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HomeMy WebLinkAbout02-96-Ordinance-Revenue Bonds Series 1996 Utility Systems-02/26/1996CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER We, the undersigned officers of said City, hereby certify as follows: 1. The City Council of said City convened in REGULAR MEETING ON THE 26TH DAY OF FEBRUARY, 1996, at the City Hall, and the roll was called of the duly constituted officers and members of said City Council, to -wit: Nel Armstrong, Mayor Tommy Kincaid, Mayor Pro Tem Joe Bell Margie C. Braxton Glen Ervin Jack Richardson Rosalie Chavez, City Secretary and all of said persons were present, except the following absentees: �%�, ��-�sr�, ,thus constituting a quorum. Whereupon, among other business, the following was transacted at said a Meeting: a written ORDINANCE AUTHORIZING THE ISSUANCE OF UTILITY SYSTEM REVENUE BONDS, SERIES 1996, AND OTHER MATTERS RELATED THERETO was duly introduced for the consideration of said City Council and read in full. It was then duly moved and seconded that said Ordinancebe passed; and, after due discussion, said motion carrying with it the passage of said Resolution, prevailed and carried by the following vote: AYES: All members of said City Council shown present above voted "Aye" NOES: None. �F - 2. That a true, full and correct copy of the aforesaid Ordinancepassed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Ordinancehas been duly recorded in said City Council's minutes of said Meeting; that the above and foregoing paragraph is a true, full and correct excerpt from said City Council's minutes of said Meeting pertaining to the passage of said Resolution; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of said City Council as indicated therein; that each of the officers and members of said City Council was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Ordinancewould be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose, and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code, 3. That the Mayor of said City has approved and hereby approves the aforesaid Resolution; that the Mayor and the City Secretary of said City have duly signed said Resolution; and that the Mayor and the City Secretary of said City hereby declare that their signing of this Certificate shall constitute the signing of the attached and following copy of said Ordinance for all purposes. SIGNED AND SEALED the 26th day of February, 1996. City SEAL �a ORDINANCE AUTHORIZING THE ISSUANCE OF UTILITY SYSTEM REVENUE BONDS, SERIES 1996, AND OTHER MATTERS RELATED THERETO THE STATE OF TEXAS § COUNTY OF DENTON § CITY OF SANGER § WHEREAS, the following Utility System Revenue Bonds of the City of Sanger, Texas (the "Issuer") are presently outstanding: City of Sanger, Texas Utility System Refunding and Improvement Revenue Bonds, Series 1991, dated December 1, 1991, outstanding in the aggregate principal amount of $2,155,000 ("Series 1991 Bonds"); and WHEREAS, the City Council has heretofore, on the Sth day of February, 1996, adopted a resolution authorizing and directing the City Secretary to give notice of intention to issue revenue bonds; and WHEREAS, said notice has been duly published in the Sanger Courier, which is a newspaper of general circulation in said City, in its issues of February 8, 1996 and February 15, 1996; and WHEREAS, the City received no petition from the qualified electors of the City protesting the issuance of such bonds; and WHEREAS, the bonds hereinafter authorized and designated are to be issued and delivered pursuant to Article 2368a, VA, T.C.S. and Articles 1111 through 1118, and WHEREAS, it is hereby officially found and determined that public notice of Al time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF SANGER, THAT: Section 1. AMOUNT AND PURPOSE OF THE BONDS. The bond or bonds of the City of Sanger, Texas (the "Issuer") are hereby authorized to be issued and delivered in the aggregate principal amount of $1,060,000 for the purpose of improving and extending the Sewer System. Section 2. DESIGNATION OF THE BONDS. Each bond issued pursuant to this Ordinance shall be designated: "CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BOND, SERIES 1996", and initially there shall be issued, sold, and delivered hereunder a single 1 �a fully registered bond, without interest coupons, payable in installments of principal (the "Initial Bond"), but the Initial Bond may be assigned and transferred and/or converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, having serial maturities, and in the denomination or denominations of $5,000 or any integral multiple of $5,000, all in the manner hereinafter provided. The term "Bonds" as used in this Ordinance shall mean and include collectively the Initial Bond and all substitute bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pursuant hereto, and the term "Bond" shall mean any of the Bonds. Section 3. INITIAL DATE, DENOMINATION, NUMBER, MATURITIES, INITIAL REGISTERED OWNER, AND CHARACTERISTICS OF THE INITIAL BOND. (a) The Initial Bond is hereby authorized to be issued, sold, and delivered hereunder as a single fully registered Bond, without interest coupons, dated March 15, 1996, in the denomination and aggregate principal amount of $1,060,000, numbered R4, payable in annual installments of principal to the initial registered owner thereof, to -wit: TEXAS WATER DEVELOPMENT BOARD, or to the registered assignee or assignees of said Bond or any portion or portions thereof (in each case, the "registered owner"), with the annual installments of principal of the Initial Bond to be payable on the dates, respectively, and in the principal amounts, respectively, stated in the FORM OF INITIAL BOND set forth in this Ordinance. (b) The Initial Bond (i) may be prepaid or redeemed prior to the respective scheduled due dates of installments of principal thereof, (ii) may be assigned and transferred, (iii) may be converted and exchanged for other Bonds, (iv) shall have the characteristics, and (v) shall be signed and sealed, and the principal of and interest on the Initial Bond shall be payable, all as provided, and in the manner required or indicated, in the FORM OF INITIAL BOND set forth in this Ordinance. Section 4. INTEREST. The unpaid principal balance of the Initial Bond shall bear interest from the date of delivery of the Initial Bond, and will be calculated on the basis of a 360-day year A twelve 30-day months to the respective scheduled due dates, or to the respective dates of prepayment or redemption, of the installments of principal of the Initial Bond, and said interest shall be payable, all in the manner provided and at the rates and on the dates stated in the FORM OF INITIAL BOND set forth in this Ordinance. Section 5. FORM OF INITIAL BOND. The form of the Initial Bond, including the form of Registration Certificate of the Comptroller of Public Accounts of the State of Texas to be endorsed on the Initial Bond, shall be substantially as follows: 2 NO. R-1 FORM OF INITIAL BOND UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BOND SERIES 1996 $1,060,000 CITY OF SANGER, in DENTON COUNTY (the "Issuer"), being a political subdivision A the State of Texas, hereby promises to pay to TEXAS WATER DEVELOPMENT BOARD or to the registered assignee or assignees of this Bond or any portion or portions hereof (in each case, the "registered owner") the aggregate principal amount of ONE MILLION SIXTY THOUSAND DOLLARS in annual installments of principal due and payable on May 15 in each of the years, and in the respective principal amounts, as set forth in the following schedule: YEAR AMOUNT YEAR AMOUNT 1997 $20,000 2007 $50,000 1998 359000 2008 55,000 1999 35,000 2009 60,000 2000 35,000 2010 %000 2001 40,000 2011 65,000 2002 40,000 2012 70,000 2003 45,000 2013 709000 2004 459000 2014 75,000 2005 45,000 2015 80,000 2006 509000 2016 85,000 and to pay interest, from the date of delivery of this Bond (which date appears on the back hereofj, on the balance of each such installment of principal, respectively, from time to time remaining unpaid, at the rates as follows: c maturity 1997, 2.85% maturity 1998, 3.10 % maturity 1999, 3.30 % maturity 2000, 3.45 % maturity 2001, 3.55% maturity 2002, 3.70 % maturity 2003, 3.80 % maturity 2004, 3.90 % maturity 2005, 4.00% maturity 2006, 4.10 % maturity 2007, 4.207o maturity 2008, 4.35 % maturity 2009, 4.45 % maturity 2010, 4.55 % maturity 2011, 4.60 % maturity 2012, 4.65 % maturity 2013, 4.70% maturity 2014, 4.70 % maturity 2015, 4.75 % maturity 2016, 4.75 % with said interest being payable on November 15, 1996 and semiannually on each May 15 and November 15 thereafter while this Bond or any portion hereof is outstanding and unpaid. THE INSTALLMENTS OF PRINCIPAL OF AND THE INTEREST ON this bond are payable in lawful money of the United States of America, without exchange or collection charges. The installments of principal and the interest on this Bond are payable to the registered owner hereof through the services of Texas Commerce Bank National Association, Dallas, Texas, which is the "Paying Agent/Registrar" for this Bond. Payment of all principal of and interest on this Bond shall be made by the Paying Agent/Registrar to the registered owner hereof on each principal and/or interest payment date by check or draft, dated as of such date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of this Bond (the "Bond Ordinance") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Paying Agent/Registrar by United States mail, first class postage prepaid, on each such principal and/or interest payment date, to the registered owner hereof, at the address of the regis- tered owner, as it appeared on the last business day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described, or by such other method acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner; however, if the Bond is owned by the Texas Water Development Board, there will be no charge to the Texas Water Development Board. The Issuer covenants with the registered owner of this Bond that on or before each principal and/or interest payment date for this Bond it will make available to the Paying Agent/Registrar, from the "Bond Fund" created by the Bond Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on this Bond, when due. IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. C! THIS BOND has been authorized in accordance with the Constitution and laws of the State A Texas, in the principal amount of $1,060,000 for the purpose of improving and extending the Sewer System. ON MAY 15, 2006, or any date thereafter, the unpaid installments of principal of this Bond may be prepaid or redeemed prior to their scheduled due dates, at the option of the Issuer, with funds derived from any available source, as a whole, or in part, and, if in part, the Issuer shall, in inverse order of annual maturity, select and designate the maturity, or maturities, and the amount that is to be redeemed, and if less than a whole maturity is to be redeemed, the Issuer shall direct the Paying Agent/Registrar to call by lot (provided that a portion of this Bond may be redeemed only in an integral multiple of $5,000), at a price equal to the principal amount to be so prepaid or redeemed, plus accrued interest to the date fixed for prepayment or redemption. AT LEAST 30 days prior to the date fixed for any such prepayment or redemption a written notice of such prepayment or redemption shall be mailed by the Paying Agent/Registrar to the registered owner hereof. By the date fixed for any such prepayment or redemption due provision shall be made by the Issuer with the Paying Agent/Registrar for the payment of the required prepayment or redemption price for this Bond or the portion hereof which is to be so prepaid or redeemed, plus accrued interest thereon to the date fixed for prepayment or redemption. If such written notice of prepayment or redemption is given, and if due provision for such payment is made, all as provided above, this Bond, or the portion thereof which is to be so prepaid or redeemed, thereby automatically shall be treated as prepaid or redeemed prior to its scheduled due date, and shall not bear interest after the date fixed for its prepayment or redemption, and shall not be regarded as being outstanding except for the right of the registered owner to receive the prepayment or redemption price plus accrued interest to the date fixed for prepayment or redemption from the Paying Agent/Registrar out of the funds provided for such payment. The Paying Agent/Registrar shall record in the Registration Books all such prepayments or redemptions of principal of this Bond or any portion hereof. THIS BOND, to the extent of the unpaid or unredeemed principal balance hereof, or any unpaid and unredeemed portion hereof in any integral multiple of $5,0002 may be assigned by the initial registered owner hereof and shall be transferred only in the Registration Books of the Issuer kept by the Paying Agent/Registrar acting in the capacity of registrar for the Bonds, upon the terms and conditions set forth in the Bond Ordinance. Among other requirements for such transfer, this Bond must be presented and surrendered to the Paying Agent/Registrar for cancellation, together with proper instruments of assignment, in form and with guarantee of signa- tures satisfactory to the Paying Agent/Registrar, evidencing assignment by the initial registered owner of this Bond, or any portion or portions hereof in any integral multiple of $5,000, to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be transferred and registered. Any instrument or instruments of assignment satisfac- tory to the Paying Agent/Registrar may be used to evidence the assignment of this Bond or any such portion or portions hereof by the initial registered owner hereof. A new bond or bonds payable to such assignee or assignees (which then will be the new registered owner or owners of such new Bond or Bonds) or to the initial registered owner as to any portion of this Bond which is not being assigned and transferred by the initial registered owner, shall be delivered by the Paying Agent/Registrar in conversion of and exchange for this Bond or any portion or portions hereof, but solely in the form and manner as provided in the next paragraph hereof for the conver. sion and exchange of this Bond or any portion hereof. The registered owner of this Bond shall be deemed and treated by the Issuer and the Paying Agent/Registrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Bond to the extent of such payment, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary. AS PROVIDED above and in the Bond Ordinance, this Bond, to the extent of the unpaid or unredeemed principal balance hereof, may be converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, payable to the assignee or assignees duly designated in writing by the initial registered owner hereof, or to the initial registered owner as to any portion of this Bond which is not being assigned and transferred by the initial registered owner, in any denomination or denominations in any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute bond issued in exchange for any portion of this Bond shall have a single stated principal maturity date), upon surrender of this Bond to the Paying Agent/Registrar for cancellation, all in accordance with the form and pro. cedures set forth in the Bond Ordinance. If this Bond or any portion hereof is assigned and transferred or converted each bond issued in exchange for any portion hereof shall have a single stated principal maturity date corresponding to the due date of the installment of principal of this Bond or portion hereof for which the substitute bond is being exchanged, and shall bear interest at the rate applicable to and borne by such installment of principal or portion thereof. Such bonds, respectively, shall be subject to redemption prior to maturity on the same dates and for the same prices as the corresponding installment of principal of this Bond or portion hereof for which they are being exchanged. No such bond shall be payable in installments, but shall have only one stated principal maturity date. AS PROVIDED IN THE BOND ORDINANCE, THIS BOND IN ITS PRESENT FORM MAY BE ASSIGNED AND TRANSFERRED OR CONVERTED ONCE ONLY, and to one or more assignees, but the bonds issued and delivered in exchange for this Bond or any portion hereof may be assigned and transferred, and converted, subsequently, as provided in the Bond Ordinance. The Issuer shall pay the Paying Agent/ Registrar's standard or customary fees and charges for transferring, converting, and exchanging this Bond or any portion thereof, but the one requesting such transfer, conversion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make any such assignment, conversion, or exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for prepayment or redemption prior to maturity, within 30 days prior to its prepayment or redemption date. IN THE EVENT any Paying Agent/Registrar for this Bond is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Bond Ordinance that 0 � � 1 it promptly will appoint a competent and legally qualified substitute therefor, and promptly will cause written notice thereof to be mailed to the registered owner of this Bond. IT IS HEREBY certified, recited, and covenanted that this Bond has been duly and validly authorized, issued, and delivered pursuant to the laws of the State of Texas; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Bond and the Series of which it is a part have been performed, existed, and been done in accordance with law; that this Bond is a special obligation of said Issuer, and that the principal of and interest on this Bond, together with other outstanding revenue bonds of the Issuer, are payable and secured by a first lien on and pledge of the Net Revenues of the Issuer's Utility System, being the Waterworks, Sewer and Electric System. THE ISSUER has reserved the right, subject to the restrictions stated, and adopted by reference, in the Ordinance authorizing this Series of Bonds, to issue additional parity revenue bonds which also may be made payable from, and secured by a first lien on and pledge of, the aforesaid Net Revenues. THE OWNER HEREOF shall never have the right to demand payment of this obligation out of any funds raised or to be raised by taxation, or from any source other than the Net Revenues. BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the terms and provisions of the Bond Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Bond Ordinance is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Bond and the Bond Ordinance constitute a contract between the registered owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Bond to be signed with the manual signature of the Mayor of the Issuer and countersigned with the manual signature of the City Secretary of the Issuer, has caused the official seal of the Issuer to be duly impressed on this Bond, and has caused this Bond to be dated March 15, 1996. City Secretary (CITY SEAL) Mayor The following shall be printed on the back of said Initial Bond: "This Initial Bond was delivered to and paid for by the Purchaser thereof 7 FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS: COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller A Public Accounts of the State of Texas. Witness my signature and seal this Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) Section 6. ADDITIONAL CHARACTERISTICS OF THE BONDS. Registration and Transfer. (a) The Issuer shall keep or cause to be kept at the principal corporate trust office of Texas Commerce Bank National Association, Dallas, Texas (the "Paying Agent/Registrar") books or records of the registration and transfer of the Bonds (the "Registration Books"), and the Issuer hereby appoints the Paying Agent/Registrar as its registrar and transfer agent to keep such books or records and make such transfers and registrations under such reasonable regulations as the Issuer and Paying Agent/Registrar may prescribe; and the Paying Agent/Registrar shall make such transfers and registrations as herein provided. The Paying Agent/Registrar shall obtain and record in the Registration Books the address of the registered owner of each Bond to which payments with respect to the Bonds shall be mailed, as herein provided, but it shall be the duty of each registered owner to notify the Paying Agent/Registrar in writing of the address to which payments shall be mailed, and such interest payments shall not be mailed unless such notice has been given. The Issuer shall have the right to inspect the Registration Books during regular business hours of the Paying Agent/Registrar, but otherwise the Paying Agent/Registrar shall keep the Registration Books confidential and, unless otherwise required by law, shall not permit their inspection by any other entity. Registration of each Bond may be transferred in the Registration Books only upon presentation and surrender of such Bond to the Paying Agent/Registrar for transfer of registration and cancellation, together with proper written instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, (1) evidencing the assignment of the Bond, or any portion thereof in any integral multiple of $5,000, to the assignee or assignees thereof, and (H) the right of such assignee or assignees to have the Bond or any such portion thereof registered in the name of such assignee or assignees. Upon the assignment and transfer of any Bond or any portion thereof, a new substitute Bond or Bonds shall be issued in conversion and exchange therefor in the manner herein provided. The Initial Bond, to the extent of the unpaid or unredeemed principal balance thereof, may be assigned and transferred by the initial registered owner thereof once only, and to one or more assignees designated in writing by the E:3 initial registered owner thereof. All Bonds issued and delivered in conversion of and exchange for the Initial Bond shall be in any denomination or denominations of any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Bond shall have a single stated principal maturity date), shall be in the form prescribed in the FORM OF SUBSTITUTE BOND set forth in this Ordinance, and shall have the characteristics, and may be assigned, trans- ferred, and converted as hereinafter provided. If the Initial Bond or any portion thereof is assigned and transferred or converted the Initial Bond must be surrendered to the Paying Agent/Registrar for cancellation, and each Bond issued in exchange for any portion of the Initial Bond shall have a single stated principal maturity date, and shall not be payable in installments; and each such Bond shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Bond is being exchanged; and each such Bond shall bear interest at the single rate applicable to and borne by such installment of principal or portion thereof for which it is being exchanged. If only a portion of the Initial Bond is assigned and transferred, there shall be delivered to and registered in the name of the initial registered owner substitute Bonds in exchange for the unassigned balance of the Initial Bond in the same manner as if the initial registered owner were the assignee thereof. If any Bond or portion thereof other than the Initial Bond is assigned and transferred or converted each Bond issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Bond for which it is exchanged. A form of assignment shall be printed or en- dorsed on each Bond, excepting the Initial Bond, which shall be executed by the registered owner or its duly authorized attorney or representative to evidence an assignment thereof. Upon surrender of any Bonds or any portion or portions thereof for transfer of registration, an authorized representative of the Paying Agent/Registrar shall make such transfer in the Registration Books, and shall deliver a new fully registered substitute Bond or Bonds; having the characteristics herein described, payable to such assignee or assignees (which then will be the registered owner or owners of such new Bond or Bonds), or to the previous registered owner in case only a portion of a Bond is being assigned and transferred, all in conversion of and exchange for said assigned Bond or Bonds or any portion or portions thereof, in the same form and manner, and with the same effect, as provided in Section 6(d), below, for the conversion and exchange of Bonds by any registered owner of a Bond. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer and delivery of a substitute Bond or Bonds, but the one requesting such transfer shall pay any taxes or other governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers of registration of any Bond or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemp- tion date. (b) Ownership of Bonds. The entity in whose name any Bond shall be registered in the Registration Books at any time shall be deemed and treated as the absolute owner thereof for all purposes of this Ordinance, whether or not such Bond shall be overdue, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary; and payment of, or on 9 account of, the principal of, premium, if any, and interest on any such Bond shall be made only to such registered owner. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums so paid. (c) Payment of Bonds and Interest. The Issuer hereby further appoints the Paying Agent/Registrar to act as the paying agent for paying the principal of and interest on the Bonds, and to act as its agent to convert and exchange or replace Bonds, all as provided in this Ordinance. The Paying Agent/Registrar shall keep proper records of all payments made by the Issuer and the Paying Agent/Registrar with respect to the Bonds, and of all conversions and exchanges of Bonds, and all replacements of Bonds, as provided in this Ordinance. However, in the event of a nonpayment of interest on a scheduled payment date, and for thirty (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 District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 days after the Special Record Date) shall be sent at least five (5) business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Bondholder appearing on the Security Register at the close of business on the last business day next preceding the date of mailing of such notice. (d) Conversion and Exchange or Replacement: Authentication. Each Bond issued and delivered pursuant to this Ordinance, to the extent of the unpaid or unredeemed principal balance or principal amount thereof, may, upon surrender of such Bond at the principal corporate trust office of the Paying Agent/Registrar, together with a written request therefor duly executed by the registered owner or the assignee or assignees thereof, or its or their duly authorized attorneys or representatives, with guarantee of signatures satisfactory to the Paying Agent/Registrar, may, at the option of the registered owner or such assignee or assignees, as appropriate, be converted into and exchanged for fully registered bonds, without interest coupons, in the form prescribed in the FORM OF SUBSTITUTE BOND set forth in this Ordinance, in the denomination of $5,000, or any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Bond shall have a single stated maturity date), as requested in writing by such registered owner or such assignee or assignees, in an aggregate principal amount equal to the unpaid or unre- deemed principal balance or principal amount of any Bond or Bonds so surrendered, and payable to the appropriate registered owner, assignee, or assignees, as the case may be. If the Initial Bond is assigned and transferred or converted each substitute Bond issued in exchange for any portion of the Initial Bond shall have a single stated principal maturity date, and shall not be payable in installments; and each such Bond shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Bond is being exchanged; and each such Bond shall bear interest at the single rate applicable to and borne by such installment of principal or portion thereof for which it is being exchanged. If a portion of any Bond (other than the Initial Bond) shall be redeemed prior to its scheduled maturity as provided herein, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in the denomination or denominations of any integral multiple of $5,000 at the request of the registered owner, and in aggregate principal amount equal to the unredeemed portion 10 thereof, will be issued to the registered owner upon surrender thereof for cancellation. If any Bond or portion thereof (other than the Initial Bond) is assigned and transferred or converted, each Bond issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Bond for which it is being exchanged. Each substitute Bond shall bear a letter and/or number to distinguish it from each other Bond. The Paying Agent/Registrar shall convert and exchange or replace Bonds as provided herein, and each fully registered bond delivered in conversion of and exchange for or replacement of any Bond or portion thereof as permitted or required by any provision of this Ordinance shall constitute one of the Bonds for all purposes of this Ordinance, and may again be converted and exchanged or replaced. It is specifically provided that any Bond authenticated in conversion of and exchange for or replacement of another Bond on or prior to the first scheduled Record Date for the Initial Bond shall bear interest from the date of the Initial Bond, but each substitute Bond so authenticated after such first scheduled Record Date shall bear interest from the interest payment date next preceding the date on which such substitute Bond was so authenticated, unless such Bond is authenticated after any Record Date but on or before the next following interest payment date, in which case it shall bear interest from such next following interest payment date; provided, however, that if at the time of delivery of any substitute Bond the interest on the Bond for which it is being exchanged is due but has not been paid, then such Bond shall bear interest from the date to which such interest has been paid in full. THE INITIAL BOND issued and delivered pursuant to this Ordinance is not required to be, and shall not be, authenticated by the Paying Agent/Registrar, but on each substitute Bond issued in conversion of and exchange for or replacement of any Bond or Bonds issued under this Ordinance there shall be printed a certificate, in the form substantially as follows: "PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE It is hereby certified that this Bond has been issued under the provisions of the Bond Ordinance described on the face of this Bond; and that this Bond has been issued in conversion of and exchange for or replacement of a bond, bonds, or a portion of a bond or bonds of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Paying Agent/Registrar Authorized Representative An authorized representative of the Paying Agent/Registrar shall, before the delivery of any such Bond, date and manually sign the above Certificate, and no such Bond shall be deemed to be issued or outstanding unless such Certificate is so executed. The Paying Agent/Registrar promptly shall cancel all Bonds surrendered for conversion and exchange or replacement. No additional ordinances, orders, or resolutions need be passed or adopted by the governing body of the Issuer or any other body or person so as to accomplish the foregoing conversion and exchange or 11 replacement of any Bond or portion thereof, and the Paying Agent/Registrar shall provide for the printing, execution, and delivery of the substitute Bonds in the manner prescribed herein, and said Bonds shall be of type composition printed on paper with lithographed or steel engraved borders of customary weight and strength. Pursuant to Vernon's Ann, Tex. Civ. St. Art. 717k-6, and particularly Section 6 thereof, the duty of conversion and exchange or replacement of Bonds as aforesaid is hereby imposed upon the Paying Agent/Registrar, and, upon the execution of the above Paying Agent/Registrar's Authentication Certificate, the converted and exchanged or re- placed Bond shall be valid, incontestable, and enforceable in the same manner and with the same effect as the Initial Bond which originally was issued pursuant to this Ordinance, approved by the Attorney General, and registered by the Comptroller of Public Accounts. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for transferring, converting, and exchanging any Bond or any portion thereof, but the one requesting any such transfer, conver- sion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying Agent/Registrar shall not be required to make any such conversion and exchange or replacement of Bonds or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date. (e) In General. All Bonds issued in conversion and exchange or replacement of any other Bond or portion thereof, (i) shall be issued in fully registered form, without interest coupons, with the principal of and interest on such Bonds to be payable only to the registered owners thereof, (ii) may be redeemed prior to their scheduled maturities, (iii) may be transferred and assigned, (iv) may be converted and exchanged for other Bonds, (v) shall have the characteristics, (vi) shall be signed and sealed, and (vii) the principal of and interest on the Bonds shall be payable, all as provided, and in the manner required or indicated, in the FORM OF SUBSTITUTE BOND set forth in this Ordinance. (f) Payment of Fees and Charges. The Issuer hereby covenants with the registered owners of the Bonds that it will (i) pay the standard or customary fees and charges %J the Paying Agent/Registrar for its services with respect to the payment of the principal of and interest on the Bonds, when due, and (n) pay the fees and charges of the Paying Agent/Registrar for services with respect to the transfer of registration of Bonds, and with respect to the conversion and exchange of Bonds solely to the extent above provided in this Ordinance. (g) Substitute Pang Agent/Re isg tray. The Issuer covenants with the registered owners of the Bonds that at all times while the Bonds are outstanding the Issuer will provide a competent and legally qualified bank, trust company, financial institution, or other agency to act as and perform the services of Paying Agent/Registrar for the Bonds under this Ordinance, and that the Paying Agent/Registrar will be one entity. The Issuer reserves the right to, and may, at its option, change the Paying Agent/Registrar upon not less than 120 days written notice to the Paying Agent/Registrar, to be effective not later than 60 days prior to the next principal or interest payment date after such notice. In the event that the entity at any time acting as Paying Agent/Registrar (or its successor by merger, acquisition, or other method) should resign or other- wise cease to act as such, the Issuer covenants that promptly it will appoint a competent and legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar under this Ordinance. Upon any change in the Paying Agent/Registrar, the previous Paying Agent/Registrar promptly shall transfer and deliver the Registration Books (or a copy thereof), along with all other pertinent books and records relating to the Bonds, to the new Paying Agent/Registrar designated and appointed by the Issuer. Upon any change in the Paying Agent/Registrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying Agent/Registrar to each registered owner of the Bonds, by United States mail, first-class postage prepaid, which notice also shall give the address of the new Paying Agent/Registrar. By accepting the position and performing as such, each Paying Agent/Registrar shall be deemed to have agreed to the provisions of this Ordinance, and a certified copy of this Ordinance shall be delivered to each Paying Agent/Registrar. Section 7. FORM OF SUBSTITUTE BONDS. The form of all Bonds issued in conversion and exchange or replacement of any other Bond or portion thereof, including the form of Paying Agent/Registrar's Certificate to be printed on each of such Bonds, and the Form of Assignment to be printed on each of the Bonds, shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or required by this Ordinance. NO. INTEREST RATE FORM OF SUBSTITUTE BOND UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BOND SERIES 1996 MATURITY DATE DATE OF ORIGINAL ISSUE March 15, 1996 PRINCIPAL AMOUNT CUSIP NO. ON THE MATURITY DATE specified above, CITY OF SANGER (the "Issuer"), in DENTON COUNTY, being a political subdivision of the State of Texas, hereby promises to pay to 13 or to the registered assignee hereof (either being hereinafter called the "registered owner") the principal amount of and to pay interest thereon from the date of delivery of this Bond (which date appears on the back hereof) to the date of its scheduled maturity, or the date of redemption prior to maturity, at the interest rate per annum specified above, with interest being payable on November 15, 1996, and semiannually on each May 15 and November 15; except that if the date of authentication of this Bond is later than October 31, 1996, such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date (hereinafter defined) but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the registered owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity, at the principal corporate trust office of Texas Commerce Bank National Association, Dallas, Texas, which is the "Paying Agent/Registrar" for this Bond. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the registered owner hereof on each interest payment date by check or draft, dated as of such interest payment date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of the Bonds (the "Bond Ordinance") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Paying Agent/Registrar by United States mail, first class postage prepaid, on each such interest payment date, to the registered owner hereof, at the address of the registered owner, as it appeared on the last business day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described, or by such other method acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner; however, if the Bond is owned by the Texas Water Development Board, there will be no charge to the Texas Water Development Board. Any accrued interest due upon the redemption of this Bond prior to maturity as provided herein shall be paid to the registered owner at the principal corporate trust office of the Paying Agent/Registrar upon presentation and surrender of this Bond for redemption and payment at the principal corporate trust office of the Paying Agent/Registrar. The Issuer covenants with the registered owner of this Bond that on or before each principal payment date, interest payment date, and accrued interest payment date for this Bond it will make available to the Paying Agent/Registrar, from the "Bond Fund" created by the Bond Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. 14 IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of an issue of Bonds initially dated March 15, 1996, authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $1,060,000 for the purpose of improving and extending the Sewer System. ON MAY 15, 2006, or on any date thereafter, the Bonds of this Series may be redeemed prior to their scheduled maturities, at the option of the Issuer, with funds derived from any available and lawful source, as a whole, or in part, and, if in part, the maturity or maturities of Bonds and the amounts thereof, to be redeemed shall, in inverse order of annual maturity, be selected and designated by the Issuer, and the Issuer shall direct the Paying Agent/Registrar to call by lot Bonds, or portions thereof within such maturities and in such principal amounts, for redemption (provided that a portion of a Bond may be redeemed only in an integral multiple of $5,000), at the redemption price of the principal amount thereof, plus accrued interest to the date fixed for prepayment or redemption. AT LEAST 30 days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be published once in a financial publication, journal, or reporter of general circulation among securities dealers in the City of New York, New York (including, but not limited to, The Bond Buyer and The Wall Street Journal), or in the State of Texas (including, but not limited to, The Texas Bond Reporter). Such notice also shall be sent by the Paying Agent/Registrar by United States mail, first class postage prepaid, not less than 20 days prior to the date fixed for any such redemption, to the registered owner of each Bond to be redeemed at its address as it appeared on the 30th day prior to such redemption date; provided, however, that the failure to send, mail, or receive such notice, or any defect therein or in the sending or mailing thereof, shall not affect the validity or effectiveness of the proceedings for the redemption of any Bond, and it is hereby specifically provided that the publication of such notice as required above shall be the only notice actually required in connection with or as a prerequisite to the redemption of any Bonds or portions thereof. By the date fixed for any such redemption due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed, plus accrued interest thereon to the date fixed for redemption. If such written notice of redemption is published and if due provision for such payment is made, all as provided above, the Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price plus accrued interest from the Paying Agent/Registrar out of the funds provided for such payment. If a portion of any Bond shall be redeemed a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any denomination or denominations in any integral multiple of $5,000, at the written request of the registered owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the registered owner upon the surrender thereof for cancellation, at the expense of the Issuer, all as provided in the Bond Ordinance. THIS BOND OR ANY PORTION OR PORTIONS HEREOF IN ANY INTEGRAL MULTIPLE OF $5,000 may be assigned and shall be transferred only in the Registration Books of the Issuer kept by the Paying Agent/Registrar acting in the capacity of registrar for the Bonds, upon the terms and conditions set forth in the Bond Ordinance. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Paying Agent/Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing assignment of this Bond or any portion or portions hereof in any integral multiple of $5,000 to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be transferred and registered. The form of Assignment printed or endorsed on this Bond shall be executed by the registered owner or its duly authorized attorney or representative, to evidence the assignment hereof. A new Bond or Bonds payable to such assignee or assignees (which then will be the new registered owner or owners of such new Bond or Bonds), or to the previous registered owner in the case of the assignment and transfer of only a portion of this Bond, may be delivered by the Paying Agent/Registrar in conversion of and exchange for this Bond, all in the form and manner as provided in the next paragraph hereof for the conversion and exchange of other Bonds. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer, but the one requesting such transfer shall pay any taxes or other governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers of registration of this Bond or any portion hereof (1) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or any portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date. The registered owner of this Bond shall be deemed and treated by the Issuer and the Paying Agent/Registrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Bond to the extent of such payment, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary. ALL BONDS OF THIS SERIES are issuable solely as fully registered bonds, without interest coupons, in the denomination of any integral multiple of $5,000. As provided in the Bond Ordinance, this Bond, or any unredeemed portion hereof, may, at the request of the registered owner or the assignee or assignees hereof, be converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, payable to the appropriate registered owner, assignee, or assignees, as the case may be, having the same maturity date, and bearing interest at the same rate, in any denomination or denominations in any integral multiple of $5,000 as requested in writing by the appropriate registered owner, assignee, or assignees, as the case may be, upon surrender of this Bond to the Paying Agent/Registrar for 16 cancellation, all in accordance with the form and procedures set forth in the Bond Ordinance, The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for trans. ferring, converting, and exchanging any Bond or any portion thereof, but the one requesting such transfer, conversion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying Agent/Registrar shall not be required to make any such conversion and exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date. IN THE EVENT any Paying Agent/Registrar for the Bonds is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Bond Ordinance that it promptly will appoint a competent and legally qualified substitute therefor, and promptly will cause written notice thereof to be mailed to the registered owners of the Bonds. IT IS HEREBY certified, recited, and covenanted that this Bond has been duly and validly authorized, issued, and delivered pursuant to the laws of the State of Texas; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Bond and the Series of which it is a part have been performed, existed, and been done in accordance with law; that this Bond is a special obligation of said Issuer, and that the principal of and interest on this Bond, together with other outstanding revenue bonds of the Issuer, are payable and secured by a first lien on and pledge of the Net Revenues of the Issuer's Utility System, being the Waterworks, Sewer and Electric System, THE ISSUER has reserved the right, subject to the restrictions stated, and adopted by reference, in the Ordinance authorizing this Series of Bonds, to issue additional parity revenue bonds which also may be made payable from, and secured by a first lien on and pledge of, the aforesaid Net Revenues. THE OWNER HEREOF shall never have the right to demand payment of this obligation out of any funds raised or to be raised by taxation, or from any source other than the Net Revenues. BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the terms and provisions of the Bond Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Bond Ordinance is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Bond and the Bond Ordinance constitute a contract between each registered owner hereof and the Issuer. 17 IN WITNESS WHEREOF, the Issuer has caused this Bond to be signed with the facsimile signature of the Mayor of the Issuer and countersigned with the facsimile signature of the City Secretary of the Issuer, and has caused the official seal of the Issuer to be duly impressed, or placed in facsimile, on this Bond. City Secretary (CITY SEAL) Mayor The following shall be printed on the back of said Bonds: "This Bond was originally delivered to and paid for by the Purchaser thereof on 11 FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Ordinance described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a bond, bonds, or a portion of a bond or bonds of a Series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated Texas Commerce Bank National Association Dallas, Texas Authorized Representative f E:3 FORM OF ASSIGNMENT: ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered owner of this Bond, or duly authorized representative or attorney thereof, hereby assigns this Bond to (Assignee's Social Security or Taxpayer Identification Number and hereby irrevocably constitutes and appoints (print or type Assignee's name and address, including zip code) attorney to transfer the registration of this Bond on the Paying Agent/Registrar's Registration Books with full power of substitution in the premises. Dated Signature Guaranteed: NOTICE: This signature must be guaranteed by a member of the New York Stock Exchange or a commercial bank or trust company. Registered Owner NOTICE: This signature must correspond with the name of the Registered Owner appearing on the face of this Bond in every particular without alteration or enlargement or any change whatsoever. Section 8. DEFINITIONS. For all purposes of this ordinance and in particular for clarity with respect to the issuance of the Bonds herein authorized and the pledge and appropriation of revenues for the payment of the Bonds, the following definitions are provided: (a) The term "Utility System" as used in this Ordinance, shall mean and include the Issuer's entire Waterworks, Sewer and Electric System, together with all future improvements, extensions, enlargements, and additions thereto, and replacements thereof. (b) The term "Net Revenues," as used in this Ordinance, shall mean gross revenues of the Utility System, after deducting the expenses of operation and maintenance of the Utility System, including all salaries, labor, materials, repairs and extensions necessary to render efficient service, provided, however, that only such repairs and extensions, as in the judgment of the City Council of said Issuer, reasonably and fairly exercised by the passage of appropriate ordinances, are necessary to keep the Utility System in operation and render adequate service to said Issuer and the inhabitants thereof, or such as might be necessary to meet some physical accident or condition which would otherwise impair the Bonds and any Additional Bonds shall be deducted in determining "Net Revenues." Depreciatil Sinking Fund, Reserve Fund, and Emergency as expenses of operation and maintenance. n, and payments into and out of the Interest and Fund hereinafter created, shall never be considered (c) The term "Bonds" shall mean the Bonds authorized to be issued and delivered by this Ordinance and the outstanding Series 1991 Bonds. (e) The term "Additional Bonds" shall mean the additional parity revenue bonds which the Issuer reserves the right to issue and deliver in the future, as provided by this Ordinance. Section 9. PLEDGE. The Bonds and all Additional Bonds, and the interest thereon, are and shall be payable from and secured by an irrevocable first lien on and pledge of the Net Revenues of the Utility System. The Bonds authorized by this Ordinance are parity Additional Bonds as defined and permitted in the ordinance that authorized the City of Sanger, Texas Utility System Revenue Bonds, Series 1969, and Sections 9 through 27 of the ordinance that authorized the City of Sanger, Texas Utility System Revenue Bonds, Series 1969 are hereby adopted by reference and shall be restated and be applicable to the Bonds authorized by this Ordinance in Sections 8 through 25 hereof for all purposes except to the extent hereinafter specifically modified and supplemented. Section 10. RATES. The Issuer covenants and agrees with the holders of the Bonds and all Additional Bonds, as follows: (a) That it will at all times fix, maintain, charge and collect for services rendered by the Utility System, rates and charges which will produce gross revenues at least sufficient to pay all operating, maintenance, depreciation, replacement and betterment expenses, and other costs deductible in determining "Net Revenues" as herein defined and to produce each month Net Revenues which together with other pledged revenues will be adequate to pay promptly all of the principal of and interest on the Bonds and all Additional Bonds, and to accumulate and maintain the Funds created and established by this Ordinance, and (b) That if the Utility System should become legally liable for any other indebtedness, the Issuer shall fix, maintain, charge and collect additional rates for services rendered by the Utility System sufficient to establish and maintain funds for the payment thereof. Section 11. FUNDS, All gross revenues of the Utility System shall be kept separate and apart from all other funds of the Issuer and the following Special Funds have been created and shall be established and maintained in an official depository bank of the Issuer, so long as any of the Bonds or Additional Bonds, or interest thereon, are outstanding and unpaid: (a) City of Sanger Utility System Revenue Bonds Revenue Fund, hereinafter called the "Revenue Fund. " (b) City of Sanger Utility System Revenue Bonds Interest and Sinking Fund, hereinafter called the "Interest and Sinking Fund. " 20 (c) City of Sanger Utility System Revenue Bonds Reserve Fund, hereinafter called the "Reserve Fund. " (d) City of Sanger Utility System Revenue Bonds Emergency Fund, hereinafter called the "Emergency Fund. " Section 12. REVENUE FUND. All gross revenues of every nature received from the operation and ownership of the Utility System shall be deposited from day to day as collected into the Revenue Fund. The reasonable, necessary, and proper expenses of operation and maintenance of the Utility System shall be paid from the gross revenues of the Utility System. The revenues remaining in the Revenue Fund shall be deposited into the other Funds, in the manner and amounts hereinafter provided, and each of such Funds shall have priority as to such deposits in the order in which they are treated in the following sections. Section 13. INTEREST AND SINKING FUND, There shall be deposited into the Interest and Sinking Fund the following: (a) such amounts, in equal monthly installments commencing on or before the ten day of each month hereafter, as will be sufficient to pay the interest scheduled to come due on the Bonds on the next interest payment date; and (b) such amounts, in equal monthly installments, made on or before the tenth day of each month, commencing May 10, 1996, as will be sufficient to pay the next maturing principal of the bonds. Section 14. RESERVE FUND. There shall be deposited into the Reserve Fund, commencing May 10, 1996 and on the loth day of each month hereafter, $403"per month until the Reserve Fund contains $281619. Whenever said Reserve Fund is reduced below said aggregate amount, there shall be deposited into the Reserve Fund an amount of at least equal to 1/60th of the average annual principal and interest requirements of the outstanding Bonds, until such time as the Fund has been restored to said aggregate amount. The Reserve Fund shall be used to pay the principal of or interest on the Bonds and any Additional Bonds falling due at any time when there is not sufficient money available in the Interest and Sinking Fund created for their payment. Money in the Reserve Fund may, upon authorization by the City Council of said Issuer, be invested in direct obligations of, or obligations, the principal of and interest on which are guaranteed by, the United States of America, or invested in direct obligations of the Federal Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage Association, Federal Home Loan Banks or Banks for Cooperatives, provided that each of the aforesaid obligations must mature, or be subject to redemption at the option of the holder thereof. Any obligation in which money in said Reserve Fund is so invested shall be kept and held by the Bank holding said Fund in escrow and in trust for the benefit of the holders of the Bonds and all Additional Bonds, and shall be promptly sold and the proceeds of sale applied to the making of all payments required to be made from the Reserve Fund. 21 Section 15. EMERGENCY FUND. There is presently on deposit in the Emergency Fund $16,212. No deposits shall be required to be made into the Emergency Fund as long as the Emergency Fund contains said aggregate amount, but if and whenever said Emergency Fund is reduced below said aggregate amount, the aforesaid monthly deposits into the Emergency Fund shall be resumed and continued until such time as the Emergency Fund has been restored to said aggregate amount. The Emergency Fund shall be used to pay the cost of any repairs or extensions to the System authorized by Vernon's Article 1113, for the payment of which no other funds are available. Also, the Emergency Fund shall be used to pay the principal of or interest on the Bonds and all Additional Bonds, at any time when there are not sufficient amounts in the Interest and Sinking Fund and the Reserve Fund for such purpose. Money in the Emergency Fund may, upon authorization by the City Council, be invested in the same manner and to the same extent as provided for money in the Reserve Fund. Any obligation in which money in the Emergency Fund is so invested shall be kept and held in an official depository bank of the Issuer in escrow and in trust for the benefit of the holders of the Bonds and all Additional Bonds, and shall be promptly sold and the proceeds of sale applied to the making of payments permitted or required to be made from the Emergency Fund. Section 16. DEFICIENCIES IN FUNDS. If in any month the Issuer shall fail to deposit into any Fund created by this Ordinance the full amounts required, amounts equivalent to such deficiencies shall be set apart and paid into said Funds from the first available and unallocated pledged revenues for the following month or months, and such payments shall be in addition to the amounts otherwise required to be paid into said Funds during such month or months. To the extent necessary, the Issuer shall increase the rates and charges for services of the Utility System to make up for any such deficiencies. Section 17. EXCESS REVENUES. The revenues pledged hereunder, in excess of those necessary to establish and maintain the Funds as required in this Ordinance, or as hereafter may be required in connection with the issuance of Additional Bonds, may be used for any lawful purpose. Section 18. SECURITY FOR FUNDS, All Funds created by this Ordinance shall be secured in the manner and to the fullest extent permitted or required by law for the security of public funds, and such Funds shall be used only for the purposes and in the manner permitted or required by this Ordinance. Section 19. ADDITIONAL BONDS. The Issuer reserves the right to issue additional parity revenue bonds, to be known as Additional Bonds, which when issued and delivered, shall be payable from and secured by a lien on and pledge of the same revenues as those securing the Bonds, and be on a parity with the Bonds and all outstanding Additional Bonds, or any bonds issued to refund same, and the Bonds and all Additional Bonds shall in all respects be on a parity and of equal dignity. The Additional Bonds may be issued in one or more installments or series, provided, however, that no installment or series of Additional Bonds shall be issued unless: (a) A certificate is executed by the Mayor and City Secretary of said Issuer to the effect that no (default exists in connection with any of the covenants or requirements of the ordinance or ordinances authorizing the issuance of all then outstanding Bonds and Additional Bonds; (b) A certificate is executed by the Mayor and City Secretary of said Issuer to the effect that the Interest and Sinking Fund and the Reserve Fund each maintain the amount then required to be on deposit therein, (c) A certificate is executed by a Certified Public Accountant to the effect that, in his opinion, the Net Earnings of the Utility System, either for the last complete fiscal year of the Issuer, or for any twelve consecutive calendar month period ending not more than ninety days prior to the passage of the ordinance authorizing the issuance of such Additional Bonds, were at least 1.25 times the average annual principal and interest requirements for all then outstanding Bonds and Additional Bonds, and for the installment or series of Additional Bonds then proposed to be issued. The term "Net Earnings" as used in this subsection (c) shall mean the gross revenues of the Utility System after deducting the expenses of operation and maintenance but not deducting depreciation, bond interest or expenditures which under standard accounting practice should be charged to capital expenditures. (d) The Additional Bonds are scheduled to mature only on May 15, and the interest thereon is scheduled to be paid only on November 15 and May 15. (e) The ordinance authorizing the issuance of such installment or series of Additional Bonds provides that the aggregate amount to be accumulated and maintained in the Reserve Fund shall be increased by an additional amount not less than the average annual principal and interest requirements for said Additional Bonds, and that such additional amount shall be so accumulated within sixty-one months from the date of the Additional Bonds by the deposit in the Reserve Fund of the necessary amount in equal monthly installments; provided, however, that the aggregate amount to be accumulated in the Reserve Fund shall never be required to exceed the average annual principal and interest requirements for all then outstanding Bonds and Additional Bonds; (f) All calculations of average annual principal and interest requirements made pursuant to this Section are made as of and from the date of the Additional Bonds then proposed to be issued. Section 20. MAINTENANCE AND OPERATION; INSURANCE. While any of the Bonds or Additional Bonds are outstanding the Issuer covenants and agrees to maintain the Utility System in good condition and operate the same in an efficient manner and at reasonable expense, and to maintain insurance on the Utility System, for the benefit of the holder or holders of the Bonds and Additional Bonds, of a kind and in an amount which usually would be carried by private companies engaged in a similar type of business. Nothing in this Ordinance shall be construed as requiring the Issuer to expend any funds which are derived from sources other than the Utility System, but nothing herein shall be construed as preventing the Issuer from doing so. �►Jlc� Section 21. ACCOUNTS AND FISCAL YEAR. The Issuer shall keep proper books of records and accounts, separate from all other records and accounts of the Issuer, in which complete and correct entries shall be made of all transactions relating to the Utility System, and shall have said books audited once each fiscal year by a certified public accountant. The Issuer agrees to operate the Utility System and keep its books of records and accounts pertaining thereto on the basis of its current fiscal year; provided, however, that the City Council may change such Fiscal year by ordinance duly passed, and if such change is deemed necessary by the City Council. Section 22. ACCOUNTING REPORTS, Within ninety days after the close of each fiscal year hereafter., the Issuer will furnish, without cost, to any holder of any outstanding Bonds or Additional Bonds who may so request, a signed or certified copy of a report by a Certified Public Accountant, covering the next preceding fiscal year, showing the following information: (a) A detailed statement of all gross revenues of the Utility System and all expenses of operation and maintenance thereof for said fiscal year, (b) Balance sheet as of the end of said fiscal year; (c) Accountant's comment regarding the manner in which the Issuer has complied with the requirements of this Ordinance and his recommendations, if any, for any changes or improvements in the operation of the Utility System, (d) List of insurance policies in force at the end of said fiscal year, showing, as to each policy, the name of the insurer, and the expiration date, (e) The number of properties connected with the water system, sewer system and electric system, and the gross revenues from the Utility System for said fiscal year. Section 23. INSPECTION. Any holder or holders of any Bonds or Additional Bonds shall have the right at all reasonable times to inspect the Utility System and all records, accounts, and data of the Issuer relating thereto. Section 24. SPECIAL COVENANTS. The Issuer further covenants as follows: (a) That other than for the payment of the Bonds herein authorized, the revenues pledged hereunder have not in any manner been pledged to the payment of any debt or obligation of the Issuer or the Utility System. (b) That while any of the Bonds or Additional Bonds are outstanding, the Issuer will not sell or encumber the Utility System or any substantial part thereof, and that, with the exception of the Additional Bonds expressly permitted by this Ordinance to be issued, it will not encumber the revenues pledged hereunder unless such encumbrance is made junior and subordinate in all respects to the Bonds and Additional Bonds and all liens and pledges in connection therewith. 24 (c) That no free service of the Utility System shall be allowed, and should the Issuer or any of its agencies or instrumentalities make use of the services and facilities of the Utility System, payment of the reasonable value thereof shall be made by the Issuer out of funds from sources other than the revenues and income of the Utility System. (d) That to the extent it legally may, the Issuer further covenants and agrees that while any of the Bonds or Additional Bonds are outstanding, no franchise shall be granted for the installation or operation of any competing water system, sewer system or electric system; that the Issuer will prohibit the operation of any such competing system; and the operation of any such competing system is hereby prohibited. Section 25. BONDS ARE SPECIAL OBLIGATIONS, The Bonds and Additional Bonds shall be special obligations of the Issuer payable solely from the pledged Net Revenues, and the holder or holders thereof shall never have the right to demand payment thereof out of funds raised or to be raised by taxation. Section 26. DEFEASANCE OF BONDS. (a) Any Bond and the interest thereon shall be deemed to be paid, retired, and no longer outstanding (a "Defeased Bond") within the meaning of this Ordinance, except to the extent provided in subsection (d) of this Section, when payment of the principal of such Bond, plus interest thereon to the due date (whether such due date be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption), or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar for such payment (1) lawful money of the United States of America sufficient to make such payment or (2) Government Obligations which mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to provide for such payment, and when proper arrangements have been made by the Issuer with the Paying Agent/Registrar for the payment of its services until all Defeased Bonds shall have become due and payable. At such time as a Bond shall be deemed to be a Defeased Bond hereunder, as aforesaid, such Bond and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, revenue pledged as provided in this Ordinance, and such principal and interest shall be payable solely from such money or Government Obligations. (b) Any moneys on deposited with the Paying Agent/Registrar may at the written direction of the Issuer also be invested in Government Obligations, maturing in the amounts and times as hereinbefore set forth, and all income from such Government Obligations received by the Paying Agent/Registrar which is not required for the payment of the Bonds and interest thereon, with A espect to which such money has been so deposited, shall be turned over to the Issuer, or deposited as directed in writing by the Issuer. (c) The term "Government Obligations" as used in this Section shall mean direct obligations of the United States of America, including obligations the principal of and interest on 25 which are unconditionally guaranteed by the United States of America, which may be United States Treasury obligations such as its State and Local Government Series, which may be in book - entry form. (d) Until all Defeased Bonds shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Bonds the same as if they had not been defeased, and the Issuer shall make proper arrangements to provide and pay for such services as required by this Ordinance. Section 27. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED BONDS. (a) Replacement Bonds. In the event any outstanding Bond is damaged, mutilated, lost, stolen, or destroyed, the Paying Agent/Registrar shall cause to be printed, executed, and delivered, a new bond of the same principal amount, maturity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Bond, in replacement for such Bond in the manner hereinafter provided. (b) Application for Replacement Bonds. Application for replacement of damaged, mutilated, lost, stolen, or destroyed Bonds shall be made by the registered owner thereof to the Paying Agent/Registrar. In every case of loss, theft, or destruction of a Bond, the registered owner applying for a replacement bond shall furnish to the Issuer and to the Paying Agent/Registrar such security or indemnity as may be required by them to save each of them harmless from any loss or damage with respect thereto. Also, in every case of loss, theft, or destruction of a Bond, the registered owner shall furnish to the Issuer and to the Paying Agent/Registrar evidence to their satisfaction of the loss, theft, or destruction of such Bond, as the case may be. In every case of damage or mutilation of a Bond, the registered owner shall surrender to the Paying Agent/Registrar for cancellation the Bond so damaged or mutilated. (c) No Default Occurred. Notwithstanding the foregoing provisions of this Section, in the event any such Bond shall have matured, and no default has occurred which is then continuing in the payment of the principal of, redemption premium, if any, or interest on the Bond, the Issuer may authorize the payment of the same (without surrender thereof except in the case of a damaged or mutilated Bond) instead of issuing a replacement Bond, provided security or indemnity is furnished as above provided in this Section. (d) Charge for Issuing_Replacement Bonds. Prior to the issuance of any replacement bond, the Paying Agent/Registrar shall charge the registered owner of such Bond with all legal, printing, and other expenses in connection therewith. Every replacement bond issued pursuant to the provisions of this Section by virtue of the fact that any Bond is lost, stolen, or destroyed shall constitute a contractual obligation of the Issuer whether or not the lost, stolen, or destroyed Bond shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Ordinance equally and proportionately with any and all other Bonds duly issued under this Ordinance. 