$12,955,000 WATER AND SEWER REVENUE BONDS SERIES 2006 of HARVEST-MONROVIA WATER, SEWER AND FIRE PROTECTION AUTHORITY, INC.

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1 NEW ISSUE - BOOK-ENTRY ONLY Rating: S&P: AAA XLCA Insured OFFICIAL STATEMENT In the opinion of Bond Counsel, Walston, Wells & Birchall, LLP, interest on the Series 2006 Bonds is presently, under Section 103 of the Internal Revenue Code of 1986, as amended, regulations and rulings of the Commissioner of Internal Revenue pertinent thereunder, and court decisions heretofore rendered, excludable from gross income for federal income taxation, and is exempt from present State of Alabama income taxation. See "TAX EXEMPTION" for a more complete statement of the tax consequences of the receipt of interest on the Series 2006 Bonds. $12,955,000 WATER AND SEWER REVENUE BONDS SERIES 2006 of HARVEST-MONROVIA WATER, SEWER AND FIRE PROTECTION AUTHORITY, INC. Dated: May 1, 2006 Due: April 1, as shown below The Series 2006 Bonds are limited obligations of the Authority payable, subject to a prior pledge, solely out of the revenues from the Authority's water and sewer system remaining after payment of the reasonable and necessary expenses of maintaining and operating the System. See "SECURITY FOR SERIES 2006 BONDS; SOURCE OF PAYMENT". The Series 2006 Bonds are not general obligations of the State of Alabama or any county or any municipality. The Authority has no taxing power. Payment of the principal of and interest on the Series 2006 Bonds when due will be insured by a financial guaranty insurance policy to be issued by XL Capital Assurance Inc. simultaneously with the delivery of the Bonds. See "DESCRIPTION OF THE INSURER." The Series 2006 Bonds will be issued as fully registered bonds in $5,000 denominations or in any integral multiple thereof. Interest on the Series 2006 Bonds is payable on October 1, 2006 and on each April 1 and October 1 in each year thereafter. The Series 2006 Bonds are subject to optional and mandatory redemption as more fully described herein. $3,550,000 Serial Bonds Year of Interest Year of Interest Maturity Principal Rate Yield Maturity Principal Rate Yield 2007 $ 85, % 3.450% 2016 $ 120, % 4.35% , , , , , , , , , , , , , ,660, , $9,405,000 Term Bonds $3,510, % Term Bonds Due April 1, 2025 Priced to Yield 4.70% $5,895, % Term Bonds Due April 1, 2028 Priced to Yield 4.78% (Accrued interest will be added) The Series 2006 Bonds are initially issuable as fully registered bonds without coupons in denominations of $5,000 and any integral multiple thereof pursuant to a book-entry only system to be administered by The Depository Trust Company, New York, New York, or any successor or assign thereof or substitute therefor as such securities depository (the "Securities Depository") and, when issued, will be registered in the name of and held by Cede & Co., as nominee and individual purchasers of the Series 2006 Bonds will not receive physical delivery of bond certificates. During the period in which the book-entry only system is in effect for the Series 2006 Bonds, purchases and transfers of ownership of beneficial interests in the Bonds will be evidenced by book-entry only and all payments of principal of, premium (if any) and interest on the Bonds will be made by Regions Bank, as paying agent, to the Securities Depository for disbursement thereby to the Direct Participants and for subsequent disbursement by the Direct Participants (and, where appropriate, by the Indirect Participants) to the owners of beneficial interests in the Series 2006 Bonds, as more particularly provided in the Indenture and described herein. The Series 2006 Bonds will be delivered, subject to prior sale, withdrawal or modification of the offer without notice, and to the approving legal opinion of Walston, Wells & Birchall, LLP, Birmingham, Alabama, Bond Counsel, and certain other conditions. It is expected that the Series 2006 Bonds in definitive form will be available for delivery on May 17, May 8, 2006

2 HARVEST-MONROVIA WATER, SEWER AND FIRE PROTECTION AUTHORITY, INC. MEMBERS Scott Schrimsher, Chairman Wallace Dorning, Vice-Chairman Roy McCrary, Secretary-Treasurer GENERAL MANAGER Roger Raby BOND COUNSEL Walston, Wells & Birchall, LLP Birmingham, Alabama UNDERWRITER Merchant Capital L.L.C. Montgomery, Alabama

3 THE INFORMATION IN THIS OFFICIAL STATEMENT HAS BEEN OBTAINED FROM SOURCES WHICH ARE CONSIDERED DEPENDABLE AND WHICH ARE CUSTOMARILY RELIED UPON IN THE PREPARATION OF SIMILAR OFFICIAL STATEMENTS, BUT SUCH INFORMATION IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS AND IS NOT TO BE CONSTRUED AS A REPRESENTATION BY THE AUTHORITY. ALL ESTIMATES AND ASSUMPTIONS CONTAINED HEREIN ARE BELIEVED TO BE RELIABLE BUT NO REPRESENTATION IS MADE THAT SUCH ESTIMATES OR ASSUMPTIONS ARE CORRECT OR WILL BE REALIZED. NO PERSON, INCLUDING ANY BROKER, DEALER OR SALESMAN, HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS OFFICIAL STATEMENT, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE AUTHORITY. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE EITHER AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THE SERIES 2006 BONDS BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER, SOLICITATION OR SALE. ANY INFORMATION OR EXPRESSIONS OF OPINION HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE AND NEITHER THE DELIVERY OF THIS OFFICIAL STATEMENT NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE AS TO THE AFFAIRS OF THE AUTHORITY SINCE THE DATE HEREOF. TABLE OF CONTENTS Page INTRODUCTION...1 DEFINITIONS...2 THE SERIES 2006 BONDS...3 BOOK-ENTRY ONLY SYSTEM...3 SECURITY FOR SERIES 2006 BONDS; SOURCE OF PAYMENT... 9 DESCRIPTION OF THE INSURER...9 RATING ESTIMATED SOURCES AND USES OF FUNDS SERIES 2006 IMPROVEMENTS THE AUTHORITY THE SYSTEM TOTAL DEBT SERVICE REQUIREMENTS GENERAL INFORMATION ECONOMIC AND DEMOGRAPHIC INFORMATION RESPECTING MADISON COUNTY AS A WHOLE UNDERWRITING LEGAL MATTERS TAX EXEMPTION INVESTMENT INFORMATION FOR FINANCIAL INSTITUTIONS ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT OR PREMIUM LITIGATION FEDERAL BANKRUPTCY CODE APPENDICES RISK FACTORS CONTINUING DISCLOSURE UNDERTAKING MISCELLANEOUS APPENDIX A - Audited Financial Statements for the Fiscal Year ended September 30, 2005 APPENDIX B - Summary of the Indenture APPENDIX C - Proposed Opinion of Bond Counsel APPENDIX D - Preliminary Engineering Report APPENDIX E - Projected Statements of Operations and Significant Changes in Fund Position APPENDIX F - Specimen Financial Guaranty Insurance Policy APPENDIX G - Specimen Debt Service Reserve Insurance Policy

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5 INTRODUCTION This Official Statement of Harvest-Monrovia Water, Sewer and Fire Protection Authority, Inc. (the "Authority") is being furnished to provide certain information concerning the $12,955,000 principal amount Water and Sewer Revenue Bonds, Series 2006 (the "Series 2006 Bonds") issued by the Authority. The Authority is a public corporation organized under the laws of the State of Alabama which owns and operates a water distribution system and sewer system (as at any time constituted, the "System") located in the Harvest-Monrovia area in Madison County, Alabama. The Harvest-Monrovia Water, Sewer and Fire Protection Authority, Inc. was originally incorporated on August 2, 1965 pursuant to the provisions of Article I of Chapter 88 of Title 11 of the CODE OF ALABAMA 1975, as amended. The Monrovia area in Madison County is located approximately three miles north of the corporate limits of the City of Madison, Alabama and three miles west of the corporate limits of the City of Huntsville, Alabama. The Harvest area is located approximately five miles north of Monrovia. Both areas are in unincorporated areas of west central Madison County, approximately five miles east of Limestone County. The general area is bounded on the east by State Highway 53 (Ardmore Highway), on the south by Capshaw Road and on the west by Limestone County. See Exhibit A to the Preliminary Engineering Report attached hereto as Appendix D. The Series 2006 Bonds are being issued pursuant to a Trust Indenture dated as of May 1, 2006 (the "Indenture") between the Authority and Regions Bank (the Trustee ). The Series 2006 Bonds are initially issued pursuant to a book-entry system to be administered by The Depository Trust Company, New York, New York ("DTC") and registered in the name of and held by Cede & Co., as nominee of DTC. During the period in which Cede & Co. is the registered owner of the Series 2006 Bonds, purchases and transfers of ownership of beneficial interests in the Series 2006 Bonds will be evidenced by book-entry only and all payments of principal of, premium (if any) and interest on the Series 2006 Bonds will be made by the Trustee to Cede & Co. (as registered owner) for DTC for disbursement by DTC to the Direct Participants of DTC and for subsequent disbursement by the Direct Participants (and, where appropriate, by the Indirect Participants) to the owners of beneficial interests in the Series 2006 Bonds, as more particularly provided in the Indenture and described herein under "Book-Entry Only System". In the event the book-entry only system for the Series 2006 Bonds is discontinued, Series 2006 Bonds in certificated form in authorized denominations will be physically distributed to the owners of the beneficial interests in the Series 2006 Bonds, the Series 2006 Bonds will be registered in the names of the owners thereof on the Bond Register, the Trustee shall make payments of principal of, premium (if any) and interest on the Series 2006 Bonds to the registered owners thereof as provided in the Series 2006 Bonds and the Indenture, and the provisions of the Series 2006 Bonds and of the Indenture with respect to registration, transfer and exchange of Series 2006 Bonds by the registered owners thereof shall apply, as described herein under "Discontinuation of Book-Entry System; Transfer, Exchange and Registration". The Series 2006 Bonds are being issued for the purposes of (i) constructing certain capital improvements to the System, (ii) funding a Reserve Fund by means of a Debt Service Reserve Insurance Policy, (iii) currently refunding and redeeming on May 17, 2006 the Authority s Water Revenue Bond, Series A, dated March 3, 1992 (the "Series A Bond"), and (iv) paying issuance costs. The Series 2006 Bonds will not constitute general obligations of or a charge against the general credit or taxing power of the State of Alabama, or any county or any municipality. The Authority has no taxing power. The Series 2006 Bonds will be limited obligations of the Authority payable, subject to a prior lien,

