The date of this Offering Memorandum is December 1, 2008.

Transcription

1 NEW ISSUE FULL BOOK-ENTRY ONLY RATINGS: Moody s: A2 S&P: AA- See RATINGS herein In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under TAX EXEMPTION herein, and is not includable in the alternative minimum taxable income of individuals. See TAX EXEMPTION for a discussion of the opinion of Bond Counsel, including the alternative minimum tax on corporations. $45,785,000 Lease Revenue Certificates of Participation, Series 2008B Evidencing Proportionate Interests of the Owners Thereof in Lease Payments to be Made Pursuant to a Master Lease Purchase Agreement by and between the METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS, as lessee and FIRST SOUTHWEST LEASING COMPANY, as lessor Interest Accrual Date: Date of Delivery Due November 1, as shown on inside cover The above described Lease Revenue Certificates of Participation, Series 2008B (the Certificates ) are being delivered pursuant to an Amended and Restated Master Trust Agreement dated as of June 15, 2008, and a Second Supplemental Trust Agreement thereto, dated as of November 15, 2008 (together, the Trust Agreement ), each made and entered into by and between First Southwest Leasing Company ( FSW Leasing ), as trustor, and Wells Fargo Bank, N.A., a national banking association with a corporate trust office located in Houston, Texas, as trustee ( Trustee ). Proceeds of the sale of the Certificates will be used to provide funds necessary to (i) finance the acquisition of certain equipment (the Equipment ) (see DESCRIPTION OF THE EQUIPMENT herein) for use by the Metropolitan Transit Authority of Harris County, Texas (the Authority ) (see METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS herein), (ii) fund a reasonably required reserve fund (see SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES Reserve Fund ), and (iii) pay the costs related to the delivery of the Certificates (see ESTIMATED SOURCES AND USES OF FUNDS herein). The Equipment will be acquired by the Authority pursuant to an Amended and Restated Master Lease Purchase Agreement (the Master Lease Agreement ) dated as of June 15, 2008, and Appendix Number 2 thereto dated as of November 15, 2008 (the Appendix, and together with the Master Lease Agreement, the Lease Agreement ), each made and entered into by and between FSW Leasing, as lessor, and the Authority, as lessee. Pursuant to an Absolute Assignment Agreement, FSW Leasing has assigned to the Trustee all of its rights, title and interest in and to the Lease Agreement, including the right to receive Lease Payments thereunder, and the security interest in the Equipment granted to the Lessor under the Lease Agreement. The Certificates will be delivered as fully registered certificates in denominations of $5,000 principal amount and integral multiples thereof, registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Certificates. DTC will record, by appropriate entries on its book-entry only registration and transfer system, the respective amounts payable in respect of Book-Entry Only Certificates. Payments by DTC participants to purchasers for whom a DTC participant is acting as agent will be governed by the standing instructions and customary practices under which securities are held at DTC through DTC participants. The Certificates will be delivered in the original principal amounts set forth on the inside cover. Distributions representing interest from the delivery date of the Certificates or the most recent Distribution Date will be payable on May 1 and November 1 (each, a Distribution Date ) commencing November 1, 2009, until maturity or earlier prepayment. The Certificates are subject to optional prepayment on November 1, 2018, or any date thereafter, as described herein. The Certificates are subject to extraordinary prepayment as described herein. See THE CERTIFICATES. DISTRIBUTIONS WITH RESPECT TO THE CERTIFICATES ARE PAYABLE SOLELY FROM THE LEASE PAYMENTS PAYABLE BY THE AUTHORITY UNDER THE LEASE AGREEMENT. SUCH LEASE PAYMENTS ARE PAYABLE SOLELY FROM FUNDS BUDGETED AND APPROPRIATED FOR SUCH PURPOSE BY THE AUTHORITY AND ANY FUNDS REALIZED FROM THE LEASE, SALE OR OTHER DISPOSITION OF THE EQUIPMENT, PLUS ANY OTHER FUNDS AND INVESTMENTS ON DEPOSIT WITH THE TRUSTEE PURSUANT TO THE TRUST AGREEMENT. THE OBLIGATION OF THE AUTHORITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE AUTHORITY WITHIN THE MEANING OF ANY STATUTORY LIMITATION AND DOES NOT CONSTITUTE A LIABILITY OF OR A LIEN OR CHARGE UPON THE MONEYS OR PROPERTY THEREOF, EXCEPT THE EQUIPMENT AND THOSE MONEYS WHICH THE AUTHORITY HAS BUDGETED AND APPROPRIATED, IN ITS DISCRETION, TO PAY SUCH OBLIGATIONS DURING ANY FISCAL YEAR. THE AUTHORITY IS NOT REQUIRED TO APPROPRIATE OR PROVIDE FUNDS FOR THIS PURPOSE. IF MONEYS ARE NOT SO APPROPRIATED BY THE AUTHORITY FOR ANY FISCAL YEAR SUFFICIENT TO MAKE THE LEASE PAYMENTS PAYABLE UNDER THE LEASE AGREEMENT, THE LEASE AGREEMENT WILL BE TERMINATED AT THE END OF THE FISCAL YEAR FOR WHICH SUFFICIENT FUNDS HAVE BEEN APPROPRIATED AND THE AUTHORITY WILL NOT BE REQUIRED TO MAKE LEASE PAYMENTS AFTER SUCH TERMINATION. IF THE AUTHORITY FAILS TO APPROPRIATE SUFFICIENT FUNDS TO MAKE LEASE PAYMENTS, THE TRUSTEE MAY TAKE POSSESSION OF AND ATTEMPT TO SELL THE EQUIPMENT BUT IT IS LIKELY THAT THE TRUSTEE WILL NOT HAVE SUFFICIENT FUNDS TO PAY THE CERTIFICATES IN FULL WHEN DUE. See Distribution and Pricing Schedule on the inside cover The purchase of the Certificates involves a degree of risk. See RISK FACTORS. The Certificates are offered for sale by the Underwriters when, as and if delivered and are subject to the receipt of the approving opinion of the Attorney General of the State of Texas with respect to the validity of the Lease Agreement and the Certificates, and of an opinion of Andrews Kurth LLP, Houston, Texas, Bond Counsel as to validity and tax exemption, and certain other conditions. Certain legal matters will be passed upon for the Underwriters by West & Associates, L.L.P., counsel for the Underwriters. It is anticipated that the Certificates in definitive form will be available for delivery through the DTC Book Entry System on or about December 9, This cover page contains information for quick reference only. It is not a summary of the material terms of this issue. Potential purchasers must read the entire Offering Memorandum to obtain information essential to making an informed investment decision. RBC CAPITAL MARKETS ESTRADA HINOJOSA & COMPANY, INC. The date of this Offering Memorandum is December 1, 2008.

2 DISTRIBUTION AND PRICING SCHEDULE Final Distribution Date (November 1) (a) Principal Amount Interest Rate Initial Yield (b) CUSIP Number (c) 2010 $2,790, % 3.37% 41421NAQ ,975, % 3.61% 41421NAR ,100, % 3.94% 41421NAS ,290, % 4.13% 41421NAT ,475, % 4.30% 41421NAU ,630, % 4.48% 41421NAV ,820, % 4.69% 41421NAW ,070, % 4.91% 41421NAX ,265, % 5.11% 41421NAY ,535, % 5.34% 41421NAZ ,790, % 5.55% 41421NBA ,045, % 5.67% 41421NBB9 (a) The Certificates are subject to optional prepayment, in whole or in part, on November 1, 2018, and on any date thereafter at par plus accrued interest to the prepayment date, upon optional prepayment of Lease Payments by the Authority. Under certain circumstances, the Certificates are subject to extraordinary prepayment on any date. (b) The initial yields are established by and are the sole responsibility of the Underwriters and may subsequently be changed. (c) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. ii

3 Board Members METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS Board Member Position Appointing Authority Mr. David S. Wolff Chairman City of Houston Mr. Gerald B. Smith Vice Chairman and Chairman, City of Houston Finance & Audit Committee Mr. Jackie Freeman Secretary Harris County Mr. George A. DeMontrond, III Board Member City of Houston Bishop James Dixon, II Board Member City of Houston Ms. Carmen Orta Board Member City of Houston Mr. Burt Ballanfant Board Member Multi-Cities Ms. Trinidad Mendenhall Sosa Board Member Harris County Mr. C. Jim Stewart, III Board Member Multi-Cities Officers Officer Mr. Frank J. Wilson Mr. John M. Sedlak Ms. Louise T. Richman Mr. David F. Feeley Ms. Pauline E. Higgins Position President & Chief Executive Officer Executive Vice President Vice President/Chief Financial Officer Senior Vice President, Operations Senior Vice President, General Counsel and Corporate Secretary Consultants and Advisors Bond Counsel... Andrews Kurth LLP Houston, Texas Financial Advisors... First Southwest Company Siebert Brandford Shank & Co., LLC Houston, Texas Trustee... Wells Fargo Bank, N.A. Houston, Texas iii

