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Home My WebLink AboutMunicipal Property Corporation - Resolutions (21) YNA.C7c-- $15, 750, 000 TOWN OF ORO VALLEY MUNICIPAL PROPERTY CORPORATION REVENUE REFUNDING BONDS, EXCISE TAX C), SERIES 2003 csr\cv,e46 BOND PURCHASE AGREEMENT 0 November 13 , 2003 Town of Oro Valley Municipal Property Corporation Oro Valley, Arizona On the basis of the representations, warranties and covenants contained in this Bond Purchase Agreement and upon the terms and conditions contained herein, the undersigned, on behalf of Stone & Youngberg LLC (the "Underwriter") , hereby offers to enter into the following agreement with the Town of Oro Valley Municipal Property Corporation (the "Corporation") in connection with the purchase and sale of the captioned Bonds (the "Bonds") . Upon the Corporation' s written acceptance of this offer and the execution and delivery by the Town of Oro Valley, Arizona (the "Town") , of the Letter of Representation, dated the date hereof and in the form of Exhibit A hereto (the "Letter of Representation") , this Bond Purchase Agreement will be binding upon the Corporation and upon the Underwriter. This offer is made subject to the Corporation' s written acceptance hereof and subject to the execution and delivery of the Letter of Representation on or before 11 :59 p.m. , MST, on November 13 , 2003 , and, if not so accepted or if the Letter of Representation is not so executed and delivered, this offer will be subject to withdrawal by the Underwriter upon notice delivered to the Corporation at any time prior to the acceptance hereof by the Corporation and execution and delivery of the Letter of Representation. Terms not otherwise defined in this Bond Purchase Agreement shall have the same meanings set forth in the "Indenture" or "Official Statement" (as such terms are defined herein) . The Bonds shall be as described in, and shall be issued and secured under and pursuant to the provisions of a Trust Indenture, dated as of April 1, 1996 (the "Indenture") , as supplemented by a First Supplement to Trust Indenture, dated as of June 1, 1999 (the "First Supplemental Indenture") , by a Second Supplement to Trust Indenture, dated as of April 1, 2001 (the "Second Supplemental Indenture") and by a Third Supplement to Trust Indenture, to be dated as of December 1, 2003 (the "Third Supplemental Indenture" ) (the "Third Supplemental Indenture" and the Indenture as supplemented by the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture, the "Indentures") , between the Corporation and Wells Fargo Bank Arizona, N.A. , as trustee (together with its successors, if any, as trustee under the Indentures, the "Trustee") . Concurrently with the execution of the Third Supplemental Indenture, the Corporation and the Town will enter into a Third Amendment to Lease-Purchase Agreement, to be dated as of December 1, 2003 (the "Third Amendment") , which amends the Lease-Purchase Agreement, dated as of April 1, 1996 (the "1996 Lease-Purchase Agreement") , as amended by the First Amendment to Lease-Purchase Agreement, dated as of June 1, 1999 (the "First Amendment") and the Second Amendment to Lease-Purchase Agreement, dated as of April 1, 2001 (the "Second Amendment" and the 1996 Lease-Purchase Agreement as amended by the First Amendment, the Second Amendment and the Third Amendment, the "Lease-Purchase Agreement") , between the Corporation, as lessor, the Town, as lessee, and the Trustee . The rental payments made by the Town pursuant to the Lease-Purchase Agreement will be used to pay part of the principal of and premium, if any, and interest requirements on the Bonds and other parity bonds issued under the Indentures . The payment of principal of and interest on the Bonds when due will be insured by a financial guaranty insurance policy (the "Bond Insurance Policy") to be issued by Ambac Assurance Corporation (the "Bond Insurer" ) . The Bonds will be offered by means of the Preliminary Official Statement of the Corporation, dated October 3 , 2003 (including the cover page and all appendices, the "Preliminary Official Statement") , relating to the Bonds and the final Official Statement of the Corporation, dated the date of this Bond Purchase Agreement (including the cover page and all appendices, the "Official Statement") , relating to the Bonds . The Town will enter into and deliver a written undertaking, to be dated the date of initial delivery of the Bonds (the "Continuing Disclosure Undertaking") , to provide, or cause to be provided, ongoing disclosure for the benefit of the owners of the Bonds as described in the Continuing Disclosure Undertaking for purposes of Rule 15c2-12 promulgated under the Securities Exchange Act of 1934 (the "Disclosure Rule") . The proceeds of the sale of the Bonds will be deposited with the Trustee, as depository trustee, and used to finance the refunding of certain obligations described in the Official Statement and to pay costs of issuance of the Bonds . The Corporation, the Town and Wells Fargo Bank Arizona, N.A. , as depository trustee (the "Depository Trustee") will execute and deliver a Depository Trust Agreement, to be dated as of December 1, 2003 (the "Depository Trust Agreement") , to accomplish such refunding. (This Bond Purchase Agreement, the Indentures, the Lease-Purchase Agreement, the Depository Trust Agreement, and any and all such other agreements and documents as may be required to be executed, delivered and/or received in order to carry out, give effect to, and consummate the transactions contemplated herein and in the Official Statement are 2 referred to herein as the "Corporation Documents. " The Letter of Representation, the Lease-Purchase Agreement, the Depository Trust Agreement, the Continuing Disclosure Undertaking and any and all such other agreements and documents as may be required to be executed, delivered and/or received in order to carry out, give effect to, and consummate the transactions contemplated herein and in the Official Statement are referred to herein as the "Town Documents. ") 1 . Purchase and Sale of the Bonds. (a) The Underwriter hereby agrees to purchase from the Corporation, and the Corporation hereby agrees to sell and deliver to the Underwriter, all, but not less than all, of the Bonds . Inasmuch as this purchase and sale represents a negotiated transaction, the Corporation understands, and hereby confirms, that the Underwriter is not acting as a fiduciary or agent of the Corporation, but rather is acting solely in its capacity as Underwriter for its own account . The Underwriter has been duly authorized to execute this contract and to act hereunder. (b) The principal amount of the Bonds to be issued, the dated date therefor, the maturities and optional redemption provisions and interest rates per annum are set forth in Schedule 1 hereto. (c) The purchase price for the Bonds shall be $15, 815, 688 . 85 (the "Purchase Price" ) plus interest accrued on the Bonds from the dated date of the Bonds to the Closing Date (as such term is hereinafter defined) . The Purchase Price represents : Par amount of Bonds $15, 750, 000 . 00 Net Original Issue Premium 172, 001 .35 (Underwriter' s Discount) 106, 312 . 50 Purchase Price $15, 815, 688 . 85 For the convenience of the Corporation, the Underwriter will, at or before the time of Closing, pay on behalf of the Corporation $90, 587 . 66 to the Bond Insurer as payment of the bond insurance premium for the Bond Insurance Policy on the Bonds, resulting in a net amount to be paid by the Underwriter to the Corporation at the time of Closing of $15, 725, 101 . 19, plus such accrued interest . 2 . Public Offering. The Underwriter intends to make a bona fide public offering of the Bonds at the offering prices or yields set forth in Schedule 1, and based upon those initial offering prices or yields, the Underwriter would receive compensation of $106, 312 .50; however, the Underwriter may offer a portion of the Bonds for sale to selected dealers who are members of the National Association of Securities Dealers, Inc . and who agree to resell the Bonds to the public on terms consistent with this Bond Purchase Agreement and the Underwriter reserves the right to change such offering prices or yields as the Underwriter shall deem necessary in connection with the marketing of the Bonds and to offer and sell the Bonds to certain dealers (including dealers depositing the Bonds into investment 3 trusts) and others at prices lower than the initial offering prices or atY ields higher than the initial yields set forth in Schedule 1 and in the Official Statement . The Underwriter also reserves the right to over-allot or effect transactions that stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market and to discontinue such stabilizing, if commenced, at any time. None of such activities shall affect the principal amounts, maturity dates, interest rates, redemption or other provision of the Bonds or the amount to be paid by the Underwriter to the Corporation for the Bonds . 3 . The Official Statement. (a) The Preliminary Official Statement has been prepared for use in connection with the public offering, sale and distribution of the Bonds by the Underwriter. The Corporation hereby deems the Preliminary Official Statement "final" as of its date for purposes of the Disclosure Rule, except for the omission of such information which is dependent upon the final pricing of the Bonds for completion, all as permitted to be excluded by Section (b) (1) of the Disclosure Rule . (b) The Corporation hereby authorizes the Official Statement and the information therein contained to be used by the Underwriter in connection with the public offering and the sale of the Bonds . The Corporation consents to the use by the Underwriter prior to the date hereof of the Preliminary Official Statement in connection with the public offering of the Bonds . The Corporation shall provide, or cause to be provided, to the Underwriter as soon as practicable after the date of the Corporation' s acceptance of this Bond Purchase Agreement (but, in any event, not later than within seven (7) business days after the Corporation' s acceptance of this Bond Purchase Agreement and in sufficient time to accompany any confirmation that requests payment from any customer) copies of the Official Statement which is complete as of the date of its delivery to the Underwriter in such quantity as the Underwriter shall request in order for the Underwriter to comply with Section (b) (4) of the Disclosure Rule and the rules of the Municipal Securities Rulemaking Board. (c) I f, after the date of this Bond Purchase Agreement to and including the date the Underwriter is no longer required to provide an Official Statement to potential customers who request the same pursuant to the Disclosure Rule (the earlier of (i) 90 days from the "end of the underwriting period" (as defined in Rule) and (ii) the time when the Official Statement is available to any person from a nationally recognized municipal securities repository, but in no case less than 25 days after the "end of the underwriting period" for the Bonds) , the Corporation becomes aware of any fact or event which might or would cause the Official Statement, as then supplemented or amended, to contain any untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements therein, not misleading, or if it is necessary to amend or supplement the Official Statement to comply with law, the Corporation will notify the Underwriter (and for the purposes of this 4 clausep rovide the Underwriter with such information as it may from time to time request) , and if, in the opinion of the Underwriter, such fact or event requires preparation and publication of a supplement or amendment to the Official Statement, the Corporation will forthwith prepare and furnish, at the Corporation' s own expense (in a form and manner approved by the Underwriter) , a reasonable number of copies of either amendments or supplements to the Official Statement so that the statements in the Official Statement as so amended and supplemented will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or so that the Official Statement will comply with law. If such notification shall be subsequent to the Closing, the Corporation shall furnish such legal opinions, certificates, instruments and other documents as the Underwriter may deem necessary to evidence the truth and accuracy of such supplement or amendment to the Official Statement . (d) The Underwriter hereby agrees to file the Official Statement with a nationally recognized municipal securities information repository. Unless otherwise notified in writing by the Underwriter, the Corporation can assume that the "end of the underwriting period" for purposes of the Rule is the date of the Closing. 4 . Representations, Warranties, and Covenants of the Corporation. The undersigned, on behalf of the Corporation, but not individually, hereby, as applicable, represents and warrants to and covenants with the Underwriter that : (a) The Corporation is a nonprofit corporation duly created, organized and existing under the laws of the State of Arizona (the "State") and has full legal right, power and authority, and at the date of the Closing will have full legal right, power and authority (i) to enter into, execute and deliver the Corporation Documents, (ii) to sell, issue and deliver the Bonds to the Underwriter as provided herein, and (iii) to carry out and consummate the transactions contemplated by the Corporation Documents and the Official Statement, and the Corporation has complied, and will at the Closing be in compliance in all respects, with the terms of the Corporation Documents as they pertain to such transactions; (b) By all necessary official action of the Corporation prior to or concurrently with the acceptance hereof, the Corporation has duly authorized all necessary action to be taken by it for (i) the execution and delivery of the Corporation Documents and the issuance and sale of the Bonds, (ii) the approval, execution and delivery of, and the performance by the Corporation of the obligations on its part, contained in the Bonds and the Corporation Documents and (iii) the consummation by it of all other transactions contemplated by the Official Statement and the Corporation Documents . (c) The Corporation Documents constitute legal, valid and binding obligations of the Corporation, enforceable in accordance with 5 their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors ' rights; the Bonds, when issued, delivered and paid for, in accordance with the Indentures and this Bond Purchase Agreement, will constitute legal, valid and binding obligations of the Corporation entitled to the benefits of the Indentures and enforceable in accordance with their terms, subject to bankruptcy insolvency, reorganization, moratorium and other similar laws and principles of equity relating to or affecting the enforcement of creditors ' rights; upon the issuance, authentication and delivery of the Bonds as aforesaid, the Indentures will provide, for the benefit of the holders, from time to time, of the Bonds, the legally valid and binding pledge of and lien it purports to create as set forth in the Indentures; (d) The Corporation is not in breach of or default in any material respect under any applicable constitutional provision, law or administrative regulation of the State or the United States or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Corporation is a party or to which the Corporation is or any of its property or assets are otherwise subject, and no event has occurred and is continuing which constitutes or with the passage of time or the giving of notice, or both, would constitute a default or event of default by the Corporation under any of the foregoing; and the execution and delivery of the Bonds and the Corporation Documents and compliance with the provisions on the Corporation' s part contained therein, will not conflict with or constitute a breach of or default under any constitutional provision, administrative regulation, judgment, decree, loan agreement, indenture, bond, note, resolution, agreement or other instrument to which the Corporation is a party or to which the Corporation is or to which any of its property or assets are otherwise subject nor will any such execution, delivery, adoption or compliance result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Corporation to be pledged to secure the Bonds or under the terms of any such law, regulation or instrument, except as provided by the Bonds and the Indentures; (e) All authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matter which are required for the due authorization of, which would constitute a condition precedent to, or the absence of which would materially adversely affect the due performance by the Corporation of its obligations under the Corporation Documents and the Bonds have been duly obtained, except for such approvals, consents and orders as may be required under the "blue sky" or securities laws of any jurisdiction in connection with the offering and sale of the Bonds; (f) The Bonds conform to the descriptions thereof contained in the Official Statement under the captions "THE SERIES 2003 BONDS; " the Indentures and the Lease-Purchase Agreement conform 6 to the descriptions thereof contained in the Official Statement under the captions "THE SERIES 2003 BONDS, " and APPENDIX A - "SUMMARIES OF THE PRINCIPAL DOCUMENTS; " and the proceeds of the sale of the Bonds will be applied generally as described in the Official Statement; (g) There is no legislation, action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, public board or body, pending or threatened against the Corporation, affecting the existence of the Corporation or the titles of its officers to their respective offices, or affecting or seeking to prohibit, restrain or enjoin the sale, issuance or delivery of the Bonds or the collection of payments promised for the payment of principal of and interest on the Bonds pursuant to the Indentures or in any way contesting or affecting the validity or enforceability of the Bonds, the Corporation Documents, or contesting the exclusion from gross income of interest on the Bonds for federal income tax purposes or State income tax purposes, or contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement or any supplement or amendment thereto, or contesting the powers of the Corporation or any authority for the issuance of the Bonds or the execution and delivery of the Corporation Documents, nor is there any basis therefor, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Bonds or the Corporation Documents; (h) As of the date thereof, the Preliminary Official Statement did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (i) At the time of the Corporation' s acceptance hereof and (unless the Official Statement is amended or supplemented pursuant to paragraph (d) of Section 3 of this Bond Purchase Agreement) at all times subsequent thereto during the period up to and including the date of Closing, the Official Statement does not and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (j ) If the Official Statement is supplemented or amended pursuant to paragraph (d) of Section 3 of this Bond Purchase Agreement, at the time of each supplement or amendment thereto and (unless subsequently again supplemented or amended pursuant to such paragraph) at all times subsequent thereto during the period up to and including the date of Closing the Official Statement as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which made, not misleading; 7 (k) The Corporation will apply, or cause to be applied, the proceeds from the sale of the Bonds as provided in and subject to all of the terms and provisions of the Indentures and will not take or omit to take any action which action or omission will adversely affect the exclusion from gross income for federal income tax purposes or State income tax purposes of the interest on the Bonds; (1) The Corporation will furnish such information and execute such instruments and take such action in cooperation with the Underwriter as the Underwriter may reasonably request (A) to (y) qualify the Bonds for offer and sale under the "blue sky" or other securities laws and regulations of such states and other jurisdictions in the United States as the Underwriter may designate and (z) determine the eligibility of the Bonds for investment under the laws of such states and other jurisdictions and (B) to continue such qualifications in effect so long as required for the distribution of the Bonds (provided, however, that the Corporation will not be required to qualify as a foreign corporation or to file any general or special consents to service of process under the laws of any jurisdiction) and will advise the Underwriter immediately of receipt by the Corporation of any notification with respect to the suspension of the qualification of the Bonds for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; (m) The financial statements of, and other financial information regarding, the Town in the Official Statement fairly present the financial position and results of the Town as of the dates and for the periods therein set forth. Prior to the Closing, there will be no adverse change of a material nature in such financial position, results of operations or condition, financial or otherwise, of the Town, and to the Town is not a party to any litigation or other proceeding pending or threatened which, if decided adversely to the Town, would have a materially adverse effect on the financial condition of the Town; (n) Prior to the Closing, the Corporation will not offer or issue any bonds, notes or other obligations for borrowed money or incur any material liabilities, direct or contingent, payable from or secured by any of the revenues or assets which will secure the Bonds without the prior approval of the Underwriter; and (o) Any certificate, signed by any official of the Corporation authorized to do so in connection with the transactions contemplated by this Bond Purchase Agreement, shall be deemed a representation and warranty by the Corporation to the Underwriter as to the statements made therein. 5 . Closing. (a) At 8 : 00 a.m. MST time, on December 18, 2003 , or at such other time and date as shall have been mutually agreed upon by the Corporation and the Underwriter (the "Closing") , the Corporation will, subject to the terms and conditions hereof, deliver the Bonds to 8 the Underwriter in the aggregate principal amount of each such maturity duly executed and authenticated, together with the other documents hereinafter mentioned, and the Underwriter will, subject to the terms and conditions hereof, accept such delivery and pay the purchase price of the Bonds as set forth in Section 1 of this Bond Purchase Agreement by a certified or bank cashier' s check or checks or wire transfer payable in immediately available funds to the order of the Corporation. Payment for the Bonds as aforesaid shall be made at the offices of Gust Rosenfeld, P.L.C. , "Bond Counsel" or such other place as shall have been mutually agreed upon by the Corporation and the Underwriter. (b) Delivery of the Bonds shall be made through the facilities of The Depository Trust Company, New York, New York. The Bonds shall be delivered in definitive fully registered form, bearing CUSIP numbers without coupons, with one Bond for each maturity of the Bonds, all as provided in the Third Supplemental Indenture, and shall be made available to the Underwriter at least one business day before the Closing for purposes of inspection. 6 . Closing Conditions. The Underwriter has entered into this Bond Purchase Agreement in reliance upon the representations, warranties and covenants of the Corporation contained herein and to be contained in the documents and instruments to be delivered at the Closing and upon the performance by the Corporation of its obligations hereunder, both as of the date hereof and as of the date of the Closing. Accordingly, the Underwriter' s obligations under this Bond Purchase Agreement to purchase, to accept delivery of and to pay for the Bonds shall be conditioned upon the performance by the Corporation of its obligations to be performed hereunder and under such documents and instruments, and the performance by the Town of its obligations to be performed hereunder and under the Letter of Representation and under such documents and instruments, at or prior to the Closing, and shall also be subject to the following additional conditions, including the delivery by the Corporation and the Town of such documents as are enumerated herein, in form and substance reasonably satisfactory to the Underwriter: (a) The representations and warranties of the Corporation contained herein and of the Town in the Letter of Representation shall be true, complete and correct on the date hereof and on and as of the date of the Closing, as if made on the date of the Closing; (b) The Corporation and the Town each shall have performed and complied with all agreements and conditions required by this Bond Purchase Agreement to be performed or complied with by it prior to or at the Closing; (c) At the time of the Closing, (i) the Corporation Documents, the Town Documents and the Bonds shall be in full force and effect in the form heretofore approved by the Underwriter and shall not have been amended, modified or supplemented, and the Official Statement shall not have been supplemented or amended, except in any 9 such case as may have been agreed to by the Underwriter, and (ii) all actions of the Corporation and of the Town required to be taken by the Corporation shall be performed in order for Bond Counsel and Greenberg Traurig, LLP, "Counsel to the Underwriter, " to deliver their respective opinions referred to hereafter; (d) At the time of the Closing, all official action of the Corporation relating to the Bonds and the Corporation Documents and all official action of the Town relating to the Town Documents shall be in full force and effect and shall not have been amended, modified or supplemented; (e) At or prior to the Closing, the Corporation Documents shall have been duly executed and delivered by the Corporation, the Town Documents shall have been duly executed by the Town, and the Corporation shall have duly executed and delivered, and the Trustee shall have duly authenticated, the Bonds; (f) At or prior to the Closing, the Bond Insurance Policy shall have been duly executed, issued and delivered by the Bond Insurer; (g) At the time of the Closing, there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or in the revenues or operations of the Town, from that set forth in the Official Statement that in the judgment of the Underwriter, is material and adverse and that makes it, in the judgment of the Underwriter, impracticable to market the Bonds on the terms and in the manner contemplated in the Official Statement; (h) Neither the Corporation nor the Town shall have failed to pay principal or interest when due on any of its outstanding obligations for borrowed money; (i) All steps to be taken and all instruments and other documents to be executed, and all other legal matters in connection with the transactions contemplated by this Bond Purchase Agreement shall be reasonably satisfactory in legal form and effect to the Underwriter; (j ) At or prior to the Closing, the Underwriter shall have received copies of each of the following documents : (1) the Official Statement, and each supplement or amendment thereto, if any, executed on behalf of the Corporation by its President and on behalf of the Town by its Mayor, or such other officials as may have been agreed to by the Underwriter, and the reports and audits referred to or appearing in the Official Statement; (2) the Corporation Documents and the Town Documents with such supplements or amendments as may have been agreed to by the Underwriter as well as a specimen of the Bonds and the resolutions of 10 the Mayor and Council of the Town and the Board of Directors of the Corporation approving the same; (3) the approving opinion of Bond Counsel with respect to the Bonds, in substantially the form attached to the Official Statement; (4) a supplemental opinion of Bond Counsel addressed to the Underwriter, substantially to the effect that : (i) the Corporation Documents and the Town Documents have each been duly approved and the execution and deliver thereof duly authorized by all necessary actions and are each in full force and effect and are legal, valid and binding obligations of the respective parties thereto; (ii) the Bonds are exempted securities under the Securities Act of 1933 , as amended (the "1933 Act" ) , and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act" ) and it is not necessary, in connection with the offering and sale of the Bonds, to register the Bonds under the 1933 Act or to qualify the Indentures under the Trust Indenture Act; (iii) the statements and information contained in the Official Statement on the cover page thereof, under the captions "INTRODUCTORY STATEMENT, " "THE SERIES 2003 BONDS, " "PLAN OF REFUNDING, " "SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS, " "LEGAL MATTERS, " "TAX EXEMPTION, " "BOND PREMIUM, " "ORIGINAL ISSUE DISCOUNT, " "POLITICAL CONTRIBUTIONS, " "RELATIONSHIPS AMONG PARTIES" and "CONTINUING DISCLOSURE" therein and in APPENDIX D - "SUMMARIES OF THE PRINCIPAL DOCUMENTS, " APPENDIX E - "FORM OF APPROVING LEGAL OPINION" and APPENDIX F - "FORM OF CONTINUING DISCLOSURE CERTIFICATE" thereto fairly and accurately summarized the matters purported to be summarized therein; and (iv) based on the examinations which they have made as Bond Counsel and their participation at conferences at which the Official Statement was discussed, but without having undertaken to determine independently the accuracy or completeness of the statements in the Official Statement other than those described in subparagraph (iii) of this subsection above, such counsel has no reason to believe that the Official Statement as of its date and as of the date hereof contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for any financial, forecast, technical and statistical data included in the Official Statement and except for information regarding the Bond Insurer, in each case as to which no view need be expressed) ; (5) an opinion, dated the date of the Closing and addressed to the Underwriter, of Counsel to the Underwriter, to the effect that based upon their participation in the preparation of the Official Statement as Counsel to the Underwriter and their 11 participation at conferences at which the Official Statement was discussed, but without having undertaken to determine independently the accuracy, completeness or fairness of the statements contained in the Official Statement, such counsel has no reason to believe that the Official Statement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for (a) any financial, forecast, technical and statistical statements and data included in the Official Statement and the information regarding the Bond Insurer and (b) the statements and information contained in the Official Statement on the cover page and under the captions and in the appendices described in subparagraph 4 (iii) above, in each case as to which no view need be expressed) ; (6) an opinion of counsel to the Corporation and the Town, addressed to the Underwriter, to the effect that : (i) the Corporation is a nonprofit corporation, duly incorporated, organized and existing under the laws of the State, and has full legal right, power and authority (A) to enter into, execute and deliver the Corporation Documents, (B) to sell, issue and deliver the Bonds to the Underwriter as provided herein, and (C) to carry out and consummate the transactions contemplated by the Corporation Documents and the Official Statement, and the Corporation has complied, and will at the Closing be in compliance in all respects, with the terms of the Corporation Documents as they pertain to such transactions; (ii) the Town is a municipal corporation, duly incorporated, organized and existing under the laws of the State, and has full legal right, power and authority (A) to enter into, execute and deliver the Town Documents and (B) to carry out and consummate the transactions contemplated by the Town Documents, and the Official Statement, and the Town has complied, and will at Closing be in compliance in all respects, with the terms of the Town Documents as they pertain to such transactions; (iii) by all necessary official action of the Corporation prior to or concurrently with the acceptance hereof, the Corporation has duly authorized all necessary action to be taken by it for (A) the approval, execution and delivery of, and the performance by the Corporation of the obligations on its part, contained in the Bonds and the Corporation Documents and (B) the consummation by it of all other transactions contemplated by the Official Statement and the Corporation Documents; (iv) by all necessary official action of the Town prior to or concurrently with the acceptance hereof, the Town has duly authorized all necessary action to be taken by it for (A) the approval execution and delivery of, and performance by the Town of the obligations on its part, contained in the Town Documents, and (B) the consummation by it of all of the transactions contemplated by the Town Documents and the Official Statement; 12 (v) all proceedings pertinent to the validity and enforceability of the Bonds and all actions necessary to levy and collect the Excise Taxes securing the payment of principal and interest on the Bonds have been duly and validly adopted or undertaken in compliance with all applicable procedural requirements of the Corporation and the Town and in compliance with the Constitution and laws of the State; (vi) the Corporation Documents have been duly authorized, executed and delivered by the Corporation, and constitute legal, valid and binding obligations of the Corporation enforceable against the Corporation in accordance with their respective terms, except to the extent limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws and equitable principles of general application relating to or affecting the enforcement of creditors ' rights; (vii) the Town Documents have been duly authorized, executed and delivered by the Town, and constitute legal, valid and binding obligations of the Town enforceable against the Town in accordance with their respective terms, except to the extent limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws and equitable principles of general application relating to or affecting the enforcement of creditors ' rights; (viii) the distribution, use and execution, as applicable, of the Preliminary Official Statement and the Official Statement has been duly authorized by the Corporation and the Town and the Official Statement, as it relates to the Town and the Corporation, does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; (ix) all authorizations, approvals, licenses, permits, consents and orders of any governmental authority, legislative body, board, agency or commission having jurisdiction of the matter which are required for the due authorization of, which would constitute a condition precedent to, or the absence of which would materially adversely affect the due performance by the Corporation of its obligations under the Corporation Documents and the Bonds or by the Town of its obligations under the Town Documents have been obtained; (x) there is no legislation, action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, government agency, public board or body, pending or, to the best knowledge of the signer, after due inquiry threatened against the Corporation, affecting the corporate existence of the Corporation or the titles of its officers to their respective offices, or to the best knowledge of the signer, after due inquiry, threatened against the Town or affecting the titles of its officers to their respective offices, or affecting or seeking to prohibit, restrain or enjoin the 13 sale, issuance or delivery of the Bonds or the levy and collection of the Excise Taxes securing the payment of principal of and interest on the Bonds pursuant to the Indentures or in any way contesting or affecting the validity or enforceability of the Bonds, the Corporation Documents, the Town Documents, or contesting the exclusion from gross income of interest on the Bonds for federal income tax purposes or State income tax purposes, or contesting in any way the completeness or accuracy of the Preliminary Official Statement or the Official Statement or any supplement or amendment thereto, or contesting the powers of the Corporation or any authority for the issuance of the Bonds or the execution and delivery of the Corporation Documents or contesting the power of the Town to execute and deliver the Town Documents, nor, to the best knowledge of the signer, after due inquiry, is there any basis therefor, wherein an unfavorable decision, ruling or finding would materially adversely affect the validity or enforceability of the Bonds, or the Corporation Documents, or to the knowledge of the Town, the Town Documents; (xi) the execution and delivery of the Corporation Documents and compliance by the Corporation with the provisions hereof and thereof, under the circumstances contemplated herein and therein, will not conflict with or constitute on the part of the Corporation a material breach of or a default under any agreement or instrument to which the Corporation is a party, or violate any existing law, administrative regulation, court order, or consent decree to which the Corporation is subject; and (xii) the execution and delivery of the Town Documents and compliance by the Town with the provisions thereof, under the circumstances contemplated therein, will not conflict with or constitute on the part of the Town a material breach or a default under any agreement or instrument to which the Town is a party, or violate any existing law, administrative regulation, court order, or consent decree to which the Town is subject; (7) a certificate, dated the date of Closing, of appropriate representatives of the Corporation to the effect that (i) the representations and warranties of the Corporation contained herein are true and correct in all material respects on and as of the date of the Closing as if made on the date of Closing all the agreements and covenants have been complied with and all the conditions satisfied which on its part were to be complied with be performed or satisfied at or prior to, and to the extent possible before, the Closing; (ii) no litigation or proceeding is pending or, to the best knowledge of the signer (s) after due inquiry, threatened in any court or administrative body nor is there a basis for litigation which would a) contest the right of the members or officials of the Corporation to hold and exercise their respective positions, (b) contest the due incorporation, organization and valid existence of the Corporation, c) contest the validity, due authorization and execution of the Bonds or the Corporation Documents or (d) attempt to limit, enjoin or otherwise restrict or prevent the Corporation from functioning and collecting Rental Payments under the Corporation Documents, and other 14 income; (iii) the resolutions of the Corporation authorizing the execution, delivery and/or performance of the Official Statement, the Bonds and the Corporation Documents have been duly adopted by the Corporation, are in full force and effect and have not been modified, amended or repealed, and (iv) to the best knowledge of the signer (s) , after due inquiry, no event has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purpose for which it is to be used or which it is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which made, not misleading in any respect as of the time of Closing, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the date of the Closing does not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading; (8) a certificate, dated the date of Closing, of appropriate representatives of the Town to the effect that (i) the representations and warranties of the Corporation contained herein are true and correct in all material respects on and as of the date of the Closing as if made on the date of the Closing all the agreements and covenants have been complied with and all the conditions satisfied which on its part were to be complied with be performed or satisfied at or prior to, and to the extent possible before, the Closing; (ii) no litigation or proceeding against it is pending or, to the best knowledge of the signer (s) after due inquiry, threatened in any court or administrative body nor is there a basis for litigation which would (a) contest the right of the officials of the Town to hold and exercise their respective positions, (b) contest the due incorporation, organization and valid existence of the Town, (c) contest the validity, due authorization and execution of the Town Documents, or (d) attempt to limit, enjoin or otherwise restrict or prevent the Town from functioning and collecting revenues, including the collection of the Excise Taxes securing the payment of the principal of and interest on the Bonds; (iii) the resolutions of the Town authorizing the execution, delivery and/or performance of the Town Documents have been duly adopted by the Town, are in full force and effect and have not been modified, amended or repealed, and (iv) to the best knowledge of the signer (s) , after due inquiry, no event has occurred since the date of the Official Statement which should be disclosed in the Official Statement for the purposes for which it is to be used or which is necessary to disclose therein in order to make the statements and information therein, in light of the circumstances under which made, not misleading in any respect as of the time of Closing, and the information contained in the Official Statement is correct in all material respects and, as of the date of the Official Statement did not, and as of the date of the Closing does not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements 15 made therein, in the light of the circumstances under which they were made, not misleading; (9) a certificate, dated the date of Closing, of appropriate representations of the Town and the Corporation in form and substance satisfactory to Bond Counsel and Counsel to the Underwriter (b) setting forth the facts, estimates and circumstances in existence on the date of the Closing, which establish that it is not expected that the proceeds of the Bonds will be used in a manner that would cause the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended (the "Code") , and any applicable regulations (whether final, temporary or proposed) , issued pursuant to the Code, and (c) certifying that to the best of the knowledge and belief of the Corporation and the Town there are no other facts, estimates or circumstances that would materially change the conclusions, representations and expectations contained in such certificate; (10) a certificate, dated the date of Closing, of the Trustee and the Depository Trustee to the effect that (i) the Bonds have been duly authenticated by an authorized officer of the Trustee; (ii) the Third Supplemental Indenture and the Depository Trust Agreement have been duly executed and delivered by an authorized officer of the Trustee and the Depository Trustee, respectively; and (iii) the resolutions of the Trustee and the Depository Trustee authorizing the execution and delivery and/or performance of the Third Supplemental Indenture by the Trustee and the Depository Trust Agreement by the Depository Trustee, respectively, have been duly adopted by the Trustee and the Depository Trustee, respectively, are in full force and effect and have not been modified, amended or repealed; (11) the filing copy of the Report of Bond and Security Issuance Pursuant to A.R.S . § 35-501B of the Arizona Department of Revenue for the Bonds; (12) the filing copy of the Information Return Form 8038-G (IRS) for the Bonds; (13) evidence that Standard & Poor' s Ratings Services, a division of the McGraw-Hill Companies, and Fitch Ratings have issued ratings of "AAA" and "AAA" , respectively, for the Bonds based on issuance of the Bond Insurance Policy and underlying, uninsured ratings of "A" and "A+" , respectively, for the Bonds (collectively, the "Ratings" ) , and that the Ratings are then in effect; (14) a copy of the Bond Insurance Policy together with an opinion of counsel to the Bond Insurer in form and substance satisfactory to the Underwriter; (15) a certificate of Bond Insurer with respect to the accuracy of statements contained in the Official Statement regarding 16 the Bond Insurance Policy and Bond Insurer and the due authorization execution issuance and delivery of the Bond Insurance Policy; (16) any other certificates and opinions required by the Indentures for the issuance thereunder of the Bonds; and (17) such additional legal opinions, certificates, instruments and other documents as the Underwriter or Counsel to the Underwriter may reasonably request to evidence the troth and accuracy, as of the date hereof and as of the date of the Closing, of the Corporation' s representations and warranties contained herein and of the Town' s representations and warranties in the Letter of Representation and of the statements and information contained in the Official Statement and the due performance or satisfaction by the Corporation and the Town on or prior to the date of the Closing of all the respective agreements then to be performed and conditions then to be satisfied by the Corporation and the Town, respectively; All of the opinions, letters, certificates, instruments and other documents mentioned above or elsewhere in this Bond Purchase Agreement shall be deemed to be in compliance with the provisions hereof if, but only if, they are in form and substance satisfactory to the Underwriter. If the Corporation shall be unable to satisfy the conditions to the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds contained in this Bond Purchase Agreement, or if the obligations of the Underwriter to purchase, to accept delivery of and to pay for the Bonds shall be terminated for any reason permitted by this Bond Purchase Agreement, this Bond Purchase Agreement shall terminate and neither the Underwriter nor the Corporation shall be under any further obligation hereunder, except that the respective obligations of the Corporation and the Underwriter set forth in Sections 4 and 8 (c) hereof shall continue in full force and effect . 