26 (e) Authority for Issuing Replacement Bonds. In accordance with Section 6 of Vernon's Ann. Tex. Civ. St. Art. 717k-6, this Section of this Ordinance shall constitute authority for the issuance of any such replacement bond without necessity of further action by the governing body A the Issuer or any other body or person, and the duty of the replacement of such bonds is hereby authorized and imposed upon the Paying Agent/Registrar, and the Paying Agent/Registrar shall authenticate and deliver such bonds in the form and manner and with the effect, as provided in Section 4(d) of this Ordinance for Bonds issued in conversion and exchange for other Bonds. Section 28. CUSTODY, APPROVAL, AND REGISTRATION OF BONDS; BOND COUNSEL'S OPINION; and CUSIP NUMBERS. The Mayor of the Issuer is hereby authorized to have control of the Initial Bond issued hereunder and all necessary records and proceedings per- taining to the Initial Bond pending delivery and investigation, examination, and approval by the Attorney General of the State of Texas, and its registration by the Comptroller of Public Accounts A the State of Texas. Upon registration of the Initial Bond said Comptroller of Public Accounts (or a deputy designated in writing to act for said Comptroller) shall manually sign the Comptroller's Registration Certificate on the Initial Bond, and the seal of said Comptroller shall be impressed, or placed in facsimile, on the Initial Bond. The approving legal opinion of the Issuer's Bond Counsel and the assigned CUSIP numbers may, at the option of the Issuer, be printed on the Initial Bond or on any Bonds issued and delivered in conversion of and exchange or replacement of any Bond, but neither shall have any legal effect, and shall be solely for the convenience and information of the registered owners of the Bonds. Section 29. COVENANTS REGARDING TAX EXEMPTION. The Issuer covenants to refrain from taking any action which would adversely affect, and to take any required action to ensure, the treatment of the Bonds as obligations described in Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Issuer covenants as follows: (a) to take any action to assure that no more than 10 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use, as defined in Section 141(b)(6) of the Code or, if more than 10 percent A the proceeds or the projects financed therewith are so used, such amounts, whether or not received by the Issuer, with respect to such private business use, do not, under the terms of this Ordinance, or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of Section 141(b)(2) of the Code; (b) to take any action to assure that in the event that the "private business use" described in subsection (a) hereof exceeds 5 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used for a "private business use" which is "related" and not "disproportionate," within the meaning of Section 141(b)(3) of the Code, to the governmental use; 27 (c) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of Section 141(c) of the Codes (d) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of Section 141(b) of the Code, (e) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of Section 149(b) of the Code; (f) to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in Section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with -- (1) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less or, in the case of a refunding bond, for a period of 30 days or less until such proceeds are needed for the purpose for which the bonds are issued, (2) amounts invested in a bona side debt service fund, within the meaning of Section 1.1484(b) of the Treasury Regulations, and (3) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Bonds; (g) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of Section 148 of the Code (relating to arbitrage) and, to the extent applicable, Section 149(d) of the Code (relating to advance refundings); and (h) to pay to the United States of America at least once during each live - year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of Section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under Section 148(f) of the Code. For the purposes of the foregoing (a) and (b), the Issuer understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Bonds. It is the understanding of the Issuer that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Bonds, the Issuer will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally -recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Bonds, the Issuer agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally -recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. In furtherance of such intention, the Issuer hereby authorizes and directs the Mayor of the Issuer to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Issuer, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. In order to facilitate compliance with the above covenant (h), a "Rebate Fund" is hereby established by the Issuer for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the bondholders. The Rebate Fund is established for the additional purpose of compliance with Section 148 of the Code. Section 30. DESIGNATION AS QUALIFIED TAX-EXEMPT OBLIGATIONS. The Issuer hereby designates the Bonds as "qualified tax-exempt obligations" as defined in Section 265(b)(3) of the Code. In furtherance of such designation, the Issuer represents, covenants and warrants the following. (a) that during the calendar year in which the Bonds are issued, the Issuer (including any subordinate entities) has not designated nor will designate obligations, which when aggregated with the Bonds, will result in more than $10,000,000 of "qualified tax-exempt obligations" being issued; and (b) that the Issuer reasonably anticipates that the amount of tax-ex- empt obligations issued, during the calendar year in which the Bonds are issued, by the Issuer (or any subordinate entities) will not exceed $10,000,000. Section 31. SALE OF BONDS. The Bonds is hereby sold and shall be delivered to the TEXAS WATER DEVELOPMENT BOARD for cash for the principal amount thereof. Section 32. APPROVAL OF ESCROW AGREEMENT AND TRANSFER OF FUNDS. The Mayor of the Issuer is hereby authorized and directed to execute and deliver and the City Secretary of the Issuer is hereby authorized and directed to attest an Escrow Agreement in substantially the form attached hereto as Exhibit A. The Issuer shall cause $ to be deposited into an Escrow Account created by the Escrow Agreement pending authorization from the Development Fund Manager on behalf of the Texas Water Development Board. Section 33. CONSTRUCTION FUND. There shall be established a Constrution Fund with the Issuer's depository bank and upon the delivery of the purchase price for such Bonds, $ initially shall be deposited into this Construction Fund. The cost of issuance of the Bonds, being legal, fiscal and engineering fees, may be paid from this Fund. There shall 29 be deposited into the Construction Fund all amounts released from the Escrow Account created by the Escrow Agreement as provided in Section 32 hereof and in Section 2 of the Escrow Agreement. The cost of the construction of the sewer system improvements will be paid from this Fund upon directionof the City Council of the Issuer. All interest and profits from investments made with moneys in the Construction Fund shall remain on deposit in the Construction Fund as a part thereof. After compeltion of the payment of all costs of the construction of the sewer system improvements, any residue remaining in the Construction Fund shall be applied in accordance with Section 35 hereof. Section 34. FINAL ACCOUNTING. That the Issuer shall render a final accounting to the Texas Water Development Board in reference to the total cost incurred by the Issuer for Sewer System improvements together with a copy of "as built" plans of the project upon completion. Section 35. SURPLUS BOND PROCEEDS. That the Issuer shall use any surplus proceeds from the Bonds remaining after completion of the Utility System improvements, to redeem in inverse annual order of maturity, the Bonds owned by the Texas Water Development Board. Section 36. ANNUAL AND MONTHLY REPORTS. That monthly operating statements and annual audits of the Issuer shall be delivered to the Texas Water Development Board as long as the State of Texas owns any of the Bonds, and that the monthly operating statement shall be in such detail as requested by the Development Fund Manager of the Texas Water Development Board until this requirement is waived by the Development Fund Manager. Section 37. COMPLIANCE WITH THE TEXAS WATER DEVELOPMENT BOARD'S RULES AND REGULATIONS. That the Issuer covenants to comply with the rules and regulations of the Texas Water Development Board, and to maintain insurance on the Issuer's Utility System in that amount required by the Texas Water Development Board. Section 38. FINDING. It is hereby officially found and determined that said meeting was open to the public, and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. 30 [i ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of March 15, 1996 ("Escrow Agreement"), together with any amendments or supplements hereto, is entered into by and between the City of Sanger, Texas (the "Issuer") and Gainesville National Bank, Sanger, Texas, as Escrow Agent (the "Bank") together with any successor in such capacity. WITNESSETHI WHEREAS, the Issuer has authorized and sold to the Texas Water Development Board, _ City of Sanger, Texas Utility System Revenue Bonds, Series 1996, in the aggregate principal amount of $1,060,000 (the "Bonds"); and WHEREAS, the Texas Water Development Board is initially depositing $ of the Bonds proceeds to be held by the Escrow Agent until the Development Fund Manager, or authorized representative, of the Texas Water Development Board, on behalf of the Texas Water Development Board, authorizes in written form the release of such funds from the Escrow Account into the Construction Fund as established with the Issuer pursuant to the Ordinance that authorized such Bonds; and WHEREAS, the Bank is located in the State of Texas, is a member of the Federal Deposit Insurance Corporation, and is otherwise qualified and empowered to enter into this Escrow Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein contained and in consideration of Ten Dollars ($10.00) duly paid by the Issuer to the Bank concurrently herewith, the receipt whereof is hereby acknowledged, and in order to secure the delivery of the Bonds, the parties hereto mutually undertake, promise and agree for themselves, their respective representatives, successors, and assigns, as follows: 1. That there is hereby deposited by the Issuer with the Bank, to be held in a special Escrow Account designated as ty of Sanger, Texas Utility System Revenue Bonds, Series 1996 Escrow Account ("Escrow Account"), the sum of $ from the sale of the Bonds, which sum will be held therein until the Development Fund Manager authorizes the release of such monies from the Escrow Account as provided in Section 2 hereof. 2. That the Bank shall invest the monies in the Escrow Account for the benefit of the Issuer, as directed in writing by the Issuer, and any income made from such investments shall be deposited into the Escrow Account, and that the Development Fund Manager, or authorized representative, of the Texas Water Development Board, on behalf of the Texas Water Development Board, may authorize in written form the transfer of such monies from the Escrow Account into the Construction Fund. 3. That monies in this Escrow Account shall be secured in the same manner as all other public funds of the Issuer. 4. That upon notification of the approval of the release of those monies from the Escrow Account by the Development Fund Manager, or authorized representative, of the Texas Water Development Board, the Bank shall transfer such monies together with any interest earned on such account as directed by the Issuer. 5. That the Bank shall not be liable for any act done or step taken or omitted by it or any mistake of fact or law, except for its negligence or default or failure in the performance of any obligation imposed upon it hereunder. The Bank shall not be responsible in any manner for any proceedings in connection with the Bonds or any recitation contained in the Bonds. 6. That this Escrow Agreement shall expire upon transfer of the funds in the Escrow Account to the Issuer. IN WITNESS WHEREOF, the Mayor of said Issuer signed this instrument on behalf of said Issuer, and the Issuer's official seal is affixed hereto, and the Mayor's signature is attested to by the City Secretary of the Issuer and has caused this instrument to be signed by the Bank in its corporate name by its President, or one of its Vice Presidents, and sealed with its corporate seal, and attested to by a Vice President, or Cashier, all as of the 15th day of March, 1996. Mayor City of Sanger, Texas City Secretary City of Sanger, Texas C�T.1J Gainesville National Bank Sanger, Texas Vice President ATTEST: Title: BANK SEAL CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996 $1,060,000 RES 02-96 ORD 02-96 RES 02-96 CERTIFICATE FOR RESOLUTION THE STATE OF TEXAS § COUNTY OF DENTON § CITY OF SANGER § We, the undersigned officers of said City, hereby certify as follows: 1. The City Council of said City convened in REGULAR MEETING ON THE 18TH DAY OF DECEMBER, 1995, at the City Hall, and the roll was called of the duly constituted officers and members of said City Council, to -wit: Nel Armstrong, Mayor Margie Braxton Joe Bell Jack Richardson Glenn Ervin Tommy Kincaid Rosalie Chavez, City Secretary Councilwoman and all of said persons were present, except the following absentees: Braxton thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written RESOLUTION REQUESTING FINANCIAL ASSISTANCE FROM THE TEXAS WATER DEVELOPMENT BOARD was duly introduced for the consideration of said City Council and read in full. It was then duly moved and seconded that said Resolution be passed; and, after due discussion, said motion carrying with it the passage of said Resolution, prevailed and carried by the following vote. AYES: All members of said City Council shown present above voted "Ave" NOES: None. CERTIFICATE FOR RESOLUTION THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER We, the undersigned officers of said Ciry, hereby certify as follows: 1. The City Council of said City convened in REGULAR MEETING ON THE STH DAY OF FEBRUARY, 1996, at the City Hall, and the roll was called of the duly constituted officers and members of said City Council, to -wit: Nel Armstrong, Mayor Tommy Kincaid, Mayor Pro Tem Joe Bell Margie C. Braxton Glen Ervin Jack Richardson Rosalie Chavez, Ciry Secretary and all of said persons were present, except the following absentees: Margie B r a x t o � thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written RESOLUTION DIRECTING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CITY OF BANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996 was duly introduced for the consideration of said Ciry Council and read in full. It was then duly moved and seconded that said Resolution be passed; and, after due discussion, said motion carrying with it the passage of said Resolution, prevailed and carried by the following vote: AYES: All members of said City Council shown present above voted "Aye" NOES: None. L. That a true, full and correct copy of the aforesaid Resolution passed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Resolution has been duly recorded in said City Council's minutes of said Meeting; that the above and foregoing paragraph is a true, full and correct excerpt from said City Council's minutes of said Meeting pertaining to the passage of said Resolution; that the persons named in the above and Foregoing paragraph are the duly chosen, qualified and acting officers and members of said City Council as indicated therein; that each of the officers and members of said City Council was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Resolution would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose, and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. 3. That the Mayor of said City has approved and hereby approves the aforesaid Resolution; that the Mayor and the City Secretary of said City have duly signed said Resolution; and that the Mayor and the City Secretary of said City hereby declare that their signing of this Certificate shall constitute the signing of the attached and following copy of said Resolution for all purposes. SIGNED AND SEALED the Sth day of February, 1996. Mayor SEAL RESOLUTION DIRECTING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CITY OF BANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996, IN THE PRINCIPAL AMOUNT OF $1,060,000 THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER WHEREAS, it is deemed advisable by the City Council to authorize the publication of notice of intention to issue Utility System Revenue Bonds; and WHEREAS, it is hereby officially found and determined that the meeting at which this Resolution was passed, was open to the public and public notice of the time, place, and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF BANGER: 1. That attached hereto is a form of the notice of intention to issue Utility System Revenue Bonds, the form and substance of which is hereby adopted and approved. 2. That the Ciry Secretary shall cause said notice to be published in substantially the form attached hereto, in a newspaper of general circulation in said City, and published in said City, on the same day in each of two consecutive weeks, the date of the first publication thereof to be at least 14 days prior to the time set for the issuance of such revenue bonds shown in said notice. 3. That this Resolution shall become effective immediately upon adoption. CITY OF SANGER, TEXAS NOTICE OF INTENTION TO ISSUE UTILITY SYSTEM REVENUE BONDS, SERIES 1996, IN THE PRINCIPAL AMOUNT OF $190609000 Notice is hereby given that the City Council of the City of Sanger, Texas, intends to consider for passage, at a Regular Meeting to be held at 7:00 P.M. on February 269 19969 at Ciry Hall, Sanger, Texas, an Ordinance authorizing the issuance, sale and delivery of an issue of bonds to be designated as "City of Sanger, Texas Utility System Revenue Bonds, Series 1996", for the purpose of improving and extending the combined Waterworks, Sewer and Electric System, not to exceed $1,060,000, with such bonds to be payable from and secured by a first lien on and pledge of the Net Revenues of the City's Utility System, being the City's Waterworks, Sewer and Electric System, all as will be further described, defined and provided in the aforesaid Ordinance. Said bonds will bear interest at maximum rates not to exceed 15 %per annum, will be scheduled to mature serially within a maximum of not to exceed 30 years from their date, and will be subject to redemption prior to maturity, and will have such other and further characteristics as will be provided in the aforesaid Ordinance. Said bonds will be authorized, issued, sold and delivered pursuant to Articles 1111 through 1118, V.A.T.C.S., and other applicable laws. Nel Armstrong, Mayor 2. That a true, full and correct copy of the aforesaid Resolution passed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Resolution has been duly recorded in said City Council's minutes of said Meeting; that the above and foregoing paragraph is a true, full and correct excerpt from said City Council's minutes of said Meeting pertaining to the passage of said Resolution; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of said City Council as indicated therein; that each of the officers and members of said City Council was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Resolution would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose, and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. 3. That the Mayor of said City has approved and hereby approves the aforesaid Resolution; that the Mayor and the City Secretary of said City have duly signed said Resolution; and that the Mayor and the City Secretary of said City hereby declare that their signing of this Certificate shall constitute the signing of the attached and following copy of said Resolution for all purposes. SIGNED AND SEALED the 18th day of December, 1995. Mayor SEAL RESOLUTION REQUESTING FINANCIAL ASSISTANCE FROM THE TEXAS WATER DEVELOPMENT BOARD THE STATE OF TEXAS § COUNTY OF DENTON § CITY OF SANGER § WHEREAS, the City of Sanger, Texas (the "City") deems it necessary to apply to the Texas Water Development Board for financial assistance for improvements and extensions to the City's Sewer System; and WHEREAS, in accordance with the rules and regulations of the Texas Water Development Board, which governs the procedures of making such application, the governing body of the City is required to adopt a resolution to accompany such application. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SANGER: 1. That the Texas Water Development Board is hereby requested to grant financial assistance to the City for improvements and extensions to the City's Sewer System, all as further described in the application for financial assistance. 2. That the Mayor of the City is hereby authorized to execute and submit to the Texas Water Development Board the application for such financial assistance; and said Mayor, together with bond counsel, financial advisor, and consulting engineers named in such application, are hereby authorized to appear before the Texas Water Development Board in support of such application and Project. 3. That said Mayor is further specifically authorized to make the required assurances to the Texas Water Development Board in accordance with the rules, regulations, and policies of the Texas Water Development Board. 4. That it is hereby found and determined that the City cannot reasonably finance the proposed Project without financial assistance in the amount requested, and that the nature of the improvements proposed to be financed constitute an emergency condition, and immediate consideration of this application is requested. 5. That a certified copy of this Resolution shall be attached to the application for financial assistance herein authorized to be prepared and submitted to the Texas Water Development Board. AFFIDAVIT OF COMPLIANCE THE STATE OF TEXAS § CITY OF SANGER § BEFORE ME, the undersigned Notary Public in and for Denton County, Texas, on this day CAME AND PERSONALLY APPEARED Nel Armstrong, Mayor, of the City of Sanger, Texas (the "City"), acting for and in behalf of the City, pursuant to and by virtue of the provisions of a Resolution adopted by the City Council of the City on the 18th day of December, 1995 (the "Resolution"), a copy of such Resolution being annexed hereto and made a part thereof, who, having by me duly sworn, says upon oath that in accordance with the said Resolution and pursuant thereto, he, the said Mayor, has assured and does hereby assure the Texas Water Development Board that the City is authorized and empowered to comply with the required conditions for the participation of Water Development Funds of the State for improvements and extensions to the City's Sewer System (the "Project"), which Project will provide benefits to the residents of the City, the State of Texas, and other interests, and that the City will participate in the said Project in accordance with all laws of the State of Texas, and all rules, regulations, and policies of the Texas Water Development Board, and specifically further, assures the Texas Water Development Board that: (1) the facts and representations set forth in the application for financial assistance authorized by the Resolution (the "application") are and will be true and correct, to the best of his knowledge and belief; (2) if such financial assistance is granted, the City will cause the Project to be constructed in accordance with the representations made to the Texas Water Development Board in said application and accompanying exhibits; (3) the City will hold and save the State of Texas harmless from any damages due to construction and maintenance of the Project; and (4) the City will tender payment pursuant to any contract for the construction of the Project in not to exceed 90 % of the amount due at the time of such payment, and further that upon completion of said contract the remaining 10 % due thereunder shall not be paid by the City from any funds available, without regard to the source thereof, unless such final payment of 10 % of the contract costs shall be specifically approved by the Texas Water Development Board. ZLZ d� Mayor, City of Sanger, Texas SUBSCRIBED AND SWORN TO BEFORE ME this I i'�day of December, 1995, Notary Public in and f� Denton County, Texas CERTIFICATE FOR RESOLUTION THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER We, the undersigned officers of said Ciry, hereby certify as follows: 1. The City Council of said City convened in REGULAR MEETING ON THE STH DAY OF FEBRUARY, 1996, at the City Hall, and the roll was called of the duly constituted officers and members of said CityCouncil, to -wit: Nel Armstrong, Mayor Tommy Kincaid, Mayor Pro Tem Joe Bell Margie C. Braxton Glen Ervin Jack Richardson Rosalie Chavez, Ciry Secretary and all of said persons were present, except the following absentees: Marcie Braxton ,thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written RESOLUTION DIRECTING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996 was duly introduced for the consideration of said City Council and read in full. It was then duly moved and seconded that said Resolution be passed; and, after due discussion, said motion carrying with it the passage of said Resolution, prevailed and carried by the following vote: AYES: All members of said City Council shown present above voted "Aye" NOES: None. 2. That a true, full and correct copy of the aforesaid Resolution passed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Resolution has been duly recorded in said City Council's minutes of said Meeting; that the above and foregoing paragraph is a true, full and correct excerpt from said City Council's minutes of said Meeting pertaining to the passage of said Resolution; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of said City Council as indicated therein; that each of the officers and members of said City Council was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Resolution would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose, and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. 3. That the Mayor of said City has approved and hereby approves the aforesaid Resolution; that the Mayor and the City Secretary of said City have duly signed said Resolution; and that the Mayor and the City Secretary of said City hereby declare that their signing of this Certificate shall constitute the signing of the attached and following copy of said Resolution for all purposes. SIGNED AND SEALED the Sth day of February, 1996. C/� at-q. a c5z/ City Secretary SEAL Mayor RESOLUTION DIRECTING PUBLICATION OF NOTICE OF INTENTION TO ISSUE CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996, IN THE PRINCIPAL AMOUNT OF $1,0609000 THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER WHEREAS, it is deemed advisable by the City Council to authorize the publication of notice of intention to issue Utility System Revenue Bonds; and WHEREAS, it is hereby officially found and determined that the meeting at which this Resolution was passed, was open to the public and public notice of the time, place, and purpose A said meeting was given, all as required by Chapter 551, Texas Government Code. THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SANGER: l . That attached hereto is a form of the notice of intention to issue Utility System Revenue Bonds, the form and substance of which is hereby adopted and approved. 2. That the City Secretary shall cause said notice to be published in substantially the form attached hereto, in a newspaper of general circulation in said City, and published in said City, on the same day in each of two consecutive weeks, the date of the first publication thereof to be at least 14 days prior to the time set for the issuance of such revenue bonds shown in said notice. 3. That this Resolution shall become effective immediately upon adoption. CITY OF SANGER, TEXAS NOTICE OF INTENTION TO ISSUE UTILITY SYSTEM REVENUE BONDS, SERIES 1996, IN THE PRINCIPAL AMOUNT OF $1,060,000 Notice is hereby given that the City Council of the City %J Sanger, Texas, intends to consider for passage, at a Regular Meeting to be held at 7:00 P.M. on February 269 19961 at Ciry Hall, Sanger, Texas, an Ordinance authorizing the issuance, sale and delivery of an issue of bonds to be designated as "Ciry of Sanger, Texas Utility System Revenue Bonds, Series 1996", for the purpose of improving and extending the combined Waterworks, Sewer and Electric System, not to exceed $1,060,000, with such bonds to be payable from and secured by a first lien on and pledge of the Net Revenues of the City's Utility System, being the Ciry's Waterworks, Sewer and Electric System, all as will be further described, defined and provided in the aforesaid Ordinance. Said bonds will bear interest at maximum rates not to exceed 15 %per annum, will be scheduled to mature serially within a maximum of not to exceed 30 years from their date, and will be subject to redemption prior to maturity, and will have such other and further characteristics as will be provided in the aforesaid Ordinance. Said bonds will be authorized, issued, sold and delivered pursuant to Articles 1111 through 1118, V.A.T.C.S., and other applicable laws. Nel Armstrong, Mayor CITY OF BANGER, TEXAS NOTICE OF INTENTION TO ISSUE UTILITY SYSTEM REVENUE BONDS; REVE SERIES 1996, IN THE PRINCIpAL AMOUNT $1,REVE0 Notice is hereby given that the City Council of the City of Sanger, Texas, intends to consider for passage, at a Regular Meeting to be held at 7:00 P.M. on February 26, 1996, at City Hall, Sanger, Texas, an Ordinance authorizing the issuance, sale and delivery of an issue of bonds to be designated as "City of Sanger, Texas Utility System Revenue Bonds, Series 1996", for the purpose of improving and extending the combined Waterworks, Sewer and Electric System, not to exceed $1,060,000, with such bonds to be payable from and secured by a first lien on and pledge of the Net Revenues of the City's Utility System, being the City's Waterworks, Sewer and Electric System, all as will be further described, defined and provided in the aforesaid Ordinance. Said bonds will bear interest at maximum rates not to exceed 15 % per annum, will be scheduled to mature serially within a maximum of not to exceed 30 years from their date, and will be subject to redemption prior to maturity, and will have such other and further characteristics as will be provided in the aforesaid Ordinance. Said bonds will be authorized, issued, sold and delivered pursuant to Articles 1111 through 1118, V.A.T.C.S., and other applicable laws. Nel Armstrong, Mayor — F8/21c AFFIDAVIT OF PUBLICATION THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER BEFORE ME, a notary public in and for the above named County, on this day personally appeared the person whose name is subscribed below, who, having been duly sworn, says upon oath that he or she is a duly authorized officer or employee of the the SANGER COURIER, which is a newspaper of general circulation in the above named County, devoting not- less than 25 % of its total column lineage to the carrying of items of general interest, published not less frequently than once each week, entered as second-class postal matter in the county where published, and having been published regularly and continuously for not less than 12 months prior to the making of any publication; and that a true and correct copy of the NOTICE OF INTENTION TO ISSUE UTILITY SYSTEM REVENUE BONDS, SERIES 1996, a clipping of which is attached to this Affidavit, was published in said Newspaper on the following dates: February 8, 1996 February 15, 1996 Authorized Officer or SUBSCRIBED AND SWORN TO BEFORE ME on the � � day of � , , 1996. lUUF Notary PU is CHERYL A, KING $ NOTAR'Y i�U'BLIC ,, S'�ATL O1i TEXAS My Commission Expires 5=15.99 CERTIFICATE FOR ORDINANCE THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER We, the undersigned officers of said City, hereby certify as follows: . 1. The City Council of said City convened in SPECIAL MEETING ON THE 26TH DAY OF FEBRUARY, 1996, at the City Hall, and the roll was called of the duly constituted officers and members of said City Council, to -wit: Nel Armstrong, Mayor Tommy Kincaid, Mayor Pro Tem Joe Bell Margie C. Braxton Glen Ervin Jack Richardson Rosalie Chavez, City Secretary and all of said persons were present, except the following absentees: ERVIN, thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written ORDINANCE AUTHORIZING THE ISSUANCE OF UTILITY SYSTEM REVENUE BONDS, SERIES 1996, AND OTHER MATTERS RELATED THERETO was duly introduced for the consideration of said City Council and read in full. It was then duly moved and seconded that said Ordinancebe passed; and, after due discussion, said motion carrying with it the passage of said Resolution, prevailed and carried by the following vote: AYES: All members of said City Council shown present above voted "Aye". NOES: None. 2. That a true, full and correct copy of the aforesaid Orumancepassed at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; that said Ordinancehas been duly recorded in said City Council's minutes of said Meeting; that the above and foregoing paragraph is a true, full and correct excerpt from said City Council's minutes of said Meeting pertaining to the passage of said Resolution; that the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of said City Council as indicated therein, that each of the officers and members of said City Council was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Ordinancewould be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose, and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. 