fund - Township Revitalization $129,122 $129,122 The City has separate contracts with the Trinity River Authority of Texas ("TRA') for the purchase of treated water and for the transportation, treatment and disposal of wastewater, which expire in 2014 and 2023, respectively. The contracts require the City to pay varying amounts based on the costs associated with water purchased and wastewater transported and/or treated and disposed. The costs include the City's proportionate share of TRA's operating and maintenance expenses, related debt service costs, -30- CITY OF GRAPEVINE TEXAS NOTES TO THE FINA.NL CIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 Operating transfers in: Transfer To Transfer From Amount General Fund Special Revenue CV&B Fund $ 400,000 Special Revenue Fund - Township Revitalization Special Revenue CV&B Fund 88,000 Special Revenue Fund - Other Special Revenue CV&B Fund 90,000 Debt Service Special Revenue CV&B Fund 389,958 Capital Projects - Maintenance General Fund 959,534 Capital Projects - Maintenance Special Revenue - Storm Drainage 870,177 Capital Projects - Maintenance Capital Projects - Streets 250,000 Capital Projects - Recreation General Fund 336,445 Capital Projects - Streets Capital Projects - Maintenance 38,905 Capital Projects - General Facilities Special Revenue Fund CV&B Fund 90,000 Internal Service - Lease Internal Service - Insurance 18,705 Total operating transfers in $ 3,531,724 Residual equity transfers for the year ended September 30, 2001, are summarized below. Included are residual equity transfers between the Special Revenue Fund - Township Revitalization and the Capital Projects Funds. These transfers represent reclassifications of assets. Residual equity transfers out: Transfer From Transfer To Amount Special Revenue Fund - Township Revitalization Capital Projects - General Facilities $129,122 Total residual equity transfers out $129,122 Residual equity transfers in: Transfer From Capital Projects - General Facilities Total residual equity transfers in 8. WATER AND SEWER CONTRACTS Transfer To Amount Special Revenue Fund - Township Revitalization $129,122 $129,122 The City has separate contracts with the Trinity River Authority of Texas ("TRA') for the purchase of treated water and for the transportation, treatment and disposal of wastewater, which expire in 2014 and 2023, respectively. The contracts require the City to pay varying amounts based on the costs associated with water purchased and wastewater transported and/or treated and disposed. The costs include the City's proportionate share of TRA's operating and maintenance expenses, related debt service costs, -30- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 plus certain other miscellaneous charges. Payments during 2001 for the purchase of treated water were $4,036,905 and payments made for the transportation, treatment, and disposal of wastewater by TRA were $671,102. If the City were unable to fulfill its obligations under the contracts, the only liability for future payment would be its proportionate share of debt service requirements. In addition, the City does not retain an ongoing financial interest in TRA and has no representation on the TRA Board; therefore, the TRA contracts are not considered to be joint venture agreements. 9. SEGMENTS OF ENTERPRISE ACTIVITIES Services provided by the City which are financed by user charges are water and sewer services and recreational golf. The key financial data for these services for the year ended September 30, 2001, are as follows: 10. CONTRIBUTED CAPITAL During 2001, contributed capital changed by the following amounts: Enterprise Funds Water Lake and Sewer Enterprise Total Balance at beginning of year $ 31,791,036 $ 520,985 $ 32,312,021 Depreciation (665,505) (39,915) (705,420) Balance at end of year $ 31,125,531 $ 481,070 $ 31,606,601 Beginning in fiscal year 2001, the City implemented GASB Statement No. 33 and recorded capital contributions to proprietary funds as revenue rather than additions to contributed capital. Total contributions in 2001 for the enterprise funds were $2,262,486. -31- Water and Lake Enterprise Sewer Fund Fund Total Operating revenues $ 15,805,663 $ 2,090,351 $ 17,896,014 Depreciation and amortization expense (1,378,121) (259,869) (1,637,990) Operating income 3,780,223 (205,464) 3,574,759 Contributions 2,262,486 2,262,486 Total revenues 17,210,223 2,197,344 19,407,567 Net income 4,811,050 (406,745) 4,404,305 Net additions to property, plant and equipment 6,580,894 2,829,150 9,410,044 Net working capital - unrestricted 7,782,794 1,526,133 9,308,927 Bonds and other