ASSETS TOTAL CURRENT ASSETS 289, ,987 RESTRICTED ASSETS 146,836 31,045 PROPERTY, PLANT, AND EQUIPMENT, NET 1,960,410 1,632,326

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2 CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $48,358 $95,394 Investments 51,187 38,488 Sales tax receivable 64,194 51,589 Transit revenue receivable, net 2,725 2,431 Due from other governments 103,466 33,433 Materials and supplies inventory 17,888 13,642 Prepaid transit expense and other 1,418 1,010 TOTAL CURRENT ASSETS 289, ,987 RESTRICTED ASSETS 146,836 31,045 PROPERTY, PLANT, AND EQUIPMENT, NET 1,960,410 1,632,326 LONG-TERM INVESTMENTS HELD TO PAY CAPITAL LEASE LIABILITIES 332, ,499 NET PENSION ASSET 5,718 5,539 PREPAID LONG-TERM DEBT ISSUANCE TOTAL ASSETS $2,735,584 $2,135,396 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $95,067 $83,639 Current portion of Commercial Paper Notes Payable 0 70,000 Current portion of North Central Project Notes Payable 70,000 0 Local Assistance Program payable 42,070 39,012 Retainage payable 10,303 3,923 Other 3,885 1,154 TOTAL CURRENT LIABILITIES 221, ,728 SALES TAX REVENUE COMMERCIAL PAPER NOTES PAYABLE 300, ,000 NORTH CENTRAL LIGHT RAIL PROJECT NOTES PAYABLE 80,000 0 CAPITAL LEASE LIABILITIES 332, ,499 TOTAL LIABILITIES 933, ,227 EQUITY: Contributed capital 557, ,230 Retained earnings 1,244,043 1,148,939 TOTAL EQUITY 1,801,749 1,547,169 TOTAL LIABILITIES AND EQUITY $2,735,584 $2,135,396 The accompanying notes are an integral part of these consolidated financial statements. 2

3 CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES For the Years Ended (In Thousands) OPERATING REVENUES: Passenger $28,825 $29,238 Charter/Flyer 828 1,067 Advertising and other 8,016 6,473 TOTAL OPERATING REVENUES 37,669 36,778 OPERATING EXPENSES: Labor 104,728 99,163 Benefits 34,907 40,503 Services 23,131 22,294 Materials and supplies 21,809 20,990 Purchased transportation 62,152 56,525 Depreciation and amortization 64,517 58,415 Utilities 6,170 5,974 Taxes, leases, and other 5,170 5,291 Casualty and liability 1,539 2,623 Less: Transit system planning, other development, and start-up costs (17,229) (15,458) TOTAL OPERATING EXPENSES 306, ,320 NET OPERATING LOSS $(269,225) $(259,542) NON-OPERATING REVENUES (EXPENSES): Sales tax revenue 373, ,657 Investment income 10,201 6,457 Interest income from investments held to pay capital leases 17,944 14,928 Interest expense on capital leases (17,944) (14,928) Local Assistance Program and street improvements (18,427) (20,703) Transit system planning, development, and start-up costs (17,229) (15,458) Interest and financing expenses (12,138) (7,225) Net gain on capital lease transaction 6,286 0 Other revenue TOTAL NET NON-OPERATING REVENUES 342, ,777 NET INCOME $73,667 $36,235 The accompanying notes are an integral part of these consolidated financial statements. 3

4 CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND CONTRIBUTED CAPITAL For the Years Ended (In Thousands) RETAINED EARNINGS, BEGINNING OF YEAR $1,148,939 $1,094,996 NET INCOME 73,667 36,235 TRANSFERS TO CONTRIBUTED CAPITAL: Depreciation on property, plant, and equipment acquired by contributions 21,437 17,708 RETAINED EARNINGS, END OF YEAR 1,244,043 1,148,939 CONTRIBUTED CAPITAL, BEGINNING OF YEAR $398,230 $339,575 INCREASE IN CONTRIBUTED CAPITAL - FEDERAL GRANTS AND OTHER CAPITAL 150,304 76,363 INCREASE IN CONTRIBUTED CAPITAL - TRINITY RAILWAY EXPRESS ASSETS 30,609 0 TRANSFERS FROM RETAINED EARNINGS: Depreciation on property, plant, and equipment acquired by contributions (21,437) (17,708) CONTRIBUTED CAPITAL, END OF YEAR 557, ,230 TOTAL EQUITY, END OF YEAR $1,801,749 $1,547,169 The accompanying notes are an integral part of these consolidated financial statements. 4

