STEELE COUNTY, MINNESOTA

Transcription

1 NEW ISSUE OFFICIAL STATEMENT DATED OCTOBER 6, 2005 BOOK-ENTRY ONLY MOODY S INVESTORS SERVICE, INC. RATING: A3 In the opinion of Bond Counsel, according to laws, regulations, rulings and decisions in effect on the date of delivery of the Bonds, interest on the Bonds is not includable in gross income for federal income tax purposes or in taxable net income of individuals, estates or trusts for State of Minnesota income tax purposes. Interest on the Bonds is not an item of tax preference for purposes of determining the federal alternative minimum tax imposed on individuals or for purposes of determining the Minnesota alternative minimum tax imposed on individuals, estates or trusts. Interest on the Bonds is subject to the Minnesota franchise tax imposed on corporations and financial institutions and is includable in adjusted current earnings for purposes of the federal and Minnesota alternative minimum taxes imposed on corporations. STEELE COUNTY, MINNESOTA $3,545,000 GROSS REVENUE HEALTH CARE CROSSOVER REFUNDING BONDS SERIES 2005B Dated: October 1, 2005 Due: June 1, as shown below THE BONDS ARE LIMITED OBLIGATIONS OF STEELE COUNTY, MINNESOTA, PAYABLE SOLELY FROM GROSS REVENUES, AS DEFINED HEREIN, OF CEDARVIEW CARE CENTER AND PARK PLACE HOUSING FOR THE ELDERLY (TOGETHER, THE HEALTH CARE FACILITIES ), EACH OWNED AND OPERATED BY THE COUNTY. THE BONDS ARE NOT GENERAL OBLIGATIONS OF THE COUNTY AND NO GENERAL TAXING POWERS OF THE COUNTY ARE AVAILABLE TO PAY PRINCIPAL OF OR INTEREST ON THE BONDS. THE BONDS DO NOT EVIDENCE A PLEDGE OF THE COUNTY S FULL FAITH AND CREDIT. SEE SECURITY AND SOURCES OF PAYMENT FOR THE BONDS HEREIN. The Bonds are hereby offered solely in book-entry form for purchase by investors. All Bonds shall be issued as fully registered bonds without coupons, in denominations of $5,000 or any integral multiple of $5,000, registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ), to whom all payments with respect to the Bonds will be made. See The Bonds-Global Book Entry System herein. Interest on the Bonds is payable on each June 1 and December 1, commencing June 1, Principal of the Bonds will be payable annually on June 1 as follows: Maturity Principal Amount Interest Rate Yield CUSIP Maturity Principal Amount Interest Rate Yield CUSIP 2011 $115, % 3.75% AR $130, % 4.15% AV , AS , AW , AT , AX , AU4 $475, % Term Bonds due June 1, 2020 at a price of % to Yield 4.65% CUSIP Number AY6 $545, % Term Bonds due June 1, 2023 at a price of % to Yield 4.78% CUSIP Number AZ3 $630, % Term Bonds due June 1, 2026 at a price of % to Yield 4.85% CUSIP Number BA7 $1,000, % Term Bonds due June 1, 2030 at a price of % to Yield 4.95% CUSIP Number BB5 The Bonds maturing on or after June 1, 2015 are subject to optional redemption, in whole or in part, on June 1, 2014, and on any date thereafter, in such manner as the County shall determine and by lot within a stated maturity, at a price of par plus accrued interest. See DESCRIPTION OF THE BONDS for additional information. The Bonds are being offered by the Underwriter subject to prior sale and withdrawal of such offer without notice when, as and if issued by the County and accepted by the Underwriter, subject to the approving opinions of Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel. It is expected that the Bonds in definitive form will be available for delivery to DTC in New York, New York, on or about October 27, 2005.

2 NO DEALER, BROKER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COUNTY OR THE UNDERWRITER. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THE BONDS BY ANY PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE. THE INFORMATION SET FORTH HEREIN HAS BEEN OBTAINED FROM THE COUNTY, DTC AND OTHER SOURCES WHICH ARE BELIEVED TO BE RELIABLE. THE INFORMATION AND EXPRESSIONS OF OPINION CONTAINED HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE AND NEITHER THE DELIVERY OF THIS OFFICIAL STATEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT SINCE THE DATE HEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COUNTY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION OF THE CONTRARY IS A CRIMINAL OFFENSE. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS THIS OFFICIAL STATEMENT CONTAINS STATEMENTS WHICH SHOULD BE CONSIDERED FORWARD- LOOKING STATEMENTS, MEANING THEY REFER TO POSSIBLE FUTURE EVENTS OR CONDITIONS. SUCH STATEMENTS ARE GENERALLY IDENTIFIABLE BY THE WORDS SUCH AS PLAN, EXPECT, ESTIMATE, BUDGET OR SIMILAR WORDS. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COUNTY DOES NOT EXPECT OR INTEND TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED, OCCUR.

3 Steele County, Minnesota Gross Revenue Health Care Crossover Refunding Bonds, Series 2005B Debt Service Schedule Date Principal Coupon Interest Total P+I Fiscal Total 10/27/ /01/ , , , /01/ , , /01/ , , , /01/ , , /01/ , , , /01/ , , /01/ , , , /01/ , , /01/ , , , /01/ , , /01/ , % 82, , , /01/ , , /01/ , % 80, , , /01/ , , /01/ , % 78, , , /01/ , , /01/ , % 75, , , /01/ , , /01/ , % 73, , , /01/ , , /01/ , % 70, , , /01/ , , /01/ , % 67, , , /01/ , , /01/ , % 63, , , /01/ , , /01/ , % 60, , , /01/ , , /01/ , % 56, , , /01/ , , /01/ , % 52, , , /01/ , , /01/ , % 48, , , /01/ , , /01/ , % 44, , , /01/ , , /01/ , % 39, , , /01/ , , /01/ , % 35, , , /01/ , , /01/ , % 30, , , /01/ , , /01/ , % 25, , , /01/ , , /01/ , % 19, , , /01/ , , /01/ , % 13, , , /01/ , , /01/ , % 6, , , Total $3,545, $2,818, $6,363, Dated 10/01/2005 Delivery Date 10/27/2005 First Coupon Date 6/01/2006 First available call date 6/01/2014 Call Price % Accrued Interest from 10/01/2005 to 10/27/ , Bond Year Dollars $59, Average Life Years Average Coupon % Net Interest Cost (NIC) % True Interest Cost (TIC) % Bond Yield for Arbitrage Purposes % Net Interest Cost % Weighted Average Maturity Years Northland Securities Public Finance

4 TABLE OF CONTENTS INTRODUCTORY STATEMENT...1 THE BONDS...1 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS...4 THE PLAN OF REFUNDING...5 SOURCES AND USES OF FUNDS...5 DEBT SERVICE SCHEDULE...6 ACTUAL DEBT SERVICE COVERAGE...7 BONDHOLDERS RISKS...7 SUMMARY OF THE BOND RESOLUTION...13 THE HEALTH CARE FACILITIES...17 THE COUNTY...18 MINNESOTA VALUATIONS; PROPERTY TAX CLASSIFICATIONS...23 ECONOMIC AND FINANCIAL INFORMATION...26 SUMMARY OF DEBT AND DEBT STATISTICS...31 LITIGATION...32 RATING...32 TAX EXEMPTION AND RELATED CONSIDERATIONS...32 APPROVAL OF LEGAL PROCEEDINGS...34 NOT QUALIFIED TAX-EXEMPT OBLIGATIONS...34 RULE 15C CONTINUING DISCLOSURE...35 UNDERWRITING...35 MISCELLANEOUS...35 APPENDICES APPENDIX A: APPENDIX B: APPENDIX C: APPENDIX D: APPENDIX E: EXCERPTS FROM THE HEALTH CARE FACILITIES AUDITED FINANCIAL STATEMENTS...A-1 EXCERPTS FROM THE COUNTY S AUDITED FINANCIAL STATEMENTS...B-1 FORM OF LEGAL OPINION OF BOND COUNSEL...C-1 MINNESOTA MEDICAID REIMBURSEMENT, THE ALTERNATIVE PAYMENT SYSTEM AND MEDICARE...D-1 CONTINUING DISCLOSURE COVENANTS...E-1

5 SUMMARY OF THE OFFERING The following is limited introductory information regarding the offering. This summary does not purport to be comprehensive or definitive and is qualified in its entirety by reference to the complete Official Statement. Undefined capitalized terms below are used as defined within the text of this Official Statement. The Bonds: Book-Entry System: Use of Proceeds: Security: Optional Redemption: Additional Bonds: Tax Exemption: The Bonds in the aggregate principal amount of $3,545,000 dated as of October 1, 2005, will be issued as fully registered bonds without coupons in book entry form and in denominations of $5,000 or any integral multiple thereof. Interest on the Bonds is payable on each December 1 and June 1, commencing June 1, Principal is payable on the dates and in the amounts shown on the cover page hereof. The Bonds are being offered only in book-entry form. The Bonds will be fully registered as to principal and interest in the name of Cede & Co. as nominee of The Depository Trust Company ( DTC ). Subject to certain exceptions described herein all payments or transfers of Bonds in book-entry form will be made pursuant to the book-entry system maintained by DTC and certain participants, and no investor will receive hold or deliver any certificates as long as the depository or any successor securities depository is the registered owner of the Bonds. See The Bonds- Global Book Entry System herein. The Bonds are being issued by Steele County, Minnesota (the County ) (i) to refund in a crossover refunding the callable maturities of the County s Gross Revenue Health Care Facilities Bonds, Series 2000 (the Series 2000 Bonds ) and (ii) to pay related issuance expenses. See Sources and Uses of Funds herein. The Bonds will be limited obligations of the County payable solely from Gross Revenues of the Health Care Facilities, except that the Bonds will also be secured by a Reserve Account in the amount of the Reserve Requirement defined herein. The Bonds will be issued on a parity with the unrefunded portion of the Series 2000 Bonds. The County has agreed to maintain rates and charges for the Health Care Facilities that will generate Net Revenues, as defined in the Bond Resolution, at least equal to 110% of the debt service on the Bonds. In the Resolution, the County has made certain agreements to continue the operation and maintenance of the Health Care Facilities. See Security and Sources of Payment for the Bonds herein. The Bonds do not constitute a debt for which the full faith and credit or taxing powers of the County are pledged, nor do the Bonds constitute general obligations of the County. Bonds maturing on or after June 1, 2015 shall be subject to redemption and prepayment at the option of the County on June 1, 2014 and on any day thereafter, in whole or in part, at a redemption price equal to the principal amount plus the accrued interest to the date of redemption, and in the case of a partial redemption, with the maturities of the redeemed Bonds to be selected by the County, and Bonds within a maturity selected by lot. Additional Bonds may be issued having a claim on a parity with the Bonds as to Gross Revenues in certain cases where the 125% debt service coverage test described herein is met. See Security and Sources of Payment for the Bonds--Additional Bonds herein. The Bonds are generally exempt from federal and state income taxes. The Bonds are not qualified tax-exempt obligations and are not a preference under the federal alternative minimum tax. See Tax Exemption and Other Federal Tax Considerations contained herein. Professionals: Paying Agent and Escrow Agent: Bond Counsel: Northland Trust Services, Inc. Minneapolis, Minnesota Dorsey & Whitney LLP Minneapolis, Minnesota Delivery Date: On or about October 27, Continuing Disclosure: The County has agreed to provide certain financial information and operating data after the date of issuance of the Bonds. See Continuing Disclosure herein for the specific terms of the County s undertaking.