6 solely out of and secured by a pledge of the revenues from the System remaining after payment of the reasonable and necessary expenses of maintaining and operating the System (the "Net System Revenues") and a non-foreclosable statutory mortgage lien on the System. See "SECURITY FOR SERIES 2006 BONDS; SOURCE OF PAYMENT." In the Indenture the Authority has reserved the right to issue additional bonds payable from and secured by a pledge of the Net System Revenues, subject to the terms and conditions set forth in the Indenture. See APPENDIX B - "SUMMARY OF THE INDENTURE - Additional Bonds." All references to or summaries of contracts, documents or official acts are qualified by the exact terms of such contracts, documents or acts, each being an item of public record. So far as any statements are made in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, they are set forth as such and not as representations of fact, and no representation is made that any such estimates will be realized. DEFINITIONS For purposes of this Official Statement the following terms have the following meanings: Beneficial Owners means the registered owners of beneficial interests in the Series 2006 Bonds. Bond Fund means the bond fund established pursuant to the Indenture. Bond Register means the register for the registration and transfer of Series 2006 Bonds maintained by the Trustee for the Authority under the Indenture. Book-Entry System means a book-entry only system of evidence of purchase and transfer of beneficial ownership interests in the Series 2006 Bonds. Business Day means a day, other than a Saturday or a Sunday, on which commercial banking institutions are open for business in the city where the designated corporate office of the Trustee is located and a day on which the payment system of the Federal Reserve System is operational. Code means the Internal Revenue Code of 1986, as amended, and all references to specific sections of the Code shall be deemed to include any and all respective successor provisions to such sections. Direct Participant means securities brokers and dealers, banks, trust companies, clearing corporations and other financial institutions which have access to the Book Entry System. Fiscal Year means the period beginning on January 1 of one calendar year and ending on December 31 of the same calendar year or such other fiscal year as may hereafter be adopted by the Authority. Indenture means the Trust Indenture dated as of May 1, Indirect Participant means a broker, dealer, bank or other financial institution for which the Securities Depository holds bonds as securities depository through a Direct Participant. 2

7 Insurer or XLCA means XL Capital Assurance Inc. Qualified Surety Bond means a debt service insurance policy or surety bond which is unconditional and irrevocable and which is issued by an insurance company rated in the highest category of Standard & Poor s Rating Service and Moody s Investors Services, Inc. Record Date means, with respect to the Series 2006 Bonds, that date which is 15 calendar days before any date on which interest is due and payable on the Series 2006 Bonds. Securities Depository means The Depository Trust Company, a limited purpose trust company organized under the laws of the State of New York, and the successors and assigns thereof, and any substitute securities depository therefor that maintains a Book-Entry System for the Series 2006 Bonds. Securities Depository Nominee means the Securities Depository or the nominee of such Securities Depository in whose name there shall be registered on the Bond Register the Series 2006 Bonds to be delivered to such Securities Depository during the period in which the Series 2006 Bonds are held pursuant to the Book-Entry System. Series 2006 Bonds means the Water and Sewer Revenue Bonds, Series 2006, dated May 1, 2006, of the Authority offered hereby. Trustee means Regions Bank, as paying agent, trustee and registrar for the Series 2006 Bonds. THE SERIES 2006 BONDS General Provisions. The Series 2006 Bonds will be issued as fully registered bonds, without coupons, in the denomination of $5,000 each or any integral multiple thereof. The Series 2006 Bonds will be dated, will mature in the amounts and on the dates and will bear interest at the applicable rates per annum, payable on the dates, set forth on the cover page of this Official Statement. Interest shall be computed on the basis of a 360-day year of twelve consecutive 30-day months. BOOK-ENTRY ONLY SYSTEM The Depository Trust Company, New York, New York ("DTC") will serve as initial Securities Depository under a Book-Entry System for the Series 2006 Bonds with no physical distribution of Series 2006 Bonds made to any owner of any Bond or Series 2006 Bonds. The ownership of one fully registered Series 2006 Bond for each maturity will be registered in the name of Cede & Co., as initial Securities Depository Nominee. Except as provided below, so long as the Securities Depository or the Securities Depository Nominee is the registered owner of the Series 2006 Bonds, references herein to the holders, owners or registered owners of the Series 2006 Bonds shall mean the Securities Depository or the Securities Depository Nominee and shall not mean the Beneficial Owners of the Series 2006 Bonds. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking corporation" under the New York Banking Law, a member of the Federal Reserve System, a "clearing 3

8 corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities of its participants (the "Direct Participants") and to facilitate the clearance and settlement of securities transactions, such as transfers and pledges, among Direct Participants in such securities through electronic computerized book-entry changes in accounts of the Direct Participants, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the Book-Entry System of DTC is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the "Indirect Participants"). The rules applicable to DTC and the Direct Participants are on file with the Securities and Exchange Commission. Beneficial ownership interests in the Series 2006 Bonds may be purchased by or through Direct Participants. The holders of these beneficial ownership interests are hereinafter referred to as the "Beneficial Owners." Such Direct Participants and the persons for whom they acquire interests in the Series 2006 Bonds as nominees will not receive a bond certificate, but each Direct Participant will receive a credit balance in the records of the Securities Depository in the amount of such Direct Participant's interest in the Series 2006 Bonds, which will be confirmed in accordance with standard procedures of the Securities Depository. Beneficial Owners of Series 2006 Bonds will not receive certificates representing their beneficial ownership interests in the Series 2006 Bonds, unless use of the Book-Entry System is discontinued as described below. Beneficial Owners will be treated in all respects as the owners of the Series 2006 Bonds. The deposit of Series 2006 Bonds with the Securities Depository and their registration in the name of the Securities Depository Nominee effect no change in beneficial ownership. The Securities Depository has no knowledge of the actual Beneficial Owners of the Series 2006 Bonds; the records of the Securities Depository reflect only the identity of the Direct Participants to whose accounts such Series 2006 Bonds are credited, which may or may not be the Beneficial Owners. The Direct Participants will remain responsible for keeping account of their holdings on behalf of their customers as Beneficial Owners. Transfers of beneficial interests in the Series 2006 Bonds which are registered in the name of the Securities Depository Nominee will be accomplished by book entries made by the Securities Depository and in turn by the Direct Participants and Indirect Participants who act on behalf of the Beneficial Owners of the Series 2006 Bonds. For every transfer and exchange of beneficial ownership in the Series 2006 Bonds, the Beneficial Owners may be charged a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. During the period in which the Book-Entry System is in effect for the Series 2006 Bonds the Authority and the Trustee shall treat the Securities Depository and the Securities Depository Nominee as the only registered owner of the Series 2006 Bonds for all purposes under the Indenture, including receipt of all principal of, premium, if any, and interest on the Series 2006 Bonds, receipt of notices, voting, and requesting or directing the Trustee to take or not to take, or consenting to, certain actions under the Indenture. The Securities Depository may be expected to assign the consent or voting rights of the Securities Depository Nominee to those Direct Participants to whose accounts the Series 2006 Bonds are credited on the record date specified by the Securities Depository therefor. In the event of such assignment, the 4

9 Authority and the Trustee shall treat the assignees as the only registered owners of the Series 2006 Bonds for purposes of exercising such rights. Neither DTC nor Cede & Co. will consent or vote with respect to the Series 2006 Bonds. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority, as soon as possible after the said record date, for purposes of assigning such consent and voting rights to the Direct Participants. Conveyance of notices and other communications by the Securities Depository to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners of the Series 2006 Bonds, will be governed by arrangements among the Securities Depository, Direct Participants, Indirect Participants and the Beneficial Owners, subject to any statutory and regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to the Securities Depository Nominee and redemption of Series 2006 Bonds shall be effected as provided in the Indenture and described herein. Principal, redemption prices, and interest payments on, the Series 2006 Bonds will be made by the Authority or the Trustee to the Securities Depository or the Securities Depository Nominee, as registered owner of the Series 2006 Bonds. Payment of interest due on each interest payment date will be made for the account of the persons who are Beneficial Owners on the Record Date for such interest payment date. Disbursement of such payments by the Securities Depository or the Securities Depository Nominee to Direct Participants shall be solely the responsibility of the Securities Depository and subsequent disbursements of such payments to the Beneficial Owners shall be solely the responsibility of the Direct Participants and, where appropriate, Indirect Participants. Upon receipt of moneys, the Securities Depository will credit immediately the accounts of the Direct Participants in accordance with their respective holdings shown on the records of the Securities Depository. Payments by Direct Participants and Indirect Participants to Beneficial Owners will be governed by standing instructions of the Beneficial Owners and customary practices, as is now the case with municipal securities held for the accounts of customers in bearer form or registered in "street name." Such payments to the Beneficial Owners will be the sole responsibility of such Direct Participant or Indirect Participant and not of the Authority or the Trustee, subject to any statutory and regulatory requirements as may be in effect from time to time. The Authority, the Trustee and the Underwriter cannot and do not give any assurances that the Direct Participants or the Indirect Participants will distribute to the Beneficial Owners of the Series 2006 Bonds (1) payments of principal or redemption price, premium, if any, or interest on, the Series 2006 Bonds, (2) certificates representing an ownership interest or other confirmation of Beneficial Ownership interests in Series 2006 Bonds, or (3) redemption or other notices sent to the Securities Depository or the Securities Depository Nominee, as the registered owner of the Series 2006 Bonds, or that they will do so on a timely basis or that the Securities Depository or the Securities Depository Nominee, the Direct Participants or Indirect Participants will serve and act in the manner described in this Official Statement. All such payments to the Securities Depository or the Securities Depository Nominee of principal, interest, or redemption price on behalf of the Authority and the Trustee shall be valid and effectual to satisfy and discharge the liability of the Authority and the Trustee to the extent of the amounts so paid, and the Authority and the Trustee shall not be responsible or liable for payment to any Beneficial Owner by the Securities Depository or any Direct Participant or any Indirect Participant. 5