5 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net operating loss $(269,225) $(259,542) ADJUSTMENTS TO RECONCILE NET OPERATING LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation and amortization 64,517 58,415 Changes in assets and liabilities: Increase in transit receivable (294) (382) Increase in government grant receivable (70,033) (8,063) (Increase) decrease in materials and supplies inventory (4,246) 474 Increase in prepaid expenses & other current assets (770) (459) (Increase) decrease in pension assets (179) 200 Increase in accounts payable and accrued liabilities 11,429 7,067 Increase in retainage payable 6,380 2,234 Increase in other current liabilities 2, NET CASH USED BY OPERATING ACTIVITIES (259,690) (199,900) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments for payment of capital lease obligations (84,066) 0 Interest on investments 9,687 6,436 (Purchase) sale of investments, net (12,698) (21,583) (Increase) decrease in restricted assets (83,636) 2,056 NET CASH USED BY INVESTING ACTIVITIES (170,713) (13,091) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition and construction of capital assets (394,476) (241,530) Proceeds from capital lease transactions 90,352 0 Proceeds from the issuance of commercial paper notes 140,000 82,000 Payment on commercial paper notes (70,000) 0 Proceeds from the issuance of North Central Project Notes payable 150,000 0 Interest and financing expenses (12,138) (7,225) Capital provided by other governments 180,913 76,363 Net proceeds from the sale of capital assets 2, NET CASH (USED) PROVIDED BY CAPITAL AND RELATED FINANCING ACTIVITIES 86,944 (90,130) CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES: Sales tax proceeds 361, ,049 Local Assistance Program and street improvements (15,369) (17,525) Planning, development, and rail start-up costs (17,229) (15,458) NET CASH PROVIDED BY NON-CAPITAL FINANCING ACTIVITIES 328, ,066 NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS (14,881) (55) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 99,693 99,748 CASH AND CASH EQUIVALENTS, END OF YEAR $84,812 $99,693 NON-CASH OPERATING, INVESTING, AND FINANCING ACTIVITIES: Recapture of safe harbor lease depreciation $128 $303 Interest income from investments held to pay capital leases $17,944 $14,928 Interest expense on capital leases $17,944 $14,928 Receipt of Trinity Railway Express Assets $30,609 $0 The accompanying notes are an integral part of these consolidated financial statements. 5

6 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization - Dallas Area Rapid Transit (DART) is a subregional transportation authority of the State of Texas, created and confirmed by passage of a referendum on August 13, 1983, pursuant to Article 1118y of the Vernon's Annotated Texas Civil Statutes, as amended, and recodified into Section 452 of the Texas Transportation Code (the Code) effective September 1, DART is organized to provide public and general transportation services to 13 member jurisdictions in five counties (Dallas, Collin, Denton, Ellis, and Rockwall). The member cities in which the voters elected to be included in DART consist of Carrollton, Cockrell Hill, Dallas, Farmers Branch, Garland, Glenn Heights, Irving, Plano, Richardson, Rowlett, and University Park, and the towns of Addison and Highland Park. Fifteen Board members represent the 13 member cities. Board members are appointed according to the ratio of the population of a member city to the total population of the service area. One Board member may represent multiple cities. Amendments to DART s enabling legislation require approval of the Texas State Legislature, which holds its regular session every two years. Past legislative changes limited the term of debt issued by DART without voter approval, allowed the issuance of defeased debt transactions (see note 7), and changed the collection period of sales taxes from quarterly to monthly. Future changes to DART s enabling legislation could have a material impact on DART s financial position. The next session of the State Legislature is scheduled for January On August 12, 2000, the voters of the DART Service Area passed a referendum that allows DART to issue up to $2.9 billion of bonds or notes that are payable from and secured by the DART sales and use tax, have maturities beyond five years, and are issued pursuant to the authority granted at the election. DART received approximately $374 million in sales and use tax revenue in fiscal year 2000 from a 1% sales tax imposed on certain retail sales in its member jurisdictions. These revenues constituted approximately 89% of DART's total revenues for fiscal year Approximately 54%, 12%, and 11% of these sales tax revenues are collected from sales in the cities of Dallas, Plano, and Irving, respectively. Under the Code, member jurisdictions can hold a referendum to withdraw from DART every six years. The City of Dallas has never called a withdrawal referendum. The next potential withdrawal referendum year is Basis of Accounting - The activities of DART are similar to those of proprietary funds of local cities and therefore are reported as an enterprise fund in accordance with governmental accounting and financial reporting principles issued by the Governmental Accounting Standards Board (GASB). Accordingly, transactions are accounted for using the accrual basis of accounting. Under Alternative 1 of GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting," DART has elected to apply all standards issued on or before November 30, 1989, by the Financial Accounting Standards Board (FASB), in addition to all GASB standards. Presentation - All dollar amounts, unless otherwise noted, are in thousands. Reporting Entity - DART has a wholly-owned subsidiary, Regional Rail Right-of-Way Corporation (RRRC), which was formed to facilitate the acquisition of certain properties and rights-of-way. The accompanying financial statements include the accounts and operations of RRRC. All significant intercompany balances have been eliminated. Cash and Cash Equivalents - DART considers investments with original maturities of less than 90 days to be cash equivalents. Cash and cash equivalents consist of the following at September 30: Cash $0 $0 Investments classified as cash equivalents 48,358 95,394 Cash equivalents included in restricted assets 36,454 4,299 Total $84,812 $99,693 6