7 . Termination. The Underwriter shall have the right to cancel its obligation to purchase the Bonds if, between the date of this Bond Purchase Agreement and the Closing, the market price or marketability of the Bonds shall be materially adversely affected, in the sole judgment of the Underwriter, by the occurrence of any of the following: (a) legislation shall be enacted by or introduced in the Congress of the United States or recommended to the Congress for passage by the President of the United States, or the Treasury Department of the United States or the Internal Revenue Service or any member of the Congress or the Arizona Legislature or favorably reported for passage to either House of the Congress by any committee of such House to which such legislation has been referred for consideration, a decision by a court of the United States or of the State or the United States Tax Court shall be rendered, or an order, ruling, regulation (final, temporary or proposed) , press release, 17 statement or other form of notice by or on behalf of the Treasury Department of the United States, the Internal Revenue Service or other governmental agency shall be made or proposed, the effect of any or all of which would be to impose, directly or indirectly, federal income taxation or State income taxation upon interest received on obligations of the general character of the Bonds or, with respect to State taxation, of the interest on the Bonds as described in the Official Statement, or other action or events shall have transpired which may have the purpose or effect, directly or indirectly, of changing the federal income tax consequences or State income tax consequences of any of the transactions contemplated herein; (b) legislation introduced in or enacted (or resolution passed) by the Congress or an order, decree, or injunction issued by any court of competent jurisdiction, or an order, ruling, regulation (final, temporary, or proposed) , press release or other form of notice issued or made by or on behalf of the Securities and Exchange Commission, or any other governmental agency having jurisdiction of the subject matter, to the effect that obligations of the general character of the Bonds, including any or all underlying arrangements, are not exempt from registration under or other requirements of the 1933 Act, or that the Indentures are not exempt from qualification under or other requirements of the Trust Indenture Act, or that the issuance, offering, or sale of obligations of the general character of the Bonds, including any or all underlying arrangements, as contemplated hereby or by the Official Statement or otherwise, is or would be in violation of the federal securities law as amended and then in effect; (c) any state blue sky or securities commission or other governmental agency or body shall have withheld registration, exemption or clearance of the offering of the Bonds as described herein, or issued a stop order or similar ruling relating thereto; (d) a general suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange, the establishment of minimum prices on either such exchange, the establishment of material restriction (not in force as of the date hereof) upon trading securities generally by any governmental authority or any national securities exchange, a general banking moratorium declared by federal, State of New York, or State officials authorized to do so; (e) the New York Stock Exchange or other national securities exchange or any governmental authority, shall impose, as to the Bonds or as to obligations of the general character of the Bonds, any material restrictions not now in force, or increase materially those now in force, with respect to the extension of credit by, or the charge to the net capital requirements of, underwriters; (f) any amendment to the federal or state Constitution or action by any federal or state court, legislative body, regulatory body, or other authority materially adversely affecting the tax status 18 of the Corporation, its property, income securities (or interest thereon) , or the validity or enforceability of the assessments or the levy of taxes to pay principal of and interest on the Bonds; (g) any event occurring, or information becoming known which, in the judgment of the Underwriter, makes untrue in any material respect any statement or information contained in the Official Statement, or has the effect that the Official Statement contains any untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (h) there shall have occurred since the date of this Bond Purchase Agreement any materially adverse change in the affairs or financial condition of the Corporation or the Town; (i) the United States shall have become engaged in hostilities which have resulted in a declaration of war or a national emergency or there shall have occurred any other outbreak or escalation of hostilities or a national or international calamity or crisis, financial or otherwise; (j ) any fact or event shall exist or have existed that, in the Underwriters judgment, requires or has required an amendment of or supplement to the Official Statement; (k) there shall have occurred any downgrading, or any notice shall have been given of (A) any intended or potential downgrading or (B) any review or possible change that does not indicate a possible upgrade, in the rating accorded any of the Corporation' s obligations; (1) United States Treasury Certificate of Indebtedness, Notes or Bonds-State and Local Government Series or acceptable open market securities shall be unavailable for purchase and/or delivery in the amounts, maturities and prices or yields required pursuant to the Depository Trust Agreement or (m) the purchase of and payment for the Bonds by the Underwriter, or the resale of the Bonds by the Underwriter, on the terms and conditions herein provided shall be prohibited by any applicable law, governmental authority, board, agency or commission. 8 . Expenses. (a) The Underwriter shall be under no obligation to pay, and the Corporation shall pay, any expenses incident to the performance of the Corporation' s obligations hereunder, including, but not limited to (i) the costs for initial delivery of the Bonds through the facilities of The Depository Trust Company, (ii) the fees and disbursements of Bond Counsel, Counsel to the Underwriter and Counsel to the Corporation and the Town; (iii) the fees and disbursements of 19 the Trustee and any other engineers, accountants, and other experts, consultants or advisers retained by the Corporation; (iv) reimbursement of certain out-of-pocket expenses of the Underwriter customarily paid by the Corporation, including advertisement in local media, and (v) the fees for bond ratings and credit enhancement fees or premiums . (b) The Underwriter shall pay (i) all advertising expenses placed in non-local media by the Underwriter in connection with the public offering of the Bonds; and (ii) all other expenses incurred by them in connection with the public offering of the Bonds, except the fees and disbursements of Counsel to the Underwriter. (c) If this Bond Purchase Agreement shall be terminated by the Underwriter because of any failure or refusal on the part of the Corporation to comply with the term or to fulfill any of the conditions of this Bond Purchase Agreement, or if for any reason the Corporation shall be unable to perform its obligations under this Bond Purchase Agreement, the Corporation will reimburse the Underwriter for all out-of-pocket reasonably incurred by the Underwriter in connection with this Bond Purchase Agreement or the offering contemplated hereunder. 9 . Notices. Any notice or other communication to be given to the Corporation under this Bond Purchase Agreement may be given by delivering the same in writing to the Town of Oro Valley Municipal Property Corporation, 11000 North La Canada Drive, Oro Valley, Arizona 85737, and any notice or other communication to be given to the Underwriter under this Bond Purchase Agreement may be given by delivering the same in writing to Stone & Youngberg LLC, Suite 280 , 2555 East Camelback Road, Phoenix, Arizona 85016, Attention: Mark Reader, Director. 10 . Parties in Interest. This Bond Purchase Agreement as heretofore specified shall constitute the entire agreement between us and is made solely for the benefit of the Corporation, the Town and the Underwriter (including successors or assigns of the Underwriter) and no other person shall acquire or have any right hereunder or by virtue hereof . This Bond Purchase Agreement may not be assigned by the Corporation. All of the Corporation' s representations, warranties and agreements contained in this Bond Purchase Agreement shall remain operative and in full force and effect, regardless of (i) any investigations made by or on behalf of any of the Underwriter; (ii) delivery of and payment for the Bonds pursuant to this Bond Purchase Agreement; and (iii) any termination of this Bond Purchase Agreement . 11 . Effectiveness. This Bond Purchase Agreement shall become effective upon the acceptance hereof by the Corporation and shall be valid and enforceable at the time of such acceptance. As required by the provisions of Section 38-511, Arizona Revised Statutes, as amended, notice is hereby given that the State, its political subdivisions (including the Town) or any department or agency of either may, within three years after its execution, cancel any 20 contract, without penalty or further obligation, made by the State, its political subdivisions, or any of the departments or agencies of either if any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of the State, its political subdivisions, or any of the departments or agencies of either is, at any time while the contract or any extension of the contract is in effect, an employee or agent of any other party to the contract in any capacity or a consultant to any other party of the contract with respect to the subject matter of the contract . The cancellation shall be effective when written notice from the Governor or the chief executive officer or governing body of the political subdivision is received by all other parties to the contract unless the notice specifies a later time . The State, its political subdivisions or any department or agency of either may recoup any fee or commission paid or due to any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of the State, its political subdivisions or any department or agency of either from any other party to the contract arising as the result of the contract . This section is not intended to expand or enlarge the rights of the Town hereunder except as required by such Section. Each of the parties hereto hereby certifies that it is not presently aware of any violation of such Section which would adversely affect the enforceability of this Agreement and covenants that it shall take no action which would result in a violation of such Section. 12 . Choice of Law. This Bond Purchase Agreement shall be governed by and construed in accordance with the law of the State. 13 . Severability. If any provision of this Bond Purchase Agreement shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions because it conflicts with any provisions of any Constitution, statute, rule of public policy, or any other reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case or circumstance, or of rendering any other provision or provisions of this Bond Purchase Agreement invalid, inoperative or unenforceable to any extent whatever. 14 . Business Day. For purposes of this Bond Purchase Agreement, "business day" means any day on which the New York Stock Exchange is open for trading. 15 . Section Headings. Section headings have been inserted in this Bond Purchase Agreement as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Bond Purchase Agreement and will not be used in the interpretation of any provisions of this Bond Purchase Agreement . 16 . Counterparts. This Bond Purchase Agreement may be executed in several counterparts each of which shall be regarded as an original (with the same effect as if the signatures thereto and hereto were 21 upon the same document) and all of which shall constitute one and the same document . 22 11/13/03 17:57 FAY __..-.- U002/003 -- , • If you agree with the foregoing, please sign the enclosed counterpart of this Bond Purchase Agreement and return it to the Underwriters . This Bond Purchase Agreement shall become a bindizig agreement between you and the Underwriters when at least the Counterpart of thisletter shall have been signed by or on behalf of each of the parties hereto and the Letter of Representation shall have been signed ori behalf of the Town. Very truly yours, STONE - :OUNGBERG -C 4 ; ,.. c 1 tr9 By 1 . . . .1 Authorized Officer I a A)kiti jr,---(1\ i 1 Accepted and agreed to this 13th day of November, 2003 TOWN OF ORO VALLEY MUNICIPAL PROPERTY CORPORATION r-D. By . . -C/1 . .-- Name• Str-pheu .11.. Juas. . . - . - . . _ PRESIDENT Title• - - - 1408329.2-11/1312003 23 OFFICIAL STATEMENT DATED NOVEMBER 13,2003 NEW ISSUE-BOOK-ENTRY-ONLY RATINGS: See"RATINGS"herein. In the opinion of Gust Rosenfeld P.L.C., Phoenix, Arizona, Bond Counsel, under existing laws, rulings and judicial decisions, and assuming continuing compliance with certain restrictions, conditions and requirements by the Town and the Corporation as mentioned under "TAX EXEMPTION"herein, interest income on the Series 2003 Bonds is excluded from gross income for purposes of calculating federal income taxes and is exempt from Arizona income taxes. Interest income on the Series 2003 Bonds is not an item of preference to be included in the alternative minimum tax of individuals or corporations;such interest income must, however, be taken into account as an adjustment to alternative minimum taxable income for certain corporations.See "TAX EXEMPTION," "BOND PREMIUM"and "ORIGINAL ISSUE DISCOUNT"herein. $15,750,000 TOWN OF ORO VALLEY MUNICIPAL PROPERTY CORPORATION EXCISE TAX REVENUE REFUNDING BONDS, SERIES 2003 Dated:December 1,2003 Due:July 1,as shown on the inside front cover The Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds,Series 2003(the"Series 2003 Bonds")are being issued for the purpose of providing funds to(1)refinance certain outstanding excise tax secured obligations of the Town and(2)pay the costs and expenses related to the issuance of the Series 2003 Bonds. Interest on the Series 2003 Bonds is payable semi-annually on January 1 and July 1 of each year(each an"Interest Payment Date")commencing on January 1,2004. Interest is calculated on the basis of a 360-day year of twelve 30-day months. The Series 2003 Bonds will be delivered to and registered in the name of Cede&Co.,as nominee of The Depository Trust Company,New York, New York,a registered securities depository("DTC").The Town of Oro Valley Municipal Property Corporation(the"Corporation")will initially utilize the"book-entry-only system" of DTC, although the Corporation and DTC each reserve the right to discontinue that system at any time. Utilization of the book-entry-only system will affect the methods and timing of payment of principal and interest on, and the method of transfer of, the Series 2003 Bonds. So long as the book-entry-only system is in effect, all payments of principal and interest will be made when due to Cede&Co.,through Wells Fargo Bank Arizona,N.A.,as Trustee.DTC will be responsible for distributing the principal and interest payments to its direct and indirect participants for distribution to the beneficial owners of the Series 2003 Bonds (the `Beneficial Owners"). So long as the book-entry-only system is in effect and Cede&Co.,as nominee of DTC,is the registered owner of the Series 2003 Bonds,all references herein to owners of the Series 2003 Bonds and provisions for consents by owners of the Series 2003 Bonds will refer to and be solicited from Cede&Co., and not the Beneficial Owners. See APPENDIX G—"BOOK-ENTRY-ONLY SYSTEM." See the Maturity Schedule on the Inside Front Cover The Series 2003 Bonds are subject to optional redemption prior to maturity as described herein. The Series 2003 Bonds are special obligations of the Corporation payable solely from the rental payments to be paid by the Town of Oro Valley, Arizona (the "Town") to the Corporation pursuant to a Lease-Purchase Agreement (as amended by the first, second and third amendments thereto),between the Town and the Corporation.The payment of the rental payments is secured,together with certain Existing Parity Obligations (defined herein) and Additional Parity Obligations (defined herein) by a pledge of and first lien on, all of the Excise Taxes (defined herein) received by the Town. The Series 2003 Bonds are not secured by the property refinanced with proceeds of the Series 2003 Bonds. See "SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS"herein.The Series 2003 Bonds are special obligations of the Corporation payable solely from the sources herein described.The Series 2003 Bonds are not general obligations of the Corporation,the Town,the State of Arizona or any political subdivision thereof and neither constitute an indebtedness of the Town when computing the limit imposed by constitutional, statutory or charter provision or a charge against the general credit or taxing power of the Town, the State of Arizona or any political subdivision thereof nor a liability of the Town,the State of Arizona or any political subdivision thereof for payment of the Series 2003 Bonds other than from the sources pledged therefore.The Corporation has no taxing power. Payment of the principal of and interest on the Series 2003 Bonds when due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation simultaneously with the delivery of the Series 2003 Bonds. Ambac The Series 2003 Bonds are offered when, as and if issued, subject to the approving opinion of Gust Rosenfeld P.LC., Phoenix, Arizona, Bond Counsel, as to validity and tax exemption. In addition, certain legal matters will be passed upon solely for the benefit of the Underwriter by Greenberg Traurig,LLP,Phoenix,Arizona.It is expected that the Series 2003 Bonds will be available for delivery to DTC on or about December 18,2003. This cover page contains certain information for convenience of reference only. It is not a summary of the issue of which the Series 2003 Bonds are a part. Investors must read this Official Statement in its entirety to obtain information essential to the making of an informed investment decision with respect to the Series 2003 Bonds. Stone & Youngberg LLC MATURITY SCHEDULE Base CUSIP No.68702L* Maturity Principal Interest CUSIP (July 1) Amount Rate Yield No. 2004 $ 200,000 2.000% 1.15% BP 5 2005 145,000 2.000 1.47 BQ 3 2006 150,000 2.000 1.83 BR 1 2007 380,000 2.250 2.20 BS 9 2008 390,000 2.500 2.58 BT 7 2009 400,000 3.000 2.86 BU 4 2010 410,000 3.125 3.16 BV 2 2011 1,200,000 3.500 3.45 BW 0 2012 1,375,000 5.000 3.70 BX 8 2013 1,450,000 5.000 3.80 BY 6 2014 2,015,000 3.750 3.95 BZ 3 2015 1,580,000 4.000 4.05 CA 7 2016 1,640,000 4.000 4.12 CB 5 2017 1,700,000 4.125 4.20 CC 3 2018 1,335,000 4.200 4.30 CD 1 2019 1,3 80,000 4.300 4.40 CE 9 (Plus interest accrued from December 1,2003) * Copyright 2003, American Bankers Association. CUSIP data herein is provided by Standard&Poor's, CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. This data is not intended to create a database and does not service in any way as a substitute for the CUSIP services. REGARDING THIS OFFICIAL STATEMENT No dealer,broker, salesperson or other person has been authorized by the Corporation,the Town or the Underwriter to give any information or to make any representations other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Series 2003 Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer,solicitation or sale. The information set forth herein has been obtained from the Town, the Corporation. the Pima County Assessor's Office, and other sources which are considered to be reliable and customarily relied upon in the preparation of similar official statements. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part, of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historical information and is not intended to indicate future or continuing trends in the financial position or other affairs of the Town. All information, estimates and assumptions contained herein have been based on past experience and on the latest information available and are believed to be reliable,but no representations arc made that such information, estimates and assumptions are correct,will continue,will be realized or will be repeated in the future. To the extent that any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated to be such, they are made as such and not as representations of fact or certainty, and no representation is made that any of these statements have been or will be realized. Information other than that obtained from official records of the Town has been identified by source and has not been independently confirmed or verified by the Town. This Official Statement contains estimates, projections and forecasts which are forward-looking statements concerning facts which mayor may not occur in the future. All such forward-looking statements may not be realized and must be viewed with an abundance of caution. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Town or any of the other parties or matters described herein since the date hereof. Upon issuance, the Series 2003 Bonds will not be registered under the Securities Act of 1933, as amended, or any state securities law, and will not be listed on any stock or other securities exchange. Neither the Securities and Exchange Commission nor any other federal, state or other governmental entity or agency will have passed upon the accuracy or adequacy of this Official Statement or approved the Series 2003 Bonds for sale. As the "obligated person" with respect to the Series 2003 Bonds, the Town has undertaken to provide continuing disclosure as described in this Official Statement under "CONTINUING DISCLOSURE" and in APPENDIX F — "FORM OF CONTINUTNG DISCLOSURE UNDERTAKING,"all pursuant to Rule I5c2-12 of the Securities and Exchange Commission. [THIS PAGE INTENTIONALLY LEFT BLANK] TABLE OF CONTENTS Page Introductory Statement 1 The Municipal Property Corporation 2 The Series 2003 Bonds 3 General Terms 3 Registrar and Paying Agent 3 Redemption Provisions 3 Optional Redemption 3 Notice of Redemption 3 Defeasance 3 Plan of Refunding 4 Schedule of Obligations Being Refunded 4 Verification of Mathematical Computations 4 Security For and Sources of Payment of the Series 2003 Bonds 5 General 5 Rental Payments Under the Town Lease 5 Reserve Fund 5 Additional Obligations 6 Junior Lien Obligations 6 Town's Intention to Pay Certain Rental Payments from Net Water System Revenues 6 Consequences of Insufficient Net Water System Revenues to Pay Rental Payments 7 Bond Insurance 8 Payment Pursuant to Financial Guaranty Insurance Policy 8 Ambac Assurance Corporation 8 Available Information 9 Incorporation of Certain Documents by Reference 9 Excise Taxes 10 Town Sales and Franchise Taxes 10 Town Sales Taxes 10 Franchise Taxes 12 Historic and Projected Town Sales Taxes and Franchise Taxes 12 State-Shared Income Taxes 13 State-Shared Sales Taxes 13 Licenses and Permits;Fines .. 14 Actual and Projected Collections 15 Possible Legislative or Initiative Measures 15 Debt Service Requirements and Coverage 16 Sources and Uses of Funds 18 The Water System 18 General Background 18 Administrative Staff 19 Billing and Accounting 19 Water Sources and Supply 19 Well Supply 19 Surface Water 19 Water Rate Structure 20 The Town 20 Recent Potable Water Rate Increase Request and Establishment of Groundwater Preservation Fee and Reclaimed Water Rate 21 Factors Affecting Water Costs 21 Water System Fees 22 TABLE OF CONTENTS Page Water Rates 26 Net Water System Revenues Coverage of Water System-related Debt Service 28 The Town's General Fund 31 Town Employee Retirement System 32 Litigation 32 Legal Matters 32 Tax Exemption 33 Bond Premium 34 Original Issue Discount 34 Ratings 35 Underwriting 35 Political Contributions 35 Relationship Among Parties 36 Continuing Disclosure 36 Certification Concerning Official Statement 36 General Purpose Financial Statements 36 Concluding Statement 37 Miscellaneous 37 APPENDIX A: Town of Oro Valley,Arizona—General Economic and Demographic Information APPENDIX B: Town of Oro Valley,Arizona—Financial Data APPENDIX C: Town of Oro Valley,Arizona—Audited Annual General-Purpose Financial Statements for the Year Ended June 30,2002 APPENDIX D: Summaries of the Principal Documents APPENDIX E: Form of Approving Legal Opinion APPENDIX F: Form of Continuing Disclosure Certificate APPENDIX G: Book-Entry-Only System APPENDIX H: Specimen Financial Guaranty Insurance Policy OFFICIAL STATEMENT $15,750,000 TOWN OF ORO VALLEY MUNICIPAL PROPERTY CORPORATION EXCISE TAX REVENUE REFUNDING BONDS, SERIES 2003 INTRODUCTORY STATEMENT This Official Statement,which includes the cover page and appendices hereto,has been prepared in connection with the original issuance and sale by the Town of Oro Valley Municipal Property Corporation (the "Corporation") of $15,750,000 principal amount of the Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds, Series 2003 (the "Series 2003 Bonds"), identified on the cover page of this Official Statement. Certain information concerning the authorization, purpose, terms, sources of payment, and security for the Series 2003 Bonds is contained in this Official Statement. Information about the Town of Oro Valley, Arizona (the "Town"), is included in Appendices A and B, and the most recent audited financial statements for the Town are included in APPENDIX C. The Series 2003 Bonds are being issued pursuant to a Trust Indenture, dated as of April 1, 1996 (the "Trust Indenture"), between the Corporation and Wells Fargo Bank Arizona, N.A., as trustee (the "Trustee"), as supplemented by the First Supplement to Trust Indenture, dated as of June 1, 1999 (the "First Supplement"), the Second Supplement to Trust Indenture, dated as of April 1, 2001 (the "Second Supplement") and the Third Supplement to Trust Indenture,dated as of December 1, 2003 (the "Third Supplement" and, together with the Trust Indenture, the First Supplement and the Second Supplement, the "Indenture"). The Series 2003 Bonds are being issued for the purpose of providing funds to (i) refinance certain outstanding excise tax secured obligations of the Town (the `Obligations Being Refunded") and (ii) pay the costs and expenses related to the issuance of the Series 2003 Bonds. The Series 2003 Bonds are special obligations of the Corporation paid from rental payments to be paid by the Town ("Rental Payments") pursuant to a Lease-Purchase Agreement dated as of April 1, 1996 (the "Lease-Purchase Agreement"), as amended by the First Amendment to Lease-Purchase Agreement, dated as of June 1, 1999 (the "First Amendment"),the Second Amendment to Lease-Purchase Agreement, dated as of April 1, 2001 (the"Second Amendment") and the Third Amendment to the Lease-Purchase Agreement, dated as of December 1, 2003 (the "Third Amendment" and, together with the Lease-Purchase Agreement, the First Amendment and the Second Amendment,the"Town Lease"). Under the terms of the Town Lease, the Town is required to make semi-annual Rental Payments in amounts sufficient to pay when due the principal and interest requirements of the Series 2003 Bonds. The Rental Payments are payable from and secured by a lien on Excise Taxes (hereinafter defined) on a parity with the $43,840,000 aggregate outstanding principal amount of Town of Oro Valley Municipal Property Corporation Municipal Water System Acquisition Bonds, Series 1996 (the "1996 Bonds"), Town of Oro Valley, Arizona Certificates of Participation, Series 1996 (the "1996 Certificates"), Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Bonds, Series 1999 (the "1999 Bonds"), the Town of Oro Valley, Arizona Excise Tax Revenue Obligations, Series 2000 (the "2000 Obligations") and the Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Bonds, Series 2001 (the "2001 Bonds" and, together with the 1996 Bonds, the 1996 Certificates, the 1999 Bonds and the 2000 Obligations, the "Existing Parity Obligations") and any additional Parity Obligations that may be issued in the future as provided in the Indenture ("Additional Parity Obligations" and, together with the Series 2003 Bonds and the Existing Parity Obligations, the "Parity Obligations"). See "SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS"herein. The Lease-Purchase Agreement was executed and delivered in connection with the issuance of the 1996 Bonds to finance the acquisition of two domestic water systems(the "1996 Project").The First Amendment was executed and delivered in connection with the issuance of the 1999 Bonds to finance a Development Services Building for the Town and to finance additional Water System-related improvements (the "1999 Project"). The Second Amendment was executed and delivered in connection with the issuance of the 2001 Bonds to finance a library for the Town and • 1 to finance additional Water System-related improvements(the"2001 Project"). The Town owns a leasehold interest in the site for a portion of the 2001 Project,leased by the Town to the Corporation in connection with the issuance of the Series 2001 Bonds pursuant to the Facilities Lease, dated as of April 1, 2001 (the "Facilities Lease"). The 1996 Project, the 1999 Project and the 2001 Project are sometimes herein collectively referred to as the "Leased Property"). Certain of the Corporation's right, title and interest, as lessor, in the Town Lease, and the Corporation's right, title and interest, as lessee, in the Facilities Lease, have been assigned to the Trustee pursuant to the Indenture. The Trustee will hold the rights and interests assigned in trust for the benefit of the owners of the 1996 Bonds, the 1999 Bonds,the Series 2001 Bonds and the Series 2003 Bonds. References to provisions of federal or Arizona law, whether codified or uncodified, are references to those current provisions.Those provisions may be amended,repealed or supplemented. The offering of the Series 2003 Bonds is made only by this Official Statement, which supersedes any other information or materials used in connection with the offering or sale of the Series 2003 Bonds. Accordingly, prospective purchasers of the Series 2003 Bonds should read this entire Official Statement before making an investment decision. This Official Statement contains financial and other information derived from the Town's records, except for information expressly attributed to other sources. The presentation of historical information, including tables of receipts from taxes and other revenues, is intended to show recent historical information and is not to be construed as a projection or indication of future or continuing trends in the financial position or other affairs of the Town.No representation is made that past experience, as shown by such financial and other information, will necessarily continue or be repeated in the future. For definitions of certain words used in this Official Statement, and denoted by initial capital letters, see APPENDIX D—"SUMMARIES OF THE PRINCIPAL DOCUMENTS." Descriptions of the authorization,purpose and terms of the Series 2003 Bonds and summaries of certain provisions of the Town Lease and the Indenture are included in this Official Statement. Such descriptions and summaries are not comprehensive or definitive,and all summaries of and references to the Town Lease and the Indenture appearing herein are qualified by reference to the full text of such documents. References herein to the Series 2003 Bonds are qualified by reference to the form thereof as set forth in the Indenture. Copies of the full texts of the Town Lease and the Indenture are available for inspection at the office of the Underwriter, Stone & Youngberg LLC, 2555 East Camelback Road, Suite 280,Phoenix,Arizona 85016. THE MUNICIPAL PROPERTY CORPORATION Except to the extent of payments received from the Town under the Town Lease, the Corporation is not financially liable for the payment of the principal of or interest on the Series 2003 Bonds and the Owners of the Series 2003 Bonds will have no right to look to the Corporation for payment of the Series 2003 Bonds. The Corporation is a nonprofit corporation incorporated pursuant to the laws of the State of Arizona (sometimes referred to herein as "Arizona" or the "State") formed in 1996 for the purpose of any civic or charitable purpose such as financing the cost of acquiring, constructing and equipping of facilities for use by and for leasing to the Town. The Corporation is governed by a 3-member Board of Directors, each of whom is appointed by the Mayor and Council of the Town to serve 3-year terms.In addition to the Series 2003 Bonds,the Corporation has previously issued the 1996 Bonds, the 1999 Bonds and the 2001 Bonds and it may in the future issue additional bonds or obligations, either pursuant to the Indenture or otherwise. 2 THE SERIES 2003 BONDS General Terms The Series 2003 Bonds will be dated as of December 1, 2003, and will bear interest at the rates, payable semi- annually on January 1 and July 1 of each year(each an"Interest Payment Date")commencing January 1,2004, and mature on the dates and in the amounts set forth on the inside front cover of this Official Statement. Interest on the Series 2003 Bonds is payable from the dated date of the Series 2003 Bonds, or from the most recent Interest Payment Date for which interest has been paid or duly provided.Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The Series 2003 Bonds initially are issuable only to Cede & Co., the nominee of the Depository Trust Company, New York, New York ("DTC"), in the book-entry-only system described herein. Ownership interests in the Series 2003 Bonds may be purchased in denominations of $5,000 or integral multiples thereof. See APPENDIX G -- "BOOK-ENTRY-ONLY SYSTEM." Registrar and Paying Agent The Trustee will serve as the initial bond registrar and transfer agent(the"Registrar") and paying agent(the"Paying Agent")for the Series 2003 Bonds. The Corporation may change the Registrar and Paying Agent without notice to or consent of the registered owners of the Series 2003 Bonds. Redemption Provisions Optional Redemption. Series 2003 Bonds maturing before or on July 1, 2013 are not subject to redemption prior to their stated maturity date. Series 2003 Bonds maturing on or after July 1, 2014,may be redeemed prior to maturity, in whole or in part, on any Interest Payment Date, in the order of maturities designated by the Town on or after July 1, 2013, at a redemption price equal to the principal amount thereof plus accrued interest on such principal to the date fixed for redemption,but without premium. Notice of Redemption. When redemption is authorized pursuant to the Indenture and the Town has directed the Trustee to do so and has designated the Series 2003 Bonds to be redeemed in writing, the Trustee shall give notice of the redemption of the Series 2003 Bonds on behalf of the Corporation. Notice of redemption of the Series 2003 Bonds shall be provided to DTC not more than sixty (60) nor less than thirty(30)days prior to the date fixed for redemption. See APPENDIX G—"BOOK-ENTRY-ONLY SYSTEM." Defeasance The Series 2003 Bonds are subject to defeasance and may be paid or provided for with moneys or Defeasance Obligations provided by or on behalf of the Town through the Town's exercise of its option to prepay or provide for payment of the Series 2003 Bonds in accordance with the defeasance provisions of the Indenture. See APPENDIX D-"SUMMARIES OF THE PRINCIPAL DOCUMENTS." 