10 The Authority, the Trustee and the Underwriter will not have any responsibility or obligation to any Direct Participant, Indirect Participant or any Beneficial Owner or any other person with respect to: (1) the accuracy of any records maintained by the Securities Depository or any Direct Participant or Indirect Participant; (2) the payment by the Securities Depository, any Direct Participant or Indirect Participant, of any amount due to any Beneficial Owner in respect of the principal or redemption price, premium, if any, and interest on the Series 2006 Bonds; (3) the delivery or timeliness of delivery by the Securities Depository, any Direct Participant or Indirect Participant of any notice to any Beneficial Owner which is required or permitted under the terms of the Indenture to be given to Beneficial Owners; or (4) any consent given or other action taken by the Securities Depository or the Securities Depository Nominee, as owner. In the event that the Securities Depository determines not to continue to act as securities depository for the Series 2006 Bonds, the Authority may appoint another qualified securities depository to administer the Book-Entry System. If the Authority appoints another securities depository to administer the Book-Entry System, the rules and procedures of such securities depository may differ from those described herein. If the Authority fails to identify another qualified securities depository, the Authority will cause the Trustee to authenticate and deliver fully registered Series 2006 Bonds to each Beneficial Owner. See "Discontinuation of Book-Entry System; Transfer, Exchange and Registration." In the event of an insolvency of the Securities Depository or if the Securities Depository has insufficient securities in its custody (e.g., due to theft or loss) to satisfy the claims of its Direct Participants or Indirect Participants with respect to deposited securities and is unable by application of (i) cash deposits and securities pledged to the Securities Depository to protect the Securities Depository against losses and liabilities; (ii) the proceeds of insurance maintained by the Securities Depository or its Direct Participants or Indirect Participants; or (iii) other resources, to obtain securities necessary to eliminate the insufficiency, no assurances can be given that Direct Participants or Indirect Participants will be able to obtain all of their deposited securities. The information in this section concerning the Securities Depository and the Book-Entry System has been obtained from sources that the Authority believes to be reliable, but the Authority takes no responsibility for the accuracy thereof. Discontinuation of Book-Entry System; Transfer, Exchange and Registration The Securities Depository may determine to discontinue the Book-Entry System with respect to the Series 2006 Bonds at any time upon notice to the Authority and the Trustee and upon discharge of its responsibilities with respect thereto under applicable law. Upon such notice the Book-Entry System for the Series 2006 Bonds will be discontinued unless a successor securities depository is appointed by the Authority. In addition, the Authority may discontinue the Book-Entry System for the Series 2006 Bonds at any time by reasonable notice to the Securities Depository. In the event the Book-Entry System for the Series 2006 Bonds is discontinued, Series 2006 Bonds in certificated form in authorized denominations will be physically distributed to the owners of beneficial interests in the Series 2006 Bonds, the Series 2006 Bonds will be registered in the names of the owners thereof on the registration books of the Trustee pertaining thereto, the Trustee shall make payments of principal of, premium (if any) and interest on the Series 2006 Bonds to the registered owners thereof as provided in the Series 2006 Bonds and the Indenture, and the following provisions with respect to registration, 6

11 transfer and exchange of the Series 2006 Bonds by the registered owners thereof shall apply, subject to the further conditions set forth in the Indenture with respect thereto: (a) The Series 2006 Bonds may be transferred by the registered owner in person or by authorized attorney, only on the Bond Register maintained by the Trustee and only upon surrender of the Bond to the Trustee for cancellation with a written instrument of transfer acceptable to the Trustee executed by the registered owner or his duly authorized attorney, and upon any such transfer, a new Bond of like tenor shall be issued to the transferee in exchange therefor. (b) The registered owner of any Bond in a face amount of more than $5,000 may surrender the same in exchange for more than one Bond, each in the principal amount which is an integral multiple of $5,000, having the same year of maturity as the Bond so surrendered and the same aggregate principal amount. The registered owner of two or more Series 2006 Bonds having the same principal maturity may surrender the same in exchange for a single Bond in the aggregate principal amount of the Series 2006 Bonds so surrendered. (c) The Trustee shall not be required to transfer or exchange any Bond during the period from the Record Date and the then next succeeding interest payment date; and in the event that any Bond (or any part thereof) is duly called for redemption, the Trustee shall not be required to register or transfer any such Bond during the period of forty-five (45) days next preceding the date fixed for such redemption. No charge shall be made for the privilege of transfer or exchange, but the registered owner of any Bond requesting any such transfer or exchange shall pay any tax or other governmental charge required to be paid with respect thereto. The registered owner of any Bond will be required to pay any expenses incurred in connection with the replacement of a mutilated, lost, stolen or destroyed Bond. The Indenture provides that each registered owner of the Series 2006 Bonds, by receiving or accepting the Bond, consents and agrees and is estopped to deny that, insofar as the Authority and the Trustee are concerned, the Bond may be transferred only in accordance with the provisions of the Indenture. Optional Redemption The Series 2006 Bonds maturing on April 1, 2017 and thereafter are subject to redemption at the option of the Authority on any date on or after April 1, 2016, in whole or in part and if in part in multiples of $5,000 in such amounts and order of maturities as the Authority shall determine, and by random selection within a maturity, at the redemption price for each Series 2006 Bond (or principal portion thereof) redeemed of par plus accrued interest thereon to the date fixed for redemption, without premium or penalty. Mandatory Redemption The Series 2006 Bonds with a stated maturity on April 1, 2025 (the "2025 Term Bonds") are required to be redeemed on April 1, 2024 in the principal amount of $1,715,000 at a redemption price equal to the principal amount thereof to be redeemed plus accrued interest thereon without premium or penalty. The remainder of the 2025 Term Bonds in the principal amount of $1,795,000 shall mature on April 1,

12 The Series 2006 Bonds with a stated maturity on April 1, 2028 (the "2028 Term Bonds") are required to be redeemed on April 1, 2026 and on April 1, 2027 in the following principal amounts at a redemption price equal to the applicable principal amount thereof plus accrued interest thereon, without premium or penalty: Year Amount to Be Mandatorily Redeemed 2026 $1,875, ,965,000 The remainder of the 2028 Term Bonds in the principal amount of $2,055,000 shall mature on April 1, Manner and Notice of Redemption If less than all of the Series 2006 Bonds are to be redeemed during a period in which the Book-Entry System is in effect for the Series 2006 Bonds, the Authority shall designate the order and amount of maturities of the Series 2006 Bonds (or portions thereof) to be redeemed not less than 45 nor more than 60 days prior to the redemption date and, in accordance with the Letter of Representation, the Securities Depository may determine the amount of the interest of each Direct Participant in those of such Series 2006 Bonds to be redeemed, on the basis of the smallest Authorized Denomination of such Series 2006 Bonds, by lot or by such other method as the Securities Depository shall deem fair and appropriate. If less than all of the Series 2006 Bonds at the time outstanding are redeemed, during a period in which the Book-Entry System is not in effect for the Series 2006 Bonds, any redemption shall be in such order and amount of maturities as the Authority shall determine in its sole discretion. In the event that less than all of the principal of the Series 2006 Bonds is to be redeemed, the Trustee shall assign a number to each $5,000 principal portion of all the Series 2006 Bonds and shall, by process of random selection based upon such numbers, select the principal portion of Series 2006 Bonds to be redeemed. Prior notice of such redemption shall be given by registered or certified mail to the Holder of each Series 2006 Bond, all or a portion of which is to be redeemed, not more than sixty (60) days or less than thirty (30) days prior to the proposed redemption date. Authority for Issuance. The Series 2006 Bonds are being issued by the Authority under the authority of the Constitution and laws of the State of Alabama, including particularly Article 1 of Chapter 88 of Title 11 of the Code of Alabama 1975, Section et seq. (the "Enabling Law"). The Enabling Law authorizes the incorporation in the State of public corporations for the purposes of operating water systems, sanitary sewer systems, and providing fire protection facilities, or any of them. Such corporations are empowered, among other things, to acquire, purchase, construct, operate, maintain, enlarge, extend and improve any system or systems the operation of which is provided for in the certificate of incorporation of such corporation; to refund outstanding bonds; to borrow money for any corporate function and to issue in evidence of such borrowing interest-bearing bonds payable solely from the revenues derived from the operation of any one or more of such systems; and to pledge for payment of its bonds any revenues from which such bonds are made payable and to pledge or otherwise convey as security for such bonds the revenues of such system or systems. All debts created and bonds issued by any such corporation are solely and exclusively an obligation of the corporation and shall not create an obligation or debt of any municipality or county. 8