4 This Offering Memorandum, which includes the cover page and appendices, does not constitute an offer to sell the Certificates in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. No dealer, salesman or any other person has been authorized by the Authority or the Underwriters to give any information or to make any representation other than those contained in this Offering Memorandum and the Appendices hereto in connection with the offering described herein and, if given or made, such other information or representation must not be relied upon. This Offering Memorandum is not to be construed as a contract with the purchasers of the Certificates. Statements contained in this Offering Memorandum which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information set forth herein includes information obtained from sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Underwriters. The information and expressions of opinions contained herein speak only as of their date and are subject to change without notice and neither the delivery of this Offering Memorandum nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Authority since the date hereof. The Certificates are exempt from registration with the Securities and Exchange Commission and consequently have not been registered therewith. The registration, qualification, or exemption of the Certificates in accordance with applicable securities law provisions of the jurisdictions in which these securities have been registered, qualified, or exempted should not be regarded as a recommendation thereof. In connection with the offering of the Certificates, the Underwriters may overallot or effect transactions that stabilize or maintain the market price of the Certificates at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. This Offering Memorandum has not been prepared by the Authority or Harris County, Texas. The Authority (i) has reviewed the information contained herein under the captions DESCRIPTION OF THE EQUIPMENT, SOURCES OF REVENUES, THE AUTHORITY S SERVICE AREA AND SALES TAX JURISDICTION and THE AUTHORITY and APPENDIX C hereto, AUDITED FINANCIAL STATEMENTS OF THE METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS FOR FISCAL YEAR ENDED SEPTEMBER 30, 2007 and (ii) has given a representation with respect to the accuracy and completeness of such information as of the date of this Offering Memorandum. RBC Capital Markets Corporation and Estrada Hinojosa & Company, Inc. (the Underwriters ) have provided the following sentence for inclusion in this Offering Memorandum. The Underwriters have reviewed the information in this Offering Memorandum in accordance with, and as part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The Trustee assumes no responsibility for this Offering Memorandum and has not reviewed or undertaken to verify any information contained herein. iv

5 TABLE OF CONTENTS OFFERING MEMORANDUM SUMMARY...VII INTRODUCTION...1 THE CERTIFICATES...2 General Provisions...2 Optional Prepayment...2 Extraordinary Prepayment...2 Notice of Prepayment...3 BOOK-ENTRY-ONLY SYSTEM...3 SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES...5 Revenues...5 Lease Payments...5 Reserve Fund...5 Security for Lease Payments...6 ESTIMATED SOURCES AND USES OF FUNDS...6 THE MASTER LEASE PURCHASE PROGRAM...6 DESCRIPTION OF THE EQUIPMENT...8 RISK FACTORS...8 Nonappropriation; Full Faith and Credit Not Pledged...8 Sales and Use Tax Revenues...9 Collection of Sales and Use Tax...9 Actions by the State Comptroller...9 The Authority May Receive Payment of Sales and Use Tax Revenue Less Frequently...9 The Authority May Experience Variations in its Sales and Use Tax Revenues...10 Insurance...10 Damage or Destruction Risk...10 Inability to Sell or Delay in Selling the Equipment...10 Other Obligations of the Authority...11 Limited Recourse on Default...11 Loss of Tax Exemption...11 Noncompliance with Arbitrage Provisions; Occurrence of Taxability...11 Transferability of Certificates Upon a Termination Event...12 No Recourse Obligation...12 No Liability of FSW Leasing to the Owners...12 Bankruptcy and Equitable Limitations...12 SOURCES OF REVENUES...12 Sales and Use Tax...13 Operating Revenue...13 Grants...13 Investment Income...13 Other Income...13 Table 1 - Combined Sources of Revenues...14 EXPENDITURES...14 Table 2 - Operating and Capital Expenditures...14 COMMITMENTS AND CONTINGENCIES...15 SELECTED INFORMATION REGARDING HARRIS COUNTY, TEXAS...15 PRINCIPAL EMPLOYERS...16 THE AUTHORITY S SERVICE AREA AND SALES TAX JURISDICTION THE AUTHORITY General Board of Directors Management Debt Policy Defeased Leases Retirement Plans Other Post Employment Benefits Transit System Ridership Information Table 3 Selected Ridership Statistics for the Last Five Fiscal Years Bus Replacement Policy Long Range Transportation Plan -- METROSolutions Effects of Hurricane Ike LITIGATION INVESTMENT POLICY General Investment Balances Table 4 - Investments TAX EXEMPTION TAX TREATMENT OF ORIGINAL PREMIUM CERTIFICATES THE CERTIFICATES AS LEGAL INVESTMENTS IN TEXAS RATINGS CONTINUING DISCLOSURE OBLIGATION Annual Reports Material Event Notices Availability of Information from NRMSIRS and SID Amendments Compliance with Prior Undertakings FORWARD-LOOKING STATEMENT DISCLAIMER REGISTRATION AND QUALIFICATION OF CERTIFICATES FOR SALE APPROVAL OF LEGALITY UNDERWRITING FINANCIAL ADVISORS INDEPENDENT ACCOUNTANTS MISCELLANEOUS APPENDIX A DEFINITIONS OF CERTAIN TERMS... A-1 APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... B-1 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY TEXAS FOR FISCAL YEAR ENDED SEPTEMBER 30, C-1 APPENDIX D FORM OF OPINION OF BOND COUNSEL... D-1 v

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7 OFFERING MEMORANDUM SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Offering Memorandum. The offering of the Certificates to potential investors is made only by means of this entire Offering Memorandum. No person is authorized to detach this summary from this Offering Memorandum or to otherwise use it without the entire Offering Memorandum. THE AUTHORITY... The Authority is a metropolitan rapid transit authority created pursuant to Chapter 141, Acts of the 63rd Legislature of the State of Texas, Regular Session, 1973 (Article 1118x, Vernon s Civil Statutes, as amended, now codified as Chapter 451, Texas Transportation Code, as amended), and was confirmed at a confirmation and tax election held on August 12, See THE AUTHORITY. THE CERTIFICATES... The Certificates are being executed and delivered to provide funds necessary to (i) finance the acquisition of certain equipment (the Equipment ) (see DESCRIPTION OF THE EQUIPMENT herein) for use by the Authority, (ii) fund a reasonably required reserve fund (see SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES ), and (iii) pay the costs related to the delivery of the Certificates (see ESTIMATED SOURCES AND USES OF FUNDS herein). SECURITY AND SOURCE OF PAYMENT... Distributions of principal of, premium, if any, and interest on the Certificates are payable solely from funds received by the Trustee pursuant to the Trust Agreement. See SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES. RESERVE REQUIREMENT... The Trust Agreement establishes a reserve requirement for the Certificates equal to the lesser of (i) 125% of the average annual debt service on the Certificates, (ii) 10% of the aggregate principal amount of the Certificates, and (iii) the maximum annual debt service requirement for the Certificates; provided, however, that in determining the aggregate principal amount of the Certificates for the purposes of clause (ii), the issue price of the Certificates (net of pre-issuance accrued interest, if any) shall be substituted for the original aggregate principal amount of Certificates if the Certificates were sold at either an original issue discount or premium exceeding two percent (2%) of the stated principal amount at the final maturity. A reserve fund funded with proceeds of the Certificates will be established pursuant to the Trust Agreement to satisfy the Reserve Requirement. See SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES Reserve Fund. LIMITED LIABILITY... Distributions with respect to the Certificates are payable solely from the Lease Payments payable by the Authority under the Lease Agreement. The payment of Lease Payments is subject to annual appropriation by the Authority, in the Authority s sole discretion, from lawfully available funds. The limited obligation of the Authority to make Lease Payments does not constitute an obligation of the Authority for which the Authority is obligated to levy or pledge any form of taxation or for which the Authority has levied or pledged any form of taxation or other sources of funds. Neither the Certificates nor the obligation of the Authority to make Lease Payments under the Lease Agreement constitutes a debt of the Authority, the State of Texas or any of its political subdivisions within the meaning of any limitation on incurring indebtedness in the Constitution of the State of Texas or otherwise or a pledge of the faith and credit of the Authority. See SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES and RISK FACTORS herein. vii