long-term liabilities - payable from operating revenues 29,756,456 5,345,000 35,101,456 Total assets 94,817,208 8,857,548 103,674,756 Total equity 60,053,763 3,113,296 63,167,059 10. CONTRIBUTED CAPITAL During 2001, contributed capital changed by the following amounts: Enterprise Funds Water Lake and Sewer Enterprise Total Balance at beginning of year $ 31,791,036 $ 520,985 $ 32,312,021 Depreciation (665,505) (39,915) (705,420) Balance at end of year $ 31,125,531 $ 481,070 $ 31,606,601 Beginning in fiscal year 2001, the City implemented GASB Statement No. 33 and recorded capital contributions to proprietary funds as revenue rather than additions to contributed capital. Total contributions in 2001 for the enterprise funds were $2,262,486. -31- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 11. COMMITMENTS AND CONTINGENCIES The City is defendant in several pending lawsuits. City management estimates, based on the advice of legal counsel, that the potential claims against the City not covered by insurance would not materially affect the general purpose financial statements of the City. The City participates in a number of federal and state grant programs. These programs are subject to program compliance audits by the grantors or their representatives. Any liability that may arise as the result of these audits is not believed to be material. Construction -The City was obligated at September 30, 2001, under contracts for various construction projects. The outstanding commitments under these contracts were approximately $15,801,881. 12. CONTRIBUTED PARK LAND In August, 1985, the City enacted an ordinance establishing the requirement for open space, park and recreational areas which is intended to ensure that, in new residential developments in the City, there will be sufficient land dedicated or otherwise set aside to meet the demands and needs of the future residents of the development for open space and neighborhood parks. In certain instances, cash may be remitted in lieu of land. Any cash received shall be restricted for acquisition and improvements of open space or park and recreational areas that will meet the needs of the residents of the related development. Any funds not expended within three years of receipt, or unconditionally committed to be expended, shall be refunded to the developer or subdivider. The funds are expended for their intended purpose. The amount of deferred revenue related to this at September 30, 2001, was approximately $104,054. Contributed park land is recorded in the General Fixed Assets Account Group at estimated fair market value. 13. RISK RETENTION The City of Grapevine is exposed to various risks of loss related to tort liability, theft of and damage to property and destruction of assets; public officials' errors and omissions; bodily injury and property damage; injury to employees and natural disasters. During fiscal year 1987 the City of Grapevine established a risk management program and risk management fund to account for and finance its risk of loss. In fiscal year 1991 the risk management program was expanded to include implementation of the SIR (Self Insured Retention) plan. Under this plan the City provided insurance protection for all known exposures, including all third party liability, law enforcement liability, public officials' errors and omissions, and all bodily injury and property damage arising out of the City's operations on a partially insured basis up to $1,000,000 per occurrence. In addition, the City provides protection for all its real property on a blanket building basis, including contents with agreed values and replacement costs. The City provides statutory workers' compensation for all employees for bodily injury and indemnity loss of wages. The City provides liability protection for all its commercial auto vehicles (fleet) on an insured basis up to $1,000,000 per occurrence and $2,000,000 in the aggregate. The City also provides $10,000,000 excess umbrella liability over all liability exposures. The City's loss experience has been very favorable with the experience modifier of .54 in the City's workers' compensation plan and similar loss ratios in the City's property and casualty insurance fund. The City purchases commercial insurance for claims in excess of its retention provided by the fund and for all other risks of loss. Settled claims -32- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEP'T'EMBER 30, 2001 have not exceeded this commercial coverage in any of the past 5 fiscal years, nor has the City experienced significant reductions in coverage. All department funds of the City