13 SECURITY FOR SERIES 2006 BONDS; SOURCE OF PAYMENT The Series 2006 Bonds are not obligations of the State of Alabama, any county, or any other political subdivision of the State of Alabama. The Series 2006 Bonds will not constitute a charge against the general credit of the Authority. The Authority has no taxing power. The Authority has issued four bond issues: (a) $2,300,000 Water Revenue Bond, Series A, dated March 3, 1992, payable to the Farmers Home Administration (the "Series A Bond"); (b) $771,000 Water Revenue Bond, Series B, dated March 21, 1997, payable to the Farmers Home Administration (the "Series B Bond"); (c) $10,900,000 Water Revenue Bond, Series C, dated December 14, 2000, payable to the Alabama Drinking Water Finance Authority (the "Series C Bond"); and (d) $9,450,000 Water Revenue Bond, Series D, payable to the Alabama Drinking Water Finance Authority (the "Series D Bond"). The Series A Bond will be currently refunded and retired on May 17, 2006 with a portion of the proceeds of the Series 2006 Bonds. The Series B Bond will remain outstanding and will be a prior lien on the Net System Revenues. The Series C Bond and the Series D Bond will remain outstanding but will be subordinated to the Series 2006 Bonds. The Series 2006 Bonds will be limited obligations of the Authority payable solely out of the Net System Revenues, subject to the prior pledge to the Series B Bond. The Series 2006 Bonds will be secured by (a) a non-foreclosable statutory mortgage lien on the System and (b) a pledge of the Net System Revenues, both on an equal and proportionate basis with any additional parity bonds hereafter issued under the Indenture. See "APPENDIX B - SUMMARY OF THE INDENTURE - Additional Bonds." DESCRIPTION OF THE INSURER The following information has been supplied by the Insurer for inclusion in this Official Statement. No representation is made by Authority or Underwriter as to the accuracy or completeness of the information. The Insurer accepts no responsibility for the accuracy or completeness of this Official Statement or any other information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Insurer and its affiliates set forth under this heading. In addition, the Insurer makes no representation regarding the Series 2006 Bonds or the advisability of investing in the Series 2006 Bonds. 9

14 General XL Capital Assurance Inc. (the Insurer or XLCA ) is a monoline financial guaranty insurance company incorporated under the laws of the State of New York. The Insurer is currently licensed to do insurance business in, and is subject to the insurance regulation and supervision by, all fifty states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Singapore. The Insurer is an indirect wholly owned subsidiary of XL Capital Ltd, a Cayman Islands corporation ( XL Capital Ltd ). Through its subsidiaries, XL Capital Ltd is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. The common stock of XL Capital Ltd is publicly traded in the United States and listed on the New York Stock Exchange (NYSE: XL). XL Capital Ltd is not obligated to pay the debts of or claims against the Insurer. The Insurer was formerly known as The London Assurance of America Inc. ( London ), which was incorporated on July 25, 1991 under the laws of the State of New York. On February 22, 2001, XL Reinsurance America Inc. ("XL Re") acquired 100% of the stock of London. XL Re merged its former financial guaranty subsidiary, known as XL Capital Assurance Inc. (formed January 13, 1999) with and into London, with London as the surviving entity. London immediately changed its name to XL Capital Assurance Inc. All previous business of London was 100% reinsured to Royal Indemnity Company, the previous owner at the time of acquisition. XL Capital Ltd announced on April 7, 2006 that Security Capital Assurance Ltd ("SCA"), a newly created holding company for XL Capital Ltd s financial guaranty insurance and reinsurance businesses conducted through XLCA and XL Financial Assurance Ltd ("XLFA"), had filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to a proposed initial public offering of a portion of its common shares. Through its operating subsidiaries of XLCA and XLFA, SCA will provide credit enhancement products to the public finance and structured finance markets throughout the U.S. and internationally. Under the registration statement, a portion of SCA s shares will be issued and sold by SCA and a portion will be sold by SCA s parent, XL Insurance (Bermuda) Ltd, as selling shareholder. After the consummation of the offering, XL Capital Ltd is expected to beneficially own approximately 65% of SCA s outstanding shares. SCA expects to use the proceeds it receives from the offering primarily for capital contributions to its financial guaranty subsidiaries to support future business growth. SCA intends to apply to have its shares listed on the New York Stock Exchange under the ticker symbol "SCA". A copy of the registration statement is available on the U.S. Securities and Exchange Commission website at under Filings and Forms (EDGAR). 10

15 Reinsurance The Insurer has entered into a facultative quota share reinsurance agreement with XL Financial Assurance Ltd ( XLFA ), an insurance company organized under the laws of Bermuda, and an affiliate of the Insurer. Pursuant to this reinsurance agreement, the Insurer expects to cede up to 90% of its business to XLFA. The Insurer may also cede reinsurance to third parties on a transaction-specific basis, which cessions may be any or a combination of quota share, first loss or excess of loss. Such reinsurance is used by the Insurer as a risk management device and to comply with statutory and rating agency requirements and does not alter or limit the Insurer's obligations under any financial guaranty insurance policy. With respect to any transaction insured by XLCA, the percentage of risk ceded to XLFA may be less than 90% depending on certain factors including, without limitation, whether XLCA has obtained third party reinsurance covering the risk. As a result, there can be no assurance as to the percentage reinsured by XLFA of any given financial guaranty insurance policy issued by XLCA, including the Policy. Based on the audited financials of XLFA, as of December 31, 2005, XLFA had total assets, liabilities, redeemable preferred shares and shareholders equity of $1,394,081,000, $704,007,000, $39,000,000 and $651,074,000, respectively, determined in accordance with generally accepted accounting principles in the United States ( US GAAP ). XLFA s insurance financial strength is rated Aaa by Moody s and AAA by S&P and Fitch Inc. In addition, XLFA has obtained a financial enhancement rating of AAA from S&P. The obligations of XLFA to the Insurer under the reinsurance agreement described above are unconditionally guaranteed by XL Insurance (Bermuda) Ltd ("XLI"), a Bermuda exempted company and one of the world's leading excess commercial insurers. XLI is a wholly owned indirect subsidiary of XL Capital Ltd. In addition to A.M. Best s rating of A+ (Negative Outlook) and issuer credit rating of "aa-", XLI s insurance financial strength rating is Aa3 (Stable Outlook) by Moody s, A+ by Standard & Poor s and AA- (Stable Outlook) by Fitch. The rating agencies have taken certain actions with respect to XL Capital Ltd and various insurance operating subsidiaries of XL Capital Ltd, as described below. On November 22, 2005, Moody s downgraded the senior debt rating of XL Capital Ltd from "A2" to "A3" and downgraded the other insurance financial strength ratings of various insurance operating subsidiaries of XL Capital Ltd (other than XLCA and XLFA) from "Aa2" to "Aa3." On November 28, 2005, Standard & Poor s downgraded the senior debt rating of XL Capital Ltd from "A" to "A-" and downgraded the counterparty credit and financial strength ratings of various insurance operating subsidiaries of XL Capital Ltd (other than XLCA and XLFA) from "AA-" to "A+". On February 28, 2006, Fitch revised the long term issuer rating of XL Capital Ltd from "A-" to "A". On October 26, 2005, Fitch downgraded the insurer financial strength ratings of various insurance operating subsidiaries of XL Capital Ltd (other than XLCA and XLFA) from "AA" to "AA-". The ratings of XLFA, XLI or any other member of the XL Capital Ltd group of companies are not recommendations to buy, sell or hold securities, including the Series 2006 Bonds and are subject to revision or withdrawal at any time by Moody s Standard & Poor s or Fitch. Notwithstanding the capital support provided to the Insurer described in this section, the Bondholders will have direct recourse against the Insurer only, and neither XLFA nor XLI will be directly liable to the Bondholders. 11

16 Financial Strength and Financial Enhancement Ratings of XLCA The Insurer's insurance financial strength is rated Aaa by Moody s and AAA by Standard & Poor s and Fitch, Inc. ( Fitch ). In addition, XLCA has obtained a financial enhancement rating of AAA from Standard & Poor s. These ratings reflect Moody s, Standard & Poor s and Fitch's current assessment of the Insurer's creditworthiness and claims-paying ability as well as the reinsurance arrangement with XLFA described under "Reinsurance" above. The above ratings are not recommendations to buy, sell or hold securities, including the Series 2006 Bonds and are subject to revision or withdrawal at any time by Moody s, Standard & Poor s or Fitch. Any downward revision or withdrawal of these ratings may have an adverse effect on the market price of the Series 2006 Bonds. The Insurer does not guaranty the market price of the Series 2006 Bonds nor does it guaranty that the ratings on the Series 2006 Bonds will not be revised or withdrawn. Capitalization of the Insurer Based on the audited financials of XLCA, as of December 31, 2005, XLCA had total assets, liabilities, and shareholder s equity of $953,706,000, $726,758,000, and $226,948,000, respectively, determined in accordance with U.S. GAAP. Based on the unaudited statutory financial statements for XLCA as of December 31, 2005 filed with the State of New York Insurance Department, XLCA has total admitted assets of $328,231,000, total liabilities of $139,392,000, total capital and surplus of $188,839,000, and total contingency reserves of $13,031,000 determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities ( SAP ). Based on the audited statutory financial statements for XLCA as of December 31, 2004 filed with the State of New York Insurance Department, XLCA has total admitted assets of $341,937,000, total liabilities of $143,494,000, total capital and surplus of $198,443,000, and total contingency reserves of $7,342,000 determined in accordance with SAP. Incorporation by Reference of Financials For further information concerning XLCA and XLFA, see the financial statements of XLCA and XLFA, and the notes thereto, incorporated by reference in this Official Statement. The financial statements of XLCA and XLFA are included as exhibits to the periodic reports filed with the Securities and Exchange Commission (the Commission ) by XL Capital Ltd and may be reviewed at the EDGAR website maintained by the Commission. All financial statements of XLCA and XLFA included in, or as exhibits to, documents filed by XL Capital Ltd pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 on or prior to the date of this Official Statement, or after the date of this Official Statement but prior to termination of the offering of the Series 2006 Bonds, shall be deemed incorporated by reference in this Official Statement. Except for the financial statements of XLCA and XLFA, no other information contained in XL Capital Ltd's reports filed with the Commission is incorporated by reference. Copies of the statutory quarterly and annual statements filed with the State of New York Insurance Department by XLCA are available upon request to the State of New York Insurance Department. 12