3. That the Mayor of said City has approved and hereby approves the aforesaid Resolution; that the Mayor and the City Secretary of said City have duly signed said Resolution; and that the Mayor and the City Secretary of said City hereby declare that their signing of this Certificate shall constitute the signing of the attached and following copy of said Ordinance for all purposes. City SIGNED AND SEALED the 26th day of February, 1996. Mayor ORDINANCE AUTHORIZING THE ISSUANCE OF UTILITY SYSTEM REVENUE BONDS, SERIES 1996, AND OTHER MATTERS RELATED THERETO THE STATE OF TEXAS § COUNTY OF DENTON § CITY OF SANGER § WHEREAS, the following Utility System Revenue Bonds of the City of Sanger, Texas (the "Issuer") are presently outstanding: City of Sanger, Texas Utility System Refunding and Improvement Revenue Bonds, Series 1991, dated December 1, 1991, outstanding in the aggregate principal amount of $2,155,000 ("Series 1991 Bonds"); and WHEREAS, the Ciry Council has heretofore, on the Sth day of February, 1996, adopted a resolution authorizing and directing the City Secretary to give notice of intention to issue revenue bonds; and WHEREAS, said notice has been duly published in the Sanger Courier, which is a newspaper of general circulation in said City, in its issues of February 8, 1996 and February 15, 1996; and WHEREAS, the Ciry received no petition from the qualified electors of the City protesting the issuance of such bonds; and WHEREAS, the bonds hereinafter authorized and designated are to be issued and delivered pursuant to Article 2368a, V.A.T.C.S. and Articles 1111 through 1118; and WHEREAS, it is hereby officially found and determined that public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF SANGER, THAT: Section 1. AMOUNT AND PURPOSE OF THE BONDS. The bond or bonds of the Ciry of Sanger, Texas (the "Issuer") are hereby authorized to be issued and delivered in the aggregate principal amount of $1,060,000 for the purpose of improving and extending the Sewer System. Section 2. DESIGNATION OF THE BONDS. Each bond issued pursuant to this Ordinance shall be designated: "CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BOND, SERIES 1996", and initially there shall be issued, sold, and delivered hereunder a single 11 fully registered bond, without interest coupons, payable in installments of principal (the "Initial Bond"), but the Initial Bond may be assigned and transferred and/or converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, having serial maturities, and in the denomination or denominations of $5,000 or any integral multiple of $5,000, all in the manner hereinafter provided. The term "Bonds" as used in this Ordinance shall mean and include collectively the Initial Bond and all substitute bonds exchanged therefor, as well as all other substitute bonds and replacement bonds issued pursuant hereto, and the term "Bond" shall mean any of the Bonds. Section 3. INITIAL DATE, DENOMINATION, NUMBER, MATURITIES, INITIAL REGISTERED OWNER, AND CHARACTERISTICS OF THE INITIAL BOND. (a) The Initial Bond is hereby authorized to be issued, sold, and delivered hereunder as a single fully registered Bond, without interest coupons, dated March 15, 1996, in the denomination and aggregate principal amount of $1,060,000, numbered R4, payable in annual installments of principal to the initial registered owner thereof, to -wit: TEXAS WATER DEVELOPMENT BOARD, or to the registered assignee or assignees of said Bond or any portion or portions thereof (in each case, the "registered owner"), with the annual installments of principal of the Initial Bond to be payable on the dates, respectively, and in the principal amounts, respectively, stated in the FORM OF INITIAL BOND set forth in this Ordinance. (b) The Initial Bond (i) may be prepaid or redeemed prior to the respective scheduled due dates of installments of principal thereof, (ii) may be assigned and transferred, (in) may be converted and exchanged for other Bonds, (iv) shall have the characteristics, and (v) shall be signed and sealed, and the principal of and interest on the Initial Bond shall be payable, all as provided, and in the manner required or indicated, in the FORM OF INITIAL BOND set forth in this Ordinance. Section 4. INTEREST. The unpaid principal balance of the Initial Bond shall bear interest from the date of delivery of the Initial Bond, and will be calculated on the basis of a 360-day year of twelve 30-day months to the respective scheduled due dates, or to the respective dates of prepayment or redemption, of the installments of principal of the Initial Bond, and said interest shall be payable, all in the manner provided and at the rates and on the dates stated in the FORM OF INITIAL BOND set forth in this Ordinance. Section 5. FORM OF INITIAL BOND. The form of the Initial Bond, including the form of Registration Certificate of the Comptroller of Public Accounts of the State of Texas to be endorsed on the Initial Bond, shall be substantially as follows: NO. R-1 UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BOND SERIES 1996 $1,060,000 CITY OF SANGER, in DENTON COUNTY (the "Issuer"), being a political subdivision of the State of Texas, hereby promises to pay to TEXAS WATER DEVELOPMENT BOARD or to the registered assignee or assignees of this Bond or any portion or portions hereof (in each case, the "registered owner") the aggregate principal amount of ONE MILLION SIXTY THOUSAND DOLLARS in annual installments of principal due and payable on May 15 in each of the years, and in the respective principal amounts, as set forth in the following schedule: YEAR AMOUNT YEAR AMOUNT 1997 $20,000 2007 $50,000 1998 35,000 2008 55,000 1999 35,000 2009 60,000 2000 35,000 2010 609000 2001 409000 2011 65,000 2002 40,000 2012 709000 2003 459000 2013 70,000 2004 45,000 2014 75,000 2005 459000 2015 805000 2006 509000 2016 85,000 and to pay interest, from the date of delivery of this Bond (which date appears on the back hereof), on the balance of each such installment of principal, respectively, from time to time remaining unpaid, at the rates as follows: 3 maturity 19979 2.85 maturity 1998, 3.10 % maturity 1999, 3.30 % maturity 2000, 3.45 % maturity 2001, 3.55% maturity 2002, 3.7O % maturity 2003, 3.80% maturity 2004, 3.90 % maturity 2005, 4.00% maturity 2006, 4.10 % maturity 2007, 4.20% maturity 2008, 4.35 % maturity 2009, 4.45 % maturity 20109 4.55 maturity 2011, 4.60 % maturity 2012, 4.65 % maturity 2013, 4.70% maturity 2014, 4.70 % maturity 2015, 4.75 % maturity 2016, 4.75 % with said interest being payable on November 15, 1996 and semiannually on each May 15 and November 15 thereafter while this Bond or any portion hereof is outstanding and unpaid. THE INSTALLMENTS OF PRINCIPAL OF AND THE INTEREST ON this bond are payable in lawful money of the United States of America, without exchange or collection charges. The installments of principal and the interest on this Bond are payable to the registered owner hereof through the services of Texas Commerce Bank National Association, Dallas, Texas, which is the "Paying Agent/Registrar" for this Bond. Payment of all principal of and interest on this Bond shall be made by the Paying Agent/Registrar to the registered owner hereof on each principal and/or interest payment date by check or draft, dated as of such date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of this Bond (the "Bond Ordinance") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Paying Agent/Registrar by United States mail, first class postage prepaid, on each such principal and/or interest payment date, to the registered owner hereof, at the address of the regis- tered owner, as it appeared on the last business day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described, or by such other method acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner; however, if the Bond is owned by the Texas Water Development Board, there will be no charge to the Texas Water Development Board, The Issuer covenants with the registered owner of this Bond that on or before each principal and/or interest payment date for this Bond it will make available to the Paying Agent/Registrar, from the "Bond Fund" created by the Bond Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on this Bond, when due. IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. C� THIS BOND has been authorized in accordance with the Constitution and laws of the State of Texas, in the principal amount of $1,060,000 for the purpose of improving and extending the Sewer System. ON MAY 15, 2006, or any date thereafter, the unpaid installments of principal of this Bond may be prepaid or redeemed prior to their scheduled due dates, at the option of the Issuer, with funds derived from any available source, as a whole, or in part, and, if in part, the Issuer shall, in inverse order of annual maturity, select and designate the maturity, or maturities, and the amount that is to be redeemed, and if less than a whole maturity is to be redeemed, the Issuer shall direct the Paying Agent/Registrar to call by lot (provided that a portion of this Bond may be redeemed only in an integral multiple of $5,000), at a price equal to the principal amount to be so prepaid or redeemed, plus accrued interest to the date fixed for prepayment or redemption. AT LEAST 30 days prior to the date fixed for any such prepayment or redemption a written notice of such prepayment or redemption shall be mailed by the Paying Agent/Registrar to the registered owner hereof. By the date fixed for any such prepayment or redemption due provision shall be made by the Issuer with the Paying Agent/Registrar for the payment of the required prepayment or redemption price for this Bond or the portion hereof which is to be so prepaid or redeemed, plus accrued interest thereon to the date fixed for prepayment or redemption. If such written notice of prepayment or redemption is given, and if due provision for such payment is made, all as provided above, this Bond, or the portion thereof which is to be so prepaid or redeemed, thereby automatically shall be treated as prepaid or redeemed prior to its scheduled due date, and shall not bear interest after the date fixed for its prepayment or redemption, and shall not be regarded as being outstanding except for the right of the registered owner to receive the prepayment or redemption price plus accrued interest to the date fixed for prepayment or redemption from the Paying Agent/Registrar out of the funds provided for such payment. The Paying Agent/Registrar shall record in the Registration Books all such prepayments or redemptions of principal of this Bond or any portion hereof. THIS BOND, to the extent of the unpaid or unredeemed principal balance hereof, or any unpaid and unredeemed portion hereof in any integral multiple of $5,000, may be assigned by the initial registered owner hereof and shall be transferred only in the Registration Books of the Issuer kept by the Paying Agent/Registrar acting in the capacity of registrar for the Bonds, upon the terms and conditions set forth in the Bond Ordinance. Among other requirements for such transfer, this Bond must be presented and surrendered to the Paying Agent/Registrar for cancellation, together with proper instruments of assignment, in form and with guarantee of signa- tures satisfactory to the Paying Agent/Registrar, evidencing assignment by the initial registered owner of this Bond, or any portion or portions hereof in any integral multiple of $5,000, to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be transferred and registered. Any instrument or instruments of assignment satisfac- tory to the Paying Agent/Registrar may be used to evidence the assignment of this Bond or any such portion or portions hereof by the initial registered owner hereof. A new bond or bonds payable to such assignee or assignees (which then will be the new registered owner or owners of such new Bond or Bonds) or to the initial registered owner as to any portion of this Bond which is not being assigned and transferred by the initial registered owner, shall be delivered by the Paying Agent/Registrar in conversion of and exchange for this Bond or any portion or portions hereof, but solely in the form and manner as provided in the next paragraph hereof for the conver. sion and exchange of this Bond or any portion hereof. The registered owner of this Bond shall be deemed and treated by the Issuer and the Paying Agent/Registrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Bond to the extent of such payment, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary. AS PROVIDED above and in the Bond Ordinance, this Bond, to the extent of the unpaid or unredeemed principal balance hereof, may be converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, payable to the assignee or assignees duly designated in writing by the initial registered owner hereof, or to the initial registered owner as to any portion of this Bond which is not being assigned and transferred by the initial registered owner, in any denomination or denominations in any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute bond issued in exchange for any portion of this Bond shall have a single stated principal maturity date), upon surrender of this Bond to the Paying Agent/Registrar for cancellation, all in accordance with the form and pro. cedures set forth in the Bond Ordinance. If this Bond or any portion hereof is assigned and transferred or converted each bond issued in exchange for any portion hereof shall have a single stated principal maturity date corresponding to the due date of the installment of principal of this Bond or portion hereof for which the substitute bond is being exchanged, and shall bear interest at the rate applicable to and borne by such installment of principal or portion thereof. Such bonds, respectively, shall be subject to redemption prior to maturity on the same dates and for the same prices as the corresponding installment of principal of this Bond or portion hereof for which they are being exchanged. No such bond shall be payable in installments, but shall have only one stated principal maturity date. AS PROVIDED IN THE BOND ORDINANCE, THIS BOND IN ITS PRESENT FORM MAY BE ASSIGNED AND TRANSFERRED OR CONVERTED ONCE ONLY, and to one or more assignees, but the bonds issued and delivered in exchange for this Bond or any portion hereof may be assigned and transferred, and converted, subsequently, as provided in the Bond Ordinance. The Issuer shall pay the Paying Agent/ Registrar's standard or customary fees and charges for transferring, converting, and exchanging this Bond or any portion thereof, but the one requesting such transfer, conversion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make any such assignment, conversion, or exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for prepayment or redemption prior to maturity, within 30 days prior to its prepayment or redemption date. IN THE EVENT any Paying Agent/Registrar for this Bond is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Bond Ordinance that it promptly will appoint a competent and legally qualified substitute therefor, and promptly will cause written notice thereof to be mailed to the registered owner of this Bond. IT IS HEREBY certified, recited, and covenanted that this Bond has been duly and validly authorized, issued, and delivered pursuant to the laws of the State of Texas; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Bond and the Series of which it is a part have been performed, existed, and been done in accordance with laws that this Bond is a special obligation of said Issuer, and that the principal of and interest on this Bond, together with other outstanding revenue bonds of the Issuer, are payable and secured by a first lien on and pledge of the Net Revenues of the Issuer's Utility System, being the Waterworks, Sewer and Electric System. THE ISSUER has reserved the right, subject to the restrictions stated, and adopted by reference, in the Ordinance authorizing this Series of Bonds, to issue additional parity revenue bonds which also may be made payable from, and secured by a first lien on and pledge of, the aforesaid Net Revenues. THE OWNER HEREOF shall never have the right to demand payment of this obligation out of any funds raised or to be raised by taxation, or from any source other than the Net Revenues. BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the terms and provisions of the Bond Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Bond Ordinance is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Bond and the Bond Ordinance constitute a contract between the registered owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Bond to be signed with the manual signature of the Mayor of the Issuer and countersigned with the manual signature of the City Secretary of the Issuer, has caused the official seal of the Issuer to be duly impressed on this Bond, and has caused this Bond to be dated March 15, 1996. City Secretary (CITY SEAL) Mayor The following shall be printed on the back of said Initial Bond: "This Initial Bond was delivered to and paid for by the Purchaser thereof 7 FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS. COMPTROLLER'3 REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Bond has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Bond has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this Comptroller of Public Accounts of the State of Texas (COMPTROLLER'S SEAL) Section 6. ADDITIONAL CHARACTERISTICS OF THE BONDS. Registration and Transfer. (a) The Issuer shall keep or cause to be kept at the principal corporate trust office of Texas Commerce Bank National Association, Dallas, Texas (the "Paying Agent/Registrar") books or records of the registration and transfer of the Bonds (the "Registration Books"), and the Issuer hereby appoints the Paying Agent/Registrar as its registrar and transfer agent to keep such books or records and make such transfers and registrations under such reasonable regulations as the Issuer and Paying Agent/Registrar may prescribe; and the Paying Agent/Registrar shall make such transfers and registrations as herein provided. The Paying Agent/Registrar shall obtain and record in the Registration Books the address of the registered owner of each Bond to which payments with respect to the Bonds shall be mailed, as herein provided; but it shall be the duty of each registered owner to notify the Paying Agent/Registrar in writing of the address to which payments shall be mailed, and such interest payments shall not be mailed unless such notice has been given. The Issuer shall have the right to inspect the Registration Books during regular business hours of the Paying Agent/Registrar, but otherwise the Paying Agent/Registrar shall keep the Registration Books confidential and, unless otherwise required by law, shall not permit their inspection by any other entity. Registration of each Bond may be transferred in the Registration Books only upon presentation and surrender of such Bond to the Paying Agent/Registrar for transfer of registration and cancellation, together with proper written instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, (i) evidencing the assignment of the Bond, or any portion thereof in any integral multiple of $5,000, to the assignee or assignees thereof, and (ii) the right of such assignee or assignees to have the Bond or any such portion thereof registered in the name of such assignee or assignees. Upon the assignment and transfer of any Bond or any portion thereof, a new substitute Bond or Bonds shall be issued in conversion and exchange therefor in the manner herein provided. The Initial Bond, to the extent of the unpaid or unredeemed principal balance thereof, may be assigned and transferred by the initial registered owner thereof once only, and to one or more assignees designated in writing by the initial registered owner thereof. All Bonds issued and delivered in conversion of and exchange for the Initial Bond shall be in any denomination or denominations of any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Bond shall have a single stated principal maturity date), shall be in the form prescribed in the FORM OF SUBSTITUTE BOND set forth in this Ordinance, and shall have the characteristics, and may be assigned, trans- ferred, and converted as hereinafter provided. If the Initial Bond or any portion thereof is assigned and transferred or converted the Initial Bond must be surrendered to the Paying Agent/Registrar for cancellation, and each Bond issued in exchange for any portion of the Initial Bond shall have a single stated principal maturity date, and shall not be payable in installments; and each such Bond shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Bond is being exchanged; and each such Bond shall bear interest at the single rate applicable to and borne by such installment of principal or portion thereof for which it is being exchanged. If only a portion of the Initial Bond is assigned and transferred, there shall be delivered to and registered in the name of the initial registered owner substitute Bonds in exchange for the unassigned balance of the Initial Bond in the same manner as if the initial registered owner were the assignee thereof. If any Bond or portion thereof other than the Initial Bond is assigned and transferred or converted each Bond issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Bond for which it is exchanged. A form of assignment shall be printed or en. dorsed on each Bond, excepting the Initial Bond, which shall be executed by the registered owner or its duly authorized attorney or representative to evidence an assignment thereof. Upon surrender of any Bonds or any portion or portions thereof for transfer of registration, an authorized representative of the Paying Agent/Registrar shall make such transfer in the Registration Books, and shall deliver a new fully registered substitute Bond or Bonds, having the characteristics herein described, payable to such assignee or assignees (which then will be the registered owner or owners of such new Bond or Bonds), or to the previous registered owner in case only a portion of a Bond is being assigned and transferred, all in conversion of and exchange for said assigned Bond or Bonds or any portion or portions thereof, in the same form and manner, and with the same effect, as provided in Section 6(d), below, for the conversion and exchange of Bonds by any registered owner of a Bond. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer and delivery of a substitute Bond or Bonds, but the one requesting such transfer shall pay any taxes or other governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers of registration of any Bond or any portion thereof (1) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemp- tion date. (b) Ownership of Bonds. The entity in whose name any Bond shall be registered in the Registration Books at any time shall be deemed and treated as the absolute owner thereof for all purposes of this Ordinance, whether or not such Bond shall be overdue, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary; and payment of, or on W account of, the principal of, premium, if any, and interest on any such Bond shall be made only to such registered owner. All such payments shall be valid and effectual to satisfy and discharge the liability upon such Bond to the extent of the sum or sums so paid. (c) Payment of Bonds and Interest. The Issuer hereby further appoints the Paying Agent/Registrar to act as the paying agent for paying the principal of and interest on the Bonds, and to act as its agent to convert and exchange or replace Bonds, all as provided in this Ordinance. The Paying Agent/Registrar shall keep proper records of all payments made by the Issuer and the Paying Agent/Registrar with respect to the Bonds, and of all conversions and exchanges of Bonds, and all replacements of Bonds, as provided in this Ordinance. However, in the event of a nonpayment of interest on a scheduled payment date, and for thirty (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 District. Notice of the Special Record Date and of the scheduled payment date of the past due interest (which shall be 15 days after the Special Record Date) shall be sent at least five (5) business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Bondholder appearing on the Security Register at the close of business on the last business day next preceding the date of mailing of such notice. (d) Conversion and Exchange or Replacement: Authentication. Each Bond issued and delivered pursuant to this Ordinance, to the extent of the unpaid or unredeemed principal balance or principal amount thereof, may, upon surrender of such Bond at the principal corporate trust office of the Paying Agent/Registrar, together with a written request therefor duly executed by the registered owner or the assignee or assignees thereof, or its or their duly authorized attorneys or representatives, with guarantee of signatures satisfactory to the Paying Agent/Registrar, may, at the option of the registered owner or such assignee or assignees, as appropriate, be converted into and exchanged for fully registered bonds, without interest coupons, in the form prescribed in the FORM OF SUBSTITUTE BOND set forth in this Ordinance, in the denomination of $5,000, or any integral multiple of $5,000 (subject to the requirement hereinafter stated that each substitute Bond shall have a single stated maturity date), as requested in writing by such registered owner or such assignee or assignees, in an aggregate principal amount equal to the unpaid or unre- deemed principal balance or principal amount of any Bond or Bonds so surrendered, and payable to the appropriate registered owner, assignee, or assignees, as the case may be. If the Initial Bond is assigned and transferred or converted each substitute Bond issued in exchange for any portion A the Initial Bond shall have a single stated principal maturity date, and shall not be payable in installments; and each such Bond shall have a principal maturity date corresponding to the due date of the installment of principal or portion thereof for which the substitute Bond is being exchanged; and each such Bond shall bear interest at the single rate applicable to and borne by such installment of principal or portion thereof for which it is being exchanged. If a portion of any Bond (other than the Initial Bond) shall be redeemed prior to its scheduled maturity as provided herein, a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in the denomination or denominations of any integral multiple of $5,000 at the request of the registered owner, and in aggregate principal amount equal to the unredeemed portion �1� thereof, will be issued to the registered owner upon surrender thereof for cancellation. If any Bond or portion thereof (other than the Initial Bond) is assigned and transferred or converted, each Bond issued in exchange therefor shall have the same principal maturity date and bear interest at the same rate as the Bond for which it is being exchanged. Each substitute Bond shall bear a letter and/or number to distinguish it from each other Bond. The Paying Agent/Registrar shall convert and exchange or replace Bonds as provided herein, and each fully registered bond delivered in conversion of and exchange for or replacement of any Bond or portion thereof as permitted or required by any provision of this Ordinance shall constitute one of the Bonds for all purposes of this Ordinance, and may again be converted and exchanged or replaced. It is specifically provided that any Bond authenticated in conversion of and exchange for or replacement of another Bond on or prior to the first scheduled Record Date for the Initial Bond shall bear interest from the date of the Initial Bond, but each substitute Bond so authenticated after such first scheduled Record Date shall bear interest from the interest payment date next preceding the date on which such substitute Bond was so authenticated, unless such Bond is authenticated after any Record Date but on or before the next following interest payment date, in which case it shall bear interest from such next following interest payment date; provided, however, that if at the time of delivery of any substitute Bond the interest on the Bond for which it is being exchanged is due but has not been paid, then such Bond shall bear interest from the date to which such interest has been paid in full. THE INITIAL BOND issued and delivered pursuant to this Ordinance is not required to be, and shall not be, authenticated by the Paying Agent/Registrar, but on each substitute Bond issued in conversion of and exchange for or replacement of any Bond or Bonds issued under this Ordinance there shall be printed a certificate, in the form substantially as follows: "PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE It is hereby certified that this Bond has been issued under the provisions of the Bond Ordinance described on the face of this Bond; and that this Bond has been issued in conversion of and exchange for or replacement of a bond, bonds, or a portion of a bond or bonds of an issue which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Paying Agent/Registrar Dated By Authorized Representative An authorized representative of the Paying Agent/Registrar shall, before the delivery of any such Bond, date and manually sign the above Certificate, and no such Bond shall be deemed to be issued or outstanding unless such Certificate is so executed. The Paying Agent/Registrar promptly shall cancel all Bonds surrendered for conversion and exchange or replacement. No additional ordinances, orders, or resolutions need be passed or adopted by the governing body of the Issuer or any other body or person so as to accomplish the foregoing conversion and exchange or 11 replacement of any Bond or portion thereof, and the Paying Agent/Registrar shall provide for the printing, execution, and delivery of the substitute Bonds in the manner prescribed herein, and said Bonds shall be of type composition printed on paper with lithographed or steel engraved borders of customary weight and strength. Pursuant to Vernon's Ann. Tex. Civ. St. Art. 717k-6, and particularly Section 6 thereof, the duty of conversion and exchange or replacement of Bonds as aforesaid is hereby imposed upon the Paying Agent/Registrar, and, upon the execution of the above Paying Agent/Registrar's Authentication Certificate, the converted and exchanged or re- placed Bond shall be valid, incontestable, and enforceable in the same manner and with the same effect as the Initial Bond which originally was issued pursuant to this Ordinance, approved by the Attorney General, and registered by the Comptroller of Public Accounts. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for transferring, converting, and exchanging any Bond or any portion thereof, but the one requesting any such transfer, conver- sion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying Agent/Registrar shall not be required to make any such conversion and exchange or replacement of Bonds or any portion thereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date. (e) In General. All Bonds issued in conversion and exchange or replacement of any other Bond or portion thereof, (i) shall be issued in fully registered form, without interest coupons, with the principal of and interest on such Bonds to be payable only to the registered owners thereof, (ii) may be redeemed prior to their scheduled maturities, (iii) may be transferred and assigned, (iv) may be converted and exchanged for other Bonds, (v) shall have the characteristics, (vi) shall be signed and sealed, and (vii) the principal of and interest on the Bonds shall be payable, all as provided, and in the manner required or indicated, in the FORM OF SUBSTITUTE BOND set forth in this Ordinance. (f) Payment of Fees and Charges. The Issuer hereby covenants with the registered owners of the Bonds that it will (i) pay a or customary fees and charges of the Paying Agent/Registrar for its services with respect to the payment of the principal of and interest on the Bonds, when due, and (ii) pay the fees and charges of the Paying Agent/Registrar for services with respect to the transfer of registration of Bonds, and with respect to the conversion and exchange of Bonds solely to the extent above provided in this Ordinance. (g) Substitute Paying A eng t/Registrar. The Issuer covenants with the registered owners of the Bonds that at all times while the Bonds are outstanding the Issuer will provide a competent and legally qualified bank, trust company, financial institution, or other agency to act as and perform the services of Paying Agent/Registrar for the Bonds under this Ordinance, and that the Paying Agent/Registrar will be one entity. The Issuer reserves the right to, and may, at its option, change the Paying Agent/Registrar upon not less than 120 days written notice to the Paying Agent/Registrar, to be effective not later than 60 days prior to the next principal or interest 12 payment date after such notice. In the event that the entity at any time acting as Paying Agent/Registrar (or its successor by merger, acquisition, or other method) should resign or other- wise cease to act as such, the Issuer covenants that promptly it will appoint a competent and legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar under this Ordinance. Upon any change in the Paying Agent/Registrar, the previous Paying Agent/Registrar promptly shall transfer and deliver the Registration Books (or a copy thereof), along with all other pertinent books and records relating to the Bonds, to the new Paying Agent/Registrar designated and appointed by the Issuer. Upon any change in the Paying Agent/Registrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying Agent/Registrar to each registered owner of the Bonds, by United States mail, first-class postage prepaid, which notice also shall give the address of the new Paying Agent/Registrar. By accepting the position and performing as such, each Paying Agent/Registrar shall be deemed to have agreed to the provisions of this Ordinance, and a certified copy of this Ordinance shall be delivered to each Paying Agent/Registrar. Section 7. FORM OF SUBSTITUTE BONDS. The form of all Bonds issued in conversion and exchange or replacement of any other Bond or portion thereof, including the form of Paying Agent/Registrar's Certificate to be printed on each of such Bonds, and the Form of Assignment to be printed on each of the Bonds, shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or required by this Ordinance. NO. Ii�Y11�1.��1C`111�7:r1i�1 FORM OF SUBSTITUTE BOND UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BOND SERIES 1996 MATURITY DATE DATE OF ORIGINAL ISSUE March 15, 1996 PRINCIPAL AMOUNT CUSIP NO. ON THE MATURITY DATE specified above, CITY OF SANGER (the "Issuer"), in DENTON COUNTY, being a political subdivision of the State of Texas, hereby promises to pay to 13 or to the registered assignee hereof (either being hereinafter called the "registered owner") the principal amount of and to pay interest thereon from the date of delivery of this Bond (which date appears on the back hereof) to the date of its scheduled maturity, or the date of redemption prior to maturity, at the interest rate per annum specified above, with interest being payable on November 15, 1996, and semiannually on each May 15 and November 15; except that if the date of authentication of this Bond is later than October 31, 1996, such principal amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date (hereinafter defined) but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date. THE PRINCIPAL OF AND INTEREST ON this Bond are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Bond shall be paid to the registered owner hereof upon presentation and surrender of this Bond at maturity or upon the date fixed for its redemption prior to maturity, at the principal corporate trust office of Texas Commerce Bank National Association, Dallas, Texas, which is the "Paying Agent/Registrar" for this Bond. The payment of interest on this Bond shall be made by the Paying Agent/Registrar to the registered owner hereof on each interest payment date by check or draft, dated as of such interest payment date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the ordinance authorizing the issuance of the Bonds (the "Bond Ordinance") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check or draft shall be sent by the Paying Agent/Registrar by United States mail, first class postage prepaid, on each such interest payment date, to the registered owner hereof, at the address of the registered owner, as it appeared on the last business day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described, or by such other method acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner; however, if the Bond is owned by the Texas Water Development Board, there will be no charge to the Texas Water Development Board. Any accrued interest due upon the redemption of this Bond prior to maturity as provided herein shall be paid to the registered owner at the principal corporate trust office of the Paying Agent/Registrar upon presentation and surrender of this Bond for redemption and payment at the principal corporate trust office of the Paying Agent/Registrar, The Issuer covenants with the registered owner of this Bond that on or before each principal payment date, interest payment date, and accrued interest payment date for this Bond it will make available to the Paying Agent/Registrar, from the "Bond Fund" created by the Bond Ordinance, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Bonds, when due. EC! IF THE DATE for the payment of the principal of or interest on this Bond shall be a Saturday, Sunday, a legal holiday, or a day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS BOND is one of an issue of Bonds initially dated March 15, 1996, authorized in accordance with the Constitution and laws of the State of Texas in the principal amount of $1,060,000 for the purpose of improving and extending the Sewer System. ON MAY 15, 2006, or on any date thereafter, the Bonds of this Series may be redeemed prior to their scheduled maturities, at the option of the Issuer, with funds derived from any available and lawful source, as a whole, or in part, and, if in part, the maturity or maturities of Bonds and the amounts thereof, to be redeemed shall, in inverse order of annual maturity, be selected and designated by the Issuer, and the Issuer shall direct the Paying Agent/Registrar to call by lot Bonds, or portions thereof within such maturities and in such principal amounts, for redemption (provided that a portion of a Bond may be redeemed only in an integral multiple of $5,000), at the redemption price of the principal amount thereof, plus accrued interest to the date fixed for prepayment or redemption. AT LEAST 30 days prior to the date fixed for any redemption of Bonds or portions thereof prior to maturity a written notice of such redemption shall be published once in a financial publication, journal, or reporter of general circulation among securities dealers in the City of New York, New York (including, but not limited to, The Bond Buyer and The Wall Street Journal), or in the State of Texas (including, but not limited to, The Texas Bond Reporter). Such notice also shall be sent by the Paying Agent/Registrar by United States mail, first class postage prepaid, not less than 20 days prior to the date fixed for any such redemption, to the registered owner of each Bond to be redeemed at its address as it appeared on the 30th day prior to such redemption date; provided, however, that the failure to send, mail, or receive such notice, or any defect therein or in the sending or mailing thereof, shall not affect the validity or effectiveness of the proceedings for the redemption of any Bond, and it is hereby specifically provided that the publication of such notice as required above shall be the only notice actually required in connection with or as a prerequisite to the redemption of any Bonds or portions thereof. By the date fixed for any such redemption due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed, plus accrued interest thereon to the date fixed for redemption. If such written notice of redemption is published and if due provision for such payment is made, all as provided above, the Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price plus accrued interest from the Paying Agent/Registrar out of the funds provided for such payment. If a portion of any Bond shall be 15 redeemed a substitute Bond or Bonds having the same maturity date, bearing interest at the same rate, in any denomination or denominations in any integral multiple of $5,000, at the written request of the registered owner, and in aggregate principal amount equal to the unredeemed portion thereof, will be issued to the registered owner upon the surrender thereof for cancellation, at the expense of the Issuer, all as provided in the Bond Ordinance. THIS BOND OR ANY PORTION OR PORTIONS HEREOF IN ANY INTEGRAL MULTIPLE OF $5,000 may be assigned and shall be transferred only in the Registration Books of the Issuer kept by the Paying Agent/Registrar acting in the capacity of registrar for the Bonds, upon the terms and conditions set forth in the Bond Ordinance. Among other requirements for such assignment and transfer, this Bond must be presented and surrendered to the Paying Agent/Registrar, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing assignment of this Bond or any portion or portions hereof in any integral multiple of $5,000 to the assignee or assignees in whose name or names this Bond or any such portion or portions hereof is or are to be transferred and registered. The form of Assignment printed or endorsed on this Bond shall be executed by the registered owner or its duly authorized attorney or representative, to evidence the assignment hereof. A new Bond or Bonds payable to such assignee or assignees (which then will be the new registered owner or owners of such new Bond or Bonds), or to the previous registered owner in the case of the assignment and transfer of only a portion of this Bond, may be delivered by the Paying Agent/Registrar in conversion of and exchange for this Bond, all in the form and manner as provided in the next paragraph hereof for the conversion and exchange of other Bonds. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for making such transfer, but the one requesting such transfer shall pay any taxes or other governmental charges required to be paid with respect thereto. The Paying Agent/Registrar shall not be required to make transfers of registration of this Bond or any portion hereof (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or any portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date. The registered owner of this Bond shall be deemed and treated by the Issuer and the Paying Agent/Registrar as the absolute owner hereof for all purposes, including payment and discharge of liability upon this Bond to the extent of such payment, and the Issuer and the Paying Agent/Registrar shall not be affected by any notice to the contrary. ALL BONDS OF THIS SERIES are issuable solely as fully registered bonds, without interest coupons, in the denomination of any integral multiple of $5,000. As provided in the Bond Ordinance, this Bond, or any unredeemed portion hereof, may, at the request of the registered owner or the assignee or assignees hereof, be converted into and exchanged for a like aggregate principal amount of fully registered bonds, without interest coupons, payable to the appropriate registered owner, assignee, or assignees, as the case may be, having the same maturity date, and bearing interest at the same rate, in any denomination or denominations in any integral multiple of $5,000 as requested in writing by the appropriate registered owner, assignee, or assignees, as the case may be, upon surrender of this Bond to the Paying Agent/Registrar for 16 cancellation, all in accordance with the form and procedures set forth in the Bond Ordinance. The Issuer shall pay the Paying Agent/Registrar's standard or customary fees and charges for trans- ferring, converting, and exchanging any Bond or any portion thereof, but the one requesting such transfer, conversion, and exchange shall pay any taxes or governmental charges required to be paid with respect thereto as a condition precedent to the exercise of such privilege of conversion and exchange. The Paying Agent/Registrar shall not be required to make any such conversion and exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Bond or portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date. IN THE EVENT any Paying Agent/Registrar for the Bonds is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Bond Ordinance that it promptly will appoint a competent and legally qualified substitute therefor, and promptly will cause written notice thereof to be mailed to the registered owners of the Bonds. IT IS HEREBY certified, recited, and covenanted that this Bond has been duly and validly authorized, issued, and delivered pursuant to the laws of the State of Texas; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Bond and the Series of which it is a part have been performed, existed, and been done in accordance with law; that this Bond is a special obligation of said Issuer, and that the principal of and interest on this Bond, together with other outstanding revenue bonds of the Issuer, are payable and secured by a first lien on and pledge of the Net Revenues of the Issuer's Utility System, being the Waterworks, Sewer and Electric System. THE ISSUER has reserved the right, subject to the restrictions stated, and adopted by reference, in the Ordinance authorizing this Series of Bonds, to issue additional parity revenue bonds which also may be made payable from, and secured by a first lien on and pledge of, the aforesaid Net Revenues. THE OWNER HEREOF shall never have the right to demand payment of this obligation out of any funds raised or to be raised by taxation, or from any source other than the Net Revenues. BY BECOMING the registered owner of this Bond, the registered owner thereby acknowledges all of the terms and provisions of the Bond Ordinance, agrees to be bound by such terms and provisions, acknowledges that the Bond Ordinance is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Bond and the Bond Ordinance constitute a contract between each registered owner hereof and the Issuer. 17 IN WITNESS WHEREOF, the Issuer has caused this Bond to be signed with the facsimile signature of the Mayor of the Issuer and countersigned with the facsimile signature of the City Secretary of the Issuer, and has caused the official seal of the Issuer to be duly impressed, or placed in facsimile, on this Bond. City Secretary Mayor (CITY SEAL) The following shall be printed on the back of said Bonds: "This Bond was originally delivered to and paid for by the Purchaser thereof on to FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Bond is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Bond has been issued under the provisions of the Bond Ordinance described in the text of this Bond; and that this Bond has been issued in conversion or replacement of, or in exchange for, a bond, bonds, or a portion of a bond or bonds of a Series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Texas Commerce Bank. National Association Dallas, Texas By Authorized Representative FORM OF ASSIGNMENT: ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered owner of this Bond, or duly authorized representative or attorney thereof, hereby assigns this Bond to (Assignee's Social Security (print or type Assignee's name or Taxpayer Identification Number and address, including zip code) and hereby irrevocably constitutes and appoints attorney to transfer the registration of this Bond on the Paying Agent/Registrar's Registration Books with full power of substitution in the premises. Dated Signature Guaranteed: NOTICE: This signature must be guaranteed by a member of the New York Stock Exchange or a commercial bank or trust company. Registered Owner NOTICE: This signature must correspond with the name of the Registered Owner appearing on the face of this Bond in every particular without alteration or enlargement or any change whatsoever. Section 8. DEFINITIONS. For all purposes of this ordinance and in particular for clarity with respect to the issuance of the Bonds herein authorized and the pledge and appropriation of revenues for the payment of the Bonds, the following definitions are provided: (a) The term "Utility System" as used in this Ordinance, shall mean and include the Issuer's entire Waterworks, Sewer and Electric System, together with all future improvements, extensions, enlargements, and additions thereto, and replacements thereof. (b) The term "Net Revenues," as used in this Ordinance, shall mean gross revenues of the Utility System, after deducting the expenses of operation and maintenance of the Utility System, including all salaries, labor, materials, repairs and extensions necessary to render efficient service, provided, however, that only such repairs and extensions, as in the judgment of the City Council of said Issuer, reasonably and fairly exercised by the passage of appropriate ordinances, are necessary to keep the Utility System in operation and render adequate service to said Issuer and the inhabitants thereof, or such as might be necessary to meet some physical accident or condition which would otherwise impair the Bonds and any Additional Bonds shall be deducted in determining "Net Revenues." Depreciation, and payments into and out of the Interest and Sinking Fund, Reserve Fund, and Emergency Fund hereinafter created, shall never be considered as expenses of operation and maintenance. 19 (c) The term "Bonds" shall mean the Bonds authorized to be issued and delivered by this Ordinance and the outstanding Series 1991 Bonds. (e) The term "Additional Bonds" shall mean the additional parity revenue bonds which the Issuer reserves the right to issue and deliver in the future, as provided by this Ordinance. Section 9. PLEDGE. The Bonds and all Additional Bonds, and the interest thereon, are and shall be payable from and secured by an irrevocable first lien on and pledge of the Net Revenues of the Utility System. The Bonds authorized by this Ordinance are parity Additional Bonds as defined and permitted in the ordinance that authorized the City of Sanger, Texas Utility System Revenue Bonds, Series 1969, and Sections 9 through 27 of the ordinance that authorized the City of Sanger, Texas Utility System Revenue Bonds, Series 1969 are hereby adopted by reference and shall be restated and be applicable to the Bonds authorized by this Ordinance in Sections 8 through 25 hereof for all purposes except to the extent hereinafter specifically modified and supplemented. Section 10. RATES. The Issuer covenants and agrees with the holders of the Bonds and all Additional Bonds, as follows: (a) That it will at all times fix, maintain, charge and collect for services rendered by the Utility System, rates and charges which will produce gross revenues at least sufficient to pay all operating, maintenance, depreciation, replacement and betterment expenses, and other costs deductible in determining "Net Revenues" as herein defined and to produce each month Net Revenues which together with other pledged revenues will be adequate to pay promptly all of the principal of and interest on the Bonds and all Additional Bonds, and to accumulate and maintain the Funds created and established by this Ordinance, and (b) That if the Utility System should become legally liable for any other indebtedness, the Issuer shall fix, maintain, charge and collect additional rates for services rendered by the Utility System sufficient to establish and maintain funds for the payment thereof. Section 11. FUNDS, All gross revenues of the Utility System shall be kept separate and apart from all other funds of the Issuer and the following Special Funds have been created and shall be established and maintained in an official depository bank of the Issuer, so long as any of the Bonds or Additional Bonds, or interest thereon, are outstanding and unpaid: (a) City of Sanger Utility System Revenue Bonds Revenue Fund, hereinafter called the "Revenue Fund. " (b) City of Sanger Utility System Revenue Bonds Interest and Sinking Fund, hereinafter called the "Interest and Sinking Fund. " 20 (c) City of Sanger Utility System Revenue Bonds Reserve Fund, hereinafter called the "Reserve Fund. " (d) City of Sanger Utility System Revenue Bonds Emergency Fund, hereinafter called the "Emergency Fund." Section 12. REVENUE FUND. All. gross revenues of every nature received from the operation and ownership of the Utility System shall be deposited from day to day as collected into the Revenue Fund. The reasonable, necessary, and proper expenses of operation and maintenance of the Utility System shall be paid from the gross revenues of the Utility System. The revenues remaining in the Revenue Fund shall be deposited into the other Funds, in the, manner and amounts hereinafter provided, and each of such Funds shall have priority as to such deposits in the order in which they are treated in the following sections. Section 13. INTEREST AND SINKING FUND, There shall be deposited into the Interest and Sinking Fund the following: (a) such amounts, in equal monthly installments commencing on or before the tenth day of each month hereafter, as will be sufficient to pay the interest scheduled to come due on the Bonds on the next interest payment date and (b) such amounts, in equal monthly installments, made on or before the tenth day of each month, commencing May 10, 1996, as will be sufficient to pay the next maturing principal of the bonds. Section 14. RESERVE FUND. There shall be deposited into the Reserve Fund, commencing May 10, 1996 and on the loth day of each month hereafter, 21Q.3er month until the Reserve Fund contains an aggregate amount of ,$254 619. Whenever said Reserve Fund is reduced below said aggregate amount, there shall be deposited into the Reserve Fund an amount of at least equal to 1/60th of the average annual principal and interest requirements of the outstanding Bonds, until such time as the Fund has been restored to said aggregate amount. The Reserve Fund shall be used to pay the principal of or interest on the Bonds and any Additional Bonds falling due at any time when there is not sufficient money available in the Interest and Sinking Fund created for their payment. Money in the Reserve Fund may, upon authorization by the City Council of said Issuer, be invested in direct obligations of, or obligations, the principal of and interest on which are guaranteed by, the United States of America, or invested in direct obligations of the Federal Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage Association, Federal Home Loan Banks or Banks for Cooperatives, provided that each of the aforesaid obligations must mature, or be subject to redemption at the option of the holder thereof. Any obligation in which money in said Reserve Fund is so invested shall be kept and held by the Bank holding said Fund in escrow and in trust for the benefit of the holders of the Bonds and all Additional Bonds, and shall be promptly sold and the proceeds of sale applied to the making of all payments required to be made from the Reserve Fund. 21 ction 15. EMERGENCY FUND. There is presently on deposit in the Emergency Fund $16 212o o deposits shall be required to be made into the Emergency Fund as long as the Emergency Fund contains said aggregate amount, but if and whenever said Emergency Fund is reduced below said aggregate amount, the aforesaid monthly deposits into the Emergency Fund shall be resumed and continued until such time as the Emergency Fund has been restored to said aggregate amount. The Emergency Fund shall be used to pay the cost of any repairs or extensions to the System authorized by Vernon's Article 1113, for the payment of which no other funds are available. Also, the Emergency Fund shall be used to pay the principal of or interest on the Bonds and all Additional Bonds, at any time when there are not sufficient amounts in the Interest and Sinking Fund and the Reserve Fund for such purpose. Money in the Emergency Fund may, upon authorization by the City Council, be invested in the same manner and to the same extent as provided for money in the Reserve Fund. Any obligation in which money in the Emergency Fund is so invested shall be kept and held in an official depository bank of the Issuer in escrow and in trust for the benefit of the holders of the Bonds and all Additional Bonds, and shall be promptly sold and the proceeds of sale applied to the making of payments permitted or required to be made from the Emergency Fund. Section 16. DEFICIENCIES IN FUNDS. If in any month the Issuer shall fail to deposit into any Fund created by this Ordinance the full amounts required, amounts equivalent to such deficiencies shall be set apart and paid into said Funds from the first available and unallocated pledged revenues for the following month or months, and such payments shall be in addition to the amounts otherwise required to be paid into said Funds during such month or months. To the extent necessary, the Issuer shall increase the rates and charges for services of the Utility System to make up for any such deficiencies. Section 17. EXCESS REVENUES. The revenues pledged hereunder, in excess of those necessary to establish and maintain the Funds as required in this Ordinance, or as hereafter may be required in connection with the issuance of Additional Bonds, may be used for any lawful purpose. Section 18. SECURITY FOR FUNDS, All Funds created by this Ordinance shall be secured in the manner and to the fullest extent permitted or required by law for the security of public funds, and such Funds shall be used only for the purposes and in the manner permitted or required by this Ordinance. Section 19. ADDITIONAL BONDS. The Issuer reserves the right to issue additional parity revenue bonds, to be known as Additional Bonds, which when issued and delivered, shall be payable from and secured by a lien on and pledge of the same revenues as those securing the Bonds, and be on a parity with the Bonds and all outstanding Additional Bonds, or any bonds issued to refund same, and the Bonds and all Additional Bonds shall in all respects be on a parity and of equal dignity. The Additional Bonds may be issued in one or more installments or series, provided, however, that no installment or series of Additional Bonds shall be issued unless: 22 (a) A certificate is executed by the Mayor and City Secretary of said Issuer to the effect that no (default exists in connection with any of the covenants or requirements of the ordinance or ordinances authorizing the issuance of all then outstanding Bonds and Additional Bonds; (b) A certificate is executed by the Mayor and City Secretary of said Issuer to the effect that the Interest and Sinking Fund and the Reserve Fund each maintain the amount then required to be on deposit therein; (c) A certificate is executed by a Certified Public Accountant to the effect that, in his opinion, the Net Earnings of the Utility System, either for the last complete fiscal year of the Issuer, or for any twelve consecutive calendar month period ending not more than ninety days prior to the passage of the ordinance authorizing the issuance of such Additional Bonds, were at least 1.25 times the average annual principal and interest requirements for all then outstanding Bonds and Additional Bonds, and for the installment or series of Additional Bonds then proposed to be issued. The term "Net Earnings" as used in this subsection (c) shall mean the gross revenues of the Utility System after deducting the expenses of operation and maintenance but not deducting depreciation, bond interest or expenditures which under standard accounting practice should be charged to capital expenditures. (d) The Additional Bonds are scheduled to mature only on May 15, and the interest thereon is scheduled to be paid only on November 15 and May 15. (e) The ordinance authorizing the issuance of such installment or series of Additional Bonds provides that the aggregate amount to be accumulated and maintained in the Reserve Fund shall be increased by an additional amount not less than the average annual principal and interest requirements for said Additional Bonds, and that such additional amount shall be so accumulated within sixty-one months from the date of the Additional Bonds by the deposit in the Reserve Fund A the necessary amount in equal monthly installments; provided, however, that the aggregate amount to be accumulated in the Reserve Fund shall never be required to exceed the average annual principal and interest requirements for all then outstanding Bonds and Additional Bonds; (f) All calculations of average annual principal and interest requirements made pursuant to this Section are made as of and from the date of the Additional Bonds then proposed to be issued. Section 20. MAINTENANCE AND OPERATION; INSURANCE. While any of the Bonds or Additional Bonds are outstanding the Issuer covenants and agrees to maintain the Utility System in good condition and operate the same in an efficient manner and at reasonable expense, and to maintain insurance on the Utility System, for the benefit of the holder or holders of the Bonds and Additional Bonds, of a kind and in an amount which usually would be carried by private companies engaged in a similar type of business. Nothing in this Ordinance shall be construed as requiring the Issuer to expend any funds which are derived from sources other than the Utility System, but nothing herein shall be construed as preventing the Issuer from doing so. 23 Section 21. ACCOUNTS AND FISCAL YEAR, The Issuer shall keep proper books of records and accounts, separate from all other records and accounts of the Issuer, in which complete and correct entries shall be made of all transactions relating to the Utility System, and shall have said books audited once each fiscal year by a certified public accountant. The Issuer agrees to operate the Utility System and keep its books of records and accounts pertaining thereto on the basis of its current fiscal year; provided, however, that the City Council may change such fiscal year by ordinance duly passed, and if such change is deemed necessary by the City Council. Section 22. ACCOUNTING REPORTS, Within ninety days after the close of each fiscal year hereafter., the Issuer will furnish, without cost, to any holder of any outstanding Bonds or Additional Bonds who may so request, a signed or certified copy of a report by a Certified Public Accountant, covering the next preceding fiscal year, showing the following information. (a) A detailed statement of all gross revenues of the Utility System and all expenses of operation and maintenance thereof for said fiscal year; (b) Balance sheet as of the end of said fiscal year; (c) Accountant's comment regarding the manner in which the Issuer has complied with the requirements of this Ordinance and his recommendations, if any, for any changes or improvements in the operation of the Utility System, (d) List of insurance policies in force at the end of said fiscal year, showing, as to each policy, the name of the insurer, and the expiration date; (e) The number of properties connected with the water system, sewer system and electric system, and the gross revenues from the Utility System for said fiscal year. Section 23. INSPECTION. Any holder or holders of any Bonds or Additional Bonds shall have the right at all reasonable times to inspect the Utility System and all records, accounts, and data of the Issuer relating thereto. Section 24. SPECIAL COVENANTS. The Issuer further covenants as follows: (a) That other than for the payment of the Bonds herein authorized, the revenues pledged hereunder have not in any manner been pledged to the payment of any debt or obligation of the Issuer or the Utility System. (b) That while any of the Bonds or Additional Bonds are outstanding, the Issuer will not sell or encumber the Utility System or any substantial part thereof, and that, with the exception of the Additional Bonds expressly permitted by this Ordinance to be issued, it will not encumber the revenues pledged hereunder unless such encumbrance is made junior and subordinate in all respects to the Bonds and Additional Bonds and all liens and pledges in connection therewith. MA (c) That no free service of the Utility System shall be allowed, and should the Issuer or any of its agencies or instrumentalities make use of the services and facilities of the Utility System, payment of the reasonable value thereof shall be made by the Issuer out of funds from sources other than the revenues and income of the Utility System. (d) That to the extent it legally may, the Issuer further covenants and agrees that while any of the Bonds or Additional Bonds are outstanding, no franchise shall be granted for the installation or operation of any competing water system, sewer system or electric system; that the Issuer will prohibit the operation of any such competing system, and the operation of any such competing system is hereby prohibited. Section 25. BONDS ARE SPECIAL OBLIGATIONS, The Bonds and Additional Bonds shall be special obligations of the Issuer payable solely from the pledged Net Revenues, and the holder or holders thereof shall never have the right to demand payment thereof out of funds raised or to be raised by taxation. Section 26. DEFEASANCE OF BONDS. (a) Any Bond and the interest thereon shall be deemed to be paid, retired, and no longer outstanding (a "Defeased Bond") within the meaning of this Ordinance, except to the extent provided in subsection (d) of this Section, when payment of the principal of such Bond, plus interest thereon to the due date (whether such due date be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption), or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar for such payment (1) lawful money of the United States of America sufficient to make such payment or (2) Government Obligations which mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to provide for such payment, and when proper arrangements have been made by the Issuer with the Paying Agent/Registrar for the payment of its services until all Defeased Bonds shall have become due and payable. At such time as a Bond shall be deemed to be a Defeased Bond hereunder, as aforesaid, such Bond and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, revenue pledged as provided in this Ordinance, and such principal and interest shall be payable solely from such money or Government Obligations. (b) Any moneys so deposited with the Paying Agent/Registrar may at the written direction of the Issuer also be invested in Government Obligations, maturing in the amounts and times as hereinbefore set forth, and all income from such Government Obligations received by the Paying Agent/Registrar which is not required for the payment of the Bonds and interest thereon, with respect to which such money has been so deposited, shall be turned over to the Issuer, or deposited as directed in writing by the Issuer. (c) The term "Government Obligations" as used in this Section shall mean direct obligations of the United States of America, including obligations the principal of and interest on PW which are unconditionally guaranteed by the United States of America, which may be United States Treasury obligations such as its State and Local Government Series, which may be in book - entry form. (d) Until all Defeased Bonds shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Bonds the same as if they had not been defeased, and the Issuer shall make proper arrangements to provide and pay for such services as required by this Ordinance. Section 27. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED BONDS. (a) Replacement Bonds. In the event any outstanding Bond is damaged, mutilated, lost, stolen, or destroyed, the Paying Agent/Registrar shall cause to be printed, executed, and delivered, a new bond of the same principal amount, maturity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Bond, in replacement for such Bond in the manner hereinafter provided. (b) Application for Replacement Bonds. Application for replacement of damaged, mutilated, lost, stolen, or destroyed Bonds shall be made by the registered owner thereof to the Paying Agent/Registrar. In every case of loss, theft, or destruction of a Bond, the registered owner applying for a replacement bond shall furnish to the Issuer and to the Paying Agent/Registrar such security or indemnity as may be required by them to save each of them harmless from any loss or damage with respect thereto. Also, in every case of loss, theft, or destruction of a Bond, the registered owner shall furnish to the Issuer and to the Paying Agent/Registrar evidence to their satisfaction of the loss, theft, or destruction of such Bond, as the case may be. In every case of damage or mutilation of a Bond, the registered owner shall surrender to the Paying Agent/Registrar for cancellation the Bond so damaged or mutilated. (c) No Default Occurred. Notwithstanding the foregoing provisions of this Section, in the event any such Bond shall have matured, and no default has occurred which is then continuing in the payment of the principal of, redemption premium, if any, or interest on the Bond, the Issuer may authorize the payment of the same (without surrender thereof except in the case of a damaged or mutilated Bond) instead of issuing a replacement Bond, provided security or indemnity is furnished as above provided in this Section. (d) Charge for Issuing Replacement Bonds. Prior to the issuance of any replacement bond, the Paying Agent/Registrar shall charge the registered owner of such Bond with all legal, printing, and other expenses in connection therewith. Every replacement bond issued pursuant to the provisions of this Section by virtue of the fact that any Bond is lost, stolen, or destroyed shall constitute a contractual obligation of the Issuer whether or not the lost, stolen, or destroyed Bond shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Ordinance equally and proportionately with any and all other Bonds duly issued under this Ordinance. 26 (e) Authority for Issuing Replacement Bonds. In accordance with Section 6 of Vernon's Ann. Tex. Civ, St. Art. 717k-6, this Section of this Ordinance shall constitute authority for the issuance of any such replacement bond without necessity of further action by the governing body of the Issuer or any other body or person, and the duty of the replacement of such bonds is hereby authorized and imposed upon the Paying Agent/Registrar, and the Paying Agent/Registrar shall authenticate and deliver such bonds in the form and manner and with the effect, as provided in Section 4(d) of this Ordinance for Bonds issued in conversion and exchange for other Bonds. Section 28. CUSTODY, APPROVAL, AND REGISTRATION OF BONDS; BOND COUNSEL'S OPINION; and CUSIP NUMBERS. The Mayor of the Issuer is hereby authorized to have control of the Initial Bond issued hereunder and all necessary records and proceedings per- taining to the Initial Bond pending delivery and investigation, examination, and approval by the Attorney General of the State of Texas, and its registration by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Initial Bond said Comptroller of Public Accounts or a deputy designated in writing to act for said Comptroller) shall manually sign the Comptroller's Registration Certificate on the Initial Bond, and the seal of said Comptroller shall be impressed, or placed in facsimile, on the Initial Bond. The approving legal opinion of the Issuer's Bond Counsel and the assigned CUSIP numbers may, at the option of the Issuer, be printed on the Initial Bond or on any Bonds issued and delivered in conversion of and exchange or replacement of any Bond, but neither shall have any legal effect, and shall be solely for the convenience and information of the registered owners of the Bonds. Section 29. COVENANTS REGARDING TAX EXEMPTION. The Issuer covenants to refrain from taking any action which would adversely affect, and to take any required action to ensure, the treatment of the Bonds as obligations described in Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Issuer covenants as follows. (a) to take any action to assure that no more than 10 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in Section 141(b)(6) of the Code or, if more than 10 percent of the proceeds or the projects financed therewith are so used, such amounts, whether or not received by the Issuer, with respect to such private business use, do not, under the terms of this Ordinance, or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Bonds, in contravention of Section 141(b)(2) of the Code, (b) to take any action to assure that in the event that the "private business use" described in subsection (a) hereof exceeds 5 percent of the proceeds of the Bonds or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used for a "private business use" which is "related" and not "disproportionate," within the meaning of Section 141(b)(3) of the Code, to the governmental use; (c) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Bonds (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of Section 141(c) of the Code; (d) to refrain from taking any action which would otherwise result in the Bonds being treated as "private activity bonds" within the meaning of Section 141(b) of the Code; (e) to refrain from taking any action that would result in the Bonds being "federally guaranteed" within the meaning of Section 149(b) of the Code; (fJ to refrain from using any portion of the proceeds of the Bonds, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in Section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Bonds, other than investment property acquired with -- (1) proceeds of the Bonds invested for a reasonable temporary period of 3 years or less or, in the case of a refunding bond, for a period of 30 days or less until such proceeds are needed for the purpose for which the bonds are issued, (2) amounts invested in a bona fide debt service fund, within the meaning of Section 1.148-1(b) of the Treasury Regulations, and (3) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Bonds; (g) to otherwise restrict the use of the proceeds of the Bonds or amounts treated as proceeds of the Bonds, as may be necessary, so that the Bonds do not otherwise contravene the requirements of Section 148 of the Code (relating to arbitrage) and, to the extent applicable, Section 149(d) of the Code (relating to advance ref endings); and (h) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Bonds) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of Section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Bonds have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under Section 148(f) of the Code. For the purposes of the foregoing (a) and (b), the Issuer understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case A refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Bonds. It is the understanding of the Issuer that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings !! promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that i�.