3 PLAN OF REFUNDING The proceeds of the Series 2003 Bonds (net of costs of issuance and any amount received as accrued interest with respect to the Series 2003 Bonds), will be placed in a trust(the"Depository Trust")with Wells Fargo Bank Arizona, N.A., as depository trustee (the "Depository Trustee") and used to acquire certain obligations of the United States (the "Government Obligations"). Remaining proceeds and the Government Obligations are calculated to be sufficient to provide for the payment of interest on the Obligations Being Refunded until payment at maturity or prior redemption, and to provide for payment of principal and premium at the maturity or prior redemption of the Obligations Being Refunded as shown below. See "SCHEDULE OF OBLIGATIONS BEING REFUNDED" below. The proceeds of the Series 2003 Bonds in the Depository Trust will be held irrevocably in trust by the Depository Trustee for the payment of debt service and redemption of the Obligations Being Refunded pursuant to the terms of a Depository Trust Agreement, dated as of December 1, 2003 (the "Depository Trust Agreement"), among the Town,the Corporation and the Depository Trustee. SCHEDULE OF OBLIGATIONS BEING REFUNDED Redemption Maturity Principal Obligations Redemption Premium(As Issue Date Amount Being Date a Percentage Series (July 1) Coupon Outstanding Refunded (July 1) of Principal) Series 1996 2014 5.45% $ 3,400,000 $ 3,400,000 2008 1.0% Municipal Water Systems 2017 5.55 3,075,000 3,075,000 2008 1.0 Acquisition Bonds 2019 5.60 2,300,000 2,300,000 2008 1.0 Series 1996 2007 5.30 230,000 230,000 2006 1.0 Certificates of Participation 2011 5.75 1,050,000 1,050,000 2006 1.0 2017 5.75 2,100,000 2,100,000 2006 1.0 Series 2000 2014 5.20 530,000 410,000 2010 1.0 Excise Tax 2020 5.50 1,050,000 850,000 2010 1.0 Revenue Obligations Series 2001 2020 5.00 3,925,000 485,000 2011 1.0 Excise Tax Revenue Bonds $ 17,660,000 $13,900,000 VERIFICATION OF MATHEMATICAL COMPUTATIONS Grant Thornton, LLP, a firm of independent public accountants,will deliver to the Corporation and the Town, on or before the settlement date of the Series 2003 Bonds, its verification report indicating that it has examined, in accordance with standards established by the American Institute of Certified Public Accountants, the information and assertions provided by the Underwriter on behalf of the Corporation and the Town relating to the Series 2003 Bonds and the Obligations Being Refunded. Included in the scope of its examination will be a verification of the mathematical accuracy of(a)the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the Government Obligations to pay, when due, or called for redemption the principal of and interest on the Obligations Being Refunded and (b) the mathematical computations supporting the conclusion of Bond Counsel that the Series 2003 Bonds are not "arbitrage bonds" under the Internal Revenue Code of 1986 as amended and the regulations promulgated thereunder. 4 SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS General The Series 2003 Bonds are special obligations of the Corporation payable solely from the Rental Payments paid by the Town pursuant to the Town Lease. The Town pledges for payment of such Rental Payments, all of the Town's fines and forfeitures, license and permit fees, transaction privilege (sales) taxes, other transaction privilege taxes, excise and business taxes,franchise fees and taxes,bed and rental taxes and income taxes which the Town now or in the future imposes and collects, and all state-shared sale and income taxes and state revenue sharing collected or allocated or apportioned, now or hereafter to the Town by the State, any political subdivision thereof, or any other governmental unit or agency, except the share of the Town of any excise or franchise taxes which by State law, rule or regulation must be expended for other purposes, such as motor vehicle fuel taxes (the "Excise Taxes"). Such pledge is on a parity with the pledge of Excise Taxes for the payment of the Existing Parity Obligations and any Additional Parity Obligations that may be issued in the future. Pursuant to the Town Lease,to the extent permitted by law,the Town agrees to retain and maintain the Excise Taxes in effect so that the combined amount of all Excise Taxes in any fiscal year(July 1 to June 30) are equal to at least two(2)times the total amount payable on the Parity Obligations during such fiscal year(July 1 to June 30). If such receipts for the preceding fiscal year shall not equal at least two (2) times such Rental Payment requirements, the Town will impose new excise and franchise taxes or increase the rates for the Excise Taxes currently imposed in order that (i) the current receipts will be sufficient to meet all such current Rental Payment requirements under the Town Lease and (ii) the current year's receipts will be reasonably calculated to attain the level as required for the next succeeding fiscal year's Rental Payment requirements for such purpose. THE SERIES 2003 BONDS AND THE RENTAL PAYMENTS UNDER THE TOWN LEASE DO NOT CONSTITUTE AN INDEBTEDNESS OR GENERAL OBLIGATION OF THE TOWN NOR SHALL THE TOWN BE LIABLE FOR THE PAYMENT FROM AD VALOREM PROPERTY TAXES OF THE RENTAL PAYMENTS OR PRINCIPAL OF AND INTEREST ON THE SERIES 2003 BONDS. PURSUANT TO THE INDENTURE, THE SERIES 2003 BONDS WILL BE SPECIAL OBLIGATIONS OF THE CORPORATION PAYABLE SOLELY FROM THE RENTAL PAYMENTS MADE PURSUANT TO THE TOWN LEASE. THE SERIES 2003 BONDS DO NOT AND SHALL NOT REPRESENT OR CONSTITUTE A DEBT OR A DIRECT OR INDIRECT PLEDGE OF THE FULL FAITH AND CREDIT OF THE TOWN OR OF THE STATE OR OF ANY POLITICAL SUBDIVISION, MUNICIPALITY OR OTHER AGENCY THEREOF. THE CORPORATION HAS NO TAXING POWER. Rental Payments Under the Town Lease The Town Lease provides for the payment by the Town to the Trustee on each June 15 and December 15, commencing December 15,2003,an amount which when added to any amount held by the Trustee for such purpose, equals the amount of interest due on the Series 2003 Bonds on the next succeeding Interest Payment Date, together with an amount which, when added to any amount held by the Trustee for such purpose, is equal to one-half(1/2) (as of December 15) or 100% (as of June 15) of the principal payable with respect to the Series 2003 Bonds on the next succeeding July 1. If the date of initial issuance and delivery of the Series 2003 Bonds is later than December 15, 2003 but prior to January 1, 2004, the payment of amounts due on January 1, 2004 with respect to the Series 2003 Bonds will be deposited on or before the date of their initial issuance and delivery. To provide the funds necessary to make these payments, the Town is required pursuant to the Town Lease to segregate, apportion and deposit into a special fund maintained by the Town, on the 10th day of each month during the six-month period prior to the above-described December 15 and June 15, one-sixth(1/6) of the amount to come due. See APPENDIX D— "SUMMARIES OF THE PRINCIPAL DOCUMENTS." Reserve Fund A Reserve Fund was established with respect to the Series 1996 Bonds and funded also with respect to the Series 1999 Bonds. In accordance with the provisions of the Trust Agreement, no deposits needed to be made into the Reserve Fund for the Series 2001 Bonds or needs to be made into the Reserve Fund for the Series 2003 Bonds so long as the Excise Taxes collected for the preceding fiscal year are at least two and one-half(2.5) times the debt 5 service requirements on all Parity Obligations for the current fiscal year. In the event that the Excise Taxes collected for the preceding fiscal year are less than two and one-half(2.5) times the highest annual debt service requirements on all Parity Obligations for the then current or any future fiscal year, the Town shall deposit into the Reserve Fund, on each Interest Payment Date, one-tenth (1/10thof Maximum Annual p � ) Debt Service on any Parity Obligations except any for which a reserve fund is already established or for which no reserve fund is required until Until the the amount in the Reserve Fund equals the Reserve Fund Requirement. Reserveq Fund is funded with respect to the Series 2003 Bonds, the Owners of the Series 2003 Bonds will have no claim on amounts in the Reserve Fund. In lieu of cash deposits, in the event the Reserve Fund is required to be funded for the Series 2003 Bonds, the Corporation may elect to provide a Qualified Surety Obligation in the amount of the Additional Reserve Requirement. Moneys deposited in the Reserve Fund from time to time will be invested according to the provisions of the Indenture (the "Eligible Investments") and will be applied bythe Trustee to the pP extent necessary to provide for the payment of principal and interest on the Series 2003, the Series 2001 Bonds, the Series 1999 Bonds and the Series 1996 Bonds when due if the moneys available in the Revenue Fund are insufficient for thatpurp ose. In the event of any such application of Reserve Fund moneys, the Town Lease provides for the payment by the Town of additional rent in an amount sufficient to replenish the Reserve Fund on or before the next shave any claimsucceedingInterest Payment Date. Neither the Series 1996 Certificates nor the Series 2000 Obligations g upon the Reserve Fund and except upon the occurrence of certain conditions, no Reserve Fund is maintained for the Series 2000 Obligations. Additional Obligations Under the Indenture, the Corporation may issue one or more series of obligations on a parity with the Series 2003 Bonds to finance and refinance the cost of acquiring,constructing,reconstructing or improving buildings, equipment and other real and personal property suitable for any use by and lease to the Town, including but not limited to domestic water systems, or for refinancing the Series 1996 Bonds, the Series 1996 Certificates, the Series 1999 Bonds, the Series 2000 Obligations, the Series 2001 Bonds, the Series 2003 Bonds or any Additional Parity Obligations, and including costs of issuance and any required reserve funds.At the time of issuance,the Corporation must enter into an amendment to the Town Lease or new lease with the Town which will provide the additional Rental Payments necessary to pay the additional debt service on the bonds to be issued. So long as any Parity Obligations remain unpaid or unprovided for,the Town covenants not to further encumber the Excise Taxes on a basis equal to the first lien pledge enjoyed by the Outstanding Parity Obligations unless the Excise Taxes collected in the next preceding fiscal year shall have amounted to at least two (2) times the highest combined Rental Payments to be made thereunder for any succeeding twelve (12) months' and any payments to be made on any obligations then outstanding and any obligations then proposed to be secured by a pari passuled e of the Excise Taxes. p g Junior Lien Obligations Under the Indenture, the Town may make pledges of and permit liens on the Excise Taxes which are subordinate to the pledge and lien securing the Series 2003 Bonds. The Town issued approximately$6,770,000 aggregate principal amount of its Water Development Fee Revenue Obligations (the "Development Fee Obligations") during calendar year 2000, which will be primarily paid from water development fees collected by the Town. Under certain circumstances, the Development Fee Obligations will be additionally secured by a pledge of and lien on the Excise Taxes,which is junior and subordinate to the pledge and lien of the Parity Obligations. It cannot be determined how much, if any, of the Excise Taxes will be needed to make payments on the Development Fee Obligations in any year. The current principal balance of the Development Fee Obligations is$3,745,000. Town's Intention to Pay Certain Rental Payments from Net Water System Revenues The Town intends to pay the portion of the Rental Payments relating to the Water System-related improvements which were funded with proceeds of the sale of the Obligations Being Refunded representing approximately 75% of the Obligation Service Charges relating to the Series 2003 Bonds as well as rental payments relating to thep ortion 6 of the 2001 Bonds, the 1999 Bonds and the 1996 Bonds, for such purposes which are not being refunded (collectively, the "Water System-related Debt Service") from revenues of the Water System remaining after the payment of operating expenses of the Water System ("Net Water System Revenues"). Should Net Water System Revenues prove insufficient to pay the Rental Payments under the Town Lease, the Town will be obligated to pay the Water System-related Debt Service from Excise Taxes Payment of the Water System-related Debt Service is secured by the Town's pledge of Excise Taxes. THE TOWN'S NET WATER SYSTEM REVENUES ARE NOT PLEDGED TO, NOR DO THEY SECURE, THE RENTAL PAYMENTS TO BE PAID UNDER THE TOWN LEASE. As Net Water System Revenues are subject to Arizona's Budget Law(A.R.S. 42-301 et seq.), the Town does not have clear legal authority to enter into a pledge agreement to pay Net Water System Revenues beyond the applicable budget year unless authorized by the voters. Therefore, the pledge of Net Water System Revenues must be annually created by the Town by annually setting forth in its adopted budget line items which indicate that the Water System-related Debt Service will be made for the respective fiscal year covered in such budget from Net Water System Revenues. Inclusion of Net Water System Revenues as a pledged source of payment for the rental payments in any fiscal year's budget will not obligate the Town to continue to include such payments from Net Water System Revenues in subsequent budgets for subsequent fiscal years. Inclusion or exclusion of Net Water System Revenues as a pledged source of payment for rental payments in any fiscal year's budget will not lessen the Town's promise and pledge to pay the rental payments from Excise Taxes. Also,the Town has reserved the right to encumber Net Water System Revenues on a senior lien basis,prior to the lien enjoyed for the Water System-related Debt Service. In that regard, in December 2003 the Town currently plans to issue approximately$33,050,000*principal amount of bonds,payable from Net Water System Revenues on such a senior lien basis,for certain improvements to the Water System (the "Senior Lien Water Project Revenue Bonds"). As such, the debt service on the Senior Lien Water Project Revenue Bonds will be payable from Net Water System Revenues on a basis senior to the pledge of annually appropriated Net Water System Revenues for the Water System-related Debt Service. The Town shall be absolutely and unconditionally obligated to pay all rental payments under the Lease-Purchase Agreement from Excise Taxes including as a result of any such non-appropriation. Consequences of Insufficient Net Water System Revenues to Pay Rental Payments The Water System-related Debt Service represents a substantial percentage of the Town's current annual budgeted expenditures. Therefore, in order to avoid using Excise Taxes which currently pay budget expenditures the Town is relying on Net Water System Revenues to provide at least one times coverage for the Water System-related Debt Service even though the pledged source of the Rental Payments for such obligations, in addition to the 1996 Certificates, a portion of the 1999 Bonds,the 2000 Obligations and the balance of the Series 2001 Bonds and Series 2003 Bonds are the pledged Excise Taxes. The issuance of the Senior Lien Water Project Revenue Bonds will decrease the amount of Net Water System Revenues available for such purpose. Although the Town expects sufficient Net Water System Revenues to pay the Water System-related Debt Service even after issuance of the Senior Lien Water Project Revenue Bonds, such Rental Payments from Net Water System Revenues must be annually budgeted by the Town and there can be no assurance that such annual appropriation will occur. IF THE TOWN USES EXCISE TAXES FOR RENTAL PAYMENTS RELATING TO THE WATER SYSTEM- RELATED DEBT SERVICE, SOME INTERRUPTION OF NORMAL MUNICIPAL SERVICES COULD RESULT BECAUSE THE TOWN USES THE EXCISE TAXES FOR OTHER MUNICIPAL OPERATIONS. For a description of the Water System, see"THE WATER SYSTEM"herein. * Subject to change. 7 BOND INSURANCE Payment Pursuant to Financial Guaranty Insurance Policy Ambac Assurance has made a commitment to issue a financial guaranty insurance policy (the "Financial Guaranty Insurance Policy") relating to the Series 2003 Bonds effective as of the date of issuance of the Series 2003 Bonds. (A(A specimen of the Financial Guaranty Insurance Policy is included in APPENDIX H.) Under the terms of the Financial Guaranty -Insurance Policy, Ambac Assurance will pay to The Bank of New York, New York, New York or any successor thereto(the "Insurance Trustee")that portion of therinci al of and interest on the Series 2003h p p Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor(as such terms are defined in the Financial Guaranty Insurance Policy).Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and interest becomes Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Trustee.The insurance will extend for the term of the Series 2003 Bonds and,once issued,cannot be canceled by Ambac Assurance. The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates and on mandatory sinking fund installment dates,in the case of principal,and on stated dates for payment,in the case of interest.If the Series 2003 Bonds become subject to mandatory redemption and insufficient funds are available for redemption of all outstanding Series 2003 Bonds,Ambac Assurance will remain obligated to pay principal of and interest on outstanding Series 2003 Bonds on the originally scheduled interest and principal payment dates including mandatory sinking fund redemption dates. In the event of any acceleration of the principal of the Series 2003 Bonds,the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration. In the event the Trustee has notice that any payment of principal of or interest on a Bond which has become Due for Payment and which is made to a Holder by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment, as defined in the Policy. Specifically,the Financial Guaranty Insurance Policy does not cover: 1. payment on acceleration, as a result of a call for redemption(other than mandatory sinking fund redemption) or as a result of any other advancement of maturity. 2. payment of any redemption,prepayment or acceleration premium. 3. nonpayment of principal or interest caused by the insolvency or negligence of any Trustee,Paying Agent or Bond Registrar,if any. If it becomes necessary to call upon the Financial Guaranty Insurance Policy,payment of principal requires surrender of Series 2003 Bonds to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such Series 2003 Bonds to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy.Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of Holder entitlement to interest payments and an appropriate assignment of the Holder's right to payment to Ambac Assurance. Upon payment of the insurance benefits,Ambac Assurance will become the owner of the Bond, appurtenant coupon,if any, or right to payment of principal or interest on such Bonds and will be fully subrogated to the surrendering Holder's rights to payment. Ambac Assurance Corporation Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Territory of Guam, the Commonwealth of Puerto Rico and the U.S. Virgin 8 Islands, with admitted assets of approximately $6,993,000,000 (unaudited) and statutory capital of$4,195,000,000 (unaudited) as of September 30, 2003. Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency reserve. Standard & Poor's Credit Markets Services, a Division of The McGraw-Hill Companies, Moody's Investors Service and Fitch Ratings, Inc. have each assigned a triple-A financial strength rating to Ambac Assurance. Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty insurance policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the Obligor of the Series 2003 Bonds. Ambac Assurance makes no representation regarding the Series 2003 Bonds or the advisability of investing in the Series 2003 Bonds and makes no representation regarding, nor has it participated in the preparation of, the Official Statement other than the information supplied by Ambac Assurance and presented under the heading"BOND INSURANCE." Available Information The parent company of Ambac Assurance,Ambac Financial Group,Inc.(the"Company"),is subject to the informational requirements of the Securities Exchange Act of 1934,as amended(the"Exchange Act"),and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These reports,proxy statements and other information can be read and copied at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains an internet site at http://www.sec.gov that contains reports,proxy and information statements and other information regarding companies that file electronically with the SEC,including the Company.These reports,proxy statements and other information can also be read at the offices of the New York Stock Exchange,Inc.(the "NYSE"),20 Broad Street,New York,New York 10005. Copies of Ambac Assurance's financial statements prepared in accordance with statutory accounting standards are available from Ambac Assurance.The address of Ambac Assurance's administrative offices and its telephone number are One State Street Plaza, 19th Floor,New York,New York, 10004 and(212)668-0340. Incorporation of Certain Documents by Reference The following documents filed by the Company with the SEC(File No. 1-10777) are incorporated by reference in this Official Statement: 1) The Company's Current Report on Form 8-K dated January 23,2003 and filed on January 24,2003; 2) The Company's Current Report on Form 8-K dated February 25, 2003 and filed on February 28, 2003; 3) The Company's Current Report on Form 8-K dated February 25,2003 and filed on March 4,2003; 4) The Company's Current Report on Form 8-K dated March 18,2003 and filed on March 20,2003; 5) The Company's Current Report on Form 8-K dated March 19,2003 and filed on March 26,2003; 6) The Company's Annual Report on Form 10-K for the fiscal year ended December 31,2002 and filed on March 28,2003; 7) The Company's Current Report on Form 8-K dated March 25,2003 and filed on March 31,2003; 8) The Company's Current Report on Form 8-K dated April 17,2003 and filed on April 21,2003; 9 9) The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31,2003 and filed on May 15,2003; 10) The Company's Current Report on Form 8-K dated July 17,2003 and filed on July 18,2003; 11) The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 30, 2003 and filed on August 14,2003; 12) The Company's Current Report on From 8-K dated October 16,2003 and filed on October 17,2003; and 13) The Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 30, 2003 and filed on November 14,2003. All documents subsequently filed by the Company pursuant to the requirements of the Exchange Act after the g date of this Official Statement will be available for inspection in the same manner as described above in `Available Information." EXCISE TAXES The Excise Taxes include the Town's unrestricted revenues from fmes and forfeitures ("Fines and Forfeitures"), license and permit fees ("Licenses and Permits"), transaction privilege taxes, other transaction privilege, excise and business taxes and bed and rental taxes ("Town Sales Taxes"), franchise fees and taxes ("Franchise Taxes") and all state-shared sales taxes ("State-Shared Sales Taxes") and state-shared income taxes ("State-Shared Income Taxes") collected or allocated or apportioned now or hereafter to the Town by the State, any political subdivision thereof, or any other governmental unit or agency, except the share of the Town of any excise or franchise taxes which by State law,rule or regulation must be expended for other purposes, such as motor vehicle fuel taxes. NO ASSURANCES CAN BE GIVEN THAT THE AMOUNT OF STATE-SHARED SALES TAXES OR STATE-SHARED INCOME TAXES WILL NOT BE REDUCED OR ELIMINATED BY THE ARIZONA LEGISLATURE IN THE FUTURE.The major categories of such revenues are discussed more fully below. Town Sales and Franchise Taxes Town Sales Taxes-Generally. Town Sales Taxes are levied by the Town upon persons and entities on account of their business activities within the Town. The amount of taxes due are calculated by applying the tax rate against the gross proceeds of sales or gross income derived from the business activities shown in the table hereafter. The revenues from Town Sales Taxes are collected by the Arizona Department of Revenue and remitted to the Town on a monthly basis. TABLE 1 TOWN TRANSACTION PRIVILEGE(SALES)TAX RATES BY CATEGORY Business Activity Category Rate Publishing 2.0% Printing and Advertising 2.0 Contracting 2.0 Retail Sales 2.0 Restaurants and Bars 2.0 Amusements 2.0 Miscellaneous 2.0 Hotel/Lodging Room Rentals 5.0 Source: Finance Department of the Town. 10 Excise Taxes and Development. A significant portion of the Excise Taxes comes from the local sales tax on construction activity. The amount of Town Sales Taxes received by the Town will be partially dependent upon the rate of development of the real property in the Town,particularly single family residential development. There is no way to predict the rate at which such development will occur.The long-term availability of and demand for finished lots suitable for the construction of homes and other structures in the Town depend on many factors. Such factors include general economic conditions, fluctuations in land prices both locally and nationally, the availability and costs of utilities necessary for development, the quality of, and costs for, the other services supplied by the Town and other political subdivisions, changes in the income tax treatment of land ownership, changes in the availability of borrowed funds and numerous other factors. For example, sewer service for the Town is supplied by Pima County,Arizona.While the Town currently believes that adequate sewer capacity will be available from the County to keep up with development at the fastest rates anticipated by the Town, there can be no assurance that that will continue to be the case. The Town believes the same to be true for the providers of other utilities, both public and private, and with respect to other services such as schools and fire and police protection. In addition, land development operations are subject to comprehensive federal, state and local regulation. Approval is required from various agencies in connection with the layout and design of developments,the nature and extent of improvements, the availability of an assured water supply, construction activity, land use, zoning, school and health requirements and many other matters. The Town likewise believes that such approvals should be forthcoming as necessary to maintain development at the fastest rates anticipated by the Town. There can be no determination about whether and for how long the foregoing factors will remain favorable for development nor whether and for how long demand for developed real property in the Town will continue. Growing Smarter. During 1998,the Arizona Legislature promulgated the Growing Smarter Act of 1998 ("Growing Smarter") which created new planning requirements throughout the State and provided stronger tools for local governments in their efforts to manage rapid development. Growing Smarter also created the "Growing Smarter Commission" which conducted hearings throughout the State on ways to enhance the law and to address certain other issues. During 2000,the Arizona Legislature adopted additional legislation known as"Growing Smarter Plus" which significantly expands Growing Smarter particularly the planning requirements passed in 1998. Fast-growing communities must now plan for growth areas and identify the means to provide necessary public services in the future. In addition to environmental and infrastructure elements, an analysis of available water is now required. To pay for growth, communities are permitted to establish service area limits, beyond which new growth pays the full cost for services. Growing Smarter allowed citizens to refer general plans passed by local government to the ballot for voter approval. Growing Smarter Plus goes a step further by requiring fast growing and large cities and Pima and Maricopa Counties to submit their general plans to the voters for ratification. Every 10 years, voters will have the final say over general planning in their communities. It is not possible to determine the effect the foregoing will have on continuing development in the Town. Local Political Considerations. In areas of rapid growth, such as has occurred in the Town,public/political attitudes toward growth arc subject to shifts from support for growth to opposition to growth.No assurances can be given that the Mayor and Council of the Town as now constituted or a future Mayor and Council will not delay and defer action required for continued growth. Such action by the Mayor and Council as now constituted or a future Mayor and Council could have a material adverse impact on the amount of Excise Taxes received by the Town. Pygmy Owl-Critical Habitat. Approximately two square miles in the western most portion of the Town(being about 6% of the area within the boundaries of the Town) as well as large portions of the area west of the Town have been included in 261,000 acres of"critical habitat"established by the U.S. Fish and Wildlife Service ("USFWS") for the cactus ferruginous pygmy owl which is included on the Endangered Species List. The area straddles the Pima-Pinal county line northeast of I-10 and extends eastward toward the municipalities of Oracle and Mammoth,Arizona, and northward east of the municipality of Florence, Arizona, before reaching extreme southeastern Maricopa County, Arizona. Once a species is listed, a number of land-use regulations take effect and impose significant burdens on land development activities. The critical habitat designation for the pygmy owl is supposed to protect areas that the owl historically lived in that it can be used for future recovery efforts and may restrict what owners of such land can do with it without permission of responsible federal agencies. In order to get federal approval, a landowner may have 11 • to, among other things, perform as many as six surveys over two years to ensure that owls are notresent. Such restrictions may affect adversely the value of such land and be responsible for delays inp p y its development. Clearing land without providing for such surveys could result in significant fines related to violations of the U.S. Endangered Species Act.Because of a recent order by a U.S.District Court, federal agencies have stopped issuin low-threshold permits for highway property State-wide until the cumulative impact on critical habitat of the owl can be more closely examined. Pima County is proposing to deal with the issue as it relates to propertyin the Countybycreating a "desert conservationplan" toprotect the owl and more than 100 other plant and animal species; the plan is currently in the study phase. The Town has prepared a map of the area within the Town boundaries affected by the critical habitat and has represented that such area is not significantly, adversely impacted by the habitat. The Town has developed a them to perform to notify potential developers of the survey requirements of the USFWS, encouragingp surveys no matter where the development lies within the boundaries of the Town. The Town has represented that the effect of the critical habitat on new building activity within the Town boundaries does nota ear to be adverse. Recently,the United States Court of Appeals for the 9th Circuit determinedpp that the USFWS had acted improperly in extending protection to pygmy owl habitat in Arizona. It is not known whether or to what extent the USFWS or the U.S. District Court can or will re-impose or eliminate the habitat protections. The County has indicated it will continue to prepare its desert conservation plan. Franchise Taxes. Cities and towns in the State have exclusive control over public rights-of-way dedicated to the municipality and may grant franchise agreements to and impose Franchise Taxes on utilities usingthose rights-of- way. A franchise may be granted only with voter approval, with the exception g pP � p of cable television franchises which due to federal law do not require voter approval. The term of voter approved franchises is limited to 25ears. The Town has granted franchises to and imposed Franchise Taxes on cable television franchises. 25y ears. and Projected Town Sales Taxes and Franchise Taxes. The following table shows the amounts of the Town Sales and Franchise Taxes collected by industry classification for fiscal years 1998/99 through 2001/02, the preliminary actual amounts of Town Sales and Franchise Taxes collected by industry classification for 2002/03 and the projected amounts of Town Sales and Franchise Taxes collected by industry classification for fiscalears 2003/04 and 2004/05: Y TABLE 2 TOWN SALES AND FRANCHISE TAX COLLECTIONS BY INDUSTRY CLASSIFICATION(a) ($000's omitted) Preliminary Actual Actual(b) Projected(c) Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Industry Classification 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Construction $ 2,398 $ 3,023 $ 2,913 $ 2,779 $ 1,978 $ 2100 $ 2,184 Manufacturing 3 3 2 6 4 2, 2 Transportation,Communication&Utilities 17 28 32 55 101 125 130 Wholesale Trade 13 13 13 61 31 25 26 Retail Trade 674 1,497 1,763 1,877 2,086 2,580 2,683 Restaurant,Bars&Lodging 918 1,053 1,082 1,250 1,354 1,765 1,836 Fire,Insurance&Real Estate 15 25 73 45 62 25 26 Services 256 221 257 258 285 320 333 All Other 2 51 (3) 42 50 10 10 Cable Franchise Tax 207 225 263 302 342 378 393 Total $ 4,503 $ 6,139 $ 6,395 $ 6,675 $ 6,293 $ 7.330 $ 7,623 (a) Figures are presented on the cash basis of accounting per the Arizona Department of Revenue Standard Industry Summary Local Taxes Collection Reports for all classifications except Cable Franchise. Cable Franchise Taxes are presented on the modified accrual basis of accounting. 12 (b) Preliminary actual figures are based on the fiscal year 2003 unaudited Comprehensive Annual Financial Report and are subject to change upon audit. (c) Projections based on the fiscal year 2003/04 budget of the Town. Such projections are forward-looking statements and no assurance can be given that the projected collections will be realized at the times or in the amounts shown. As indicated above, approximately 29% of the Town's Sales and Franchise Tax collections are projected to be construction activity in fiscal year 2003/04. Therefore, a decline in construction activity may cause the Sales and Franchise Tax collections projected for fiscal years 2003/04 and 2004/05 to differ from those displayed above. Although the rate of growth in construction, particularly in single-family residences has slowed, the Town expects activity to remain level for the next twenty years. SUCH PROJECTIONS MUST BE VIEWED WITH AN ABUNDANCE OF CAUTION. See "EXCISE TAXES- Town Sales and Franchise Taxes—Excise Taxes and Development." Source: Finance Department of the Town. State-Shared Income Taxes. Also,under current State law,Arizona cities and towns are preempted from imposing a local income tax. Cities and towns are, however, entitled by statutory formula to receive typically 15.0% of the net revenues of the State's personal and corporate income tax collections for the two fiscal years prior to the current fiscal year. Distribution of such funds is made monthly based on the proportion of each city's or town's population to the total population of all incorporated cities and towns in the State as determined by the latest census. Reduced economic activity or reductions in the statutory formula share could adversely affect the Town's revenues. Such percentage amount was adjusted to 15.8% for fiscal year 1999/00 but returned to 15% for the next fiscal year. The increase to 15.8%was intended to offset expected reduced income tax collections resulting from percentage rate reductions in the prior year. The return to 15% did not have an immediate impact due to continuing increases in collections. To resolve a State budget shortfall projected to be larger than forecasted at the time of adoption of the biennial budget, such percentage amount was reduced to 14.8% for fiscal years 2002/03 and 2003/04. The percentage is to revert back to 15%automatically for fiscal year 2004/05. The Town is unable to predict at this time whether in fact the percentage will revert back to 15%in such fiscal year. State-Shared Sales Taxes. Pursuant to statutory formula, cities and towns in Arizona receive a portion of the State- levied transaction privilege (sales) tax. The State transaction privilege (sales) tax is levied against the same categories of business activity as the Town's transaction privilege(sales)tax with the exception of food sales,which the State exempts from tax. As Table 3 indicates, the rate of taxation varies among the different types of business activities taxed, with the most common effective rate being subject to the hereinafter described distribution share being 5%of the amount or volume of business transacted. Under current State law, the aggregate amount distributed to all Arizona cities and towns is equal to 25% of the "distribution share" of revenues attributable to each category of taxable activity. The allocation of each city and town of the revenues available to all cities and towns is based on their population relative to the aggregate population of all cities and towns as shown by the latest census. State-levied transaction privilege (sales) taxes are collected by the State and are distributed monthly to cities and towns. 13 TABLE 3 TAXABLE ACTIVITIES,TAX RATES AND DISTRIBUTION SHARE Tax Distribution Business Activity Category Rate(d) Share Mining—Severance 2.500% 80.00% Oil and Gas,Nonmetal Mining 3.125 32.00 Transportation—Towing 5.000 20.00 Utilities 5.000 20.00 Communication 5.000 20.00 Publishing 5.000 20.00 Printing 5.000 20.00 Private Cars/Pipelines 5.000 20.00 Contracting 5.000 20.00 Restaurants and Bars 5.000 40.00 Amusements 5.000 40.00 Personal Property Rentals 5.000 40.00 Retail(excluding food sales) 5.000 40.00 Hotel/Motel 5.500 50.00 Membership Camping 5.000 40.00 Timbering- Severance (e) 80.00 Rental Occupancy Tax 3.000 67.00 Use and Use Inventory Tax 5.000 0.00 Jet Fuel Tax 0 40.00 Jet Fuel Use Tax (f) 0.00 Railroad and Aircraft 5.000 20.00 (d) On November 7, 2000, Arizona voters passed Proposition 301, which increased the state sales tax rate on certain of the categories of business activity from 5% to 5.6%. The additional 0.6% is being used to fund certain educational programs by the State. Such portion of the sales tax which is attributable to Proposition 301 will not be subject to distribution; therefore, the additional 0.6%is not reflected in Table 3. (e) The amount of severance tax levied on a severer engaged in the business of timbering shall be: (1) $2.13 per thousand board feet for timber products that are derived from ponderosa pine. (2) $1.51 per thousand board feet for timber products derived from all species except ponderosa pine. (I) The amount of tax levied on a taxpayer engaged in retail jet fuel sales or jet fuel use shall be $0.0305 per gallon. Source: Arizona Department of Revenue. Licenses and Permits; Fines. The Town imposes and collects fees for licenses and permits to engage in certain activities within the Town and for the right to utilize certain Town property. The Town also imposes and collects fines for violations of State laws or Town ordinances relating to traffic, parking and other offenses. Beginning September 1, 2003 (such year serving as the base year for such purposes) 75% of the judicial collections of the Town's court in excess of their fiscal year 2003 collections are required each fiscal year to be transferred to the State for deposit in the State's general fund. The State will collect the excess collections from all cities and towns until it receives$45 million annually. 14 Actual and Projected Collections. The following tables set forth the Town's actual Excise Tax collections for fiscal year 1998/99 through 2001/02,the Town's preliminary actual Excise Tax collections for fiscal year 2002/03 and the Town's projected collections for fiscal years 2003/04 and 2004/05. TABLE 4 HISTORICAL AND PROJECTED EXCISE TAX COLLECTIONS ($000's omitted) Preliminary Actual(g) Actual(h) Projected(i) Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Revenue Source 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Town Sales and Franchise Taxes $ 4,519 $ 6,139 $ 6,395 $ 6,675 $ 6,293 $ 7,330 $ 7,623 License and Permits 1,396 1,597 1,750 1,415 1,759 1,821 1,894 Fines 210 203 225 203 225 200 208 State-Shared Sales Taxes 1,571 1,727 1,845 2,289 2,323 2,495 2,595 State-Shared Income Taxes 1,963 2,178 2,346 3,098 3,161 2,871 2,986 Total $ 9,659 $ 11,844 $ 12,561 $ 13,680 $ 13,761 $ 14,717 $ 15,306 (g) These figures are presented on a modified accrual basis of accounting, except for Town sales taxes which are presented on the cash basis accounting per the Arizona Department of Revenue Standard Industry Summary Local Taxes Collection Report. (h) Preliminary actual figures are based on the fiscal year 2003 unaudited Comprehensive Annual Financial Report and are subject to change upon audit. (i) Projections based on the fiscal year 2003/04 budget. Such projections are forward-looking statements and no assurance can be given that the projected collections will be realized at the times or in the amounts shown. Budgeted numbers for Fines do not reflect changes in state law as shown above in "Licenses and Permits;Fines and Forfeitures." Source: Finance Department of the Town. POSSIBLE LEGISLATIVE OR INITIATIVE MEASURES From time to time, bills are introduced in the Arizona Legislature to change the formula used to allot State-Shared Sales Taxes and State-Shared Income Taxes. The Town cannot determine whether any such measures will become law or how they might effect the Town's revenues which comprise the Excise Taxes.In addition,initiative measures are circulated from time to time seeking to place on the ballot changes in Arizona law or Town resolution or ordinances which repeal or modify Town Sales Taxes, State-Shared Sales Taxes and State-Shared Income Taxes, as applicable. The Town cannot predict if any such initiative measures will ever actually be submitted to the electors, what form the measures might take or the outcome of any such election. 