8 TERMS OF THE CERTIFICATES... The owner of each Certificate is entitled to receive Distributions on each May 1 and November 1 (each, a Distribution Date ), commencing November 1, 2009, until the stated final Distribution Date (the Final Distribution Date ) of such Certificate or earlier prepayment thereof. The total amount of Distributions to be made with respect to each Certificate shall be equal to the principal amount thereof (the Principal Amount ) plus interest calculated with respect to such Principal Amount at a per annum rate equal to the respective interest rates set forth on the inside cover hereof. See THE CERTIFICATES General Provisions. PREPAYMENT... The Certificates are subject to prepayment prior to their respective Final Distribution Dates in whole or in part, commencing November 1, 2018, and on any date thereafter, at par, plus accrued interest to the prepayment date, upon the optional prepayment of the Lease Payments by the Authority. See THE CERTIFICATES Optional Prepayment. Under certain circumstances, the Certificates are subject to extraordinary prepayment prior to their respective Final Distribution Dates in whole or in part on any date, at par plus accrued interest to the prepayment date. See THE CERTIFICATES Extraordinary Prepayment. BOOK-ENTRY-ONLY SYSTEM... The Certificates will be delivered in book-entry form only and when delivered, the Certificates will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Certificates. Purchasers will not receive certificates representing their ownership interest in the Certificates purchased. The Certificates will be available in book-entry form only in the denomination of $5,000 principal amount and integral multiples thereof. See BOOK-ENTRY-ONLY SYSTEM. CONTINUING DISCLOSURE OBLIGATION... The Authority has represented in the Continuing Disclosure Certificate (the Disclosure Certificate ) that it will provide, or cause to be provided, to each information dissemination system approved by the Securities Exchange Commission ( SEC ) for purposes of SEC Rule 15c2-12(b)(5) (the Rule ) certain annual financial information and operating data of the type set forth herein including, but not limited to, its Audited Financial Statements and, in a timely manner, notice of certain material events. See CONTINUING DISCLOSURE OBLIGATION for a description of the specific nature of the Authority s obligation to provide annual reports and notices of material events and a summary description of the terms of the Disclosure Certificate pursuant to which such reports and notices are to be provided. These representations have been made in order to assist the Underwriters in complying with the Rule. TAX MATTERS... In the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under TAX EXEMPTION herein, and is not includable in the alternative minimum taxable income of individuals. See TAX EXEMPTION for a discussion of the opinion of Bond Counsel, including the alternative minimum tax on corporations. viii

9 RATINGS... Moody s Investors Service, Inc. has assigned an underlying rating of A2, and Standard & Poor s Ratings Services, A Division of The McGraw Hill Companies, Inc. has assigned an underlying rating of AA- to the Certificates. See RATINGS. OTHER INFORMATION... The Certificates will be offered when, as and if executed and delivered, and received by the Underwriters, subject to the approving opinion of the Attorney General of the State of Texas with respect to validity of the Lease Agreement and the Certificates and of an opinion of Bond Counsel as to validity and tax exemption and certain other conditions. It is anticipated that the Certificates in definitive form will be available for delivery through the facilities of DTC on or about December 9, The descriptions of the Certificates and other documents described in this Offering Memorandum do not purport to be definitive or comprehensive, and all references to those documents are qualified in their entirety by reference to the approved form of those documents, which documents are available at the corporate trust office of the Trustee in Houston, Texas. ix

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11 OFFERING MEMORANDUM $45,785,000 Lease Revenue Certificates of Participation, Series 2008B Evidencing Proportionate Interests of the Owners Thereof in Lease Payments to be Made Pursuant to a Master Lease Purchase Agreement by and between the METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS, as lessee and FIRST SOUTHWEST LEASING COMPANY, as lessor INTRODUCTION The following introduction presents a brief description of certain information regarding the Certificates and is qualified in its entirety by reference to the entire Offering Memorandum and the documents summarized or described herein. References to, and summaries of, provisions of the Constitution and the laws of the State of Texas and any documents referred to herein do not purport to be complete and such references are qualified in their entirety by reference to the complete provisions thereof. The purpose of this Offering Memorandum, including the front cover and the Appendices hereto (the Offering Memorandum ), is to provide certain information in connection with the sale and delivery of the Lease Revenue Certificates of Participation, Series 2008B (the Certificates ) in the aggregate principal amount of $45,785,000. The Texas State Legislature authorized the creation of local transit authorities in In 1978, Houston-area voters created the Metropolitan Transit Authority of Harris County, Texas (the Authority ) and approved a onecent sales tax to support its operations. The Authority opened for business in January The Authority provides transit service for a 1,285 square mile area with a population of approximately 2.9 million, including the cities of Houston, Bellaire, Bunker Hill Village, El Lago, Hedwig Village, Hilshire Village, Humble, Hunters Creek, Katy, Missouri City, Piney Point, Southside Place, Spring Valley Village, Taylor Lake Village, West University Place, and significant portions of unincorporated Harris County. The Authority does not cover certain portions of eastern Harris County, including the cities of Baytown, La Porte and Pasadena. See THE AUTHORITY. The Authority, as lessee, will acquire certain Equipment (see DESCRIPTION OF THE EQUIPMENT herein) pursuant to an Amended and Restated Master Lease Purchase Agreement and Appendix Number 2 (together, the Lease Agreement ) with First Southwest Leasing Company ( FSW Leasing ), as lessor, pursuant to the authority of Chapter 451, Texas Transportation Code, as amended and Chapter 271, Subchapter A, Texas Local Government Code, as amended. FSW Leasing has entered into an Absolute Assignment Agreement (the Assignment Agreement ) with Wells Fargo Bank, N.A. (the Trustee ), pursuant to which FSW Leasing has assigned all of its rights, title and interest in the Lease Agreement to the Trustee, including FSW Leasing s right to receive Lease Payments under the Lease Agreement and FSW Leasing s remaining interest in the Equipment, including, without limitation, title thereto or any security interest therein. FSW Leasing will obtain an opinion of counsel dated as of the delivery date of the Certificates, to the effect that, among other things, in the event a bankruptcy case is commenced by or against FSW Leasing (i) the Lease Payments should not be subject to the automatic stay provisions of the federal Bankruptcy Code ( Bankruptcy Code ) and shall not constitute voidable preferences within the meaning of the Bankruptcy Code, (ii) neither the Lease Payments nor any other assigned right would be included in any bankruptcy estate of FSW Leasing, (iii) the Lease Agreement and the Trust Agreement could not be rejected by FSW Leasing or its bankruptcy trustee pursuant to the Bankruptcy Code and (iv) the separate entity status of FSW Leasing and the Trustee would be maintained such that a bankruptcy court would not order substantive consolidation of the Trustee or the property assigned under the Assignment Agreement with FSW Leasing. FSW Leasing and the Trustee also have entered into an Amended Master Trust Agreement and a Second Supplemental Trust Agreement (together, the Trust Agreement ), pursuant to which the Certificates are being issued. The Certificates are payable solely from the Lease Payments payable by the Authority pursuant to the Lease Agreement and from proceeds from the sale or other lease of the Equipment.