6 STEELE COUNTY PRINCIPAL COUNTY OFFICIALS Elected Officials County Officials Name Position Term Expires Tom Shea Board Chair 12/31/06 Jim Wagner Vice Chair 12/31/08 Doug Johnson Commission Member 12/31/08 Bruce Kubicek Commission Member 12/31/06 Gerald Peterson Commission Member 12/31/06 Primary Contacts Laura Ihrke Steven J. Rohlik Dave Severson Douglas L. Ruth Glen Purdie County Auditor County Treasurer County Coordinator County Attorney County Assessor Bond Counsel Dorsey & Whitney LLP Minneapolis, Minnesota Underwriter Northland Securities, Inc. Minneapolis, Minnesota

7 INTRODUCTORY STATEMENT The purpose of this Official Statement, including the cover page and the appendices hereto, is to set forth information in connection with the offering of $3,545,000 aggregate principal amount of Steele County, Minnesota, Gross Revenue Health Care Crossover Refunding Bonds, Series 2005B (the Bonds ) issued by Steele County, Minnesota (the County ) pursuant to a resolution adopted by the Board of County Commissioners of the County on September 27, 2005 (the Resolution ). The Bonds are being issued by the County pursuant to Minnesota Statutes, Sections through Proceeds of the Bonds, together with other available funds, will be used (i) to refund in a crossover refunding the callable maturities of the County s Gross Revenue Health Care Facilities Bonds, Series 2000 (the Refunded Bonds ) the proceeds of which were used to finance construction of a elderly housing facility and (ii) to pay related issuance expenses. The Bonds are payable from the Gross Revenues of Cedarview Care Center and Park Place, Housing for the Elderly (together, the Health Care Facilities ). Gross Revenues means any and all of the revenues and receipts, of whatever kind or nature (including without limitation all earnings on investments, all insurance proceeds, and all funds derived by the County from the sale liquidation or other disposition of any of the Health Care Facilities assets), derived by the County from the operation or disposition of the Health Care Facilities. The Bonds do not constitute a debt for which the full faith and credit or taxing powers of the County are pledged, nor do the Bonds constitute general obligations of the County. This Official Statement contains descriptions of, among other matters, the factors to be considered by investors, the Resolution, the Bonds, and the security for the Bonds. All summaries and descriptions of documents or laws are qualified in their entirety by reference to such documents and laws, and all summaries of the Bonds are qualified in their entirety by reference to the form thereof included in the Resolution. General THE BONDS The Bonds will be dated as of October 1, The Bonds will be issued in fully registered form in the denomination of $5,000 each or integral multiples thereof, maturing in the amounts and on the dates set forth on the cover page of this Official Statement. Interest is payable on each June 1 and December 1, commencing June 1, 2006, and will be computed on the basis of a 360-day year of twelve 30-day months. Interest on the Bonds will be payable to the registered owners of the Bonds appearing of record in the register as of the close of business on the 15th day of the immediately preceding month. Northland Trust Services, Inc. will act as Registrar/Paying Agent and will keep appropriate records of the transfer of Bonds. Optional Redemption The County may elect on June 1, 2014, and on any day thereafter, to prepay Bonds maturing on or after June 1, All prepayments shall be at a price of par plus accrued interest. Redemption may be in whole or in part and if in part, at the option of the County and in such order as the County shall determine. If less than all Bonds of a maturity are called for redemption, the County will notify DTC of the particular amount of such maturity to be prepaid. DTC will determine by lot the amount of each participant's interest in such maturity to be redeemed and each participant will then select by lot the beneficial ownership interests in such maturity to be redeemed. The County shall cause notice of the call for redemption to given to the registered owners of any Bonds. 1

8 Mandatory Sinking Fund Redemption The Bonds maturing on June 1 in the years 2020, 2023, 2026 and 2030 are subject to mandatory sinking fund redemption prior to maturity on June 1 in the years set forth below, together with interest to the redemption date: Book-Entry System Year Principal Amount 2018 $150, , (maturity) 165,000 Year Principal Amount 2021 $175, , (maturity) 190,000 Year Principal Amount 2024 $200, , (maturity) 220,000 Year Principal Amount 2027 $230, , , (maturity) 270,000 The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over two million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organization. DTC is a wholly-owned subsidiary of The Depository Trust and Clearing Corporation ( DTCC ). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation and Emerging Markets Clearing Corporation (NSCC, GSCC, MBSCC and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange, LLC., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s 2

9 highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interest in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other DTC name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the securities within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the County as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, redemption price and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts, upon DTC s receipt of funds or corresponding detail information from the County or the Registrar, on each payment date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC (nor its nominee), the Registrar, or the County, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption price (if applicable) and interest to Cede & Co., (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the County or the Registrar, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to Beneficial Owners is the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the County or the Registrar. Under such circumstances, in the event that a successor depository is not obtained. Bond certificates are required to be printed and delivered. 3

10 The County may decide to discontinue use of the system of book-entry transfers through DTC (or a successor depository). In that event, bond certificates will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the County believes to be reliable, but the County takes no responsibility for the accuracy thereof. Limited Obligations SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Bonds are limited obligations of the County, payable solely from Gross Revenues (unless paid from amounts available in the Reserve Account). The Bonds are not general obligations of the County and shall not constitute a charge, lien or any encumbrance upon any property of the County, including the Health Care Facilities, and no holder of any Bonds shall have the right to compel any exercise of the taxing power of the County to pay the principal of or interest on the Bonds. Dedication of Gross Revenues The County will dedicate and pledge for annual payment of the principal and interest on the Bonds, any bonds issued to refund the Bonds, and Additional Bonds, the Gross Revenues of the Health Care Facilities necessary to pay debt service on the Bonds as authorized pursuant to Minnesota Statutes, Sections through and the Resolution. See The Health Care Facilities herein. In the Resolution, the County will covenant to collect the Gross Revenues of the Health Care Facilities and to deposit such funds into the Gross Revenue Bond Account (the Gross Revenue Bond Account ) as required to pay debt service. After payment of required deposits to the Gross Revenue Bond Account, any remaining funds shall be deposited in the Operating and Maintenance Account (the Operating and Maintenance Account ) to pay the operating and maintenance costs of the Health Care Facilities and then to the Reserve Account (the Reserve Account ) to maintain the Reserve Account at the Reserve Requirement. Such revenues and dedication shall be irrepealable so long as any principal of or interest on the Bonds, or any bonds issued to refund the Bonds remains outstanding and unpaid. See Summary of the Bond Resolution Fund and Accounts herein. Reserve Account The Reserve Account is established by the Resolution. On the date of issuance of the Bonds, funds remaining in the debt service reserve fund for the Refunded Bonds will be credited to the Reserve Account in an amount equal to the Reserve Requirement (as described in Summary of the Bond Resolution-Fund and Accounts contained herein). Amounts available in the Reserve Account will be used to pay the principal of and interest on the Bonds (and any Additional Bonds) if amounts in the Gross Revenue Bond Account are insufficient for such purposes. If amounts in the Reserve Account are less than the Reserve Requirement, the deficiency is required to be restored from Net Revenues to the extent such revenues of the Health Care Facilities after payment debt service on the Bonds and current operation and maintenance expenses. Rate Covenant In the Resolution the County has agreed to maintain rates and charges for all services and commodities furnished by the Health Care Facilities so that the annual Net Revenues will be at least 110% of the regularly scheduled debt service due in that year. Agreement to Maintain Health Care Facilities The County has agreed to maintain the Health Care Facilities as revenue producing facilities in the manner provided by law. The County has also agreed in the Resolution to maintain the Health Care Facilities, their furnishings and equipment in good condition. In the event that there is a deficiency in revenues of the Health Care Facilities to cover the costs of administration, operation and maintenance of the Health Care Facilities, the County, in the Resolution, has agreed to include the amount of any insufficiency within its general fund levy and to appropriate such funds to the payment of such costs for the Health Care Facilities, subject to any then applicable law. 4

11 Additional Bonds Specific provisions relating to the issuance of Additional Bonds on a parity with the Bonds or on a junior basis are more fully described in Summary of the Bond Resolution-Fund and Accounts contained herein. THE PLAN OF REFUNDING Upon receipt of the proceeds from the sale of the Bonds, the County will deposit a portion of the proceeds of the Bonds with Northland Trust Services, Inc., Minneapolis, Minnesota, as escrow agent (the Escrow Agent ) under an Escrow Agreement to be dated the date of delivery of the Bonds (the Escrow Agreement ). The amounts so deposited will be invested in a guaranteed investment contract with MBIA Inc. (the GIC ) meeting the requirements of Minnesota law for escrow fund investments maturing and paying interest in amounts and at rates sufficient to pay interest due on the Bonds to and including June 1, 2010 (the Crossover Date ), and will be sufficient to pay the principal of the Refunded Bonds called for redemption on said Crossover Date, the first optional redemption date with respect to the Refunded Bonds. Under the Escrow Agreement, the amounts held by the Escrow Agent, including the interest earnings on the GIC, are pledged solely for the benefit of holders of the Bonds and the Refunded Bonds as their interest may appear SOURCES AND USES OF FUNDS Following are the expected sources and uses of funds, excluding accrued interest, in connection with the issuance of the Bonds: Sources of Funds Proceeds of the Bonds $3,545, Accrued Interest 11, Total $3,556, Uses of Funds Deposit to Crossover Escrow Fund $3,454, Debt Service Reserve Account 1, Costs of Issuance (including underwriter s discount, legal and accounting fees and expenses, printing costs, etc.) 99, Original Issue Discount 1, Subtotal $3,556, (Remainder of page left intentionally blank) 5

12 DEBT SERVICE SCHEDULE The following table sets forth the scheduled payments of principal of and interest on the Bonds: Principal Interest* Total Debt Service Date (2005 Bonds) (2005 Bonds) (2000 Bonds) Total Debt Service December 1, 2005 $125, $125, June 1, , , December 1, , , June 1, , , December 1, , , June 1, , , December 1, , , June 1, , , December 1, , , June 1, , , December 1, 2010 $82, , June 1, 2011 $115,000 82, , December 1, , , June 1, ,000 80, , December 1, , , June 1, ,000 78, , December 1, , , June 1, ,000 75, , December 1, , , June 1, ,000 73, , December 1, , , June 1, ,000 70, , December 1, , , June 1, ,000 67, , December 1, , , June 1, ,000 63, , December 1, , , June 1, ,000 60, , December 1, , , June 1, ,000 56, , December 1, , , June 1, ,000 52, , December 1, , , June 1, ,000 48, , December 1, , , June 1, ,000 44, , December 1, , , June 1, ,000 39, , December 1, , , June 1, ,000 35, , December 1, , , June 1, ,000 30, , December 1, , , June 1, ,000 25, , December 1, , , June 1, 2028 $245,000 19, , December 1, , , June 1, ,000 13, , December 1, , , June 1, ,000 6, , *Interest from June 1, 2006 through June 1, 2010 on the Bonds paid from Escrow Fund earnings. 6

13 ACTUAL DEBT SERVICE COVERAGE For the Years Ending December Actual Gross Income Available for Debt Service $6,269,226 $6,736,783 $7,046,001 Maximum Debt Service on the Series 2005B 268, , ,085 Bonds (1) Gross Debt Service Coverage Ratio 23.8x 21.68x 22.57x Net Income Available for Debt Service $624,080 $658,492 $722,143 Coverage Ratio (2) Net Debt Service Coverage Ratio 2.32x 2.11x 2.31x Net Debt Service Coverage based on two Year average Net Income 2.06x 2.21 (1) Represents actual annual debt service on the Series 2000 Bonds. (2) Net Income Available for Debt Service is defined as the County s change in unrestricted net assets plus noncash items (depreciation and amortization) and interest. BONDHOLDERS RISKS The following is a discussion of certain risks that could affect payments to be made with respect to the Bonds. Such discussion is not exhaustive, should be read in conjunction with all other parts of this Official Statement and should not be considered as a complete description of all risks that could affect such payments. Prospective purchasers of the Bonds should analyze carefully the information contained in this Official Statement, including the Appendices hereto, and additional information in the form of the complete documents summarized herein, copies of which are available as described in this Official Statement. General The principal of, premium, if any, and interest on the Bonds are payable solely from (i) Gross Revenues of the Health Care Facilities; and (ii) moneys and investments held by the County and the Paying Agent under, and to the extent provided in, the Bond Resolution. No representation or assurance is given or can be made that revenues will be realized by the County in amounts sufficient to pay debt service on the Bonds when due and other payments necessary to meet the obligations of the County with regard to the Health Care Facilities. The revenues of the Health Care Facilities are affected by and subject to conditions that may change in the future to an extent and with effects that cannot be determined at this time. The risk factors discussed below, which are not presented in any significant order, should be considered in evaluating the County s ability to make payments in amounts sufficient to provide for payment of the principal of, premium, if any, and interest on the Bonds. Dependence on Health Care Facilities Gross Revenues The Health Care Facilities have no significant assets or business other than the assets and business related to the Health Care Facilities. The ability of the County to make payments and prepayments on the Bonds will depend on the Health Care Facilities ability to generate revenues sufficient to make such payments, while also paying costs associated with operating, maintaining and repairing the Health Care Facilities. No representation or assurance can be made that revenues will be realized by the Facilties in amounts sufficient to pay maturing principal of and interest on the Bonds. Future revenues and expenses are subject to, among other things, the capabilities of the Health Care Facilities management, receipt of grants and contributions, economic conditions in the Health Care Facilities service 7

