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CC Resolution No. 1577 20 RESOLUTION NO. 1577 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BAYTOWN, TEXAS, APPROVING PRELIMINARY OFFICIAL STATEMENT FOR THE CITY OF BAYTOWN, TEXAS, WATERWORKS AND SEWER SYSTEM REVENUE IMPROVEMENT AND REFUNDING BONDS, SERIES 2003; APPOINTING THE UNDERWRITING SYNDICATE FOR THE SALE OF SAID BONDS; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. WHEREAS, the City Council has determined to proceed with the sale of the City's Waterworks and Sewer System Revenue Improvement and Refunding Bonds, Series 2003 (the "Bonds"); and WHEREAS, the City Council has received a Preliminary Official Statement relating to the sale of the Bonds, and wishes to approve said document for use in connection with the sale of the Bonds; and WHEREAS, the City Council wishes to appoint an underwriting syndicate for the sale of the Bonds; NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF BAYTOWN, TEXAS: Section 1: The Preliminary Official Statement, attached hereto as Exhibit "A," for the sale of the Bonds is hereby approved. Section 2: The City's financial advisor, First Southwest Company, is authorized and directed to proceed with the necessary arrangements for the sale of the Bonds in accordance with the aforesaid Preliminary Official Statement. Section 3: The following firms are hereby appointed as the underwriting syndicate for the sale of the Bonds: Morgan Stanley, Prudential Securities, Inc., CHIC World Markets Corp., and Legg Mason Wood Walker, Inc. Section 4: This resolution shall take effect immediately from and after its passage by the City Council of the City of Baytown, Texas. INTRODUCED, READ and PASSED by the affirmative vote of the City Council of the City of Baytown this the 27`h day of March, 2003. PETE C. ALFARO, Nfayor ATTEST: W SMITH, City Clerk APPROVED AS TO FORM: ACIO RAMIREZ, SR., i ttomey F:Vcanene\My Documents\Council\02-03\March\ApproveStatement4Watemorks&SewerSystemBonds2003.DOC PRELIMINARY OFFICIAL STATEMENT DATED MARCH 27,2003 Ratings: Moody's: "Applied for" S&P: "Applied for" See("OTHER INFORMATION- NEW ISSUE-BOOK-ENTRY-ONLY RATINGS"herein) In the opinion of Bond Counsel,interest on the Bonds is excludable from gross income for federal income tax purposes under existing law and the Bonds are not private activity bonds. See "TAX MATTERS - TAx EXEMPTION"herein for a discussion of the opinion of Bond Counsel,including a description of alternative minimum tax consequences for corporations. THE BONDS WILL NOT BE DESIGNATED AS"QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $9,090,000* CITY OF BAYTOWN,TEXAS (Harris and Chambers Counties) WATERWORKS AND SEWER SYSTEM REVENUE IMPROVEMENT AND REFUNDING BONDS SERIES 2003 Dated Date: May 1,2003 Due: February 1,as shown below PAYMENT TERMS .. .Interest on the $9,090,000` City of Baytown, Texas, Waterworks and Sewer System Revenue Improvement and Refunding Bonds,Series 2003(the"Bonds")will accrue from May 1,2003,(the"Dated Date")and will be payable February l and August l of each year commencing August 1,2003,and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of,premium,if any,and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede&Co.,which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds(see"THE BONDS-BOOK-ENIRY- ONLY SYSTEM"). The initial Paying Agent/Registrar is]P Morgan Chase Bank(see"THE BONDS-PAYING AGENT/REGISTRAR"). AUTHORITY FOR ISSUANCE . ..The Bonds are issued pursuant to the general laws of the State of Texas("the State"),particularly Chapters 1207 and 1502, Texas Goverment Code, as amended, and an ordinance(the "Ordinance") passed by the City Council, and are special obligations of the City of Baytown(the"City"),payable,both as to principal and interest,solely from and,together with previously issued bonds,secured by a first lien on and pledge of the Net Revenues of the City's Waterworks and Sewer System(the"System")The City is not authorized to pay the Bonds from monies raised or to be raised from taxation(see"THE BONDS-AUTHORITY FOR ISSUANCE"). PURPOSE...Proceeds from the sale of the Bonds will be used to(i)reimburse the City for expenses incurred in the rehabilitation of portions of the Sewer System;(ii)refund a portion of the City's outstanding Waterworks and Sewer System Revenue Bonds(the"Refunded Bonds"), in order to lower the overall debt service requirements of the City; and(iii)to pay the costs associated with the issuance of the Bonds(see "SCHEDULE I-SCHEDULE OF REFUNDED BONDS") MATURITY SCHEDULE Due Principal Interest Price or Due Principal Interest Price or Feb 1 CUSIP Amount Rate Yield Feb I LUSH, Amount Rate Yield 2004 $ 480,000 % % 2014 $ 620,000 % % 2005 630,000 2015 15,000 2006 1,020,000 2016 15,000 2007 1,055,000 2017 15,000 2008 845,000 2018 15,000 2009 875,000 2019 15,000 2010 905,000 2020 15,000 2011 945,000 2021 15,000 2012 985,000 2022 15,000 2013 590,000 2023 20,000 (Accrued Interest from May 1,2003 to be added) LEGALITY . ..The Bonds are offered for delivery when, as and if issued and received by the Underwriter and subject to the approving opinion of the Attorney General of Texas and the opinion of Vinson&Elkins L.L.P.,Bond Counsel,Houston,Texas(see"APPENDIX C- FORM OF BOND COUNSEL'S OPINION").Certain legal matters will be passed upon for the Underwriter by Fulbright&7aworski L.L.P.,Counsel for the Underwriter. DELIVERY. ..It is expected that the Bonds will be available for delivery through DTC on May 7,2003. MORGAN STANLEY PRUDENTIAL SECURITIES,INC. CIBC WORLD MARKETS CORP. }��r�r p LEGG MASON WOOD WALKER,INC. Preliminary,subject to change. MR A, For the purpose of compliance with Rule I5c2-12 of the Securities and Exchange Commission, this document constitutes an Official Statement of the City with respect to the Bonds that has been deemed 'final"by the City as of its date except for the omission of no more than the information permitted by subsection(a)(I)of Rule 15e2-11. No dealer, broker, salesman or other person has been authorized by the City 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 City or the Underwriter. This Official Statement does not constitute an offer to sell Bonds in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Certain information set forth herein has been obtained from the City and other sources which are believed to be reliable but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Financial Advisor. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described herein since the date hereof. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABIL17E OR MAINTAIN THE MARKET PRICES OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,IF COMMENCED,MAY BE DISCONTINUED ATA IVY TIME. TABLE OF CONTENTS OFFICIAL STATEMENT SUMMARY......................III FINANCIAL INFORMATION.......................................8 SELECTED FINANCIAL INFORMATION..........................V TABLE 6-CONDENSED STATEMENT OF OPERATIONS...8 TABLE 7-DEBT SERVICE COVERAGE..........................8 CITY OFFICIALS,STAFF AND CONSULTANTS..VI FINANCIAL POLICIES...................................................8 ELECTED OFFICIALS..................................................VI INVESTMENTS.............................................................9 SELECTED ADMINISTRATIVE STAFF..................._......VI TABLES-CURRENT INVESTMENTS...........................10 CONSULTANTS AND ADVISORS..................................VI TAX MATTERS.............................................................10 INTRODUCTION............................................................1 CONTINUING DISCLOSURE OF INFORMATION 12 PLAN OF FINANCING..................................................I OTHER INFORMATION.............................................13 THEBONDS....................................................................2 RATINGS...................................................................13 THESYSTEM..................................................................5 LITIGATION..............................................................13 WATER SYSTEM-BAYTOWN AREA WATER REGISTRATION AND QUALIFICATION OF BONDS FOR AUTHORITY......................................................5 SALE...............................................................13 TABLE I-HISTORICAL WATER CONSUMPTION LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE (GALLONS).......................................................6 PUBLIC FUNDS IN TEXAS.................................14 TABLE 2-TEN LARGEST WATER CUSTOMERS(BASED LEGAL MATTERS......................................................14 ON GALLONS CONSUMED)................................6 FINANCIAL ADVISOR......................................... 14 TABLE 3-MONTHLY WATER RATES(EFFECTIVE VERIFICATION OF MATHEMATICAL COMPUTATIONS-14 OCTOBER 1,2002)............................................7 UNDERWRITING........................................................14 WASTEWATER SYSTEM..............................................7 MISCELLANEOUS......................................................15 TABLE 4-MONTHLY SEWER RATES (EFFECTIVE OCTOBER 1,2002)............................................7 SCHEDULE OF REFUNDED BONDS.....SCHEDULE I DEBT INFORMATION..................................................7 APPENDICES TABLE 5 - PRO-FORMA WATERWORKS AND SEWER GENERAL INFORMATION REGARDING THE CITY........ A SYS I'EM REVENUE DEBT SERVICE EXCERPTS FROM THE ANNUAL FINANCIAL REPORT.. B REQUIREMENTS................................................7 FORM OF BOND COUNSEL OPINION........................... C OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY................................ The City of Baytown is a political subdivision and municipal corporation of the State, located in Harris and Chambers Counties, Texas. The City's boundary extends approximately 33 square miles(see"INTRODUCTION-DESCRIPTION OF CITY"). THE BONDS..._........................ The Bonds are issued in the aggregate principal amount of$9,090,000-,and mature on February I in each of the years and in the amounts shown on the cover page hereof(see"THE BONDS- DESCRIPTION OF THE BONDS"). PAYMENT OF INTEREST.......... Interest on the Bonds accrues from May 1, 2003, and is payable August 1, 2003, and each February I and August I thereafter until maturity or prior redemption (see "THE BONDS - DESCRIPTION OF THE BONDS"and"THE BONDS-OPTIONAL REDEMPTION"). AUTHORITY FOR ISSUANCE..... The Bonds are issued pursuant to the general laws of the State, including Chapters 1207 and 1502,Texas Government Code, and an Ordinance passed by the City Council of the City (see "THE BONDS-AUTHORITY FOR ISSUANCE"). SECURITY FOR THE BONDS..... The Bonds constitute special obligations of the City, payable, both as to principal and interest, solely from and,together with Previously Issued Bonds,secured by a first lien on and pledge of the Net Revenues of the City's Waterworks and Sewer System. The City is not authorized to pay the Bonds from monies raised or to be raised from taxation(see "THE BONDS - SECURITY AND SOURCE OF PAYMENT"). OPTIONAL REDEMPTION......... The City reserves the right,at its option, to redeem Bonds having stated maturities on and after February 1, 2014, in whole or in part in principal amounts of$5,000 or any integral multiple thereof,on February 1,2013,or any date thereafter,at the par value thereof plus accrued interest to the date of redemption(see"THE BONDS-OPTIONAL REDEMPTION"). TAX EXEMPTION....................... In the opinion of Bond Counsel,the interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law and the Bonds are not private activity bonds. See "TAX MATTERS-TAX EXEMPTION"for a discussion of the opinion of Bond Counsel,including a description of the alternative minimum tax consequences for corporations. USE OF PROCEEDS................... Proceeds from the sale of the Bonds will be used to(i)reimburse the City for expenses incurred in the rehabilitation of portions of the Sewer System; (ii) refund a portion of the City's outstanding Waterworks and Sewer System Revenue Bonds(the"Refunded Bonds") in order to lower the overall debt service requirements of the City;and(iii)to pay the costs associated with the issuance of the Bonds. RATINGS ................................. All of the presently outstanding revenue debt of the City is rated "Aaa" by Moody's Investors Service,Inc.("Moody's")and"AAA"by Standard&Poor's Ratings Services,A Division of The McGraw-Hill Companies,Inc.("S&P")through insurance by MBIA Insurance Corporation. The underlying ratings for the outstanding revenue debt are "AT' by Moody's and "A" by S&P. Applications for ratings on the Bonds have been made to Moody's and S&P (see "OTHER INFORMATION-RATINGS"). BOOK-ENTRY-ONLY SYSTEM.................. The definitive Bonds will be initially registered and delivered only to Cede&Co.,the nominee of DTC pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of$5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see "THE BONDS -BOOK-ENTRY- ONLY SYSTEM"). PAYMENT RECORD.................. The City has never defaulted in payment of principal of or interest on its bonds. in SELECTED FINANCIAL INFORMATION Fiscal Water Wastewater Net Average Year Average Average Available Annual Debt Ended Daily Daily For Debt Service Coverage 9/30 Production(mgd) Treatment(mgd) Service Requirements of Debt 1997 9.73 9.80 $ 4,541,265 $ 2,166,945 2.10x 1998 10.41 10.13 5,637,302 2,154,800 2.62x 1999 10.97 8.69 4,966,689 2,063,602 2.41x 2000 10.50 7.93 5,460,069 2,023,660 2.70x 2001 10.60 11.21 4,940,094 2,016,494 2.45x 2002 10.09 11.92 5,836,956 2,007,754 2.91x For additional information regarding the City,please contact either of the following: Ms.Donna Sams Mr.Drew Masterson Finance Director Financial Advisor City of Baytown First Southwest Company 2401 Market Street 1021 Main Street,Suite 2200 Baytown,Texas 77520 Houston,Texas 77002 (281)420-6530 Phone (713)651-9850 Phone (281)420-6586 Fax (713)654-8658 Fax v CITY OFFICIALS,STAFF AND CONSULTANTS ELECTED OFFICIALS Length of City Council Service Term Expires Occupation Pete C.Alfaro 13 Years May 2004 Retired Engineer Mayor Don Murray 2 Years May 2004 Retired PhD, Mayor Pro-Tempora Chemical Engineer Mercedes Renteria III 1 Year May 2003 Educator Council Member Scott Sheley 5 Year May 2003 Educator Council Member Calvin Mundinger 3 Years May 2003 Pipeline Contractor Council Member Coleman Godwin 4 Years May 2004 Retired Lab Technician Council Member Ronnie Anderson 2 Years May 2004 Senior Vice President Council Member Credit Union SELECTED ADMINISTRATIVE STAFF Length of Name Position Service Gary Jackson City Manager 1 Year Bob Leiper Assistant City Manager 25 Years Bill Pederson City Engineer I '/z Years Ignacio Ramirez,Sr. City Attorney 15 Years Gary Smith City Clerk 3 Years Donna Sams Director of Finance 8 Years Fred Pack Director of Public Works/Utilities 8 Years CONSULTANTS AND ADVISORS Auditor.......--.........................................................................................--..................................................................Tiller and Company Certified Public Accountants Baytown,Texas BondCounsel...........................................................................................................................................................Vinson&Elkins L.L.P. Houston,Texas FinancialAdvisor.................................................................................................................................................First Southwest Company Houston,Texas vi PRELIMINARY OFFICIAL STATEMENT RELATING TO $9,090,000* CITY OF BAYTOWN,TEXAS (Harris and Chambers Counties) WATERWORKS AND SEWER SYSTEM REVENUE IMPROVEMENT AND REFUNDING BONDS,SERIES 2003 INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $9,090,000* City of Baytown, Texas, Waterworks and Sewer System Revenue Refunding Bonds, Series 2003 (the `Bonds"). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance to be adopted on or about the date of sale of the Bonds which will authorize the issuance of the Bonds,except as otherwise indicated herein. There follows in this Official Statement descriptions of the Bonds and certain information regarding the City and its finances.All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City's Financial Advisor,First Southwest Company,Houston, Texas. DESCRIPTION OF THE CITY...The City is a home rule city, duly organized and existing under the laws of the State, including the City's Home Rule Charter. The City was incorporated in 1948, and first adopted its Home Rule Charter in 1948. The City operates under a Council/Manager form of government with a City Council comprised of the Mayor and six Councilmembers. The term of office is two years with the terms of the Mayor and three of the Councilmembers'terms expiring in even-numbered years and the terms of the other three Councilmembers expiring in odd-numbered years. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are: public safety(police and fire protection), highways and streets, water and sanitary sewer utilities, health and social services, culture-recreation, public transportation, public improvements,planning and zoning,and general administrative services. The 1990 Census population for the City was 63,850 and the 2000 Census population was 66,430. The City covers approximately 33 square miles. PLAN OF FINANCING PURPOSE...Proceeds from the sale of the Bonds will be used to(i)reimburse the City for expenses incurred in the rehabilitation of portions of the Sewer System;(ii)refund a portion of the City's outstanding Waterworks and Sewer System Revenue Bonds (the"Refunded Bonds") in order to lower the overall debt service requirements of the City (see"SCHEDULE I-SCHEDULE OF REFUNDED BONDS.");and(in)to pay the costs associated with the issuance of the Bonds. REFUNDED BONDS...The principal and interest due on the Refunded Bonds are to be paid on the scheduled interest payment dates and the respective redemption dates of such Refunded Bonds, from funds to be deposited pursuant to an Escrow Agreement(the "Escrow Agreement")between the City and JP Morgan Chase Bank(the"Escrow Agent"). The Ordinance provides that from the proceeds of the sale of the Bonds received from the Underwriter,the City will deposit with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Bonds on their respective redemption dates. Such funds will be held by the Escrow Agent in a special escrow account(the"Escrow Fund")and used to purchase direct obligations of the United States of America(the"Federal Securities"). Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Bonds. Grant Thomton LLP,a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriter thereof the mathematical accuracy of the schedules that demonstrate the Federal Securities will mature and pay interest in such amounts which,together with uninvested funds,if any,in the Escrow Fund,will be sufficient to pay,when due,the principal of and interest on the Refunded Bonds. Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds(see"OTHER INFORMATION-VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS"). By the deposit of the Federal Securities and cash,if necessary,with the Escrow Agent pursuant to the Escrow Agreement,the City will have effected the defeasance of all of the Refunded Bonds in accordance with Texas law. As a result of such defewanee,the Refunded Bonds will be deemed to be fully paid and no longer outstanding except for the purpose of being paid from the funds provided therefore in the Escrow Agreement. Preliminary,subject to change. The City has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully available funds,of any additional amounts required to pay the principal of and interest on the Refunded Bonds,if for any reason,the cash balances on deposit or scheduled to be on deposit in the Escrow Fund are insufficient to make such payment. Use OF PROCEEDS...The proceeds from the sale of the Bonds will be applied approximately as follows: Deposit to Escrow Fond $ Deposit to Construction Fund Deposit to Interest and Sinking Fund Original Issue Discount Underwriter's Discount Costs of Issuance Total Uses of Funds $ THE BONDS DESCRIPTION OF THE BONDS ...The Bonds are dated May 1,2003,and mature on February I in each of the years and in the amounts shown on the cover page hereof. Interest will be computed on the basis of a 360-day year of twelve 30-day months,and will be payable on February 1 and August 1, commencing August 1, 2003. The definitive Bonds will be issued only in fully registered form in any integral multiple of$5,000 for any one maturity and will be initially registered and delivered only to Cede &Co.,the nominee of The Depository Trust Company("DTC")pursuant to the Book-Entry-Only System described herein. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of,premium, if any,and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede&Co.,which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see `BOOK-ENTRY-ONLY SYSTEM"). AUTHORITY FOR ISSUANCE...The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Chapters 1207 and 1502,Texas Government Code,as amended,and by the Ordinance passed by the City Council. SECURITY AND SOURCE OF PAYMENT. . .The Bonds are special obligations of the City payable,both as to principal and interest, solely from and, together with the outstanding waterworks and sewer system revenue bonds of the City (the "Previously Issued Bonds")and any additional parity bonds which may be issued in the future,secured by a first lien on and pledge of the Net Revenues of the System after the payment of Maintenance and Operating Expenses. Maintenance and Operating Expenses include contractual payments which under Texas laws and their provisions are established as operating expenses. The City has entered into contracts with payments established as Operating Expenses of the System,as more fully described under"THE SYSTEM-WATER SYSTEM- BAYTOWN AREA WATER AUTHORITY." The City has outstanding Previously Issued Bonds secured by and payable from Net Revenues on parity with the Bonds,as follows: Dated Outstanding Date Description Debt") 11/l/92 Waterworks and Sewer System Revenue Bonds,Series 1992 S 225,000 11/l/94 Waterworks and Sewer System Revenue Bonds,Series 1994 190,000 7/l/95 Waterworks and Sewer System Revenue Bonds,Series 1995 660,000 7/1/98 Waterworks and Sewer System Revenue Refunding Bonds,Series 1998 9,190,000 7/1/98 Waterworks and Sewer System Revenue Refunding Bonds,Series 2003 9,090,000 Total $ 19,355,000 (1) Includes the bonds that will remain outstanding after the issuance of the Bonds. It is anticipated that the Bonds will refund all of the Series 1993 Bonds and portions of the Series 1994 Bonds,and the Series 1995 Bonds(see"DEBT INFORMATION—TABLE 5"herein). The Bonds are not a charge upon any other income or revenues of the City and shall never constitute an indebtedness or pledge of the general credit or taxing powers of the City. The Ordinance does not create a lien or mortgage on the System,except on the Net Revenues,and any judgment against the City may not be enforced by levy and execution against any property owned by the City. As additional security,a Reserve Fund is required to be maintained in an amount at least equal to the average annual debt service requirements of the outstanding Previously Issued Bonds, the Bonds and any Additional Bonds issued on a parity with the Bands. Because the issuance of the Bonds will reduce the average annual debt service,the required reserve amount will also be reduced. PLEDGED REVENUES...All of the Net Revenues of the System with the exception of those in excess of the amounts required to establish and maintain the Reserve Fund and Interest and Sinking Fund are irrevocably pledged for the payment of the Bonds and 2 interest thereon. The Bonds and the Previously Issued Bonds are equally and ratably secured by a first lien upon the Net Revenues of the System. RATES...The City has covenanted in the Ordinance that it will at all times charge and collect rates for services rendered by the System sufficient to pay all operating, maintenance, replacement and improvement expenses, any other costs deductible in determining Net Revenues and to pay interest on and the principal of the Previously Issued Bonds,the Bonds and any additional parity bonds,and to establish and maintain the funds provided for in the Ordinance. The City has further covenanted that, if the System should become legally liable for any other indebtedness,it will fix and maintain rates and collect charges for the services of the System sufficient to discharge such indebtedness. OPTIONAL REDEMPTION ...The City reserves the right, at its option, to redeem Bonds having stated maturities on and after February 1,2014,in whole or in part in principal amounts of$5,000 or any integral multiple thereof,on February 1,2013,or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Bonds are to be redeemed, the City may select the maturities of Bonds,or portions thereof,within each maturity to be redeemed. If a Bond(or any portion of the principal sum thereof)shall have been called for redemption and notice of such redemption shall have been given, such Bond(or the principal amount thereof to be redeemed)shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date,provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. MANDATORY SINKING FUND REDEMPTION . . . In addition to the foregoing optional redemption provision, if principal amounts designated in the serial maturity schedule on the cover hereof are combined to create Term Bonds,each such Term Bond shall be subject to mandatory sinking fund redemption commencing on February 1 of the first year which has been combined to form such Term Bond and continuing on February 1 in each year thereafter until the stated maturity date of that Term Bond. Term Bonds to be redeemed in any year by mandatory sinking fund redemption shall be redeemed at par and shall be selected by lot from and among the Term Bonds then subject to redemption. The City,at its option,may credit against any mandatory sinking fund redemption requirement Term Bonds of the maturity then subject to redemption which have been purchased and canceled by the City or have been redeemed and not theretofore applied as a credit against any mandatory sinking fund redemption requirement. NOTICE OF REDEMPTION ...Not less than 30 days prior to a redemption date for the Bonds, the City shall cause a notice of redemption to be sent by United States mail,first class,postage prepaid,to the registered owners of the Bonds to be redeemed,in whole or in part,at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN,THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF SHALL CEASE TO ACCRUE. BOOK ENTRY ONLY SYSTEM... This section describes how ownership of the Bonds is to be transferred and haw the principal of and interest on the Bonds are to be paid to and credited by DTC while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement, The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2)DTC Participants or others will distribute debt service payments paid to DTC or its nominee(as the registered owner of the Bands),or redemption or other notices, to the Beneficial Owners,or that they will do so on a timely basis, or(3)DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company("DTC"),New York,New York,will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede&Co.(DTC's partnership nominee). One fully-registered certificate will be issued for each maturity of the Bonds in the aggregate principal amount of each such maturity and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking law, a "banking organization"within the meaning of the New York Banking Law,a member of the Federal Reserve System,a"clearing corporation"within the meaning of the New York Uniform Commercial Code,and a"clearing agency"registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants("Direct Participants")deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities,through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities 3 Bonds. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of the Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation,(NSCC,GSCC, MBSCC,and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange,Inc.,the American Stock Exchange LLC,and the National Association of Securities Dealers,Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers,banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of 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 tutu to be recorded on the Direct and Indirect Participants'records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial owners are,however,expected to receive written confirmations providing details of the transaction,as well as periodic statements of their holdings,from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Bonds representing their ownership interests in Bonds,except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee,Cede&Co.,or such other name as may be requested by an authorized 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 and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants,by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them,subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds,such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative,Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed,DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede&Co.(nor any other DTC nominee)will consent or vote with respect 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 City as soon as possible after the record date. The Omnibus Proxy assigns Cede&Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date(identified in a listing attached to the Omnibus Proxy). Redemption proceeds,distributions,and dividend payments on the Bonds will be made to Cede&Co.,or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants'accounts upon DTC's receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar,on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices,as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC (nor its nominee), the Paying Agent/Registrar,or the City,subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such nominee as may be requested by an authorized representative of DTC)is the responsibility of the City or the Paying Agent/Registrar,disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Beneficial Owner shall give notice to elect to have its Bond purchased or tendered, through its Participant, to the Paying Agent/Registrar,and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant's interest in the Bonds,on DTC's records,to the Paying Agent/Registrar. The requirement for physical delivery of Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Bonds to the Paying Agent/Registrar's DTC account. 