participate in the program and make payments to the risk management fund based on actuarial estimates of the amounts needed to pay prior and current year premiums and claims. All third party liability and property protection is provided by A+ rated insurance carriers as defined by Best Key Rating Guide, A.M. Best Company. All workers' compensation protection afforded the employees of the City of Grapevine is through the Texas Municipal League Risk Retention Pool (TML Intergovernmental Risk Pool -Texas Municipal League, 211 E. 7th Street, Austin, Texas 78701). Risk Management identifies risk of loss to the government and provides ample protection for exposures to their loss. The City establishes claim liability based on estimates of the ultimate cost of claims reported but unsettled and of claims incurred but not reported. Any claims incurred and not reported are not believed to be significant to the City's financial statements. Claims payable at beginning of year Current year claims and changes in estimates Payments on claims Claims payable at end of year 14. BUDGET BASIS RECONCILIATION 2001 2000 $ 13,201 $ 35,480 2,193,524 1,999,455 2,206,725 2,021,734 $ - $ 13,201 The City does not budget all Special Revenue or Debt Service Funds and, accordingly, the applicable columns of the Combined Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual exclude amounts relating to the unbudgeted funds. A reconciliation of GAAP basis results with the budget basis follows: Special Revenue Funds Budgeted Funds Unbudgeted Funds Hotel Special Occupancy Revenue Storm Township Fund Other Draina¢e Grant Revitalization Totals Revenues $ 6,791,829 $ 432,325 $1,426,835 $123,747 $ 1,013 $ 8,775,749 Expenditures 6,980,630 188,474 1,975,253 123,747 276,904 9,545,008 Excess of revenues over (under) expenditures (188,801) 243,851 (548,418) - (275,891) (769,259) Other financing sources (uses) (1,057,959) 90,000 (870,178) 231,400 1,606,737 Excess of revenues and other financing sources over (under) expenditures and other uses (1,246,760) 333,851 (1,418,596) (44,491) (2,375,996) Fund balance (deficit), beginning 1,574,402 919,281 1,917,580 4,411,263 Residual equity transfer 129,122 129,122 Fund balance (deficit), ending $ 327,642 $1,253,132 $ 498,984 $ $ 84,631 $ 2,164,389 -33- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 Debt Service Funds 15. INDIVIDUAL FUND DISCLOSURES As of September 30, 2001, the following Internal Service funds had deficit fund balances: Technology Fund Self -Insurance Fund 16. LEASE $ (1,421) (12,596) During 2000, the City held a note from the Texas Bank in the amount of $3,800,000 which was subsequently loaned to its discretely presented component unit, the Heritage Foundation ("Foundation"), for repairs on the Palace Theater. On July 17, 2001, the City and the Foundation entered into an agreement whereby the City would forgive the $3,800,000 note from the Foundation in exchange for the title to the Palace Theater. The City refinanced the bank note by issuing Certificates of Obligation for $4,385,000. Also on July 17, 2001, an operating lease agreement was entered into by the City and the Foundation whereby the Foundation would rent the Palace Theater from the City for $370,000 annually for a term of 20 years. The minimum future rental receipts as of September 30, 2001 are as follows. Year Ending Budgeted Funds Unbudgeted funds Rental Payments 2002 Debt TIF #1 Debt TIF #2 Debt 2004 370,000 Service Service Service Totals Revenues $ 7,616,641 $4,155,570 $ 149,953 $11,922,164 Expenditures 12,234,538 2,515,067 1,983,429 16,733,034 Excess (deficiency) of revenues over expenditures (4,617,897) 1,640,503 (1,833,476) (4,810,870) Other financing sources (uses) 4,774,958 4,774,958 Excess of revenues and other financing sources over expenditures and other uses 157,061 1,640,503 (1,833,476) (35,912) Fund balance, beginning 1,612,591 2,110,057 3,644,732 7,367,380 Fund balance, ending $ 1,769,652 $ 3,750,560 $ 1,811,256 $ 7,331,468 15. INDIVIDUAL FUND DISCLOSURES As of September 30, 2001, the following Internal Service funds had deficit fund balances: Technology Fund Self -Insurance Fund 16. LEASE $ (1,421) (12,596) During 2000, the City held a note from the Texas Bank in the amount of $3,800,000 which was subsequently loaned to its discretely presented component unit, the Heritage Foundation ("Foundation"), for repairs on the Palace Theater. On July 17, 2001, the City and the Foundation entered into an agreement whereby the City would forgive the $3,800,000 note from the Foundation in exchange for the title to the Palace Theater. The City refinanced the bank note by issuing Certificates of Obligation for $4,385,000. Also on July 17, 2001, an operating lease agreement was entered into by the City and the Foundation whereby the Foundation would rent the Palace Theater from the City for $370,000 annually for a term of 20 years. The minimum future rental receipts as of September 30, 2001 are as follows. Year Ending Minimum Future September 30 Rental Payments 2002 $ 370,000 2003 370,000 2004 370,000 2005 370,000 2006 370,000 Thereafter 5,550,000 Total $ 7,400,000 -34- CITY OF GRAPEVINE TEXAS NOTES TO THE FINANCIAL STATEMENTS FISCAL YEAR ENDED SEPTEMBER 30, 2001 MEL-Do3�y�[ll�l �!