�uaa�tutiJ vi 1U1ll1�J air. ix,i�.aiu.:i Yivttlul�a�cu wtlll.lt liluutly ut cnYaiiu Yiuvl�tull� ut utc �,vuc, as applicable to the Bonds, the Issuer will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally -recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the . V tl,o n ao T„ +U. 0<,0,,, ,U1 + j promulgated which impose additional requirements which are applicable to the Bonds, the Issuer agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally -recognized bond counsel_ to nreserve the exemption from federal income taxation of interest on the Bonds under Section 103 of the Code. In furtherance of such intention, the Issuer hereby authorizes and directs the Mayor of the Issuer to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Issuer, which may be permitted by the Code as are consistent with the purpose for the issuance of the Bonds. In order to facilitate compliance with the above covenant (h), a "Rebate Fund" is hereby established by the Issuer for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the bondholders. The Rebate Fund is established for the additional purpose of compliance with Section 148 of the Code. Section 30. DESIGNATION AS QUALIFIED TAX-EXEMPT OBLIGATIONS. The Issuer hereby designates the Bonds as "qualified tax-exempt obligations" as defined in Section 265(b)(3) of the Code. In furtherance of such designation, the Issuer represents, covenants and warrants the following, (a) that during the calendar year in which the Bonds are issued, the Issuer (including any subordinate entities) has not designated nor will designate obligations, which when aggregated with the Bonds, will result in more than $10,000,000 of "qualified tax-exempt obligations" being issued; and (b) that the Issuer reasonably anticipates that the amount of tax-ex- empt obligations issued, during the calendar year in which the Bonds are issued, by the Issuer (or any subordinate entities) will not exceed $10,000,000. Section 31. SALE OF BONDS. The Bonds is hereby sold and shall be delivered to the TEXAS WATER DEVELOPMENT BOARD for cash for the principal amount thereof. Section 32. APPROVAL OF ESCROW AGREEMENT AND TRANSFER OF FUNDS. The Mayor of the Issuer is hereby authorized and directed to execute and deliver and the City Secretary of the Issuer is hereby authorized and directed to attest an Escrow Agreement in substantially the form attached hereto as Exhibit A. The Issuer shall cause $957,925 to be deposited into an Escrow Account created by the Escrow Agreement pending authorization from the Development Fund Manager on behalf of the Texas Water Development Board. Section 33. CONSTRUCTION FUND. There shall be established a Construction Fund with the Issuer's depository bank and upon the delivery of the purchase price for such Bonds, $102,075 initially shall be deposited into this Construction Fund. The cost of issuance of the Bonds, being legal, fiscal and engineering fees, may be paid from this Fund. There shall be 29 be deposited into the Construction Fund all amounts released from the Escrow Account created by the Escrow Agreement as provided in Section 32 hereof and in Section 2 of the Escrow Agreement. The cost of the construction of the sewer system improvements will be paid from this Fund upon directionof the City Council of the Issuer. All interest and profits from investments made with moneys in the Construction Fund shall remain on deposit in the Construction Fund as a part thereof. After compeltion of the payment of all costs of the construction of the sewer system improvements, any residue remaining in the Construction Fund shall be applied in accordance with Section 35 hereof. Section 34. FINAL ACCOUNTING. That the Issuer shall render a final accounting to the Texas Water Development Board in reference to the total cost incurred by the Issuer for Sewer System improvements together with a copy of "as built" plans of the project upon completion. Section 35. SURPLUS BOND PROCEEDS. That the Issuer shall use any surplus proceeds from the Bonds remaining after completion of the Utility System improvements, to redeem in inverse annual order of maturity, the Bonds owned by the Texas Water Development Board. Section 36. ANNUAL AND MONTHLY REPORTS. That monthly operating statements and annual audits of the Issuer shall be delivered to the Texas Water Development Board as long as the State of Texas owns any of the Bonds, and that the monthly operating statement shall be in such detail as requested by the Development Fund Manager of the Texas Water Development Board until this requirement is waived by the Development Fund Manager. Section 37. COMPLIANCE WITH THE TEXAS WATER DEVELOPMENT BOARD'S RULES AND REGULATIONS. That the Issuer covenants to comply with the rules and regulations of the Texas Water Development Board, and to maintain insurance on the Issuer's Utility System in that amount required by the Texas Water Development Board. Section 38. FINDING. It is hereby officially found and determined that said meeting was open to the public, and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. 30 ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of March 15, 1996 ("Escrow Agreement"), together with any amendments or supplements hereto, is entered into by and between the City of Sanger, Texas (the "Issuer") and Guaranty National Bank, Sanger Banking Center, Sanger, Texas (formerly known as Gainesville National Bank), as Escrow Agent (the "Bank"), together with any successor in such capacity. WITNESSETH: WHEREAS, the Issuer has authorized and sold to the Texas Water Development Board, City of Sanger, Texas Utility System Revenue Bonds, Series 1996, in the aggregate principal amount of $1,060,000 (the "Bonds"); and WHEREAS, the Texas Water Development Board is initially depositing $957,925 of the Bonds proceeds to be held by the Escrow Agent until the Development Fund Manager, or authorized representative, of the Texas Water Development Board, on behalf of the Texas Water Development Board, authorizes in written form the release of such funds from the Escrow Account into the Construction Fund as established with the Issuer pursuant to the Ordinance that authorized such Bonds; and WHEREAS, the Bank is located in the State of Texas, is a member of the Federal Deposit Insurance Corporation, and is otherwise qualified and empowered to enter into this Escrow Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein contained and in consideration of Ten Dollars ($10.00) duly paid by the Issuer to the Bank concurrently herewith, the receipt whereof is hereby acknowledged, and in order to secure the delivery of the Bonds, the parties hereto mutually undertake, promise and agree for themselves, their respective representatives, successors, and assigns, as follows: 1. That there is hereby deposited by the Issuer with the Bank, to be heldspecial Escrow Account designated as y of Sanger, Texas Utility System Revenue Bonds, Series 1996 Escrow Account ("Escrow Account"), the sum of $957,925 from the sale of the Bonds, which sum will be held therein until the Development Fund Manager authorizes the release of such monies from the Escrow Account as provided in Section 2 hereof. 2. That the Bank shall invest the monies in the Escrow Account for the benefit of the Issuer, as directed in writing by the Issuer, and any income made from such investments shall be deposited into the Escrow Account, and that the Development Fund Manager, or authorized representative, of the Texas Water Development Board, on behalf of the Texas Water Development Board, may authorize in written form the transfer of such monies from the Escrow Account into the Construction Fund. 3. That monies in this Escrow Account shall be secured in the same manner as all other public funds of the Issuer. 4. That upon notification of the approval of the release of those monies from the Escrow Account by the Development Fund Manager, or authorized representative, of the Texas Water Development Board, the Bank shall transfer such monies together with any interest earned on such account as directed by the Issuer. 5. That the Bank shall not be liable for any act done or step taken or omitted by it or any mistake of fact or law, except for its negligence or default or failure in the performance of any obligation imposed upon it hereunder. The Bank shall not be responsible in any manner for any proceedings in connection with the Bonds or any recitation contained in the Bonds. 6. That this Escrow Agreement shall expire upon transfer of the funds in the Escrow Account to the Issuer. IN WITNESS WHEREOF, the Mayor of said Issuer signed this instrument on behalf of said Issuer, and the Issuer's official seal is affixed hereto, and the Mayor's signature is attested to by the City Secretary of the Issuer and has caused this instrument to be signed by the Bank in its corporate name by its President, or one of its Vice Presidents, and sealed with its corporate seal, and attested to by a Vice President, or Cashier, all as of the 15th day of March, 1996. Mayor City of Sanger, Texas City Secretary City of Sanger, Texas SEAL Gainesville National Bank Sanger, Texas Vice President ATTEST: Title: BANK SEAL ACKNOWLEDGMENT OF NOTICE OF SPECIAL MEETING FOR ABSENTEES THE STATE OF TEXAS § COUNTY OF DENTON § CITY OF BANGER § The undersigned officer or member of the City Council of said City acknowledges and certifies that he or she was duly and sufficiently notified officially and personally, in advance, of the time, place, and purpose of the Special Meeting of said City, which was held at the regular designated meeting place in said City on February 26, 1996, and that an ORDINANCE AUTHORIZING THE ISSUANCE OF UTILITY SYSTEM REVENUE BONDS, SERIES 1996, AND OTHER MATTERS RELATED THERETO would be duly introduced and considered for passage at said Special Meeting, and that he or she consented in advance to the holding of said Special Meeting for such purpose. SIGNED the day of March, 1996. Glen Ervin GENERAL CERTIFICATE THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER We, the undersigned officers of said City, hereby certify as follows: 1. That this certificate is executed for and on behalf of said City with reference to the issuance of the proposed CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996, dated March 15, 1996, in the principal amount of $1,060,000, 2. That said City was incorporated, and is now operating and existing under the general laws of the State of Texas, with an Aldermanic form of government; and that the provisions of Title 28, Revised Civil Statutes of Texas, 1925, as amended, relating to cities and towns, including particularly Chapters 1 through 10 thereof, are applicable to, and have been lawfully accepted or adopted by said City. 3. That no litigation of any nature has ever been filed pertaining to, affecting, questioning, or contesting: (a) the ordinance which authorized said City's proposed Bonds described in paragraph 1 of this certificate; (b) the issuance, execution, delivery, payment, security or validity of said proposed Bonds, (c) the authority of the City Council and the officers of said City to issue, execute and deliver said Bonds, (d) the validity of the corporate existence or charter of said City, or (e) the current tax rolls of said City, and that no litigation is pending pertaining, affecting, questioning, or contesting the current boundaries of said City. 5. That no petition was received protesting the issuance of the proposed Bonds. 6. That the City's current water, sewer and electric rates are reflected in ordinances adopted by the City on July 18, 1994 and September 25, 1995, copies of which are attached hereto. 7. That none of the revenues or income of said City's Utility System have been pledged or encumbered to the payment of any debt or obligation of said City or said System, except in connection with the aforesaid proposed Bonds and the following outstanding revenue bonds: Utility System Refunding and Improvement Revenue Bonds, Series 1991, no outstanding in the aggregate principal amount of $2,155,000 8. That no default exists in connection with any of the covenants or requirements contained in the ordinance that authorized the issuance of the outstanding bonds listed above, and that each of the Funds, including the Interest and Sinking Fund and Reserve Fund created in said ordinance and maintained for the benefit of said outstanding bonds, contains the amount now required to be on deposit therein. I 9. That the following is a true, full and correct schedule of the income and expenses of the Utility System for the past three years, to -wit: 1995 1994 1993 Income $3,4079943 $2,911,874 $2,8509662 Expenses 243806535 2 063 026 2 1035077 Net Revenues $190275408 $ 848,848 $ 747,155 City SIGNED AND SEALED this the 26th day of February, 1996. V •. TEL Feb 22,96 10*54 No.001 P.02 ORDINANCE NO. Ir 10-95 AN ORDINANCE AMENDING CHAPTER 10, SECTION 3A OF THE CODE OF ORDINANCES OF THE CITY OF SANGER, DENTON COUNTY, TEXAS, TO PROVIDE FOR A SCHEDULE OF WATER UTILPIY RATES; PROVIDING FOR THE REPEAT. OF ORDINANCES IN CONFLICT. PROVIDING A SEVERABILITY CLAUSE; PROVIDING A PENALTY CLAUSE; AND PROVIDING FOR AN EFFECTIVE DATE. BE IT ORDAINED AND ORDERED by the City Council of the City of Sanger, Texas that: $11.00 Minimum per unit served for 0-1,000 gallons $1.85 per thousand gallons $2.05 per thousand gallons $2.45 per thousand gallons $8.25 per thousand gallons effective September 2ra, 1995. SECTIOI�Y II r I,001 - 5,000 - 15,000 - 30,000 + All ordinanecs or parts of ordinances in conflict hereof are, to the extent of such conflict, repealed. SECTION III It is declared to be the intention of the City Council that the sections, paragraphs, sentences, clauses and phrases of this Ordinance are severable and, should any of the same be declared null or void by any court of competent jurisdiction, such action shall not affect the remaining phrases, clauses, sentences, paragraphs or sections of this Ordinance. SECTION IV Failure to comply with any section or provision of this Ordinance that is prohibited or is declared to be unlawful or a misdemeanor , or whenever in this Ordinance, the commission of an act is required or the omission thereof is prohibited, the violation of such provision shall be punishable by a fine not to exceed One Thousand Dollars ($1,000.00); provided however, that no penalty shall be greater or less than the penalty provided under the ORDINANCE * 10w95 WATER Me RATES PAGE 2 laws of the State of Texas. Each day any violation of this Ordinance shall continue shall constitute a separate offense. PASSED, APPROVED AND ADOPTED, this the 25th day of September A.D.. 1995, by the City Council of the City of Sanger, Denton County, Texas. . "M"%Vf.CT. J i Nel Armstrong Mayor, City of Sanj '4 CITY OIr' SANGER, TEXAS ORDINANCE NO, IF 11-va AN ORDINANCE AMENDING CHAPTER 10, SECTION 4 OF THE CODE OF ORDINANCES OF THE CITY OF SANGER* DENTON COUNTY, TEXAS, ENTITLED SEWER SERVICE RATES; ESTABLISHING RATES FOR MULTIFAMILY DWELLINGS; PROVIDING FOR REPEAL OF ORDINANCES IN CONFLICT; PROVIDING A SEVERABILITY CLAUSE; PROVIDING A PENALTY CLAUSE; AND PROVIDING AN EFFECTIVE DATE. _ BE IT ORDAINED AND ORDERED by the City Council of the City of Sanger, Texas that: SECTION 1 Chapter 10, Section 4 of the Sanger code of Ordinances is hereby amended to read as follows: Section 4: Sewer Service Rates ( l.) Residential � Class A Class A custom�crs shall include all residential type users aaa..auusus vut atuL AUItiLCu W, l31I1giC-IBIIIlIy resaaences, apartment units, trailer court units, duplexes, or any other service primarily intended for domestic or residential use. The City may include similar low volume users such as churches and small business offices or stores in Class A. All Class A customers of municipal wastewater facilities will be charged a minimum of 912 per monthly cycle and I0 per thousand gallons of metered water in excess of the first one thousand (1,000) gallons, but in not case to exceed $26.00 per month. (2) Commercial -Class B Class B customers shell include commercial users such as but not limited to, restaurants, cafes, car washes, schools, hospitals. nursing homes, offices, hotels, motels, laundries, grocery stores, department stores and other commercial business operations as may be identified as not a Class A type user,IL All Class B customers of is wastewater facilities shall be charged a minimum a'�.,1$QSLler monthly cycle end it 1.00 per thousand. gallons of metered water in excess of the first one TELM Feb 22,96 10057 No.001 P.03 r� PO • ORDINANCE f 11-95 SEWER SERV. RATES PAGE 2 thousand (1,000) gallons, but in no case to exceed $125 per month. (8) Multi -Family Dwellings 'The amount due fvr multi -family dwellings shall be the Closs A rate multiplied by the number of occupied dwelling units. SECTION II All Qrdinances or parts of Ordinances in conflict herewith are, to the extent of such conflict, hereby repealed. SECTION III It is declared to be the intention of the City Council that the sections, paragraphs, sentences, clauses and phrases of this Ordinance are severable and, if any phrase, clause, sentence, paragraph or section of this Ordinance shall be declared unconstitutional by the valid judgment or decree of any court of competent jurisdiction, such unconstitutionality shall not affect any of the remaining phrases, clauses, sentences, paragraphs, and sections of this Ordinance, since the same would have been enacted by the City Council without the incorporation in this Ordinance of any such unconstitutional phrase, clause, sentence. paragraph or section Whenever in the Ordinance an act is prohibited or is made or declared to be unlawful or en offense or a misdemeanor or whenever in such Ordinance, the doing of an act is required or the failure to do any act is declared to be unlawful, the violation of any such provision shall be punishable by a fine not to exceed One Thousand ($1,000 00) Dollars, provided that no penalty shall be greater or less than the penalty provided for the same or similar offense under the laws of the Mate of Texas. Each day any violation of this Ordinance shall continue shall constitute a separate offense. This Ordinance will take effect September 25, 1995. ORDINANCE 11-95 SEWER SERV. RATES PACE 3 PASSED, APPROVED AND ADOPTED, this the 25th A.D., 1995, by the City Council of the City of Sanger. Denton ATTEST: APP�tOVEDa day oP September County, Texas, Nel Armstrong Mayor, City of Sanger CITY OF SANGER, TEXAS ORDINANCE NO. # 14-95 AN ORDINANCE AMENDING CHAPTER 10 ju llsaITIES) OF THE CODE OF ORDINANCES OF THE CITY OF SANGER, DENpON COUNTY, TEXAS, MORE SPECIFICALLY SECTION 2 ENTITLED WATER AND SEWER SERVICE CONNECTIONS ESTABLISHING NEW FEES; .. _ FROVIDING FOR THE REPEAL OF ORDINANCES IN CONFLICT; PROVIDING A SEVERABILITY CLAUSE; PROVIDING A PENALTY CLAUSMoF AND PROVIDING FOR AN EFFECTIVE DATE. HE IT ORDAINEn AND ORDERED by the City Council of tht City of Sanger, Texas that. Section 2, subsections A &Bare hereby amended to read as follows: SECTION 2: WATER AND 3EWEYt SERVICE CONNECTIONS • �'he City of Sanger shall install, or Cause to be installed, and maintain all water service connections in the streets, alleys, and easements. All interruptions of water service to any and all customers shell be shade under the direct supervision of the city water department before such interruption is made. Any person, firm, or corporation found interrupting water service without city •~•��^a•+^�+ Shalt he in violation of this section and shall be subject to tines and penalties as prescribed in Chapter 1, Seegon or the 9 Sanger City Coda The city shall charge for the installation and connections maintenance of all such a sum sufficient to cover the average cost thereof. Such sum is to be determined and collected by the utility department and shall be at the following rates: Tap charge for all sizes up to 7 in a the Infrastructure for connection approved provided byvisions thedeveloper------•------'-----------------------------------...�_....$0 0 35 0 Tap charges for all other up to 2" �_._._�^_r__ �500.00 Tap charges for each additional inch over 2"-�....._ d l 00.00 Charge for meter, box, and 10.00 Charge for service interruption supervision-----...__._ �' 25:00 ConnCCtiOri9--------�.._ACtual Cost Charge for Water Connect Fees (User Fee)----.--___�.��.� TEL� ' ^4d Feb 22,96 10*58 No.001 P.04 • Where service lines have been installed by developer, the water service connection charge shall be reduced by the amount of the tap charge as shown for related sizes. All water services for construction purposes shall be metered and subject to the same regulations and billings as permanent water accounts. In the event that a meter box has been installed by the developer, the meter and box charge will be reduced ten dollars ($10.001 The City of Sanger shall install all sanitary sewer service connections in the streets, alleys, and easements both inside and outside the City limits. Said service connections shall be installed frow the main to the property line when the sewer main is located in an alley or a street right-of-way if the sewer :Hain is in an easement, the service connection shall be installed from the sewer main to the easement boundary line. The City of Sanger shall charge four hundred dollars ($400.00) for each sewer lateral connect. Service lines that require tl�e cutting or boring of paved streets or alleys will be subject to an additional charge based on the actual cost for such bores or cuts necessary for installation. Such costs will be determined by the City. The property owner shall install a service line at his or her expense to the City's lateral, in accordance with City regulations and subject to the inspection of the City, and shall hereafter be responsible for normal maintenance of said service line from the house to property line. Each house or building within the City of Sanger shall be served by a separate and independent water and sanitary sewer connection. Where the service laterals have been installed by a developer to serve a lot or tract of land, said lot or tract of land shall be exempt from a connection charge. SECTION II All Qrdinanees or parts of Ordinances in eonriict herewith are, to the extent of such conflict. hereby repealed. TEL: SECTION III Feb 22996 10059 No.001 P.05 IL is hereby declared to be the intention of the City Council that the sections, paragraphs, sentences, clauses, and phrases of this Ordinance are severable and, if any phrase, clause, sentence, paragraph, or section of this ordinance shall be declared unconstitutional by the valid judgment decree of any court of competent jurisdiction, such unconstitutionality shall not affect any of the remaining phrases. clauses, sentences, paragraphs, and sections of this Ordinance, since the same would have been enacted by the City Council without the incorporation in this Ordinance of any such unconstitutional phrase, clause, sentence, paragraph, or section. Whenever in this Ordinance an act is prohibited or is made or declared to be unlawful or an offense or a misdemeanor, or whenever in such Ordinance, the doing of an act is required or the failure to do any act is declared to be unlawful, the violation of any such provision shall be punished b a fine of not exceeding One Thousand Dollars ($1,000 00r provided however, that no penalty shall be greater or less than the penalty provided for the same or similar offense under the laws of the State. Each day constitutes a separate offense. This Ordinance will take affect immediately from and after its passage and the publication of the caption as the law in such cases provides. FASSED, APPROVED AND ADOPTED, this the 25th day of September A.D., 1995, by the City Council of the City of Sanger, Dentpn Cpunty, ATTIf�lr'`'` Y/� ` iTO z ,oft O n. �``a TEL" Feb 22,96 10%59 No.001 P.06 .i CITY orSANGER* TEXAS wOFVG�f-i.�fW&/J+d, j+ArpeKpl i/ • 111 IL . 1 f 1 f • • rIL• • r I '• 1 1 i •• li • i SECTYON Y 276102 AND A=CLIS 27'w103 OF :1TY OF SANGER CODE OF ORDINANCES 13 HERE13YI. r r TO READ FOLLOWS:ks C . F'acilitiee C16uarge: Energy Charge: .....Minimum Bilk �9.OU per month i._ - C_ 1$0.0621029 per KWH - _ .. $9.00 per month B. SNi,A►IwL CONiME12CYAL ELECTRIC RASE Facilities Charge: , 'w'" {' 11.50 per month Energy Charge $0.0676982 per KWH otgoilk ONO 04 Miniminn sili: $11.60 per month C. LARGE COMM RCIAL RATE or. . A �0.0237048 per KWH !or ; � nll KWH �52.39 per month 'The i'uel adjustment charge for ail IS;WH ei�tll be �.0 SECTION II All Ord;nsz�ces or parts of C?rdirxences in cor�ilict harcwith ere, t0 the C7t1�GriL of aucn c�nutiCy ucativy +■.��++-W SECTION III SECTION I'V PASSED AND A,P1��tOVED this 1� dsty of July t984. by the City Council of ttie i;ity of Sager, 'iaxas. .. - A r PAYING AGENT/REGISTRAR AGREEMENT THIS AGREEMENT entered into as of March 15, 1996 (this "Agreement"), by and between the City of Sanger, Texas (the "Issuer"), and Texas Commerce Bank National Association, Dallas, Texas, a national banking association duly organized and existing under the laws of the United States of America (the "Bank"). WHEREAS, the Issuer has duly authorized and provided for the issuance of its Utility System Revenue Bonds, Series 1996 (the "Securities") in the aggregate principal amount of $1,060,000, such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchasers thereof on or about April 11, 1996; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on said Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities, NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Ordinance" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of said Securities and with respect to the transfer and exchange thereof as provided herein and in the "Ordinance. " The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Annex A attached hereto for the remainder of the Fiscal Year during which this Agreement is executed and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for municipalities, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. 1 In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). requires: ARTICLE TWO DEFINITIONS Section 2.01. Defmitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the principal corporate trust office of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Ordinance" means a written request or ordinance signed in the name of the Issuer by the Mayor of the Issuer, any one or more of said officials, delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trustI unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this defmition1 any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Ordinance). "Redemption Date" when used with respect to any Bond to be redeemed means the date fixed for such redemption pursuant to the terms of the Ordinance. "Ordinance" means the ordinance of the governing body of the Issuer pursuant to which the Securities are issued, certified by the City Secretary or any other officer of the Issuer and delivered to the Bank. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice -Chairman of the Board of Directors, the Chairman or Vice-chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Ordinance the principal of a Security is scheduled to be due and payable. Section 2.02. Other Defmitions0 The terms "Bank," Issuer," and Securities (Security)" have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. ARTICLE THREE PAYING AGENT Section 3.01. Duties of Paying Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office, As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Ordinance. ARTICLE FOUR REGISTRAR Section 4.01. Security Register -Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register") for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. All transfers, exchanges and replacement of Securities shall be noted in the Security Register, Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect a re -registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereof will be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three (3) business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. Section 4.02. Certificates. The Issuer shall provide an adequate inventory of printed Securities to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities in safekeeping, which shall be not less than the care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that is maintained for its own securities. Section 4.03. Form of Security Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order and prior to the release or disclosure of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the court order or such release or disclosure of the contents of the Security Register. Section 4.05. Return of Cancelled Certificates. The Bank will, at such reasonable intervals as it determines, surrender to the Issuer, Securities in lieu of which or in exchange for which other Securities have been issued, or which have been paid. Section 4.06. Mutilated, Destroyed, Lost or Stolen Secures. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Ordinance, to deliver and issue Securities in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities as long as the same does not result in an overissuance. Incase any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitu- tion for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities it has paid pursuant to Section 3.01, Securities it has delivered upon the transfer or exchange of any Securities pursuant to Section 4.01, and Securities it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities pursuant to Section 4.06. ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and agrees to use reasonable care in the performance thereof. Section 5.02. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any fmancial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or 5 other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by Issuer. (e) The Bank may consult with counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Moneys Held by Bank. Funds held by the Bank hereunder need not be segregated from any other funds provided appropriate accounts are maintained in the name and for the benefit of the Issuer. The Bank shall be under no liability for interest on any money received by it hereunder. The Bank shall deposit any moneys received from the Issuer into a trust account to be held in a fiduciary capacity for the payment of the Securities, with such moneys in the account that exceed the deposit insurance available to the Issuer by the Federal Deposit Insurance Corporation, to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas, and to the extent practicable under the laws of the United States of America, to secure and be pledged as collateral for trust accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such trust account shall be made by check drawn on such trust account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Subject to the Unclaimed Property Law of the State of Texas, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for three years after the final maturity of the Security has become due and payable will be paid by the Bank to the Issuer if the Issuer so elects, and the Holder of such Security shall hereafter look only to the Issuer for payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. If the Issuer does not elect, the Bank is directed to report and dispose of the funds in compliance with Title Six of the Texas Property Code, as amended. Section 5.06, Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the State and County where either the Bank Office or the administrative offices of the Issuer is located, and agree that service A process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective August 1, 1987, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. or not. Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed 7 Section 6.06, Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between his Agreement and the Ordinance, the Ordinance shall govern. Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of fmal payment of the principal of and interest on the Securities to the Holders thereof or (ii) maybe earlier terminated by either party upon sixty (60) days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securities, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. E3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written• A tract• [BANK SEAL] [ISSUER SEAL] City TEXAS TEXAS COMMERCE BANK NATIONAL ASSOCIATION Dallas, Texas CITY OF BANGER By Mayor G� SCHEDULE OF FEES FOR PAYING AGENT/REGISTRAR Initial Fee $350.00 Annual Fee $550.00 These fees do not include out of pocket expenses which are billed at cost to the issuer. These fees also do not cover extraordinary services which are priced on the time and scope of our duties. A $10.00 charge per check will be assessed for disbursement of cost of issuance by the Paying Agent. These fees assume retention by the Paying Agent of the float on uninvested funds held in accounts by the Paying Agent. ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of March 15, 1996 ("Escrow Agreement"), together with any amendments or supplements hereto, is entered into by and between the City of Sanger, Texas (the "Issuer") and Guaranty National Bank, Sanger Banking Center, Sanger, Texas (formerly known as Gainesville National Bank), as Escrow Agent (the "Bank"), together with any successor in such capacity. WITNESSETH: WHEREAS, the Issuer has authorized and sold to the Texas Water Development Board, City of Sanger, Texas Utility System Revenue Bonds, Series 1996, in the aggregate principal amount of $1,060,000 (the " Bonds ")a and WHEREAS, the Texas Water Development Board is initially depositing $957,925 of the Bonds proceeds to be held by the Escrow Agent until the Development Fund Manager, or authorized representative, of the Texas Water Development Board, on behalf of the Texas Water Development Board, authorizes in written form the release of such funds from the Escrow Account into the Construction Fund as established with the Issuer pursuant to the Ordinance that authorized such Bonds; and WHEREAS, the Bank is located in the State of Texas, is a member of the Federal Deposit Insurance Corporation, and is otherwise qualified and empowered to enter into this Escrow Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein contained and in consideration of Ten Dollars ($10.00) duly paid by the Issuer to the Bank concurrently herewith, the receipt whereof is hereby acknowledged, and in order to secure the delivery of the Bonds, the parties hereto mutually undertake, promise and agree for themselves, their respective representatives, successors, and assigns, as follows: 1. That there is hereby deposited by the Issuer with the Bank, to be held in a special Escrow Account designated as "City of Sanger, Texas Utility System Revenue Bonds, Series 1996 Escrow Account ("Escrow Account"), the sum of $957,925 from the sale of the Bonds, which sum will be held therein until the Development Fund Manager authorizes the release of such monies from the Escrow Account as provided in Section 2 hereof. 