15 a) ct) a) a) i-. ) %� W ,r M - N O° cn 't3 cam, O �, a) , N — ^. ,8 O •+ C j C% > N N N N N .-0 v) �+ i z CY co Q U O O U E'i U U O (1,) •,•. •7...., 0 S = +*�-► 0 U N a) �.► O t. 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O •�" ON En 7 ° 4) W O Ci '� ti o e ,..ifs a a off" t � ^--. `ti cy ON O �' ° X43 0\ ' I� ,.a�' � a � W � ' �, ti ocn gIz') '4 Z4 v Cn 4) Z ----,._.. 0.) •,,-.4 ti c) p .vim Mme' V _,Cn '' OQ" O o) D o) v ,J v 0 o b4 W o o �, a -�, ti> `ti o� o w „..z o v o •° y cV, o ^ a a a° CZ 0 0) N 0Vj ° p 4) 4) 'Z3 4) Z Z 4) '�• `0 `0 4,.. ,., `ti „ 2 t �v z v *� o o, a, 4) s, a, 4, o o) a, cL, .4 •z .4 ,, 0., m — , .4 .4 •E ,,,_ .4 E . TABLE 6 SOURCES AND USES OF FUNDS Sources Series 2003 Bonds $15,750,000.00 Net Original Issue Premium* 65,688.85 Accrued Interest 29,568.67 Total Sources $15,845,257.52 Uses Deposit to Depository Trust $15,651,473.75 Deposit to Costs of Issuance Account** 160,587.66 Deposit to Interest Account 33,196.11 Total Uses $15,845,257.52 * Net of Underwriter's compensation. ** Includes bond insurance premium. THE WATER SYSTEM General Background The water system serving the Town(the"Water System")is comprised of two separate public water systems located within and without the town limits of the Town. The larger water system serves customers located in the Town and has approximately 14,000 connections. The second water system (sometimes referred to as the "Countryside System") serves customers located near the Town in unincorporated Pima County, Arizona and has approximately 2,000 connections. The Water System is owned by the Corporation and,pursuant to a lease purchase agreement with the Corporation, is operated and maintained as a self-supporting municipally-operated utility of the Town. It is operated in a manner where the costs of providing water to the general public on a continuing basis will be financed by user charges. The Water System is operated, and accounted for, under a separate enterprise fund by the Town. Although a separate audit of the Water System's records will not be conducted, it is subject to audit procedures in conjunction with the annual audit of the Town's combined financial statements. The Water System's authority and responsibility is derived from the Arizona Revised Statutes and ordinances and resolutions of the Town Mayor and Council. The Mayor and Council adopt the Water System's annual budget(the "Water System Budget"),establish water rates and fee structures and provide overall policy direction. State law establishes the requirements for presentation and adoption of the Town's budget, which includes the Water System Budget and requires the submission of a proposed Water System Budget to the Mayor and Council each year. The Mayor and Council are required to hold a public hearing on the proposed budget and to adopt the Town Budget. The Oro Valley Water Utility Commission (the "Commission") was established by Ordinance to act as an official advisory board to the Town Council on water system matters and policies. The Commission consists of seven members appointed by the Town Council. The constituency of the Commission shall include at least one member 18 from the service area outside the Town limits.Pursuant to the Ordinance establishing the Commission, the primary responsibility of the Commission is to conduct an annual water review process involving an evaluation of the Water System's revenue requirements and capital improvement program and water rate adjustments to meet those needs. The Commission was actively involved in the evaluation and analysis of the Reclaimed Water Improvements including the recommendation to the Town Council to fund such improvements. Following the Commission's review of the water system, it recommends a capital program and schedule of rate adjustments to the Mayor and Council.After public hearings,the Mayor and Council have the final authority to establish water rates and charges. Administrative Staff In accordance with the utility code of the Town, the day-to-day management of the Water System shall be the responsibility of the Water Utility Director who is appointed by the Town Manager. Alan Forrest presently is the Water Utility Director. Mr. Forrest has a M.S. degree in Civil Engineering, Hydraulics &Water Resources from the University of Arizona and has been a Registered Professional Civil Engineer in the State of Arizona since 1988. Mr. Forrest has over 18 years experience working for water utilities in the Tucson area.Prior to coming to Oro Valley in June 2000,he held various positions, including: Chief Planning Engineer with Tucson Water, District Engineer with the Metropolitan Domestic Water Improvement District; and General Manager of Community Water Company in Green Valley, Arizona. Shirley Seng has 7 years experience working with the water utility as its Utility Administrator. Prior to the Town acquiring it in 1996,the utility was owned and operated as a private water company. Ms. Seng was employed by the private water company for 13 years and held various positions including Controller and General Manager. Billing and Accounting Accounting for the Water System is performed by the Finance Department of the Town while computer operations are performed by the Water System itself Meters are read and bills issued monthly. Delinquent accounts receive a "late notice" thirty days after the initial billing and one "delinquent notice" ten days after the "late notice." Water service is discontinued until the account is paid in full and a service charge assessed. Less than 1% of the Water System's total accounts reach the point turn-off Water Sources and Supply Well Supply. The Water System obtains all of its municipal water supply from groundwater sources pumped from twenty-four(24) wells. The well fields are all located in the Canada Del Oro Wash watershed of the Tucson basin portion of the Upper Santa Cruz River Valley. According to letters from the Arizona Department of Water Resources ("ADWR"), recoverable groundwater in the aquifers from which the Utility pumps its water (between ground level and 1,000 feet below the surface) will be sufficient and of adequate quality to meet the projected demand of the Water System's service areas through and beyond the final maturity of the Series 2003 Bonds. Surface Water. The Central Arizona Project ("CAP") is a water delivery system run by the Central Arizona Water Conservation District ("CAWCD") which conveys approximately 1.5 million acre feet per year of Arizona's 2.8 million acre feet annual entitlement of Colorado River water to Maricopa, Pinal and Pima counties in central Arizona. CAWCD's boundaries include all three such counties. This water is supplemental to the existing surface water and groundwater now being used by municipalities, industry, agriculture and Indian communities in these counties. CAWCD is vested with the powers of a municipal corporation. CAWCD's responsibilities include contracting with the Secretary of the Interior of the United States for water to be provided by the CAP, subcontracting with local water users for delivery of CAP water, repaying construction, operation, maintenance and replacement costs connected with the CAP, and operating and maintaining the CAP facilities. In addition, it has express authority to levy an ad valorem tax against all real property within the three counties.This tax,in an amount not to exceed$0.14 19 per$100 of assessed valuation,may be used to repay construction and operation costs of the CAP. CAWCD also has bonding authority. CAWCD is governed by a 15-member Board of Directors, elected by the voters of each of the three counties. Litigation, to which the Town is not a party, is currently pending between CAWCD and the United States Department of the Interior concerning, among other things, reimbursement of the U.S. Department of the Interior for certain CAP costs. The parties have entered into, and the Court has approved, p a settlement agreement subject to several conditions. If the conditions cannot be satisfied, the litigation may resume. While this litigation may, if, CAWCD is unsuccessful, have some adverse impact on the cost of CAP water g � to the Town, it is not expected that the litigation will have a material adverse effect on the Town or the Water System. During the early years of CAP availability, supply will exceed demand. Excess water will be recharged until 2017 impact the reliability of the in non-shortage years after 2017. Various long-term factors could im a g g pe CAP supply including precipitation in the upper Colorado River basin; operation of the Colorado River system bythe United Y States Bureau of Reclamation ("USBR"); obligations to fulfill Colorado River appropriations to other users which have priority over the Town; operation of the CAP by the USBR and CAWCD; and operation and maintenance, and failures of the CAP facilities. The USBR has predicted that project shortages may occur one year in five bythe year 2050. With the acquisition of the Canada Hills Water Company in 1996, the Town acquired an allocation of 1,652 acre feet of CAP water, however, no facilities have been constructed to connect the Water System service area with the CAP aqueduct. With the Town's management of Oro Valley Water Improvement District ("OVWID"), the Town received control of an additional allotment of 642 ) acre feet of CAP water.Additionally,the Town is anticipating the assignment of an additional allotment of 4,454 acre feet within the next six months. For the past three years, the Town has contracted with Kai Farms to take direct delivery of its CAP allotment for use in irrigating their crops. In storage lieu of their use of groundwater, this has allowed the Town to accumulate long-termp credits for future water resource management. Water Rate Structure.After reviewing recommendations from the Commission,water rate schedules are adopted p by the Mayor and Council. The Town's principal consideration in designing rate schedules is to assure that allocated costs of service are recovered in an equitable manner from the various customer classes. The first element of the water rate is the base rate or service fee.The base rate is designed to recover customer costs associated with billing,collection expenses and meter reading. The second element of the monthly water use rate is the commodity charge. This charge is dependent upon the amount of water used per month. A typical single-family residential customer in the Water System's service area has historically used an average of 10,000 gallons per month throughout the calendar year. On the basis of this level of use,typical customer wouldpaY $31.00 per month during the calendar year under current rates. THE TOWN The Town has adjusted the water rates eight times since acquiring the Water System. The first adjustment was in fiscal year 1996/97. Upon acquisition, the Town reduced the monthly base rate and increased the commodity rate. The second adjustment was in fiscal year 1997/98 to equalize the rates between the two private utilities acquired. The third adjustment was in fiscal year 1998/99 which resulted in a 5.5% increase in revenues to meet the revenue requirements. The fourth rate increase was in fiscal year 1999/00 which created a three-tier conservation rate structure. The fifth adjustment was in fiscal year 2000/01 which resulted in a 6.74% increase in revenues to meet the revenue requirements and equalize the rates of the newly acquired service area formerly known as the Oro Valley Water Improvement District. The sixth adjustment was in 2001/02 which resulted in a 6.7% increase in base and commodity rates. The seventh adjustment removed the 1,000 gallons of water previously included in the base rate. This change made in fiscal year 2002/03 resulted in a $1.90 cost per customer per month. The eighth adjustment made in fiscal year 2003/04 was a 1.6%increase to meet revenue requirements. Additionally,the Town implemented the preservationY p groundwater fee(GPF)to finance delivery systems for renewable water supplies such as reclaimed water and/or CAP water. 20 Recent Potable Water Rate Increase Request and Establishment of Ground Water Preservation Fee and Reclaimed Water Rate On August 20, 2003 the Town Council adopted a resolution that provided notice of intention to establish a groundwater preservation fee;establish a reclaimed water rate; and to increase the existing potable water rates. Regarding the recommended rates, the Town projected the operating costs, capital improvements and debt service requirements to determine the utility's estimated revenue requirements for the next ten fiscal years. The potable water system and the reclaimed water system were analyzed individually to evaluate the revenue requirements of each system prior to combining both systems into one analysis. The updated potable water master plan identified substantial improvements to the existing system that created the need to increase the potable water rates. Based on preliminary engineering,the reclaimed water system master plan identified the capital costs to construct a reclaimed water system. The potable water rates will increase by 2.1%in fiscal year 2003/04. Subsequent potable water rate increases for the next five years need to be increased; however, it is important to note that these are far reaching projections and are subject to change. The recommended rates consist of the following changes for fiscal year 2003/04: 1. 2.1%potable water rate increase 2. Establish the GPF at 21 t per 1,000 gallons of water used 3. Establish the reclaimed water rate equal to the potable water rate The above-referenced rates were approved by the Town Council on October 1, 2003 and became effective on November 1, 2003. Factors Affecting Water Costs Over the past several years, energy costs have had a significant impact on the operating expenses of municipal water systems.The energy costs of operating the existing well systems vary from well to well and from one well system to another. Operating expenses, including power, are affected by topographic pumping lifts needed to serve the higher elevations of the water system's service area as well as depth of wells from which groundwater is extracted. Use of CAP water, if only for groundwater recharge, will also increase operating expenses because costs associated with CAP water purchase and recharge is currently more expensive than pumping groundwater from system wells. In an effort to decrease pumping costs, the Water System is in the process of replacing over-sized and under-sized pumps as well as constructing large size reservoirs to provide gravity feeds to as many customers as possible thereby reducing the need for pumps that currently pressurize the water system. 21 Water System Fees Customers connecting to the Water System are required to place a deposit as security against future service charges. In addition, customers must pay meter installation fees, potable water system development impactg Y p fees and alternative water resource development impact fees("AWRD")prior to installation of any meter. The followingare schedules of fees and charges: TABLE 7 TOWN OF ORO VALLEY WATER UTILITY SCHEDULE OF FEES AND CHARGES(u) Service Charge Amount New Service Establishment Fee $ 20.00 Service Reconnection Fee 25.00 Service Reconnection Fee(after 5:00 p.m.) 50.00 Meter Re-read Fee 20.00 Insufficient Funds/Returned Check Fee 25.00 Backflow Prevention Install.Permit 35.00 Customer Requested Meter Test Cost Customer Security Deposit(basic) 40.00 Destruction of Property Cost Hydrant Meter Deposit 1,200.00 Delinquent Payment Fee 5.00 Service Area Inclusion Fee: per acre 5.00 per lot 2.00 (u) Service charges became effective June 21, 2003. Source: The Town. • 22 TABLE 8 METER FEES&IMPACT FEES Meter Installation AWRD Meter Size Charges (v) Impact Fees (in inches) Effective 7-06-02 Effective 8-13-96 5/8 x 3/4 $150.00 $300.00 3/4 x 3/4 175.00 450.00 1 standard 200.00 750.00 1.5 standard 390.00 1,500.00 1.5 turbine 560.00 1,500.00 2 standard 560.00 2,400.00 2 turbine 550.00 2,400.00 2 compound 1,365.00 2,400.00 3 turbine 875.00 4,500.00 3 compound 1,700.00 4,500.00 4 turbine 1,600.00 7,500.00 4 compound 2,750.00 7,500.00 6 turbine 3,240.00 15,000.00 6 compound 4,925.00 15,000.00 8 turbine Time&Materials N/A Multifamily - 144.00 Per Unit Cost N/A Turf Uses(per acre) Golf Course turf areas 3,680.00 Lakes&open water 4,640.00 Turf for cemeteries,parks&schools 2,880.00 Turf areas with 10 acres or more turf 2,880.00 (v) 5.6%sales tax will be added to meter installation fees. Source: The Town. 23 TABLE 9 TOWN OF ORO VALLEY WATER UTILITY NEW DEVELOPMENT CONSTRUCTION INSPECTION FEES Length of Water Main (in feet) Inspection Fee(w) 0—500 $365.00 501 — 1000 585.00 1001— 1500 805.00 1501—2000 1,025.00 2001—2500 1,245.00 2501 —3000 1,465.00 3001 —3500 1,685.00 3501—4000 1,905.00 4001—4500 2,125.00 4501—5000 2,345.00 Repeat Pressure Test(per test) 60.00 Repeat Bacteria Test(per test) 75.00 (w) Fees are collected prior to project acceptance. Source: The Town. TABLE 10 TOWN OF ORO VALLEY WATER UTILITY NEW DEVELOPMENT HYDRAULIC&DESIGN REVIEW FEES(x) New Development Hydraulic Review Fees Design Review Fee Base Sheet $155.00 $260.00 Each Additional Sheet 25.00 15.00 (x) Fees include 2 hydraulic reviews and 2 design reviews. Additional review to be$85.00 per review. Fees to be collected prior to receipt of approved plans. Source: The Town. 24 All water meters remain the property of the Town and the Town is responsible for meter maintenance. The Town estimates that approximately 95%of the water system connections are customers with a 5/8"meter. The following table presents the Water System meter connections at the time the Water System was acquired by the Corporation, the meters connected from fiscal year 1996/97 through 2002/03, meters projected to be connected during fiscal years 2003/04 through 2007/08 and a running total number of meters connected or projected to be connected during each year show. All projections are forward-looking statements and must be viewed with an abundance of caution. TABLE 11 NUMBER OF METERS CONNECTED Fiscal Meters Running Year Connected Total Pre— 05-01-96(y) 9,863 9,863 1995/96 (z) 152 10,015 1996/97 629 10,644 1997/98 810 11,454 1998/99 985 12,439 1999/00(aa) 1,930 14,369 2000/01 787 15,156 2001/02 507 15,663 2002/03 470 16,133 2003/04(bb) 400 16,533 2004/05(bb) 400 16,933 2005/06(bb) 400 17,333 2006/07(bb) 400 17,733 2007/08(bb) 400 18,133 (y) Connections existing at the time the Town acquired the two private water companies. (z) Connections added between May 1st and June 30, 1996. (aa) Fiscal year 1999/00 includes 924 Metropolitan Domestic Water Improvement District of Pima County, Arizona, connections which became customers of the Water System in July 1999. (bb) These projections are forward-looking statements. No assurance can be given that these projections will be met. Source: The Town. 25 Water Rates With adoption of the rate increase in fiscal year 2003/04, the Water System now has one rate schedule. The following rates plus the applicable proportionate part of any taxes or any governmental impositions which are assessed on water sales,apply to all individually metered water services: TABLE 12 SCHEDULE OF WATER RATES METER BASE RATE COMMODITY COMMODITY COMMODITY SIZE includes TIER 1 TIER 2 TIER 3 (in inches) ZERO gallons $1.92 per 1,000 gals. $2.55 per 1,000 gals. $3.25 per 1,000g als. 5/8 x 3/4 $ 12.30 0- 10,000 10,001 -25,000 OVER 25,000 3/4 x 3/4 18.40 0- 10,000 10,001 -25,000 OVER 25,000 1 30.60 0- 16,000 16,001 -27,000 OVER 27,000 1.5 61.30 0-3 8,000 3 8,001 - 64,000 OVER 64,000 2 98.00 0- 80,000 80,001 - 134,000 OVER 134,000 3 196.00 0- 186,000 186,001 -311,000 OVER 311,000 4 306.30 0- 169,000 169,001 -283,000 OVER 283,000 6 612.60 0- 1,800,000 1,800,001 -3,006,000 OVER 3,006,000 8 1,225.20 0- 1,800,000 1,800,001 -3,006,000 OVER 3,006,000 Source: The Town. Golf course usage to be billed at Tier 1 rates. Tier 2 and Tier 3 will be implemented for any usage in excess of ADWR allotment and will be billed after ADWR annual report is filed. The Town entered into an agreement at the time of acquisition of the Rancho Vistoso Water Company that provides for a special rate for the Vistoso Partners golf courses. The commodity rate for any Vistoso Partners golf course is $194.00 per acre foot of water effective on October 4, 2002. See Table 15—"SCHEDULE OF THE 15 LARGEST WATER SYSTEM CUSTOMERS" hereafter. This rate is valid until alternative water can be provided to the golf courses. 26 The following table lists the number of customers connected and the respective water revenues for each type of customer for fiscal year 2002/03(the most recently completed fiscal year). TABLE 13 NUMBER OF CONNECTIONS BY TYPE FOR FISCAL YEAR 2002/03 Number Percentage Percentage of of Water of User Type Connections Total Revenues Total Residential 15,316 94.90% $6,024,763 69.64% Commercial 203 1.27 506,156 5.85 Irrigation 331 2.06 702,930 8.13 Construction 273 1.70 202,923 2.35 Turf 9 0.06 1,163,114 13.44 Wholesale/Unmetered 1 0.01 51,055 0.59 Totals 16,133 100.00% $8,650,941 100.00% Source: The Town. TABLE 14 CONNECTION HISTORY OF THE WATER SYSTEM DEVELOPMENT OF THE AREA SERVED BY THE SYSTEM Fiscal Years Single Multi- Ending Family Family Commercial Irrigation Turf Total Total June 30 Connections Connections Connections Connections Connections Connections EDU's(cc) 2003 416 29 10 15 - 470 610 2002 477 1 11 18 - 507 665 2001 749 9 14 15 - 787 789 2000(dd) 927 24 33 21 1 1,006 1,397 1999 928 18 10 28 1 985 1,277 1998 786 2 12 10 - 810 936 1997 621 - 3 5 - 629 639 1996(ee) 152 - - - - 152 152 (cc) EDU's are determined by dividing the total amount collected with respect to connections to the Water System by the then existing fee for a 5/8-inch connection. There can be no assurance that these levels of connections or any other level will continue in future years. (dd) Fiscal year 1999/00 includes 924 Metropolitan Domestic Water Improvement District of Pima County, Arizona, connections which became customers of the Water System in July 1999. (ee) On May 1, 1996, the Town entered into a lease purchase agreement to acquire two water companies'assets which were the bulk of the facilities then supplying the water needs of the area within the boundaries of the Town as well as certain areas outside the boundaries of the Town. At that time, those facilities had 9,863 existing connections. From May 1, 1996 to June 30, 1996, 152 connections were added. Source: The Town. 27 TABLE 15 SCHEDULE OF THE 15 LARGEST WATER SYSTEM CUSTOMERS FOR FISCAL YEAR 2002/03 Annual Annual Water Gallons Water System Customer Charges Delivered* Hilton El Conquistador Golf Course&Country Club $ 686,188 347,963 Sun City Golf Course 268,219 137 378 Stone Canyon Golf Course ' 105,369 200,217 Hilton El Conquistador Resort 101,550 39 327 Vistoso Highland Golf Course ' 79,427 145,934 Rockridge Apartments 65,332 23 365 Sun City Community Association ' 60,660 16,456 La Reserve Apartments 60,431 22 177 La Cholla Air Park ' 50,740 22,191 The Boulder Apartments 29,622 11,987 Pusch Ridge Christian Academy 28,013 9,278 Fry's Grocery Store 26,598 9 164 Honeywell(Allied Signal) ' 20,101 6,780 Copper Creek Elementary School 16,612 4 332 Marana Unified School District(De Grazia) 12 673 ' 3,851 Totals $1,611,535 1,000,400 * 000's omitted. Source: The Town. Net Water System Revenues Coverage of Water System-related Debt Service As stated under "SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS - Town's Intention to Pay Rental Payments from Net Water System Revenues,"the Town intends toa the Rental Payments System topay relating to the Water System-related Debt Service from Net Water S y m Revenues. The following table illustrates the Water System's revenues, expenditures, Water System supported debt service and Net Water System Revenues for thepast five fiscal projections y years and rojections for the next fiscal year. Such projections are forward-looking statements and must be viewed with an abundance of caution. See "ESTIMATED DEBT SERVICE REQUIREMENTS AND DEBT SERVICE COVERAGE." 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Z W. {.. ++ +.+ Q) F. w +�+ w +�+ � -..+ i.. .a 4) -•-. 4) }, a) ) f O. 0 `� `� = `� � �' O o ° � . � t2 4) a) �' 4) � ' � '3 .1:: 3 '3 +: � ni i o i 7-4 3 ..fl ; 33 ¢ 3o ,54c7c7c� o �'aouo Q a o � °\ c!) V] NV1 0 Z) -`,) r.G H w H H Z Z 3 H Z 4.1 4. Qa Z �o _•� 0 0 `ti .N a o 4) W o ' zZi N ,� o Z 0 k3 c c_ 'J a .o o -z M cn �, o °' o o a) o q •S o N ° o crn ry v p ,) OU WM N U C wL L p � ,) 0 0 0) o z z •� 4) ,, t.,z%) E c < Z c 0) W sy '' 4) p 4) "Z3 it% U ' I E., '•t2 ,b4 ''., ss, 01,, 4> o a; -� I _ U � : 0 C/D THE TOWN'S GENERAL FUND The following table sets forth the Town's general fund revenues, expenditures, other financing sources and uses, excess of revenues and other sources over expenditures and other uses, and beginning and ending general fund balances for the fiscal years indicated. Figures for fiscal years 1997/98 through 2001/02 are taken from the audited financial statements of the Town which are prepared using generally accepted accounting principles. Preliminary actual figures for fiscal year 2002/03 are based on the fiscal year 2003 unaudited Comprehensive Annual Financial Report. Unaudited figures are subject to change upon audit and should be viewed with an abundance of caution. Fiscal year 2003/04 figures are budgeted amounts as provided by the Finance Department of the Town. Budgeted amounts are "forward-looking" statements which should be considered with an abundance of caution. Historical trends should not be used to predict future trends. TABLE 17 TOWN OF ORO VALLEY,ARIZONA GENERAL FUND SCHEDULE OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCE Preliminary Taken from Audited Statements(nn) Actual Budgeted 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03(oo) 2003/04(pp) REVENUES Taxes(qq) $ 3,844,944 $ 4,518,732 $ 6,139,176 $ 6,429,157 $ 6,674,725 $ 6,217,798 $ 7,330,000 Intergovernmental Grants&Aid(qq) 4,523,228 5,073,616 5,486,779 5,774,770 7,097,629 7,589,237 7,826,393 Fines(qq)and Forfeitures(rr) 190,828 210,450 202,714 225,409 203,385 225,207 200,000 Licenses and Permits(qq) 1,069,327 1,396,431 1,596,520 1,749,793 1,415,028 1,759,118 1,821,000 Charges for Services 258,079 220,506 269,665 339,592 503,314 598,383 554,300 Contributions and Donations 37,278 2,001 8,397 2,752 - 37,331 24,500 Interest 274,985 402,475 547,657 638,441 285,819 (109,421) 125,000 Other 17,145 16,187 49,628 61,071 88,795 117,365 100,000 TOTAL REVENUES $10,215,814 $11,840,398 $14,300,536 $15,220,985 $16,268,695 $ 16,435,018 $17,981,193 EXPENDITURES Current General Government $ 2,746,215 $ 3,131,693 $ 4,127,761 $ 7,256,133 $ 6,052,145 $ 6,330,236 $ 6,093,094 Public Safety 4,217,741 5,048,148 6,116,785 7,193,831 8,416,448 8,724,667 9,708,163 Culture and Recreation 647,146 636,302 637,084 1,193,846 1,474,667 2,394,212 2,335,534 TOTAL EXPENDITURES $ 7,611,102 $ 8,816,143 $10,881,630 $15,643,810 $15,943,260 $17,449,115 $18,136,791 Excess of Revenues Over(Under)Expenditures $ 2,604,712 $ 3,024,255 $ 3,418,906 $ (422,825) $ 325,435 $ (1,014,097) $ (155,598) OTHER FINANCING SOURCES Operating Transfer In $ - $ - $ - $ 238,269 $ - $ 193,194 $ - Operating Transfer Out (763,079) (599,040) (1,616,810) (1,705,235) (1,155,104) (1,134,954) (1,182,168) Proceeds from Capital Lease Agreements 33,580 - - - - - - Proceeds from Sale of Bonds - - - 2,450,553 - - - TOTAL OTHER FINANCING SOURCES(USES) $ (729,499) $ (599,040) $(1,616,810) $ 983,587 $(1,155,104) $ (941,760) $(1,182,168) Excess(Deficiency)of Revenue Over Expenditures and Other Sources(Uses) $ 1,875,213 $2,425,215 $ 1,802,096 $ 560,762 $ (829,669) $ (1,955,857) $(1,337,766) Fund Balance at Beginning of Year $ 4,563,577 $ 6,438,790 $ 8,864,005 $10,666,101 $11,226,863 $10,397,194 $ 7,992,149 FUND BALANCE AT END OF YEAR $ 6,438,790 $ 8,864,005 $10,666,101 $11,226,863 $10,397,194 $ 8,441,337 $ 6,654,383 (nn) Although these figures are taken from audited financial statements, this table has not been audited. For further information, please refer to the most recent actual audited financial statements for fiscal year 2001/02 for the Town. (oo) Audited figures may vary significantly from unaudited figures shown here. The preliminary actual amounts are based on the unaudited fiscal year 2002/03 Comprehensive Annual Financial Report and are subject to change upon audit. Figures for fiscal year 2002/03 should be analyzed with an abundance of caution and are not intended as statements or representations of fact or certainty. The budgeted amounts for fiscal year 31 2003/04 should be analyzed with an abundance of caution and are not intended as statements or representations of fact or certainty; no representation is made as to the correctness of such amounts or that they will be realized. (pp) The budgeted amounts for fiscal year 2003/04 should be analyzed with an abundance of caution and are not intended as statements or representations of fact or certainty;no representation is made as to the correctness of such amounts or that they will be realized. (qq) These amounts are pledged to the payment of the obligations described under APPENDIX B— "TOWN OF ORO VALLEY, ARIZONA -FINANCIAL DATA - Current Year Statistics -Municipal Property Corporation Bonds, Certificates of Participation and Excise Tax Revenue Obligations." (rr) The amounts attributable to "Forfeitures" are pledged for other specific uses and are not pledged to the payment of the obligations described under footnote(oo). Source: The Audited Financial Statements, the preliminary fiscal year 2002/03 unaudited Comprehensive Annual Financial Report and the fiscal year 2003/04 Annual Budget of the Town. TOWN EMPLOYEE RETIREMENT SYSTEM Effective September 1, 2003, the Town shifted from the State's participation in a defined contribution plan administered by the ICMA Retirement Corporation as a 401(a)plan to the Arizona State Retirement Plan. See Note 4C in APPENDIX C for further discussion of the Town's retirement plan. LITIGATION Representatives of the Town will certify that no litigation or administrative action or proceeding is pending or,to the best of their knowledge, threatened, restraining or enjoining, or seeking to restrain or enjoin, the issuance and delivery of the Series 2003 Bonds or contesting or questioning the proceedings and authority under which the Series 2003 Bonds have been authorized and are to be issued, secured, sold; executed or delivered, or the validity of the Series 2003 Bonds. LEGAL MATTERS The Series 2003 Bonds are sold with the understanding that the Corporation will furnish the Underwriter with the approving opinion of Gust Rosenfeld P.L.C., Phoenix, Arizona, Bond Counsel. The proposed form of such opinion is included in this Official Statement as APPENDIX E. Bond Counsel is to render such opinion upon the validity and enforceability of the Series 2003 Bonds under Arizona law and on the exclusion of the interest income on the Series 2003 Bonds from gross income for purposes of calculating federal income taxes and of the exemption of the interest income on the Series 2003 Bonds from State income taxes. (See "TAX EXEMPTION" herein.) Fees of Bond Counsel are contingent upon the sale of the Series 2003 Bonds and are expected to be paid from proceeds of the sale of the Series 2003 Bonds. Bond Counsel will opine to the Underwriter upon the information on the cover, in Appendices D, E and F and under the headings entitled "INTRODUCTORY STATEMENT," "THE SERIES 2003 BONDS," "PLAN OF REFUNDING," "SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS," "TAX EXEMPTION," "BOND PREMIUM," "ORIGINAL ISSUE DISCOUNT," "POLITICAL CONTRIBUTIONS" (only as it relates to Bond Counsel), "RELATIONSHIPS AMONG PARTIES" (only as it relates to Bond Counsel) and "CONTINUING DISCLOSURE" (except for statements concerning compliance with existing continuing disclosure obligations)but otherwise has not participated in the preparation of this Official Statement and will not opine upon its accuracy, completeness or sufficiency. Bond Counsel has not examined nor attempted to examine or 32 verify any of the financial or statistical statements or data contained in this Official Statement and will also express no opinion with respect thereto. Certain legal matters will be passed upon solely for the benefit of the Underwriter by Greenberg Traurig, LLP, Phoenix,Arizona,counsel to the Underwriter. The various legal opinions to be delivered concurrently with the delivery of the Series 2003 Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. By rendering a legal opinion, the opinion giver does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of parties to the transaction.Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. TAX EXEMPTION In the opinion of Gust Rosenfeld P.L.C., Phoenix. Arizona, Bond Counsel, under existing laws, regulations rulings and judicial decisions, and assuming continuing compliance with certain covenants by the Corporation and the Town as described below, interest income on the Series 2003 Bonds is excluded from gross income for federal income tax purposes and is exempt from State of Arizona income taxes.A form of such opinion is included herein in APPENDIX E—"FORM OF APPROVING LEGAL OPINION." The Code imposes various restrictions, conditions and requirements relating to the continued exclusion of interest income on the Series 2003 Bonds from gross income for federal income tax purposes, including a requirement that the Corporation rebate to the federal government certain of its investment earnings with respect to the Series 2003 Bonds. The Corporation and the Town have covenanted to comply with the provisions of the Code relating to such matters. Failure to comply with such restrictions, conditions and requirements could result in the interest income on the Series 2003 Bonds being included as gross income for federal income tax purposes,under certain circumstances, from the date of issuance.The opinion of Bond Counsel assumes continuing compliance with such covenants. The Code also imposes an "alternative minimum tax" ("AMT") upon certain corporations and individuals. The AMT is equal to the excess (if any) of a taxpayer's "tentative minimum tax" for a taxable year over its regular income tax liability for the taxable year. The tentative minimum tax is based upon taxpayer's "alternative minimum taxable income" ("AMTI"). A taxpayer's AMTI is its taxable income with certain adjustments. Interest income on the Series 2003 Bonds is not an item of tax preference to be included in the AMTI of individuals or corporations. Notwithstanding the preceding sentence, included in the adjustments of AMTI for corporations is an adjustment increasing any such corporation's AMTI by 75% of the excess (if any) of such corporation's "adjusted current earnings" over the corporation's AMTI for the taxable year (determined without regard to such adjustment for excess current earnings and the alternative tax net operating loss deduction). A corporation's "adjusted current earnings"includes all tax-exempt interest,including the interest on the Series 2003 Bonds. Although Bond Counsel will render an opinion that, as of the delivery of the Series 2003 Bonds, interest income on the Series 2003 Bonds, is excluded from gross income for federal income tax purposes, the accrual or receipt of interest on the Series 2003 Bonds, may otherwise affect a beneficial owner's federal tax liability. Certain taxpayers may experience other tax consequences. Taxpayers purchasing the Series 2003 Bonds, including without limitation, corporations subject to the branch profits tax, financial institutions, certain insurance companies, certain subchapter S corporations, individuals who receive Social Security or Railroad Retirement benefits and taxpayers who have or are deemed to have incurred indebtedness to purchase or carry tax-exempt obligations should consult their tax consultants as to the applicability of such tax consequences to the respective beneficial owner.The nature and extent of these other tax consequences will depend upon the beneficial owner's particular tax status and the beneficial owner's other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. The Series 2003 Bonds are not"private activity bonds,"within the meaning of Section 141 of the Code. 33 Under existing federal tax law, if the Series 2003 Bonds are determined to be invalid for failure to comply with a substantive or procedural requirement of local law, the Series 2003 Bonds will be deemed not to be an obligation of the Town and interest on the Series 2003 Bonds will not be excludable from gross income for federal income tax purposes. From time to time, there are legislative proposals in Congress which, if enacted could alter or amend the federal tax matters referred to above or adversely affect the market value of the Series 2003 Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether, if enacted, it would apply to obligations (such as the Series 2003 Bonds)issued prior to enactment. BOND PREMIUM The difference between the principal amount of the Series 2003 Bonds maturing on July 1, 2004, through and including July 1, 2007,July 1, 2009 and July 1, 2011,through and including July 1,2013 (referred to in this section as the "Premium Bonds"), and the initial offering price to the public (excluding bond houses, brokers or similar persons or organizations acting in the capacity of underwriters or wholesalers)at which price a substantial amount of the Premium Bonds of the same maturity was sold constitutes to an initial purchaser amortizable bond premium which is not deductible from gross income for federal income tax purposes. The amount of amortizable bond premium for a taxable year is determined actuarially on a constant interest rate basis over the term of each Premium Bond. For purposes of determining gain or loss on the sale or other disposition of a Premium Bond, an initial purchaser who acquires such obligation in the initial offering to the public at the initial offering price is required to decrease such purchaser's adjusted basis in such Premium Bond annually by the amount of amortizable bond premium for the taxable year. The amortization of bond premium may be taken into account as a reduction in the amount of tax-exempt income for purposes of determining various other tax consequences of owning the Premium Bonds. Owners of the Premium Bonds are advised that they should consult with their own advisors with respect to the state and local tax consequences of owning the Premium Bonds. ORIGINAL ISSUE DISCOUNT The Series 2003 Bonds maturing on July 1, 2008,July 1, 2010 and July 1, 2014, through and including July 1, 2019 (referred to in this section collectively as "Original Discount Obligations"),will be sold at an original issue discount. The difference between the initial public offering price, including any pre-issuance accrued interest, of an Original Discount Obligation(the "Issue Price"), and the amount payable at maturity of the Original Discount Obligation will be treated as"original issue discount."With respect to a taxpayer who purchases an Original Discount Obligation in the initial public offering at the Issue Price and who holds the Original Discount Obligation to maturity, the full amount of original issue discount will constitute interest income which is not includable in the gross income of the beneficial owner of the Original Discount Obligation for Federal income tax purposes or Arizona income tax purposes and that owner will not, under present Federal income tax law or present Arizona income tax law, realize taxable gain upon payment of the Original Discount Obligation at its maturity. The original issue discount on each Original Discount Obligation is treated for Federal income tax purposes and Arizona income tax purposes as accruing daily over such Original Discount Obligation's term on the basis of a constant interest rate compounded at the end of each six-month period (or shorter period from the date of original issue)ending on January 1 and July 1 (with straightline interpolation between compounding dates). The amount of original issue discount accruing each period wi l l be added to the beneficial owner's tax basis for an Original Discount Obligation.The beneficial owner's tax basis in an Original Discount Obligation will be decreased • by the payment of any amounts (such as interest payments) to the beneficial owner under the terms of the Original Discount Obligation. The adjusted tax basis will be used to determine taxable gain or loss upon disposition of an Original Discount Obligation. An owner of an Original Discount Obligation who disposes of the Original Discount Obligation prior to maturity should consult his or her tax advisor as to the amount of original issue discount accrued over the period held and the amount of taxable gain or loss upon the sale or disposition of the Original Discount Obligation prior to maturity. 