12 THE PURCHASE OF THE CERTIFICATES INVOLVES A DEGREE OF RISK. SEE RISK FACTORS HEREIN. THE CERTIFICATES General Provisions The Certificates are being executed and delivered to provide funds necessary to (i) finance the acquisition of certain equipment (the Equipment ) (see DESCRIPTION OF THE EQUIPMENT herein) for use by the Authority, (ii) fund a reasonably required reserve fund (See SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES Reserve Fund ), and (iii) pay the costs related to the delivery of the Certificates. See ESTIMATED SOURCES AND USES OF FUNDS herein. The Certificates will accrue interest from the date of delivery thereof (the Delivery Date ). The Certificates will be executed and delivered in fully registered, book-entry-only form in denominations of $5,000 each and integral multiples thereof ( Authorized Denominations ). Interest with respect to the Certificates will be computed based on a 360-day year consisting of twelve 30-day months, and will be payable on each May 1 and November 1, commencing November 1, 2009 (the Distribution Dates ) until the stated Final Distribution Date (the Final Distribution Date ) or earlier prepayment. The Final Distribution Date for the Certificates and the per annum interest rates with respect thereto are set forth on the inside cover page of this Offering Memorandum. Payment of Distributions to the beneficial owners of the Certificates initially will be made through the DTC System. See BOOK-ENTRY-ONLY SYSTEM herein. If the book-entry-only system is no longer in effect, Distribution of principal of and premium, if any, with respect to the Certificates will be payable upon surrender thereof on the Final Distribution Date of each maturity or the earlier prepayment thereof at the corporate trust office of the Trustee in Houston, Texas. Distribution of interest will be made by check or draft, mailed to the persons whose names appear as the owners in the registration books kept by the Trustee as of the close of business on the fifteenth calendar day of the month immediately preceding any Distribution Date (a Record Date ) or, upon the request of any owner of at least $500,000 in aggregate principal amount of the Certificates, and at the risk and expense of such owner, by wire transfer. If the book-entry-only system is no longer in effect, the registration of any Certificates may be transferred upon the surrender of such Certificates to the Trustee and payment of such reasonable transfer fees as the Trustee may establish. Certificates may be exchanged at the designated corporate trust of the Trustee for a new Certificate(s) with the same Final Distribution Date(s) and aggregate principal amount in Authorized Denominations. The Trustee may require the payment by the owner thereof of any tax or other governmental charge required to be paid with respect to such exchange. No registration of any transfer or exchange of Certificates shall be required to be made during (i) the period from a Record Date to the related Distribution Date, (ii) the period after the mailing of notice of prepayment has been given or (iii) the period fifteen days next preceding the giving of a notice of prepayment. Optional Prepayment The Certificates are subject to prepayment prior to their respective Final Distribution Dates, in whole or in part, commencing November 1, 2018, and on any date thereafter, at par, plus accrued interest to the prepayment date, upon the optional prepayment of the Lease Payments by the Authority. Extraordinary Prepayment The Certificates are subject to extraordinary prepayment, in whole or in part on any date, whether or not such date is a Distribution Date, at par plus accrued interest to the prepayment date from Net Proceeds (as defined in the Lease Agreement), in the event of the destruction or condemnation of, or damage to, all or any part of the Equipment acquired pursuant to the Lease Agreement and the Authority, in its sole discretion, determines that replacement, repair or restoration of the affected Equipment is impractical or economically undesirable. See RISK FACTORS Damage or Destruction Risk. Additionally, the Certificates are subject to extraordinary prepayment, in whole or in part on any date, whether or not such date is a Distribution Date, at par plus accrued interest to the prepayment date in the event that the Authority determines that less than all of the funds deposited to the Acquisition Fund (as defined in the Trust Agreement) will be used to acquire the Equipment and directs the Trustee to transfer such unused funds from the Acquisition Fund to the Payment Fund (as defined in the Trust Agreement) for such purpose. 2

13 Additionally, the Certificates are subject to extraordinary prepayment, in whole but not in part, at the Trustee s option, on any date, whether or not such date is a Distribution Date at par plus accrued interest to the Distribution Date to the extent that the Lease Agreement is terminated due to an event of default or nonappropriation by the Authority. The Certificates shall be paid on the next succeeding Distribution Date for which proper notice can be given. If there are insufficient funds to pay in full the prepayment price plus accrued interest for all Outstanding Certificates, then the Trustee shall affect a partial prepayment of the Certificates in the manner described below. See RISK FACTORS Nonappropriation; Full Faith and Credit Not Pledged. Notice of Prepayment Not less than 30 days prior to the prepayment date for the Certificates, the Trustee shall cause a notice of prepayment to be deposited by the Trustee in the United States mail with first class postage prepaid and addressed to the owners of the Certificates with respect to which a prepayment is being made at their respective addresses appearing upon the Register. Notwithstanding the foregoing, any defect in any notice given pursuant to this section shall not affect the validity of the proceedings for the proposed prepayment. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ( DTC ), New York, New York, while the Certificates are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Offering Memorandum. The Authority believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. None of the Authority, the Trustee or FSW Leasing can give any assurance that (1) DTC will distribute payments of debt service on the Certificates, or prepayment or other notices, to DTC Participants, (2) DTC Participants or others will distribute Distributions paid to DTC or its nominee (as the registered owner of the Certificates), or prepayment or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Offering Memorandum. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates. The Certificates 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 Certificate will be issued for each maturity of the Certificates in the aggregate principal amount of such maturity. 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 3.5 million issues of U.S. and non-u.s. equity, corporate and municipal debt issues, and money market instruments from over 100 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 organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and 3

14 Purchases of the Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC s records. The ownership interest of each actual purchaser of each Certificate ( 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, but Beneficial Owners are 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 Owners entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates 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 Certificates; DTC s records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping accounts 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 the Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the financing documents. For example, Beneficial Owners of the Certificates may wish to ascertain that the nominee holding the Certificates 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. Prepayment notices shall be sent to DTC. If less than all of the Certificates within an issue are being prepaid, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be prepaid. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Authority 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 Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Prepayment amounts, principal, premium, if any, and interest payments on the Certificates are to be made to Cede & Co., or such other name as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from Authority or Trustee, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners are 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 or its nominee, the Trustee or Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of prepayment amounts and principal and interest to Cede & Co. (or such other name as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to Authority or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, the Certificates are required to be printed and delivered. Further, the Trustee may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, physical Certificates will be printed and delivered to DTC. 4

15 Use of Certain Terms in Other Sections of this Offering Memorandum. In reading this Offering Memorandum it should be understood that while the Certificates are in the Book-Entry-Only System, references in other sections of this Offering Memorandum to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Trust Agreement will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the Authority, FSW Leasing, the Trustee, the Financial Advisors or the Underwriters. In the event that the Book-Entry Only System is discontinued, payments of principal, premium, if any, and interest with respect to the Certificates and payment of the maturity amount, and prepayment premium, if any, of the Certificates shall be payable as described herein under the caption THE CERTIFICATES General Provisions. Revenues SECURITY AND SOURCE OF PAYMENT FOR THE CERTIFICATES The Distributions with respect to the Certificates are payable solely from moneys held by the Trustee in the Trust Estate established in the Trust Agreement. Subject to its right of nonappropriation, the Authority s obligation to make Lease Payments constitutes a current expense payable exclusively from lawfully available funds of the Authority, including 75% of its sales and use tax revenues, operating revenues, grants, investment income and other income. See SOURCES OF REVENUES. The Authority and FSW Leasing understand and intend that the obligation of the Authority to pay Lease Payments constitutes a current expense of the Authority contingent upon sufficient annual appropriations of lawfully available funds of the Authority. UNLIKE CERTAIN OTHER TEXAS GOVERNMENTAL ISSUERS, STATE LAW DOES NOT REQUIRE THAT, AT THE TIME OF AN APPROPRIATION, THE AUTHORITY HAVE SUFFICIENT FUNDS ON HAND TO PAY SUCH APPROPRIATION. HOWEVER, IT HAS BEEN THE AUTHORITY S PRACTICE TO MAKE APPROPRIATIONS AGAINST FUNDS EITHER ON HAND AT THE TIME OF THE APPROPRIATION OR REASONABLY ANTICIPATED TO BE ON HAND BY THE TIME THAT SUCH APPROPRIATION IS DUE TO BE PAID. THE LEASE PAYMENTS ARE NOT SECURED BY A PLEDGE OF THE FULL FAITH AND CREDIT OF THE AUTHORITY OR ITS SALES AND USE TAX REVENUES OR ANY OTHER FUNDS OR MONEYS OF THE AUTHORITY. Lease Payments Distributions are payable only from the moneys received, if any, and held by the Trustee pursuant to the Trust Agreement. Such moneys include the Lease Payments and any investment earnings thereon (see SUMMARY OF THE LEASE AGREEMENT - Lease Payments in APPENDIX B hereto), moneys on deposit in the Reserve Fund (see SUMMARY OF THE TRUST AGREEMENT Funds and Accounts Reserve Fund in APPENDIX B hereto), and any moneys received by the Trustee from the sale, lease, or sublease of the Equipment upon termination of the Lease Agreement following an Event of Default (as defined in the Master Lease Agreement) or a nonappropriation by the Authority. The amount of each Lease Payment is equal to an amount of money which, when added to money then on deposit in the Payment Fund held by the Trustee, will equal (i) the amount of interest to become due on the Certificates on the next Distribution Date plus (ii) the amount of principal to become due on the Certificates, whether by maturity or scheduled prepayment, on the next Distribution Date. Reserve Fund A Reserve Fund has been established under the Trust Agreement (the Reserve Fund Requirement ) and will be funded from proceeds of the Certificates. Pursuant to the Trust Agreement, the Reserve Fund Requirement for the Certificates is equal to the lesser of (i) 125% of the average annual debt service on the Certificates, (ii) 10% of the aggregate principal amount of the Certificates, and (iii) the maximum annual debt service requirement for the Certificates; provided, however, that in determining the aggregate principal amount of the Certificates for the purposes of clause (ii), the issue price of the Certificates (net of pre-issuance accrued interest, if any) shall be substituted for the original aggregate principal amount of Certificates if the Certificates were sold at either an original issue discount or premium exceeding two percent (2%) of the 5