17 Regulation of the Insurer The Insurer is regulated by the Superintendent of Insurance of the State of New York. In addition, the Insurer is subject to regulation by the insurance laws and regulations of the other jurisdictions in which it is licensed. As a financial guaranty insurance company licensed in the State of New York, the Insurer is subject to Article 69 of the New York Insurance Law, which, among other things, limits the business of each insurer to financial guaranty insurance and related lines, prescribes minimum standards of solvency, including minimum capital requirements, establishes contingency, loss and unearned premium reserve requirements, requires the maintenance of minimum surplus to policyholders and limits the aggregate amount of insurance which may be written and the maximum size of any single risk exposure which may be assumed. The Insurer is also required to file detailed annual financial statements with the New York Insurance Department and similar supervisory agencies in each of the other jurisdictions in which it is licensed. The extent of state insurance regulation and supervision varies by jurisdiction, but New York and most other jurisdictions have laws and regulations prescribing permitted investments and governing the payment of dividends, transactions with affiliates, mergers, consolidations, acquisitions or sales of assets and incurrence of liabilities for borrowings. THE FINANCIAL GUARANTY INSURANCE POLICIES ISSUED BY THE INSURER, INCLUDING THE INSURANCE POLICY, ARE NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The principal executive offices of the Insurer are located at 1221 Avenue of the Americas, New York, New York and its telephone number at this address is (212) RATING Standard & Poor s has assigned a rating of AAA to the Series 2006 Bonds. The rating on the Series 2006 Bonds reflects such rating agency s current assessment of the creditworthiness of the Insurer and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above rating may be obtained only from the rating agency. The above rating is not a recommendation to buy, sell or hold the Series 2006 Bonds, and such rating may be subject to revision or withdrawal at any time by the rating agency. Any downward revision or withdrawal of any such rating may have an adverse effect on the market price of the affected Series 2006 Bonds. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds are as follows: SOURCES Series 2006 Bonds $12,955, Accrued interest [1] 26, Original Issue Discount (246,572.80) Series A Reserve and Replacement Fund 250, TOTAL SOURCES $12,984,

18 USES Refunding of Series A Bond $2,100, Deposit to Construction Fund [2] 10,484, Deposit of Accrued Interest to Bond Fund 26, Cost of Issuance 188, Underwriter s Discount 155, Reserve Fund Surety Policy 29, TOTAL USES $12,984, [1] Accrued interest on the Series 2006 Bonds will be deposited in the Interest Account of the Bond Fund and applied to the payment of the first interest due on the Series 2006 Bonds. [2] Such Bond proceeds shall be used to construct capital improvements to the System. See "SERIES 2006 IMPROVEMENTS. SERIES 2006 IMPROVEMENTS The Authority s consulting engineer, G. W. Jones & Sons, Consulting Engineers, Inc., projects the total number of customers served by the Authority will continue to grow. It is estimated that in five years the Authority will need to produce 15,000,000 gallons per day and by year 2015, the Authority will need to produce 20,000,000 gallons per day based on the engineering report supplied by G. W. Jones & Sons. Along with the need for water there is also a need for wastewater treatment facilities to serve this growing area. The 2006 Improvements will meet the current needs of the Authority by construction of the following capital improvements: Series 2006 Improvements Estimated Cost (a) Water Treatment Plant - Mt. Zion Road $3,838,000 (b) Wastewater Plant - Monrovia School 3,763,000 (c) Forced main sewer line on Mt. Zion Road 750,000 (d) Discharge line for sewer plant - Monrovia 300,000 (e) Water line and new well development for water plants 500,000 (f) Wastewater plant on Burwell, 250,000 gpd 2,200,000 (g) Wastewater plant Hunters Crossing, 250,000 gpd[1] 2,200,000 (h) Water line and new well development for water plants 500,000 (i) Sewer line construction and replacement 500,000 Subtotal of Series 2006 Improvements $14,551,000 Less Money available from Series D Bond (1,200,000) Total Cost of All Series 2006 Improvements $13,351,000 14

19 [1] In lieu of constructing a new wastewater plant at Hunters Crossing, alternatively, a pump station and forced main may be constructed to carry sewage for treatment at the new Monrovia plant. The Series 2006 Bonds will provide approximately $10,300,000 of project costs for the needed improvements. The remaining capital need of $3,051,000 will be met by an additional bond issue within the next thirty-six months. THE AUTHORITY General. The Authority is a public corporation existing under the provisions of the Enabling Law ( et seq. of the Code of Alabama 1975). The Authority was incorporated in 1965 pursuant to a resolution adopted by the governing body of Madison County, Alabama. Under its Certificate of Incorporation, as last amended, the Authority has the powers, among others, to acquire, construct, improve, operate and maintain a water system and sewer system within its service area, to refund its outstanding bonds, and to issue revenue bonds for any of its corporate purposes. The Authority supplies services for domestic, commercial, agricultural, industrial, and other purposes, to persons, firms, and corporations located in the Harvest-Monrovia area. In March, 2003 the name of the Authority was officially changed to Harvest- Monrovia Water, Sewer and Fire Protection Authority, Inc. Board of Directors. The Authority consists of and is governed by three members, each of whom is appointed by the governing body of Madison County. The directors of the Authority serve on a part time basis for minimal compensation and are not active in the day to day operation of the System. The General Manager of the Authority is Roger Raby who has served in that capacity since Mr. Raby has been associated with the Authority for over 14 years. Mr. Raby is a state certified Grade 4 operator of water systems in the State of Alabama and has a business degree from Athens State University in Athens, Alabama. Water System THE SYSTEM The Water System was originally constructed with the proceeds of loans and grants from the Farmers Home Administration of the United Stated Department of Agriculture, self-generated funds of the Authority and grants and contributions from the State Revolving Fund. The System, as now constituted, consists of approximately 575 miles of mains, having diameters ranging from 6" through 30". The System's service area is approximately 45 square miles. The Authority does not operate in any incorporated area. The service area of the Authority is essentially rural residential in character though it encompasses several small commercial areas. The Authority estimates that the population of its service area is approximately 35,000. Most of the service area residents work in the cities of Huntsville and Madison, Alabama. The Authority has at present seven storage tanks ranging from 350,000 gallons to 3,000,000 gallons. Two of the storage tanks are elevated and five provide ground level storage. Present total storage for the service area is 13.5 million gallons. The existing storage tanks and their capacities are as follows: 15

20 Tank No. and Location Capacity (gallons) No. 1 - Wall Triana Highway 350,000 No. 2 - Ford Chapel Road 650,000 No. 3 - Kellywoods S/D 3,000,000 No. 4 - Ford Chapel Road 3,000,000 No. 5 - Harvest Road 3,000,000 No. 6 - Wall Triana Highway 3,000,000 No. 7 - Ridge S/D 500,000 Based on an average summer month consumption of 6.5 million gallons per day, the service area has a current reserve of two days storage, both of which exceed ADEM s two-day storage requirement. The System has one booster pump, four wells, and a 10-mgd water treatment plant. The Authority produces its water from four well sources. Two of the well sources produce 5,000 gallons and 3,000 gallons per minute, or 11.5 million gallons per day. These wells supply water to a 10 million gallon per day water treatment plant. Two other wells produce a combined total of 555 gallons per minute or 799,200 gallons per day. The water treatment plant was completed in 2003 and also includes a laboratory with water sampling and monitoring equipment manned by qualified operators 24 hours per day. Adjoining Systems The City of Huntsville and The Water and Wastewater Board of the City of Madison are the only other water and sewer systems presently in the area. Number of Water Customers The number of water customers of the Authority has been as follows: Fiscal Year Customers , , , , , , ,407 Source: The Authority The Authority anticipates growing by approximately 5%-6% each year, based on past experience. 16

21 Customer Classes The gross revenue described for each class of customers is as follows for the last three fiscal years: Number of Gross Number of Gross Number of Gross Accounts Revenue Accounts Revenue Accounts Revenue Residential Accounts 10,806 $4,665,704 10,481 $3,613,396 9,800 $3,196,604 Commercial Accounts , , ,242 Major Customer[1] Since the Authority primarily serves residential areas, the only large water customer of the Authority for the fiscal year ended December 31, 2005 was the Madison County School Board. Percent of Gallons Charges for Customer Sold/Year Billing Sales and Services Madison County School Board 54,600,000 $126, % [1] No single customer has produced or is expected to produce over 5% of the Authority's water revenues. Average Daily and Peak Water Production Average daily and peak water system production for the last five fiscal years has been as follows: Franchises Average Daily Peak Year Production Production ,429,416 6,808, ,595,373 6,823, ,409,707 7,033, ,289,222 6,143, ,174,761 5,924,000 The Authority does not hold a franchise from the City of Huntsville, in which the Authority has customers. All parts of the System which are now located within the corporate limits of Huntsville were installed prior to the time those areas were incorporated in the municipal limits. Under the law of Alabama, the Authority is entitled to maintain those parts of its System which are already in place at a time when a 17