14 area, levels and methods of federal reimbursement under Medicare, federal and state reimbursement under Medicaid, reimbursement from other third-party payors, demand for services offered by the Health Care Facilities, competition with other health care providers, governmental regulation and licensing requirements, the ability of the Health Care Facilities to provide the kinds of facilities and services desired or required by residents and patients, and other factors which are unpredictable and may not be quantifiable or determinable at this time. The Health Care Facilities are subject to competition from other facilities providing similar or comparable services. There can be no assurance that competing facilities will not be acquired or constructed in the future, including facilities located in the Health Care Facilities current service area. Future revenues and expenditures of the Health Care Facilities will be subject to conditions in the future which cannot be determined with assurance. Prior revenues and expenditures of the Health Care Facilities are no guarantee as to future revenue and expenditures. Special Obligations The Bonds and the interest thereon are special obligations of the County and do not constitute general obligations of the County or any other governmental unit. The County is obligated to make payments on the Bonds only to the extent of available gross revenues. Bondholders will have no right to require the County or any other governmental unit to levy any taxes in support of the Bonds or other obligations of the County. The County's ability to repay the Bonds will depend on the overall results of operations and financial condition of the Health Care Facilities. No representation or assurance can be made that the revenues derived from the Health Care Facilities operations will be sufficient to make the required payments under the Bonds. Nature of Projected Data Certain data concerning operation of the Health Care Facilities is set forth herein. Neither the Health Care Facilities nor the County has retained consultants or Certified Public Accountants or other accountants to prepare projections of future financial performance of the Health Care Facilities. The projected data included has been developed by management of the Health Care Facilities and is based solely on past financial performance of the Health Care Facilities. The projections do not contain any additional income related to the additions financed from proceeds of the Bonds. In addition, any projections contained in this Official Statement do not include additional operating and maintenance costs related to the additions financed from proceeds of the Bonds. Accordingly, actual future revenues, operating costs and other information concerning the Health Care Facilities are likely to vary from projected data due to the actual occurrence or existence of future events and conditions, which variance may be material and adverse. Government Regulation and Reimbursement General. Nursing facilities are subject to extensive governmental regulation through state licensing requirements and complex laws and regulations imposed at the federal and state level for facilities to remain licensed and certified to receive payments under the so-called Medicaid and Medicare programs. The Minnesota Department of Health renews nursing home licenses annually and makes periodic inspections to determine compliance with licensure and certification requirements. Continuing licensure to provide nursing care is essential to the operation of the Health Care Facilities. Further, the prospective revenues of the Health Care Facilities will be significantly dependent on payments under the Medicaid program such that a loss of certification for participation in the Medicaid program or an elimination of or a material reduction in the availability of Medicaid payments would materially adversely affect the operations and financial condition of the Health Care Facilities. For more information with respect to the Medicaid and Medicare programs, see Appendix D. Changes in Law. Licensing and certification requirements are subject to change, and there can be no assurance that the Health Care Facilities will be able to maintain all necessary licenses or certifications or that the Health Care Facilities will not incur substantial costs in doing so. Both federal and state regulation relating to health care and the payment of health care costs have been subject to change in the past, and future change can be expected, the effect of which may materially adversely affect the operations and financial condition of the Health Care Facilities. In attempts to limit federal and state expenditures, there have been, and the County expects that there will continue to be, a number of proposals to limit Medicare and Medicaid payments, including those for care provided by nursing 8

15 facilities. In addition, changes have been made in Medicare reimbursement, including the adoption of a prospective payment system ( PPS ), as further described in Appendix D. Previous federal changes have included limitations on payments to nursing facilities under the Medicare and Medicaid programs and an increased emphasis on cost control. Further, various health care reform proposals have been made which may result in changes in general health care funding in the near future. It is presently unclear which, if any, of such proposals might be actually enacted into law or their effect on the Health Care Facilities. A number of proposals to regulate or alter the method of financing health care have been discussed or introduced in Congress. In addition, the methods of determining the amount and availability of payments under the Medicaid Program in Minnesota have been subject to a variety of significant changes and future changes can be expected to occur. Medicaid. The revenues of the Health Care Facilities are expected to be derived in significant part from payment rates established under the Minnesota Medical Assistance Program ( Medicaid ). States currently fund a substantial portion of Medicaid payments and exercise considerable discretion in determining payments allowed to care providers. Federal regulations provide that states are not required to pay for long-term care services on a cost-related basis, but may do so according to payment rate systems established by the state and identified in a state Medicaid plan. Those payment systems may be implemented after the state provides public notice of its methodologies and justifications and affords providers, beneficiaries and other interested parties a reasonable opportunity to comment on any proposed rates, methodologies and justifications. As a result, the reimbursement payments allowed by states are based less on the actual costs of the nursing services and more on formula rates which the governmental agencies deem acceptable, creating a more competitive environment for nursing facilities. The political emphasis on budget cutting, further changes in the Medicaid and Medicare funding and changes in reimbursement patterns of the Federal Government and the State of Minnesota may have an adverse effect upon the revenues of the Health Care Facilities. For more information with respect to the Medicaid and Medicare programs, see Appendix D. Contractual Alternative Payment System. After participating in a competitive application process, during the County s fiscal year ended December 31, 1996, the County s nursing facility was accepted by the Minnesota Department of Human Services into a legislatively enacted Contractual Alternative Payment System (the Alternative Payment System ) for payment of services provided under Medicaid. The Alternative Payment System discontinues use of costs and cost limits in the calculation of future facility rates. Rates are set by contract and are initially those being received at the time the nursing facility enters into the contract, with future rates adjusted in annual renewals of the contract. Such annual adjustments are limited to an annual inflation index and increased costs resulting only from administratively approved moratorium exception project. For the rate year beginning July 1, 2003, there will be no inflationary increase to the operating component of the payment rate and a 2.5% increase applicable to the property component of each facility s payment rate. In addition, each facility that contains licensed, skilled nursing beds received an increase of $5.56 per day to offset the increase in the state surcharge on nursing home licensed beds. Nursing facilities participating in the Alternative Payment System also receive limited exemptions from certain state regulatory and reimbursement restrictions. See Appendix D: Contractual Alternative Payment System. Given the limitations on rate increases under the Alternative Payment System, there can be no assurance that such rates in the future will be sufficient for timely payment in full of all debt service (including debt service on the Bonds) and for the proper operation of the Project. Limitations under the cost-based reimbursement system previously applicable to the facility created certain risks and negative incentives. Payment rates under the Alternative Payment System, while more predictable, are generally not sensitive to changes in facilities actual costs, except that payment by case-mix level will continue. Each contract under the Alternative Payment System is terminable by either the State or the participating facility on 30 days notice. Although DHS has stated that, unless the legislature withdraws funding or authority, it intends to enter into the contract with each participant in the Alternative Payment System annually to provide the stated inflation adjustment in subsequent years, no assurance can be made that either the State will continue to authorize such inflation adjustments or that DHS will renew and revise contracts each year to allow such inflation adjustments. Adverse interpretation of contract language, of a foreseeable or unforeseeable nature, could increase the costs of a facility or decrease revenue. The Alternative Payment System, its terms, its funding, and its continued existence are all subject to annual legislative review and potential revision. If a contract is terminated, exemptions from state law restrictions on operations and reimbursement would end, and a facility s Medicaid reimbursement would revert to costbased reimbursement or such other system as may be established in the future. Such a transition could last up to 27 9

16 months during which time the facility would, according to the terms of the contract, receive its annual inflation adjustment. Standard Minnesota Medicaid Reimbursement. Although a contract has been entered into with the State of Minnesota for the participation of the Health Care Facilities in the Alternative Payment System, it is possible, for various reasons, that the Health Care Facilities would be reimbursed in the future under standard Medicaid or some other program, all as further described in Appendix D. In Minnesota, except for facilities that have entered into contracts for the Alternative Payment System, the amount which will be paid (reimbursed) by Medicaid for services provided to a Medicaid-eligible resident in a multiple bed room is based on a daily rate established for such facility and for the patient s level of required care, both of which are periodically adjusted. There can be no assurance that such rates in the future will be sufficient for timely payment in full of all debt service payments owed by the County (including debt service on the Bonds) and for the proper operation of the nursing facility. Under current Minnesota laws and regulations, daily Medicaid rates for a facility vary among thirty-four case-mix levels of care provided to residents. Historically, daily rates were based on those costs of the facility during the prior reporting year which were allowed for rate-setting purposes and the actual occupancy and level of care provided during such year. For a variety of reasons, it is typical that not all actual costs are allowed for rate-setting purposes as described below. Since the 1998 rate year, rates have been determined legislatively by across-the-board percentage increases over the rates in effect each year. Inflation adjustments are not automatic but subject to legislative discretion and there can be no assurance the Legislature will grant such increases in future years. Rates determined in this manner may not be adequate, either on an interim basis until a following rate year or otherwise, to cover the costs of the facility. Rates might be inadequate for a number of reasons, including, but not limited to (i) an increase in operating costs in excess of historic costs, even after an adjustment by the inflation factor, (ii) a decline in occupancy or increase in the average level of care provided in the facility such that the per resident rate derived from prior occupancy or care levels is not adequate, and (iii) a disallowance in the rate-setting formula of prior costs because such costs exceed a certain percentage of costs for other facilities; because administrative costs exceed certain levels; or for numerous other reasons. As a result of limitations on the recognition of costs in the rate-setting process, incentives exist to avoid or defer costs, which may result in deferring costs for maintenance and repair to the long term detriment of the physical condition of a facility. Subject to certain appeal rights of health care providers, DHS has broad discretion in determining the allowed historic costs and other factors establishing a facility s daily rates. Furthermore, due to the complexity and detailed record-keeping required by Minnesota law, errors in or disagreements with DHS related to reporting costs and resident care classifications may arise with the result that a facility (i) receives less reimbursement than might be otherwise available, or (ii) is required retroactively to make repayments to the state for prior overpayments. From time to time, Medicaid reimbursements paid to participating facilities may be subject to DHS field audit that may result in retroactive adjustment of such facilities daily rates to create liabilities which could adversely affect cash flow and, in the extreme, the ability of the County to make timely payments in respect of the Bonds. See Appendix D. Once under the Alternative Payment System, a facility s cost reports are not subject to field audit for years after the base rate year. The Minnesota legislature has enacted a law to effectively replace the current cost-based reimbursement system with a new payment mechanism for nursing facilities. As proposed, the new system would include a formula that would pay a facility its previous year s rates plus a factor for inflation. The proposed system would contain many features similar to the current Alternative Payment System. See Appendix D. Although the legislation envisions that specific details for the proposed system will be adopted during a future legislative session, there can be no assurance that any such performance-based contract system will be enacted and implemented. Nor can there be any degree of certainty as to the effect of any such new system on the Project or the Health Care Facilities financial condition as compared with reimbursement under the current cost-based system or the Alternative Payment System. Medicare. The successful operation of skilled nursing facilities in the current competitive marketplace is becoming increasingly dependent on revenues derived from Medicare. Average lengths of stay in many facilities are becoming shorter as facilities are being used more significantly by residents who are recovering from hospitalizations and whose rates are typically covered by Medicare reimbursement. These payment rates are frequently higher than comparable rates paid by the Medicaid program. At the same time, the ongoing trend in Medicare payment rates is expected to continue to be focused on the creation of savings to the federal government through an emphasis on cost cutting and the imposition of greater responsibility on providers to control costs and take on the risk of providing quality care to residents under stricter budget constraints. Future limitations on Medicare payment rates and other restrictions can be expected to have an adverse impact on skilled nursing facilities and such impact may be material. 10