7 Investments - The investment balances at are stated at fair value. Fair value is the amount at which an investment is exchanged in a current transaction between willing parties. DART considers quoted market prices at September 30, 2000, as the equivalent of the fair value of investments. Material and Supplies Inventory - Inventory consists of expendable supplies and parts for bus and rail facilities and vehicles and is recorded as an expense when consumed or placed in service. Inventory is stated at average cost. Property, Plant, and Equipment - Property, plant, and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Major improvements to buildings and equipment are capitalized. Maintenance and repairs are charged to expense as incurred. Improvements and betterments that extend the useful lives of fixed assets, are capitalized. Transit system development costs for outside services including project-related design, construction, construction management, and project management costs are capitalized when incurred. Federal Grants - Grant funds used to acquire or construct capital assets are recorded as contributed capital when the associated capital costs are incurred. Grant funds for fare subsidies on shared-ride programs are recorded as revenues when the associated costs are incurred. Vacation and Sick Leave - Effective January 1, 1997, salaried exempt and non-exempt employees were converted to a "Paid Time Off" benefits program that removed the cash value from accrued, but not taken, sick and vacation leave. Vacation and sick leave benefits for hourly employees were not modified. Hourly employees earn vacation and sick leave, which may be taken or accumulated up to certain levels, until paid upon retirement or termination. Salaried employees are not eligible for the accrued benefit. As of September 30, 2000 and 1999, the liability for accrued vacation and sick leave was approximately $6.4 million and $6.3 million, respectively. This liability has been calculated in accordance with GASB Statement No. 16, "Accounting for Compensated Absences," and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. Revenue Recognition - Operating revenues are recognized when transit service is provided. Monthly tickets and passes are sold for revenue service, including bus and rail operations. An estimate of unused tickets and passes is recorded as deferred transit revenue and is included in other current liabilities in the accompanying consolidated balance sheets. Non-operating revenues include revenues not associated with the operations of DART's transit service. Self-Insurance Liabilities - DART administers and maintains self-insured reserves for employee medical, auto, and general liability (including bus/rail accidents), and engineering and construction liability claims. These programs are administered by DART, or in some instances, a third party. DART accrues the estimated cost of self-insurance liabilities based on actuarial review. This new process was initiated in 1999, when DART recorded a one-time $6.3 million adjustment that was treated as a change in accounting estimate and reflected in the consolidated statement of revenues and expenses. Changes in the liabilities in 2000 and 1999 for all of DART's self-insured programs are detailed below: Period Beginning Balance Current Year Claims & Changes in Estimates Payments Ending Balance 1999 $5,023 $13,115 $8,821 $9, $9,317 $4,613 $6,496 $7,434 7

8 2. SERVICE AGREEMENTS DART has entered into several long-term agreements with contractors to provide fixed route bus, paratransit van, and commuter rail services. Payments to these contractors are recorded as purchased transportation in the accompanying consolidated statements of revenues and expenses. A summary of the major amounts for services rendered by these contractors in 2000 and 1999 and the current contract terms, including option periods, follows: Contractor Service Annual Payments to Contractors Current Contract Terms Name Type Began Expires First Transit Fixed Route Bus $38,491 $35,424 09/29/00 12/31/06 First Transit Paratransit - Van 8,966 9,237 05/17/95 12/31/00 E.C. Corp./Crawford Tech. Srv. Paratransit - Van 6,738 6,343 09/21/95 09/30/00 Herzog Transit Services, Inc. Commuter Rail 5,680 4,796 10/25/96 09/30/01 Other Various 2, Various Various Total $62,152 $56,525 On August 27, 1996, the Board approved an amendment to the Interlocal Agreement with the Fort Worth Transportation Authority, the T, to enter into a five-year contract with Herzog Transit Services, Inc. for operation and maintenance of commuter rail services beginning in October 1996 through September Cost sharing between the two authorities is based on respective ridership, according to the terms of the Interlocal Agreement. Service to Tarrant County began on September 18, The T will reimburse $140,331 to DART for these services during CASH AND INVESTMENTS Deposits: State statutes authorize DART's cash to be deposited in demand deposits, time deposits, or certificates of deposit and require that all deposits be fully collateralized or insured. At, the carrying amount of DART's deposits was a deficit of approximately $10 million and $7 million, respectively, with an overall bank balance of approximately zero for each year. The entire bank balance was covered either by Federal Depository Insurance or by collateral held by DART's agent in DART's name. The cash deficits are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. Investments: In accordance with the Texas Public Funds Investment Act and DART's investment policy, DART invests in, among others, obligations of the United States or its agencies and instrumentalities, and obligations of states, agencies, counties, cities, and other state political subdivisions with ratings from a nationally recognized investment rating firm of not less than "A" or its equivalent and commercial paper with ratings of not less than "A1" or "P1." In addition, State statutes authorize DART to invest funds in other cash equivalents such as money market mutual funds. DART's investments are categorized in accordance with GASB Statement No. 3, "Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements," to give an indication of the level of custodial risk assumed by DART at September 30, Category 1 includes investments that are insured or registered or for which the securities are held by DART or its agent in DART's name. 8