►`�1If al�I �1►`Y K� The City entered into an operating lease agreement with the Heritage Foundation on July 17, 2001 for the Palace Arts Center. The cost of the leased asset on the City's financial statements is $5,703,677. No depreciation has provided on the general fixed asset. Rental payments commence February 1, 2002 and are $370,000 annually through 2006 and $1,850,000 annually through 2021. On November 20, 2001, the City approved a resolution to issue equipment notes not to exceed $1,300,000. On December 12, 2001, the Industrial Development Corporation Board approved a resolution expressing interest to issue tax-exempt bonds in the amount of $6,500,000. The funds will be loaned to Aero DFW. The bonds are corporate obligations of the company and are not secured by any funds or revenues of either the Industrial Development Corporation or the City. The cost to the City will be minimal. -35- E,F I'l 40 APPENDIX C FORM OF BOND COUNSEL'S OPINIONS Vmson&-EIk ns�. ATTOAN."EYS AT L1W [Date of Closing] CITY OF GRAPEVINE, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION SERIES 2003 VINSON & ELRINS LL.P. 3700 TRaSL\IELL CROW CENTER 2001 ROSS AVENUE DALLAS, =E kS 75201-2975 TELEPHONE (211) 220-7700 FAit (214) 220-7716 ww .velawxom 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 2003, dated January 1, 2003, issued in the principal amount of $ The Certificates mature, bear interest, are subject to redemption prior to maturity 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"). WE HAVE represented the Issuer as bond counsel for the sole 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. 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 AUSTIN • BEIJING - DALLAS - HOUSTON • LONDON • MOSCOW • NEW YORK • SINGAPORE - WASHINGTON. D.C. Constitution and laws of the State of Texas presently effective and, therefore, the pf Certificates constitute valid and legally binding obligations of the Issuer; and (B) A continuing ad valorem tax upon all taxable property within the Issuer, necessary to pay the interest on and principal of the Certificates, has been levied and pledged irrevocably for such purposes, within the limit prescribed by law, and the total indebtedness of the Issuer, including the Certificates, does not exceed any constitutional, statutory or other limitations. In addition, the Certificates are further secured by a pledge limited to $1,000 of the surplus revenues of the Issuer's waterworks and sewer system as provided in the Ordinance. 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 the years through , both 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 Certificate 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 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 liability. In providing such opinions, we have relied on representations of the Issuer, the Issuer's financial advisor and the initial purchasers of the Certificates with respect to matters solely within the knowledge of the Issuer, the Issuer's financial advisor and the Underwriters 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 that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are 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. C-2 Purchasers of Original Issue Discount Certificates in the initial public offering are directed to the discussion entitled "TAX MATTERS -Tax Accounting Treatment of Original Issue Discount Obligations" set forth in 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 receipt or accrual of interest on, or acquisition, ownership 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 United States 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. C-3 ni CZE_C---:::Z=E:-:_ 3700 TR-AALY[ELL CROW CENTER - d2001 ROSS AVENUE DAIS-r1S, TEX-kS 73201-2975 Vn isori&£1k is W t ATTORN'EY'S AT L{(p TELEPHONE (214) 220.7700 FAX (214) 220-7716 w xelawsom [Date of Closing] CITY OF GRAPEVINE, TEXAS GENERAL OBLIGATION REFUNDING AND IMPROVEMENT BONDS SERIES 2003 WE HAVE represented the City of Grapevine, Texas (the "Issuer"), as its bond counsel in connection with an issue of bonds (the "Bonds") described as follows: CITY OF GRAPEVINE, TEXAS GENERAL OBLIGATION REFUNDING AND IMPROVEMENT BONDS, SERIES 2003, dated January 1, 2003, in the principal amount of $_ The Bonds mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Bonds and in the Ordinance adopted by the City Council of the Issuer authorizing their issuance (the "Ordinance"). 