17 For more information with respect to the Medicare program, see Appendix D: Medicare. Fraud and Abuse Laws and Regulations Anti-Kickback Laws. The Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (the Anti-Kickback Law ) make it a criminal felony offense (subject to certain exceptions) to knowingly or willfully offer, pay, solicit or receive, remuneration in order to induce business for which reimbursement may be provided under the Medicare or Medicaid programs. The arrangements prohibited under the Anti-Kickback Law can involve hospitals, physicians and other health care providers such as nursing facilities. Prohibited arrangements may include joint ventures between providers, space and equipment rentals, purchases of physician practices, physician recruiting programs and management and personal services contracts. In addition to criminal penalties, violations of the Anti-Kickback Law can lead to civil monetary penalties and exclusion from the Medicare and Medicaid programs for not less than five years. Exclusion of the Health Care Facilities from either of these programs would have a material adverse impact on the operations and financial condition of the County. Billing and Reimbursement Practices. Health care providers, including nursing facilities, also are subject to criminal, civil and exclusionary penalties for violating billing and reimbursement standards under state and federal law. In recent years, state and federal enforcement authorities have investigated and prosecuted providers for submitting false claims to Medicare or Medicaid for services not rendered or for misrepresenting the level or necessity of services actually rendered in order to obtain a higher level of reimbursement. The Department of Health and Human Services Office of Inspector General ( OIG ) and the Department of Justice ( DOJ ) have conducted several joint investigation and prosecution projects in recent years involving as many as 4,600 hospitals nationwide in an effort to recover alleged overpayments to hospitals. In some instances, the OIG and DOJ have recovered double or treble damages, plus penalties and interest, and have imposed strict compliance measures to ensure correct billing practices in the future. Managed Care Nursing facilities throughout the United States are facing a health care environment that is becoming increasingly dominated by the development of risk-based managed care plans. The necessity for nursing facilities to contract with managed care plans is increasing not only for privately insured residents but also for certain Medicare beneficiaries. States are experimenting with innovative delivery and payment systems to provide care to Medicare beneficiaries, and in Minnesota there are certain plans that provide for contractual risk sharing in the delivery of services to individuals who are eligible for both Medicaid and Medicare. The current trend in health care reimbursement is for the federal government to enable the states to use managed care as a way to reduce costs without the need for federal interference and approval. There can be no assurances that the Health Care Facilities will choose to, or will be able to enter into, satisfactory contracts with such managed care plans or that the revenues generated for the Health Care Facilities by any such managed care plans with which it may choose to contract will be sufficient to meet the actual operating costs of the Health Care Facilities. Other Regulatory Matters Various health and safety regulations and statutes apply to nursing facilities and are administered and enforced by various state agencies. Violations of certain health and safety standards could result in closure of all or a portion of such facilities or imposition of immediate sanctions. The Health Care Facilities are currently in compliance with all existing material regulations and standards. Such standards are, however, subject to change and there can be no guarantee that in the future the Health Care Facilities will meet these changed standards or that the Health Care Facilities will not be required to expend significant sums in order to comply with such changed standards. Changes in Law Licensing and certification requirements are subject to change, and there can be no assurance that the Health Care Facilities will be able to maintain all necessary licenses or certification or that it will not incur substantial costs in doing so. Both federal and state regulation relating to health care and the payment thereof have been subject to change in the past, and future change can be expected, the effect of which may materially adversely affect the operations and 11

18 financial condition of the Health Care Facilities. In attempts to limit federal and state expenditures, there have been, and it is expected that there will continue to be, a number of proposals to limit Medicare and Medicaid payments, including those for care provided by nursing facilities. Previous federal changes include limitations on payments to nursing facilities under the Medicare and Medicaid programs and an increased emphasis on cost control. Further, various health care reform proposals have been made recently which may result in changes in general health care funding in the near future. It is presently unclear which, if any, of such proposals might be actually enacted into law or their effect on the Health Care Facilities. Labor Matters In recent years, the nursing home industry has suffered from an increasing scarcity of nursing personnel to staff its facilities. As the competition for skilled nursing personnel, such as nurses aides and licensed practical nurses, increases, more skilled nursing personnel can be expected to work in environments other than nursing homes. Scarcity of nursing personnel could eventually force the County to pay increased salaries to such personnel as competition for such employees intensifies, and, in an extreme situation, could lead to difficulty in keeping the Health Care Facilities licensed to provide service at current levels. Typically when nursing facilities face shortages of nursing personnel, temporary staffing needs are met through labor pools, where labor costs generally run higher than corresponding costs for permanent nursing employees. Environmental Matters Nursing facilities are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations which address, among other things, hospital operations, and facilities and properties owned or operated by nursing facilities. Among the myriad types of such regulatory requirements faced by nursing facilities are: (a) air and water quality control requirements; (b) waste management requirements; (c) specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances; (d) requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the nursing facility; and (e) requirements for training employees in the proper handling and management of hazardous materials and wastes. Management of the Health Care Facilities is not aware of any pending or threatened claim, investigation or enforcement action regarding such environmental issues involving the Health Care Facilities which, if determined adversely, would have a material adverse effect on the future financial condition or results of operations of the Health Care Facilities, taken as a whole. Licensing, Surveys, Investigations and Audits The Health Care Facilities are subject to periodic review by various federal, state and local agencies. Management of the Health Care Facilities does not expect any such review to require actions or impose conditions that could not be satisfied. No assurance can be given as to the effect on future operations of existing laws, regulations and standards for certification or accreditation or of any future changes in such laws, regulations and standards. State Laws and Regulations Legislation may be introduced from time to time in the Minnesota Legislature relating to the operations and reimbursement of health care providers, including nursing facilities. No precise determination can be made at this time whether the bills that have been or may be introduced or the regulations which may be proposed for the purpose of containment of costs, or otherwise affecting revenues or increasing the competition among nursing facilities, will be enacted or, if enacted, whether and to what degree such legislation will affect the future financial condition or results of operations of the Health Care Facilities or its ability to make future capital expenditures. Market for the Bonds Subject to prevailing market conditions, the Underwriter intends, but is not obligated, to make a market in the Bonds. There is presently no secondary market for the Bonds and no assurance that a secondary market will develop. 12

19 Consequently, investors may not be able to resell the Bonds purchased should they need or wish to do so for emergency or other purposes. Damage or Destruction Although the County maintains insurance on physical property of the Health Care Facilities, there can be no assurance that the Health Care Facilities will not suffer losses for which insurance cannot be or has not been obtained or that the amount of any such loss, or the period during which the Hospital cannot generate revenues, will not exceed the coverage of such insurance policies. General SUMMARY OF THE BOND RESOLUTION The Bonds will be issued pursuant to the Resolution adopted by the Board of County Commissioners. Following is a summary of the Resolution, a copy of which is available upon request to the Underwriter during the offering of the Bonds and thereafter from the County or the Financial Advisor. Funds and Accounts The Resolution establishes the funds and accounts for the Health Care Facilities. Below are excerpts of the relevant sections of the Resolution: Fund and Accounts. In order to provide for the proper administration of all funds which are derived from the operation of the Health Care Facilities, the Treasurer/Finance Director has heretofore established and shall continue to maintain a Health Care Facilities Gross Revenue Fund (the "Fund") which shall remain a separate fund of the County subject to the following separate accounting: (a) Gross Revenue Bond Account. Until the principal of and interest on the Bonds and all other Outstanding Bonds (as described in the Resolution) are paid, or until all such Bonds are otherwise discharged as hereinafter provided, there shall be credited to and maintained in the Gross Revenue Bond Account (1) first, the "Gross Revenues" of the Health Care Facilities (as hereinafter defined), but only in such amounts and at such times as shall be necessary, when combined with other monies in the in the Gross Revenue Bond Account and available for such purposes, to make full and timely payment of the debt service due on the Outstanding Bonds; (2) second, to the extent that there are insufficient funds in the Gross Revenue Bond Account to pay the principal of or interest on the Outstanding Bonds, when due, there shall be transferred to the Gross Revenue Bond Account, from the Reserve Account, the amount of said deficiency: and (3) third, any other funds which are properly available and are appropriated by the Council to the Gross Revenue Bond Account. The aforesaid funds, when deposited in the Gross Revenue Bond Account, shall be used only and exclusively for, and are hereby pledged to, the payment of the principal of and interest on the Outstanding Bonds, when due. The Board reasonably expects that the funds available to the Gross Revenue Bond Account from time to time will be sufficient to pay the principal of and interest on the Outstanding Bonds, when due. For purposes of the foregoing, the Gross Revenues of the Health Care Facilities shall mean any and all of the revenues and receipts, of whatever kind or nature (including without limitation all earnings on investments, all insurance proceeds. and all funds derived by the County from the sale, liquidation or other disposition of any of the Hospital's assets), derived by the County from the operation or disposition of the Health Care Facilities, and such Gross Revenues shall not be reduced by any amounts required from time to time to pay the costs of operation and maintenance of the Health Care Facilities or any other expense of the Health Care Facilities, including without limitation utility charges, taxes or other governmental impositions, insurance premiums, repair expenses, and reasonable contingency reserves and any other items described as "Current Expenses" in subsection (c) below. (b) Operating Account. To the Operating Account within the Fund there shall be paid all of the Gross Revenues not required to be deposited into the Gross Revenue Bond Account pursuant to paragraph (a) 13

20 above. From this account there shall be paid the Current Expenses of the Health Care Facilities, hereby defined to be the reasonable and necessary costs of administering, operating, maintaining and insuring the Health Care Facilities, the cost of salaries, wages, and benefits of Health Care Facilities employees, costs of materials and supplies, necessary legal, engineering and auditing services, and all other items which, by sound accounting practices constitute normal, reasonable and current costs of operation and maintenance, but excluding any allowance for depreciation or extraordinary repairs. The Net Revenues of the Health Care Facilities are hereby defined to be the Gross Revenues minus the Current Expenses. (c) Excess Net Revenues. Gross Revenues in excess of the sum of the amounts thereof (i) required to be deposited into the Gross Revenue Bond Account and (ii) needed to pay Current Expenses (and not needed to restore the funding of the Reserve Account to the Reserve Requirement, as described in the Resolution) are hereby defined to be the Excess Net Revenues of the Health Care Facilities, which may be used for any proper lawful purpose of the County, including without limitation capital and other costs of the Health Care Facilities. Reserve Account. A separate Reserve Account shall also be maintained in the Fund and shall secure the prompt and full payment of the principal of and the interest on the Bonds (and any other Outstanding Bonds described in the Resolution), but only to the extent that the regular debt service amounts deposited in the Gross Revenue Bond Account are insufficient for such purposes. The Purchaser has required the establishment and funding of the Reserve Account, and while the Council believes said requirement is reasonable and necessary, the Council also believes that, based upon cash flow projections for the Health Care Facilities, the use of monies in the Reserve Account is not expected to be required. The Reserve Account shall be maintained at the "Reserve Requirement described in this paragraph. At the time of issuance of the Bonds and any additional Outstanding Bonds (collectively, the "Secured Bonds"), the County shall cause the Reserve Account to be funded in the amount equal to the smallest of the following: (a) The maximum of the unpaid annual debt service requirements of the outstanding Secured Bonds (including those then being issued); (b) 125% of the average of the unpaid annual debt service requirements of the outstanding Secured Bonds (including those then being issued); (c) An amount equal to the sum of the Reserve Requirement (if any) just prior to the issuance of additional Secured Bonds plus 10% of the "issue price of the Secured Bonds at the time being issued; provided, however, that pursuant to such instructions and opinions as the County may receive or request from its bond counsel, the Reserve Requirement, and the investment of funds in the Reserve Account, shall be subject to such restrictions and affirmative obligations as shall be necessary in order that none of the interest on the Secured Bonds shall (in the absence of compliance with any such restrictions or affirmative obligations) become generally subject to federal income taxation. If an entire issue of Secured Bonds shall have been paid in full in accordance with its terms, or if any obligation under any Secured Bond shall have been defeased, the Reserve Requirement shall be reduced to that level thereof which would apply had said issue of Secured Bonds, or said obligation of that Secured Bond, as the case may be, never been issued; provided, however, that any such reduction shall be subject to the condition that there shall not at the time be a default continuing with respect to the payment of or security for any Secured Bond or a default continuing under any resolution, indenture or other document pursuant to which any Secured Bonds were issued. The County shall maintain the Reserve Account not in excess of the Reserve Requirement(s) that may apply from time to time and the County shall promptly withdraw from the Reserve Account any amounts which are in excess thereof (including all earnings, as and when received, on investments of monies in the Reserve Account); provided that the County hereby covenants and agrees that at any time that the Reserve Account shall be funded at 14