9 All of DART's investments are categorized in Category 1 except for the money market mutual funds, which consist of United States Government Agencies and Securities, and other investments. These investments are not categorized because they represent an interest in a group of securities and have no specific security subject to custodial risk. Investments at consist of the following: Investment Type 2000 Fair Value 1999 Fair Value U.S. Government Agencies $88,838 $36,854 U.S. Government Securities 11,939 5,479 Commercial Paper 74,447 77,926 Money Market Mutual Funds 69,860 44,348 Total Investments $245,084 $164,607 In 1998, DART adopted the provisions of GASB Statement No. 31, "Accounting and Financial Reporting for Certain Investments and for External Investment Pools." The adoption of this statement had no material effect on the financial statements. The contractual maturities for these investments are as follows: Contractual Maturity 2000 Fair Value 1999 Fair Value Less than 1 year $215,033 $126,703 1 to less than 2 years 13,456 12,398 2 to less than 3 years 8,438 11,855 3 to less than 4 years 7,164 5,450 Greater than 4 years 993 8,201 Total Investments $245,084 $164,607 The investments listed below are classified as follows on the accompanying consolidated balance sheets. The amounts shown are reported at fair value for 2000 and Investment Classification Cash Equivalents $48,358 $95,394 Investments 51,187 38,488 Restricted Assets 146,836 31,045 Total Investments $246,381 $164,927 9

10 4. RESTRICTED ASSETS The DART Board has designated that certain cash and investment balances be maintained for specific purposes. These amounts are shown as restricted assets in the accompanying consolidated financial statements. The restricted assets for self-insurance include amounts designated by the Board to fund future claims and workers' compensation liabilities. The Board established the financial reserve to reimburse the general operating account in future years if sales tax collections fall below projections, to fund costs that exceed the budget for major capital projects, to fund transportation system management (street improvement) projects, and to reduce debt outstanding or future borrowing requirements. An affirmative vote of two-thirds of the appointed and qualified Board members is required before these funds may be used. Sales taxes received in excess of the prior year's budget are to be placed in the reserve prior to January 1 of the subsequent year. Sales tax collections were $15.7 million and $0.4 million in excess of the budget for fiscal years 2000 and As of, restricted assets, including investments and accrued interest, consisted of the following: Description Cash Equivalents Investments Total Total Self-Insurance $0 $9,257 $9,257 $5,388 Project Financial Reserve 1,506 24,503 26,009 25,593 Construction 34,938 76, ,560 0 Total $36,454 $110,382 $146,836 $31,045 The construction fund was established in February 2000 to hold the proceeds from the sale of North Central Light Rail Project Notes (see Footnote 9) until project expenditures are made. 10

11 5. PROPERTY, PLANT, AND EQUIPMENT Changes in property, plant, and equipment for the years ended are shown in the following tables. Beginning, Oct. 1, 1999 Additions Disposals Net Transfers Ending, Sept 30, 2000 Land and rights-of-way $305,937 $25,181 $(1,830) $43,613 $372,901 Transitways 657, , ,026 Buildings and improvements 208,629 7,244 (114) 42, ,595 Buses and equipment, net of safe harbor lease proceeds 428, (27,029) 125, ,489 Furniture, fixtures, and leasehold improvements 18,364 0 (268) 5,210 23,306 1,619,123 32,553 (29,241) 218,882 1,841,317 Less accumulated depreciation and amortization 303,996 64,645 (27,366) 0 341,275 1,315,127 (32,092) (1,875) 218,882 1,500,042 Projects in progress - transit system development 317, ,051 0 (218,882) 460,368 $1,632,326 $329,959 $(1,875) $0 $1,960,410 Beginning, Oct. 1, 1998 Additions Disposals Net Transfers Ending, Sept 30, 1999 Land and rights-of-way $302,448 $0 $0 $3,489 $305,937 Transitways 653, , ,442 Buildings and improvements 207,001 0 (34) 1, ,629 Buses and equipment, net of safe harbor lease proceeds 360, (16,299) 84, ,751 Furniture, fixtures, and leasehold improvements 10,268 0 (418) 8,514 18,364 1,533, (16,751) 101,734 1,619,123 Less accumulated depreciation and amortization 261,976 58,718 (16,698) 0 303,996 1,271,861 (58,415) (53) 101,734 1,315,127 Projects in progress - transit system development 177, ,370 0 (101,734) 317,199 $1,449,424 $182,955 $(53) $0 $1,632,326 11