34 The Code contains certain provisions relating to the accrual of original issue discount in the case of subsequent purchasers Of an Original Discount Obligation. Beneficial owners who do not purchase an Original Discount Obligation in the initial offering should consult their own tax advisors with respect to the tax consequences of the beneficial ownership of the Original Discount Obligation. A portion of the original issue discount that accrues in each year to an owner of an Original Discount Obligation may result in certain collateral Federal income tax consequences for which the beneficial owner's own tax advisor should be consulted. The owners of Original Discount Obligations in states other than Arizona should consult their own tax advisors with respect to the state and local tax consequences. In the case of income tax laws of states other than Arizona, it is possible that under the applicable provisions governing the determination of state or local income taxes, accrued interest on the Original Discount Obligations may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment received by the beneficial owner until a later year. RATINGS Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies ("S&P") and Fitch Ratings Inc. ("Fitch") have assigned ratings of "AAA" and "AAA," respectively, for the Series 2003 Bonds with the understanding that the Financial Guaranty Insurance Policy will be issued by Ambac simultaneously with the delivery of the Series 2003 Bonds. S&P has assigned the Series 2003 Bonds an underlying rating of"A." Fitch has assigned the Series 2003 Bonds an underlying rating of"A+." Such ratings reflect only the views of S&P and Fitch. An explanation of the significance of a rating assigned by S&P may be obtained from S&P at 55 Water Street,New York, New York, 10004. An explanation of the significance of a rating assigned by Fitch may be obtained from Fitch at One State Street Plaza,New York,New York 10004. Such ratings may be revised downward or withdrawn entirely by S&P or Fitch, if, in their judgment, circumstances so warrant. Any downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2003 Bonds. The Town has covenanted in its continuing disclosure undertaking that it will file notice of any formal change in any such ratings relating to the Series 2003 Bonds. See"CONTINUING DISCLOSURE." UNDERWRITING The Series 2003 Bonds will be purchased by Stone & Youngberg LLC (the "Underwriter"), at an aggregate net purchase price of$15,815,688.85 plus accrued interest on the Series 2003 Bonds to the closing date, pursuant to a bond purchase contract(the"Series 2003 Bond Purchase Agreement")entered into between the Corporation and the Underwriter. The Series 2003 Bonds are sold to produce the yields shown on the inside front cover, the Underwriter's compensation will be $106,312.50. The Series 2003 Bond Purchase Agreement provides that the Underwriter will purchase all of the Series 2003 Bonds so offered if any are purchased. The Underwriter may offer and sell the Series 2003 Bonds to certain dealers (including dealers depositing Series 2003 Bonds into unit investment trusts) and others at yields higher or lower or prices higher or lower than the public offering yields or prices stated on the inside cover page hereof.The offering yields or prices set forth on the inside cover page may be changed, from time to time,by the Underwriter.The Corporation,the Town and the Underwriter have agreed that if any financial consulting relationship between them has existed with respect to the Series 2003 Bonds such relationship is terminated, and the Corporation and the Town have consented to the acquisition or participation in the purchase of the Series 2003 Bonds on a negotiated basis by the Underwriter. POLITICAL CONTRIBUTIONS To the best knowledge of appropriate representatives thereof, the Underwriter, Bond Counsel and Counsel to the Underwriter have not made political contributions to any person who currently holds a seat on the Council of the Town or a seat on the Board of Directors of the Corporation with respect to their election to that seat. 35 RELATIONSHIP AMONG PARTIES Bond Counsel has represented, and continues to represent, the Underwriter with respect to financings other than for the Corporation and the Town and will continue to do so if requested in the future. Bond Counsel has also previously acted as bond counsel with respect to other obligations underwritten by the Underwriter and will continue to do so if requested in the future. Counsel to the Underwriter has represented the Underwriter with respect to financings other than for the Corporation and the Town and will continue to do so if requested in the future. Counsel to the Underwriter acts as bond counsel for various municipal entities for which the Underwriter may provide financial consultant services or act as underwriter. CONTINUING DISCLOSURE The Town, as the "obligated person"with respect to the Series 2003 Bonds,has covenanted for the benefit of certain owners of the Series 2003 Bonds to provide certain financial information and operating data relating to the Town by not later than February 1 in each year commencing February 1, 2004 (the "Annual Reports"), and to provide notice of the occurrence of certain enumerated events, if material (the "Notice of Material Events"). The Annual Reports will be filed by the Town with each Nationally Recognized Municipal Securities Information Repository and with any State Information Depository established by the State. (At present no such State Information Depository has been designated.) The Notices of Material Events will be filed by the Town with each Nationally Recognized Municipal Securities Information Repository and with any State Information Depository established by the State. The specific nature of the information to be contained in the Annual Reports and the Notices of Material Events is set forth in APPENDIX F—"FORM OF CONTINUING DISCLOSURE UNDERTAKING."These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2- 12(b)(5) (the "Rule"). A failure by the Town to comply with any of such covenants must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series 2003 Bonds in the secondary market. A failure by the Town to comply with any of such covenants could adversely affect the Series 2003 Bonds and specifically their market price and marketability. The Town has been and is currently in material compliance with its existing continuing disclosure requirements. CERTIFICATION CONCERNING OFFICIAL STATEMENT The documents delivered in connection with the issuance of the Series 2003 Bonds will include a certificate to the effect that, to the knowledge of appropriate representatives of the Town after appropriate review, the statements contained in this Official Statement relating to the Town and the Corporation were at the time of the sale,and at the time of delivery of the Series 2003 Bonds, true, correct and complete in all material respects and were not misleading and did not omit matters which, in light of the circumstances under which they are made, would make such statements misleading. GENERAL PURPOSE FINANCIAL STATEMENTS The General Purpose Financial Statements of the District for the period ended June 30, 2002, a copy of which are included in APPENDIX C of this Official Statement, have been audited by Cronstrom&Trbovich, Certified Public Accountants, to the extent and for the period indicated in their report thereon. Cronstrom&Trbovich has provided consent to use of such General Purpose Financial Statements in this Official Statement. The District is not aware of any facts that would make such audited General Purpose Financial Statements misleading. 36 CONCLUDING STATEMENT To the extent that any statements made in this Official Statement involve matters of opinion or estimates,whether or not expressly stated to be such, they are made as such and not as representations of fact or certainty and no representation is made that any of these statements have been or will be realized.All financial and other information in this Official Statement has been derived from official records and other sources and is believed by the Town to be accurate and reliable. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the Town and the Corporation.No representation is made that past experience, as is shown by that financial and other information,will necessarily continue or be repeated in the future. MISCELLANEOUS The agreement of the Corporation with the holders of the Series 2003 Bonds is fully set forth in the Town Lease and the Indenture and neither any advertisement of the Series 2003 Bonds nor this Official Statement is to be construed as constituting any agreement with the purchasers of the Series 2003 Bonds. The execution and delivery of this Official Statement have been duly authorized and approved by the Corporation and the Town. TOWN OF ORO VALLEY TOWN OF ORO VALLEY,ARIZONA MUNICIPAL PROPERTY CORPORATION By /s/ Stephen D. Lucas By /s/ Paul Loomis President Mayor 37 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A TOWN OF ORO VALLEY,ARIZONA GENERAL ECONOMIC AND DEMOGRAPHIC INFORMATION The following information regarding the Town is provided for background information only. No representation is made as to the relevance of the data to the repayment of the Series 2003 Bonds. The Series 2003 Bonds are payable solely from payments to be paid by the Town under the Purchase Agreement which are secured by Excise Taxes as described under the heading "SECURITY FOR AND SOURCES OF PAYMENTS OF THE SERIES 2003 BONDS." General The Town incorporated in 1974 and is located in northeastern Pima County, Arizona (the "County"). The Town is approximately six miles north of the city limits of the City of Tucson,Arizona("Tucson").A farming area 30 years ago, it is now a part of the Tucson Metropolitan area. The Town covers an area of approximately 32 square miles and is located at an elevation of 2,620 feet at the base of the Santa Catalina Mountains. The following table illustrates population statistics for the State,the County and the Town. POPULATION STATISTICS State of Pima Town of Arizona County Oro Valley 2002 Estimate* 5,472,750 890,545 34,050 2000 Census 5,130,632 843,746 29,700 1990 Census 3,665,339 666,957 6,670 1980 Census 2,716,546 531,443 1,489 1970 Census 1,775,399 351,667 581 1960 Census 1,302,161 265,660 ** * Estimate as of July 1, 2002. ** The Town incorporated in 1974. Source: Arizona Department of Economic Security,Population Statistical Unit. Municipal Government and Organization The Town government operates under the Council-Manager form of government. Policymaking and legislative authority are vested in the Town Council, which consists of a Mayor and four Councilmembers. The Town expects to add two additional Councilmember positions in the primary election to be held in March 2004 and, if necessary, at the election to be held in May 2004. Councilmembers are elected to four-year staggered terms. The Mayor is directly elected by the qualified voters of the Town and the Vice-Mayor is selected by the Council from among its members. The Town Council is responsible, among other things, for the adoption of local ordinances, budget adoption, the development of citizen advisory committees and the hiring of the Town Manager. The Manager is responsible for implementation of the policies of the Town Council. The Town Manager appoints all department heads except the Town Clerk, Chief of Police,Town Engineer and Magistrate. A-1 Employment and Employers The Town's economy is linked closely with that of Tucson. Due to the Town's proximity to Tucson,the majority of the residents of the Town commute to the Tucson Metropolitan area for employment.mp oyment. The tables hereafter illustrate several of the major employers within the Town, followed by tables of the major manufacturing employers and non- manufacturing employers of Tucson. MAJOR EMPLOYERS Town of Oro Valley,Arizona Approximate Number of Employer Product/Service Employees Honeywell International Inc. Technology/Aerospace Manufacturing 800 Hilton El Conquistador Resort and Country Club Resort and Country Club 600 Ventana Medical Systems Health Care 400 Canyon Del Oro High School Education 250 Fry's Food Stores Grocery Store 250 Town of Oro Valley Government 240 Securaplane Technologies Aircraft Electronics Manufacturing 110 Home Depot Home Improvement Store 100 Northwest Urgent Care Health Care 100 Target Retail 100 Source: The Town. A-2 MAJOR MANUFACTURING EMPLOYERS City of Tucson,Arizona Approximate Number of Employer Product/Service Employees Raytheon Missile Systems Company Tactical Missiles and Gun Systems 10,100 Asarco Inc. Mining 1,900 IBM Corporation Information Technology Equipment 1,650 Bombardier Aerospace* Lear Jets 1,470 Texas Instruments Tucson Corporation** Integrated Circuits 1,100 Honeywell International Inc. Technology/Aerospace 850 MiSys Healthcare Systems Healthcare Products 695 Borderland Construction Co.Inc. Construction 585 Tucson Newspapers Inc. Daily Newspapers 530 Air System Components HVAC Metal Products 480 Kalil Bottling Company Soft drinks and carbonated water 310 Ventana Medical Systems Medical Equipment 310 The Sundt Companies Inc. Construction 300 W.G.Valenzuela Drywall Inc. Construction 290 Precision Shooting Equipment Archery equipment 280 * On October 16, 2003, Bombardier Aerospace announced its decision to consolidate Learjet and Challenger Series Business Aircraft production to manufacturing sites in Wichita, Kansas and Dorval, Quebec. The creation of these integrated manufacturing centers will result in a reduction of approximately 800 jobs over the next 15 to 18 months from the Tucson location. However, approximately 300 new jobs will be created over a three-year period as Tucson will serve as the location for the western Bombardier Regional Aircraft Service Centre, where the Bombardier Business Aviation Services Centre will also continue its operation. ** Formerly known as Burr-Brown Corporation. Source: The Arizona Daily Star — The Star 200 Trend Tracker, 2003. "The Major Employers of Southern Arizona." A-3 MAJOR NON-1VIANUFACTURING EMPLOYERS City of Tucson,Arizona Approximate Number of Employer Product/Service Employees University of Arizona Education 11,335 Davis-Monthan Air Force Base Military 9,950 State of Arizona Government 9,730 Tucson Unified School District No. 1 Education 8,235 Pima County Government 7,135 City of Tucson Government 6,170 Wal-Mart Stores Inc. Department Store 4,000 Carondelet Health Network Healthcare 2,905 University Medical Center Healthcare 2,565 TMC Healthcare Healthcare 2,435 Pima Community College Education 2,275 Sunnyside Unified School District No. 12 Education 2,070 Source: The Arizona Daily Star — The Star 200 Trend Tracker, 2003. "The Major Employers of Southern Arizona." As indicated in the above table, Davis-Monthan Air Force Base (the "Base") is a major employer in Tucson. According to the Public Affairs Department of the 355th Wing (the "Department"), the military and civilian personnel employed both on and off the Base constituted an annual gross payroll of over $331.7 million. The Department further indicates that 7,146 employees are currently employed in a military capability by the Base in addition to 1,188 civilian employees. From 1982 through 1985 the Base was included on lists of bases considered for closure or realignment by the Defense Base Closure and Realignment Commission.As of the date of this Official Statement,the Base is not under consideration for closure or realignment. Although measures were undertaken in late 1996 to ensure omission from Federal Closure List, such measures have been deemed no longer necessary by the Base due to the improbability of being included in the near future. However, there can be no assurances that the Base will not be included on future lists of entities such as the aforementioned Commission.Any such closure or realignment would probably be subject to review and approval by, among others, the Department of Defense and the President of the United States and would have a negative but unquantifiable effect on Tucson. A-4 The following table illustrates annual unemployment averages for the Town, Tucson, the County,the State and the United States. UNEMPLOYMENT AVERAGES Town of City of Pima State of United Year Oro Valley Tucson . County Arizona States 2003* 3.0% 4.9% 4.5% 5.9% 6.0% 2002 3.0 5.0 4.5 5.8 5.8 2001 2.3 3.8 3.5 4.7 4.8 2000 1.9 3.2 2.8 3.9 4.0 1999 2.1 3.5 3.1 4.4 4.2 1998 1.8 3.0 2.7 4.1 4.5 * Data through September 2003. Source: Arizona Department of Economic Security, Bureau of Information and Research Analysis, Labor Force Statistical Unit and the U.S.Department of Labor,Bureau of Labor Statistics. A-5 Construction The following charts illustrate a building permit summary for residential and non-residential construction and new housing starts for the Town. VALUE OF BUILDING PERMITS Town of Oro Valley,Arizona ($000's omitted) Year Residential Commercial Industrial Other Total 2003* $54,892 $ 2,728 $ - $519 $58139 2002 85,413 3,109 _ ' 1,100 89,622 2001 122,784 6,144 - 5,190 134,118 2000 N/R N/R N/R N/R 1999 N/R N/R N/R N/R 1998** 184 220 - - 404 N/R=No Report. * Data through the second quarter of 2003. ** Incomplete data. Source: Arizona Business, Arizona State University Bureau of Business and Economic Research. Note that the Bureau obtains its data from county and municipal divisions which issue such permits. Construction is valued on the basis of estimated costs,not on market price or value of construction at the time thep ermit is issued. The date on which the permit is issued is not to be construed as the date of construction. NEW HOUSING STARTS Town of Oro Valley,Arizona Total New Year Housing Units 2004* 140 2003 412 2002 534 2001 793 2000 1,144 1999 1,020 * Data through the first quarter of 2004. Source: The Town. A-6 Education The University of Arizona (the "University") was established in 1885 and is the oldest institution of higher education in the State. The University is the largest employer in Tucson. The University has 18 colleges and 12 schools offering bachelor degree programs, masters programs, doctoral programs and professional programs. The University's estimated full-time enrollment for the fall quarter 2003 school year was approximately 37,083 students. This enrollment figure includes students in all undergraduate-level and graduate-level degree programs. Also located within the Tucson Metropolitan area is Pima County Community College, which is a branch of the Arizona State Community College System. Pima County Community College offers two-year academic,vocational and technical programs. The school's estimated enrollment for the spring quarter 2003 school year was approximately 21,359 full-time students and 8,167 part-time students. Tourism The Tucson Metropolitan area attracts a significant number of vacationers and conventioneers. The Town reports that tourism comprises 12% of the County's wage and salary economy, with overnight visitors to Tucson contributing $1.15 billion per year. The hotel/motel lodging industry makes up approximately 19% of the Town's sales tax base. Some recreational and sightseeing attractions within driving distance of the Town include Biosphere 2,Catalina State Park,the Arizona Sonora Desert Museum,Mission San Xavier del Rae, Old Tucson Movie Studios Kitt Peak National Observatory, Mount Lemmon, Organ Pipe Cactus National Monument, Saguaro National Park and Sabino Canyon. The following table illustrates the approximate number of visitors to Organ Pipe Cactus National Monument and Saguaro National Park in the years indicated. NUMBER OF VISITORS* Organ Pipe Cactus Saguaro Year National Monument National Park 2003** 1,134,180 2,493,255 2002 1,577,727 3,437,830 2001 1,481,476 3,422,841 2000 1,376,221 3,393,401 1999 1,585,398 3,419,121 1998 1,464,505 3,305,473 * Based on a calendar year. ** Estimate as of September 2003. Source: The United States Department of the Interior,National Park Service. A-7 Below is a partial list of the larger hotel and resorts in Tucson's Metropolitan area,based on number of units. HOTELS AND RESORTS Tucson Metropolitan Area Number Approximate of Number of Hotel/Motel Name Units Employees* The Westin La Paloma 487 550 Hilton El Conquistador Resort and Country Club** 428 750 Loews Ventana Canyon Resort 398 760 Radisson Inn City Center 307 250 Doubletree Guest Suites 304 125 Holiday Inn Palo Verde 299 100 Doubletree Hotel 295 240 Marriott University Park 250 220 Westward Look Resort 244 260 Tucson East Hilton 232 145 Inn Suites Hotel&Resort 30 85 * Number of full-time equivalent employees. ** Located within the boundaries of the Town. Source: Inside Tucson Business — 2003 Book of Lists, Tucson Chamber of Commerce and an individual employer survey. A-8 Transportation Industry,business and residents benefit from the transportation network available to the Metropolitan Tucson area. Rail,air and highway facilities are developed throughout the area. The Town is near Interstates 10 and 19, as well as traversed by Arizona State Highway 77. Interstate 10 connects Tucson with Phoenix to the north and Los Angeles to the west. Interstate 19 provides access to Nogales, Arizona, and Mexico to the south and U.S.Highway 86 connects with the direct route to the Gulf of California vacation areas. The Union Pacific Railroad, as well as interstate motor freight services supplied by forty-five carriers, facilitates the transportation of area products and supplies.Inter-city transportation service is provided by Greyhound-Trailways. Tucson International Airport, located approximately fifteen miles from the Town, provides local, regional and transcontinental air service through a number of major airlines. A smaller,private facility,La Cholla Airpark Inc.,is located approximately twenty-five miles from the Town. La Cholla Airpark Inc. provides fuel, rents hangars and serves as the only homeowner-owned aircraft center in the Tucson metropolitan area. AIRLINES SERVING TUCSON INTERNATIONAL AIRPORT Aero California Continental Airlines Northwest/KLM Airlines Aerolitoral Delta Airlines Sky West Airlines Alaska Airlines Frontier Airlines Southwest Airlines America West/British Airways Horizon Airlines United/Lufthansa Airlines American Airlines Source: Tucson Airport Authority. NUMBER OF PASSENGERS ARRIVING AND DEPARTING TUCSON INTERNATIONAL AIRPORT Year Arrivals Departures Total 2003* 1,304,260 1,318,774 2,623,034 2002 1,746,825 1,761,058 3,507,883 2001 1,809,491 1,818,307 3,627,798 2000 1,776,046 1,816,142 3,592,188 1999 1,751,378 1,762,732 3,514,110 1998 1,742,304 1,735,118 3,477,422 * Data through September of 2003. Source: Tucson Airport Authority. A-9 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B TOWN OF ORO V ALLEY,ARIZONA FINANCIAL DATA Current Year Statistics(For Fiscal Year 2003/04) Town of Oro Valley,Arizona General Obligation Bonds None Municipal Property Corporation Bonds $ 44,045,000(a)(b) Certificates of Participation 610,000(b) Water Development Fee Revenue Obligations 3,745,000 Excise Tax Revenue Obligations 1,035,000(b) Secondary Assessed Valuation 293,635,648 Primary Assessed Valuation 275,883,041 Estimated Full Cash Value 2,491,341,490 (a) Includes the Series 2003 Bonds. (b) Net of the Obligations Being Refunded. Source: The Town. Municipal Property Corporation Bonds Outstanding Town of Oro Valley,Arizona Bonds Issue Original Maturity Balance Being Balance to be Series Purpose Amount Dates Outstanding Refunded Outstanding 1996 Water Company Acquisitions $28,400,000 07-01-97/26 $25,875,000 ($8,775,000) $ 17,100,000 1999 Construct,Acquire and Equip Facilities 4,930,000 01-01-00/19 3,875,000 3,875,000 2001 Improve,Construct and Equip Facilities 9,010,000 07-01-01/20 7,805,000 (485,000) 7,320,000 Total Municipal Property Corporation Bonds Outstanding $28,295,000 Plus Series 2003 Bonds 15,750,000 Total Municipal Property Corporation Bonds to be Outstanding $44,045,000 Source: The Town. B-1 { Excise Tax Revenue Obligations Outstanding Town of Oro Valley,Arizona Obligations Issue Original Maturity Balance Being Balance to be Series Purpose Amount Dates Outstanding Refunded Outstanding 2000 Purchase Land $2,580,000 7-1-01/20 $ 2,295,000 ($1,260,000) $ 1,03 5,000 Total Excise Tax Revenue Bonds Outstanding $ 1,035,000 Source: The Town. Water Development Fee Revenue Obligations Outstanding Town of Oro Valley,Arizona Issue Original Maturity Balance Series Purpose Amount Dates Outstanding 2000 Water System Improvements $6,770,000 1-1-04/08 $ 3,745,000 Total Water Development Fee Revenue Obligations Outstanding $ 3,745,000 Source: The Town. See"SECURITY FOR AND SOURCES OF PAYMENT OF THE SERIES 2003 BONDS— Junior Lien Obligations." Tucson Settlement Agreement Obligation Town of Oro Valley,Arizona Issue Original Maturity Balance Series Purpose Amount Dates Outstanding 2002 CAP Water Allocation Purchase $5,410,000 5-1 and 11-1 $ 4,3 82,100 2002-2012 Total Obligations Outstanding $ 4,3 82,100 Source: The Town. B-2 Certificates of Participation Outstanding Town of Oro Valley,Arizona Bonds Issue Original Maturity Balance Being Balance Series Purpose Amount Dates Outstanding Refunded Outstanding 1996 Property Acquisition and $5,125,000 07-01-97/17 $ 3,990,000 ($3,380,000) $ 610,000 Improvements Total Certificates of Participation Outstanding $ 610,000 Source: The Town. B-3 r , [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX C TOWN OF ORO VALLEY,ARIZONA AUDITED ANNUAL GENERAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2002 [THIS PAGE INTENTIONALLY LEFT BLANK] (-711 CRONSTROM 8. TRBOVICH CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT The Honorable Mayor and the Town Council of the Town of Oro Valley, Arizona We have audited the accompanying general-purpose financial statements of the Town of Oro Valley, Arizona (Town), as of and for the year ended June 30, 2002, as listed in the table of contents. These general-purpose financial statements are the responsibility of the Town'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 U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general-purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the general-purpose financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall general-purpose 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 Town of Oro Valley, Arizona as of June 30, 2002, and the results of its operations and the cash flows of its proprietary fund types for the year then ended in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated September 23, 2002 on our consideration of the Town's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. 1 8706 EAST MANZANITA DRIVE.SUITE 100 • SCOTTSDALE. ARIZONA 85258 • (480) 348-1102 • FAX (480) 348-1104 A PROFESSIONAL CORPORATION Our audit was made for the purpose of formingan opinion on the general-purpose p g 1 purpose financial statements taken as a whole. The combining and individual fund and accountou gr p financial statements and schedules listed in the table of contents as supplementary information are presented for purposes of additional analysis and are not a required part of the general-purpose financial statements. Such information has been subjected to the auditingprocedures 1 p applied in the audit of the general-purpose financial statements and, in our opinion, is p fairly stated in all material respects in relation to the general-purpose financial statements taken as a whole. The other information included in this report, designated as the "Statistical Section"tion in the table of contents, was not audited by us and, accordingly, we p no express opinion on it. p evelh,dtav0-041Vt-C1\. ) Cronstrom & Trbovich, P.C. September 23, 2002 2 General-Purpose Financial Statements 3 TOWN OF ORO VALLEY,ARIZONA COMBINED BALANCE SHEET-ALL FUND TYPES AND ACCOUNT GROUPS AS OF JUNE 30,2002 Proprietary Governmental Fund Types Fund Types Special Debt Capital General Revenue Service Projects Enterprise Assets and Other Debits Assets Cash and investments $ 9,626,419 $ 2,878,469 $ 2,453,307 $ 15,844,403 $ 6,970,599 Restricted assets - - - - 3,570,508 Accounts receivable 169,359 10,515 - 55,000 1,258,674 Taxes receivable 675,512 - - - - Intergovernmental receivable 433,733 290,436 - - - Interest receivable 16,587 3,924 3,225 22,952 13,623 Due from other funds 1,246,948 222,904 - - - Prepaid items 2,556 - - Advances to other funds 330,729 - - - - Deferred charges - - - - 964,570 Fixed assets(net,where applicable, of accumulated depreciation) - - - - - 39,823,473 Other Debits Amount available in debt service fund - - - - - Amount to be provided for retirement of general long-term debt - - - - Total Assets And Other Debits $12,501,843 $ 3,406,248 $ 2,456,532 $ 15,922,355 $52,601,447 Liabilities,Equity and Other Credits Liabilities Accounts payable $ 622,313 $ 54,863 $ - $ 735,633 $ 319,591 Accrued wages and benefits 416,847 14,892 - 5,969 17,833 Interest payable - - 171,713 - 905,804 Intergovernmental payable 12,610 - - 253,374 Due to other funds 222,904 506,291 740,657 - - Customer deposits 86,103 537,575 - - 74,858 Deferred revenue 243,338 2,954 - 73,243 - . Compensated absences payable 500,534 37,759 - - 43,298 Advances from other funds - - 330,729 - - Note payable - - - - 4,869,000 Revenue bonds payable - - 420,000 - 34,720,989 Certificates of participation - - - - - Total Liabilities 2,104,649 1,154,334 1,663,099 814,845 41,204,747 Equity and Other Credits Investment in general fixed assets - - - - Contributed capital - - - - 5,437,330 Retained earnings Unreserved - - - - 5,959,370 Fund balances Reserved for preaid items 2,556 - - - - Reserved for advances 330,729- - - - - Unreserved,designated for unemployment benefits 195,312 '25,135 - - - Unreserved,undesignated 9,868,597 2,226,779 793,433 15,107,510 - Total Equity and Other Credits 10,3 97,194 2,251,914 793,433 15,107,510 11,396,700 Total Liabilities,Equity and Other Credits $12,501,843 $ 3,406,248 $ 2,456,532 $ 15,922,355 $52,601,447 The accompanying notes to financial statements are an integral part of this statement. 4 r Account Groups Totals General General (Memorandum Fixed Assets Long-term Debt Only) $ - S - $ 37,773,197 _ - 3,570,508 1,493,548 675,512 724,169 60,311 1,469,852 2,556 330,729 964,570 30,829,422 - 70,652,895 793,433 793,433 - 15,482,643 15,482,643 $30,829,422 $ 16,276,076 $133,993,923 $ - $ - $ 1,732,400 - 455,541 - 1,077,517 265,984 - 1,469,852 698,536 319,535 581,591 330,729 4,869,000 11,936,076 47,077,065 4,340,000 4,340,000 16,276,076 63,217,750 30,829,422 - 30,829,422 5,437,330 5,959,370 2,556 330,729 220,447 27,996,319 30,829,422 - 70,776,173 $30,829,422 $ 16,276,076 $133,993,923 The accompanying notes to fianacial statements are an integral part of this statement. 5 THIS PAGE BLANK 6 TOWN OF ORO VALLEY,ARIZONA COMBINED STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES- ALL GOVERNMENTAL FUND TYPES YEAR ENDED JUNE 30,2002 Totals Special Debt Capital (Memorandum General Revenue Service Projects Only) Revenues Taxes $ 6,674,725 $ - $ - $ - $ 6,674,725 Intergovernmental 7,097,629 2,946,263 - 2,947,562 12,991,454 Fines and forfeitures 203,385 112,954 - - 316,339 Licenses and permits 1,415,028 15,129 - - 1,430,157 Charges for services 503,314 46,126 - - 549,440 Special assessments - - 1,180,614 1,232,274 2,412,888 Interest 285,819 80,475 56,493 452,574 875,361 Other 88,795 28,238 - 33,411 150,444 Total Revenues 16,268,695 3,229,185 1,237,107 4,665,821 25,400,808 Expenditures Current General government 6,052,145 2,917 - - 6,055,062 Public safety 8,416,448 170,186 - - 8,586,634 Highways and streets - 3,144,676 - - 3,144,676 Culture and recreation 1,474,667 - - - 1,474,667 Capital outlay - - - 8,094,782 8,094,782 Debt service Principal retirement - - 1,596,456 - 1,596,456 Interest and fiscal charges - - 932,124 - 932,124 Total Expenditures 15,943,260 3,317,779 2,528,580 8,094,782 29,884,401 Excess of revenues over(under)expenditures 325,435 (88,594) (1,291,473) (3,428,961) (4,483,593) Other financing sources(uses) Operating transfers in - - 1,155,104 - 1,155,104 Operating transfers out (1,155,104) - - - (1,155,104) Total other financing sources(uses) (1,155,104) - 1,155,104 - - Excess of revenues and other sources over(under)expenditures and other uses (829,669) (88,594) (136,369) (3,428,961) (4,483,593) Fund balance,beginning of year 11,226,863 2,340,508 929,802 18,536,471 33,033,644 Fund balance,end of year $10,397,194 $ 2,251,914 $ 793,433 $15,107,510 $28,550,051 The accompanying notes to financial statements are an integral part of this statement. 7 TOWN OF ORO VALLEY,ARIZONA COMBINED STATEMENT OF REVENUES,EXPENDITURES AND CHANGES IN FUND BALANCES- BUDGET AND ACTUAL-ALL GOVERNMENTAL FUND TYPES YEAR ENDED JUNE 30,2002 General Special Revenue Variance Variance Favorable Favorable Budget Actual (Unfavorable) Beset Actual (Unfavorable) Revenues Taxes $ 6,150,000 $ 6,674,725 $ 524,725 $ - $ - $ - Intergovernmental 7,194,270 7,097,629 (96,641) 3,212,574 2,946,263 (266,311) Fines and forfeitures 220,000 203,385 (16,615) 50,000 112,954 62,954 Licenses and permits 2,240,000 1,415,028 (824,972) 28,000 15,129 (12,871) Charges for services g 357,425 503,314 145,889 43,000 46,126 3,126 Contributions and donations 500 - (500) - - - Special assessments - - - Interest 385,000 285,819 (99,181) 44,000 59,419 15,419 9 Other 25,000 88,795 63,795 5,000 28,238 23 238 Total Revenues ' 16,572,195 16,268,695 (303,500) 3,382,574 3,208,129 (174,445) Expenditures Current General government 14,776,240 6,052,145 8,724,095 4,851 2,907 1,944 Public safety 8,826,964 8,416,448 410,516 166,798 170,186 (3,388) Highways and streets - - - 5,045,200 3,144,676 1,900,524 Culture and recreation 1,822,490 1,474,667 347,823 - - - Capital Outlay - - - - - - Debt service Principal retirement - - - Interest and fiscal charges - _ - - - - Total Expenditures 25,425,694 15,943,260 9,482,434 5,216,849 3,317,769 1,899 080 Excess of revenues over(under)expenditures (8,853,499) 325,435 9,178,934 (1,834,275) (109,640) 1,724,635 Other financing sources(uses) Operating transfers in - - - Operating transfers out (1,155,104) (1,155,104) - - - - Total other financing sources(uses) (1,155,104) (1,155,104) - - ._ - Excess of revenues and other sources over(under)expenditures and other uses (10,008,603) (829,669) 9,178,934 (1,834,275) (109,640) 1,724,635 Fund balance,beginning of year 10,008,603 11,226,863 1,218.260 1,834,275 2,099,596 265,321 Fund balance,end of year $ - $10,397,194 $ 10,397,194 $ - $ 1,989,956 $ 1,989,956 The accompanying notes to financial statements are an integral part of this statement. 8 Debt Service Capital Projects Variance Variance Favorable Favorable Bud•et Actual nfavorable Bud•et Actual Unfavorable) S - $ - $ - $ - $ - $ - - - - 6,011,012 2,947,562 (3,063,450) 1,342,000 1,180,614 (161,3 86) 1,613,000 1,232,274 (380,726) 50,000 56,493 6,493 335,000 452,574 117,574 - — - - - 33,411 33,411 1,392.000 1,237,107 (154,893) 7,959,012 4,665,821 (3,293,191) - - - 25,184,622 8,094,782 17,089,840 1,607,000 1,596,456 10,544 - - - 1.8117,940 932,124 885,816 - - - 3,424,940 2,528,580 896,360 25,184,622 8,094.782 17,089,840 (2,03 2,940) (1,291,473) 741,467 (17,225,610) (3,428,961) 13,796,649 1,155,104 1,155,104 - - - - 1,155,104 1,155,104 - - - - (877,836) (136,369) 741,467 (17,225,610) (3,428,961) 13,796,649 877,836 929,802 51,966 17,225,610 18,536,471 1,310,861 $ - $ 793,433 $ 793,433 $ - S 15,107,510 $ 15,107,510 The accompanying notes to financial statements are an integral part of this statement. 9 TOWN OF ORO VALLEY,ARIZONA COMBINED STATEMENT OF REVENUES,EXPENSES AND CHANGES IN RETAINED EARNINGS-ALL PROPRIETARY FUND TYPES YEAR ENDED JUNE 30,2002 Enterprise Operating revenues Charges for sales and services $ 8,703,813 Total operating revenues 8,703,813 Operating expenses Costs of sales and services 3,728,168 Depreciation 11276,250 Total operating expenses 5,004,418 Operating income 3,699,395 Nonoperating revenues(expenses) Intergovernmental 52,500 Interest revenue 278,813 Interest expense (1,813,602) Issuance costs (61,673) Other 9,330 Total nonoperating revenues(expenses) (1,534,632) Net income 2,164,763 Retained earnings,beginning of year 3,794,607 Retained earnings,end of year $ 5,959,370 The accompanying notes to financial statements are an integral part of this statement. 10 TOWN OF ORO VALLEY,ARIZONA COMBINED STATEMENT OF CASH FLOWS-ALL PROPRIETARY FUND TYPES YEAR ENDED JUNE 30,2002 Enterprise INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Cash received from customers $ 8,514,154 Cash payments to employees for services (1,348,609) Cash payments to suppliers for goods/services (2,668,566) Customer deposits received (19,872) Intergovernmental revenue 52,500 Other nonoperating revenue 9,330 Net cash provided by operating activities 4,538,937 Cash flows from capital and related financing activities Acquisition of capital assets (4,705,784) Principal paid on note payable (541,000) Principal paid on revenue bonds (868,544) Interest paid on revenue bonds (1,767,442) Net cash used for capital and related financing activities (7,882,770) Cash flows from investing activities Interest 308,026 Net cash provided by investing activities 308,026 Net decrease in cash and cash equivalents (3,035,807) Cash and cash equivalents at beginning of year 13,576,914 Cash and cash equivalents at end of year $ 10,541,107 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE SHEET Cash and investments per the balance sheet $ 6,970,599 Restricted assets 3,570,508 Total $ 10,541,107 (Continued) The accompanying notes to financial statements are an integral part of this statement. 11 TOWN OF ORO VALLEY,ARIZONA COMBINED STATEMENT OF CASH FLOWS-ALL PROPRIETARY FUND TYPES YEAR ENDED JUNE 30,2002 Enterprise (Concluded) RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 3,699,395 Adjustments to reconcile operating income to net cash provided by operating activities Depreciation 1,276,250 Intergovernmental 52,500 Other nonoperating revenues 9,330 (Increase)decrease in operating assets Accounts receivable (419,057) Increase(decrease)in operating liabilities Accounts payable (275,149) Accrued payroll (23,640) Intergovernmental payable 229,398 Compensated absences payable 9,782 Customer deposits (19,872) Net cash provided by operating activities $ 4,538,937 NON-CASH INVESTING,CAPITAL AND FINANCING ACTIVITIES Bond issuance costs of$61,673 were amortized during the year_ The Town also purchased$5,410,000 of water rights through a note payable. The accompanying notes to financial statements are an integral part of this statement_ 12 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 1 -SUMMARY OF SIGNIFICANT A CCO UNTING POLICIES The general-purpose financial statements of the Town of Oro Valley, Arizona (Town) conform to U.S. generally accepted accounting principles as applicable to governmental units. The more significant of the Town's accounting policies are described below. Reporting Entity - In evaluating how to define the Town, for financial reporting purposes, management has identified one potential component unit. The decision to include a potential component unit in the reporting entity has been made by applying criteria set forth in U.S. generally accepted accounting principles. Generally, component units are legally separate organizations for which the elected officials of the primary government (i.e., the Town) are financially accountable. The primary government is financially accountable for a potential component unit if it: appoints a voting majority of the potential component unit's governing body; and, either is able to impose its will on the potential component unit or there is a possibility of the potential component unit to provide specific financial benefits to, or impose specific financial burdens on the primary government. In addition, a primary government may be financially accountable for a potential component unit even though the potential component unit may have a separately elected governing board, a board appointed by another government, or a jointly appointed board if the potential component unit is fiscally dependent on the primary government (e.g., the primary government must approve the potential component unit's budget, tax rates, etc.). Blended components, although legally separate entities are, in substance, part of the Town's operations and so data from these units are combined with data of the primary government. Blended Component Unit: Town of Oro Valley Municipal Property Corporation - The Town of Oro Valley Municipal Property Corporation's (MPC) board of directors consists of three members which are appointed by the Town of Oro Valley Town Council. The MPC, which is a nonprofit corporation incorporated under the laws of the State of Arizona, was originally formed for the purpose of assisting the Town in obtaining financing for acquiring the Canada Hills and Rancho Vistoso water companies. The Town has a contractual obligation for the repayment of the Municipal Property Corporation's Municipal Facilities Revenue Bonds, Series 1996 and 1999. The activity of the 1996 MPC is reported in the applicable water enterprise fund and the activity of the Series 1999 MPC is reported in the applicable water enterprise fund and governmental fund. All related receivables and payables between the Town and the MPC have been eliminated. 