21 a level less than the applicable Reserve Requirement, the County shall retain all such earnings in the Reserve Account and shall pay such monies into the Reserve Account from available Excess Net Revenues as shall be sufficient to restore such deficiency. Withdrawals from the Reserve Account shall be deposited to the Gross Revenue Bond Account. County s Obligation to Maintain the Health Care Facilities The source of payment for the Bonds is the Gross Revenues of the Health Care Facilities. The Net Revenues are available to pay the operating and maintenance costs. In addition, in the Resolution, the County has made certain covenants as to its responsibility to maintain, operate and insure the Health Care Facilities. Following are excerpts of the Resolution: Covenants as to Maintenance, Rates and Charges, Sale, Insurance, Etc. The County certifies and represents to, and covenants and agrees with, the Owners from time to time of the Bonds as follows: (a) The County will continue its ownership and operation of the Health Care Facilities as revenue producing facilities and conveniences, in the manner authorized and subject to the restrictions imposed by applicable law. The County will maintain the Health Care Facilities, its furnishings, and equipment in good condition, and free from all liens, provided that purchase money liens may be created thereon and such property may be acquired subject to liens existing at the time of acquisition. (b) If any properties constituting capital assets of the Health Care Facilities shall be sold and disposed of, it shall be only at their fair market value, and the proceeds of such sale or disposition shall be used either to acquire other capital assets for the Hospital or treated as Gross Revenues. No such sale or sales shall be made at times or prices such as to imperil the prompt and full payment of the Bonds. (c) The County will procure and keep in force insurance on the Health Care Facilities and the equipment and furnishings thereof, protecting against loss or damage by fire, tornado, windstorm, flood, theft and all other causes customarily insured against for like properties. In the event of loss covered by said insurance policies, the insurance proceeds shall be used to repair or restore the damage or treated as Gross Revenues. (d) The County will further keep in force a liability insurance policy (covering its operation of the Health Care Facilities). Said policy shall specifically provide for the payment by the insurance company on behalf of the insured of all sums which the County shall be obligated to pay by reason of liability imposed upon it by law for injuries or damage to persons, other than employees. (e) The County will cause proper and adequate books and records of account to be kept separate from all other records of the County, reflecting all receipts and disbursements relating to the Health Care Facilities. All of said books and records shall be open to inspection and copying at all reasonable times by the Owners of the Bonds, and the County will, without cost, furnish copies of any portions thereof reasonably requested by any bondholder. The County will cause annual operating statements to be prepared and an independent audit of the books of the Health Care Facilities to be made by a competent public accountant, and will upon request furnish a copy thereof without cost to each bondholder. (f) Each and all of the foregoing provisions of this Resolution which in any way tend to secure or assure prompt and full payment of the principal of and interest on the Bonds will be promptly and faithfully performed and carried out by the County and its officers and agents. (g) The County will at all times, to the extent permitted by law, impose and collect rates and charges for all services and commodities furnished and made available by and through its Health Care Facilities so that the annual Net Revenues derived therefrom will be at least 110% of the regularly scheduled debt service due in that year on the Bonds and any additional Outstanding Bonds described in paragraph 19(b) hereof. 15

22 (h) The County will include within its annual general fund levy and will appropriate for such purposes to the extent of such levy, subject to such limitations as may be prescribed by law, amounts sufficient for the payment of expenses of administration, operation and maintenance of the Health Care Facilities, to the extent of any insufficiency of the revenues of the Health Care Facilities which are available for such purposes pursuant to the terms of this Resolution. Additional Bonds The Resolution provides for the issuance of additional bonds by the County and payable by the Gross Revenues of the Health Care Facilities on a parity basis with the Bonds. Following are excerpts from the Resolution: Additional Bonds. The County reserves the right to issue additional bonds payable from the Gross Revenue Bond Account and secured by the covenants set forth in the Resolution on the terms and conditions specified in this paragraph. (a) Purpose of Bonds; Net Revenues. Additional bonds may be issued only to finance the acquisition and betterment of improvements or additions to the Health Care Facilities, including necessary equipment, or to refund bonds issued for such purposes. All revenues derived from any such improvements or additions shall be Gross Revenues of the Health Care Facilities. (b) Parity Bonds. Additional Bonds may be made payable from the Gross Revenue Bond Account, the Reserve Account and the Gross Revenues pledged thereto on a parity as to both principal and interest with all other bonds payable therefrom under the following conditions: (1) There is filed with the County: (A) A certificate of a Financial Advisor stating that the Income Available for Debt Service for each of the two most recent Fiscal Years preceding the date of delivery of the certificate was not less than 125% of the maximum Principal and Interest Requirements (including the requirements for the Additional Bonds proposed to be issued) for any future Fiscal Year during the term of all Bonds then Outstanding; or (B) (i) A certificate of a Financial Advisor stating that the Income Available for Debt Service for each of the two Fiscal Years next preceding the date of delivery of the certificate was not less than 125% of the maximum Principal and Interest Requirements (excluding the Additional Bonds proposed to be issued) for any future Fiscal Year during the term of all Bonds then Outstanding; and (ii) a certificate of a Financial Advisor to the effect that the estimated Income Available for Debt Service for each of the next two succeeding Fiscal Years or, if such Additional Bonds are being issued in connection with the financing of improvements to the Health Care Facilities, the two Fiscal Years succeeding the projected completion date of such improvements, is not less than 125% of the maximum Principal and Interest Requirements (including the Additional Bonds proposed to be issued) for any future Fiscal Year during the term of all Bonds then Outstanding; provided that such certificate shall include forecast statements of revenues and expenses for each of such two Fiscal Years (which may be in summary form) and a statement of the relevant assumptions upon which such forecasted statements are based. In making the foregoing computations, the Financial Advisor may reasonably allocate the balance on deposit in the Reserve Account to each series of Outstanding Bonds and assume said allocated balance will be applied toward the payment of the final maturity of any such series (thereby reducing the Principal and Interest Requirements in such Fiscal Year). In making the calculations in (1) above, the Income Available for Debt Service for a fiscal year may be increased to reflect any increase in the rates and charges which were put into effect during, but were not in effect for all of that fiscal year. 16

23 (2) Additional Bonds may be issued for the purpose of refunding (whether in advance or otherwise, including without limitation refunding through the issuance of crossover refunding bonds) any series of Outstanding Bonds, or portion thereof, if prior to the issuance thereof a certificate of a Financial Advisor is delivered to the County stating that, taking into account the issuance of the proposed Additional Bonds and the application of the proceeds thereof and any other funds available to be applied to such refunding, the Principal and Interest Requirements during the remaining term of all Bonds then Outstanding and not to be redeemed or defeased in connection with the refunding will not be increased by more than 10%. (3) In determining the Principal and Interest Requirements on Bonds in the course of the various calculations required under the foregoing provisions, and any other provisions of this Resolution, if the terms of the Bonds being considered are such that interest thereon for any future period of time is expressed to be calculated at a varying rate per annum, a formula rate or a fixed rate per annum based on a varying index such that the interest payments on such Bonds at any future date cannot be accurately calculated, the Principal and Interest Requirements shall be calculated as if the average interest rate in effect during the last Fiscal Year preceding the date of calculation was in effect throughout the entire term of the Bonds, or if said Bonds were issued in the same Fiscal Year as the calculation, the first rate in effect for said Bonds shall be used in calculating the interest payments on said Bonds as if said interest rate was in effect throughout the term of the Bonds. Bonds may be converted from one interest rate mode to another payment mode pursuant to the terms of the documents authorizing the issuance of said Bonds, provided that the Bonds were issued in compliance with this Section 3.1 based upon the payment mode in effect on the date of such issuance. (e) Subordinate Lien Bonds. Except as specifically provided in the Resolution, any other Long- Term Indebtedness issued or incurred by the County and made payable from the revenues of the Health Care Facilities shall be payable from the Surplus Account in the Health Care Facilities Gross Revenue Fund and from Gross Revenues transferred thereto after the requirements set forth in the Resolution are met. Any pledge of Gross Revenues to the payment of such Long-Term Indebtedness shall be subordinate to the pledge and appropriation of such Gross Revenues to the Bonds pursuant to the Resolution. General THE HEALTH CARE FACILITIES Cedarview Care Center is a 108-bed licensed nursing home facility. The facility is a two-story masonary building offering all levels of care. Cedarview Care Center has a full-time Administrator and full-time nursing staff. Park Place is a 50-unit senior housing project constructed in 2000/2001. The facility is a two-story wood frame structure providing 35 units of congregate care and 15 units of assisted living care. Park Place has a full-time director and nursing staff which is shared with Cedarview Care Center. Officers Terry Schneider has served as Administrator of Cedarview Care Center since Prior to his tenure at Cedarview Care Center, Mr. Schneider was Administrator of Grand Meadow Healthcare Center, in Grand Meadow, Minnesota from 2000 to 2001 and the Administrator of Green Lea Manor, Mable Minnesota from 1997 to Mr. Schneider attended Indian Hills Community College, Ottumwa, Iowa from August 1989 to June 1990 with an emphasis on Health Care Administration and graduated from the University of Wisconsin, Eau Claire, Wisconsin in 1983 with a B.S. in Business Administration. Jennifer Redman has served as Administrator of Park Place since Prior to her tenure at Park Place, Ms. Redman was a social worker at Allina Hospital, Owatonna, Minnesota in the mental health unit as well as a with a Medicare research project called Healthy Seniors. Ms. Redman graduated Summa Cum Laude from Mankato State University with a degree in Social Work with an emphasis in mental health. 17

24 Occupancy The average annual occupancy of the Health Care Facilities through August 31, 2005 and during the fiscal years ended June 30, 2004 and 2003 was as follows: Park Place and Cedarview Care Center Year (Thru Aug) PARK PLACE (50 Units) 99.84% 99.90% 99.96% CEDARVIEW CARE CENTER (108 Units) Medicaid 53.41% 56.49% 52.82% Medicare 8.93% 10.49% 11.93% Private 36.35% 31.32% 32.47% Financial Results Total 98.69% 98.30% 97.22% Selected audited financial statements of the Health Care Facilities for the years ended December 31, 2004 and 2003 are attached to this Official Statement in Appendix A. General Information Location/Access/Transportation THE COUNTY Steele County is located in the southwestern portion of Minnesota approximately 60 miles from the Twin Cities Metropolitan Area. The County is comprised of four cities, thirteen townships and three school districts that are located entirely or partially within the County. The County Seat is located in the City of Owatonna, which lies in the north-central region of the County. Access is provided via U.S. Highway 14 and 218, State Highway 30, as well as Interstate 35. Tax Base For taxes collectable in 2005, the tax breakdown is 51.68% residential homestead (non-agriculture); 19.13% agricultural; 19.84% commercial & industrial; 1.12% public utility; 6.20% residential non-homestead;.34% seasonal/recreational commercial & residential; and 1.69% personal property. Area 276,480 Acres (432 Square Miles) Population 1980 Census 30, Census 33,680 18

25 1990 Census 30, Estimate * 34,429 County Facilities Sheriff s Department. The County operates its own Sheriff s Department consisting of one sheriff; fifteen deputies; one jail facility with administrator; and forty jailors/dispatchers. In addition, the Department has twenty patrol vehicles, one boat, motor & trailer, radio equipment, Jaws of Life equipment, and other miscellaneous equipment. Park and Recreational Facilities. The County operates three parks encompassing approximately 23 acres of designated land. The following parks lie within Steele County: Beaver Lake Park, Crane Creek Park, Hope School County Park and Rice Lake State Park. Facilities include fishing piers; sand volleyball court; baseball/softball fields; skiing/hiking trails; swimming beaches; and picnic facilities. Municipal Building(s). The County owns or partially owns and operates the following municipal buildings: courthouse, jail, annex, administration building, law enforcement center, community center, and county attorney facility. In addition nursing home and assisted living facilities include Cedarview Care Center, Park Place (assisted living), and a reflection building. Total square footage for all facilities is approximately 303,126. Landfill. Steele County has owned and operated the landfill since The landfill operation and capital costs have been financed entirely through tipping or user fees since its inception. The original landfill site was approximately 80 acres and the incoming waste is currently being deposited in the third and final phase of the original site. There is a remaining capacity of about one year in the three-phase area. Steele County began the process of finding future landfill capacity in 1994 to provide long-term waste disposal capacity for Steele County generated waste. An 80-acre parcel adjacent to the existing landfill was purchased in 1995 and a hydrogeologic investigation was conducted in 1997 on the expansion site. The public environmental review process for the landfill expansion project was concluded in The final step in the landfill expansion permitting process was completed in January 2002 when the permit was issued to Steele County by the MPCA. The Steele County Landfill operation is managed by the Environmental Services Director, who has a Bachelor s Degree in Biology/Environmental Studies and Business. As of December 31, 2004, the total landfill balance was $2,652,041 comprised of two separate funds: landfill operations and financial assurance. The landfill operations fund had a balance of $541,087 and the financial assurance fund had a balance of $2,110,954. The financial assurance fund is a dedicated trust fund that is used to pay for landfill closure, post-closure care and monitoring, and contingency costs. In 2003, Steele County paid $871,000 and in 2004, paid $449,730 for a cell development. With the purchase of a new landfill compactor in 1998, this will extend the life of the landfill expansion area by nine years, from 26 years to 35 years. In order to continue cash flowing the landfill through the use of tipping fees, the Steele County Board of Commissioners has been working with garbage haulers to sign contracts for delivery of waste to the county landfill. Steele County will consider other options to cash flow the landfill, if the waste delivery contract mechanism is insufficient. The Four Seasons Centre: In July 1999, the City of Owatonna issued $1,375,000 Lease Revenue Bonds, Series 1999 to add a 33,800 square foot addition consisting of a second ice arena and additional space to provide greater flexibility for the use of the facility. The County leases the facility from the City and is obligated to pay debt service from operating revenues. Under the lease, the County will continue to operate and maintain the facility. The City will pay for a substantial part of the energy expense. Agriculture * Source: Steele County. 19