4 DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bonds are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC(or a successor securities depository). In that event,Bonds will be printed and delivered. PAYING AGENT/REGISTRAR...The initial Paying Agent/Registrar is JP Morgan Chase Bank. In the Ordinance,the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid and any successor Paying AgentRegistrar shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve as and perform the duties and services of Paying AgentRegistrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds,the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class,postage prepaid,which notice shall also give the address of the new Paying Agent/Registrar. TRANSFER,EXULTANCE AND REGISTRATION ...In the event the Book-Entry-Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying AgenURegistrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be assigned by the execution of an assignment form on the respective Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying AgentRegistrar,in lieu of the Bonds being transferred or exchanged,at the designated office of the Paying Agent/Registrar,or sent by United States mail,first class,postage prepaid,to the new registered owner or his designee.To the extent possible,new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled,and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in forth satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of S5,000 for any one maturity and for a like aggregate designated amount as the Bonds surrendered for exchange or transfer. See"Book-Entry-Only System"herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. RECORD DATE FOR INTEREST PAYMENT . ..The record date ("Record Date") for the interest payable on the Bonds on any interest payment date means the close of business on the 15th day of the preceding month. In the event of a non-payment of interest on a scheduled payment date,and for 30 days thereafter,a new record date for such interest payment(a"Special Record Date")will be established by the Paying Agent/Registrar,if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest("Special Payment Date",which shall be 15 days after the Special Record Date)shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. BONDHOLDERS' REMEDIES ...Except for the remedy of mandamus to enforce the City's covenants and obligations under the Ordinance,the Ordinance does not establish remedies or specify Events of Default with respect to the Bonds.The Ordinance does not provide for a trustee to enforce the covenants and obligations of the City. In no event will registered owners have the right to have the maturity of the Bonds accelerated as a remedy. The enforcement of the remedy of mandamus may be difficult and time consuming and no assurance can be given that a mandamus or other legal action to enforce a default under the Ordinance would be successful. Furthermore,the City is eligible to seek relief from its creditors under Chapter 9 of the U.S.Bankruptcy Code. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues,such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit,without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore,should the City avail itself of Chapter 9 protection from creditors,the ability to enforce any remedies under the Ordinance would be subject to the approval of the Bankruptcy Court(which could require that the action be heard in Bankmptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that the rights of the owners of the Bonds are subject to the applicable provisions of the federal bankruptcy laws and other similar laws affecting the rights of creditors of political subdivisions and may be limited by general principles of equity which permit the exercise ofjudicial discretion. THE SYSTEM WATER SYSTEM—BAYTOwN AREA WATER AUTHORITY The City obtains its entire domestic and commercial water supply from the Baytown Area Water Authority("BAWA"). BAWA was created in 1973 to serve the Baytown area with surface water. Construction was completed and the City began taking water in April, 1981. BAWA purchases raw water from the City of Houston. The water originates from the Trinity River and is 5 conveyed to the BAWA plant through the Coastal Water Authority canal system. BAWA's contract with the City of Houston for the purchase of water extends through the year 2020. The City of Baytown is the largest water purchaser from BAWA, purchasing an average 10.1 million gallons per day("mgd")in 2002. The current contract with the City of Houston allows BAWA to purchase 13.09 mgd. Additional water is available over the 13.09 mgd with a penalty clause. BAWA's water treatment facility which serves the City currently consists of one treatment plant with a design capacity of 19 mgd and peak flow capacity of 26 mgd. Treated water storage capacity totals 12 million gallons. The BAWA plant production during 2002 averaged 11.3 mgd. BAWA's physical plant was constructed so that when needed, the plant can be expanded in thirteen mgd increments to an ultimate 39 mgd. BAWA is currently in the construction phase to increase pumping capacity of the plant which will increase the rated capacity of the plant to 26 mgd. In addition,various plant equipment will be upgraded or replaced and ground storage tanks are being rehabilitated and repainted. On January 31, 1977,BAWA and the City entered into a contract whereby BAWA agreed to sell and deliver treated water to the City as described above. In return,the City agreed to pay BAWA debt service and related expenses on outstanding water supply contract revenue bonds issued by BAWA and the cost of raw water purchased from the City of Houston. The contract was amended and restated on October 23, 1997,and continues in effect until all of BAWA's bonds are retired. BAWA also contracts with seven utility districts to provide them with treated water. Eighty-nine percent(89%)of BAWA's water is used by the City and eleven percent(I I%)is used by the seven utility districts. BAWA has$15,060,000 total outstanding water supply contract revenue bonds with average annual debt service of$1,286,576 for years 2003 through 2020. The City and BAWA have also entered into a contract under which the City provides the personnel necessary to manage and operate BAWA's water treatment plant. BAWA reimburses the City the actual cost of such employees salaries and benefits and for materials and supplies bought on BAWA's behalf. Payments made to BAWA constitute operating expenses of the City's water system. TABLE 1-HISTORICAL WATER CONSUMPTION (GALLONS) Fiscal Water Wastewater Net Average Year Average Average Available Annual Debt Ended Daily Daily For Debt Service Coverage 9/30 Production(mgd) Treatment(mgd) Service Requirements Of Debt 1997 9.73 9.80 S 4,541,265 $ 2,166,945 2.10x 1998 10.41 10A3 5,637,302 2,154,800 2.62x 1999 10.97 8.69 4,966,689 2,063,602 2.41x 2000 10.50 7.93 5,460,069 2,023,660 2.70x 2001 10.60 11.21 4,940,094 2,016,494 2.45x 2002 10.09 11.92 5,836,956 2,007,754 2.91x TABLE 2-TEN LARGEST WATER CUSTOMERS(BASED ON GALLONS CONSUMED) Water Usage Customer In GallonsO1 Exxon Corporation 236,698,000 Goose Creed ISD 61,259,000 San Jacinto Methodist Hospital 57,810,000 TEK Investments 32,936,000 Chevron Phillips Chemical Company 32,555,000 Bayer 31,881,000 The Meadows 27,839,000 Chambers County MUD 27,525,000 Quail Hollow Apartments 20,317,000 Lee College 18,572,000 547,392,000 Source: The City (1) For the fiscal year ended September 30,2002, 6 TABLE 3-MONTHLY WATER RATES(EFFECTIVE OCTOBER 1,2002) Inside City Limits Outside City Limits First 2,000 gallons $7.50 minimum $15.00 minimum Over 2,000 gallons $2.86 per 1,000 gallons $4.29 per 1,000 gallons WASTEWATER SYSTEM The City has three wastewater treatment plants. The East District Plant is rated at 6.0 mgd,the Central District Plant is rated at 6.2 mgd and the West District Plant is rated at 4.0 mgd. Currently, all three plants are operating at less than 100% design capacity and all meet the minimum standards as set forth by the EPA and the Texas Commission on Environmental Quality. TABLE 4-MONTHLY SEWER RATES (EFFECTIVE OCTOBER I,2002) Inside City Limits Outside City Limits First 2,000 gallons $7.50 minimum $15.00 minimum Over 2,000 gallons $2.63 per 1,000 gallons $3.94 per 1,000 gallons DEBT INFORMATION TABLE 5 - PRO-FORMA WATERWORKS AND SEWER SYSTEM REVENUE DEBT SERVICE REQUIREMENTS year Less: Total End Outstanding Debt Refunded The Bondsto Debt Service 9/30 Principal Interest Total Bonds Principal Interest Total Requirements 2003 1,250,000 964,263 2,214,263 223,333 - 73,039 73,039 2,063,969 2004 1,545,000 893,313 2,438,313 739,915 480,000 284,956 764,956 2,463,354 2005 1,630,000 813,930 2,443,930 935,090 630,000 268,306 898,306 2,407,146 2006 1,715,000 731,926 2,446,926 1,292,961 1,020,000 243,556 1,263,556 2,417,521 2007 1,810,000 645,301 2,455,301 1,297,848 1,055,000 212,431 1,267,431 2,424,885 2008 1,920,000 553,670 2,473,670 1,065,953 845,000 183,931 1,028,931 2,436,649 2009 2,025,000 457,025 2,482,025 1,067,843 875,000 158,131 1,033,131 2,447,314 2010 2,135,000 353,983 2,488,983 1,071,695 905,000 130,753 1,035,753 2,453,040 2011 2,260,000 244,826 2,504,826 1,078,421 945,000 100,552 1,045,552 2,471,957 2012 1,940,000 139,666 2,079,666 1,083,008 985,000 67,368 1,052,368 2,049,026 2013 955,000 63,841 1,018,841 639,591 590,000 39,510 629,510 1,008,760 2014 625,000 18,594 643,594 643,594 620,000 17,420 637,420 637,420 2015 - - - - 15,000 5,665 20,665 20,665 2016 - - - - 15,000 5,080 20,080 20,080 2017 - - - - 15,000 4,490 19,480 19,480 2018 - - - - 15,000 3,871 18,871 18,871 2019 - - - - 15,000 3,243 18,243 18,243 2020 - - - - 15,000 2,596 17,596 17,596 2021 - - - - 15,000 1,934 16,934 16,934 2022 - - - - 15,000 1,263 16,263 16,263 2023 - - - - 20,000 463 20,463 20,463 $ 19,810,000 $ 5,880,338 $ 25,690,338 $ 11,139,250 $ 9,090,000 $ 1,808,546 $ 10,898,546 $ 25,449,634 Average Annual Debt Service Requirement(2003-2023) $ 1,211,887 M aximum Annual Debt Service Requirement(2004) $ 2,471,957 (1) The average life of the Bonds is 6.23 years. Interest on the Bonds has estimated for the purpose of illustration. Preliminary,subject to change. 