12 During fiscal year 2000, DART and the T entered into an interlocal agreement to operate the Trinity Railway Express ( TRE ) for commuter rail services between Dallas and Fort Worth. Assets for the TRE were donated from Railtran, which was dissolved at that point in time. Assets were recorded at estimated fair value of $32 million at the date of donation. Services to Tarrant County began in September Certain rights-of-way contain provisions restricting their use to rail and/or transit operations. Violation of these restrictions could result in impairment of DART's use and/or claim to these rights-of-way. The estimated lives used in computing depreciation and amortizations is shown in the following table. Description Buildings and improvements Buses and equipment Furniture, fixtures, and leasehold improvements Facilities and Transitways (LRT System and HOV lanes) Light rail transit vehicles and remanufactured diesel cars Years Depreciation on the federal share of contributed assets is recorded as depreciation expense in the accompanying consolidated statements of revenues and expenses. Subsequently, such depreciation expense is reclassified from retained earnings to the appropriate contributed capital account. 6. LOCAL ASSISTANCE PROGRAM PAYABLE Since 1989, DART has had a Local Assistance Program (LAP) to provide technical and financial assistance to cities for the implementation of projects to reduce traffic congestion and complement bus and public transit operations. Eligible member cities are responsible for developing and submitting projects to DART for approval in order to receive distribution of these funds. According to the terms of interlocal agreements, DART allocates a percentage of its annual sales tax collections for the LAP program. Eligible member cities receive 15% of the estimated sales taxes collected within that city, except Irving, which receives 7.5%; and Dallas, University Park, and the Town of Highland Park, which are not eligible. DART allocated $16.3 million and $17.9 million in LAP funds in FY 2000 and FY 1999, respectively. Accrued but unpaid funds may be carried over to succeeding years and are recorded as a liability on the accompanying consolidated balance sheets. The Board has agreed to continue LAP funding for eligible member cities until a contract is awarded for rail construction in that city. In any event, the program ends in LAP funds for Garland, Plano, and Richardson were ended in fiscal year Member cities that elect to withdraw from DART forfeit any future allocations and any previously earned allocations, unless the city has an executed construction contract for the approved project. 7. FINANCE OBLIGATIONS UNDER CAPITAL LEASE On July 25, 1997, DART entered into transactions to lease 40 light rail vehicle cars and 12 rail diesel cars to investors (the headlease) and simultaneously sublease the vehicles back (the sublease). DART entered into similar transactions on May 26, 1998, to lease four of its facilities (Headquarters, the Northwest Bus Facility, the East Dallas Bus Facility, and the light rail Service & Inspection Facility) and on September 28, 2000 to lease 28 light rail vehicles and simultaneously lease them back. Under these transactions, DART maintains the right to continued use and control of the assets through the end of the leases and is required to insure and maintain the assets. The headleases and subleases have been recorded as capital leases for accounting purposes. 12

13 At the July 25, 1997 closing, the rail cars had a fair market value of approximately $126.2 million and a book value of $116.7 million. As part of the light rail and diesel car headlease, DART received a prepayment equivalent to the net present value of the headlease obligations totaling approximately $111.9 million. With the prepayment, DART purchased investments sufficient to make the payments under the sublease. Approximately $84.6 million was deposited with AMBAC Asset Funding Corporation (AMBAC) under the terms of Insured Payment Undertaking Agreements (IPUA) by which AMBAC committed to pay the debt portion of the sublease obligations and repurchase options. The IPUAs are guaranteed by AMBAC Indemnity Corporation, a AAA-rated financing company, through a Financial Guarantee Insurance Policy. In addition, $18.1 million was invested in United States Treasury strips which, at maturity, will be sufficient to pay the remaining equity portions of the sublease obligations and repurchase options. After payment of closing costs, DART retained a net benefit from the transactions of approximately $8.9 million, which was recorded as non-operating revenue in the accompanying statement of revenues and expenses in fiscal year With respect to the 1998 facility lease/leasebacks, the facilities had a fair market value of approximately $128 million and a book value of approximately $102 million at closing. As part of the headleases, DART received prepayments equivalent to the net present value of the headlease obligations totaling approximately $113.2 million. Approximately $78.3 million was deposited with AIG Special Finance Ltd. ("AIG Special") under the terms of IPUAs by which AIG Special committed to pay the debt portion of the sublease obligations and repurchase options. In addition, $23.8 million was invested in guaranteed insurance contracts (GICs) with AIG Matching Funds Corporation ("AIG Matching") to satisfy the remaining equity portion of the sublease obligation. Both AIG Special and AIG Matching are AAA-rated finance companies and carry the guarantee of their parent company, American International Group, Inc., AAA-rated finance company. After applicable closing expenses, DART received a net benefit of approximately $10.8 million, which was recorded as non-operating revenue in the accompanying statement of revenues and expenses in fiscal year With respect to the 2000 lease transaction, the 28 light rail vehicles at closing had a fair market value of approximately $91 million and a book value of $74.6 million. DART received a prepayment equivalent to the net present value of the headlease obligations totaling approximately $91 million. Approximately $76.2 million was deposited with AIG-FP Special Finance (Cayman) Limited to partially meet DART's obligations under the sublease payments. Approximately $14.8 million was deposited with AIG Financial Products (Jersey) Limited (Equity Payment Undertaker) to meet DART's remaining obligations under the sublease. The Equity Payment Undertaker then purchased a guaranteed investment contract for approximately $7.8 million to secure these sublease payments. The Equity Payment Undertaker then released the remaining funds, approximately $6.9 million, to DART which was recorded as non-operating revenue in fiscal year Subsequent to the receipt of these funds certain associated closing costs of approximately $0.7 million were disbursed leaving a net benefit to DART of approximately $6.3 million. The net present value of the future sublease payments has been recorded as a long-term liability in the accompanying consolidated balance sheets. Since the investments have been structured to meet all future obligations under the subleases at all times when due, the investment balances have been recorded to equal the sublease liabilities on the accompanying consolidated balance sheet. The following chart highlights pertinent information on the subleases: 1997 Light Rail Cars 1997 Rail Diesel Cars 1998 Headquarters Facility 1998 Northwest Facility 1998 East Dallas Facility 1998 Service & Inspection Facility 2000 Light Rail Cars Sublease balances, 9/30/99 $99,192 $19,630 $25,071 $11,154 $15,810 $59,642 0 Interest accrued, 9/30/00 8,946 1,368 1, ,180 3,769 0 Sublease balances, 9/30/00 $108,138 $20,998 $26,930 $11,977 $16,990 $63,411 $84,066 Repurchase option date 01/01/13 01/01/08 11/01/13 11/01/08 11/01/10 01/01/14 01/02/23 Sublease termination date 03/01/25 01/01/19 10/27/27 01/02/24 12/03/25 02/15/29 01/02/23 First payment due date 01/01/01 01/01/01 11/01/01 11/01/01 11/01/01 11/01/01 N/A First principal and interest $8,454 $1,884 $2,010 $1,933 $1,248 $3,793 N/A amount Total principal and interest due $148,548 $24,576 $34,419 $12,825 $19,696 $82,338 N/A 13