26 Steele County s agricultural activity is primarily in corn, soybean and oats and livestock production. The average farm size within Steele County is approximately 314 acres. Farmers had cash receipts from crops of $80,270,000 and livestock of $47,682,000. The number of acres harvested for soybeans and corn were 90,000 and 98,800, respectively. Steele County ranked 41 st and 32 nd in the State for soybean and corn production as of December 31, The number of livestock for dairy cows, cattle, hogs and pigs, and beef cows are 4,700; 20,000; 100,000; and 1,300, respectively. County Government Steele County, organized in 1855 and reorganized with its present boundaries in 1856, is an organized County having the powers, duties, and privileges granted Counties by Minnesota Statutes, Chapter 373. The Board sets policies and makes program decisions for all departments and business. The Board meets the second and fourth Tuesdays of each month with the exception of the first meeting in January, which is set by statutes on the first Tuesday after the first Monday of the month. The County has a governing body with a chairperson, vice chair and three commissioners. The professional staff includes the following: attorney, auditor, treasurer, coordinator, assessor, engineer, planning and zoning director and sheriff. Medical Services Medical facilities and services are available to area residents at Owatonna and Blooming Prairie Clinics (Mayo Health System), public health nursing clinics in Blooming Prairie and Ellendale as well as the Owatonna Hospital with 77 beds and 300 employees. Long-term health care is available at Cedarview Care Center and Park Place, Owatonna. Employee Pension Programs The County employs 317 people. The pension plan covers all eligible part-and full-time County s employees. The County participates in contributory pension plans through the Public Employees Retirement Association (PERA) under Minnesota Statutes, Chapters, 353 and 356, which covers all full-time and certain part-time employees. PERA administers the Public Employees Retirement Fund (PERF) and the Public Employees Police and Fire Fund (PEPFF), which are cost sharing, multiple-employer retirement plans. Benefits are established by State Statute and vest after three years of credited service. State Statute requires the County to fund current service pension cost as it accrues. Defined retirement benefits are based on a member s highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. Audited County contributions to PERF, PEPFF and LGCSRF for the past six years have been as follows: Year Amount Year Amount 2003 $770, $576, , , , ,848 Labor Force Data Comparative average labor force and unemployment rate figures for 2005 (through May) and year-end 2004 from the Minnesota Department of Economic Security, Research and Statistics Office, are listed below. Figures are not seasonally adjusted and numbers of people are estimated by place of residence. May Civilian Labor Force Unemployment Rate Civilian Labor Force Unemployment Rate Steele County 20, % 20, % Minnesota 2,951, ,951,

27 Financial Institutions City Name Bank Name Reported Deposits 1 Blooming Prairie Farmers and Merchants State Bank U.S. Bank National Association (branch of Minneapolis) $ 33,268,000 12,125,000 Ellendale First National Bank of Waseca (branch of Waseca) 11,510,000 Medford Americana Community Bank (branch of Sleepy Eye) 16,505,000 Owatonna 1 st United Bank (branch of Faribault) Community Bank Owatonna Federated Employees Credit Union Home Town Federal Credit Union Josten Employees Credit Union Minnesota First Credit and Savings Inc. (branch of Rochester) Premier Bank Minnesota (branch of Farmington) U.S. Bank National Association United Prairie Bank Wells Fargo Bank, National Association (branch of Minneapolis) Wells Federal Bank, FSB (branch of Wells) 14,366,000 20,523,000 28,929,000 59,463,000 1,143,000 5,629,000 23,004,000 61,638,000 76,413, ,561,000 6,034,000 Education The County is served by ISD No. 761, Owatonna; ISD No. 756, Blooming Prairie; and ISD No. 763, Medford. ISD No. 761, Owatonna, operates seven schools, a district office and community education building serving 4,880 students in grades kindergarten through twelve. The District employs 671 people, comprised of 330 teachers and 17 administrators. ISD No. 756, Blooming Prairie, operates two educational buildings: an elementary school, grades kindergarten through six and a secondary school, grades seven through twelve. Both schools are located within the City of Blooming Prairie. The District employs 99 people, comprised of 36 non-licensed employees and 63 licensed. Enrollment for the past six school years is as follows: Year Elementary (Grades K-6) Secondary (Grades 7-12) Totals 2004/ / / / / / ISD No. 763, Medford, operates two school buildings in Medford serving 739 students in grades kindergarten through twelve. The District employs 78 people, comprised of 31 non-licensed employees and 47 licensed. Major/Leading Employers Following are sixteen-major/leading employers within the County as reported by Steele County: 1 All reported deposit/asset information is as of June 30, 2004 and obtained from the Federal Reserve s National Information Center (NIC) website at and the Federal Deposit Insurance Corporation (FDIC) website at www2.fdic.gov. 21

28 Commercial/Industrial Product/Service Number of Employees 1 Viracon Inc. Glass Products 1,350 Federated Mutual Insurance Co. Insurance 1,425 Truth Hardware Corp. Window Hardware 848 ISD No. 761, Owatonna Public Education 671 SPX Corp-OTC Div. Component Manufacturing 650 Wenger Corp. Musical Equipment 615 City of Owatonna Municipal Government 578 Josten s Inc. Recognition Products 550 Cabela s Retail Inc. Sporting Goods 425 Medford Outlet Center, LLC Retail Outlet Center 350 Owatonna Clinic and Pharmacy Health Care/Pharmacy Services 350 Owatonna Hospital Hospital Medical Services 322 Steele County County Government 317 Lumex Inc. Exercise Equipment Manufacturing 299 Cedar Valley Services Job Training/Rehabilitation 240 Lakeside Foods 2 Food Processing 213 Largest Taxpayers Following are ten largest taxpayers within the County as reported by Steele County: Name Classification 2004/2005 Estimated Market Value 2004/2005 Tax Capacity Percent of Real Property to Tax Capacity ($25,007,467) 3 Northern Natural Gas Company (5) Utility $15,407,000 $ 306, % Viracon Inc. Glass products 10,633, , Cabela s Retail Inc. Retail 8,736, , Medford Outlet Center LLC Retail 7,342, , Mills Properties Inc. Retail 7,330, , Federated Mutual Insurance Co. Commercial 7,297, , JAS Realty LLC Commercial 6,921, , Wal-Mart Stores Retail 5,576, , J R Holdings LLC Hotel 5,487, , Lakeside Foods Inc. Commercial 5,345, , Financial Results $ 1,592, % Selected audited financial statements of the County for the years ended December 31, 2004 and 2003 are attached to this Official Statement in Appendix B. 1 Includes full-time, part-time and seasonal employees. 2 Formerly Chiquita Processed Foods. 3 Before tax increment adjustment. 22

29 MINNESOTA VALUATIONS; PROPERTY TAX CLASSIFICATIONS Market Value According to Minnesota Statutes, Chapter 273, all real property subject to taxation is to be appraised at maximum intervals of four years. All real property becoming taxable in any year is listed at its estimated market value on January 2 of that year. The estimated market value is the County Assessor s appraisal of the worth of the property. Indicated Market Value The Minnesota Department of Revenue conducts the Real Estate Sales Assessment Ratio Study to accomplish equalization of property valuation in the State of Minnesota and to determine the probable selling price of a property. The study is a three-year average of sale prices as related to the latest assessor s estimated market value. The indicated market value is determined by dividing the estimated market value by the Sales Assessment Ratio for the Issuer as determined by the Department of Revenue. Tax Cycle Minnesota local government ad valorem property taxes are extended and collected by the various counties within the state. The process begins in the fall of every year with the certification, to the county auditor, of all local taxing districts property tax levies. Local tax rates are calculated by dividing each taxing district s levy by its net tax capacity. One percentage point of local tax rate represents one dollar of tax per $100 net tax capacity. A list of taxes due is then prepared by the county auditor and turned over to the county treasurer on or before the first Monday in January. The county treasurer is responsible for collecting all property taxes within the county. Real estate tax statements are to be mailed out no later than March 31 and personal property tax statements no later than July 4. The due dates for payment of real property taxes are one-half on or before May 15 and one-half on or before October 15. Personal property taxes become due one-half on or before August 31 and one-half on or before November 15. Following each settlement (January 25, June 19, and December 1 of each year), the county treasurer must redistribute property tax revenues to the local taxing districts in proportion to their tax capacity ratios. Delinquent property taxes are penalized at various rates depending on the type of property and the length of delinquency. Tax Credits Prior to 1990, taxes on homestead residential and agricultural property were reduced by a direct subsidy to the taxpayer. Beginning in 1990, the homestead credit has been eliminated. The state subsidy is now accomplished through lower class rates to homesteaded classifications of property and increased state aids paid directly to local taxing districts. This new system is intended to have generally the same impact as the former homestead credit system. Tax Levies for General Obligation Bonds (Minnesota Statutes, Section ) The governing body of any municipality issuing general obligations shall, prior to delivery of the obligations, levy by resolution a direct general ad valorem tax upon all taxable property in the municipality to be spread upon the tax rolls for each year of the term of the obligations. The tax levies for all years shall be specified and such that if collected in full they, together with estimated collections of special assessments and other revenues pledged for the payment of said obligations, will produce at least five percent in excess of the amount needed to meet when due the principal and interest payments on the obligations. Such resolution shall irrevocably appropriate the taxes so levied and any special assessments or other revenues so pledged to the municipality s debt service fund or a special debt service fund or account created for the payment of one or more issues of obligations. The governing body may, at its discretion, at any time after the obligation have been authorized, adopt a resolution levying only a portion of such taxes, to be filed, assessed, extended, collected and remitted as hereinafter 23

30 provided, and the amount or amounts therein levied shall be credited against the tax required to be levied prior to delivery of the obligations. The recording officer of the municipality shall file in the office of the county auditor of each county in which any part of the municipality is located a certified copy of the resolution, together with full information regarding the obligations for which the tax is levied. No further action by the municipality is required to authorize the extension, assessment and collection of the tax, but the municipality s liability on the obligations is not limited thereto and its governing body shall levy and cause to be extended, assessed and collected any additional taxes found necessary for full payment of the principal and interest. The auditor shall annually assess and extend upon the tax rolls the amount specified for such year in the resolution, unless the amount has been reduced as authorized below or, if the municipality is located in more than one county, the portion thereof that bears the same ratio to the whole amount as the tax capacity value of taxable property in that part of the municipality located in his county bears to the tax capacity value of all taxable property in the municipality. Tax levies so made and filed shall be irrevocable, except that if the governing body in any year makes an irrevocable appropriation to the debt service fund of moneys actually on hand or if there is on hand any excess amount in the debt service fund, the recording officer may certify to the county auditor the fact and amount thereof and the auditor shall reduce by the amount so certified the amount otherwise to be included in the rolls next thereafter prepared. All such taxes shall be collected and remitted to the municipality by the county treasurer as other taxes are collected and remitted, and shall be used only for payment of the obligations on account of that levied or to repay advances from other funds used for such payments, except that any surplus remaining in the debt service fund when the obligations and interest thereon are paid may be appropriated to any other general purpose by the municipality. Class Rate The factors (class rates) for converting estimated market value to net tax capacity represent a basic element of the State s property tax relief system and are therefore subject to annual revisions by the State Legislature. Refer to the following page for a partial summary of these factors. (Remainder of page left intentionally blank) 24

31 The following is a partial summary of these factors: Property Tax Classifications Class Rate Schedule Class Type of Property 2000/ / / / / a Residential Homestead Under $76,000 $76,001-$500,000 Over $500, % % % % % a Agricultural Land & Buildings Homestead: Under $115, N/A N/A N/A $115,000-$600,000 Under 320 Acres Over 320 Acres N/A N/A N/A N/A N/A N/A Over $600,001 Under 320 Acres Over 320 Acres N/A N/A N/A N/A N/A N/A Agricultural Homestead House, Garage, One Acre: First $500,000 Over $500,000 Remainder of Farm First $600,000 Over $600, b Non-Homestead Agricultural Land * a Commercial/Industrial Public Utility First $150,000 Over $150,000 4bb(1) 4d 4a 4bb(2) Rental Housing Residential Non-Homestead: 1 Unit First $500,000 1 Unit Over $500,000 1 unit 1 to 3 units 2 or 3 units 4 or more units 4 or more units (including private for-profit hospitals) Cities of population < 5,000-4 or more units Four or more units built after 6/30/01 Under $76,000 $76,001-$500,000 Over $500, N/A N/A N/A N/A N/A b(4) Vacant Land c(1) Seasonal Recreational Residential,a Non-Commercial: Under $76,000 * $76,001-$500,000 * Over $500,000 * 1c 4c(2) Commercial seasonal-residential recreationalunder 250 days and includes homestead First $500,000 Over $500,000 Qualifying golf courses Under $500,000 Over $500, Exempt from referendum market value based taxes. Subject to the state general property tax. a Note: For purposes of the state general property tax only, the net tax capacity of non-commercial class 4c(1) seasonal recreational residential property has the following class rate structure: First $76, %, $76,001-$500, % and over $500, %. 25