22 municipality extends its corporate limits to a new territory, but the Authority is not entitled to extend its system beyond the facilities in existence at the time the area was included within the corporate limits. Present Water Rates Residential Rate The Authority has established the following water rates which became effective February, 2004: First 2,500 gallons Next 2,500 gallons Next 5,000 gallons Next 10,000 gallons All over 20,000 Gallons $10.00 (minimum monthly bill) 3.75 per 1,000 gallons 3.25 per 1,000 gallons 2.75 per 1,000 gallons 2.25 per 1,000 gallons Commercial Rate First 15,000 gallons $40.00 (minimum monthly bill) All over 15,000 gallons 2.00 per 1,000 gallons 2" fire hydrant meter first 5,000 gallons All over 5,000 gallons 3.50 per 1,000 gallons * Note: The above Commercial Rates apply to all services metered or unmetered such as sprinklers, fire hydrants, irrigation, etc. New Service Installation Meter Deposit 3/4" meter with impact fees paid $ /4" meter with no impact fees paid " meter " meter 3, /4" meter $ " meter " meter Rate-Making Authority The Board of Directors of the Authority has sole jurisdiction to set the rates for water service to the System's customers. These rates are not currently subject to regulation by any Federal, State of Alabama or similar agency, but are subject to judicial review as to reasonableness. Sewer System The Authority authorized sewer service to begin in May, The Authority approved a resolution that all new subdivisions to be developed after such date would be required to have wastewater treatment available before the subdivision would be approved for construction. There are two methods for sewer 18

23 treatment available to a developer and all developments are required to utilize one of these two methods of treatment before approval is granted for a development. Conventional sewer treatment is utilized if a treatment plant is in the area being developed. If there is no treatment plant in the area, a recirculating sand filter system can be utilized. The developer builds the system and then turns it over to the Authority for operation. The Authority has purchased four package sewer treatment plants that can treat up to a combined total of 105,000 gallons of wastewater per day. These systems were previously owned and operated by private companies in the service area of the Authority. The Authority has plans to expand the capacity of the sewer treatment facilities to 750,000 gallons per day to accommodate growth in the area. Sewer Rates The following rates became effective April 27, 2004: Conventional Treatment Plant Residential Rates $26.10 monthly change flat rate $ per lot inspection fee charged to developer at time of approval $2, connection fee paid by builder when paying for water service. Commercial Rates 0-15,000 gallons of water usage per month $ ,001-50,000 gallons of water usage per month ,001 to 100,000 gallons of water usage per month Over 100,000 gallons of water usage per month Impact Fees $1,000 for the first acre or less $1,000 for each additional acre or part of an acre Tap Fees $2,000 for the first acre or less $2,000 for each additional acre or part of an acre Sewer Rates for Sand Filter or Other Alternative Sewer System if Self Contained Residential Rates $36.00 monthly flat fee $ inspection and connection fee 19

24 Commercial Rates 0-15,000 gallons of water usage per month $ ,001-50,000 gallons of water usage per month ,001 to 100,000 gallons of water usage per month Over 100,000 gallons of water usage per month Impact Fees $1,000 for the first acre or less $1,000 for each additional acre or part of an acre Tap Fees $2,000 for the first acre or less $2,000 for each additional acre or part of an acre Number of Sewer Customers The number of sewer customers of the Authority for the fiscal year ending December 31, 2005 was 300. There are no other historical customer data as the sewer system just recently began operation. Regulation The Authority is subject to regulation by ADEM with respect to water quality and the addition of facilities to the System. The history of such regulation has been one of increasingly more stringent standards with attendant increase costs to the Authority to achieve compliance. Personnel The Authority presently employs 28 persons full time. The benefits and compensation for all employees of the Authority are established by the Board of Directors of the Authority. No employees of the Authority are represented by labor unions or similar employee organizations. The Authority does not bargain collectively with any labor union or employee organization and has never been subject to a work stoppage. Employee Pension Plan and Liability The Authority has since September 1, 1993 participated in the Alabama Employees Retirement System (the "State System"). See Note III, Page 29 of the Financial Statement attached hereto as Appendix A. The State System is operated by the State of Alabama for certain of its employees and employees of participating local governments and public bodies such as the Authority. The State System is not responsible for the funding of benefits of employees of participating public bodies and acts only in an administrative capacity with respect to local plans. The information given below respecting the participation of the Authority in the State System relates only to the administration of the local plan by the State System 20

25 and should not be read as indicating that the State System is in any way responsible for the funding of any benefits payable to employees of the Authority. In general, employees of public bodies electing to participate in the State System are entitled to the same benefits provided for state employees as though those local employees were state employees having comparable years of covered service. Upon such election, the State System administers the local plan, and the rates of contribution to be made by the participating local plan are determined by the Actuary for the State System. As stated above, the cost of providing benefits is borne by the participating public body, and no part of such cost is paid by the State System. Contributions are made to the State System by employees of the Authority and by the Authority. The contribution rate for participating employees is 5% of employee wages, and the Authority contributes an amount at an actuarially determined rate. For the period ended September 30, 2004 (the most recent period for which information is available), such rate was 8.15% of annual covered payroll. An actuary (herein called the "Actuary"), makes a preliminary valuation before a public body enters the State System and makes a subsequent initial valuation after entry to determine the accrued liability and the accrued liability contribution rate referable to that public body. After the initial valuation, a separate actuarial valuation is not regularly made for each public body, but the accrued liability contribution rate is adjusted from time to time to reflect changes in the benefit structure of the State System and changes in the actuarial methods and assumptions. Estimates of the accrued liability of local governments are from time to time made available by the Actuary. The Actuary is of the present opinion that payment of the recommended Authority contributions will, with the employee contributions at the rate of 5%, cover the annual normal contributions. An actuarial valuation of the accrued liability respecting the Authority is prepared by the Actuary on the basis of revised actuarial assumptions. Consequently, Authority contribution rates set forth above may be adjusted either upward or downward. The State System does not undertake to fund the retirement plans of participating public bodies and acts only in an administrative capacity, and then only upon the election of public bodies. The statute permitting such election provides that: "[T]he retirement system shall not be liable for the payment of any pensions or other benefits on account of the employees or pensioners of any employers under the section, for which reserves have not been previously created from funds contributed by such employers or its employees for such benefits." The statute further provides that the agreement of public bodies to contribute to the State System on account of their employees is irrevocable, but should the public body become financially unable to make the normal and accrued liability contribution, it would be deemed to be in default under the State System. In the event any participating public body elects to withdraw from the State System by mutual agreement with employees, the statute provides that the rights and privileges of existing beneficiaries shall not, as a result of such withdrawal, be diminished or impaired. Upon any such withdrawal, the statute requires the Actuary to certify to the public body the actuarial determination of the reserves necessary to provide 21

26 existing benefits and provides that the public body shall agree to appropriate such amounts as may be necessary to maintain existing benefits. Compensated Absences Full-time, permanent employees receive 80 hours of vacation leave and 96 hours of sick leave per year. Employees are allowed to carry-over 40 hours of unused vacation leave and 1,920 hours of unused sick leave to the following year. All accumulated vacation leave over 40 hours and accumulated sick leave over 1,920 hours must be taken by the end of each calendar year or it is lost. 22

27 TOTAL DEBT SERVICE REQUIREMENTS Set forth below are the debt service requirements on the Series 2006 Bonds and the other outstanding bonds of the Authority, which will be the only long term debt obligations of the Authority payable from the Net System Revenues. Period Ending Series 2006 Bonds Series B Series C Series D December 31 Principal Interest Bond Bond Bond Total $243, $601,049 $517,350 $1,362, $85, ,680 $48, , ,750 2,168, , ,549 49, , ,450 2,171, , ,103 48, , ,625 2,175, , ,564 49, , ,275 2,175, , ,931 48, , ,400 2,172, , ,035 48, , ,000 2,175, , ,914 48, , ,075 2,168, , ,064 48, , ,625 2,177, , ,794 48, , ,475 2,178, , ,274 48, , ,800 2,178, , ,544 49, , ,425 2,175, , ,911 49, , ,525 2,176, , ,929 48, , ,925 2,179, , ,659 48, , ,625 2,182, , ,981 49, , ,450 2,187, , ,894 49, , ,575 2,180, ,660, ,944 49, ,177, ,715,000[1] 392,006 48, ,155, ,795, ,031 48, ,156, ,875,000[2] 229,284 49, ,153, ,965,000[2] 140,484 48, ,154, ,055,000 47,522 49, ,151, , , , , , , , , , , , , , , , , , ,592 TOTAL $12,955,000 $10,653,908 $1,520,071 $13,279,697 $11,171,350 $49,580,026 [1] Mandatory redemption of 2025 Term Bonds. [2] Mandatory redemption of 2028 Term Bonds. 23

28 Historical Operating Results The operating results of the System for audited Fiscal Year 2004 and Fiscal Year 2005 are shown below. Historical operating results for Fiscal Years are shown on the following page. HARVEST-MONROVIA WATER, SEWER AND FIRE PROTECTION AUTHORITY, INC. STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2005[3] OPERATING REVENUES Water sales $3,025,912 $3,356,095 Refunds and adjustment (9,803) (12,240) Net Water Sales 3,016,109 3,343,855 Construction impact fees - Water 417, ,400 Construction impact fees - Sewer 61, ,550 Refund of state utility privilege license tax 220,092[1] -- Water user agreements 200, ,270 Miscellaneous income 51,032 87,242 Forfeited discounts 37,676 41,938 Sewer sales -- 40,063 Service charges 34,585 35,250 Sewer connection fees -- 22,500 Sewer service fees 4,591 10,470 TOTAL OPERATING REVENUES 4,043,485 4,758,538 OPERATING EXPENSES 2,967,595[2] 3,341,957 OPERATING INCOME 1,075,890 1,416,581 NONOPERATING REVENUES (EXPENSES) Interest income 131, ,186 Interest expense (894,992) (865,016) Net non-operating revenues (expenses) (763,216) (620,830) Income before capital contributions 312, ,751 CAPITAL CONTRIBUTIONS 1,120, ,592 Increase in net assets 1,433,564 1,720,343 Beginning net assets 19,703,045 21,136,609 Ending net assets $21,136,609 $22,856,952 [1] One time payment received from the State of Alabama Department of Revenue resulting from litigation described in Note II.B.2, page 29, of the Financial Statement attached hereto as Appendix A. [2] Operating Expenses include depreciation of $937,517 in and $991,294 in [3] Format for fiscal year and differs from prior years as a result of the requirements of Governmental Accounting Standards Board Statement No