13 TOWN OF ORO VALLEY,ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOIE I -SUMMARY OF SIGNIFICANT.ACCOUNTING POLICIES(Cont'd) Fund Accounting - The accounts of the Town are organized on the basis of funds and account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures, as appropriate. Government resources are allocated to and accounted for in individual funds based upon the purposes for which they are to be spent and the means by which spending activities are controlled. The various funds are grouped, in the financial p statements in this report, into generic fund types and broad categories as follows: Governmental Funds General Fund - The General Fund is the general operating fund of the Town. It is used to account for all financial resources except those required to be accounted for in another fund. Special Revenue Funds - Special Revenue Funds are used to account for thep roceeds of specific revenue sources _(other,than special assessments, expendable trusts, or major capital projects) that are legally restricted to expenditures for specified purposes. p Debt Service Funds - The Debt Service Funds account for the accumulation of resources for, and the payment of, general long-term debt principal, interest and related costs. Capital Projects Funds - The Capital Projects Funds are used to account for the acquisition and construction of major capital facilities other than those financed by proprietary funds and trust funds. Proprietary Fund Enterprise Funds - The Enterprise Funds are used to account for (a)o erations that are p financed and operated in a manner similar to private business ente rises--where the intent of the governing body is that the costs (expenses, including ) de reciation of depreciation) 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, ty or other purposes. 14 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 1 -SUMMARY OF SIGNIFICANT A CCO UNTING POLICIES(Cont'd) Account Groups General Fixed Assets - The General Fixed Assets Account Group accounts for the fixed assets of the Town. General Long-term Debt - The General Long-term Debt Account Group accounts for the unmatured principal balances of bonds and other long-term debt not reported in proprietary funds. Measurement Focus - The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All Governmental Funds are accounted for using a current financial resources measurement focus. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. Operating statements of these funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing uses) in net current assets. Proprietary Funds are accounted for on a cost of services or "capital maintenance" measurement focus. This means that all assets and all liabilities (whether current or noncurrent) associated with the activity are included on their balance sheets. The measurement focus is upon the determination of net income, financial position and changes in financial position. Basis of Accounting - Basis of accounting refers to when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements. Governmental Funds are accounted for using the modified accrual basis of accounting. Revenues are recognized when they become measurable and available to finance expenditures of the current period. Expenditures are recognized when the related fund liability is incurred, except for principal and interest on general long-term debt that are recognized when due. Those revenues susceptible to accrual are intergovernmental grants and appropriations, franchise taxes, licenses, interest revenue and charges for services. Sales taxes collected and held by the state at year end on behalf of the government also are recognized as revenue. Fines, permits, and other revenues are not susceptible to accrual because generally they are not measurable until received in cash. 15 TOWN OF ORO VALLEY,ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE I -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Coned) Proprietary Funds are accounted for using the accrual basis of accounting. The Town applies all applicable FASB pronouncements issued on or before November 30, 1989, unless they conflict with GASB pronouncements. Their revenues are recognized when they are earned, and their expenses are recognized when they are incurred. Interest on bonds, proceeds of which are used in financing the construction of certain assets, is capitalized during the construction period net of interest on the investment of unexpended bond proceeds. Budgetary Accounting The Town Council follows these procedures in establishing g the budgetary data reflected in the financial statements: 1. In accordance with Arizona Revised Statutes, the Town Manager submit g s a proposed budget for the fiscal year commencing the following July 1 to the Town Council. The operating budget includesro osed expenditures and the means P pof financing them for the upcoming year. 2. Public hearings are conducted to obtain taxpayer comment. 3. Prior to the second Monday in August, the expenditure limitation of the Town is legally enacted through the p adopting of the budget. To ensure compliance with the expenditure limitation, a uniform expenditure report must be filed with the State each year. This report, issued under a separate cover, reconciles total Town expenditures from the audited general-purpose financial statements to total expenditures for reporting in accordance with the State's uniform expenditure reporting system (A.R.S. §41-1279.07). 4. Expenditures may not legally exceed the locally adopted expenditure limitation of all fund types as a whole. The Town adopts a legal budget bydepartment for the g p General Fund and in total by fund for all funds for which a budget is adopted. The Town Manager, subject to Town Council approval, may at any time transfer various unencumbered appropriation balances or portions thereof between a department or activity. The any ted budget cannot be amended in p g wa y without Town Council approval. 5. Formal budgetary integration is employed as a management control device during the year on the same modified accrual basis of accounting used to record actual revenues and expenditures (see Note 12 for individual funds with no adopted budgets). The Town is subject to the State of Arizona's Home Rule Expenditure Limitation Law for Towns and Cities. This law does not permit the Town to spend more than budgeted revenues plus the carry-over unrestricted cash balance from the prior fiscal year. The limitation is applied to the total of the combined funds. The Town complied with this law during the year. 16 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Cont'd) No supplementary budgetary appropriations were necessary during the year. Encumbrances - Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of monies are recorded to reserve that portion of the applicable fund balance, is employed in the General, Special Revenue and Capital Projects Funds. Encumbrances outstanding at year-end are reported as reservations of fund balances since they do not constitute expenditures or liabilities. All appropriations lapse at year-end. Cash Equivalents - Cash equivalents consist of short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash; and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less meet this definition. Investments - Investments in securities are stated at fair value in accordance with GASB Statement No. 31. Prepaid items - Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. The costs are recorded as expenditures in governmental fund-types when consumed rather than when purchased. Interfund Receivables/Payables - During the course of operations, individual funds within the District's pooled cash accounts may borrow money from other funds within the pool on a short-term basis. These receivables and payables are classified as "due from other funds" or "due to other funds" on the balance sheet. Long-term interfund receivables and payables are classified as "advances to other funds" or "advances from other funds" on the balance sheet. Inventory of Supplies - Purchases of such inventory items are recorded at the time of purchase as expenditures in the funds from which the purchases were made; and because the amounts on hand at June 30, 2002, were immaterial, they are not included in the balance sheet. Restricted Assets - Certain proceeds of the Town's bonds, as well as certain resources. set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. In addition, customer deposits are also recorded as restricted assets. 17 TOWN OF ORO VALLEY,ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 1 -SUMMARY OF SIGNIFICANT A CCO UNTING POLICIES(Cont'd) Property, Plant and Equipment - Fixed assets used inove g rnmental fund type operations are accounted for in the General Fixed Assets Account Group. Public domain (infrastructure) assets consisting of certain improvements otherbuildings, than buildings, such as roads and sidewalks are not capitalized, as these assets are immovable and of value only to the government. Property, lant and equipment ac ui pacquired or constructed for general governmental operations are recorded at the time of purchase as expenditures in the funds from which the expenditures were made. Property,roperty, plant and equipment is recorded at historical cost. Donated fixed assets are valued at their estimated fair market value on the date donated. Property, plant and equipment acquired forro rieta funds p ry is capitalized in the respective funds to which it applies. Assets in the general fixed assets account ou are not depreciated.�' p p ted. Depreciation of buildings, equipment and vehicles in the proprietary fundtypes _ p p �y is computed using the straight-line method. Interest is capitalized on proprietary fund assets acquired withtax-exempt tax exempt debt. The interest of capitalized was calculated by offsetting interest expense incurred from the date of the borrowing until completion of the project with interest earned on invested proceeds over the same period. Fund Equity - The unreserved fund balances for governmental funds represent the amount available for budgeting future operations. The reserved fund balances for governmental funds represent the amount that has been legally identified g y for specific purposes. Designations of fund balance represent tentative management subjectg plans that are to change. Unreserved retained earnings for proprietary' funds represent thenet assets available for future operation or distribution. Compensated Absences - The Town accrues vested or accumulated compensated absences in governmental fund types for the amount expected p ed to be liquidated withexpendable financial resources. Because all compensated absences of p the governmental fund types are expected to be liquidated with expendable financial resources, no liability is recorded in the General Long-term Debt Account g Group. Proprietary funds accrue compensated absences in the period for which they are incurred. Interfund Transactions - Quasi-external transactions are accounted for as revenues, expenditures or expenses. Transactions that constitute reimbursements to a fund for expenditures/expenses initially made from it that arero erI p p y applicable to another fund, are recorded as expenditures/expenses in the reimbursing ng fund and as reductions of expenditures/expenses in the fund that is reimbursed. 18 TOWN OF ORO VALLEY,ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30,2002 NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Concl'd) All other interfund transactions, except quasi-external transactions and reimbursements, are reported as transfers. Nonrecurring or nonroutine permanent transfers of equity are reported as residual equity transfers. All other interfund transfers are reported as operating transfers. Total Columns - Total columns on the combined financial statements are captioned "Memorandum Only" to indicate 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 U.S. generally accepted accounting principles. Neither are such data comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data. NOTE 2- COMPLIANCE AND ACCOUNTABILITY Expenditures exceeded the adopted budget in the following funds: Amount of Fund Overexpenditure General Fund: Town Clerk $ 4,016 Finance 1,965 Human Resources 8,994 Special Revenue Funds Federal Seizures and Forfeitures 21,271 Capital Projects Funds Library Construction 175,061 Cash was available to meet all of the overexpenditures listed above. 19 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 3- CASH AND INVESTMENTS State statutes authorize the Town to invest in obligations of the U.S. Treasury and U.S. agencies, certificates of deposit in eligible depositories, agreements,re urchase p obligations of the State of Arizona or any of its counties or incorporated cities, towns or duly organized school districts, improvement districts in this state and the State Treasurer's Local Government Investment Pool. Cash and investments at June 30, 2002 consist of the following: g Cash on hand $ 2,850 Cash in bank 11,446,929 Cash with the County Treasurer 185,416 State Treasurer's Investment Pool 29,708,510 Total cash and investments 41,343,705 Restricted assets (3,570,508) Total cash and investments on the combined balance sheet $ 37,773,197 The Town's deposits as of June 30, 2002 were entirely insured or collateralized with securities held by the Town's custodial bank in the Town's name. The Town's investments at June 30, 2002 consisted of shares in the State Treasurer's investment pool. The State Board of Deposit provides oversight for the State Treasurer's Pools, and the Local Government Investment Pool Advisory Committee provides consultation and advice to the Treasurer. The full value of ap c artii ant's p position in the pool approximates the value of that participant's pool shares. The shares identified are not identified with specific investments and are not subject to custodial credit risk. Cash on Deposit with the County Treasurer is pooled and invested. Interest earned from investments purchased with suchooled monies is allocated to each of the p funds based on the average monthly balance. 20 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 4 -RESTRICTED ASSETS Restricted assets in the Enterprise Fund at June 30, 2002 consisted of the following: Enterprise Fund Future debt service $ 2,287,940 Customer deposits 74,858 Construction accounts 1,207,710 $ 3,570,508 NOTE S - CHANGES IN GENERAL FIXED ASSETS A summary of the changes in general fixed assets follows. Balance Completed Balance July 1, 2001 Additions Deletions Construction June 30, 2002 Land and improvements $ 10,052,290 $ -0-$ -0- $ -0- $ 10,052,290 Buildings and improvements 9,781,3 81 794,626 -0- -0- 10,576,007 Furniture and equipment 2,524,285 472,786 (66,632) -0- 2,930,439 Vehicles 2,420,930 491,621 (313,342) -0- 2,599,209 Construction in Progress 500,021 4,171,456 -0- -0- 4,671,477 Total $ 25,278,907 $ 5,930,489 $ (379,974) $ -0- $ 30,829,422 Estimated cost to complete construction in progress at June 30, 2002 was $1,235,000. NOTE 6-PROPRIETARY FUND FIXED ASSETS The following is a summary of proprietary fund fixed assets at June 30, 2002: Land $ 103,691 Water system 37,343,716 Equipment and vehicles 1,020,185 Water rights 6,172,3 61 Construction in progress 2,609,940 Less: accumulated depreciation (7,426,420) Net fixed assets $ 39,823,473 21 TOWN OF ORO VALLEY,ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 6-PROPRIETARY FUND FIXED ASSETS(Conci'd) The following estimated useful lives are used to compute depreciation: Mains 50 years Services 30 years Hydrants 50y ears Water system 30 years Buildings and improvements 20 years Furniture, equipment and vehicles 5-10 years The estimated cost to complete construction in progress at June 30, 2002 was $4.3 million. NOTE 7-NOTE PAYABLE A note payable was entered into for $5,410,000 with the City of Tucson for water rights. Semiannual payments began May 1, 2002 and range from $251,362 to $541,000 plus interest at a rate of 6.5%. $ 4,869,000 Balance Balance July 1, 2001 Increase Decrease June 30, 2002 $_20, $ 5,410,000 $ (541,000) $ 4,869,000 Future debt service requirements including$1,661,550 of interest are as follows: o s. June 30, 2003 $ 795,473 2004 763,825 2005 732,176 2006 700,528 2007 668,879 Thereafter 2,869,669 $ 6,530,550 22 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 8-REVENUE BONDS PAYABLE Revenue bonds payable at June 30, 2002 consisted of the outstanding revenue bonds presented below. The bonds are callable with interest payable semiannually. Principal and interest requirements at June 30, 2002 were as follows. General Long-term Debt Outstanding Outstanding Interest Principal Principal Description Rates(%) Maturity July 1, 2001 Retirements June 30, 2002 MPC, Excise Tax Revenue Bonds, Series 1999 3.5%-4.5% 1/1/02-09 $ 1,485,000 $ (150,000) $ 1,335,000 Excise Tax Revenue Bonds, Series 2000 4.4%-5.5% 7/1/01-20 2,580,000 (120,000) 2,460,000 Excise Tax Revenue Bonds, Series 2002 3.25%-5.0% 7/1/01-20 3,362,532 (216,456) 3,146,076 Water Development Fee Revenue Bonds, Series 2000 6.1%-6.4% 7/1/01-08 6,770,000 (1,355,000) 5,415,000 $ 14,197,532 $ (1,841,456) 12,356,076 Less: Amounts transferred to Debt Service Fund To retire bonds payable on July 1, 2002 (420,000) $ 11,936,076 23 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 8-REVENUE BONDS PAYABLE(Conci'd) • Enterprise Funds Outstanding Outstanding Interest Principal Principal Description Rates(%) Maturity July 1, 2001 Retirements June 30, 2002 MPC, Water System Acquisition, 1996 4.25%-5.6% 7/1/01-26 $ 27,275,000 $ (375,000) $ 26,900,000 MPC, Excise Tax Revenue Bonds, Series 1999 3.5%-5.0% 1/1/02-19 3,065,000 (130,000) 2,935,000 Excise Tax Revenue Bonds, Series 2002 3.25%-5.0% 7/1/01/20 5,647,468363,544 ( ) 5,283,924 $ 35,987,468 $ (868,544) 35,118,924 Less: unamortized discount 397 ( ,935) Total long-term bonds payable $ 34,720,989 Revenue bond debt service requirements to maturity, including y, n chiding $4,894,981 and. $27,895,658 of general long-term debt and enterprise fund interest, respectively, are as follows: General Long-term Debt Enterprise Year ending June 30. 2003 $ 985,365 $ 2,615,975 2004 1,591,626 2,647,559 2005 957,742 2,620,424 2006 957,080 2,645,468 2007 948,699 2,619,194 Thereafter 11,390,545 49,865,962 $ 16,831,057 $ 63,014,582 24 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINAlNCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 9- CERTIFICATES OF PARTICIPATION Certificates of Participation payable at June 30, 2002 consisted of the amounts presented below. They are callable with interest payable semiannually. Principal and interest requirements at June 30,2002,were as follows. Outstanding Outstanding Interest Principal Principal Description Rates(%) Maturity July 1, 2001 Retirements June 30, 2002 Certificates of Participation, Series 1996 4.625%-5.75% 7/1/01-2017 $ 4,500,000 $ (160,000) $ 4,340,000 Debt service requirements to maturity, including$2,273,847 of interest, are as follows: Year ending June 30: 2003 $ 407,994 2004 409,350 2005 410,005 2006 414,881 2007 413,959 Thereafter 4,557,658 $ 6,613,847 NOTE 10-INTERFUND RECEIVABLES AND PAYABLES As of June 30, 2002, interfund receivables and payables that resulted from various interfund transactions were as follows: Due from Due to Other Funds Other Funds General Fund $ 1,246,948 $ 222,904 Special Revenue Funds: HURF 222,904 -0- Federal Seizures and Forfeitures -0- 72,140 Public Transportation -0- 434,151 Debt Service Funds: • Municipal Debt Service -0- 740,657 $ 1,469,852 $ L469,852 25 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 10-IN1 ERFUND RECEIVABLES AND PAYABLES(Concl'd) As of June 30, 2002, advances that resulted from the approval of a long-term loan to the Debt Service ay. Water Connection Fee Fund from the General Fund were as follows: Advances from Advances to Other Funds Other Funds General Fund $ -0- $ 330,729 Debt Service Funds: O.V. Water Connection Fee Fund 330,729 -0- $ 330,729 $ 330,729 NOTE 11 - CONTRIBUTED CAPITAL During the year, contributed capital changed by the following amounts: Enterprise Fund Contributed capital July 1, 2001 $ 2,933,990 Current year increases: Developer contributions 2,516,648 Current year decreases: Developer refund (13,308) Contributed capital June 30, 2002 $ 5,437,330 • 26 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 12-BUDGETARY BASIS OF ACCOUNTING Budgets for the Industrial Development Authority and the Revegetation Assurances Special Revenue Funds were not prepared. The following summary is useful to reconcile the Combined Statement of Revenues, Expenditures and Changes in Fund Balances to the Combined Statement of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual: Special Revenue Fund Balance Total Total at Beginning Revenues Expenditures of Year Combined Statement of Revenues, Expenditures and Changes in Fund Balances $ 3,229,185 $ 3,317,779 $ 2,340,508 Less: funds with no adopted budget (21,056) (10) (240,912) Combined Statement of Revenues, Expenditures and Changes in Fund Balances -Budget and Actual $ 3,208,129 $ 3,317,769 $ 2,099,596 NOTE 13 - CONTINGENT LIABILITIES Accumulated Sick Leave - Sick leave benefits provide for ordinary sick pay and are cumulative but do not vest with employees unless an employee has exceeded 90 days of accrued sick leave, then one-half of the sick leave balance in excess of 90 days is paid upon termination. Unvested accumulated sick leave of Town employees at June 30, 2002, totaled $1,343,021. NOTE 14-RISK MANAGEMENT The Town of Oro Valley is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters. The Town's insurance protection is provided by the Arizona Municipal Risk Retention Pool, of which the Town is a participating member. The limit for basic coverage is for $2,000,000 per occurrence on a claims made basis. Excess coverage is for an additional $10,000,000 per occurrence on a follow form, claims made basis. The aggregate limit is also $10,000,000. No significant reduction in insurance coverage occurred during the year and no settlements exceeded insurance coverage during any of the past three fiscal years. 27 TOWN OF ORO VALLEY,ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 14-RISK MANA GEM ENT(Conci'd) The Arizona Municipal Risk Retention Pool is structured such that memberp remiums are based on an actuarial review that will provide adequate reserves to allow theP ool to meet its expected financial obligations. The pool has the authority to assess its members additional premiums should reserves and annual premiums be insufficient to meet the pool's obligations. The Town is insured by Arizona Municipal Workers Compensation Pool forP otential worker related accidents. The Town is self-insured for unemployment insurance. Changes in the balances of claims liabilities during the past twoy ears are as follows: Year Ended June 30, 2002 2001 Unpaid claims, beginning of year $ -0- $ -0- Incurred claims (including IBNRs) 16,563 4,573 Claim payments (16,563) (4,573) Unpaid claims, end of year $ -0- $ -0- NOTE 15 -DEFINED CONTRIBUTION PENSION PLAN All non-peace officers and certain part-time employees of the Townartici ate in a p P defined contribution pension plan administered by the ICMA Retirement Corporation as a 401(a) plan. The payroll for Town employees covered by thisyear endedlan for the June 30, 2002 was$6,341,400. The Town's P total payroll was $10,057,148. A defined contribution pensionplanprovides benefits in individual return for services rendered, provides an individual account for each participant, and specifies how contributions to the individual's account are to be determined instead ofeci 'n the amount of � � g benefit the individual is to receive. Under a defined contribution pension plan, the benefits a participant will receive depend solely on the amount contributed to the participant's account, the returns earned on investments of those contributions, and forfeitures of other participants' benefits that may be allocated to suchartici ant's P p account. All non-peace officer full-time Town employees must participate in the pension plan six months from the date they are hired. Contributions made by an employee vest immediately and contributions made by the Town vest after oneY ear of service. 28 TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED JUNE 30, 2002 NOTE 15-DEFINED CONTRIBUTION PENSION PLAN(Conci'd) An employee that leaves the employment of the Town is entitled to his or her contributions and the vested portion of the Town's contributions, plus interest earned. Each employee must contribute 5.0% of his or her gross earnings. The Town must contribute 7.0% of covered earnings. During fiscal year 2001-02 the required and actual contributions amounted to $443,898. The employees' contributions totaled $318,369. No pension provision changes occurred during the year that affected the required contributions to be made by the Town or its employees. The ICMA Retirement Corporation held no securities of the Town or other related parties during the fiscal year 2001-02 or as of the close of the fiscal year. NOTE 16-RETIREMENT AND PENSION PLANS Public Safety Personnel Retirement System (PSPRS) Plan Description - The Town contributes to the Public Safety Personnel Retirement System (PSPRS), an agent multiple-employer, public employee retirement system that acts as a common investment and administrative agent to provide retirement and death and disability benefits for public safety personnel who are regularly assigned hazardous duty in the employ of the State of Arizona or a political subdivision thereof. All benefit provisions and other requirements are established by State statute. The Public Safety Personnel Retirement System issues a publicly available financial report that includes financial statements and required supplementary information.for PSPRS. That report may be obtained by writing to Public Safety Personnel, 1020 E. Missouri Ave., Phoenix, AZ 85014 or by calling (602) 255-5575. Funding Policy - Covered employees are required to contribute 7.65 percent of their annual salary to the PSPRS. The Town is required to contribute the remaining amounts necessary to fund the PSPRS, as determined by the actuarial basis specified by statute. The current rate is 7.48%of annual covered payroll. 29 • TOWN OF ORO VALLEY, ARIZONA NOTES TO FINANCIAL STATEMENTS FISCAL YEAR ENDED TUNE 30, 2002 NOTE 16-RETIREMENT AND PENSION PLANS(Concl'd) Annual Pension Cost - During the year ended June 30, 2001 date (the of the last available information), the Town's annual pension cost of$331,950 for police was equal to the Town's required and actual contributions. The required contribution was determined aspart • of the June 30,2001 actuarial valuation using an entry age actuarial funding method. Significant gn ant actuarial assumptions used in determining the entry age actuarial accrued liabilityinclude de (a) a rate of return on the investment of present and future assets of 9% . per year compounded annually, (b) projected salary increases of 6.5% peryear compounded . . p ended annually, and (c) additional projected salary increases of 0.0% to 3%° per year attributable to seniority/merit. The actuarial value of the Town's assets was determined usingtechniques ques t hat smooth the effects of short-term volatility in the market value of investments over a four-year period. The Town's unfunded actuarial accrued liabilityis beingamortized . as.a level percentage of projected payroll on a closed basis. The remaining amortization period at June 30, 2001, was 20 years. The preceding methods comply with the financial reporting standards established by the Governmental Accounting Standards Board. Three-Year Trend Information Police Fiscal Annual Year Ended Pension Percent Net Pension June.30, Cost(APC) Contributed Obligation 1999 $ 174,091 100% $ -0- 2000 186,368 100 -0- 2001 331,950 100 -0- Additional historical trend information for the Town's PSPRS is disclosed on page 32. Historical trend information is presented in order for a reader to assess the progress made in accumulating sufficient assets to pay pension benefits as they become payable. 30 REQUIRED SUPPLEMENTARY INFORMATION 31 TOWN OF ORO VALLEY, ARIZONA REQUIRED SUPPLEMENTARY INFORMATION PUBLIC SAFETY PERSONNEL RETIREMENT SYSTEM ANALYSIS OF FUNDING PROGRESS Schedule of Funding Progress Police Entry Age Unfunded AAL Valuation Actuarial Actuarial (Overfunded) Annual as a Percentage Date Value of Accrued Unfunded Funded Covered of Covered June 30, Assets Liability(AAL) AAL Ratio Payroll yr Payroll 1996 $ 1,591,318 $ 2,121,636 $ 530,318 75.0% $ 1,440,63836.8% 1997 2,239,319 2,614,221 374,902 85.7 1,682,582 2 2.3 1998 2,772,586 3,067,826 295,240 90.4 1,890,076 1 5.6 1999 3,623,182 3,956,207 333,025 91.6 2,143,829 15.5 2000 4,583,291 4,862,212 278,921 94.3 2,493,062 11.2 2001 5,766,661 5,168,557 (598,104) 111.6 2,948,683 - 32 Combining,Individual Fund and Account Group Statements and Schedules Combining,Individual Fund and Account Group Financial Statements have been omitted from APPENDIX A. [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX D SUMMARIES OF THE PRINCIPAL DOCUMENTS [THIS PAGE INTENTIONALLY LEFT BLANK] SUMMARIES OF THE PRINCIPAL DOCUMENTS The following statements are summaries of certain definitions and provisions of the Lease, as amended by the First, Second and Third Amendments and the Indenture, as supplemented by the First, Second and Third Supplements. Some of these provisions, together with certain other provisions thereof, have been summarized elsewhere in this Official Statement. All such summaries are qualified in their entirety by reference to the Lease and the Indenture and reference is made to such documents for a full and complete statement of their provisions. DEFINITIONS "Annual Debt Service Requirement" for any fiscal year the amount to be paid with respect to the Obligations(at maturity,mandatory redemption or otherwise). "Board" the Corporation's board of directors. "Code" the Internal Revenue Code of 1986,as amended. "Defeasance obligations"—: (1) Cash; (2) Non-callable Federal Securities("Government obligations"); (3) CATS,TIGRS, or STRPS; (4) Refcorp interest strips; (5) Municipal obligations rated "AAA" by S&P and "Aaa" by Moody's meeting the following requirements: (i) (a)the municipal obligations are not subject to redemption prior to maturity or (b)the Trustee has received irrevocable instructions concerning their redemption ad the issuer has covenanted to comply with such instructions; (ii) the municipal obligations are secured by cash or Government Obligations which may be applied only to payment thereof; (iii) the principal of and interest on the Government Obligations (plus any cash) has been verified by an independent certified pubic accountant as sufficient to pay in full all municipal obligations when due("Verification"); (iv) such cash and/or Government Obligations are held in trust for the municipal obligations' owners; (v) no substitution of the Government Obligations is permitted except with another Government Obligation and a new accountant's verification of sufficiency and if a Forward Supply Contract exists with respect to such municipal obligations, the accountant's verification sets forth the matters required below;and (vi) the cash or Government Obligations are not available to satisfy any other claims, including those by or against the trustee or escrow agent, (6) Any combination of the items listed in subparagraphs(1)through(5)above. If a forward supply contract is used in a defeasance(I)the accountant's verification shall rely solely on the cash, initial Defeasance Obligations and the maturing principal and interest thereon and will not assume forward supply contract performance, and (ii)the applicable trust agreement provides that between the forward supply contract and the trust agreement and the Indenture,the trust agreement and Indenture control. "Delivery Costs" all expense items directly or indirectly payable or reimbursable to Trustee, Corporation or Town relating to the Indenture,the Lease-Purchase Agreement or the Obligations. "Development Services Building" an office building located in the vicinity of the Town's Town Hall which houses the administration offices of the Community Development Department, the Planning and Zoning Division, the Building Safety Division and the Department of Public Works of the Town and includes a hearing room for use by the Planning and Zoning Commission, the Development Review Board, the Board of Adjustment and other community groups of the Town. "1992 Project" the water system formerly owned by the Metropolitan Water Company, but acquired from Tucson with Series 1992 Bond proceeds. D-1 "Eligible Investments" (a) Federal Securities. (b) Obligations issued or guaranteed by the following federal agencies if backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): (1) U.S.Export-Import Bank. (2) Rural Economic and Community Development (formerly known as Farmers Home Administration). (3) Federal Financing Bank. (4) Federal Housing Administration. (5) General Services Administration. (6) Government National Mortgage Association. (7) U.S.Maritime Administration. (8) U.S.Department of Housing and Urban Development. (9) U.S.Public Housing notes and bonds. (10)U.S.Department of Housing and Urban Development. (c) Obligations issued or guaranteed by any of the following United States governments(not full faith and credit agencies): (1) Federal Home Loan Bank System. (2) Federal Home Loan Mortgage Corporation. (3) Federal National Mortgage Association. (4) Student Loan Marketing Association. (5) Resolution Funding Corporation. (6) Farm Credit System. (d) Money Market funds rated AAAm-g or AAAm or Aam by S&P and if rated by Moody's of AAA,Aal or Aa2. (e) Certificates of deposit secured by collateral described in (a)or (b)above if issued by commercial banks, savings and loan associations or mutual savings banks with short-term obligation ratings of"A-1" or better by S&P and"P-i"by Moody's. (f) Any deposits fully insured by FDIC,including BIF and SAIF. (g) Commercial paper rated Prime-1 by Moody's and A-1 or better by S&P. (h) Bonds or notes of states or municipalities rated in the two highest rating categories by Moody's and S&P. (i) Federal funds or banker's acceptances running not more than one year issued by a bank having an unsecured, uninsured and unguaranteed obligation rating of"prime-1" or"A3" or better by Moody's and "A-1" or "A"or better by S&P. 0) Repurchase agreements which satisfy the following: (1) From a dealer bank or securities firm who is: a. Primary dealers on the Federal Reserve reporting list and who are rated A or better by S&P and Moody's;or b. Banks rated"A:above by S&P and Moody's. (2) The Securities are: a. Direct U.S. governments or Federal agencies backed by the full faith and credit of the U.S. Government(and FNMA and FHLMC). b. With a term not more than 30 days. c. Collateral must be delivered to the Trustee or third party acting as Trustee's agent. d. Trustee has a perfected first priority security interest therein. e. The collateral is free and clear of third-party liens and if a SIPIC broker is the seller was not acquired under repurchase or reverse repurchase agreements. f. Failure to maintain the collateral percentage requires that the Trustee liquidate the collateral. g. Valuation: 1. Weekly,marked to market at current price plus accrued interest. 