32 ECONOMIC AND FINANCIAL INFORMATION Valuations Estimated Market Value 2004/2005 Net Tax Capacity 2004/2005 Real Property $ 2,401,001,100 $ 25,007,467 Personal Property 22,166, ,936 Less Tax Increment Deduction ( 205,954) Total Valuation $ 2,423,168,000 $ 25,230,449 Market Value after Sales Assessment Ratio The Minnesota Department of Revenue conducts the Real Estate Sales Assessment Ratio Study to accomplish equalization of property valuations in the State and to determine the probable selling price of a property. The Study is a three-year average of sale prices as related to the latest assessor s market value. The latest Sales Assessment Ratio (2003) in Steele County is 90.8% meaning the County Auditor s recorded real property market value of $2,401,001,100 is 90.8% of the probable resale market value. We have made the following computations in deriving the market value figure used in the Summary of Debt and Debt Statistics. Sales Assessment Ratios 1 $ 2,401,001,100 County Auditor s recorded real property estimated market value. 90.8% Latest Composite Ratio from the Real Estate Sales Assessment Ratio Study of the Minnesota Department of Revenue. = $ 2,644,274,339 Indicated market value of real property. + 22,166,900 Personal property. = $ 2,666,441,239 Indicated market value of real and personal property used in Summary of Debt and Debt Statistics. Sales assessment ratios over the past ten years have been as follows: Year Ratio Year Ratio 2004 N/A% % The 2004 Sales Assessment Ratio will not be available until late July to mid August from the Minnesota Department of Revenue, Property Tax Division. 26

33 Valuation Trends (Real and Personal Property) Valuation trends over the past ten years have been as follows: Levy Year/ Collection Year Indicated Market Value Estimated Market Value Tax Capacity Before Tax Increments Tax Capacity After Tax Increments 2004/2005 $2,666,441,239 $2,423,168,000 $25,436,403 $25,230, /2004 2,484,395,028 2,257,852,100 23,695,693 23,237, /2003 2,411,846,897 2,105,597,400 22,154,170 21,698, /2002 2,232,511,251 1,944,517,300 20,534,994 20,351, /2001 1,989,372,429 1,760,594,600 24,185,746 23,721, /2000 1,839,347,398 1,660,930,700 22,522,981 22,114, /1999 1,811,918,685 1,570,933,500 21,267,346 20,602, /1998 1,663,897,655 1,419,304,700 21,059,461 19,982, /1997 1,521,462,471 1,305,414,800 21,037,473 19,838, /1996 1,409,702,523 1,229,260,600 19,608,904 18,469,946 Breakdown of Valuations 2004/2005 Estimated Market Value, Real and Personal Property: Real Property 1 $ 2,401,001, % Personal Property 22,166, Total $ 2,423,168, % 2004/2005 Tax Capacity, Real and Personal Property (before tax increment adjustment): Residential Homestead $ 13,145, % Agricultural 4,865, Commercial & Industrial 5,045, Public Utility 286, Residential Non-Homestead 1,578, Seasonal/Recreational Commercial & Residential 86, Personal Property 428, Total $ 25,436, % 1 Breakdown of Real Property Estimated Market Value is not available from Steele County. 27

34 Tax Capacity Rates Following are tax rates for residents in the City of Owatonna, County Seat of Steele County, for the past fiveassessable/collection years: Levy Year/ Collection Year 2000/01 Tax Capacity Rates 2001/02 Tax Capacity Rates 2002/03 Tax Capacity Rates 2003/04 Tax Capacity Rates 2004/05 Tax Capacity Rates Steele County City of Owatonna ISD No. 761, Owatonna Totals: Tax Levies and Collections 1 Levy Year/ Collection Year 2000/ / / / 2004 Original Gross Tax Levy $ 9,935,746 $ 10,690,392 $ 12,078,848 $ 11,891,905 Property Tax Credits 2 ( 1,309,022) ( 2,490,198) ( 2,589,800) ( 1,348,310) Levy Adjustments ( 0) ( 0) ( 0) ( 5,889) Net Tax Levy $ 8,626,724 $ 8,200,194 $ 9,489,048 $ 10,537,706 Amount Collected during Collection Year $ 8,559,121 $ 8,122,499 $ 9,394,216 $ 10,440,541 Percent of Net Tax Levy Collected 99.22% 99.05% 99.00% 99.08% Amount Delinquent at end of Collection Year $ 67,603 $ 77,695 $ 94,832 $ 97,165 Delinquencies Collected as of (12/31/04) ( 67,603) ( 69,570) ( 73,823) ( 0) Delinquencies Abated or Cancelled as of (12/31/04) ( 0) ( 0) ( 0) ( 0) Total Delinquencies Outstanding as of (12/31/04) $ 0 $ 8,125 $ 21,009 $ 97,165 Percent of Net Tax Levy Collected % 99.90% 99.78% 99.08% Note: 2004/2005 Gross Tax Levy $12,996, /2005 Net Tax Levy $11,634,684 Effective in 2002, the State of Minnesota took over most of the funding for the school districts, including the general fund, transportation, etc. The only funding that remains for school districts is community service, general debt service, and general net tax capacity /2004 property taxes are currently in the process of collection/reporting and no updated figures are available from Steele County. 2 Property tax credits are aids provided by the State of Minnesota and paid directly to the County. 28

35 Indirect Debt * Issuer 2004/2005 Tax Capacity Value (1) 2004/2005 Tax Capacity Value in County (1) Percentage Applicable in County Net Debt Taxpayers Share of Debt City of Blooming Prairie $ 793,461 $ 789, % $ 2,425,000 (2) $ 2,414,088 City of Ellendale 268, , ,145 (3) 378,145 City of Medford 801, , ,588,986 (4) 2,588,986 City of Owatonna 15,184,018 15,184, ,544,455 (5) 19,544,455 ISD 756, Blooming Prairie 3,451,736 1,659, ,784,983 (6) 858,398 ISD 763, Medford 2,444,878 2,018, ,238,886 (7) 11,752,777 ISD 761, Owatonna 19,782,780 19,776, ,809,395 (8) 26,801,352 Net Indirect Debt: $ 64,338,201 (Remainder of page left intentionally blank) * Only those taxing jurisdictions with general obligation debt outstanding are included. Debt figures do not include non-general obligation debt, short-term general obligation debt, or general obligation tax/aid anticipation certificates of indebtedness. (1) Tax Capacity Value is after tax increment adjustment. (2) Blooming Prairie has bond indebtedness of $2,425,000 and sinking funds of $0 as of July 18, (3) Ellendale has bond indebtedness of $378,145 and sinking funds of $0 as of December 31, 2004, as reported by Steele County. (4) Medford has bond indebtedness of $3,850,000 as of July 18, 2005 and sinking funds of $1,261,014 as of June 30, (5) Owatonna has bond indebtedness of $22,177,181 as of August 2, 2004 and sinking funds of $2,632,726 as of July 31, (6) ISD 756, Blooming Prairie, has bond indebtedness of $1,855,000 as of July 18, 2004 and sinking funds of $70,017 as of April 30, General Obligation Aid Anticipation Certificates in the amount $1,325,000 have not been included in the above figures since the certificates are anticipated to be paid from state aids. (7) ISD 763, Medford, has bond indebtedness of $14,306,957 and sinking funds of $68,071 as of April 30, (8) ISD 761, Owatonna, reported bond indebtedness of $48,875,000 and sinking funds of $22,065,605 as of June 30,

36 Statutory Debt Limit 1 Minnesota Statutes, Section , states that a county may not incur or be subject to a net debt in excess of two percent (2%) of its estimated market value. Net debt is, with limited exceptions, debt paid solely from ad valorem taxes. Computation of Legal Debt Margin as of July 18, 2005, including this issue: 2004/2005 Estimated Market Value $ 2,423,168,000 Times 2% of Estimated Market Value x.02 Statutory Debt Limit $ 48,463,360 Outstanding bonds applicable to debt limit: $6,095,000 General Obligation Refunding Capital Improvement Plan Bond, Series ,625,000 $2,525,000 General Obligation Jail Bonds, Series ,000 $9,950,000 General Obligation Jail Building Bonds, Series ,605,000 $9,850,000 General Obligation Jail Crossover Refunding Bonds, Series 2005A 9,850,000 Total debt applicable to debt limit $ 17,960,000 Legal debt margin $ 30,503,360 Cash and Investment Balances as of June 30, 2005 (unaudited) Fund General Fund $ 5,302,384 Special Revenue Funds 5,382,875 Capital Projects Fund 15,000 Debt Service Fund 512,000 Enterprise Funds 3,778,969 Agency Funds 15,394,664 Total Cash and Investment Balances $ 30,385,892 1 Pursuant to Minnesota Statutes , any lease revenue or public project revenue bond issues/agreements of $1,000,000 or more are subject to the statutory debt limit. Lease revenue or public project revenue bond issues/agreements less than $1,000,000 are not subject to the statutory debt limit. Excludes the (i) $1,340,000 of the $2,220,000 outstanding of the $2,525,000 General Obligation Jail Bonds, Series 2001, dated February 1, 2001 and (ii) $8,345,000 of the $9,950,000 outstanding of the $9,950,000 General Obligation Jail Building Bonds, Series 2002, dated April 1, The above-indicated bonds are excluded in the total bonded debt summary and will also be deducted from bond indebtedness ratios since the bonds will be crossover refunded. 30

37 SUMMARY OF DEBT AND DEBT STATISTICS General Obligation Debt Bonds secured primarily by ad valorem taxes $ 17,960,000 Total General Obligation Direct Debt $ 17,960,000 Less debt service funds ( 512,000) Net Direct General Obligation Debt $ 17,448,000 Add taxpayers share of net indirect debt 64,338,201 Net Direct and Indirect Debt $ 81,786,201 Facts for Ratio Computations 2004/2005 Indicated Market Value (real and personal property) $2,666,441, /2005 Net Tax Capacity (real and personal property, after tax increment adjustment) $25,230,449 Population (2004 Estimate) 34,429 Revenue Debt $1,375,000 Lease Revenue Bonds, Series 1999 $ 815,000 $3,870,000 Gross Revenue Health Care Facilities Bonds, Series ,000 1 $3,545,000 Gross Revenue Health Care Crossover Refunding Bonds, Series 2005B (this issue) 3,545,000 Debt Ratios Direct Debt Net Direct Debt Net Indirect Debt Net Direct and Indirect Debt To Indicated Market Value.67%.65% 2.41% 3.06% Per Capita $522 $507 $1,869 $2,376 Per Capita Adjusted 2 $413 $401 $1,477 $1,878 1 Excludes the $3,400,000 of the $3,705,000 outstanding of the $3,870,000 Gross Revenue Health Care Facilities Bonds, Series 2000, dated June 16, The above-indicated bonds are excluded in the total bonded debt summary since the bonds will be crossover refunded. 2 The County s tax base is 19.84% commercial & industrial and 1.12% public utility, which have been deducted. 31