29 HARVEST-MONROVIA WATER, SEWER AND FIRE PROTECTION AUTHORITY, INC. STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS YEARS ENDED DECEMBER 31, OPERATING REVENUES Water sales $2,617,071 $2,674,768 $2,317,285 $2,539,531 Refunds and adjustment (9,925) (13,351) (12,758) (9,333) NET WATER SALES 2,607,146 2,662,417 2,304,527 2,530,198 Construction impact fees 431, , , ,940 Water user agreements 238, , , ,570 Forfeited discounts 33,323 39,244 32,576 31,546 Miscellaneous income 27,834 27,164 17,372 16,377 Service charges 23,280 26,115 21,879 20,976 Sewer fees 3,913 1, Bad debt recovery ,972 2, , , , ,032 TOTAL OPERATING REVENUES 3,364,846 3,465,243 2,874,702 2,982,230 OPERATING EXPENSES 2,824,600 1,803,294 1,459,610 1,356,069[1] OPERATING INCOME 540,246 1,661,949 1,415,092 1,626,161 NONOPERATING REVENUES (EXPENSES) Interest income 127, , , ,459 Sale of surplus equipment 9, Interest expense (456,186) (184,200) (186,108) (187,310) Net non-operating revenues (expenses) (319,533) (34,708) 23,808 4,149 Net income 220,713 1,627,241 1,438,900 1,630,310 Beginning retained earnings 11,797,660 10,170,419 8,731,519 7,101,209 Ending retained earnings $12,018,373 $11,797,660 $10,170,419 $8,731,519 [1] Includes depreciation of $683,294 in ; $324,428 in ; $446,113 in ; and $382,277 in

30 Debt Service Coverages Based on December 31, 2005 Fiscal Year Based on the audited Net Revenues Before Depreciation and Interest Expense of $2,652,061 during the fiscal year ending December 31, 2005, coverage of debt service on the Series B Bond, Series C Bond, Series D Bond and the Series 2006 Bonds would be as follows: (a) Maximum annual debt service of $2,187, occurring in calendar year 2021 would be covered 1.21 times; and (b) 1.22 times. Average annual debt service (calendar years ) of $2,171,526 would be covered The Series C Bond and Series D Bond are subordinated to the payment of debt service on the Series 2006 Bonds. The Authority anticipates continued growth as shown below under "Debt Service Coverage." Debt Service Coverage Tucker, Smith & Associates, P.C., certified public accountants, Huntsville, Alabama, has prepared certain financial projections concerning future operations of the Authority attached hereto as Appendix E. Such projections are based on certain assumptions concerning additional customers, average usage, expenses and inflationary costs which may or may not materialize. While the Authority does expect growth in its service area to continue, no assurance may be given that this will occur. Even if the hypothetical assumptions described in Appendix E, Projected Statements of Operations and Signific ant Changes in Financial Position, materialize, there will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected and those differences may be material. Such projections are shown as follows: 26

31 PROJECTED STATEMENTS OF OPERATIONS AND SIGNIFICANT CHANGES IN FINANCIAL POSITION CASH BASIS WATER AND SEWER SYSTEMS YEARS ENDED DECEMBER 31 REVENUES Water revenue $4,316,961 $4,643,026 $4,969,000 $5,295,154 $5,621,219 Sewer revenue 846, ,260 1,139,900 1,286,540 1,064,860 TOTAL REVENUE 5,163,581 5,636,286 6,108,990 6,581,694 6,686,079 EXPENSES[1] Water expense 3,368,707 3,470,164 3,574,371 3,681,746 3,790,870 Sewer expense 247, , , , ,458 TOTAL EXPENSES 3,615,707 3,768,142 3,916,341 4,067,708 4,110,328 NET INCOME $1,547,874 $1,868,144 $2,192,649 $2,513,986 $2,575,751 [1] Does not include depreciation expenses or bad debt expenses. [2] Assumes additional water customer growth during of approximately 725 customers per year. This rate of growth is higher than during the past five years. Assumes the addition of 400 sewer customers per year through 2009 with 200 additional customers for The average water bill for each water customer is assumed to be twelve times $26.53, the average monthly bill of all water customers for August, Water Expenses are assumed to increase at a rate of 4.5% per year. The average sewer bill is assumed to be twelve times the average monthly bill of $30.55, which is the average of the Authority s two sewer rates. Sewer expenses are assumed to be 30% of total sewer revenue for each year. See Appendix E. Projected Coverage Ratio Calculations[1] Net Income $1,547,874 $1,868,144 $2,192,649 $2,513,986 $2,575,751 Plus Interest Expense 894, , , , ,992 Plus Interest Income 200, , , , ,000 Net Income Before Depreciation and Interest Expense 2,642,866 2,963,136 3,287,641 3,608,978 3,670,743 Maximum Annual Debt Service[2] 2,187,879 2,187,879 2,187,879 2,187,879 2,187,879 Debt Service Coverage[2] [1] Assumes 11,675 water customers as of December 31, 2006 increasing to 12,400 in 2007; 13,125 in 2008; 13,850 in 2009; and 14,575 in Assumes 700 sewer customers as of December 30, 2006, increasing to 1,100 in 2007; 1,500 in 2008; 1,900 in 2009; and 2,100 in [2] Includes debt service on the Series B Bond, Series C Bond, Series D Bond and the Series 2006 Bonds. 27

32 THE PROJECTIONS AND ESTIMATES OF REVENUES OF THE AUTHORITY AS A RESULT OF ADDITIONAL CUSTOMERS, WHILE CONSIDERED TO BE BASED ON REASONABLE ASSUMPTIONS, ARE NOT PRESENTED AND SHOULD NOT BE UNDERSTOOD OR CONSTRUED AS REPRESENTATIONS OF FACT AND NO REPRESENTATION IS MADE NOR ASSURANCE GIVEN THAT ANY OF THE ESTIMATES OR PROJECTIONS WILL BE REALIZED. THE ACHIEVEMENT OF SUCH PROJECTED INCREASES IN REVENUES WILL BE AFFECTED BY THE NUMBER OF CUSTOMERS OF THE AUTHORITY, FLUCTUATING ECONOMIC CONDITIONS, CASUALTY, LITIGATION, AND OTHER FACTORS OR CIRCUMSTANCES THAT CANNOT BE PRESENTLY DETERMINED. THE ACTUAL RESULTS ACHIEVED MAY VARY FROM SUCH PROJECTIONS AND ESTIMATES. FURTHER, THE ESTIMATES AND PROJECTIONS SHOULD NOT BE CONSIDERED AS A FEASIBILITY STUDY BECAUSE THE ESTIMATES AND PROJECTIONS DO NOT INCLUDE ALL CHECKS, TESTS, FINANCIAL INFORMATION AND DEMOGRAPHIC DATA ON WHICH FEASIBILITY STUDIES WOULD BE BASED OR WHICH THE PREPARER OF SUCH A STUDY WOULD REQUIRE. GENERAL INFORMATION The Series 2006 Bonds are limited obligations of the Authority payable solely out of the revenues of the System subject to the prior pledge to the Series B Bond. The Series 2006 Bonds are not an obligation of any county or municipality. The following information pertaining to Madison County is presented solely in order to give prospective purchasers of the Series 2006 Bonds certain information about the general area in which customers of the Authority may be employed. The service area of the Authority is generally rural in character. Geographic Information The area served by the Authority is primarily residential, with some commercial customers. The majority of inhabitants reside in single family residences. A substantial percentage of the residents in the service area perform an outside job rather than relying on agriculture for their living. Many residents in the Authority's service area work in Huntsville, Madison, and Decatur, which are the commercial and manufacturing centers of the area. General ECONOMIC AND DEMOGRAPHIC INFORMATION RESPECTING MADISON COUNTY AS A WHOLE Madison County is located in the north-central part of the State of Alabama and is bordered on the east by Jackson County, on the north by the State of Tennessee, on the west by Limestone County and on the south by Morgan and Marshall counties. The City of Huntsville is the county seat. Huntsville, along with the City of Madison, constitutes the principal urban areas in the County. Madison is approximately 70 miles north of Birmingham, Alabama. The County has a diversified industrial base and is home to manufacturers producing electronics, space and missile products, space vehicles and parts, aerospace products and services, automotive supplies, plastics, apparel, poultry, and manufactured housing. The County is served by Interstate 565, U.S. Highways 431 and 231 and State Highways 53 and

33 Economy In recent years, much of Madison County s economic growth has derived from several large manufacturing facilities, primarily in the electronics and space and aerospace industries. The service area of the Authority has also benefitted from the expansion of the electronics and defense industries in Madison County. The economy of the Authority s service area has experienced stability and moderate growth during recent years. The prospects for future economic growth depend upon the national economy, industrial development in the service area and economic growth in the Madison/Huntsville area. Population - Madison County The following table sets forth certain historical population statistics relating to Madison County: Census Year Madison County , , , ,540 Source: U.S. Department of Commerce, Bureau of the Census Per Capita Income - County Estimated per capita income levels in Madison County and the State of Alabama have been as follows for the years indicated: Year Madison County State of Alabama 2000 $28,995 $23, ,049 22, ,224 21, ,106 20, ,858 20, ,139 19, ,164 18, ,814 17,901 Source: U.S. Department of Commerce; Economics and Statistics Administration, Bureau of Economic Analysis 29