14 8. SALES TAX REVENUE COMMERCIAL PAPER NOTES PAYABLE In June 1995, the Board approved execution of a $300 million line of credit and an irrevocable letter of credit and debt resolution for the issuance of $180 million of Sales Tax Revenue Commercial Paper Notes, Series A, with a maximum maturity of June In July 1998, the Board approved execution of Series B in the amount of $130 million with a maximum maturity of June 2003 to continue DART's capital programs. In July 1999, the Board approved execution of Series C in the amount of $100 million with a maximum maturity of August In June 2000, the Board approved the execution of Series D in the amount of $130 million with a maximum maturity of June 2005 and increased the line of credit to $360 million. DART s ability to issue further letters of credit under the line of credit expired on June 30, 2000 per the terms of the debt agreements. At September 30, 2000, DART had commercial paper outstanding of $130 million, $100 million, and $70 million for Series B, C, and D, respectively. The average interest rate on the outstanding commercial paper notes was 3.95% during DART's line of credit was originally executed with Credit Suisse and Swiss Bank Corporation. In November 1997, the line of credit was assumed by Westdeutsche Landesbank Girozentrale (WLG), Bayerische Landesbank Girozentrale (BLG), and Union Bank of Switzerland (UBS-AG). Effective January 1999, WLG and BLG assumed UBS-AG's obligation under the line of credit and issued new letters of credit for Series A and B. The letter of credit agreements contain certain debt covenants. DART must maintain a 1.25% coverage ratio of available funds to maximum debt service for the preceding twelve-month period. DART may not issue additional debt unless it has a 1.25% coverage ratio of available funds to maximum debt service for any four consecutive quarters out of the preceding six quarters and a projected coverage ratio of 1.25% for the four consecutive calendar quarters following the new debt issuance. Commercial paper is issued in blocks for terms of one to 270 days. The commercial paper notes are recorded as a longterm liability on the consolidated balance sheets because the letters of credit are irrevocable. Series A was retired in fiscal year The letters of credit are secured by a gross pledge of DART's sales tax revenue. Changes for the years ended are as follows: Series A Series B Series C Series D Total Balance Oct. 1, 1998 $120,000 $28,000 $0 $0 $148,000 Additions 0 102,000 30, ,000 Retirements (50,000) (50,000) Balance Sept. 30, , ,000 30, ,000 Addition 0 6,000 76,700 70, ,700 Retirements (70,000) (6,000) (6,700) 0 (82,700) Balance Sept. 30, 2000 $0 $130,000 $100,000 $70,000 $300,000 14