2. Collateral value must be at least 104%. If such value slips below 104% then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or GHLMC, then the value of the collateral must equal 105%. D-2 3. The Trustee receives a legal opinion that the repurchase Agreement is a legal investment of public monies under the laws of the State. (k) Investment with the Arizona State Treasurer in the local government investment pool. (1) Investment Agreements,including GIC's,issued by entities rated A or better by S&P and Moody's and otherwise acceptable to the Insurer and Moody's. "Excise Taxes" all fines and forfeitures,license and permit fees,transaction privilege(sales)taxes,other transaction privilege, excise and business taxes, franchise fees and taxes, bed and rental taxes and income taxes which the Town now collects or in the future imposes and collects, and all state shared sale and income taxes and state revenue sharing collected or allocated or apportioned, now or hereafter to the Town by the State of Arizona, any political subdivision thereof; or any governmental unit or agency, except the share of the Town of any excise or franchise taxes which by State of Arizona law,rule or regulation must be expended for other purposes. "Federal Securities" direct obligations the united states of America(including obligations issued or held in book-entry form on the books of the Department of the Treasury and CATS and TIGRS) or obligations on which are unconditionally guaranteed by, the United states of America, or obligations that are backed by the full faith and credit of the United States of America. "First Amendment" the First Amendment to the Lease-Purchase Agreement. "First Supplement" the First Supplement to Trust Indenture. "Indenture" the Trust Indenture, as supplemented by the First Supplement, the Second Supplement, the Third Supplement and all later supplements. "Insurance Policy" the municipal bond insurance policy issued by an Insurer guaranteeing payment of any Obligation. "Insurer" for the Series 1996 Bonds—MBIA. for the Series 1999 Bonds Financial Guaranty Insurance Company. for the Series 2001 Bonds Financial Guaranty Insurance Company. for the Series 2003 Bonds Ambac Assurance Corporation. "Lease" the Lease-Purchase Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment and all later amendments. "Leased Property" the 1992 Project,the land upon which the Development Services Building is located, the Development Services Building, the Series 1999 Water System Improvements, the Series 2001 Water System Improvements,the land upon which the Library is located and the Library. "Library" the municipal public library. "Maximum Annual Debt Service Requirement" at any computation, the greatest Annual Debt Service Requirement for the then current or any succeeding fiscal year (whether by maturity, mandatory redemption or otherwise). With respect to any one or more Obligations, Maximum Annual Debt Service means, at the time of computation,the greatest Annual Debt Service Requirement with respect to the applicable Obligations. "Net Revenues" all income, monies and receipts derived by the Town from the ownership, use and operation of the Project, and profits realized from the sale of investments made with monies of the project less all Operating Expenses; further,the term Net revenues shall not include: (I)nonrecurring revenues, such as grants and gifts;(ii)interest received on any investment placed irrevocably in trust to pay, or provide for the payment of,Senior Obligations,Additional Obligations or the Lease-Purchase Agreement;and(iii)amounts received which the Town is now or at the time of receipt contractually required to pay out as reimbursement for construction or installation of water lines or other water facilities included,or to be included in the Project. "Obligation Retirement Fund" the Fund comprised of the Interest Account and the principal Account. "Obligation Service Charges" for any period, the principal of and interest on any premium due on the Obligations for that period or that date. D-3 "Obligations" the Series 1996 Bonds, the Series 1999 Bonds, the Series 2001 Bonds, the Series 2003 Bonds and any Additional Obligations. "Obligations Being Refunded"means the Series 1996 Bonds Being Refunded, the Series 1996 Certificates Being Refunded, the Series 1999 Bonds Being Refunded, the Series 2000 Obligations BeingRefunded and Series 2001 Bonds Being Refunded. the "Operating Expenses" any annual premium and fees of any issuer of a Qualified Surety Obligation, fees payable to the Trustee and payingagent or registrar for the g Obligations ad the reasonable and necessary costs of operation, maintenance, and repair of the project, but shall exclude depreciation, payments into the Obligation retirement,and Reserve Funds. "Owner" the person in whose name an Obligation is registered on the Bond Register. "Predecessor Obligation" as to any Obligation, every previous Obligation evidencing the same debt. "Prepayments" any prepayments made pursuant to the Lease. "Principal Payment Date" July 1 in the years specified in this Official Statement and as to Additional Obligations the dates so designated in the applicable Supplemental Indenture. "Project" (i)all or part of the Canada Hills Water System, (ii)the Rancho Vistoso Water System, (iii)the Series 1999 Project, (iv)the Series 2001 Project, and(v) g such other buildings, equipment y and other real and personal properties suitable for use by and for leasing to the Town or its agencies or instrumentalities, includingbut not limited to domestic water systems, as may hereafter be subject to the Lease as amended or J supplemented. "Qualified Surety Issuer" the issuer of a Qualified Surety Obligation which, if a letter of credit or line of credit, by a bank rated at least"AA"by S&P or"Aa"by Moody's and, if an insurance policyor suretybond byan insurance company rated in the highest ratingcategory byS&P and g g ry Moody's ad by A.M.Best&Co. (if so rated). "Qualified Surety Obligation" letter of credit or line of credit, insurance policy or surety bond issued by a Qualified surety Issuer, andprovided such Qualified surety Obligation will not adversely affect the then—current rating if then rated by Moody's or S&P. "Rental Payments" the payments to be made by the Town under the Lease. "Reserve Requirement" as to all of the Series 1996 Bonds and Series 1999 Bonds combined$2,454,540, and as to any other Additional Obligations for which the Reserve Fund is required to be funded, it means the lesser of the Maximum Annual Debt Service Requirement, 125%of the average Annual Debt Service Requirement or 10% of the stated principal amount. The Reserve Requirement maybe satisfied byq q cash, a Qualified Surety Obligation, or a combination thereof. For the Series 2001 Bonds and the Series 2003 Bonds,no reserve is required to be funded unless in any year Excise Taxes pledged and received during the prior Fiscal Year was less than 250%of the highest aggregate Annual Debt Service Requirement for the current or anyfutureyear on the Obligations. g gat ons. If required to be funded, the Town must deposit on each Interest Payment Date one-tenth of the amount required until the Reserve Fund equals the Reserve Requirement. "Revenues" (a) All Rental Payments under the Lease;and (b) All other monies received or to be received by the Corporation or the Trustee under the Lease. "Second Amendment" the Second Amendment to the Lease-Purchase Agreement. "Second Supplement" the Second Supplement to Trust Indenture. "Senior Obligations" any bond or obligation payable from the net Revenues which enjoy a prior and paramount claim on the net Revenues to that of the Lease-Purchase Agreement. "Series 1992 Bonds" Town of Oro Valley Water Improvement District No. 1 Special Assessment and Water Revenue Bonds, Series 1992. "Series 1996 Bonds" the Town or Oro Valley Municipal Property Corporation,Municipal Water System Acquisition Bonds, Series 1996. Y D-4 "Series 1996 Bonds Being Refunded" that portion of the Series 1996 Bonds being refunded with the proceeds of the Series 2003 Bonds. "Series 1996 Certificates" the Town of Oro Valley,Arizona,Certificates of Participation,Series 1996. "Series 1996 Certificates Being Refunded" that portion of the Series 1996 Certificates being refunded with the proceeds of the Series 2003 Bonds. "Series 1996 Certificates Trust Agreement" that Trust Agreement dated as of September 1, 1996,by and between Wells Fargo Bank Arizona,N.A.,as successor to Norwest Bank Arizona,N.A.,as Trustee,and the Town of Oro Valley,Arizona,as Buyer. "Series 1996 Certificates Trustee" Wells Fargo Bank Arizona, N.A., as successor to Norwest Bank Arizona,N.A.,acting as Trustee under the Series 1996 Certificates Trust Agreement. "Series 1999 Bonds" The Town of Oro Valley Municipal Property Corporation, Excise Tax Revenue Bonds, Series 1999. "Series 1999 Bonds Being Refunded" that portion of the Series 1999 Bonds being refunded with the proceeds of the Series 2003 Bonds. "Series 1999 Project" (1)construction and equipping of: (a)the Series 1999 Water System Improvements and (b)the Development Services Building, (2)the refunding and refinancing of the Town's following obligations: (a)the Series 1992 Bonds and(b)the Tucson Settlement, (3)funding any required additional Reserve Fund contributions or purchasing a Qualified Surety Obligation for such purpose, and (4)the payment of the costs of issuance of the Series 1999 Bonds. "Series 2000 Obligations" the Town of Oro Valley, Arizona, Excise Tax Revenue Obligations, Series 2000. "Series 2000 Obligations Being Refunded" that portion of the Series 2000 Obligations being refunded with the proceeds of the Series 2003 Bonds. "Series 2000 Trust Agreement" that Trust Agreement dated as of November 1, 2000, by and between Wells Fargo Bank Arizona,N.A.,as Trustee,and the Town of Oro Valley,Arizona,as Buyer. "Series 2000 Trustee" Wells Fargo Bank Arizona, N.A., acting as Trustee under the Series 2000 Trust Agreement. "Series 2001 Bonds" The Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Bonds, Series 2001. "Series 2001 Bonds Being Refunded" that portion of the Series 2001 Bonds being refunded with the proceeds of the Series 2003 Bonds. "Series 2001 Project" (1) construction and equipping of the Series 2001 Water System Improvements and the Library, and(2)paying the costs of issuance of the Series 2001 Bonds. "Series 2001 Water System Improvements" the water facilities constructed or acquired with proceeds of the Series 2001 Bonds. "Series 2003 Bonds" The Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds, Series 2003. "Series 2003 Rental Payments" the additional Rental Payments to be made by the Town pursuant to the Third Amendment which are assigned by the Corporation to the Trustee by the Third Supplement. "Supplemental Indenture" any indenture supplemental to the Indenture. "Third Amendment" the Third Amendment to the Lease-Purchase Agreement. "Third Supplement" the Third Supplement to the Trust Indenture. "Trustee" Wells Fargo Bank Arizona,N.A., acting as Trustee under the Trust Agreement for the Series 1996 Bonds,the Series 1999 Bonds,the Series 2001 Bonds and the Series 2003 Bonds. D-5 • "Town" the Town of Oro Valley,Arizona. "Unassigned Corporation's Rights" all of the Corporation's rights to receive additional payments under the Lease, to be held harmless ad indemnified, to be reimbursed for certain expenses, to receive notice under the Lease and to give or withhold consent to amendments to the Lease. SUMMARY OF LEASE-PURCHASE AGREEMENT The parties to the Lease-Purchase Agreement are the Town and the Corporation. The Corporation is the lessor,the Town is the lessee. LEASE TERM AND RENTAL PAYMENTS Lease Term. The Lease Term commences March 1, 1996, and continues until July 2, 2026, or until the Series 1996 Bonds, the Series 1999 Bonds, the Series 2001 Bonds, the Series 2003 Bonds and any bonds or Additional Obligations issued on a parity therewith are deemed paid and discharged. The Lease is in full force and effect notwithstanding the acquisition of all or part of the project by the Corporation. In addition to all other property leased under the Lease-Purchase Agreement, the Corporation leases the Leased Property to the Town, and the Town leases, or subleases as the case may be, the Leased Property from the Corporation,Until the Series 2003 Bonds and any Additional Obligations, are deemed paid, the Lease shall remain in full force and effect notwithstanding the inability or failure by the Town or the Corporation to acquire all orp art of the Leased Property. The Town agrees to pay the Rental Payments in accordance with the Third Amendment, which shall supercede and replace any prior Rental Payment schedule in the Lease-Purchase Agreement. While the Series 2003 Bonds are outstanding, the fee title to and any leasehold estate in the Leased Property shall not merge, but shall always be kept separate and distinct, notwithstanding the union of such estates either in the Town or the Corporation. Termination of Lease. The Town may terminate the Lease on or after the date the Indenture is released upon payment or provision for payment of the entire amount owed. In such event,the Leased Property vests in the Town. Rental Payments. Notwithstanding the acquisition of all or part of the Project,the Town shall pay, as rental payments (i)on each December 15 and June 15, an amount which, when added to the balance then in the Interest Account, shall equal the interest due on the next interest payment date; (ii)on each December 15th and June 15th,an amount which, when added to the balance then in the principal Account shall be equal to the principal due on the Bonds on the next interest payment date; (iii)on the 20th day of each month all other amounts required to be paid in such month pursuant to the Indenture; and (iv)on each January 1 and July 1 the amount required to restore the Reserve Fund to the Reserve Requirement. If the date of initial issuance and delivery of the Series 2003 Bonds is later than December 15, 2003 but prior to January 1, 2004, the payment of amounts due on January 1, 2004 with respect to the Series 2003 Bonds will be deposited on or before the date of their initial issuance and delivery. All rental payments shall be paid directly to the Trustee. Rental payments are paid for the Town's control, use and occupancy of the Project. All rental payments shall be paid directly to Trustee. The Town's Lease Payments are co-extensive with the Corporation's debt service under the Indenture. Source of Funds for Rental Payment. All rental payments are the Town's special obligations. Subject to all present and future rights of owners of Additional Obligations to a pledge, claim or lien on a parity with or equal to the lien of the Series 2003 Bonds on Excise Taxes, the Excise Taxes are pledged and assigned as security for the payment of all rental payments without regard to any nonappropriation. Further, Net Revenues are pledged and assigned as security for the payment of all rental payments; provided, however, such pledge of Net Revenues is subject to the annual appropriation and inclusion in the Town's budget and further subject to the senior pledge, claim or lien on Net Revenues of any Senior Obligations. Nothing in this provision shall limit the Town's authority to issue Senior Obligations secured by Net Revenues or Additional Obligations secured by Excise Taxes. The Lease-Purchase Agreement shall not be deemed a limitation upon the issuance of additional Obligations or other obligations under any law which are secured by monies, income, and funds other than Excise Taxes and other monies and investments pledged. The Lease-Purchase Agreement shall not be construed to limit the Town's authority to issue junior obligations enjoying a pledge, claim or lien junior to that enjoyed by the Corporation. D-6 Under no circumstances shall the obligation to make rental payments constitute a general obligation of the Town or be payable from the proceeds of ad valorem taxes. Additional Rent. The Town shall pay as additional rent: (i) all rebates to the United States required under the Internal Revenue Code; (ii) all fees and expenses of the Trustee,registrars and paying agents; (iii) all expenses of the Corporation; (iv) all investment losses suffered by Trustee at the direction of the Town, to the extent necessary to pay obligations of the Town or the Corporation under the Indenture; (v) fees to maintain the Corporation's existence; (vi) all other expenses of the Corporation including Delivery Costs. Rent. Rent shall be paid in lawful money of the United States. Rental payments not paid within five days of the due date shall bear interest at 12%per annum from the date due until the date paid. Payments Paid to Trustee. The Corporation shall cause the Trustee to apply rental payments as provided in the Indenture. Credit for Excess Revenues. The Town shall receive credit or any excess monies in the Revenue Fund not necessary for payment of currant debt service. Unconditional Rights. The Town's obligations to pay rental payments and performance and observe its covenants shall be absolute and unconditional and be free of deductions and without any abatement, offset, recoupment, diminution or set-off of any kind or nature. The Town(i)shall not suspend or discontinue payment of the rental payments, (ii)shall perform and observe all of its agreements contained in the Lease, and (iii)will not terminate the Lease-Purchase Agreement for any reason. TAXES,LIENS,UTILITIES,INSURANCE AND OTHER CHARGES No Offsets. The rental payments shall be an absolute net return to the Corporation, free from any expenses and charges with respect to the project or its income. Payment of Taxes. The Town shall pay all taxes and all water and sewer charges and assessments and other governmental taxes and charges of every kind and nature; (i) which become liens upon the Project; (ii) upon Project possession,operation or use; (iii) upon the Lease Agreement. It shall not be a breach if the Town contests any amount or validity of a tax assessment or charge. The Corporation shall contest any such tax assessment or charge at the Town's request and upon its payment of the Corporation's costs. No Liens. The Town shall pay for any labor, services, materials supplies or equipment furnished or to be furnished to the project which may be secured by any mechanic's,materialman's or other liens against the project or the interest of the Corporation therein. If the Town contests any such lien or charge,the Town may do so as long as the Town makes all necessary payments to avoid forfeiture. Utilities. The Town shall pay all charges for utility services furnished to or in connection with the Project. Maintenance and Improvements. (a)The Town shall keep the Project in good repair, ordinary wear and tear excepted, and renew or replace any'portion which loses its usefulness. The Corporation shall provide nothing more than the Project. The Corporation retains reasonable inspection rights to determine if the Town is performing its obligations. The Town shall act to preserve all water rights associated with the Project and the right to pump water from Project wells. (b) The Town may make ally Project improvements which it deems desirable. All such improvements shall be deemed a part of the Project. D-7 (c) If the Town determines that any personal property which is part of the Project has become unnecessary or should be replaced, the Town may remove such item provided that removal does not impair or damage the Project's operative unity. The Town shall cause the Project to be insured against loss or damage customarily insured under extended coverage, in an amount not less than the full insurable Project value; but at least equal to the par amount of the outstanding Obligations. The Town shall carry other insurance customarily carried by similarly situated municipal corporations with policies of sound and reputable insurance companies doing business in the state or through the State's risk retention pool. Each policy shall contain provisions, if available, permitting 30 days' notice of any cancellation or substantial modification. The Town may obtain blanket policies. SOURCES OF PAYMENT AND PLEDGE Payment from Net Revenues; Pledge; Definition; Flow of Funds; Investments. (a)Except for that portion of Rental Payments allocated to the Development Services Building or the Library, all rental payments and other payments, shall be made from Net Revenues, but payment from Net Revenues shall be subject to annual appropriation and inclusion in the Town's budget. To the extent Net Revenues are insufficient or not appropriated and included in the Town's budget payment of rental payments and other payments due shall be paid from Excise Taxes. (b) Reservation. The Town reserves the right to incur Senior Obligations Senior Obligations shall be limited to a pledge of Net Revenues only, and Senior Obligations shall not be secured by any pledge or claim of the Excise Taxes superior to or on a parity with the Lease. The Town and the Corporation agree that the flow of funds set forth below shall apply to both Senior Obligations, the Lease-Purchase Agreement and any Additional Obligations. (c) Flow of Funds. On the tenth (10th) day of the first month the Town shall segregate, apportion and deposit in the following order or priority the following amounts solely from Net Revenues; First: as the required monthly payments to any Senior Obligations Fund,that month's current amount,then accrued, which is required to be paid either on maturing principal, interest or rental payments on Senior Obligations at the next Senior Obligation payment date; Second: to any reserve fund established for the Senior Lien Obligations any reserve fund amounts then delinquent or then required to be paid into any Senior Lien Obligation reserve fund and to any other fund established in connection with the Senior Lien Obligations to receive payments of amounts due pursuant to the documents that authorized the Senior Lien Obligations; Third: to the extent any Net Revenues remain, except for that portion of Rental Payments allocated to the Development Services Building or the Library, to an account entitled the Town of Oro Valley Lease-Purchase Obligation Fund(the"Lease-Purchase Fund"); 1/6 of the next forthcoming lease payment allocated to interest on the Series 1996 Bonds and on any Additional Obligations and 1/12 of the next maturing rental payment allocated to principal on the Series 1996 Bonds and any Additional Obligations. To the extent Net Revenues are insufficient in any month,the Town shall transfer Excise Taxes to the Lease-Purchase Fund; Fourth: to reimburse any amounts owed to a Qualified Surety Obligation Issuer(including interest)then to the Trustee any amounts necessary to return the Reserve Fund to the Reserve Requirement. Fifth: to the Trustee under the Indenture or such other person described in the Lease-Purchase Agreement, 1/2 of any other annual payment, 1/6th of any other semiannual payment and 100% of any other monthly payment next due as required under the Lease. When all of the above transfers have been made, the remaining net Revenues and any Excise Taxes not required to be so transferred may be used for any lawful purpose of the Town, including debt service payments on any subordinate obligations. Transfers. The moneys held in the funds established pursuant to clauses "First" and "Second"above shall be held and used solely and only to pay Senior Obligations and shall be either maintained as a separate and special funds or transferred to a paying agent pursuant to contracts pertaining to Senior Obligations. When the Senior Obligations Fund is held by the Town it shall be held separate and part from all other Town moneys, and used solely for payment of Senior Obligations. D-8 If Net Revenues are insufficient in any month to make the required deposits to the funds established by clauses "Third", "Fourth" and "Fifth" above (the "Lease-Purchase Funds"), the Town shall immediately transfer Excise Taxes to such fund or funds in the amount of any insufficiency. All moneys in the Lease-Purchase Funds shall be held and used solely to pay rental payments when due and for no other purpose. The Town's Finance Director shall establish the Lease-Purchase Funds as separate and special funds of the Town and such fund shall never be commingled with any other moneys,investments or assets of the Town. Investments. Moneys in the Senior Obligations Fund shall be invested pursuant to instructions contained n the contracts and agreements establishing the Senior Obligations. Moneys in the Lease-Purchase Funds may be invested by the Town Finance Director in any Eligible Investments Permitted under the Indenture. Other Funds. At its option the Town may make rental payments from other funds permitted by law. Source of Payment. (A)Subject to the Town's annual appropriation of sufficient Net Revenues, except for that portion of Rental Payments allocated to the Development Services Building or the Library, the Town agrees to pay all Rental Payments from Net Revenues and, to the extent such Net Revenues are not appropriated or are insufficient,then the Town agrees to make such payments from Excise Taxes. The Town pledges to make all Rental Payments which are allocated to the Development Services Building or the Library from Excise Taxes and not from Net Revenues. Notwithstanding any other provision thereof, including any non-appropriation of Net Revenues, the Town shall be absolutely and unconditionally obligated to pay all Rental Payments from Excise Taxes, and all other amounts due. The Town will not grant any lien or pledge upon Excise Taxes superior to the lien created by the Lease. The Town,without the requirement for annual appropriation and inclusion in its budget,pledges all is Excise Taxes to the lease payments. The Town intends the pledge to be a first lien on all Excise Taxes sufficient to make rental payment and other payments pursuant to the Lease, except to the extent the Town may choose to make payments from other sources. (B) In order to secure payment thereof and to create a separate and special fund containing only Excise Taxes which shall not contain any other moneys of the Town,there is created a special fund,the "Excise Tax Fund", funded solely from Excise Taxes and from no other source. Under no circumstances shall moneys be deposited from the Town's general fund to the Excise Tax Fund. The Excise Tax Fund may be reduced to zero each month after the amount required to be transferred to the Oro Valley Lease-Purchase Obligation Fund in such month has been so transferred. All Excise Taxes shall be deposited in the Excise Tax Fund. If by the eleventh(11th) day of each month the Town has not set aside sufficient Net Revenues to meet the then current month's rental payments, then, to the extent required to meet such rental payments such rental payments shall be made from the Excise Taxes deposited in the Excise Tax Fund which shall be transferred to the Lease-Purchase Fund; and such payment from Excise Taxes shall continue until such Oro Valley Lease-Purchase Obligation Fund contains the then required amount. Each month upon the deposit of the required amount (whether from Net Revenues, Excise Taxes or a combination thereof), all moneys then in the Excise Tax Fund, and all moneys required to be deposited to the Excise Tax Fund for the balance of the month, may thereafter be deposited to the Town's general fund. On the first day of each month thereafter, all Excise Taxes shall be deposited to the Excise Tax Fund untie the amounts required to be deposited to the Oro Valley Lease-Purchase Obligation Fund for such month have been so deposited. Rate Covenant. To the extent permitted by law, the Excise Taxes for the current fiscal year shall be maintained so that the combined amount shall be equal to at least two (2)times the total of all rental payments payable under the Lease in such fiscal year. If such receipts for any preceding fiscal year shall not equal two (2)times the rental payment requirements of the next changes to such fiscal year,the Town shall impose new Excise Taxes or increase the rates for the Excise Taxes currently imposed in order that (i)the current receipts will be sufficient to meet all current requirements under the Lease-Purchase Agreement and (ii)the current year's receipts will be reasonably calculated to attain the level as required above for the next fiscal year's rental payment requirements. Coverage Test. During the Lease, the Town shall not encumber the Excise Taxes on a basis equal to the first lien pledge unless the Excise Taxes collected in the next preceding fiscal year shall have amounted to at least two times the highest combined rental payments to be made under the Lease for any succeeding 12-month period and any payments to be made on any obligations outstanding or proposed to be secured by a pari passu pledge of Excise Taxes. D-9 Reserve Fund. If the Reserve Fund is required to be funded with respect to the Series 2001 Bonds, the Town shall make the payments necessary to fund the Reserve Fund. Enforcement of Pledge. The Trustee on behalf of the owners may enforce all liens and pledges under the Lease. QUIET ENJOYMENT Quiet Enjoyment. If the Town is not in default of the Lease,it shall hold and enjoy the Project. Surrender to the Town. Upon termination thereof due to reasons other than full payment, the Town shall surrender the Project to the Corporation in good order and condition and in a state of repair that is consistent with prudent use and conscientious maintenance,except for reasonable wear and tear. REMEDIES UPON DEFAULT;NO ABATEMENT OF RENTALS Events of Default. Upon nonpayment of rental payments, or the Town's violation of any other lease provision which is not cured (i)as to nonpayment within five (5)days or (ii)as to any other provision, within thirty(30) days after written notice specifying such default, then the Trustee may bring an action to recover rental payments due (but not rental payments accruing) or for damages for breach thereof and may pursue any other remedy,including specific performance. Enforcement of Pledges. Any suit to collect rental payments may enforce the pledges and foreclosure of the liens created under the Lease. In such a suit the Trustee without giving bond may take all legal action to enforce, collect and apportion Net Revenues and Excise Taxes pledged to pay the rental payments. No termination. The Lease Agreement shall not terminate or be affected by condemnation, destruction or damage, in whole or in part, or due to unuseability of, the Project, and, the rentals, shall be paid by the Town without abatement, diminution or reduction. TOWN REPRESENTATIONS The Town covenants that: 1. It is a town duly organized and existing. 2. The laws of the State authorized the Town to enter into the Lease-Purchase Agreement and to carry out is obligations. 3. Neither the execution or the fulfillment of the terms and conditions of the Lease,nor consummation of the transactions contemplated thereby,conflicts with or breaches any agreement to which the Town is now a party or constitutes a default under any of the foregoing. 4. It has duly authorized and executed the Lease-Purchase Agreement. 5. All rental payments and other payments under the Lease have been, or will be, duly authorized and paid when due from sources legally available. 6. It has an immediate need for,and expects to make immediate use of,the Project,which need is neither temporary nor expected to diminish in the foreseeable future. 7. There are no circumstances presently affecting the Town that could be reasonably expected to alter its foreseeable need for the Project. 8. The Project will be used by the Town during the term thereof only to carry out is proprietary purposes. 9. To perform all obligations and duties imposed on it under the Lease and under the Indenture. The . Town, immediately upon receiving or giving any notice relating to the project will deliver the same, or a copy to the Trustee. 10. It shall promptly, upon Trustee's or any Owner's request, take action to remedy any defect or cloud upon the Project's title and shall prosecute all such appropriate proceedings for such purpose. 11. It will make, execute and deliver any such further resolutions, instruments and assurances reasonably necessary to carry out the Indenture and the Lease-Purchase Agreement. D-10 Additional Parity Obligations. The Corporation may issue additional bonds or other obligations on a parity with the Obligations subject to the following specific conditions precedent thereto: (i) such additional bonds or other obligations must either refinance the Obligations or finance or refinance the acquiring,constructing,reconstructing or improving domestic water systems,buildings,equipment and other real and personal properties suitable for lease to the Town; (ii) the Corporation shall be in full compliance with all undertakings in the Lease Agreement and the Indenture; (iii) the proceeds of additional bonds or obligations shall be applied solely for one or more of the purposes set forth in(i)above and expenses and costs incidental thereto; (iv) such additional bonds or other obligations shall be equally and ratably secured with the Obligations; (v) the Corporation and the Town shall have amended the Lease or shall have entered into a Lease Agreement substantially similar to the Lease so that the Town obligates itself to rental payments from Net Revenues and Excise Taxes sufficient to pay such additional bonds or other obligations. Control by Town. The Town, if not in default under the Lease, shall retain all rights of access to and control of the Project. SUMMARY OF THE INDENTURE THE GRANTING CLAUSE The Corporation absolutely assigns to Trustee, all its right, title and interest in(i)its interest in the Lease, the Corporation, however, remains liable to observe and perform all of its conditions and covenants therein; (ii)all of the rents, issues and profits payable to the Corporation except the Unassigned Corporation's Rights; and (iii)all property which is, by the express provisions thereof, to be subjected to the Indenture and any additional property that may, from time to time hereafter,be subjected to the lien thereof. IN TRUST,NEVERTHELESS (a) for the equal and proportionate benefit,of al present and future Owners of the Obligations, (b) for enforcement of payment of the Obligations,and, (c) to secure performance and observance of and compliance with the covenants,of the Indenture,in each case, without preference,priority or distinction,as to lien or otherwise, of any one Obligation over any other;but if the Obligations shall be well and truly paid, or discharged then, the Indenture shall cease, determine and be void; otherwise,to remain in full force and effect. It is declared that all Obligations issued under the Indenture and secured thereby are to be issued, authenticated and delivered, and that all Revenues assigned thereby are to be dealt with and disposed of as provided in the Indenture. The Corporation agrees and covenants with the Trustee and with each and all Owners,as follows: AUTHORIZATION AND TERMS OF ADDITIONAL OBLIGATIONS Authorization of Additional Obligations. The Corporation may issue one or more series of Additional Obligations. Additional Obligations. (a) Additional Obligations shall be on a parity with the Series 1996 Bonds, the Series 1999 Bonds, the Series 2001 Bonds and the Series 2003 Bonds. Nothing prevents payment of Obligation Service Charges on any Additional Obligations from(i)being otherwise secured by property or instruments not applicable to the Series 1996 Bonds, the Series 1999 Bonds, the Series 2001 Bonds or the Series 2003 Bonds, or (ii)not being secured or protected from sources, property or instruments applicable to the Series 1996 Bonds, the Series 1999 Bonds, the Series 2001 Bonds or the Series 2003 Bonds. (b) The issuance of such Additional Obligations is subject to the following specific conditions: D-11 (i) such Additional Obligations shall have been authorized to fmance or refinance the cost of acquiring, constructing, reconstructing or improving buildings, equipment and other real and personal properties suitable for any use by and for leasing to the Town or its agencies or instrumentalities, including,but not l' domestic water systems, or for refinancing or advance refundingof Obligations. united to, g (ii) the Corporation shall be in full compliance with the Lease and the Indenture; (iii) the resolution authorizing issuance of such Additional Obligations shall require that their proceeds shall be applied solely for one or more of the purposes set forth in clause(i) q � of this subsection(b). TERMS OF OBLIGATIONS GENERALLY Source of Payment of Obligations. Any Obligations shall be the Corporation's special obligations ations the Obligation Service Charges shall be payable equally and ratablysolelyp g and q y from Revenues. Payment of Obligation Service Charges on any series of Additional Obligations may be otherwise secured andprotected from instruments not applicable to other Obligations, or not secured sources or by g � and protected from sources or by property or instruments applicable to other Obligations. The Obligations do not constitute a debt or pledge of h credit of the Corporation or the taxingpower of the Town or p g the faith and of the State or of any political subdivision,municipality or other agency thereof. FUNDS AND PAYMENTS Establishment of Funds. The following funds are established: (i)Revenue Fund; (ii)Obligation Retirement Fund, comprised of the Interest Account and g the Principal Account; (iii)Reserve Fund; (iv)Acquisition and Improvement Fund; and (vi)Town Contribution Fund. Additional funds and accounts maybe Supplemental Indenture. createdin any Receipt of Revenues. All rental payments will be paid by the Town directly to the Trustee to the credit of the Revenue Fund. Flow of Funds. The Trustee shall transfer from the Revenue Fund to the Obligation Retirement Fund the following amounts at the time and in the manner provided,to-wit: (i) Interest Account: Five (5)business days prior to each Principal Payment Date, the Trustee shall deposit in the Interest Account an amount equal to the amount of the interest becomingdue and payable on the outstanding Obligations on the next Interest Payment Date. The Interest p Y solely Ym e est Account shall be used by the Trustee solely to pay interest on the Obligations when due. (ii) Principal.Account. Five (5)business days prior to each Principal Payment Date, the Trustee shall deposit in the Principal Account an amount equal to the amount of the principal becomingdueand payable p y on the Outstanding Obligations on the next Principal Payment Date, and each such deposit shall be made so that adequate moneys for the payment of principal will be available in such account on each date that principal payments are to be withdrawn by the under the Indenture. Money in the Principal Account shall be used and p p p Trustee solely to pay principal on the Obligations. (iii)Reserve Fund: On June 20 and December 20, the Trustee shall deposit in the Reserve Fund any moneys received for deposit therein under the Lease-Purchase Agreement. Reserve Fund. (a) All Reserve Fund moneys shall be held in Trust for the benefit of the Owners of Obligations for which and the Series Reserve Fund has been funded. The Reserve Requirement for the Series 1996 Bondsg 1999 Bonds shall not exceed $2,454,540. Reserve Fund moneys shall be a reserve for prompt aYent of rental paymentspursuant to the Lease. If on any June 20 or December 20 the moneys available in the Obligation Retirement Fund do not at least equal the amount of the Obligation Service Charges then due and payable with respect to Obligations for which the Reserve Fund has been funded, the Trustee shall apply the Reserve Fund to g pp Y make delinquent rental payments by transferring the amount necessary to the Obligation Retirement Fund for such Obligations. In the case of Qualified Surety Obligation,the Trustee shall deliver a demand fora p yment to the issuer of the Qualified Surety Obligation at least three (3)business days before the funds are required. Upon receipt of any delinquent q rental payment corresponding to the moneys advanced from the Reserve Fund, such rental payment shall be deposited in the D-12 Reserve Fund. Transfers from the Reserve Fund to the Obligations Retirement Fund shall not result in a credit or reduction of Lessee's obligation to pay rental payments. (b) If the Reserve Fund and the Obligation Retirement Fund (excluding amounts required for payment of the Obligation Service Charges with respect to the Obligations not presented for payment) are sufficient to pay all Outstanding Obligations, including all Obligation Service Charges, the Trustee shall, upon the Town's direction, transfer all amounts then in the Reserve Fund to the Obligation Retirement Fund and shall thereafter pay the Obligations. (c) The Reserve Fund shall be valued at the following time: (i)as of the initial issuance of Obligations; (ii)each December 1 and June 1; and (iii)immediately after a Reserve Fund draw down occurs which transfers moneys or investments to the Obligation Retirement Fund. The Trustee shall promptly notify the Town of any Reserve Requirement deficiency and request the Town to pay such deficiency in the next rental payment date. (d) The Town may present a Qualified Surety Obligation in exchange for the money and investments then on deposit in the Reserve Fund. The Qualified Surety Obligation shall be issued by an issuer meeting the Insurer's requirements. The Town agrees to comply with the terms and provisions pertaining to any Qualified Surety Obligation. (e) Except as described in (g) below, the supplemental indenture shall require that a Qualified Surety Obligation or a cash deposit from Additional Obligation Proceeds of an amount which will cause the Reserve Fund to equal the Reserve Requirement immediately the Additional Obligations are issued. No Reserve Fund deposit need be made if the amount therein at least equals the Reserve Requirement. (f) If on January 15 of any year the Reserve Fund value exceeds the Reserve Requirement and no Indenture default then exists, the Trustee shall transfer the excess to the Revenue Fund. All money in the Reserve Fund shall be used solely to pay Series 1996 Bonds, Series 1999 Bonds and any Additional Obligations for which the Reserve Fund has been funded,if no other money is available therefore,or for retirement of all Obligations. (g) So long as the aggregate amount of Excise Taxes pledged and received by or on behalf of the Town during the prior Fiscal Year is at least 250% of the highest aggregate Annual Debt Service Requirement for the current or any future Bond Year for the Obligations and all Parity Obligations, then the Town is not obligated to fund the Reserve Fund with respect to the Series 2001 Bonds or the Series 2003 Bonds. If such Excise Taxes are less than 250% of such Annual Debt Service Requirement, the Town shall in addition to the payments provided under the Lease, pay to the Trustee for deposit into the Reserve Fund, on each Interest Payment Date, one-tenth of Maximum Annual Debt Service on the Series 2001 Bonds and the Series 2003 Bonds until the amount in the Reserve Fund equals the Reserve Fund Requirement. (h) So long as the Reserve Fund is not required to be funded with respect to the Series 2001 Bonds and the Series 2003 Bonds, the Owners of the Series 2001 Bonds and the Series 2003 Bonds shall have no claim upon amounts held in the Reserve Fund. Investment of Funds. At the Town's direction all the money in any funds shall be invested and reinvested in Eligible Investments. Eligible Investments attributable to moneys in the Reserve Fund shall not have maturities extending beyond five(5)years. Moneys to Be Held in Trust. All moneys paid to Trustee under the Indenture shall be held by the Trustee in trust. Obligation with Respect to Rebate. The Town has agreed pursuant to the Lease to provide for amounts due pursuant to Section 148 of the Code as"rebate". ENFORCEMENT OF REVENUE PLEDGE Enforcement of Revenue Pledge. As provided in the Lease, the Trustee shall have the right of specific performance of the covenants of the Town. Exclusive Pledge. The pledges of Revenues are for the benefit of the Owners of the Series 1996 Bonds, the Series 1999 Bonds,the Series 2001 Bonds,the Series 2003 Bonds and of any Additional Obligations. Payment Pursuant to Insurance Policy. As long as any Insurance Policy shall be in effect the Corporation,Town and the Trustee agree: D-13 (a) If, on the third day preceding an Interest Payment Date the Trustee does not have sufficient moneys to pay all the Obligations then to become due, the Trustee shall immediatelynotifythe Insurer. y If, by said Interest Payment Date,the Deficiency has not been cured,the Trustee shall present the registration books to the Insurer and: (i) make arrangements for the Insurer(A)to pay interest and(B)pay principal to the Owners entitled thereto;and (ii) notify Owners entitled to received payments from the Insurer if an Owner is entitled to receive partial payment of principal from the Insurer,such Owner must tender his Obligation for payment to the Trustee. (b) If an Obligation payment has been recovered from an Owner under the United States Bankruptcy Code under a nonappealable order,notify all Owners that if the Owners'payment is also recovered, p y p Ym eyed,such Owner is entitled to such payment from the Insurer. (c) The Insurer,to the extent of such payments, shall be subrogated to the recipients'rights. The Insurer's Control of Proceedings.UNLESS THE INSURER IS IN BANKRUPTCY, OR SIMILAR PROCEEDINGS OR IS IN DEFAULT UNDER THE INSURANCE POLICY, THE INSURER SHALL (i)CONTROL ENFORCEMENT OF THE INDENTURE, (ii)APPROVE ALL WAIVERS OF EVENTS OF DEFAULT,AND (iii)BE DEEMED THE SOLE OWNER OF ALL OBLIGATIONS FOR CERTAIN PURPOSES UNDER THE INDENTURE. Default by the Insurer. If any action requires the Insurer's consent, if the Insurer is then in bankruptcy, or required. similar proceedings or is in default of the Insurance Policy then such Insurer's consent is not re y THE TRUSTEE,REGISTRAR AND PAYING AGENT Trustee's Acceptance and Responsibilities. (a) Trustee accepts the trusts imposed upon it, and shall observe and perform those trusts, but only upon g the terms and conditions set forth,to all of which the parties and the Owners agree. p (b) Prior to the occurrence of a default or an"Event of Default" of which Trustee has been notified, or of which Trustee is deemed to have notice,and after the cure or waiver of all default or Events of Default: (i) Trustee undertakes to perform only those duties and obligations which are set forth specifically in the Indenture and no duties or obligations shall be implied to Trustee; (ii) in the absence of bad faith on its part, Trustee may rely conclusively, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to Trustee and conforming to the requirements thereof; but in case of any such certificates or opinion which are required specifically to be furnished to the Trustee, the Trustee shall be under a dutyq to examine the same to determine whether or not they conform to the requirements of the Indenture. (c) If an Event of Default has occurred and its continuing (of which the Trustee has been notified, or is deemed to have notice),Trustee shall exercise those rights and powers vested in the