16 stated principal amount at the final maturity. Amounts in the Reserve Fund are to be used only for the payment of the Distributions to the extent amounts in the Payment Fund are insufficient therefore. See APPENDIX B SUMMARY OF THE TRUST AGREEMENT - Funds and Accounts - Reserve Fund in APPENDIX B hereto. Security for Lease Payments In order to secure the obligations of the Authority under the Lease Agreement, the Authority has granted a security interest in and to the Equipment to FSW Leasing. Such security interest has been assigned, pursuant to the Assignment Agreement, to the Trustee for the benefit of the owners of the Certificates. See APPENDIX B SUMMARY OF THE LEASE AGREEMENT Nonappropriation and SUMMARY OF THE LEASE AGREEMENT Events of Default and Remedies herein for a description of the rights of the Trustee, as assignee of FSW Leasing upon the occurrence of an Event of Default or nonappropriation by the Authority. ESTIMATED SOURCES AND USES OF FUNDS Set forth below are the sources of funds to be received in connection with the sale of the Certificates and the uses thereof: Sources of Funds: Par Amount of Certificates $45,785, Premium _1,275, Total Sources $47,060, Uses of Funds: Acquisition Fund Deposit $41,937, Reserve Fund Deposit 4,706, Costs of Issuance (1) 417, Total Uses $47,060, (1) Includes counsel fees, financial advisor fees, underwriters discount, rating fees and other costs of executing and delivering the Certificates. THE MASTER LEASE PURCHASE PROGRAM In order to provide for the lease purchase financing from time to time of equipment including buses, bus rapid transit vehicles and rail rapid transit vehicles, the Authority s Board of Directors has authorized the execution and delivery of the Master Lease Purchase Agreement between the Authority and First Southwest Leasing Company. Equipment to be lease purchased from time to time will be identified on separate Appendices to the Master Lease Purchase Agreement. Upon execution and delivery thereof, each Appendix together with provisions of the Master Lease Purchase Agreement, will constitute a separate Lease Agreement. Pursuant to the terms of the Master Lease Purchase Agreement, the Authority may acquire up to $250 million in equipment between June 15, 2008 and June 14, 2013, unless the parties mutually agree in writing to increase the maximum dollar amount or extend the acquisition period. The Lease Agreement is one of the two lease agreements that will be in effect under the Master Lease Purchase Agreement on the date of the issuance of the Certificates. In addition to the Equipment to be lease purchased by the Authority, the Authority is currently lease purchasing 98 buses pursuant to the Series 2008A Certificates under the Master Lease Purchase Agreement. The Series 2008A Certificates were delivered on July 15, 2008 in the aggregate principal amount of $62,255,000. Each purchaser of the Certificates is subject to certain risks, and particular attention should be given to the factors described under RISK FACTORS herein, which, among others, could affect the market price of the Certificates to an extent that cannot be determined. Pursuant to the Master Lease Purchase Agreement, the Authority will be required to deposit the Lease Payments with respect to each series of certificates with the Trustee in accordance with the following schedule, which semi-annual payments are also equal to the Distributions with respect to the Series 2008A Certificates and the Series 2008B Certificates, respectively: 6

17 PAYMENT SCHEDULE FOR THE SERIES 2008A AND SERIES 2008B CERTIFICATES Date 2008B Principal 2008B Interest 2008B Total P+I 2008A Principal 2008A Interest 2008A Total P+I Combined Net New D/S Combined Fiscal Total 11/01/2008 $ $ $ $ $809, $809, $809, $ 05/01/ ,374, ,374, ,374, /30/ ,183, /01/2009-2,178, ,178, ,090, ,374, ,464, ,643, /01/2010-1,218, ,218, ,292, ,292, ,510, /30/ ,153, /01/2010 2,790, ,218, ,008, ,255, ,292, ,547, ,555, /01/2011-1,148, ,148, ,228, ,228, ,377, /30/ ,932, /01/2011 2,975, ,148, ,123, ,385, ,228, ,613, ,737, /01/2012-1,073, ,073, ,119, ,119, ,193, /30/ ,930, /01/2012 3,100, ,073, ,173, ,605, ,119, ,724, ,898, /01/ , , ,035, ,035, ,032, /30/ , /01/2013 3,290, , ,286, ,770, ,035, ,805, ,092, /01/ , , , , ,837, /30/ ,929, /01/2014 3,475, , ,389, ,995, , ,918, ,307, /01/ , , , , ,625, /30/ ,933, /01/2015 3,630, , ,457, ,245, , ,043, ,500, /01/ , , , , ,430, /30/ ,930, /01/2016 3,820, , ,556, ,455, , ,148, ,705, /01/ , , , , ,223, /30/ ,928, /01/2017 4,070, , ,711, ,675, , ,257, ,968, /01/ , , , , , /30/ ,929, /01/2018 4,265, , ,799, ,985, , ,411, ,210, /01/ , , , , , /30/ ,929, /01/2019 4,535, , ,954, ,240, , ,539, ,493, /01/ , , , , , /30/ ,929, /01/2020 4,790, , ,082, ,555, , ,698, ,780, /01/ , , , /30/ ,931, /01/2021 5,045, , ,196, ,196, /30/2022 5,196, Total $45,785, $20,085, $65,870, $62,255, $20,644, $82,899, $147,959,

18 DESCRIPTION OF THE EQUIPMENT The Equipment consists of fifty (50) new MCI 45 Hybrid coach buses and ten (10) new Orion VII coach buses. Selected features of each type of bus follow: MCI buses: Next-generation ( NG ) diesel electric hybrid buses 2008 Cummings ISL 330 horsepower engine Low-emission clean diesel engine technology Allison propulsion system 55-passenger capacity Forward facing seating, reclining seats Wheelchair-lift equipped Orion buses: NG diesel electric hybrid buses 2008 Cummings ISB 260 horsepower engine hybrid propulsion system Low emission clean diesel engine technology Hydraulic over electric wheelchair ramp system with wheelchair restraints 37-passenger capacity See THE AUTHORITY Bus Replacement Policy for a description of the Authority s Bus Replacement Policy. RISK FACTORS The following factors, along with the other information in this Offering Memorandum, should be considered by potential investors in evaluating a purchase of the Certificates. However, they do not purport to be an exhaustive listing of risks and other considerations which may be relevant to an investment in the Certificates. The order in which the following factors are presented is not intended to reflect the relative importance of any such risks. THE PURCHASE OF THE CERTIFICATES IS SUBJECT TO CERTAIN RISKS. EACH PROSPECTIVE INVESTOR IN THE CERTIFICATES IS URGED TO READ THIS OFFERING MEMORANDUM IN ITS ENTIRETY INCLUDING ITS APPENDICES. PARTICULAR ATTENTION SHOULD BE PAID TO THE FACTORS DESCRIBED BELOW WHICH, AMONG OTHERS, COULD AFFECT THE PAYMENT OF DISTRIBUTIONS ON THE CERTIFICATES, AND WHICH COULD ALSO AFFECT THE MARKETABILITY OF THE CERTIFICATES TO AN EXTENT WHICH CANNOT BE DETERMINED. Nonappropriation; Full Faith and Credit Not Pledged The Distributions on the Certificates are payable solely from Lease Payments and funds realized from the disposition of the Equipment by the Trustee following termination of the Lease Agreement. There can be no assurance that the Authority will annually appropriate funds to pay the Lease Payments. In the event that the Authority elects to not appropriate sufficient funds to pay Lease Payments in any Fiscal Year, then the Lease Agreement will terminate, the obligation of the Authority to make further Lease Payments under the Lease Agreement shall cease and the Authority shall have no further obligations thereunder, other than to surrender the Equipment and to fulfill any existing obligations prior to termination. No opinion will be obtained with regard to the treatment of the interest component of the Distributions payable from moneys received as a result of the sale, lease or sublease of the Equipment. The Authority has not pledged its full faith and credit to the payment of Lease Payments. If the Authority appropriates less than the amount sufficient to make the Lease Payments in any Fiscal Year, the Authority is not obligated to pay the remaining portion of the Lease Payments from any other funds of the Authority. 8