15 9. NORTH CENTRAL LIGHT RAIL TRANSIT (NCLRT) PROJECT NOTES In January 2000, the Board executed a $190 million Letter of Credit Commitment Agreement and related documents (collectively called the Agreements ) with Dexia Credit Local de France (Dexia) and approved the initial issuance of $150 million of debt ( North Central Light Rail Project Notes, Series 2000 ) to fund timing differences between expenditures for the North Central light rail project and the receipt of Federal funds under DART s Full Funding Grant Agreement (FFGA) with the Federal Transit Administration (FTA). According to the terms of the Agreements, DART may issue notes with a maximum term of five years through January 2005, providing the total debt outstanding does not exceed $190 million. The notes are secured by a subordinate pledge of DART s sales taxes (as compared to the Commercial Paper program) and a negative pledge of DART s FTA Federal funds from the FFGA. The notes will be retired as DART receives Federal funds under the FFGA. Accordingly, $70 million of the notes have been classified as a current liability in the accompanying balance sheet to reflect Federal funds projected to be received in The remaining $80 million has been reflected as a long-term liability. The debt agreements also contain certain debt covenants including an additional bonds test and coverage ratio that are less restrictive than required by DART s Commercial Paper Program described in Footnote PENSION, RETIREMENT, AND DEFERRED COMPENSATION PLANS DART operates several employee benefit plans. The DART Capital Accumulation Plan and Trust is a Section 401(k) deferred compensation plan, which is offered to all employees. Participation is voluntary. The DART Retirement Plan is a noncontributory deferred compensation plan that automatically covers all employees not participating in the Dallas Transit System (DTS) pension plan, which is limited to those employed by DTS prior to October 1, Pension Plans - Under the Purchase and Sale Agreement for the purchase of the assets and liabilities of DTS from the City of Dallas, DART agreed to continue operating the DTS pension plans in accordance with existing plan provisions and subsequent amendments. The plans consist of "Original Plan A," "Amended Plan A," and "Plan B." These plans were merged into a single consolidated plan entitled the DART Employees' Defined Benefit Plan and Trust (DB Plan). The plan is a single-employer defined benefit plan and uses the projected-unit-credit method. Membership was a condition of employment for all full-time, permanent employees of DTS. DART's covered payroll for the DB Plan as of October 1, 1999 (actuarial valuation date), was approximately $26.5 million. The contribution percentage of covered wages is 3% for employees in Plan B and original Plan A. Amended Plan A participants do not contribute to the plan. DART's contributions for these plans are equal to an amount actuarially determined to amortize the unfunded actuarial reserve over a period of 30 years and 15 years, respectively. Participants under the provisions of Original Plan A may elect normal retirement at age 60 or at the date at which the sum of their credited service and age equals 90. Employees who elected to remain under the provisions of the original plan receive monthly benefits equal to 2% times the years of credited service multiplied by the participant's final average monthly compensation. Participants in Amended Plan A are entitled to monthly benefits equal to: (1) 2% times the number of years of credited service up to October 1, 1983; plus (2) 1.5% times the number of years of credited service after October 1, 1983; times (3) the participant's final average monthly compensation. A participant may elect early retirement at age 55 with 10 years of service (30 years of service for participants under the original plan). Monthly income under this election will equal normal retirement benefits reduced by 5/12 of 1% for each full month by which the participant's early retirement date precedes the normal retirement date. Participants under the provisions of Plan B may elect normal retirement at age 60 or at the date at which the sum of their credited service and age equals 90. At this time, they are entitled to monthly benefits equal to 2% of the final average monthly earnings multiplied by their credited service. A participant may elect early retirement at age 55 with 30 years of credited service. Monthly income under this election equals normal retirement benefits reduced by 5/12 of 1% for each month by which retirement precedes the normal retirement date. 15

16 In 1998, DART adopted GASB Statement No. 27, "Accounting for Pensions by State and Local Governmental Employers." This statement establishes standardized measures of recording and reporting pension expense and the related asset or liability. As a result, DART recognized a cumulative effect of $5.7 million, which is recorded as a net pension asset in the accompanying consolidated balance sheet at September 30, In accordance with GASB Statement No. 27, an actuary determines the contribution amount that DART pays to the plan each year. The amount determined is referred to as the "Annual Required Contribution" (ARC). All significant actuarial assumptions used to compute the ARC are the same as those used to compute the actuarial accrued liability. The net pension asset/obligation is the cumulative difference between annual pension cost (including any interest accumulated on the pension asset/obligation, the ARC, and any adjustments to the ARC), and the employer's actual contribution to the plan. The net pension asset for fiscal year 2000 was computed as part of an actuarial valuation performed and dated as of the first day of the fiscal period, October 1, The significant actuarial assumptions as of October 1, 1999, 1998, and 1997 follow: October 1, 1999, 1998, and 1997 Investment Return 9% compounded annually, net of expenses. Discount Rate 9% Salary Scales 4.5 % per annum. Post-Retirement Mortality 1984 Unisex Mortality Table; set back 4 years for females. Disability 1965 Railroad Retirement Board Disabled Life Mortality Table. Retirement Age Age 60 Cost-of-Living Factors Adjusted January 1 of each year, based on changes in the CPI. Actuarial Cost Method Projected unit credit for participants in Plans A and B. At October 1, 1999, 1998, and 1997, the actuarial valuation date for plan years 2000, 1999, and 1998, the net pension asset was as follows: Annual Required Contribution $1,732 $2,310 $2,308 Interest on net pension asset (498) (516) (538) Adjustment to annual required contribution Annual Pension Cost 1,921 2,506 2,502 Employer Contributions 2,100 2,306 2,270 Increase/(Decrease) in net pension asset 179 (200) (241) Net Pension asset, beginning of year 5,539 5,739 5,980 Net Pension asset, end of year $5,718 $5,539 $5,739 The actuarial value of plan net assets is determined using a technique that smoothes the effects of short-term volatility in the market value of investments over a five-year period. The unfunded actuarial accrued liability is being amortized using a level dollar amount on a closed basis with no amortization period exceeding 30 years. Trend information gives an indication of the progress made in accumulating sufficient assets to pay benefits when due. Such trend information as of October 1 of each fiscal year (actuarial valuation date) is as follows. Additional trend information for the DB Plan can be obtained by writing to the DB Plan, Dallas Area Rapid Transit, P.O. Box , Dallas, Texas,