38 LITIGATION There is no litigation now pending or, to the knowledge of County officials, overtly threatened which in any way questions or materially affects the validity or security of the Bonds or of any proceedings or transactions with respect to the issuance, sale or delivery thereof. RATING A rating on the Bonds has been received from Moody s Investors Service, which presently assigns long term municipal debt ratings from Aaa (the highest rating) through C (the lowest rating). The rating of Moody s Investors Service reflects only the views of such organization as to the credit risk involved in the financing. Moody s Investors Service has assigned the Bonds a rating of A3. Any explanation of the significance of the rating may be obtained from Moody s Investors Service, 99 Church Street, New York, New York 10007, telephone (212) There is no assurance that a rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by Moody s Investors Service if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Bonds. Tax Exemption TAX EXEMPTION AND RELATED CONSIDERATIONS It is the opinion of Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel, based on present federal and Minnesota laws, regulations, rulings and decisions, and on certifications to be furnished at closing, and assuming compliance by the County with certain covenants contained in the Resolution (the Tax Covenants ), that interest to be paid on the Bonds is excluded from gross income for federal income tax purposes and from taxable net income of individuals, estates, and trusts for Minnesota income tax purposes. Such interest is, however, included in taxable income for purposes of Minnesota franchise taxes imposed on corporations and financial institutions. The Internal Revenue Code of 1986, as amended (the Code ), establishes certain requirements that must be met after the issuance of the Bonds in order that interest on the Bonds be and remain excludable from federal gross income and from Minnesota taxable net income of individuals, estates, and trusts. These requirements include, but are not limited to, provisions regarding the use of Bond proceeds and the facilities financed with such proceeds; restrictions on the investment of Bond proceeds and other amounts; and provisions requiring that certain investment earnings be rebated periodically to the federal government. Noncompliance with such requirements may cause interest on the Bonds to become includable in federal gross income or in Minnesota taxable net income retroactively to their date of issue. Compliance with the Tax Covenants will satisfy the current requirements of the Code with respect to exemption of interest on the Bonds. No provision has been made for redemption of or for an increase in the interest rate on the Bonds in the event that interest on the Bonds becomes includable in federal gross income or in Minnesota taxable net income. Original Issue Discount The Bonds maturing in the years 2023 and 2026 (collectively, the Discount Bonds ) are being sold at a discount from the principal amount payable on such Bonds at maturity. The difference between the price at which a substantial amount of the Discount Bonds of a given maturity is first sold to the public (the Issue Price ) and the principal amount payable at maturity constitutes original issue discount under the Code. The amount of original issue discount that accrues to a holder of a Discount Bond under section 1288 of the Code is excluded from federal gross income and from Minnesota taxable net income of individuals, estates, and trusts to the same extent that stated interest on such Discount Bond would be so excluded. The amount of the original issue discount that accrues with respect to a Discount Bond under section 1288 is added to the owner s federal and Minnesota tax basis in determining gain or loss upon disposition of such Discount Bond (whether by sale, exchange, redemption or payment at maturity). Original issue discount is taxable under the Minnesota franchise tax on corporations and financial institutions. 32

39 Interest in the form of original issue discount accrues under section 1288 pursuant to a constant yield method that reflects semiannual compounding on dates that are determined by reference to the maturity date of the Discount Bond. The amount of original issue discount that accrues for any particular semiannual accrual period generally is equal to the excess of (1) the product of (a) one-half of the yield on such Bonds (adjusted as necessary for an initial short period) and (b) the adjusted issue price of such Bonds, over (2) the amount of stated interest actually payable. For purposes of the preceding sentence, the adjusted issue price is determined by adding to the Issue Price for such Bonds the original issue discount that is treated as having accrued during all prior semiannual accrual periods. If a Discount Bond is sold or otherwise disposed of between semiannual compounding dates, then the original issue discount that would have accrued for that semiannual accrual period for federal income tax purposes is allocated ratably to the days in such accrual period. If a Discount Bond is purchased for a cost that exceeds the sum of the Issue Price plus accrued interest and accrued original issue discount, the amount of original issue discount that is deemed to accrue thereafter to the purchaser is reduced by an amount that reflects amortization of such excess over the remaining term of such Bond. Except for the Minnesota rules described above, no opinion is expressed as to state and local income tax treatment of original issue discount. It is possible under certain state and local income tax laws that original issue discount on a Discount Bond may be taxable in the year of accrual, and may be deemed to accrue differently than under federal law. Holders of Discount Bonds should consult their tax advisors with respect to computation and accrual of original issue discount and with respect to the state and local tax consequences of owning Discount Bonds. Bond Premium The Bonds maturing in the years 2011, 2012, 2015, 2016 and 2030 are being issued at a premium to the principal amount payable at maturity. Except in the case of dealers, which are subject to special rules, Bondholders who acquire Bonds at a premium must, from time to time, reduce their federal and Minnesota tax bases for the Bonds for purposes of determining gain or loss on the sale or payment of such Bonds. Premium generally is amortized for federal and Minnesota income and franchise tax purposes on the basis of a bondholder s constant yield to maturity or to certain call dates with semiannual compounding. Bondholders who acquire Bonds at a premium might recognize taxable gain upon sale of the Bonds, even if such Bonds are sold for an amount equal to or less than their original cost. Amortized premium is not deductible for federal or Minnesota income tax purposes. Bondholders who acquire Bonds at a premium should consult their tax advisors concerning the calculation of bond premium and the timing and rate of premium amortization, as well as the state and local tax consequences of owning and selling Bonds acquired at a premium. Related Tax Considerations Interest on the Bonds is not an item of tax preference for federal or Minnesota alternative minimum tax purposes, but it is included in adjusted current earnings of corporations for purposes of the federal alternative minimum tax. Section 86 of the Code and corresponding provisions of Minnesota law require recipients of certain social security and railroad retirement benefits to take interest on the Bonds into account in determining the taxability of such benefits. Passive investment income, including interest on the Bonds, may be subject to taxation under section 1375 of the Code, and corresponding provisions of Minnesota law, for an S corporation that has accumulated earnings and profits at the close of the taxable year, if more than 25 percent of its gross receipts is passive investment income. Section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Bonds, and Minnesota law similarly denies a deduction for such interest in the case of individuals, estates, and trusts. Indebtedness may be allocated to the Bonds for this purpose even though not directly traceable to the purchase of the Bonds. Federal and Minnesota laws also restrict the deductibility of other expenses allocable to the Bonds. In the case of a financial institution, no deduction is allowed under the Code for that portion of the holder's interest expense which is allocable to interest on the Bonds within the meaning of section 265(b) of the Code. In the case of an insurance company subject to the tax imposed by section 831 of the Code, the amount which otherwise would be taken into account as losses incurred under section 832(b)(5) of the Code must be reduced by an amount equal to 15 percent of the interest on the Bonds that is received or accrued during the taxable year. Interest on the Bonds may be included in the income of a foreign 33

40 corporation for purposes of the branch profits tax imposed by section 884 of the Code, and is included in net investment income of foreign insurance companies under section 842(b) of the Code. The market value and marketability of the Bonds may be adversely affected by future changes in federal or Minnesota tax treatment of interest on the Bonds or by future reductions in income tax rates. THE FOREGOING IS NOT INTENDED TO BE AN EXHAUSTIVE DISCUSSION OF COLLATERAL TAX CONSEQUENCES ARISING FROM OWNERSHIP OR DISPOSITION OF THE BONDS OR RECEIPT OF INTEREST ON THE BONDS. PROSPECTIVE PURCHASERS OR BONDHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO COLLATERAL TAX CONSEQUENCES AND APPLICABLE STATE AND LOCAL TAX RULES IN STATES OTHER THAN MINNESOTA. APPROVAL OF LEGAL PROCEEDINGS All legal matters incident to the authorization and issuance of the Bonds are subject to the approval of Dorsey & Whitney LLP, Bond Counsel. The approving opinion of Bond Counsel will be delivered with the Bonds, in substantially the form set out in Appendix C to this Official Statement. NOT QUALIFIED TAX-EXEMPT OBLIGATIONS The Bonds are not qualified tax exempt obligations within the meaning of Section 265(b)(3) of the Code. RULE 15C2-12 For purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission, this document, as the same may be supplemented or corrected by the County from time to time (collectively, the "Official Statement"), may be treated as an Official Statement with respect to the Bonds described herein that is deemed final as of the date hereof (or any such supplement or correction) by the County, except for the omission of certain information referred to in the succeeding paragraph. The Official Statement, when further supplemented by an addendum or addenda specifying the maturity dates, principal amounts and interest rates of the Bonds, together with any other information required by law, shall constitute a "Final Official Statement" of the County with respect to the Bonds, as that term is defined in Rule 15c2-12. Any such addendum shall, on and after the date thereof, be fully incorporated herein and made a part hereof by reference. By awarding the Bonds to any underwriter or underwriting syndicate submitting an Official Bid Form therefor, the County agrees that, no more than seven business days after the date of such award, it shall provide without cost to the senior managing underwriter of the syndicate to which the Bonds are awarded copies of the Official Statement and the addendum or addenda described in the preceding paragraph in the amount specified in the Official Terms of Offering. The County designates the senior managing underwriter of the syndicate to which the Bonds are awarded as its agent for purposes of distributing copies of the Final Official Statement to each Participating Underwriter. Any underwriter executing and delivering an Official Bid Form with respect to the Bonds agrees thereby that if its bid is accepted by the County (1) it shall accept such designation and (2) it shall enter into a contractual relationship with all Participating Underwriters of the Bonds for purposes of assuring the receipt by each such Participating Underwriter of the Final Official Statement. No dealer, broker, sales representative or other person has been authorized by the County to give any information or to make any representations with respect to the Bonds other than as contained in the Official Statement or the Final Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the County. Certain information contained in the Official Statement and the Final Official Statement may have been obtained from sources other than records of the County and, while believed to be reliable, is not guaranteed as to completeness or accuracy. 34

41 The information and opinions in this Official Statement and the Final Official Statement are subject to change and neither the delivery of the Official Statement nor the final official statement nor any sale made under either such document shall create any implication that there has been no change in the affairs of the County since the date thereof. References herein to laws, rules, regulations, resolutions agreements, reports and other documents do not purport to be comprehensive or definitive. All references to such documents are qualified in their entirety by reference to the particular document, the full text of which may contain qualifications of and exceptions to statements made herein. Where full texts have not been included as appendices to the Official Statement or the Final Official Statement, they will be furnished on request. CONTINUING DISCLOSURE On the date of actual issuance and delivery of the Bonds, the County will execute and deliver a Continuing Disclosure Undertaking (the Undertaking ) whereunder the County will covenant for the benefit of the owners of the Bonds to provide certain financial and other information about the County and notices of certain occurrences to information repositories as specified in and required by SEC Rule 15c2-12(b)(5) (the Rule ). The County s proposed form of the Undertaking is set forth in the attached Appendix E. It is anticipated that the resolution (the Resolution ) awarding the sale and setting the terms of the Bonds will authorize the execution and delivery of the Undertaking substantially in the attached form thereof, but the final form of the Undertaking may vary from the attached form based upon request for changes made by the original purchaser(s) of the Bonds which are acceptable to the County and consistent with the Rule. A failure by the County to comply with the Undertaking (a Default ) would not constitute a default on the Bonds or under the Resolution (although Bondholders would have a right to compel specific performance of the Undertaking of the County). The Rule would require that the County report any such Default. In the event of Default, the Rule may make it unlawful for any broker, dealer or municipal securities dealer to recommend the purchase or sale of the Bonds in the secondary market. Consequently, such a Default might adversely affect the transferability and liquidity of the Bonds and their market value. The County has not failed to comply with the continuing disclosure requirements of any prior bond issue. UNDERWRITING The Bonds are being purchased from the County by Northland Securities, Inc., Minneapolis, Minnesota (the Underwriter ). The Underwriter will receive total compensation of $65, in connection with the purchase of the Bonds assuming all Bonds are sold at the rates and yields set forth on the cover page of this Official Statement, which compensation is 1.850% of the par value. The obligation to make such purchase is subject to certain terms and conditions, the approval of certain legal maters by counsel and certain other conditions. The initial public offering prices set forth on the cover page hereof may be changed from time to time by the Underwriter. MISCELLANEOUS Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the County or the Underwriter and the purchaser or holder of any of the Bonds. Certain information contained in this Official Statement has been obtained from sources other than records of the County and, while believed to be reliable, is not guaranteed as to completeness or accuracy. The information in this Official Statement is subject to change, and neither the delivery of the Official Statement nor any sale made under such document shall create any implication that no such change has occurred since the date thereof. The County has not undertaken to provide secondary market disclosure except as discussed in Continuing Disclosure herein. 35

42 This Official Statement has been duly approved, executed and delivered by the County. STEELE COUNTY, MINNESOTA /s/laura Ihrke County Auditor 36

43 APPENDIX A Annual Financial Statements The financial statements of Cedarview Care Center are audited annually by an Independent Certified Public Accounting firm. Selected audited financial statements for the years ending December 31, 2004 and 2003 are presented following. The complete financial statements may contain additional data relating to the information presented here which may interpret, explain or modify the information presented in this Appendix. A-1

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63 APPENDIX B Annual Financial Statements The financial statements of the County are audited annually by an Independent Certified Public Accounting firm. Selected audited financial statements for the years ending December 31, 2004 and 2003 are presented following. The complete financial statements may contain additional data relating to the information presented here which may interpret, explain or modify the information presented in this Appendix. B-1

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