Indenture and shall use the same degree of care and skill in their exercise as a prudent corporate trustee would exercise or use under the circumstances in the conduct of their corporate trust business. (d) No provision of the Indenture shall be construed to relieve the Trustee from liability for its own gross negligent action,its own gross negligent failure to act,or its own willful misconduct, except that, (i) the Trustee shall not be liable for any error of judgment made in good faith by any one of its officers,unless it shall be established that the Trustee was negligent in ascertaining the pertinent facts; (ii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of not less than a majority in principal amount of a series of the Obligations then outstanding relating to the time, method and place of conduction any proceeding for anyremedy Y available to the Trustee,or exercising any trust or power conferred upon the Trustee;and (iii) no provision of the Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability(including,without limitation,any and all environmental liability)in thep erformance of any of its duties under the Indenture, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. D-14 (e) Whether or not expressly so provided, every provision of the Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to these provisions. Fees,Charges and Expenses of Trustee,Registrar and Paying Agents. (a) The Trustee, the Registrar and any Paying Agents shall be entitled to payment or reimbursement for reasonable fees for its services and for all advances, counsel fees and other expenses reasonably and necessarily paid or incurred. (b) The Trustee, the Registrar and any Paying Agent shall not be entitled to compensation or reimbursement for services or expenses occasioned by their gross negligence or willful misconduct. Successor Trustee. Any Successor Trustee shall (i)be a trust company or a bank having the powers of a trust company, (ii)be in good standing within the State, (iii)be duly authorized to exercise trust powers, and (iv)have a reported capital and surplus of not less than$50,000,000. Resignation by the Trustee; Removal of Trustee. The Trustee may resign at any time by giving written notice thereof by mail to the Owners as their names and addresses appear on the Registrar at the close of business fifteen(15)days prior to the mailing. The resignation shall take effect upon the appointment of a successor Trustee. The Trustee may be removed at any time by an instrument signed on behalf of the Owners at least a majority in aggregate principal amount of the Obligations then Outstanding. The Trustee also may be removed for action in violation of any provision of the Indenture by a court of competent jurisdiction upon the application of the Corporation, or the Owners of not less than twenty percent(20%) in aggregate principal amount of the Obligations then Outstanding. DEFAULT PROVISIONS AND REMEDIES Defaults;Events of Default. (a) Any of the following constitute an Event of Default: (i) Payment of any interest shall not be made when due; (ii) Payment of the principal or any premium shall not be made when due,whether at stated maturity, by redemption, or otherwise; (iii)The occurrence and continuance of any default as defined in the Lease; (iv) The occurrence of an Event of Bankruptcy as to the Corporation. Notice of Default. If an Event of Default shall occur, the Trustee shall give written notice of the Event of Default, by registered or certified mail, to the Corporation, the Town, the Registrar, any Paying Agent, and the Original Purchaser of each series of Obligations, within five (5)days after the Trustee has notice of the Event of Default. If an Event of Default occurs of which the Trustee has notice pursuant to the Indenture, the Trustee shall give written notice thereof, by notice promptly to the Owners of all Obligations then outstanding as shown by the Register at the close of business fifteen(15) days prior to the mailing of the principal of or any premium. The Trustee may withhold such notice if its board of directors, the executive committee or a trust committee in good faith determines that withholding such notice is in the owners'interest. Remedies;Rights of Owners. (a) Upon an Event of Default, the Trustee may pursue any available remedy to enforce the payment of Obligation Service Charges or the observance and performance of any other covenant, agreement or obligation under the Indenture,the Lease or any other instrument providing security, directly or indirectly,for the Obligations. (b) Upon an Event of Default, if requested to do so by the Owners of at least twenty-five percent(25%)in aggregate principal amount of each series of Obligations outstanding, the Trustee shall, if all preconditions are met, exercise any rights and powers conferred. (c) The Trustee is empowered to enforce each remedy granted to Corporation under the Lease. D-15 Application of Moneys. (a) After payment of any amounts incurred to collect moneys under the Indenture or under the Lease, all moneys received by the Trustee shall be deposited Obligation Retirement Fund and shall be applied as follows: First to pay all installments of interest then in the order of the interest due dates beginning earliest date and, if the amount available is not sufficient to payin g ng with the full any particular installment, then to the payment thereof ratably, without discrimination, except as to any difference in the ve rates respective specified in the Obligations;and p of interest Second To pay unpaid principal then due (other than Obligations previouslycalled for the payment of which moneys are held pursuant to theprovisions thereof) in redemption for the order of their due dates,beginning with the earliest, and if the amount available is not sufficient to pay in full all Obligations due thereof ratably,without discrimination. g , then to the payment Rights and Remedies of Owners. (a) An Owner shall not have any right to institute any suit, action or proceedingfor the enforcement, rcement,unless. (i) there has occurred and is continuing an Event of Default of which the Trustee has been notified. (ii) the Owners of at least twenty-five percent (25%) in aggregate principal amount of a afforded of Obligations then outstanding shall have requested that the Trusteep series (andthe Trustee reasonable opportunity to proceed) exercise the powers granted in the Indenture or to bring an action in its own name, and shall offered the Trustee indemnity; and have (iii) the Trustee thereafter shall have failed or refused to exercise the remedies, ow rights and granted in the Indenture or to institute the suit. gpowers (b) No one or more Owners shall have any right to affect, in any manner or benefit of the Indenture, enforce, except in the mannerprovided, any or to p power under the Indenture. SUPPLEMENTAL INDENTURES Supplemental Indentures Without Owner's Consent. Without consent of anyOwner,Trustee may into supplemental indentures: enter (i) to cure any ambiguity,inconsistency, formal defect or omission; (ii) to grant to or confer upon the Trustee for the benefit of the Owners anyadditional rights, remedies,powers or authority that lawfully may be sogranted or conferred; g s, , (iii) to assign additional revenues; (iv) to accept additional security and documents of further assurance with resect to the Obligations Lease, and to release all or any portion of the Project from the Lease in accordance with thep g (v) to add other covenants, agreements and obligations to be observed for the Owners' rotection or to surrender or limit any right, power or authority reserved to the Co oratio includin p limitation of rights of redemption so that in certain instances � n' g� without limitation, the p Obligations of different series will be redeemed in some prescribed relationship to one another for the protection of the Owners of a particular series of Obligations. (vi) to evidence any succession to the Corporation; (vii) to make necessary or advisable amendments or additions in connection with the issuance of Additional Obligations not adversely affecting the Owners' interests; (viii) to permit the use of a book-entry system of bond ownership; (ix) to permit the Trustee to comply with any obligations imposed upon it by law; (x) to specify further the duties and responsibilities of, and to define further the relationship the Trustee,the Registrar and any paying Agents; amon g' D-16 (xi) to achieve compliance of the Indenture with any applicable federal securities or tax law; (xii) to permit the use of a Qualified Surety Obligation to satisfy all or a portion of the Reserve Requirement;and (xiii) to permit any other amendment which, in the opinion of nationally recognized bond counsel, is not to the prejudice of the Trustee or the Owners. Supplemental Indentures Requiring Owners' Consent. (a) Except for Supplemental Indentures not requiring consents, the Owners of not less than a majority in aggregate principal amount of each series of Obligations, the Corporation and the Trustee may execute and deliver Supplemental Indentures. Nothing,however,shall permit: (i) without the consent of the Owner thereof, (A)extension of the maturity date of any Obligation, (B)reduction in the principal amount or the rate of interest or premium thereon, or(C)reduction in the amount or extension of the time of payment of any mandatory redemption requirement,or (ii) without the consent of the Owners of all Obligations then outstanding, (A)the creation of a privilege or priority of any Obligation or Obligations over any other Obligation or Obligations or(B)a reduction in the aggregate principal amount of the Obligations required for consent to a Supplemental Indenture. Opinion of Counsel. The Trustee shall be fully protected in relying upon,the opinion of any counsel (who may be the corporation's counsel) that: (i)any proposed Supplemental Indenture complies with the provisions thereof and(ii)it is proper for the Trustee to join in the execution of that Supplemental Indenture. DEFEASANCE Release of Indenture. (a) If the Corporation shall pay all of the outstanding Obligations, or shall cause them to be paid and discharged, then the Indenture shall cease, determine and become null and void, and the Corporation's obligations under the Indenture shall be released,discharged and satisfied. (b) Thereupon: (i) the Trustee shall release the Indenture; and (ii) the Trustee and any other Paying Agents shall assign and deliver to the Corporation any property subject at the time to the lien of the Indenture which then may be in their possession. Payment and Discharge of Obligations. (a) All or any part of the Obligations shall be deemed to have been paid and discharged if: (i) the Trustee shall have received,in trust for and irrevocably committed thereto, sufficient moneys, or (ii) the Trustee shall have received, in trast, noncallable Defeasance Obligations certified by an independent public accounting firm of national reputation to be of such maturities or redemption dates and interest payment dates, and to bear such interest and mature in such amounts as will be sufficient together with any applicable moneys to pay all Obligation Service Charges on deferred Obligations, at maturity or prior redemption dates. COVENANTS Town Covenants. The Town states: (a) It has the power to enter into the Indenture and that the provisions of the Indenture pertaining to the Town are lawful,valid and binding obligations enforceable in accordance with their terms; Integration; Incorporation by Reference. All terms and conditions in each and every Section of the Trust Indenture, the First Supplement and the Second Supplement which are not modified or superceded by the Third Supplement and which do not conflict with the terms of the Third Supplement are incorporated by reference into the Third Supplement, it being deemed the intention of the parties that the Trust Indenture, the First Supplement,the Second Supplement and the Third Supplement shall be construed to be one integrated document. D-17 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX E FORM OF APPROVING LEGAL OPINION [THIS PAGE INTENTIONALLY LEFT BLANK] Town of Oro Valley, Arizona The Town of Oro Valley, Arizona Municipal Property Corporation Ladies and Gentlemen: We have examined the proceedings relating to the issuance by The Town of Oro Valley Municipal Property Corporation (the "Corporation") of its $15,750,000 aggregate principal amount of The Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds, Series 2003 dated as of December 1, 2003 (the "Bonds") issued pursuant to a Trust Indenture dated as of April 1, 1996, as amended by the First Supplement thereto dated as of June 1, 1999, the Second Supplement thereto dated as of April 1, 2001 and the Third Amendment thereto dated as of December 1, 2003 (collectively, the "Indenture"), by and between Wells Fargo Bank Arizona, N.A., as Trustee (the "Trustee") and the Corporation. The Bonds are secured by an assignment of the Corporation's interest in a Lease-Purchase Agreement, dated as of April 1, 1996, as amended by the First Amendment thereto dated as of June 1, 1999, Second Amendment thereto dated as of April 1, 2001, and by Third Amendment thereto dated as of December 1, 2003, by and among the Corporation, the Trustee and the Town of Oro Valley, Arizona(the "Town")under which the Corporation has agreed to lease, or permit the use of, certain water utility systems and certain land and the improvements thereon to, or by, the Town (collectively the "Lease"). The rights of the Corporation to receive lease payments under the Lease have been assigned to the Trustee by the Corporation pursuant to the Indenture. We have also examined a form of the Bonds. Under the Lease, the Town will pay lease payments through July 1, 2019 or until the Bonds are paid in full. Lease payments are to be paid from the Town's Excise Taxes, as defined below. The Town's Excise Taxes have been pledged on a first lien basis to secure payment of the lease payments. The Lease does not create a debt of the Town and neither the Trustee nor any Bond owner may compel the Town to exercise its ad valorem taxing power to make lease payments. For purposes of this opinion, the term "Excise Taxes" means: all fines and forfeitures, license and permit fees, transaction privilege (sales) taxes, other transaction privilege, excise and business taxes, franchise fees and taxes, bed and rental taxes and income taxes which the Town now or in the future imposes and collects, or may collect in the future, and all state shared sales and income taxes and state revenue sharing collected and allocated or apportioned, now or hereafter to the Town by the State of Arizona or any political subdivision E-1 thereof, or by any other governmental unit or agency, and which are not required by State of Arizona law, rule or regulation to be expended for otheru oses such as the p rp motor vehicle fuel tax. The Lease commits the Town to pay lease payments for a certaineriod during g the time the Bonds will be outstanding. The aggregate of lease payments to be made under the Lease are coextensive with the principal and interest payments to be paid by the Corporation on the Bonds and all bonds or additional obligations on aarit with the Bonds. p Y Based upon such examination, we are of the opinion that, under the law existing on the date of this opinion: 1. The Bonds, the Indenture and the Lease are legal, valid, bindingand g enforceable in accordance with their respective terms, except that the binding enforceabilityp ng effect and thereof are subject to applicable bankruptcy, insolvenc reorganization, y, g nization, moratorium and other laws in effect from time to time affecting the rights of creditors generally, and except to the extent that the enforceability thereof maybe limited bythe . application of general principles of equity. 2. The Bonds are special obligations of the Corporation, and thep rinci al of p and interest on the Bonds, unless paid from other sources, area able from the Excise Y Taxes received from the Town as lease payments under the Lease and other moneys pledged y p g and assigned pursuant to the Indenture to secure that payment. Notwithstandingthe foregoing, the Bonds do not constitute an indebtedness of the Town or the State of Arizona for constitutional or statutory purposes nor are they secured by a pledge of the full faith and credit of or anytaxi power of the Town or the State of taxing Arizona. The Corporation has no taxing power. 3. Under existing laws, regulations, rulings and judicial decisions, the interest income on the Bonds is excluded from gross income for theu ose of calculatingthe p � federal income taxes and is exempt from Arizona income taxes. Interest income on the Bonds is not an item of tax preference to be included in computingthe alternative minimum tax of individuals or corporations; however, such interest income must be taken into account for federal income tax purposes as an adjustment to alternative minimum taxable income for certain corporations, which income is subject to the federal alternative minimum tax. The Bonds are not private activity bonds within the meaning of Section 141 of the Internal Revenueo C de of 1986, as amended (the "Code"). We express no opinion regarding other federal tax consequences arising with respect to the Bonds. The Code imposes various restrictions, conditions and requirements relatingto the q continued exclusion of interest income on the bonds fromoss income for federal income ncome tax purposes, including a requirement that the issuer rebate to the federalg overnment certain of the investment earnings with respect to the Bonds. Failure to comply with ' . . p y such restrictions, conditions and requirements could result in the interest income on the Bonds being included as gross income for federal income tax purposes from their date of issuance. The Corporation and the Town have covenanted to comply with the restrictions, conditions and requirements of the E-2 Code necessary to preserve the tax-exempt status of the Bonds. For purposes of this opinion we have assumed compliance by the issuer with such restrictions, conditions and requirements. We express no opinion as to the exemption from federal or Arizona state income taxation of any other amounts paid under the Lease. As to questions of the fact material to our opinion we have relied upon, and assumed due and continuing compliance with the provisions of, the proceedings and other documents, and have relied upon certificates, covenants and representations furnished to us without undertaking to verify the same by independent investigation. GUST ROSENFELD P.L.C. Bond Counsel E-3 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX F FORM OF CONTINUING DISCLOSURE UNDERTAKING [THIS PAGE INTENTIONALLY LEFT BLANK] $15,750,000 THE TOWN OF ORO VALLEY MUNICIPAL PROPERTY CORPORATION EXCISE TAX REVENUE REFUNDING BONDS,SERIES 2003 CONTINUING DISCLOSURE CERTIFICATE (CUSIP 68702L) This Continuing Disclosure Certificate (the "Disclosure Certificate") is undertaken by the Town of Oro Valley,Arizona(the "Town"), as the obligated person, in connection with the issuance by The Town of Oro Valley Municipal Property Corporation (the "Corporation") of the Corporation's Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds, Series 2003 (the "Bonds"). In consideration of the initial sale and delivery of the Bonds,the Town covenants as follows: Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is for the benefit of the Bondholders and in order to assist the Participating Underwriter in complying with the Rule(as defined herein). Section 2. Definitions. Any capitalized term used herein shall have the following meanings, unless otherwise defined herein: "Annual Report" shall mean the annual report provided by the Town pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate. "Bondholder" shall mean any beneficial owner of the Bonds (when the Bonds are in Book-Entry-Only form)or registered owner when the Bonds are not in Book-Entry-Only form. "Bond Counsel" shall mean Gust Rosenfeld P.L.C. or such other nationally recognized bond counsel as may be selected by the Town. "Dissemination Agent" shall mean the Town, or any person designated in writing by the Town as the Dissemination Agent. "Listed Events"shall mean any of the events listed in Section 5(a)of this Disclosure Certificate. "National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. Currently,the following are National Repositories: Bloomberg Municipal Repository Standard&Poor's 100 Business Park Drive Securities Evaluations,Inc. Skillman,New Jersey 08558 55 Water Street,45th Floor Telephone: 609.279.3225 New York,New York 10041 Fax: 609.279.5962 Telephone: 212.438.4595 vvvvw.bloomberg.com/markets/muni_contactinfo.html Fax: 212.438.3975 E-mail: Munis@Bloomberg.com www.jjkenny.com/jjkenny/pser_descrip_data_rep.html E-mail: nrmsir_repository@sandp.com DPC Data Inc. FT Interactive Data One Executive Drive Attn: NRMSIR Fort Lee,New Jersey 07024 100 William Street Telephone: 201.346.0701 New York,New York 10038 Fax: 201.947.0107 Telephone: 212.771.6999 www.dpcdata.com Fax: 212.771.7390 E-mail: nrmsir@dpcdata.com www.interactivedata.com E-mail: NRMSIR@FTID.com "Official Statement" shall mean the final official statement dated November 13, 2003, relating to the Bonds. F-1 "Participating Underwriter" shall mean the original underwriter of the Bonds required to complywith the Rule in connection with offering of the Bonds. "Repository"shall mean each National Repository and each State Repository. "Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934,as the same may be amended from time to time. "State Repository"shall mean any public or private repository or entity designated by the State of Arizona as a state repository for the purpose of the Rule. As of the date of this Disclosure Certificate, there is no State Repository. Section 3. Provision of Annual Reports. (a) The Town shall, or shall cause the Dissemination Agent to,not later than FebruaryI of each year (the "Filing Date"), commencing February 1, 2004,provide to each Repository an Annual Report for the fiscal year ending on the preceding June 30 which is consistent with the requirements of Section q 4 of this Disclosure Certificate. Not later than two (2) day before such Filing Date, the Town shall provide the Annual Report to the Dissemination Agent(if other than the Town). p (b) If the Town is unable or for any reason fails to provide to the Repositories an Annual Report or any part thereof by the Filing Date required in subsection(a)above, the Town shall promptly P p p y send a notice to each Repository in substantially the form attached as Exhibit"A"not later than such Filing Date. (c) If the Town's audited financial statements are not submitted with the Annual Report and the Town fails to provide to the Repositories a copy of its audited financial statements within 30 days of receipt thereof by the Town, then the Town shall promptly send a notice to each Repository in substantially the form attached as Exhibit"B". (d) The Dissemination Agent shall: (i) determine each year prior to the date(s) for providing the Annual Report and audited financial statements the name and address of each National Repository and each State Repository, if any; and(if the Dissemination Agent is other than the Town) (ii) file a report or reports with the Town certifying that the Annual Report and audited financial statements, if applicable, have been provided pursuant to this Disclosure Certificate, stating the date such information was provided and listing all the Repositories to which it was provided. Section 4. Content of Annual Reports. (a) The Annual Report may be submitted as a single document or as separate documents comprising a package, and may incorporate by reference other information as provided in this Section, including the audited financial statements of the Town; provided, however, that if the audited financial statements of the Town are not available at the time of the filing of the Annual Report, the Town shall file unaudited financial statements of the Town with the Annual Report and, when the audited financial statements of the Town are available, the same shall be submitted to each Repository within 30 days of receipt by the Town. (b) The Town's Annual Report shall contain or incorporate by reference the following: (i) Type of Financial and Operating Data to be Provided: (A) Subject to the provisions of Section 4(a) hereof, annual audited financial statements for the Town. F-2 (B) Annually updated financial information and operating data of the type contained in the following subsections of the Official Statement: (1) Tables 1 through 5. (C) Information concerning the Water System: (1) Total number of operating wells at the end of the Fiscal Year (2) Any changes in the Central Arizona Project water allotment from the previous fiscal year(if no changes occur,no report will be required for this item). (3) Annual information substantially as set forth in Official Statement Tables 7 through 15 dated to the end of the Fiscal Year;provided however, that the Town shall not be required to include estimates, forecasts,projections or other forward-looking statements, whether or not included in the Official Statement. (D) In the event of an amendment pursuant to Section 8 hereof not previously described in an Annual Report,an explanation, in narrative form,of the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided and, if the amendment is made to the accounting principles to be followed, a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles, including a qualitative discussion of the differences, and the impact on the presentation and,to the extent feasible, a quantitative comparison. (ii) Accounting Principles Pursuant to Which Audited Financial Statements Shall Be Prepared: The audited annual financial statements shall be prepared in accordance with generally accepted accounting principles and state law requirements as are in effect from time to time. A more complete description of the accounting principles currently followed in the preparation of the Town's audited annual financial statements is contained in Note 1 of the audited financial statement included within the Official Statement at Note 1 is incorporated by reference herein. (c) Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the Town or related public entities,which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document incorporated by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The Town shall clearly identify each such other document so incorporated by reference. Section 5. Reporting of Significant Events. (a) This Section 5 shall govern the giving of notices by the Town of the occurrence of any of the following events with respect to the Bonds,if material: (1) Principal and interest payment delinquencies; (2) Non-payment related defaults; (3) Unscheduled draws on debt service reserves reflecting financial difficulties; (4) Unscheduled draws on credit enhancements reflecting financial difficulties; (5) Substitution of credit or liquidity providers,or their failure to perform; (6) Adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) Modifications to rights of Bondholders; (8) Bond calls; (9) Defeasances; (10) Release,substitution,or sale of property securing repayment of the Bonds;and (11) Rating changes. F-3 (b) Whenever a Listed Event occurs, then the Town, if such Listed Event is material, shallro tl file a notice of such occurrence with each Repository; p y provided, that any event under subsection(a)(1), (6), (8), (9)or(11)will always be deemed to be material. Section 6. Termination of Reporting Obligation. The Town's obligations under this Disclosure Certificate shall terminate upon the legal defeasance,prior redemption or payment in full of all of the Bonds. Such termination shall not terminate the obligation of the Town to give notice of such defeasance or prior redemption. Section 7. Dissemination Agent. The Town may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge g any such Agent,with or without appointing a successor Dissemination Agent. g Section 8. Amendment. Notwithstanding any other provision of this Disclosure Certificate,the Town may amend this Disclosure Certificate if: (a) The amendment is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in identity, nature or status of the Town, or the type of business conducted; (b) This Disclosure Certificate, as amended, would, in the opinion of Bond Counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule,as well as any change in circumstances;and (c) The amendment does not materially impair the interests of Bondholders, as determined by Bond Counsel. Notice of any amendment to the accounting principles shall be sent within 30 days to the Repositories. Section 9. Additional Information. If the Town chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the Town shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 10. Default. In the event of a failure of the Town to comply with any provision of this Disclosure Certificate any Bondholder may seek specific performance by court order to cause the Town to comply pY with its obligations under this Disclosure Certificate. The sole remedy under this Disclosure Certificate in the event of any failure of the Town to comply with this Disclosure Certificate shall be an action to compel performance and such failure shall not constitute a default under the Bonds or the resolution authorizing the Bonds. Section 11. Compliance by the Town. The Town hereby covenants to comply with the terms of this Disclosure Certificate. The Town expressly acknowledges and agrees that compliance with the undertaking contained in this Disclosure Certificate is its sole responsibility and the responsibility of the Dissemination Agent, if any, and that such compliance,or monitoring thereof, is not the responsibility of, and no duty is present with respect thereto for,the Participating Underwriter,Bond Counsel or the Town's financial advisor. Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Town, the Dissemination Agent, the Participating Underwriter and Bondholders, and shall create no rights in any other person or entity. Section 13. Governing Law. This Disclosure Certificate shall be governed by the law of the State of Arizona and any action to enforce this Certificate must be brought in an Arizona state court. The terms and provisions of this Disclosure Certificate shall be interpreted in a manner consistent with the interpretation of such terms and provisions under Rule 15c2-12 and the federal securities law. F-4 Section 14. Notice Concerning Cancellation of Contracts. To the extent applicable by provision of law, this Disclosure Certificate is subject to cancellation pursuant to Arizona Revised Statutes, Section 38-511, as amended. Date:December 18,2003. TOWN OF ORO VALLEY,ARIZONA By: Its: F-5 EXHIBIT A NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT Name of Obligated Person: Town of Oro Valley,Arizona Name of Issuer: The Town of Oro Valley Municipal Property Corporation Name of Bond Issue: $15,750,000 Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds,Series 2003 Dated date of Bonds: December 1,2003 CUSIP: 68702L NOTICE IS HEREBY GIVEN that the Town has not provided an Annual Report with respect to the above- named Bonds as required by Section 3(a) of the Disclosure Certificate dated December 18, 2003. The Town anticipates that the Annual Report will be filed by Dated: December 18,2003 Town of Oro Valley,Arizona By: Its: EXHIBIT B NOTICE TO REPOSITORIES OF FAILURE TO FILE AUDITED FINANCIAL STATEMENTS Name of Obligated Person: Town of Oro Valley,Arizona Name of Issuer: The Town of Oro Valley Municipal Property Corporation Name of Bond Issue: $15,750,000 Town of Oro Valley Municipal Property yCororation Excise Tax Revenue Refunding Bonds, Series 2003 Dated date of Bonds: December 1,2003 CUSIP: 68702L NOTICE IS HEREBY GIVEN that the Town failed to provide its audited financial statements with its Annual Report or, if not then available, within 30 days of receipt as required by Section 4(a) of the Disclosure Certificate dated December 18, 2003 with respect to the above-named Bonds. The Town anticipates that the audited financial statements for the fiscal year ended June 30, will be filed by Dated: December 18, 2003 Town of Oro Valley,Arizona By: Its: EXHIBIT C NOTICE TO REPOSITORIES OF FAILURE TO APPROPRIATE FUNDS Name of Obligated Person: Town of Oro Valley,Arizona Name of Issuer: The Town of Oro Valley Municipal Property Corporation Name of Bond Issue: $15,750,000 Town of Oro Valley Municipal Property Corporation Excise Tax Revenue Refunding Bonds,Series 2003 Dated date of Bonds: December 1,2003 CUSIP: 68702L NOTICE IS HEREBY GIVEN that the Town failed to appropriate funds necessary to perform the undertaking required by the Disclosure Certificate. Dated: December 18,2003 Town of Oro Valley,Arizona By: Its: [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX G BOOK-ENTRY-ONLY SYSTEM [THIS PAGE INTENTIONALLY LEFT BLANK] BOOK-ENTRY-ONLY SYSTEM 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 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 other 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 Direct Participants and Indirect Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com Purchase of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond("Beneficial Owner") is in turn to be recorded on the Direct Participant's and Indirect Participant's 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 Participant or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interest in the Bonds are to be accomplished by entries made on the books of Direct Participants and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interest in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers,all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede&Co.,or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co., or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct Participants 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. Redemption notices of the Bonds shall be sent to DTC. If less than all of the Bonds 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 Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures,DTC mails an Omnibus Proxy to the Trustee as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). G-1 Payment of principal of and interest on the Bonds and the redemption price of anyBonds will be Co.,or such other nominee as may be requested byan authorized representative made to Cede & q of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and correspondingdetail information from Registrar and Paying Agent, on payable date in accordance with the Bond their respective holdings shown on DTC's records. Payments by Direct Participants and Indirect Participants to Beneficial Owners will beov g erned 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 Direct Participant or Indirect Participant and d not of DTC (nor its nominee) or the Bond Registrar and Paying Agent, subject to anystatutory requirements as may be in effect from time to time. Paymentof or regulatory principal of and interest on the Bonds and the redemption price of any Bonds will be made to Cede & Co. (or such other nominee as maybe requested authorized representative of DTC) is the responsibility of the q by an p ty Corporation or the Bond Registrar and Paying Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, disbursement of payments to Indirect Participants will be the responsibility of Direct Participants and disbursement ofa Beneficial ents to Be Owners will be the responsibility of Direct Participants and Indirect Participants. p fi cial DTC may discontinue providing its services as depository with respect to the Bonds at anytime reasonable notice to the Bond Registrar and Paying Agent. Under such circumstances, by giving g in the event that a successor depository is not obtained,physical Bonds are required to be printed and delivered. The Corporation may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event,physical Bonds will be printed and delivered. G-2 APPENDIX H SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY [THIS PAGE INTENTIONALLY LEFT BLANK] T Ambac .moac Assurance Corporation One State Street Plaza, 15th Floor <s p (212) 3 New York, New York 10004 Policy Financial Guaranty Insurance olicy Tele hone:2 668-0 40 Obligor: Policy Number: Obligations: Premium: Ambac Assurance Corporation (Ambac), a Wisconsin stock insurance corporation, in consideration of the payment of the premium and subject to the terms of this Policy, hereby agrees to pay to The Bank of New York, as trustee, or it. su,cessor(the "Insurance Trustee"),for the benefit of the Holders,that portion of the principal of and interest on the above-described o.ligations (the "Obligations")which shall become Due for Payment but shall be unpaid by reason of Nonpayment b Obli:or. Ambac will make such payments to the Insurance Trustee within one(1)business day following w en .•tif .tio o 'm.ac of Nonpayment.Upon a Holder's presentation and surrender to the Insurance Trustee of such un �� ati. s • .te. '•u •n P g supons, uncanceled and in bearer form and free of any adverse claim, the Insurance Trustee will to the old- the .• ount •f principal and interest which is then Due for Payment but is unpaid. Upon such disburse ent(.5,/.-i Amb.- s all b• o - the ow er of the surrendered Obligations and/or coupons and shall be fully subrogated to all of r` e s of'er's c- is . payme .t th-reon. In cases where the Obligations are issued in registered form, the Insurance Trust all isb se ��rincipa o ..Ho der only upon presentation and surrender to the Insurance Trustee of the unpaid Oblia ,_ •n,un a -le and tee •f- iy a. -rse claim, together with an instrument of assignment, in form satisfactory to Ambac and thus anc- este- dui! execu -• by the Holder or such Holder's duly authorized representative,so as to permit ownersl f sue-i lig io t .e ret este _ in the name of Ambac or its nominee. The Insurance Trustee shall disburse interest to a 'Holo r o a r •ste b••at:•n onlyupon re � p presentation to the Insurance Trustee of proof that the claimant is the perso•. - idea'to t ,e pavme�t�f i`te est .n the Obligation and delivery to the Insurance Trustee of an instrument of assignment, . form sati' ac ry A._bat an ti Insurance Trustee,duly executed by the Holder or such Holder's duly authorized represe°tat. e, tra sferrin to m'.c a 1 rights under such Obligation to receive the interest in respect of which the insurance disbu_se_ ent was made. \mbg sh, i be subrogated to all of the Holders' rights to payment on registered Obligations to • ex ent .f a,y. insuran :_ d sbucerr..nts so made. In the event that a trustee or .- ing ..ent for t`le •--•ligatio-s as notice that any payment of principal of or interest on an Obligation which has become tue .r Pay.-en an. chic-` i, ma: to a Holder by or on behalf of the Obligor has been deemed a preferential transfer and .- etofo e re . -ere rom the -,_.1 ._ ursuant to the United States Bankruptcy Code in accordance with a final,nonappealab =order of cot t of- mpetenn risdiction,such Holder will he entitled to payment from Ambac to the extent of such recovery suf. ien fun's a no oft 2` ise -ailable. As used herein,t'- to "•old:r"mea.s any - rson other than(i)the Obligor or(ii)any person whose obligations constitute the und- ing se tit or s.urc• if paymen f- the Obligations who,at the time of Nonpayment,is the owner of an Obligation or of a •up•- r- ing to ,n L. igation. As used herein, "Due for Payment", when referring to the principal of Obligations, is when t e s hedule• --t. urit da - or mandatory redemption date for the application of a required sinking fund installment has been re:che. .nd does no re'-r to any earlier date on which payment is due by reason of call for redemption(other than by application of - u -: sinki g und •nstallments), acceleration or other advancement of maturity; and, when referring to interest on the Obligations,is e the scheduled date for payment of interest has been reached. As used herein,"Nonpayment"means the failure of the •.li:•r to ave provided sufficient funds to the trustee or paying agent for payment in full of all principal of and interest on the •: ons which are Due for Payment. This Policy is noncancelable. The premium on this Policy is not refundable for any reason,including payment of the Obligations prior to maturity. This Policy does not insure against loss of any prepayment or other acceleration payment which at any time may become due in respect of any Obligation,other than at the sole option of Ambac,nor against any risk other than Nonpayment. In witness whereof, Ambac has caused this Policy to be affixed with a facsimile of its corporate seal and to be signed by its duly authorized officers in facsimile to become effective as its original seal and signatures and binding upon Ambac by virtue of the countersignature of its duly authorized representative. --. )--e___,4 414A- ®,"••dir •a• § r $1-L President f -- - == 't -r: ZI_ _ : Secretary v •• go... ` i ' o •O a ` „„ :.a-eGa AP p Q• Effective Date: °O•Tool."°•ems°•• „��s�� Authorized Representative THE BANK OF NEW YORK acknowledges that it has agreed -' to perform the duties of Insurance Trustee under this Policy. Form No.: 2B-0012 (1/01) Authorized Officer of Insurance Trustee A- J - r