17 Annual Pension costs $1,921 $2,506 $2,512 Employer Contribution made $2,100 $2,306 $2,270 Percentage of annual pension cost contributed % 92.0% 90.4% Net pension asset $5,718 $5,539 $5,739 Retirement Plan - DART has adopted a defined contribution retirement plan for all employees not covered by the pension plans described above. DART contributes an amount equal to 7.7% of each participant's annual compensation to the plan. Participants become 25% vested in plan benefits after two years of service, and thereafter increasing 25% for each year of additional service until 100% vested. Total expense to DART to fully fund this plan was approximately $5.7 million and $5.2 million for the years ended, respectively. Section 401(k) Plan - DART has adopted a deferred compensation plan created in accordance with Internal Revenue Code Section 401(k), which allows employees to contribute up to 14% of their annual compensation to the plan. DART matches 50% of the employee's contribution up to a maximum of 3% of the employee's annual compensation. After two years of service, employees are vested in 25% of DART's contributions, graduating to 100% vested after five years. Total expense to DART to fully fund this plan was approximately $1.9 million and 1.7 million for the years ended, respectively. 11. POSTEMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS In addition to the pension benefits described in Footnote 9, DART provides postretirement health care and life insurance benefits in accordance with DART policy to all employees who retire from DART under the defined contribution retirement plan or the DTS pension plans described above. Total payments for postretirement health care and life insurance benefits for the years ended, were approximately $1.6 million and $1.2 million, respectively, with DART funding approximately $0.9 million in 2000 and $0.6 million in 1999, and the retirees funding the remainder. DART has approximately 361 retirees eligible to receive these benefits. 12. CLAIMS AND LITIGATION In the ordinary course of business, a number of claims and lawsuits arise from individuals seeking compensation for personal injury, death, and/or property damage resulting from accidents occurring in the operation of the system. In addition, DART has been named as a defendant in a number of lawsuits relating to personnel and contractual matters. Management does not believe that the outcome of these claims will have a material adverse effect on DART's financial position. Management has accrued an estimate of losses on such claims and has included this accrual in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. Certain owners of an office building in downtown Dallas have filed suit against DART for alleged damages of up to approximately $60 million related to flooding in 1995 while DART s light rail line was under construction. At this point of the litigation, management does not believe loss to be probable under this lawsuit and intends to defend it vigorously. 13. COMMITMENTS AND CONTINGENCIES The Board has approved a Transit System Plan that includes the design and construction of a 23-mile LRT extension from Dallas to Garland, Richardson, and Plano, which is budgeted at $1 billion at September 30, DART has expended approximately $533.1 million and has entered into contract commitments for a total of $804.9 million as of September 30, 2000, on these projects. These current expenditures, current contract commitments, and any future commitments will be funded by DART out of available cash and investments, future sales tax collections, Federal grants, and debt financing. 17

18 DART participates in several Federal grant programs that are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies; therefore, to the extent that DART has not complied with the rules and regulations governing the grants, refunds of any money received may be required and the collectibility of any related receivable at, may be impaired. In the opinion of management, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the accompanying financial statements for such contingencies. DART has entered into certain operating lease agreements. Operating lease expense was approximately $1.2 million in both 2000 and Future minimum lease payments for all non-cancelable operating leases are approximately $0.5 million in 2001, and $0.2 million for SUBSEQUENT EVENT On October 26, 2000, DART closed a new capital lease/leaseback transaction on 25 light rail vehicles having a market value of $81 million and a book value of $67 million. The structure of this note is similar to the lease transaction dated September 28, 2000, and described in Footnote 7. As part of this transaction, DART recorded a $75 million capital lease liability, a $75 million long-term investment held to pay capital lease liabilities, and net benefit of $6 million. 18