7 ANTICIPATED ISSUANCE OF REVENUE BONDS...The City is authorized to issue waterworks and sewer system revenue bonds subject to satisfying the additional bonds test contained within the Ordinances authorizing the Bonds and the previously issued Bonds. The City does not anticipate the issuance of additional waterworks and sewer system revenue bonds within the next 12 months. PENSION FUND. ..The City provides pension benefits for all of its full-time employees through the Texas Municipal Retirement System ("TMRS"), a State-wide administered pension plan. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. (For more detailed information concerning the retirement plan, see "APPENDIX B - EXCERPTS FROM THE CITY'S ANNUAL FINANCIAL REPORT"-Note No.7.) FINANCIAL INFORMATION TABLE 6-CONDENSED STATEMENT OF OPERATIONS For Fiscal Year Ended September 30 2002 2001 2000 1999 1998 Revenue: Charges for Service S 15,508,170 $14,136,508 $14,337,066 $ 12,974,370 $13,461,860 Other Charges 1,151,910 1,147,554 975,706 857,825 987,688 Interest Income 234,062 421,927 493,293 612,755 877,252 Total Revenue $ 16,894,142 $ 15,705,989 $ 15,806,065 $ 14,444,950 $ 15,326,800 Expenses (other than depreciation): Water Production&Distribution $ 1,683,636 $ 1,406,702 $ 1,544,541 $ 1,367,798 $ 1,317,333 Water Purchases 4,641,698 4,816,877 4,866,249 4,197,301 4,489,408 Wastewater Collection&Disposal 3,978,763 3,785,021 3,347,865 3,296,424 3,214,181 General Overhead 753,089 757,295 587,341 616,738 668,576 Total Expenses $ 11,057,186 $ 10,765,895 $ 10,345,996 $ 9,478,261 $ 9,689,498 Net Revenue Available for Debt Service $ 5,836,956 $ 4,940,094 $ 5,460,069 $ 4,966,689 $ 5,637,302 Water Customers 19,045 18,543 18,222 17,928 17,953 Sewer Customers 18,508 18,075 17,807 17,622 17,518 (1) Unaudited,provided by the City. TABLE 7-DEBT SERVICE COVERAGE Average Annual Debt Service Requirement(2003-2023)'11...................................................................................._. $ 1,211,887 2003 Net Revenue Coverage of Average Annual Debt Service Requirement(2003-2023)....................................... 4.82x M aximum Annual Debt Service Requirement(2004)"I.........................................................................................._. $ 2,471,957 2003 Net Revenue Coverage of M aximum Annual Debt Service Requirement(2004)...........................................- 2.36x (2) Includes the Bonds being offered herein;excludes the Refunded Bonds. Preliminary,subject to change. FINANCIAL POLICIES GASB 34. . .The City is a Phase II City which requires GASB 34 implementation for the fiscal year ending September 30,2003. The City fully expects to meet the GASB 34 reporting deadline. Basis of Accounting . . .The accounts of the City 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 or expenses,as appropriate. 8 General Fund Balance . . .The General Fund is the principal fund of the City. All general tax revenues and other receipts that are not allocated by law or contractual agreement to some other fund are accounted for in this fund. From the fund are paid general operating costs,fixed charges and capital improvement costs that are not paid through other funds. Special Revenue Funds. . .The Special Revenue Funds are used to account for the proceeds of specific revenue sources(other than expendable trusts or major capital projects)that are legally restricted to expenditures for specified purposes. These funds include grants from the Department of Housing and Urban Development(Community Development Block Grant), the Texas Criminal Justice Division,the Department of Transportation,Texas State Library,and miscellaneous other sources. Debt Service Fund Balance. . .The Debt Service Fund is used to account for the payment of principal and interest on general long-term liabilities paid primarily by taxes levied by the City. Capital Projects Funds. . .The Capital Projects Funds are used to account for the acquisition of capital facilities being financed from bond proceeds,contributed capital or transfers from other funds,other than those recorded in the Enterprise Funds,Internal Service Funds or Trust Funds. Bud¢etary Procedures . . .At least 60 days prior to the beginning of each fiscal year, the City Manager submits to the City Council a proposed budget for the fiscal year beginning the following October 1. The operating budget includes proposed expenditures and the means of financing them. Public hearings are conducted prior to the adoption of the budget in order to obtain taxpayer comments. The annual budget adopted by the City Council covers the General Fund and the Debt Service Fund. The budget is legally enacted at the fund level by the City Council through passage of an ordinance prior to the beginning of the fiscal year. The City Manager is authorized to transfer budgeted amounts between departments within any fund. However,any revisions that modify the total expenditures of any budgeted fund must be approved by the City Council. Budgeted amounts are as revised by City Manager,or as amended by City Council. INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council of the City. Both state law and the City's investment policies are subject to change. LEGAL INVESTMENTS...Under Texas law,the City is authorized to invest in(1)obligations of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instnnnentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States,the underlying security for which is guaranteed by an agency or instrumentality of the United States,(4)other obligations,the principal of and interest on which are unconditionally guaranteed or insured by,or backed by the full faith and credit of,the State of Texas or the United States or their respective agencies and instrumentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent,(6)certificates of deposit that are guaranteed or insured by the Federal Deposit Insurance Corporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amount provided by law for City deposits, (7) certificates of deposit and share certificates issued by a state or federal credit union domiciled in the State of Texas that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in the clauses(1)through(5)or in any other manner and amount provided by law for City deposits,(8)fully collateralized repurchase agreements that have a defined termination date,are fully secured by obligations described in clause(1),and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) bankers' acceptances with the remaining term of 270 days or less,if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency,(10)commercial paper that is rated at least A-1 or P-1 or the equivalent by either(a)two nationally recognized credit rating agencies or(b)one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S.or state bank,(11)no-load money market mutual funds regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of$1 for each share,and(12)no- load mutual funds registered with the Securities and Exchange Commission that:have an average weighted maturity of less than two years;invests exclusively in obligations described in the preceding clauses;and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent, (13) bonds, or other obligations issued, assumed, or guaranteed by the State of Israel, and (14)guaranteed investment contracts secured by obligations of the United States of America or its agencies and instrumentalities, other than the prohibited obligations described in the next succeeding paragraph. The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. 9 INVESTMENT POLICIES...Under Texas law,the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity;that address investment diversification,yield,maturity,and the quality and capability of investment management;and that includes a list of authorized investments for City funds,maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted`Investment Strategy Statement"that specifically addresses each funds'investment. Each Investment Strategy Statement will describe its objectives concerning:(1)suitability of investment type,(2)preservation and safety of principal,(3)liquidity,(4)marketability of each investment,(5)diversification of the portfolio,and(6)yield. Under Texas law, City investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation,but for investment,considering the probable safety of capital and the probable income to be derived." At least quarterly the investment officers of the City shall submit an investment report detailing:(1)the investment position of the City,(2)that all investment officers jointly prepared and signed the report, (3)the beginning market value, any additions and changes to market value and the ending value of each pooled fund group,(4)the book value and market value of each separately listed asset at the beginning and end of the reporting period,(5)the maturity date of each separately invested asset,(6)the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and(b)state law. No person may invest City funds without express written authority from the City Council. ADDITIONAL PROVISIONS ...Under Texas law the City is additionally required to: (1) annually review its adopted policies and strategies;(2)require any investment officers' with personal business relationships or relatives with finns seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Council; (3)require the registered principal of firths seeking to sell securities to the City to: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activifies, and (c) deliver a written statement attesting to these requirements;(4)perform an annual audit of the management controls on investments and adherence to the City's investment policy; (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement;(7) restrict the investment in mutual funds in the aggregate to no more than 80%of the City's monthly average fund balance,excluding bond proceeds and reserves and other funds held for debt service and further restrict the investment in