2. That the Bank shall invest the monies in the Escrow Account for the benefit of the Issuer, as directed in writing by the Issuer, and any income made from such investments shall be deposited into the Escrow Account, and that the Development Fund Manager, or authorized representative, of the Texas Water Development Board, on behalf of the Texas Water Development Board, may authorize in written form the transfer of such monies from the Escrow Account into the Construction Fund. 3. That monies in this Escrow Account shall be secured in the same manner as all other public funds of the Issuer. 4. That upon notification of the approval of the release of those monies from the Escrow Account by the Development Fund Manager, or authorized representative, of the Texas Water Development Board, the Bank shall transfer such monies together with any interest earned on such account as directed by the Issuer. 5. That the Bank shall not be liable for any act done or step taken or omitted by it or any mistake of fact or law, except for its negligence or default or failure in the performance of any obligation imposed upon it hereunder. The Bank shall not be responsible in any manner for any proceedings in connection with the Bonds or any recitation contained in the Bonds. 6. That this Escrow Agreement shall expire upon transfer of the funds in the Escrow Account to the Issuer. IN WITNESS WHEREOF, the Mayor of said Issuer signed this instrument on behalf of said Issuer, and the Issuer's official seal is affixed hereto, and the Mayor's signature is attested to by the City Secretary of the Issuer and has caused this instrument to be signed by the Bank in its corporate name by its President, or one of its Vice Presidents, and sealed with its corporate seal, and attested to by a Vice President, or Cashier, all as of the lSth day of March, 1996. City S ��• ..� " • • ;Y� 'G v��.. . �� i ATTEST: �, wz ��/l �., � "r�� �� Title: Banking Officer BANK SEAL ---__ �-�� � wr���"'�t �� Mayor City of Sanger, Texas Guaranty National Bank formerly known as Gainesville NationaYBank Vice Texas C.P.A. CERTIFICATE THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER I, the undersigned, Certified Public Accountant, for the City of Sanger, Texas, hereby state as follows: 1. That this certificate and report is executed with reference to the proposed CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE BONDS, SERIES 1996, dated March 15, 1996, in the principal amount of $1,060,000 (the "Bonds"). 2. That the term "Net Earnings", as used in this Certificate, shall mean the annual gross revenues of the City's Waterworks, Sewer and Electric System (the "Utility System"), after deducting the expenses, operation and maintenance thereof, but not deducting depreciation, bond payments or expenditures, which under standard accounting practice, should be charged to capital expenditures. 3. That the Net Earnings of said Utility System for the preceding fiscal year ending September 30, 1995, were equal to 1.25 times the average annual requirements for the payment of principal and interest on the aforesaid proposed Bonds, and the outstanding bonds of the following issues of said City after delivery of the Bonds: Utility System Refunding and Improvement Revenue Bonds, Series 1991, now outstanding in the aggregate principal amount of $2,155,000. EXECUTED THIS THE $ day of F Q- , 1996. Certified Public Accountant SUBSCRIBED AND SWORN TO BEFORE ME, this the oC(/ 1996. n U `HOSAl.1E M. CHAVCZ otary Public S'IATG OF TD=E3 My Commission Expires N1.97 y NO -ARBITRAGE CERTIFICATE 1. In General. 1.1. The undersigned is the Mayor %J the City %J Sanger, Texas (the "Issuer"). 1.2. This Certificate is executed for the purpose of establishing the reasonable expectations of the Issuer as to future events regarding the Issuer's Utility System Revenue Bonds, Series 1996 (the "Bonds"). The Bonds are being issued pursuant to an ordinance of the Issuer (the "Ordinance") adopted on the date of sale of the Bonds. The Ordinance is incorporated herein by reference. 1.3. To the best of the undersigned's knowledge, information and belief, the expectations contained in this Certificate are reasonable. 1.4. The undersigned is an officer of the Issuer delegated with the responsibility of issuing and delivering the Bonds. 2. The Purpose of the Bonds. 2. I. The Bonds are being issued pursuant to the Ordinance (a) to provide for the payment of costs of issuing the Bonds, and (b) to improve and extend the Issuer's sewer system (the "Project"). 2.2. All earnings, such as interest and dividends, received from the investment of the proceeds of the Bonds during the period of acquisition and construction of the Project and not used to pay interest on the Bonds, will be used to pay the costs of the Project, unless required to be rebated and paid to the United States in accordance with section 148(f) of the Internal Revenue Code of 1986 (the "Code"). 2.3. The proceeds of the Bonds, together with any investment earnings thereon, are expected not to exceed the amount necessary for the governmental purpose of the Bonds. 3. Tem�orary Period and Hedge Bond. 3.1. The Issuer will incur, within six months after the date of issue of the Bonds, a binding obligation to commence the Project, either by entering into contracts for the construction of the Project or by entering into contracts for architectural or engineering services for such Project, or contracts for the development, purchase of construction materials, or purchase of equipment, for the Project, with the amount to be paid under such contracts to be in excess of five percent of the proceeds which are estimated to be used for the cost of the Project. 3.2. After entering into binding obligations, work on such Project will proceed promptly with due diligence to completion. 3,3. All original proceeds derived from the sale of the Bonds to be applied to the Project and all investment earnings thereon (other than any amounts required to be rebated to the United States pursuant to section 148(f) of the Code) will be expended for the Project no later than a date which is three years after the date of issue of the Bonds. 3.4. The Issuer will not invest the proceeds in any guaranteed investment contract or other nonpurpose investment with a substantially guaranteed yield for a period equal to or greater than four years. 4. Interest and Sinkine; Fund. 4.1. A separate and special Interest and Sinking Fund has been created and established solely to pay the principal of and interest on the Bonds and any parity bonds, with a portion of the Interest and Sinking Fund constituting a bona fide debt service fund for the Bonds, and money deposited into the Interest and Sinking Fund for the Bonds will not be invested at a yield higher than the yield on the Bonds, except during the thirteen month period beginning on the date of each such deposit of money, and the amounts received from the investment of money in the Interest and Sinking Fund will not be invested at a yield higher than the yield on the Bonds, except during the one year period beginning on the date of receipt of such amounts; provided, however, and except that, if any money so deposited, and any amounts received from the investment thereof, are accumulated in the Interest and Sinking Fund and remain on hand in the Interest and Sinking Fund after thirteen months from the date of deposit of any such money or one year after the receipt of any such amounts from the investment thereof, such money and amounts allocable to the Bonds, to the extent of an aggregate not exceeding the lesser of 5 percent of the proceeds of the Bonds or $100,000 will not be subject to investment yield restrictions, and shall constitute a separate portion of the Interest and Sinking Fund. 4.2. It is expected that a portion of the Interest and Sinking Fund will be used primarily to achieve a proper matching of revenues collected for the Bonds and debt service on the Bonds within each bond year, and it is expected that such portion of the Interest and Sinking Fund will be depleted once a year on a first -in - first -out basis, except for a possible carryover amount which will not exceed the greater of one year's earnings on the Interest and Sinking Fund or 1/12 of annual debt service on the Bonds payable from the Interest and Sinking Fund, but any money and amounts which may be accumulated in the Interest and Sinking Fund, to constitute a debt service reserve fund for the Bonds as described in Section 4.1, above, shall constitute a separate portion of the Interest and Sinking Fund, and will not be depleted annually, and will not be subject to yield restrictions; provided that in no event will such debt service reserve fund portion of the Interest and Sinking Fund ever exceed the lesser of 5 percent of the proceeds of the Bonds or $100,000. 5. Reserve Fund. 5. I . Funds on deposit in the Reserve Fund are held in trust for the benefit of the holders of the bonds. If on any interest payment or maturity date, the Interest and Sinking Fund does not contain an amount sufficient to make debt service payments on the Bonds, the Issuer is required to transfer money from the Reserve Fund to the Interest and Sinking Fund in an amount sufficient to make such payments. 5.2. The present value of the investments deposited to the Reserve Fund and allocable to the Bonds that will be invested at a yield higher than the yield on the Bonds will not, as of any date, exceed an aggregate amount which equals the lesser of (a) 10 percent of the stated principal amount (or, in the case of a discount, the issue price) of the Bonds, (b) 1.25 of the average annual debt service on the Bonds, or (c) maximum annual debt service on the Bonds. 5.3. No amounts will be deposited in the Reserve Fund constituting proceeds received from the sale of the Bonds. 6. Revenue Fund, 6.1. The Ordinance confirms the creation of a Revenue Fund into which certain revenues of the Issuer are deposited. Amounts on deposit in the Revenue Fund are transferred and used in the manner required by the Ordinance. 6.2. Other than moneys in the Revenue Fund that are transferred to the Interest and Sinking Fund, the moneys in the Revenue Fund are reasonably expected not to be used to pay the principal of and interest on the Bonds. There will be no assurance that such moneys will be available to meet debt service if the Issuer encounters financial difficulty. Amounts in the Revenue Fund will be invested without yield restriction. 7. Emergency Fund. 7.1. The Ordinance confirms the creation of an Emergency Fund which is to be used solely for the purpose of paying the cost of any repairs or extensions to the System, as defined in the Ordinance. 7.2. Moneys in the Emergency Fund are reasonably expected not to be used to pay the principal of and interest on the Bonds. There will be no assurance that such amounts will be available to meet debt services if the Issuer encounters financial difficulty. Amounts in the Emergency Fund will be invested without yield restriction. 8. Yield. The Bonds are being purchased by the Texas Water Development Board at a purchase price of 100 percent of the stated principal amount thereof. 9. Invested Sinking Fund Proceeds, Replacement Proceeds. 9. 1. The Issuer has, in addition to the moneys received from the sale of the Bonds, certain other moneys that are invested in various funds which are pledged for various purposes. These other funds are not available to accomplish the purposes described in Section 2 of this Certificate. 9.2. Other than the Interest and Sinking Fund and the Reserve Fund, there are, and will be no other funds or accounts established, or to be established, by or on behalf of the Issuer (a) which are reasonably expected to be used, or to generate earnings to be used, to pay debt service on the Bonds, or (b) which are reserved or pledged as collateral for payment of debt service on the Bonds and for which there is reasonable assurance that amounts therein will be available to pay such debt service if the Issuer encounters financial difficulties. Accordingly, there are no other amounts constituting "gross proceeds" of the Bonds, within the meaning of section 148 of the Code. 10. Other Obli, ate ions. There are no other obligations of the Issuer which (a) are sold at substantially the same time as the Bonds (i.e., within 15 days of the date of sale of the Bonds), (b) are sold pursuant to a common plan of financing with the Bonds, and (c) will be payable from the same source of funds as the Bonds. 3 11. Rebate to United States, The Issuer has covenanted in the Ordinance that it will comply with the requirements of the Code, including section 148(f) of the Code, relating to the required rebate to the United States. Specifically, the Issuer will take steps to ensure that all earnings on gross proceeds of the Bonds in excess of the yield on the Bonds required to be rebated to the United States will be timely paid to the United States. The Issuer acknowledges receipt of the memorandum attached hereto as Exhibit "A" which discusses regulations promulgated pursuant to section 148(f) of the Code. This memorandum does not constitute an opinion of Bond Counsel as to the proper federal tax or accounting treatment of any specific transaction. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.) 0 )ATEDO APR 6 CITY OF SANGER, TEXAS By: Exhibit "A" UW OFFICES 3100 ONE AMERICAN CENTER AUSTIN, TEXAS 78701-3248 TELEPHONE: 512 4783805 FACSIMILE: 512 472.0871 McCALL, PARKHURST & HORTON L.L.P 717 NORTH HARWOOD NINTH FLOOR DALLAS, TEXAS 75201-6587 TELEPHONE: 214 220.2800 FACSIMILE: 214 7$4.9250 January 1, 1995 1225 ONE RIVERWALK PLACE SAN ANTONIO, TEXAS 78205 3503 ARBITRAGE REBATE REGULATIONS© TELEPMON E: 210 225.2800 FACSIMILE: 210 225.2984 The Tax Reform Act of 1986 amended the provisions of the Intemal Revenue Code by providing a newly -enacted section 148(f) of the Internal Revenue Code of 1986 (the "Code"), relating to arbitrage rebate. This arbitrage rebate requirement generally provides that in order for interest on any issue of obligations to be excluded from gross income (i.e., tax-exempt) the issuer must rebate to the United States the sum of, (1) the excess of the amount earned on all "nonpurpose investments" acquired with "gross proceeds" of the issue over the amount which would have been earned if such investments had been invested at a yield equal to the yield on the issue, and (2) the earnings on such excess earnings. These rules are substantially similar to the rules which, prior to the Tax Reform Act of 1986, applied to industrial development bonds and mortgage revenue bonds. Section 148(f) of the Code has been amended by several subsequent tax acts, most notably, the Revenue Reconciliation Acts of 1989 and 1990. These amendments primarily provided a special exception to rebate for certain construction issues, as discussed under the heading "Exceptions to Rebate." On June 18, 1993, the U.S. Treasury Department promulgated regulations relating to the computation of arbitrage rebate and the rebate exceptions. These regulations, which replace the previously -published regulations promulgated on May 15, 1989, and on May 18, 1992, are effective for bonds issued after June 30, 1993. These newly -promulgated regulations also replace the arbitrage regulations, other than those relating to rebate, which were published in 1978, This memorandum was prepared by McCall, Parkhurst & Horton L.L.P. and provides a general discussion of the arbitrage rebate regulations. This memorandum does not otherwise discuss the general arbitrage regulations, other than as they may incidentally relate to rebate. This memorandum also does not attempt to provide an exhaustive discussion of the arbitrage rebate regulations and should not be considered advice with respect to the arbitrage rebate requirements as applied to any individual or governmental unit or any specific transaction. McCall, Parkhurst & Horton L.L.P. remains available to provide legal advice to issuers with respect to the provisions of these tax regulations but recommends that issuers seek competent Copyright 1993 by Harold T. Flanagan, McCall, Parkhurst &Horton L.L.P. All rights reserved. financial and accounting assistance in calculating the amount of such issuer's rebate liability under section 148(f) of the Code and in making elections to apply the rebate exceptions. In this memorandum the word "bond" is defined to include any bond, note, certificate, financing lease or other obligation of an issuer. Effective Dates The regulations promulgated on June 18, 1993, generally apply to bonds delivered after June 30, 1993, but, as discussed below, also permit an issuer to elect to apply the newly - promulgated rules to bonds issued prior to that date. The temporary regulations adopted by the U.S. Treasury Department in 1989 and 1992 incorporated the same effective dates which generally apply for purposes of section 148(f) of the Code. The statutory provisions of section 148(f) of the Code, other than the exception for construction issues, apply to all bonds issued after August 15, 1986, (for private activity bonds) and August 31, 1986, (for governmental public purpose bonds). As such, the previous versions of the rebate regulations generally applied to bonds issued between August 1986 and June 30, 1993 (or, with an election, to bonds issued prior to August 15, 1993). The statutory exception to rebate applicable to construction issues generally applies to such issues if delivered after December 19, 1989. The newly -promulgated regulations provide numerous transitional rules for bonds sold prior to July 1, 1993. Moreover, since, under prior law, rules were previously published with respect to industrial development bonds and mortgage revenue bonds, the transitional rules contained in these newly -promulgated regulations permit an issuer to elect to apply certain of these rules for computing rebate on pre-1986 bonds. The regulations provide for numerous elections which would permit an issuer to apply the newly -promulgated rules (other than 18-month spending exception) to bonds which were issued prior to July 1, 1993 and remain outstanding on June 30, 1993. Due to the complexity of the regulation, it is impossible to discuss in this memorandum all circumstances for which specific elections are provided. If an issuer would prefer, in certain circumstances, to use the newly -promulgated regulations in lieu of the computational method stated under prior law (e.g., due to prior redemption) or the previously - published regulations, please contact McCall, Parkhurst & Horton L.L.P. for advice as to the availability of such options. Future Value Computation Method The regulations employ an actuarial method for computing the rebate amount based on the future value of the investment receipts (i.e., earnings) and payments. The rebate method employs a two-step computation to determine the amount of the rebate payment. First, the issuer determines the bond yield. Second, the issuer determines the arbitrage rebate amount. The regulations require that the computations be made at the end of each five-year period and upon final maturity of the.issue (the "computation dates").. THE FINAL MATURITY DATE WILL ACCELERATE IN CIRCUMSTANCES IN WHICH THE BONDS ARE OPTIONALLY REDEEMED PRIOR TO MATURITY. AS SUCH, IF BONDS ARE REFUNDED OR OTHERWISE REDEEMED, THE REBATE MAY BE DUE EARLIER THAN INITIALLY PROJECTED. In order to accommodate accurate record -keeping and to assure that sufficient amounts will be available for the payment of arbitrage rebate liability, however, we recommend that the computations be performed at least annually. McCall, Parkhurst 8Horton L.L.P. -Page 2 Under the future value method, the amount of rebate is determined by compounding the aggregate earnings on all the investments from the date of receipt by the issuer to the computation date. Similarly, a payment for an investment is future valued from the date that the payment is made to the computation date. The receipts and payments are future valued at a discount rate equal to the yield on the bonds. The rebatable arbitrage, as of any computation date, is equal to the excess of the (1) future value of all receipts (i.e., earnings) from investments, over (2) the future value of all payments. The following example is provided in the regulations to illustrate how arbitrage rebate is computed under the future value method for a fixed -yield bond: "On January 1, 1994, City A issues a fixed yield issue and invests all the sale proceeds of the issue ($49 million). There are no other gross proceeds. The issue has a yield of 7.0000 percent per year compounded semiannually (computed on a 30 day month/360 day year basis). City A receives amounts from the investment and immediately expends them for the governmental purpose of the issue as follows: Date Amount 2/1 /1994 $3,000,000 4/1 /1994 51000, 000 6/1 /1994 14,000,000 9/1 /1994 20,000,000 7/1 /1995 101000,000 City A selects a bond year ending on January 1, and thus the first required computation date is January 1, 1999. The rebate amount as of this date is computed by determining the future value of the receipts and the payments for the investment. The compounding interval is each 6-month (or shorter) period and the 30 day month/360 day year basis is used because these conventions were used to compute yield on the issue. The future value of these amounts, plus the computation credit, as of January 1, 1999, is: Date Receipts (Payments) 1/1/1994 ($49,000,000) 2/1/1999 3,000,000 4/1/1994 5,000,000 6/1/1994 14,000,000 9/1/1994 20,000,000 1/1/1995 (11000) 7/1/1995 10, 000, 000 1/1/1996 (11000) Rebate amount (1/01/1999) FY (7.0000 percent) ($69, 119, 339) 4,207,602 6,932,715 191190,277 26, 947, 162 (1, 317 ) 12,722,793 (1,229) $878,669" McCall, Parkhurst &Horton L.L.P. -Page 3 General Method for Computing Yield on Bonds In general, the term "yield," with respect to a bond, means the discount rate that when used in computing the present value of all unconditionally due .payments of principal and interest and all of the payments for a qualified guarantee produces an amount equal to the present value of the issue price of the bond. For this purpose, the term "issue price" has the same meaning as provided in sections 1273 and 1274 of the Code. That is, if bonds are publicly offered (i.e., sold by the issuer to a bond house, broker or similar person acting in the capacity of underwriter or wholesaler), the issue price of each bond is determined on the basis of the initial offering price to the public (not to the aforementioned intermediaries) at which price a substantial amount of such bond was sold to the public (not to the aforementioned intermediaries). The "issue price" is separately determined for each bond (i.e., maturity) which comprises an issue. The regulations also provide varying periods for computing yield on the bonds depending on the method by which the interest payment is determined. Thus, for example, yield on an issue of bonds sold with variable interest rates (i.e., interest rates which are reset periodically based on changes in market) is computed separately for each annual period ending on the first anniversary of the delivery date that the issue is outstanding. In effect, yield on a variable yield °issue is determined on each computation date by "looking back" at the interest payments for such period. The regulations, however, permit an issuer of a variable -yield issue to elect to compute the yield for annual periods ending on any date in order to permit a matching of such yield to the expenditure of the proceeds. Any such election must be made in writing, is irrevocable, and must be made no later than the earlier of (1) the fifth anniversary date, or (2) the final maturity date. Yield on a fixed interest rate issue (i.e., an issue of bonds the interest rate on which is determined as of the date of the issue) is computed over the entire term of the issue. issuers of fixed -yield issues generally use the yield computed as of the date of issue for all rebate computations. Such yield on fixed -yield issues generally is recomputed only if (1) the issue is sold at a substantial premium, may be retired within five years of the date of delivery, and such date is earlier than its scheduled maturity date, or (2) the issue is a stepped -coupon bond. In such cases, the regulations require the issuer to recompute the yield on such issues by taking into account the early retirement value of the bonds. Similarly, recomputation occurs in circumstances in which the issuer or bondholder modify or waive certain terms of, or rights with respect to, the issue or in sophisticated hedging transactions. IN SUCH CIRCUMSTANCES ISSUERS ARE ADVISED TO CONSULT McCALL PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. For purposes of determining the principal or redemption payments on a bond, different rules are used for fixed-rate and variable -rate bonds. The payment is computed separately on each maturity of bonds rather than on the issue as a whole. In certain circumstances, the yield on the bond is determined by assuming that principal on the bond is paid as scheduled and that the bond is retired on the final maturity date for the stated retirement price._ For bonds subject to early redemption or stepped -coupon bonds, described above, or for bonds subject to mandatory early redemption, the yield is computed assuming the bonds are paid on the early redemption date for an amount equal to their value. Section 148 of the Code provides that premiums paid to guarantee the payment of debt service on bonds are taken into account in computing the yield on the bond. Payments for McCall, Parkhurst & Horton L.L.P. - Page 4 guarantees are taken into account by treating such premiums as the payment of interest on the bonds. This treatment, in effect, raises the yield on the bond, thereby permitting the issuer to recover such fee with excess earnings. The guarantee must be an unconditional obligation of the guarantor enforceable by the bondholder for the payment of principal or interest on the bond or the tender price of a tender bond. The guarantee may be in the form of an insurance policy, surety bond, irrevocable letter or line of credit, or standby purchase agreement. Importantly, the guarantor must be legally entitled to full reimbursement for any payment made on the guarantee either immediately or upon commercially reasonable repayment terms. The guarantor may not be a co -obligor of the bonds or a user of more than 10 percent of the proceeds of the bonds. Payments for the guarantee may not exceed a reasonable charge for the transfer of credit risk. This reasonable charge requirement is not satisfied unless it is reasonably expected that the guarantee will result in a net present value savings on the bond (i.e., the premium does not exceed the present value of the interest savings resulting by virtue of the guarantee). If the guarantee is entered into after June 14, 1989, then any fees charged for the nonguarantee services must be separately stated or the guarantee fee is not recoverable. The regulations also treat certain "hedging" transactions in a manner similar to qualified guarantees. "Hedges" are contracts, e.g., interest rate swaps, futures contracts or options, which are intended to reduce the risk of interest rate fluctuations. Hedges and other financial derivatives are sophisticated and ever -evolving financial products with which a memorandum, such as this, can not readily deal. IN SUCH CIRCUMSTANCES ISSUERS ARE ADVISED TO CONSULT McCALL PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Earnings on Nonpurpose Investments The arbitrage rebate provisions apply only to the receipts from the investment of "gross proceeds" in "nonpurpose investments." For this purpose, nonpurpose investments are stock, bonds or other obligations acquired with the gross proceeds of the bonds for the period prior to the use of the gross proceeds for its ultimate purpose. For example, investments deposited to construction funds, reserve funds (including surplus taxes or revenues deposited to sinking funds) or other similar funds are nonpurpose investments. Such investments include only those which are acquired with "gross proceeds." For this purpose, "gross proceeds" include original proceeds received from the sale of the bonds, investment earnings from the investment of such original proceeds, amounts pledged to the payment of debt service on the bonds or amounts actually used to pay debt service on the bonds. The regulations do not provide sufficient amount of guidance to include an exhaustive list of "gross proceeds" for this purpose; however, it can be assumed that "gross proceeds" represent all amounts received from the sale of bonds, amounts earned as a result of such sale or.amounts (including taxes and revenues) which are used to pay, or secure the payment of, debt service for the bonds. The total amount of "gross proceeds" allocated to a bond generally can not exceed the outstanding principal amount of the bonds. The regulations provide generally that an investment is allocated to an issue for the period (1) that begins on the date gross proceeds are used to acquire the investment, and (2) that ends on the date such investment ceases to be allocated to the issue. In general, proceeds are McCall, Parkhurst &Horton L.L.P. - Pa.ge 5 allocated to a bond issue until expended for the ultimate purpose for which the bond was issued or for which such proceeds are received (e.g., construction of a bond -financed facility or payment of debt service on the bonds). Deposit of gross proceeds to the general fund of the issuer (or other fund in which they are commingled with revenues or taxes) does not alleviate the obligation to compute rebate in most cases. As such, proceeds commingled with the general revenues of the issuer are not "freed -up" from the rebate obligation. An exception to this commingling limitation for bonds, other than private activity bonds, permits "investment earnings" (but not sale proceeds or other types of gross proceeds) to be considered spent when deposited to a commingled fund if those amounts are reasonably expected to be spent within six months. Other than for these amounts, issuers may consider segregating investments in order to more easily compute the amount of such arbitrage earnings by not having to allocate investments. Special rules are provided for purposes of advance refundings. These rules are too complex to discuss in this memorandum. Essentially, the rules relating to refundings, however, do not require that amounts deposited to the escrow fund to defease the prior obligations of the issuer be subject to arbitrage rebate to the extent that the investments deposited to the escrow fund do not have a yield in excess of the yield on the bonds. Any loss resulting from the investment of proceeds in an escrow fund below the yield on the bonds, however, may be recovered by combining those investments with investments deposited -to other funds, e.g., reserve or construction funds. The arbitrage regulations also provide that the investment of bond proceeds in tax- exempt obligations does not result in arbitrage. The provisions of the Technical and Miscellaneous Revenue Act of 1988, however, amended that rule by providing that investment of bond proceeds in "private activity bonds" (i.e., bonds subject to the alternative minimum tax under section 57(a)(5) of the Code) are treated as investments in taxable obligations. As such, earnings from these tax-exempt investments are subject to rebate. Similarly, the investment of gross proceeds in certain tax-exempt mutual funds are tI eated as a direct investment in the tax-exempt obligations deposited in such fund. While issuers may invest in such funds for purposes of avoiding arbitrage rebate, they should be aware that if "private activity bonds" are included in the fund then a portion of the earnings will be subject to arbitrage rebate. Issuers should be prudent in assuring that the funds do not contain private activity bonds. The arbitrage regulations provide a number of instances in which earnings will be imputed to the nonpurpose investments. Receipts generally will be imputed to investments that do not bear interest at an arm's-length (i.e., market) interest rate. As such, the regulations adopt a "market price" rule. In effect, this rule prohibits an issuer from investing bond proceeds in investments at a price which is higher than the market price of comparable obligations, in order to reduce the yield. Special rules are included for determining the market price for investment contracts, certificates of.deposit and certain U.S. Treasury obligations.. For example, to establish the fair market value of investment contracts a bidding process between three qualified bidders must be used. The fair market value of certificates of deposit which bear a fixed interest rate and are subject to an early withdrawal penalty is its purchase price if that price is not less than the yield on comparable U.S. Treasury obligations and is the highest yield available from the institution. In any event, a basic" common sense" rule -of -thumb that can be used to determine whether a fair market value has been paid is to ask whether the general funds of the issuer would McCall, Parkhurst &Horton L.L.P. -Page 6 be invested at the same yield. An exception to this market price rule is available for United States Treasury Obligations - State or Local Government Series in which case the purchase price is always the market price. Reimbursement and Working Cagltal The final regulations provide new rules for purposes of determining whether gross proceeds are used for working capital and, if so, at what times those proceeds are considered spent. In general, working capital financings are subject to many of the same rules that have existed since the mid-1970s. For example, the regulations generally continue the 13-month temporary period. By adopting a "proceeds -spent -last" rule, the regulations also generally require that an issuer actually incur a deficit (i.e., expenditures must exceed receipts) for the computation period (which generally corresponds to the issuer's fiscal year). Also, the regulations continue to permit an operating reserve, but unlike prior regulations the amount of such reserve may not exceed five percent of the issuer's actual working capital expenditures for the prior fiscal year. Another change made by the regulations is that the issuer may not finance the operating reserve with proceeds of a tax-exempt obligation. Importantly, the regulations also adopt rules for determining whether proceeds used to reimburse an issuer for costs paid prior to the date of issue of the obligation, in fact, are considered spent at the time of reimbursement. These rules apply to an issuer who uses general revenues for the payment of all or a portion of the costs of a project then uses the proceeds of the bonds to reimburse those general revenues. Failure to comply with these rules would result in the proceeds continuing to be subject to federal income tax restrictions, including rebate. To qualify for reimbursement, a cost must be described in an expression (e.g., resolution, legislative authorization) evidencing the issuer's intent to reimburse which is made no later than 60 days after the payment of the cost. Reimbursement must occur no later than 18 months after the later of (1) the date the cost is paid or (2) the date the project is placed in service. Except for projects requiring an extended construction period or small issuers, in no event can a cost be reimbursed more than three years after the cost is paid. Reimbursement generally is not permitted for working capital; only capital costs, grants and loans may be reimbursed. Moreover, certain anti -abuse rules apply to prevent issuers from avoiding the limitations on refundings. IN CASES INVOLVING WORKING CAPITAL OR REIMBURSEMENT, ISSUERS ARE ADVISED TO CONTACT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. Rebate Payments Rebate. payments: generally are due 60 days.after. each installment. computation date. The interim computation dates occur each fifth anniversary of the issue date. The final computation date is on the latest of (1) the date 60 days after the date the issue of bonds is no longer outstanding, (2) the date eight months after the date of issue for certain short-term obligations (i.e., obligations retired within three years), or (3) the date the issuer no longer reasonably expects any spending exception, discussed below, to apply to the issue. On such payment dates, other than the final payment date, an issuer is required to pay 90 percent of the McCall, Parkhurst 8 Horton L.L.P. -Page 7 rebatable arbitrage to the United States. On the final payment date, an issuer is required to pay 100 percent of the remaining rebate liability. Failure to timely pay rebate does not necessarily result in the loss of tax -exemption. Late payments, however, are subject to the payment of interest, and unless waived, a penalty of 50 percent (or, in the case of private activity bonds, other than qualified 501(c)(3) bonds, 100 percent) of the rebate amount which is due. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Rebate payments are refundable. The issuer, however, must establish to the satisfaction of the Commissioner of the Internal Revenue Service that the issuer paid an amount in excess of the rebate and that the recovery of the overpayment on that date would not result in additional rebatable arbitrage. An overpayment of less than $5,000 may not be recovered before the final computation date. Alternative Penalty Amount In certain` cases, an issuer of a bond the proceeds of which are to be used for construction may elect to pay a penalty, in lieu of rebate. The penalty may be elected in circumstances in which the issuer expects to satisfy the two-year spending exception which is more fully described under the heading "Exceptions to Rebate." The penalty is payable, if at all, within 60 days after the end of each six-month period. This is more often than rebate. The election of the alternative penalty amount would subject an issuer, which fails the two-year spend- out requirements, to the payment of a penalty equal to one and one-half of the excess of the amount of proceeds which was required to be spent during that period over the amount which was actually spent during the period. The penalty has characteristics which distinguish it from arbitrage rebate. First, the penalty would be payable without regard to whether any arbitrage profit is actually earned. Second, the penalty continues to accrue until either (1) the appropriate amount is expended or (2) the issuer elects to terminate the penalty. To be able to terminate the penalty, the issuer must meet speck requirements and, in some instances, must pay an additional penalty equal to three percent of the unexpended proceeds. Exceptions to Rebate The Code and regulations provide certain exceptions to the requirement that the excess investment earnings be rebated to the United States. _ a. Small Issuers. The first exception provides that if an issuer (together with all subordinate issuers)_during a .calendar year does not. issue tax-exempt obligations in an aggregate face amount exceeding $5 million, then the obligations are not subject to rebate. Only issuers with general taxing powers may take advantage of this exception. For this purpose, "private activity bonds" neither are afforded the benefit of this exception nor are taken into account for purposes of determining the amount of bonds issued. Subordinate issuers are those issuers which derive their authority to issue bonds from the same issuer, e.g., a city and a health McCall, Parkhurst &Horton L.L.P. -Page 8 facilities development corporation, or which are controlled by the same issuer, e.g., a state and the board of a public university. b. Spending Exceptions. Six -Month Exception. The second exception to the rebate requirement is available to all tax-exempt bonds, all of the gross proceeds of which are expended during six months. The Mx month rule is available to bonds issued after the effective date of the Tax Reform Act of 1986. See the discussion of effective dates on page two. For this purpose, proceeds used for the redemption of bonds (other than proceeds of a refunding bond deposited to an escrow fund to discharge refunded bonds) can not be taken into account as expended. As such, bonds with excess gross proceeds generally can not satisfy the second exception unless the amount does not exceed the lesser of five percent or $100,000 and such de minimis amount must be expended within one year. Certain gross proceeds are not subject to the spend -out requirement, including amounts deposited to a bona fide debt service fund, to a reserve fund and amounts which become gross proceeds received from purpose investments. These amounts themselves, however, may be subject to rebate even though the originally expended proceeds were not. The Code provides a special rule for tax and revenue anticipation notes (i.e., obligations issued to pay operating expenses in anticipation of the receipt of taxes and other revenues). Such notes are referred to as TRANs. To determine the timely expenditure of the proceeds of a TRAN, the computation of the "cumulative cash flow deficit" is important. If the "cumulative cash flow deficit" (i.e., the point at which the operating expenditures of the issuer on a cumulative basis exceed the revenues of the issuer during the fiscal year) occurs within the first six months of the date of issue and must be equal to at least 90 percent of the proceeds of the TRAN, then the notes are deemed to satisfy the exception. This special rule requires, however, that the deficit actually occur, not that the issuer merely have an expectation that the deficit will occur. In lieu of the statutory exception for TRANs, the regulations also provide a second exception. Under this exception, 100 percent of the proceeds must be spent within six months, but before note proceeds can be considered spent, all other available amounts of the issuer must be spent first ("proceeds -spent -last" rule). In determining whether all available amounts are spent, a reasonable working capital reserve equal to five percent of the prior year's expenditures may be set aside and treated as unavailable. 18-Mon46 Exception. The regulations also establish anon -statutory exception to arbitrage rebate if all of the gross proceeds (including investment earnings) are expended within 18 months after the date of issue. Under this exception, 15 percent of the gross proceeds must be expended within a six-month spending period, 60 percent within a 12-month spending period and 100 percent within an 18-month spending period. The rule permits an issuer to rely on its reasonable expectations, for. computing investment earnings which are .included as gross proceeds during the first and second spending period. A reasonable retainage not to exceed five percent of the sale proceeds of the issue is not required to be spent within the 18-month period but must be expended within 30 months. Rules similar to the six-month exception relate to the definition of gross proceeds. McCall, Parkhurst 8Horton L.L.P. -Page 9 Two Year Exception. Bonds issued after December 19, 1989 (i.e., the effective date of the Omnibus Reconciliation Act of 1989), at least 75 percent of the net proceeds of which are to be used for construction, may be exempted from rebate if the gross proceeds are spent within two years. Bonds more than 25 percent of the proceeds of which are used for acquisition or working capital may not take advantage of this exception. The exception applies only to governmental bonds, qualified 501(c)(3) bonds and private activity bonds for govemmentally- owned airports and docks and wharves. The two-year exception requires that at least 10 percent of the available construction proceeds must be expended within six months after the date of issue, 45 percent within 12 months, 75 percent within 18 months and 100 percent within 24 months. The term "available construction proceeds" generally means sale proceeds of the bonds together with investment earnings less amounts deposited to a qualified reserve fund or used to pay costs of issuance. Under this rule, a reasonable retainage not to exceed five percent need not be spent within 24 months but must be spent within 36 months. The two-year rule also provides for numerous elections which must be made not later than the date of issuance of the bonds. Once made, the elections are irrevocable. Certain elections permit an issuer to bifurcate bond issues, thereby treating only a portion of the issue as a qualified construction bond; and, permit an issuer to disregard earnings from reserve funds for purposes of determining "available construction proceeds." Another election permits an issuer to pay the alternative penalty amount discussed above in lieu of rebate if the issuer ultimately fails to satisfy the two-year rule. Issuers should discuss these elections with their financial advisors prior to issuance of the bonds. Of course, McCall, Parkhurst & Horton L.L.P. remains available to assist you by providing legal interpretations thereof. c. Debt Service Funds. Additionally, an exception to the rebate requirement, whether or not any of the previously discussed exceptions are available, applies for earnings on "bona fide debt service funds." A "bona fide debt service fund" is one in which the amounts are expended within 13 months of the accumulation of such amounts by the issuer. In general, most interest and sinking funds (other than any excess taxes or revenues accumulated therein) satisfy these requirements. For private activity bonds, short term bonds (i.e., have a term of less than five years) or variable rate bonds, the exclusion is available only if the gross earnings in such fund does not exceed $100,000, for the bond year. For other bonds issued after November 11, 1988, no limitation is applied to the gross earnings on such funds for purposes of this exception. Therefore, subject to the foregoing discussion, the issuer is not required to take such amounts into account for purposes of the computation. FOR BONDS ISSUED AFTER THE EFFECTIVE DATE OF THE TAX REFORM ACT OF 1986 WHICH WERE OUTSTANDING AS OF NOVEMBER 110 19881 OTHER THAN PRIVATE ACTIVITY BONDS, SHORT TERM BONDS OR VARIABLE RATE BONDS, A ONE-TIME ELECTION MAY BE MADE TO EXCLUDE EARNINGS ON "BONA FIDE DEBT SERVICE FUNDS" WITHOUT REGARD TO THE $100,000, LIMITATION. THE ELECTION MUST BE MADE IN . WRITING. (AND.. MAINTAINED AS PART OF THE ISSUER'S BOOKS AND RECORDS) NO LATER THAN THE LATER OF MARCH 21, 1990, OR THE FIRST DATE A REBATE PAYMENT IS REQUIRED. McCall, Parkhurst 8� Horton L.L.P. -Page 10 Conclusion McCall, Parkhurst & Horton L.L.P. hopes that this memorandum will prove to be useful as a general guide to the arbitrage rebate requirements. Again, this memorandum is not intended as Cl" exhaustive discussion nor as specific advice with respect to any specific transaction. We advise our clients to seek competent financial and accounting assistance. Of course, we remain available to provide legal advice regarding all federal income tax matters, including arbitrage rebate. If you have any questions, please feel free to contact Harold T. Flanagan at (214) 220-2800. McCall, Parkhurst &Horton L.L.P. -Page 11 Exhibit "B" February 26, 1996 Mr. John Hamilton City Manager City of Sanger, Texas P.O. Box 578 Sanger, Texas 76266-0578 Re: City of Sanger, Texas Utility System Revenue Bonds, Series 1996 Dear Mr. Hamilton: As you lnow, the City of Sanger, Texas (the "Issuer") will issue the captioned bonds in order to provide for the acquisition and construction of the project. As a result of that issuance, the federal income tax laws impose certain restrictions on the investment of amounts deposited to the interest and sinking fund and the reserve fund for the captioned bonds. The purpose of this letter is to set forth, in somewhat less technical language, those provisions of the tax law which require that obligations acquired with these amounts be invested at a yield which is not higher than the yield on the captioned bonds. For this purpose, please refer to line 20(f) of the Form 8038-G included in the transcript of proceedings for the yield on the captioned bonds. Generally, the federal tax laws provide that, unless excepted, amounts deposited to the interest and sinking fund and the reserve fund which are allocable to the captioned bonds must be invested in obligations the combined yield on which does not exceed the yield on the bonds. Importantly, for purposes of administrative convenience, the bonds, however, have been structured in such a way as to avoid, for the most part, this restriction on investment yield. First, the interest and sinking fund is made up of amounts which are received annually for the payment of current debt service on all the Issuer's outstanding bonds. Any taxes or revenues deposited to the interest and sinking fund which are to be used for the payment of current debt service on the captioned bonds, or any other outstanding bonds, are not subject to yield restriction. By definition, current debt service refers only to debt service to be paid within one year of the date of receipt of these amounts. For the most part, this would be debt service in the current fiscal year. These amounts deposited to the account for current debt service may be invested without regard to any constraint imposed by the federal income tax laws. Second, a portion of the interest and sinking fund is permitted to be invested without regard to yield restriction as a "minor portion." The "minor portion" exception is available for de minimis amounts of taxes or revenues deposited to the interest and sinking fund. The maximum amount that may be invested as part of this account may not exceed the lesser of 5 percent of the principal amount of the bonds or $10010000 In addition, the reserve fund contains an amount, which although not expended for debt service within the current year, is necessary to ensure that amounts will be sufficient to pay debt service in the event that taxes or revenues are insufficient during that period. This amount represents a reserve against periodic fluctuations in the receipt of taxes and revenues. The Internal Revenue Code permits amounts which are held in reserve for the payment of debt service, in such instances, to be invested without regard to yield restriction if such amounts do not exceed the lesser of (1) 10 percent of the outstanding principal amount of all outstanding bonds, (2) maximum annual debt service on all outstanding bonds, or (3) 125 percent of average annual debt service on all outstanding bonds. Accordingly, you should review the current balance in the interest and sinking fund and the reserve and in order to determine if such balances exceed the aggregate amounts discussed above. Additionally, in the future it is important that you be aware of these restrictions as additional amounts are deposited to the funds. The amounts in these funds which are subject to yield restriction would only be the amounts which are in excess of, in the case of the interest and sinking fund, the sum of (1) the current debt service account and (2) the "minor portion" account and, in the case of the reserve fund, the amount which is the lesser of the three amounts described above. Moreover, to the extent that additional bonds are issued by the Issuer, whether for new money projects or for refunding, these amounts will change in their proportion. Obviously, this letter only presents a fundamental discussion of the yield restriction rules as applied to amounts deposited to the funds. Moreover, this letter does not address the rebate consequences with respect to the interest and sinking fund and the reserve fund. You should review the memorandum attached to the No -Arbitrage Certificate as Exhibit "A" for this purpose. If you have certain concerns with respect to the matters discussed in this letter or wish to ask additional questions with regards to certain limitations imposed, please feel free to contact our firm. Thank you for your consideration and we look forward to our continued relationship. Very truly yours, McCALL, PARKHURST & HORTON L.L.P. ®fffce of t�je �ttorr�ep �et>lera�C �� �� DAN MORALES ATTORNEI' GENERAL April 2, 1996 THIS IS TO CERTIFY that the City of Sanger, Texas (the "Issuer"), has submitted to me Citv of Sanger, Texas Utility System Revenue Bond, Series 1996 (the "Bond") in the principal amount of $1,060,000 for approval. The Bond is dated March 15, 1996, numbered R-1 and was authorized by an Ordinance of the Issuer passed on February 26, 1996 (the "Ordinance"). I have examined the law and such certified proceedings and other papers as I deem necessary to render this opinion. As to questions of fact material to my opinion, I have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials furnished to me without undertaking to verify the same by independent investigation. I express no opinion relating to the official statement or any other offering material relating to the Bond. Based on my examination, I am of the opinion, as of the date hereof and under existing law, as follows (capitalized terms, except as herein defined, have the meanings given to them in the Ordinance): (1) The Bond has been issued in accordance with law and is a valid and binding special obligation of the Issuer. (2) The Bond is payable from and secured by a first lien on and pledge of the Net Revenues of the Issuer's Utility System. (3) The owner of the Bond shall never have the right to demand payment of the Bond from any funds raised or to be raised by taxation. Therefore, the Bond is approved. No. 30113 Book No. 96-A spc Attorney of the State of Texas 512/463-2100 PRINTED ON 1;�'i'YCLFU PAPER P.O. BOX 12548 AUSTIN, TEXAS 78711-2548 AN F.QL7A1. E„1PLOYb1i;NT Oi'1 f�.RTliN1Tl' F.h�tPP.O'IEn OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, John Sharp, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the: City of Sanger, Texas Utility System Revenue Bond, Series 1996 numbered R-1, of the denomination of $ 1,060.000, dated March 15, 1996, as authorized by issuer, interest various percent, under and by authority of which said bonds/certificates were registered electronically in the office of the Comptroller, on the 2nd day of April, 1996, under Registration Number 58115. Given under my hand and seal of office, at Austin, Texas, the 2nd dak of April, 1996. �S JOHN SHARP Comptroller of Public Accounts of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, John Sharp, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the. City of Sanger. Texas Utility System Revenue Bond. Series 1996 numbered R-1, of the denomination of $ 1.060,000, dated March 15. 1996, as authorized by issuer, interest various percent, under and by authority of which said bonds/certificates were registered electronically in the office of the Comptroller, on the 2nd day of April, 1996, under Registration Number 58115. Given under my hand and seal of office, at Austin, Texas, the 2nd day of April, 1996. JOHN SHARP Comptroller of Public Accounts of the State of Texas SIGNATURE IDENTIFICATION AND NO -LITIGATION CERTIFICATE THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER We, the undersigned officers of the City of Sanger hereby certify as follows: (a) That this certificate is executed and delivered with reference to CITY OF BANGER, TEXAS UTILITY SYSTEM REVENUE BOND, SERIES 1996, dated March 15, 1996, in the principal amount of $1,060,000, being a single fully registered Bond payable in installments to the registered owner thereof (the "Initial Bond") and the Bonds (the "Definitive Bonds") initially made available by the Issuer for completion and exchange for the Initial Bond. (b) That each of us manually signed the Initial Bond. (c) That each of us signed the Definitive Bonds by causing facsimiles of our manual signatures to be printed or lithographed on each of the Definitive Bonds, and we hereby adopt said facsimile signatures as our own, respectively, and declare that said facsimile signatures constitute our signatures the same as if we had manually signed each of the Definitive Bonds. (d) That the Initial Bond is, and the Definitive Bonds are, substantially in the form, and each of them has been duly executed and signed in the manner, prescribed in the order authorizing the issuance thereof. (e) That at the time we so executed and signed the Initial Bond and the Definitive Bonds (collectively the "Bonds") we were, and at the time of executing this certificate we are, the duly chosen, qualified, and acting officers indicated therein, and authorized to execute and sign the same. (f) That no litigation of any nature has been filed or is now pending to restrain or enjoin the issuance or delivery of any of the Bonds, or which would affect the provision made for their payment or security, or in any manner questioning the proceedings or authority concerning the issuance of the Bonds, and that so far as we know and believe no such litigation is threatened. (g) That neither the corporate existence nor boundaries of the Issuer is being contested, that no litigation has been filed or is now pending which would affect the authority of the officers of the Issuer to issue, execute, sign, and deliver any of the Bonds, and that no authority or proceedings for the issuance of any of the Bonds have been repealed, revoked, or rescinded. (h) That we have caused the official seal of the Issuer to be impressed, or printed, or lithographed on each of the Bonds; and said seal on each of the Bonds has been duly adopted as, and is hereby declared to be, the official seal of the Issuer. XECUTED d delivered MANUAL SIGNATURES Execute i h r I or II below: OFFICIAL TITLES I. The signatures of the officers subscribed above are hereby certified to be true and genuine. I� Authorized Officer Mayor City Secretary (BANK SEAL) or (initials of Authorized Officer if Bank has no seal on premises ) II. Before me, on this day personally appeared the foregoing individuals, known to me to be the persons whose names are subscribed to the foregoing instrument. Given under my hand and seal of office this,,, � n n n Notary Notary Seal 2 p CHERYL A. KING NbTA;2Y PUBLIC STY E OP TLUS My COMMISsion EXPIres 6.15.99 m m ow Odd v q7 >ST�aa:�v �g�,0�mo�_ n'rO y=b° o V on DZ w• °c 0'a o 4• EL LZ 0 no 0 °'.R='='�8°� 0 3 s a o � Yo G�.oH.A oin� C7 0 Er o"ay�,n•� B g� Ta„ R sm S'g� 5• yadno��; �oo'o m=` tz Lr o �a�my'� mn'awm 0 3 c s a an F O � Z m a Z c o z s. D n A vmy�ooe°�ocvc a .fD, m m� yag.o F; 2.0 Woo 5. m < v pad �.o w a gy 8.ONO na� n so Cr E'.an w•°n��.d� •oTc H� DRw �mw� am o <D Co o=nG.Etr� �y �00o �7oyC= ao2�� an2S�'' E2rc$Fo ds w3can'w�w�" ao 3 •'G my m�� o Ea=o��o =d5•^aEr Ag 0 wo aooEor iiPP RR F o CO o o . r TREASURER' 5 RECEIPT THE STATE OF TEXAS COUNTY OF DENTON CITY OF SANGER The undersigned hereby certifies as follows: (a) That this certificate is executed and delivered with reference to CITY OF SANGER, TEXAS UTILITY SYSTEM REVENUE REVENUE BOND, SERIES 1996, dated March 15, 1996, in the principal amount of $1,060,000, being a single fully registered Bond payable in installments to the registered owner thereof. (b) That the undersigned is the duly chosen, qualified, and acting Treasurer of the Issuer of said Bond. (c) That said Bond has been duly delivered to the purchaser thereof, namely: TEXAS WATER DEVELOPMENT BOARD (d) That said Bond has been paid for in full by said purchaser concurrently with the delivery of this certificate, and the Issuer of said Bond has received, and hereby acknowledges receipt of, the agreed purchase price for said Bond and accrued interest to the date EXECUTED and delivered M Treasurer LAW OFFICES McCALL, PARKHURST & HORTON L,L.P. 3100 ONE AMERICAN CENTER AUSTIN, TEXAS 78701-3248 TELEPHONE'. 512 4783805 FACSiM ILE' 512 472-087i Internal Revenue Service Center Philadelphia, Pennsylvania 19255 7I7 NORTH HARWOOD NINTH FLOOR DALLAS, TEXAS 75201-6587 TELEPHONE: 214 220.2800 FACSIMILE: 214 754.9250 August 5, 1996 Re: Information Reporting -Tax-Exempt Bonds City of Sanger, Texas Utility System Revenue Bonds, Series 1996 Ladies and Gentlemen: 1225 ONE RIVERWALK PLACE 5AN A[N I I TEXAS 78205.3503 TELEPHONE: 210 225-2800 FACSIM iLE: 210 225-2984 Pursuant to the requirements of Section 149(e) of the Internal Revenue Code of 1986, enclosed please find an original and a photocopy of Form 8038-G which is hereby submitted to you for the above -captioned bonds issued April 11, 1996. Please file the original and return the receipted copy of Form 8038-G to the undersigned in the enclosed self-addressed, postage paid envelope. Sincerely, McCALL, PARK:HURST & HORTON L.L.P. T 41W%0w10V\W Harold T. Flanagan HTF:amc Enclosures cc: Mr. Peter M. Tart Information Return for Tax -Exempt Governmental Obligations Form 8038=V (Rev. May 1995) Department of the Treasury Internal Revenue Service Part a Rep 1 Issuer's name Citv of Sa Auth r, Texas ► Under Internal Revenue Code section 149(e) ► See separate Instructions. (Note: Use Form 8038-GC if the issue price is under $1001000.) If Amended Retur OMB No. 1545-0720 check here ► 2 Issuer's employer identification number 3 Number and street (or P.O. box if mail is not delivered to street address) I Room/suite 14 Report number P.O. Box 578 G1996 - 1 5 City, town, or post office, state, and ZIP code 16 Date of issue Sanaer. Texas 76266-0578 4-11-96 7 Name of issue 8 CUSIP number Utility System Revenue Bonds, Series 1996 800890 FF7 Part ll .: Type of Issue (check applicable boxes) and enter the issue price) 9 ❑ Education (attach schedule -see instructions) ............................................ 10 ❑ Health and hospital (attach schedule -see instructions) .................................... 11 ❑ Transportation..................................................................... 12 ❑ Public safety ...................................................................... 13 R Environment (including sewage bonds) ................................................ 14 ❑ Housing.......................................................................... 15 ❑ Utilities........................................................................... 16 ❑ Other. Describe (see instructions) ► 17 If obligations are tax or other revenue anticipation bonds, check box ► ❑ 18 If obligations are in the form of a lease or installment sale, check box ► ❑ 9 $ 10 11 12 13 $1,0609000 14 15 16 :P rt`.I)i. ...................: Description of Obligations 19 Final maturity .. e Issue 20 Entire (a) Maturity date (b) Interest rate (c) Issue price (d) Stated redemption price at maturity (e) Weighted average maturity M Yield (g) Net interest cost 5-15-2016 4.75 % 855000 855000 .....:. . ...... 1 060 000 > 1 060 000 > 12.396 ears Y 4.441 o /e 4.474 o /o part 11.« Uses of Proceeds of Bond Issue (including underwriters' discount) ...................... 21 Proceeds used for accrued interest....................................................... 22 Issue price of entire issue (enter amount from line 20, column (c)) ............................. 23 Proceeds used for bond issuance costs (including underwriters' discount) . 23 17,850 24 Proceeds used for credit enhancement .............................. 24 —0— 25 Proceeds allocated to reasonably required reserve or replacement fund .. 25 —0— 26 Proceeds used to currently refund prior issues ....................... 26 27 Proceeds used to advance refund prior issues ........................ 27 —0— 28 Total (add lines 23 through 27).......................................................... 29 Nonrefunding proceeds of the issue (subtract line 28 from line 22 and enter amount here) ......... 21 —0- 22 19060,000 ....... I........ ..........: 17 , 850 28 29 13,0429150 Part V ] Description of Refunded Bonds (Complete this part only for refunding bonds.) Not Applicable 30 Enter the remaining weighted average maturity of the bonds to be currently refunded ...........► years 31 Enter the remaining weighted average maturity of the bonds to be advance refunded ...........► years 32 Enter the last date on which the refunded bonds will be called. 33 Enter the date(s) the refunded bonds were issued ► Part Vi»1 Miscellaneous 34 Enter the amount of the state volume cap allocated to the issue under section 141(b)(5) ........... 34 35 Enter the amount of the bonds designated by the issuer under section 265(b)(3)(B)(i)(III) (small issuer exception) ..... 35 36a Enter the amount of gross proceeds invested or to be invested in a guaranteed investment contract (see instructions) .. 36a b Enter the final maturity date of the guaranteed investment contract .. ► N/A 37 Pooled financings: a Proceeds of this issue that are to be used to make loans to other governmental units. 37a b If this issue is a loan made from the proceeds of another tax-exempt issue, check box ... ► ❑ and enter the name of the issuer ► N/A and the date of the issue .. ► N/A 38 If the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box .......... ► ❑ N/A 39 If the issuer has identified a hedge, check box ..................................... ► ❑ N/A Please Sign Here Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Signature of issuer's authorized representative 4-11-96 10, Nel Armstrong Mayor Type or print name and title For Paperwork Reduction Act Notice, see page 1 of the Instructions. Cat. No. 63773S Form 8038-G (Rev. s-ss> 'U.S. Government Printing Office' 1995 — 387.095/20109 STF FEG610)F LAW OFFICES 3100 ONE AMERICAN CENTER AUSTIN, TEXAS 7870i3248 TELEPHONE' 512 478.3805 FACSIMILE: 512 472.0871 McCALL, PARKHURS I & HORTON L.L.P. 717 NORTH HARWOOD NINTH FLOOR DALLAS, TEXAS 75201.6587 TELEPHONE: 214 220-2800 FACSIMILE: 214 754-9250 CITY OF BANGER, TEXAS UTILITY SYSTEM REVENUE BOND SERIES 1996, DATED MARCH 15, 1996, IN THE PRINCIPAL AMOUNT OF $12060,000 1225 ONE RIVERV�'ALK PLACE SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 210 225.2800 FACSIMILE: 210 225-2984 AS BOND COUNSEL for the City of Sanger, Texas (the "Issuer"), we have examined into the legality and validity of the bond issue initially evidenced by the bond described above (the "Initial Bond"), which Initial Bond originally has been issued and delivered as a single fully registered bond, without interest coupons, with the principal amount thereof payable on May 15 in installments, and with the unpaid balance of each installment of principal, respectively, bearing interest from the date of the delivery of the Initial Bond to the scheduled due date ("maturity"), or to the date of prepayment or redemption, of each installment of principal, at the following rates per annum for each maturity, respectively: maturity 1997, 2.85 maturity 1998, 3.10 % maturity 1999, 3.30 % maturity 2000, 3.45 % maturity 2001, 3.55 % maturity 2002, 3.70 % maturity 2003, 3.80 % maturity 2004, 3.90 % maturity 2005, 4.00 % maturity 2006, 4.10 % maturity 2007, 4.20% maturity 2008, 4035% maturity 2009, 4.45 % maturity 2010, 4.55 % maturity 2011, 4 5 60 % maturity 2012, 4.65 % maturity 2013, 4.70 % maturity 2014, 4.70 % maturity 2015, 4.75 % maturity 2016, 4.75 % with interest payable on November 15, 1996, and semiannually on each May 15 and November 15 thereafter, and with the principal of the Initial Bond being subject to prepayment or redemption prior to the scheduled maturities, at the option of the Issuer, on May 15, 2006, or any date thereafter, in ac- cordance with the terms and conditions stated in the text of the Initial Bond. The Initial Bond may, at the request of the registered owner, be transferred and converted into, and/or exchanged for, fully registered bonds, without interest coupons, in the denomination of $5,000 or any integral multiple of $5,000, and such bonds again may be transferred and/or exchanged, all subject to the conditions stated and in the manner provided in the ordinance authorizing the issuance of the Initial Bond (the "Bond Ordinance"), with any such bonds which are registered, authenticated, and delivered in accordance with the Bond Ordinance being hereinafter called "Definitive Bonds". WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution and laws of - the State of Texas, and a transcript of certified proceedings of the Issuer, and other pertinent instruments relating to the authorization of the Initial Bond and Definitive Bonds and the issuance and delivery of the Initial Bond, including the executed Initial Bond, and a printed specimen of the form for the Definitive Bonds initially made available by the Issuer for conversion of and exchange for the Initial Bond, IT IS OUR OPINION that the Initial Bond and Definitive Bonds have been duly authorized, and that the Initial Bond has been duly issued and delivered, all in accordance with law; and that, except as may be limited by laws applicable to the Issuer relating to bankruptcy, reorganization, and other similar matters affecting creditors' rights, the Initial Bond constitutes and Definitive Bonds (hereinafter referred to collectively as "Bonds") will constitute valid and legally binding special obligations of the Issuer, and that the principal of and interest on the Bonds, together with other outstanding revenue bonds of the Issuer, are payable from, and secured by a first lien on and pledge of the Net Revenues of the Issuer's Utility System, being the Waterworks, Sewer and Electric System. THE ISSUER has reserved the right, subject to the restrictions stated in the Bond Ordinance, to issue additional parity revenue bonds which also may be made payable from, and secured by, a lien on and pledge of the Net Revenues. THE OWNER HEREOF shall never have the right to demand payment of this obligation out of any funds raised or to be raised by taxation. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "private activity bonds" and that accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under Section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on, and assume compliance by the Issuer with, certain representations and covenants regarding the use and investment of the proceeds of the Bonds. We call your attention to the fact that failure by the Issuer to comply with such representations and covenants may cause the interest on the Bonds to become includable in gross income retroactively to the date of issuance of the Bonds. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Bonds will be (a) included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax and the environmental tax imposed on corporations by Sections 55 and 59A of the Code, (b) subject to the branch profits tax imposed on foreign corporations by Section 884 of the Code, and (c).included in the passive investment income of an S corporation and subject to the tax imposed by Section 1375 of the Code. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. WE HAVE ACTED AS BOND COUNSEL for the Issuer for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds described above under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on such Bonds for federal income tax purposes, and for no other reason or purpose. We have not been requested to investigate or verify, and have not investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer, and we have not assumed any responsibility with respect thereto. We have relied solely on certificates executed by officials of the Issuer as to the availability and sufficiency of the Net Revenues of the Issuer's Utility System. Respectfully,