19 DISTRIBUTIONS WITH RESPECT TO THE CERTIFICATES ARE PAYABLE SOLELY FROM THE LEASE PAYMENTS PAYABLE BY THE AUTHORITY UNDER THE LEASE AGREEMENT. SUCH LEASE PAYMENTS ARE PAYABLE SOLELY FROM FUNDS BUDGETED AND APPROPRIATED FOR SUCH PURPOSE BY THE AUTHORITY AND ANY FUNDS REALIZED FROM THE LEASE, SALE OR OTHER DISPOSITION OF THE EQUIPMENT, PLUS ANY OTHER FUNDS AND INVESTMENTS ON DEPOSIT WITH THE TRUSTEE PURSUANT TO THE TRUST AGREEMENT. THE OBLIGATION OF THE AUTHORITY TO MAKE LEASE PAYMENTS UNDER THE LEASE AGREEMENT DOES NOT CONSTITUTE AN INDEBTEDNESS OF THE AUTHORITY WITHIN THE MEANING OF ANY STATUTORY LIMITATION AND DOES NOT CONSTITUTE A LIABILITY OF OR A LIEN OR CHARGE UPON THE MONEYS OR PROPERTY THEREOF, EXCEPT THE EQUIPMENT AND THOSE MONEYS WHICH THE AUTHORITY HAS BUDGETED AND APPROPRIATED, IN ITS DISCRETION, TO PAY SUCH OBLIGATIONS DURING ANY FISCAL YEAR. THE AUTHORITY IS NOT REQUIRED TO APPROPRIATE OR PROVIDE FUNDS FOR THIS PURPOSE. IF MONEYS ARE NOT SO APPROPRIATED BY THE AUTHORITY FOR ANY FISCAL YEAR SUFFICIENT TO MAKE THE LEASE PAYMENTS PAYABLE UNDER THE LEASE AGREEMENT, THE LEASE AGREEMENT WILL TERMINATE AT THE END OF THE FISCAL YEAR FOR WHICH SUFFICIENT FUNDS HAVE BEEN APPROPRIATED AND THE AUTHORITY WILL NOT BE REQUIRED TO MAKE LEASE PAYMENTS AFTER SUCH TERMINATION. IF THE AUTHORITY FAILS TO APPROPRIATE SUFFICIENT FUNDS TO MAKE LEASE PAYMENTS, THE TRUSTEE MAY TAKE POSSESSION OF AND ATTEMPT TO SELL THE EQUIPMENT BUT IT IS LIKELY THAT THE TRUSTEE WILL NOT HAVE SUFFICIENT FUNDS TO PAY THE CERTIFICATES IN FULL WHEN DUE. Sales and Use Tax Revenues Subject to its right of nonappropriation, the Authority s obligation to make Lease Payments constitutes a current expense payable exclusively from lawfully available funds of the Authority, including 75% of its sales and use tax revenues, operating revenues, grants, investment income and other income. To the extent that operating revenues exceed operating expenses, the net operating revenues could be used to pay Lease Payments; however, because the Authority s operating expenses historically have exceeded its operating revenues, it is unlikely that net operating revenues will be available to pay Lease Payments, as is typical with transit operators. Sales and use tax receipts are impacted by changes in the economic activity and conditions of the areas served by the Authority, and the amount of sales and use tax revenues generated in any future year is not certain (see SOURCES OF REVENUES ). Collection of Sales and Use Tax Generally, the seller of taxable items and services collects the sale and use tax from the consumer at the point of a taxable transaction and remits these taxes to the Comptroller of the State of Texas. The Authority does not control the Comptroller s collection efforts, and the Comptroller s collection efforts against a private seller of goods and services are subject to applicable State law and to federal bankruptcy code provisions with respect to the protection of debtors. Actions by the State Comptroller The Comptroller may reduce future payments of the Authority s sales and use tax revenues or require the Authority to make repayments to provide for the repayment of overpayments of sales and use tax revenues that occurred in prior periods. The Comptroller periodically identifies underpayments and overpayments of sales and use tax revenues and responds to claims by taxpayers. In the event that the Comptroller determines that the Authority received an overpayment, the sales and use tax revenues for future periods are subject to reduction or the Authority may be required to make a repayment in order to reimburse the overpayment. Under State law, the Authority has no legal standing or ability to intervene or appeal the Comptroller s determination. The Authority May Receive Payment of Sales and Use Tax Revenue Less Frequently State law requires the Comptroller to remit sales and use tax revenue to the Authority only on a quarterly basis. As a matter of convenience and accommodation to local taxing entities, the Comptroller remits sales and use tax revenues to the Authority and other taxing entities on a monthly basis. While the Authority has no reason to believe that the Comptroller s current practice will be discontinued, there is no assurance that the Comptroller will continue to remit sales and use tax revenues to the Authority on a monthly basis. Thus, temporary cash flow irregularities could occur. 9

20 The Authority May Experience Variations in its Sales and Use Tax Revenues Variations in the amount of receipts can be adversely affected by a number of variables, including (1) changes in State law and administrative practices governing the remittance and allocation of sales and use tax receipts, (2) changes in the tax base against which the sales and use tax is assessed, (3) changes in the economic activity and conditions of a geographic area, and (4) the withdrawal from the Authority of one or more of the participating governmental entities served by the Authority. Insurance The Authority covenants under the Lease Agreement to self-insure, or at its option, commercially insure, the Equipment to protect against risk of loss, fire and other risks associated with the Equipment. The Authority purchases commercial property insurance to cover its bus operating facilities, warehouse and other maintenance facilities, the Authority s administrative buildings, select transit centers, rail platforms, power substations and rail cars. The commercial property insurance covers risk of loss to the Authority s bus fleet while located on the Authority s property, however, the Authority provides self-insurance for its buses when they are located outside the Authority s property. The Authority does not maintain segregated cash reserves for repairing or replacing buses that are damaged or destroyed while outside the Authority s property. No assurance can be given that self-insurance will be adequate to cover any claims that may arise. The Authority s liability is limited by the Texas Tort Claims Act to $100,000 per person or $300,000 per occurrence for bodily injury and $100,000 per occurrence for property damage. The Authority does maintain cash reserves to cover such claims. See APPENDIX B -- Summary of Principal Legal Documents - Summary of the Lease Agreement - Insurance. Damage or Destruction Risk If all or a portion of the Equipment is damaged or destroyed and the net proceeds of any insurance award are sufficient, in the Authority s sole discretion, to repair or replace the Equipment, then, pursuant to the Lease Agreement, the Authority is required to use such net proceeds for such purposes and the Authority is obligated to continue to pay the Lease Payments. If, in the Authority s sole discretion, repair, restoration or replacement of the Equipment would be impractical or economically undesirable, then the Authority may, but not is not required to, exercise its right to prepay amounts outstanding under the Lease Agreement. The prepayment price would be paid with the net proceeds of the insurance and available funds appropriated therefor by the Authority solely in the Authority s discretion. In the event that the Authority does not appropriate sufficient funds to pay the prepayment price in full, then the Lease Agreement will terminate and the Authority will have no further obligations thereunder. THERE CAN BE NO ASSURANCE THAT AN INSURANCE AWARD WILL BE SUFFICIENT TO REPAIR, RESTORE OR REPLACE THE EQUIPMENT OR, IF THE NET PROCEEDS ARE INSUFFICIENT, THAT THE AUTHORITY WILL APPROPRIATE SUFFICIENT FUNDS FOR THE REPAIR, RESTORATION OR REPLACEMENT OF THE EQUIPMENT OR FOR THE PAYMENT OF THE PREPAYMENT PRICE UNDER THE LEASE AGREEMENT. Inability to Sell or Delay in Selling the Equipment An Event of Default or nonappropriation gives the Trustee the right to sell the Equipment. The Equipment is designed and built for use in public mass transportation; therefore there may be a limited secondary market for the Equipment. Potential purchasers of the Certificates should not anticipate that the sale or lease of the Equipment could be accomplished rapidly, if at all. Any delays in the ability of the Trustee to obtain possession of the Equipment or to sell or lease the Equipment will result in delays in the payment of the Certificates after expenditure of amounts on deposit in the Reserve Fund. There can be no assurance that the Trustee will be able to sell or lease the Equipment for an amount equal to the aggregate amount of unpaid Certificates then outstanding plus unpaid interest. If the Equipment is sold or leased for an amount less than the aggregate amount of and accrued interest on the Certificates, such partial payment would be the only remedy of the owners of the Certificates. 10