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 Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds 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 Bonds. Our role in connection with the Issuer's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Bonds, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the City; an escrow agreement (the "Escrow Agreement") between the City and Bank One, National Association, as escrow agent (the "Escrow Agent"); a report (the "Report") of Grant Thornton LLP, Certified Public Accountants (the "Verification Agent"), verifying the sufficiency of the deposits made with the Escrow Agent for defeasance of the obligations being refunded (the "Refunded Bonds") and the mathematical accuracy of certain computations of the yield on the Bonds and obligations acquired with the proceeds of the Bonds; and customary certificates of officers, agents and representatives of the City, and other public officials, and other certified showings relating to the authorization and issuance of the Bonds. We have also examined executed Bond No. 1 of this issue. AUSTIN • BEIJING - DALLAS • HOUSTON - LONDON - MOSCOW • NEW YORK • SINGAPORE • WASHINGTON, D.C. C-4 BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently effective and, therefore, the Bonds constitute valid and legally binding obligations of the Issuer; (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 Bonds, has been levied and pledged irrevocably for such purposes, within the limit prescribed by law, and the total indebtedness of the Issuer, including the Bonds, does not exceed any constitutional, statutory or other limitations; and (C) Firm banking and financial arrangements have been made for the discharge and final payment of the Refunded Bonds pursuant to the Escrow Agreement, and therefore, the Refunded Bonds are deemed to be fully paid and no longer outstanding except for the purpose of being paid from the funds provided therefor in such Escrow Agreement. THE RIGHTS OF THE OWNERS of the Bonds 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 Bonds is excludable from gross income for federal income tax purposes under existing law; (2) The difference between the amount payable at maturity of each Bond maturing in each of the years through and (collectively, the "Original Issue Discount Bonds"), and the "issue price," within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") of such Bonds is excludable from gross income for federal income tax purposes as original issue discount under existing law; and (3) The Bonds are not "private activity bonds" within the meaning of the Code, and interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Bonds 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 Issuer's Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the Issuer, the Issuer's Financial Advisor and the Underwriters, 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 C-5 of interest on the Bonds for federal income tax purposes. We have further relied on the Report of the Verification Agent regarding the mathematical accuracy of certain computations. If such representations or the Report are determined to be inaccurate or incomplete or the Issuer fails to comply with the foregoing provisions of the Ordinance, interest on the Bonds 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 Bonds in the initial public offering are directed to the discussion entitled "TAX MATTERS - Tax Accounting Treatment of Original Issue Discount Obligations" in the Official Statement prepared for use in connection with the sale of the Bonds for purposes of determining the portion of the original issue discount described in paragraph 2 above which is allocable to the period such Bonds are held by a holder. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Bonds 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 Bonds. Owners of the Bonds 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 Bonds). 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 Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted 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 Bonds as includable in gross income for federal income tax purposes. An