non-money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to no more than 15% of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service;and(8)require local government investment pools to conform to the new disclosure,rating,net asset value,yield calculation,and advisory board requirements. TABLE 8-CURRENT INVESTMENTS As of December 18,2002,the City's investable funds were invested in the following categories: Type of Investments Amount Percent Market Value Deposits and Government Pools $ 29,848,845 46.75% $ 29,871,802 U.S.Agencies 33,993,137 53.25% 34,134,825 $ 63,841,982 100,00% $ 64,006,627 TAX MATTERS TAX EXEMPTION ...In the opinion of Vinson&Elkins L.L.P.,Bond Counsel,(i) interest on the Bonds is excludable from gross income for federal income tax purposes under existing law, (d)certain"original issue discount"on the Bonds is excludable from gross income for federal income tax purposes under existing law as described more fully in"Tax Accounting Treatment of Original Issue Discount Bonds",and(iii) the Bonds are not"private activity bonds'under the Internal Revenue Code of 1986,as amended (the"Code"),and interest on the Bonds will not be subject to the alternative minimum tax on individuals and corporations,except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. The Code imposes a number of requirements that must be satisfied for interest on state or local obligations,such as the Bonds,to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of proceeds and the source of repayment,limitations on the investment of proceeds prior to expenditure,a requirement that excess arbitrage earned on the investment of proceeds be paid periodically to the United States,and requirement that the issuer file an information report with the Internal Revenue Service. The City has covenanted in the Ordinance that it will comply with these requirements. Bond Counsel's opinion will assume continuing compliance with the covenants of the Ordinance pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Bonds for federal income tax purposes and,in addition,will rely on representations by the City,the City's Financial Advisor and the Underwriters of the Bonds with respect to matters solely 10 within the knowledge of the City,the City's Financial Advisor and the Underwriters of the Bonds,respectively,which Bond Counsel has not independently verified. If the City should fail to comply with the covenants in the Ordinance or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds,regardless of the date on which the event causing such taxability occurs. The Code also imposes a 20%alternative minimum tax on the"alternative minimum taxable income"of a corporation,if the amount of such alternative minimum tax is greater than the meant of the corporation's regular income tax. Generally, the alternative minimum taxable income of a corporation(other than any S corporation,regulated investment company,REIT,REMIC or FASIT), includes 75% of the amount by which its "adjusted current earnings" exceeds its other "alternative minimum taxable income." Because interest on tax-exempt obligations,such as the Bonds,is included in a corporation's"adjusted current earnings,"ownership of the Bonds could subject a corporation to alternative minimum tax consequences. Under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Bonds, received or accrued during the year. Except as stated above,and as stated below in"TAx ACCOUNTING TREATMENT OF ORIGINAL ISSUE DiscouNT BONDS",Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the ownership of,receipt of interest on,or disposition of,the Bonds. Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations,taxpayers owning an interest in a FASIT that holds tax-exempt obligations,and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the U.S. may be subject to the "branch profits tax" on their effectively-connected earnings and profits including tax-exempt interest such as interest on the Bonds. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Bond Counsel's opinions are based on existing law,which is subject to change. Such opinions are further based on Bond Counsel's knowledge of facts as of the date hereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel's attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover,Bond Counsel's opinions are not a guarantee of result and are not binding on the Internal Revenue Service(the"Service"); rather, such opinions represent Bond Counsel's legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rates that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced,in accordance with its current published procedures the Service is likely to treat the City as the taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during pendency of the audit regardless of the ultimate outcome of the audit. TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT BONDS ...The Initial public offering price for certain of the Bonds may be less than the principal amount thereof(the "Original Issue Discount Bonds"), In the opinion of Bond Counsel, under existing law and based upon the assumptions hereinafter stated: (a) The difference between (i) the amount payable at the maturity of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond constitutes original issue discount with respect to such Original Issue Discount Bond in the hands of any owner who has purchased such Original Issue Discount Bond in the initial public offering of the Bonds;and (b)Such initial owner is entitled to exclude from gross income(as defined in Section 61 of the Code)an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Bond continues to be owned by such owner. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. (Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the Bonds under the caption "Tax Exemption" generally applies,except as otherwise provided below,to original issue discount on an Original Issue Discount Bond held by an owner who purchased such Bond at the initial offering price in the initial public offering of the Bonds,and should be considered in connection with the discussion in this portion of the Official Statement.) II In rendering the foregoing opinion,Bond Counsel will assume,in reliance upon certain representations of the Underwriters,that (a)the Underwriters have purchased the Bonds for contemporaneous sale to the public and(b)all of the Original Issue Discount Bonds have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arms-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof. Neither the City nor Bond Counsel warrants that the Original Issue Discount Bonds will be offered and sold in accordance with such assumptions. Certain of the representations of the Underwriters, upon which Bond Counsel will rely in rendering the foregoing opinion,will be based on records or facts the Underwriters have no reason to believe were not correct. Under existing law,the original issue discount on each Original Issue Discount Bond accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semi-annual anniversary dates of the date of the Bonds and ratably within each such six-month period)and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption,sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to(a)the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity(determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period)less(b)the amounts payable as current interest during such accrual period on such Bond. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Bonds,which are not purchased in the initial offering at the initial offering price,may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state,and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal,state,local and foreign tax consequences of the purchase,ownership,redemption,sale or other disposition of such Original Issue Discount Bonds. CONTINUING DISCLOSURE OF INFORMATION In the Ordinance,the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement,the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. ANNUAL REPORTS ...The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under Tables numbered 1 through 9 and in Appendix B. The City will update and provide this information within six months after the end of each fiscal year. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") and to any state information depository("SID")that is designated by the State of Texas and approved by the State of Texas and approved by the staff of the United States Securities and Exchange Commission(the"SEC"). The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15e2-12. The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the City will provide unaudited financial statements by the required time and audited financial statements when and if audited such financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix B or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly,it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year,it will notify each NRMSIR and the SID of the change. The Municipal Advisory Council of Texas has been designated by the State of Texas and approved by the SEC staff as a qualified SID. The address of the Municipal Advisory Council is 600 West 8th Street, P.O. Box 2177, Austin,Texas 78768- 2177,and its telephone number is 512/476-6947. MATERIAL.EVENT NOTICES...The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3)unscheduled draws on debt service reserves reflecting financial difficulties;(4)unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds;(7)modifications to rights of holders of the Bonds;(8)Bond calls;(9)defeasances; (10)release,substitution,or sale of property securing repayment of the Bonds;and(11)rating changes. (Neither the Bonds nor the Ordinance make any provision for debt service reserves or liquidity enhancement.) In addition,the City will provide timely 12 notice of any failure by the City to provide information,data,or financial statements in accordance with its agreement described above under"Annual Reports." The City will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board("MSRB"). AVAILABILITY OF INFORMATION FROM NRMSIRS AND SID. ..The City has agreed to provide the foregoing information only to NRMSIRs and the SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. LIMITATIONS AND AMENDMENTS...The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations,condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements,a change in law,or a change in the identity,nature, status,or type of operations of the City,if(i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the initial primary offering in compliance with the Rule,taking into account any amendments or interpretations of the Rule to the date of such amendment,as well as such changed circumstances,and(ii)either(a)the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 are invalid,but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. COMPLIANCE WITH PRIOR UNDERTAKINGS...The City has complied in all material respects with its previous continuing disclosure agreements made in accordance with SEC Rule 15c2-12. OTHER INFORMATION RATINGS All of the presently outstanding revenue debt of the City is rated "Am"by Moody's Investors Service, Inc. ("Moody's") and "AAA"by Standard and Poor's Ratings Services,A Division of the McGraw-Hill Companies,Inc("S&P")through insurance by MBIA Insurance Corporation. The underlying ratings for the outstanding revenue bonds are"AT'by Moody's and"A"by S&P. Applications for ratings on this issue have been made to Moody's and S&P. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies,if in the judgment of either or both companies,circumstances so warrant. Any such downward revision or withdrawal of such ratings,or either of them,may have an adverse effect on the market price of the Bonds. LITIGATION There is no pending litigation against the City that would have a material adverse financial impact upon the City or its operations. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2);and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any other jurisdiction. The City assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be constmed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. 13 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the Public Security Procedures Act(Chapter 1201,Texas Government Code)provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code,and are legal and authorized investments for insurance companies, fiduciaries,and trustees,and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas,the Public Funds Investment Act,Chapter 2256,Texas Government Code,requires that the Bonds be assigned a rating of"A" or its equivalent as to investment quality by a national rating agency. See "OTHER INFORMATION — RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks,savings banks,trust companies with at capital of one million dollars or more, and savings and loan associations.The Bonds are eligible to secure deposits of any public funds of the State,its agencies,and its political subdivisions,and are legal security for those deposits to the extent of their market value. No review by the City has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. LEGAL MATTERS The City will furnish a complete transcript of proceedings incident to the authorization and issuance of the Bonds,including the approving legal opinion of the Attorney General of the State of Texas to the effect that the Initial Bond is a valid and binding obligation of the City, and based upon examination of such transcript of proceedings,the approving legal opinion of Bond Counsel in substantially the form attached hereto as Appendix C. Bond Counsel was not requested to participate,and did not take part,in the preparation of the Official Statement, and such firm has not assumed any responsibility With respect thereto or undertaken independently to verify any of the information contained therein,except that,in its capacity as Bond Counsel,such firm has reviewed the information describing the Bonds in the Official Statement under the captions"PLAN OF FINANCING,"`TIIE BONDS"(except for the subcaption"Boost-ENTRY-ONLY SYSTEM'),"TAX MATTERS"and"CONTINUING DISCLOSURE OF INFORMATION"(except for the subcaption"COMPLIANCE WITH PRIOR UNDERTAKINGS") and the subcaptlons"LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUND IN TEXAS,"and "LEGAL MATTERS"under the caption"OTHER INFORMATION"and is of the opinion that the information relating to the Bonds and the Ordinance contained therein fairly and accurately describe the provisions thereof and is correct as to matters of law. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds are contingent on the sale and delivery of the Bonds. Certain legal matters will be passed upon for the Underwriter by ,Counsel to the Underwriter. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. First Southwest Company, in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds,or the possible impact of any present,pending or future actions taken by any legislative or judicial bodies. VERIFICATION OF NIATIIEMATICAL COMPUTATIONS Grant Thomson LLP will verify from the information provided to them the mathematical accuracy as of the date of the closing on the Bonds of(1)the computations contained in the provided schedules to determine that the anticipated receipts from the securities and cash deposits listed in the Underwriter's schedules,to be held in escrow,will be sufficient to pay,when due,the principal,interest and call premiums payment requirements,if any,of the Refunded Bonds,and(2)the computations of yield on both the securities and the Bonds contained in the provided schedules used by Bond Counsel in its determination that the interest on the Bonds is exempt from tax. Grant Thornton LLP will express no opinion on the assumptions provided to them,nor as to the exemption from taxation of the interest on the Bonds. UNDERWRITING The Underwriter has agreed,subject to certain conditions,to purchase the Bonds from the City at an underwriting discount of $ . The Underwriter will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers(including the Underwriter and other dealers depositing Bonds into investment trusts)at prices lower than the public offering prices of such Bonds,and such public offering prices may be changed,from time to time,by the Underwriter. 14 MISCELLANEOUS The financial data and other information contained herein have been obtained from the City's records,audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The Ordinance authorizing the issuance of the Bonds will also approve the form and content of this Official Statement, and any addenda,supplement or amendment thereto,and authorize its further use in the reoffering of the Bonds by the Underwriter. /s/ Mayor City of Baytown,Texas ATTEST: /s/ City Clerk 15 Schedulel SCHEDULE OF REFUNDED BONDS [THIS PA GE INTENTIONALLY LEFT BLANK] APPENDIX A GENERAL INFORMATION REGARDING THE CITY GENERAL INFORMATION The City of Baytown is the third largest city in the Houston Metropolitan Area. Located east of Houston, Baytown is approximately 20 miles from downtown Houston, within 35 minutes of Houston Hobby Airport and within 55 minutes of Houston Intercontinental Airport.Houston is readily accessible via Interstate 10,a major thoroughfare running through the north side of Baytown. The City encompasses an area of 34 square miles with a population of 66,430 as indicated by the 2000 Census. The City was incorporated January 24, 1948 as a Home Rule City operating under the Council-Manager form of government. The City Council is composed of the Mayor and six City Council members. All six of the Council members are required to reside within defined districts from which they are elected. The Mayor is elected at large. All City Council positions and the Mayor are elected for two-year staggered terms. Article III,Section 32 of the City Charter requires that the Council appoint a City Manager to act as the chief administrative and executive officer of the City. It is the responsibility of the City Manager to appoint and remove department heads and conduct the general affairs of the City in accordance with the policies of the Council. SUMMARY OF LOCAL ECONOMY The City of Baytown has experienced a surge in building permit activity over the last three years and is prepared to address additional major growth initiatives in the future. In the past three years,approximately$146 million in new commercial and$49 million in new residential building activity has occurred. This residential trend is continuing with $16.6 million of the new construction occurring in the last 12 months. Commercial renovation and expansion activity totaling$31.7 million occurred over the past 36 months. Some of the recent efforts to continue to strengthen the City's industrial base include: • On May 5,2001, in the general election,the citizens of the City of Baytown approved six bond propositions that include $20 million in street improvement and rehabilitation projects, $3.2 million in drainage improvements and$2.2 million in fire fighting facilities and equipment. • On May 5,2001,in the general election,the citizens of the City of Baytown voted to authorize the creation of the Baytown Municipal Development District (MOD) and the collection of a '/r cent sales and use tax for the purpose of financing economic development projects. The MDD is expected to fund additional economic and public improvements in the amount of$27 million dollars over the next 10 years. Phase one projects,which are planned for the next five years,include the areas of economic development initiatives; streets, drainage, sidewalks and signalization improvements; utilities improvements;and parks improvements. Projects planned for the first year total approximately$3 million. • On February 2, 2002 the citizens voted to dissolve the Crime Control and Prevention District(CCPD) 'h cent sales tax effective since 1998. The CCPD provided resources needed to upgrade the City's radio system and construct new court and jail facilities. Eight of the ten police officer positions have been eliminated. The other two have been funded from grants and local contributions. The General Fund has absorbed recurring CCPD expenses for operation of the jail and police capital. Transitional funding was provided in the CCPD plan to assists with the phase out of the tax. • The voters approved a charter amendment on May 4,2002 increasing