21 Other Obligations of the Authority The obligation of the Authority to make Lease Payments will be satisfied from funds appropriated, in the Authority s discretion, for such use. The Authority may enter into other obligations which may constitute additional charges against the funds from which the Lease Payments may be appropriated. To the extent additional obligations are incurred by the Authority, the funds available for appropriation for Lease Payments may be decreased. Limited Recourse on Default If the Authority defaults on its obligations to make Lease Payments pursuant to the Lease Agreement, the Lease Agreement provides that the Trustee, as assignee of FSW Leasing, may (subject to the restrictions described below) take possession of and attempt to sell, lease or sublease the Equipment and hold the Authority liable, to the extent lawfully available funds have been appropriated therefor, for (i) all payments due up to the effective date of such selling, leasing, or subleasing; and (ii) the difference, if any, between the purchase price, rental and other amounts paid by the lessee or sublessee pursuant to such sale, lease or sublease and all amounts owed by the Authority under the Lease Agreement, including the Prepayment Price applicable to the immediately preceding Lease Payment due date with respect to which the Lease Payment due on such date has been paid. Such possession and sale, lease or sublease would not automatically result in a termination of the Lease Agreement. Alternatively, the Trustee may, by written notice, terminate the Lease Agreement with respect to the Equipment and proceed against the Authority to recover damages pursuant to the Lease Agreement. It is uncertain what remedies will actually be available to the Trustee in the event of a default. Due to the specialized nature of the Equipment, even if the Trustee has the ability to sell, lease or sublease the Equipment, no assurance can be given that the Trustee will be able to sell, lease or sublease the Equipment so as to provide rental income sufficient to make distributions with respect to the Certificates in a timely manner. In addition, due to the governmental function of the Equipment, it is not certain whether a court would permit the exercise of the remedies of repossession and sale, lease or sublease with respect thereto. Any suit for money damages would be subject to limitations on legal remedies against public entities in Texas, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. The payment of Distributions on the Certificates is without recourse to FSW Leasing and the ability of the Trustee to make Distributions is completely dependent upon the receipt of Lease Payments from the Authority. Loss of Tax Exemption As discussed under the heading TAX EXEMPTION herein, the interest component of Distributions could become includable in gross income for purposes of federal income taxation retroactive to the date of delivery of the Certificates, as a result of acts or omissions of the Authority in violation of its covenants in the Lease Agreement. Should such an event of taxability occur, the Certificates would not be subject to a special prepayment and would remain outstanding at the same rates. In addition, if the Authority does not appropriate sufficient funds to make Lease Payments, the Trustee may have limited ability to sell, lease or sublease the Equipment in order to preserve the tax-exempt nature of the interest component of the Lease Payments and the Distributions. Bond Counsel has rendered no opinion as to the treatment for federal income tax purposes of any money received by an owner of Certificates subsequent to a termination of the Lease Agreement by reason of an Event of Default or an event of nonappropriation. There is no assurance that any money received by an owner of a Certificate subsequent to such an event will continue to be excludable from gross income for federal income tax purposes. Noncompliance with Arbitrage Provisions; Occurrence of Taxability The Lease Agreement obligates the Authority to comply with requirements of federal law regarding rebate of certain investment proceeds to the federal government. If the Authority fails to comply with those requirements, the Certificates would become arbitrage bonds, and the interest portion of the Distributions could become includable in gross income for federal income tax purposes retroactive to the date of delivery of the Certificates. Such a failure by the Authority to comply with the covenants, conditions or agreements on its part to be observed or performed by it under the Lease Agreement, if not cured within 30 days of written notice thereof, will constitute an Event of Default under the Lease Agreement. Thereafter, the Trustee will have the right to exercise one or more of the remedies set forth in the Lease Agreement or the Trust Agreement, which may or may not include the acceleration of the principal of and accrued but unpaid interest on the Distributions. In no event, however, would the registered owners of the Certificates be entitled to an 11

22 increase in the interest rate on the Certificates and, accordingly, the after-tax yield to the registered owners would be materially decreased. Transferability of Certificates Upon a Termination Event Neither Bond Counsel nor Underwriters counsel has rendered an opinion with respect to the applicability or inapplicability of the registration requirements of the Securities Act of 1933, as amended, to any Certificate subsequent to termination of the Lease Agreement by reason of an Event of Default or an event of non-appropriation. If the Lease Agreement is terminated, there is no assurance that the Certificates may be transferred without compliance with the registration provisions of the Securities Act of 1933, as amended, or the availability of an exemption therefrom. See REGISTRATION AND QUALIFICATION OF CERTIFICATES FOR SALE. No Recourse Obligation The purchase of a Certificate offered hereby is without recourse to the Authority, the Trustee or the Underwriters, and the investor must assume the entire risk that the Authority will meet its obligations under the Lease Agreement. The Authority s ability to perform its obligations under the Lease Agreement and the willingness to appropriate money for the Lease Payments could be affected by the financial condition of the Authority. No Liability of FSW Leasing to the Owners Except as expressly provided in the Trust Agreement, FSW Leasing shall not have any obligation or liability to the owners of the Certificates with respect to the payment when due of the Lease Payments by the Authority, or with respect to the performance by the Authority of other agreements and covenants required to be performed by it contained in the Lease Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement. Bankruptcy and Equitable Limitations In addition to the limitation on remedies contained in the Trust Agreement, the rights and remedies provided in the Trust Agreement and the Lease Agreement may be limited by and are subject to the provisions of federal bankruptcy laws, as now or hereafter enacted, and to other laws or equitable principles that may affect the enforcement of creditors rights. The various legal opinions to be delivered concurrently with the delivery of the Certificates (including Bond Counsel's approving legal opinion) will be qualified, as to the enforceability of the Certificates, the Lease Agreement and other related documents, by bankruptcy, reorganization, moratorium, insolvency, fraudulent conveyance or other similar laws relating to or affecting the enforcement of creditors rights, to the application of equitable principles, to the exercise of judicial discretion in the appropriate cases and to the limitation on legal remedies against public entities in the State of Texas. Under Chapter 9 of the Bankruptcy Code (Title 11, United States Code) which governs the bankruptcy proceedings for public entities such as the Authority, there are no involuntary petitions in bankruptcy. If the Authority were to file a petition under Chapter 9 of the Bankruptcy Code, the owners and the Trustee could be prohibited from taking any steps to enforce their rights under the Lease Agreement and from taking any steps to collect amounts due from the Authority under the Lease Agreement. SOURCES OF REVENUES The information contained in this section is for informational purposes only. The Authority has not pledged any of the revenues described below to the payment of Lease Payments. The Authority s obligation to pay Lease Payments is subject to annual nonappropriation in the Authority s sole discretion. The Lease Payments do not constitute a full faith and credit obligation of the Authority. 12

23 Sales and Use Tax The Authority collects a one-percent sales and use tax in its 1,285 square mile service area, as approved by public vote when the Authority was confirmed in Pursuant to an election held within the Authority in November 2003, 25% of sales and use tax revenue collected by the Authority through September 30, 2014, is dedicated for street improvements and mobility projects. The remaining 75% of the sales and use tax revenue is available for the payment of the Authority s other obligations, including repayment of bonds, notes, commercial paper and, to the extent appropriated for such purpose, the Lease Payments. See TABLE 1 Combined Sources of Revenues. Sales tax revenues for sales made in September 2008 were 1.66% higher than the same period last year. Although sales tax revenues were better than expected (see THE AUTHORITY Effects of Hurricane Ike ), the Authority has taken a conservative approach due to the slowing national economy and has budgeted sales tax revenues for FY2009 at the FY2007 level of $481 million. Operating Revenue Operating revenue is derived from transportation fares which include bus, rail and METRO lift fare box receipts plus ticket sales from special events, charter services and the Texas Medical Center Route Guarantee Services. See TABLE 1 Combined Sources of Revenues for a history of operating revenue. Pursuant to State law, the Authority must use operating revenues first to pay operating expenses. To the extent that operating revenues exceed operating expenses, the net operating revenues could be used to pay Lease Payments; however, as is typical with transit operators, because the Authority s operating expenses historically have exceeded its operating revenues, it is unlikely that net operating revenues will be available to pay Lease Payments. See TABLE 2 Operating and Capital Expenditures. Grants The Authority is the recipient of a number of federal and state grants from a variety of programs including Urbanized Area Formula Funds, Clean Fuel Program, New Starts, Fixed Guideway Modernization, Bus and Bus Facilities, Congestion Mitigation/Air Quality (CMAQ), Surface Transportation Program (STP) and Texas Emission Reduction Program (TERP). Year-to-year changes in the amount of grant revenue received and recognized is dependent upon the pace at which projects proceed and the associated expenditures incurred. With the exception of TERP grant funds which represent approximately 1%-to-2% of total grant funds received, funds received from the above grants are eligible to pay the Lease Payments, to the extent that the Authority appropriates funds for such purpose. Recent major projects affecting grant revenue are the Regional Computerized Traffic Signal System (RCTSS), Downtown/Midtown Transit Streets construction projects, the 1900 Main Administration Building, several park and ride facilities, METRONet and Metro Q Card projects and preliminary engineering for the North and Southeast METROSolutions corridors. See TABLE 1 Combined Sources of Revenues for additional information relating to grant receipts. Investment Income The Authority s investment portfolio typically consists of the following: U.S. Treasuries, U.S. Agencies, commercial paper, investment pools, cash and money market funds. See TABLE 1 Combined Sources of Revenues and TABLE 4 Investments for additional information relating to the Authority s investment income. Other Income Other income consists of miscellaneous revenues such as parking revenue, concession sales, leased property revenue and rebates on procurement cards. See TABLE 1 Combined Sources of Revenues for a history of other income receipts. 13

24 Table 1 below highlights the major sources of revenues of the Authority for Fiscal Years ending September 30, Table 1 - Combined Sources of Revenues Fiscal Sales and Operating Investment Other Year Use Tax (a) Revenue (b) Grants Income Income Total 2007 $ 481,721,482 $ 53,266,927 $ 101,322,505 $ 14,240,392 $ 648,162 $ 651,199, ,645,812 54,186, ,469,486 7,923, , ,671, ,015,831 50,137, ,607,114 1,803,936 (874,336) 595,689, ,932,680 51,212, ,608,481 1,568, , ,733, ,498,093 52,252, ,125,847 5,722,026 3,640, ,239, ,857,631 54,169, ,282,830 9,113,410 4,946, ,370, ,919,523 54,147, ,093,321 21,108,942 7,521, ,790, ,254,669 50,347,393 96,476,000 16,205, , ,167, ,460,909 48,531, ,396,131 9,128, , ,920, ,697,620 47,541,666 66,254,738 14,612, , ,763, ,009,303 44,905,179 73,469,765 14,846, , ,744,780 Source: METRO Annual Financial Reports. The Authority, Office of Management and Budget. (a) Represents total amount of Sales and Use Tax revenue collected by the Authority. Pursuant to an election held within the Authority in November 2003, 25% of the Authority s Sales and Use Tax revenue is dedicated for street improvements and mobility projects. The remaining 75% of the Authority s Sales and Use Tax revenue is available to pay the Authority s other obligations, including repayment of bonds, notes, commercial paper and, to the extent appropriated for such purpose, the Lease Payments. See SOURCES OF REVENUES Sales and Use Tax. (b) Net operating revenues, if any, remaining after the payment of the Authority s operating expenses are available to pay the Lease Payments to the extent appropriated for such purpose. However, because operating expenses historically have exceeded operating revenues, it is unlikely that net operating revenues will be available to pay Lease Payments. See SOURCES OF REVENUES Operating Revenue and EXPENDITURES Table 2 Operating and Capital Expenditures below. EXPENDITURES Table 2 below highlights the Authority s major expenditures for Fiscal Years ending September 30, Table 2 - Operating and Capital Expenditures Fiscal Capital Year Operating Depreciation Infrastructure Additions 2007 $ 339,330,593 $ 120,289,857 $ 108,530,541 $ 254,907, ,642, ,030, ,616, ,911, ,476, ,970, ,178, ,153, ,613, ,336, ,238, ,773, ,488, ,075, ,782, ,790, ,716,662 96,138,041 92,559, ,220, ,326,881 83,950,800 94,087, ,711, ,805,307 79,771, ,849, ,044, ,615,734 81,627,201 98,297, ,596, ,943,807 78,952,936 98,021, ,325, ,120,938 64,034, ,724, ,166,755 Source: METRO Annual Financial Reports The Authority, Office of Management and Budget. 14

25 COMMITMENTS AND CONTINGENCIES The Authority currently has no outstanding sales and use tax revenue debt. The Authority has $640 million in authorized but unissued sales and use tax revenue bonds to fund projects for its transit system pursuant to an election held in November 2003 in conjunction with METROSolutions. The Authority has a $300 million sales and use tax revenue commercial paper program. JPMorgan Chase Bank, N.A. ( JPMorgan ), DEPFA BANK plc, acting through its New York Branch ( DEPFA ), and Compass Bank ( Compass ) are the liquidity providers (the Liquidity Providers ) under a revolving credit and term loan agreement (the Credit Agreement ) for the program. As of October 31, 2008, the Authority has $143 million of outstanding commercial paper. On October 16, 2008, the Authority and the Liquidity Providers entered into an amendment to the Credit Agreement which provided for DEPFA s voluntary reduction and eventual complete withdrawal from the Credit Agreement. As a result of the amendment, DEPFA s original 33.33% share of the commitment under the Credit Agreement now only applies to the $73,000,000 of commercial paper which was outstanding on October 16, In addition, the Authority and the Liquidity Providers are currently working on withdrawing DEPFA from its commitment on such outstanding commercial paper notes. Commercial paper issued by the Authority after October 16, 2008 will carry liquidity provided only by JPMorgan and Compass under the Credit Agreement. SELECTED INFORMATION REGARDING HARRIS COUNTY, TEXAS Harris County is a southeast Texas county and a major component of the Houston Primary Metropolitan Statistical Area. The economy is based on petrochemicals, tourism, shipping, refining, chemicals, space exploration, manufacturing, and education. The County is ranked as the 6th largest manufacturing county in the country. The County seat is Houston, Texas. The chart below presents selected demographic statistics for years 1998 to Harris County Population (a) Harris County Per Capita Personal Income (a) Demographic Statistics ( ) Per Capita Personal Income (State of Texas) (b) Harris County Total Retail Sales (a) Harris County Unemploymen Rate (a) Unemployment Rate (State of Texas) (c) Fiscal Year ,841,854 $44,164 37,187 $76,897, % 4.3% ,718,000 42,984 35,166 69,279, % 4.9% ,764,000 41,009 33,253 63,475, % 5.4% ,415,000 39,252 30,948 62,248, % 6.0% ,377,000 34,578 29,404 59,159, % 6.7% ,341,000 34,401 28,835 58,209, % 6.4% ,268,000 35,489 29,036 57,374, % 5.0% ,178,000 34,041 28,314 56,213, % 4.4% ,058,000 31,168 26,250 52,697, % 4.7% ,965,000 30,066 25,186 53,192, % 4.9% Source: (a) Institute for Regional Forecasting A Division of the Center for Public Policy University of Houston. (b) U.S. Department of Commerce, Bureau of Economic Analysis. Released March 26, (c) Texas Workforce Commission. 15

26 Employer PRINCIPAL EMPLOYERS 2006 Employees % of Total Harris County Employment Administaff, Inc. 19,851.82% Wal-Mart Stores, Inc. 12,957.53% Memorial Hermann Hospital System 12,561.52% Shell Oil Co. 11,621.48% Halliburton Companies 11,217.46% Hewlett-Packard 8,500.35% Methodist Hospital System 7,969.33% Continental Airlines 7,500.31% JPMorgan Chase 6,749.28% AT&T 6,000.28% Based on calendar year Source: Houston Business Journal First Survey/Greater Houston Partnership/HBJ Note: Total County Employment for 2006 was approximately 2,431,000. THE AUTHORITY S SERVICE AREA AND SALES TAX JURISDICTION 16