minimum staffing for the fire department. • The City has undertaken to develop certain amenities including (1) the Goose Creek Greenbelt Project,which creates a linear park through the heart of the community;(2)The Baytown Nature Center,a 400 acre preserve within the City limits developed from what was known as the Brownwood subdivision that was destroyed by subsidence and Hurricane Alicia. The Nature Center is on the National Bird Watching Trail and is host to over 275 different species of birds along with numerous varieties of flora and fauna and(3)The Eddie V.Gray Wetlands Education and Recreation Center,a cooperative effort of the School District, Lee College and the City to provide an opportunity to learn more about fisheries, wildlife, ecology,etc. • The City has constructed a public marina and restaurant at Bayland Park near the Fred Hartman Bridge. The marina facilities have floating docks with 104 boat slips and three public boat ramps. • The Grand Parkway is a 170-mile outer loop planned to serve the regional mobility needs of Houston and seven surrounding counties. It is being developed through a partnership with the Texas Department of Transportation, private landowners,local governments and public interest groups. The Baytown portion of the Grand Parkway contains a distance of 12 miles. The Texas Department of Transportation plans to let construction in two phases:Phase 1)I-10 to FM 565 and Phase 2)FM 565 to FM 1405. Phase 1 is now expected to be let in the near future as work on design;detention requirement and land deeds are finalized. Phase 2 is currently in design and expected to be let for construction in April 2003. The project will redirect commercial traffic away from populated areas, reduce traffic congestion,and improve accessibility to existing and future businesses and industry. A- I TRANSPORTATION A wide range of transportation sources, including rail, air, water and highways, are available to companies located in the Baytown/West Chambers County area.Rail service is provided by the Union Pacific railroad. There are two major airports located within 30 miles of the area.Most of the air cargo service and 67 percent of the air passenger service is out of Houston's Bush Intercontinental Airport to the north. Hobby Airport, to the south of downtown Houston, provides passenger service and some cargo capabilities. Daily nonstop or direct flights are available to 105 cities in the United States,including 47 of the 50 largest U.S.markets and 29 foreign markets. Houston is served by 23 passenger airlines and eight all-cargo carriers. Freighter and "combi" service is also available to Europe, Asia and Latin America. Every major overnight delivery service in the United States serves Houston on a daily basis. The Houston Ship Channel,near Baytown,is the largest port in the nation in foreign commerce,third largest in the nation in total tonnage,and the sixth largest overall in the world.The channel stretches 50 miles from the Gulf of Mexico just east of Galveston Island to the Turning Basin six miles from downtown Houston. The waterway is generally 40 feet deep and 400 feet wide. Vessels of 80,000-100,000 deadweight tons routinely navigate the channel. EDUCATIONI'1 Goose Creek Consolidated Independent School District(the"District"),accredited since 1921,has 14 elementary schools, five junior schools, two high schools, one special education school, one alternative school, two instructional support centers, one media center,and one vocational center. The District encompasses a 128-square mile area and has nearly 18,000 students. Six of the District's elementary schools earned honors from the Texas Education Agency as"recognized schools"for their students' outstanding performance on state-mandated testing (Texas Assessment of Academic Skills/TAAS),while another two received monetary awards for students'significant gains on TAAS. The City has numerous private schools. Located in the City since 1934, Lee College is a public co-educational, two-year community college offering liberal arts, technical and continuing education. The 37-acre campus,comprised of ten major buildings and several small facilities,serves in excess of 12,000 students per year. (1) Source: Baytown Chambcr of Commerce. POPULATION 1970 1980 1990 2000 Official Official Official Official Census Census Census Census City of Baytown 43,980 56,917 63,850 66,430 City of Houston 1,233,535 1,595,138 1,630,553 1,953,631 Harris County 1,741,912 2,409,544 2,818,199 3,400,578 A-3 MAJOR INITIATIVES UNDERTAKEN OVER THE PAST YEAR The City continues to actively address the growing needs of the community. Baytown has undergone major changes and the City has managed to proactively develop plans that address the needs of older established communities along with the new ones that are coming online today. Some of the major initiatives are as follows: • Bonds were issued for the first year of the 2001 bond program. Projects included in the first phase include street improvements, fire equipment, information technology improvements,water and sewer rehabilitation projects and facility repairs. Water and sewer rates were increased to cover the debt service for bonds issued for water and sewer system improvements. The first year of debt issued for the General Obligation bonds did not require a tax rate increase due to growth experienced in assessed values and an increase industrial district contract rates as contracts advanced a year. • The City implemented Phase 11 of a two-year program to adjust employee compensation to the market to enable the city to attract and retain qualified employees. • With the support of the community, development continues on numerous amenities including: (1) The Goose Creek Greenbelt Project,a linear park through the heart of the community; (2)The Baytown Nature Center, a 400 acre preserve within the city limits and on the National Bird Watching Trail and host to over 322 different species of birds along with numerous varieties of flora and fauna. • The new court and jail facility opened in January 2002, This facility was funded from the Crime Control and Prevention District sales tax approved by voters in 1998. MAJOR INDUSTRIES'EFFECT ON THE CITY'S ECONOMY The City has created, within its extraterritorial jurisdiction outside of the City limits, three Industrial Districts. The City has annexed a portion of and entered into a contract with each industry located within the Industrial Districts. The contracts specify payments to be made to the City in lieu of ad valorem taxes,thereby protecting the industries from further annexation by the City during the seven-year terms of the contracts. Each Industrial District payment is based upon a percentage of the fair market value of all the industry within the City limits and extraterritorial jurisdiction of the City, times the current tax rate,minus the amount paid by the industry to the City as taxes on that portion of the industry within the city limits. The total net contract value in the Industrial District is $2,106,949,649. This value in the Industrial District is not included in the certified tax rolls unless specifically annexed by the City. THE CITY SIN'DUSTRIAL TAXBASEPROV/DES TIIEFOUNDA TIONFORSTABLEECONOM/CCONDITIONSNECESSARYFOR MAINTAINING AHEALTHYECON'OMY. TRECORNERSTONESOFBAYTOWNSINDUSTRALDEVELOPMENTARETIIREEWORLD-RECOGNIZ DENTITIES CONSISTINGOFEXXONMOBIL,BAYERAND CIIEVRONPHILLIPS. The ExxonMobil petroleum/petrochemical complex in Baytown is believed to be the largest of its type in the world. The complex consists of a diversified array of businesses including a refinery, three chemical plants and two research/technology centers with a total value in excess of$2 billion. Major investments for compliance with the State Implementation Plan for ozone will continue until the 2007 deadline. The complex provides work for more than 4,000 employees and 2,000 contractors. Another industrial corporate presence in Baytown,the Bayer Corporation, has been marked by steady expansion. Since 1971, when the first polyurethane unit started up,the site has grown more than 10-fold. Positioned along Cedar Bayou,the Baytown plant is located on 1,688 acres,of which 35 percent is developed,and employs approximately 2,000 people,including permanent contractors. Today,Baytown is a flagship industrial park,housing three active Bayer companies-(1)Bayer Polymers,(2)Bayer Chemicals and (3)Bayer Corporate & Business Services. Bayer Baytown hosts five additional major manufacturers (Calpine Baytown Energy Center, Borden Chemical, El Dorado Nitrogen, First Chemical, and Texas Brine), which own and operate plants that produce raw materials and energy for Bayer's consumption. The Calpine Baytown Energy Center's 800 mega watt gas-fired cogeneration power plant began providing steam and electricity in mid 2002. Chevron Phillips Chemical Company LP's (CPChem) Cedar Bayou Plant is an integrated olefins chemical manufacturing complex situated on 1,200 acres in Baytown, Texas. It is the largest of 34 manufacturing facilities owned by CPChem and employs over 600 CPChem employees and approximately 350 contracted skilled tradespeople. The plant was established in 1963 by Gulf Oil Corporation and became part of Chevron Corporation in 1985 with the merger of Gulf Oil and Chevron. It was included in the joint venture of the chemical businesses of Chevron Corporation and Phillips Petroleum Company in 2000. It a subsidiary of Chevron Phillips Chemical Company LLC, which has assets of more than $6 billion and is owned equally by ChevronTexaco Corporation and ConoeoPhillips. The plant consists of eight process units; olefins, alpha olefins (2), polyalphaolefins, polyethylene (3), and acetylene black: and central utilities and support facilities. The newest unit, a high- density polyethylene unit is scheduled for completion in January 2003. A-2 APPENDIX B EXCERPTS FROM THE CITY OF BAYTOWN,TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30,2002 The information contained in this Appendix consists of excerpts from the City of Baytown, Texas Annual Financial Report for the Year Ended September 30,2002,and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information.