34 Median Family Income - Madison County Estimated median family income levels in Madison County and the State of Alabama have been as follows: Madison State of Year County Alabama Source: Alabama County Data Book Major Employers 2000 $54,360 $41, ,264 28, ,350 16, ,439 7,266 A number of residents in the Authority's service area work in the City of Huntsville and the City of Madison. The largest employers in the City of Madison and the City of Huntsville are as follows: City of Madison Approximate Industry Product Employment Intergraph Corporation Computer sales 1,000 Madison City School System Education 550 Wal-Mart Super Center Department store 430 City of Madison Municipality 228 Verilink Corporation Telecommunications 200 Kroger Company Grocery store 170 Lowe s Home Improvement Warehouse Home improvement store 160 K-Mart Department store 125 Winn-Dixie Grocery store 125 Cracker Barrel Restaurant 120 Valleyview Nursing Home Nursing home 120 Packaging Materials Containers 115 Ruby Tuesday s Restaurant 110 Bruno s Grocery store 100 Holiday Inn Hotel 90 Halsey Grocery Company Wholesale food 90 Madison Manor Nursing home 86 Excellance Corporation Ambulances 75 Nextel Electronic equipment 74 Applebee s Restaurant 60 The Park at Madison Entertainment 55 Water and Wastewater Board Water and sewer services 48 SEA Wire & Cable Corporation Computer cable 45 Soldering Technology Soldering training and supplies 40 Label-Aid Corporation Labels 40 Source: City of Madison 30

35 City of Huntsville Approximate Industry Product Employment U.S. Army/Redstone Arsenal Government 14,599 Huntsville Hospital System Health care 4,320 The Boeing Company Engineering services 3,092 Huntsville City Schools Education 2,700 NASA/Marshall Space Flight Center Government 2,676 Wal-Mart Stores Retail 2,300 CINRAM Audio/video replication 2,200 Intergraph Corporation Computer equipment 2,097 Madison County Schools Education 2,033 SAIC Engineering services 2,031 Sanmina-SCI Corporation Electronic components 2,013 City of Huntsville Government 2,000 Siemens VDO Automotive Electronic equipment 2,000 ADTRAN Telecommunications 1,744 University of Alabama in Huntsville Education 1,589 Teledyne Brown Engineering Engineering services 1,451 Northrop Grumman Engineering services 1,200 Madison County Government 1,100 West Corporation Customer services 1,100 Direct TV Customer services 1,000 Alabama A&M University Education 982 Madison City Schools Education 950 LG Electronics, Inc. Electronic devices 900 Lockheed Martin Aerospace and defense 844 Crestwood Medical Center Health care 840 Benchmark Electronics, Inc. Engineering services 800 Palco Telecom Service, Inc. Telecommunications 800 Target Distribution Center Retail 800 Toyota Motor Manufacturing Alabama Automotive engines 800 COLSA Corporation Engineering services 700 Computer Sciences Corporation (CSC) Engineering services 700 Jacobs Sverdrup Technology Engineering services 639 CAS, Inc. Engineering services 630 Redstone Federal Credit Union Financial services 604 Dynetics, Inc. Engineering services 600 PPG Industries, Inc. Aircraft parts 550 Raytheon Company Engineering services 528 Engelhard Corporation Motor vehicle parts 520 Huntsville Utilities Utilities 516 Source: Chamber of Commerce of Huntsville/Madison County 31

36 Education Education rates for Madison County and the State are as follows according to the 2000 Census: Madison County State High School Graduate 85.4% 75.3% College Graduates % The County Board of Education of Madison County provides public school facilities for the students located outside the City of Huntsville and the City of Madison. The City of Huntsville and the City of Madison have their own independent school systems. Residents of the area have access to the University of Alabama-Huntsville, Alabama A & M University and Calhoun Community College for higher education opportunities. Housing Value The median value of owner occupied residences in Madison County has been as follows: Madison State of Year County Alabama 1999 $103,300 $85, ,900 55,700 Assessed Valuation of Taxable Property The total net assessed valuations of taxable property in Madison County have been as follows for the periods indicated: Fiscal Year Ending Real and Motor September 30 Personal Property Vehicles Total 2005 $2,847,330,680 $399,306,660 $3,246,637, ,350,976, ,749,360 2,733,726, ,213,636, ,191,580 2,580,827, ,147,762, ,528,860 2,514,291, ,005,372, ,147,380 2,354,519,820 Source: License Commissioner and Tax Assessor of Madison County 32

37 Unemployment Rate The unemployment rate in Madison County and the State of Alabama has been historically as follows: Madison County State of Alabama 2006 (February) 3.3% 3.6% Source: State Department of Industrial Relations UNDERWRITING The Series 2006 Bonds are being purchased by Merchant Capital L.L.C. (the "Underwriter") at a price of $12,552, (par amount less underwriter s discount of $155,460 and a net original issue discount of $246,572.80) plus accrued interest to the date of delivery. LEGAL MATTERS The legality and validity of the Series 2006 Bonds are being approved by Walston, Wells & Birchall, LLP, Bond Counsel, Birmingham, Alabama, whose approving opinion will be printed on the Series 2006 Bonds. The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. By rendering a legal opinion, the opinion giver does not become an insurer or guarantor of that expression of 33

38 professional judgment, of the transaction opined upon, or of the future performance of parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. TAX EXEMPTION In the opinion of Bond Counsel, Walston, Wells & Birchall, LLP, assuming the accuracy of certain representations and the compliance with certain covenants made in the Indenture by the Authority with respect to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), interest on the Series 2006 Bonds is presently excludable from gross income for federal income taxation pursuant to Section 103 of the Code, regulations and rulings of the Commissioner of Internal Revenue pertinent thereunder, and court decisions heretofore rendered. Bond Counsel is also of the opinion that interest on the Series 2006 Bonds is exempt from income taxation by the State of Alabama. Interest on the Series 2006 Bonds is not an item of tax preference to be included in calculating alternative minimum taxable income for purposes of the alternative minimum tax imposed on individuals and corporations. Interest on a Series 2006 Bond held by a corporation (other than an S corporation, regulated investment company, real estate trust or real estate mortgage investment conduit) may be indirectly subject to the corporate alternative minimum tax because of its inclusion in the reported income or earnings and profits of the corporate holder. Also, interest on Series 2006 Bonds held by a foreign corporation may be subject to the branch profits tax imposed by the Code. Ownership of the Series 2006 Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, certain S corporations, individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred (or continued) indebtedness to purchase or carry the Series 2006 Bonds. Prospective purchasers of the Series 2006 Bonds should consult with their tax advisors as to the applicability of any such collateral consequences. The Authority has covenanted that the applicable requirements of the Code will be met as long as the Series 2006 Bonds are outstanding. The exclusion from gross income for federal income tax purposes of the interest on the Series 2006 Bonds depends on and is subject to compliance with respect to the applicable requirements of the Code. A failure to comply with these requirements could cause interest on the Series 2006 Bonds to be deemed not excludable from gross income for federal income tax purposes as of the date of issuance of the Series 2006 Bonds or as of some later date. No assurances can be given that federal legislation will not be introduced and enacted which could adversely affect the exclusion of interest on the Series 2006 Bonds from gross income for federal income taxation or the tax treatment of certain owners of the Series 2006 Bonds as a result of the receipt of such interest. Neither the Series 2006 Bonds nor the Indenture contains any provision for an increase in the rates of interest applicable to the Series 2006 Bonds or for the mandatory redemption of the Series 2006 Bonds, in the event the interest thereon should become includable in gross income for federal income taxation after their date of issuance. 34

39 INVESTMENT INFORMATION FOR FINANCIAL INSTITUTIONS The Authority has not designated the Series 2006 Bonds as "qualified tax-exempt obligations" for purposes of paragraph (3) of subsection (b) of Section 265 of the Code. The Series 2006 Bonds should not be treated as being bank qualified. ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT OR PREMIUM The Series 2006 Bonds are being offered to the public at the prices shown on the cover page hereof which reflect a purchase discount or premium from their respective face amounts. Under present federal income tax law, the difference between the Issue Price (defined below) and the stated amount to be paid at the maturity of a Series 2006 Bond is original issue discount ("OID"). OID is treated as interest on the Series 2006 Bonds and is not includable in gross income for federal income tax purposes in the case of holders who (i) purchase the Series 2006 Bonds at the initial offering price in the initial public offering at which a substantial amount of the Series 2006 Bonds are sold to the public (the "Issue Price"), and (ii) hold such Series 2006 Bonds to maturity. Generally, a holder who acquires a Series 2006 Bond in the initial public offering at the Issue Price will be treated as having received, in each taxable year from the date of issuance of that Bond, an amount of interest on that Bond equal to the OID accrued daily and compounded semiannually on each interest payment date. The amount of interest representing OID that is treated as having been received is excluded from gross income and is added to the holder's adjusted basis in the Bond for the purpose of determining gain or loss upon a sale or redemption of such Bond. OID on the Series 2006 Bonds will be deemed to have been received in the year of accrual and will be taken into account in determining the respective amounts of the collateral federal taxes referred to herein and, in some cases, state and local income, excise and franchise taxes, even though the holders of the Series 2006 Bonds will not have received corresponding cash payments. Holders of the Series 2006 Bonds should consult their own tax advisors as to the tax consequences of the purchase of the Series 2006 Bonds other than at the Issue Price, and as to the consequences of a sale, transfer, redemption or other disposition of such Bonds prior to their stated maturity, other applications of federal tax law and the application of state, local or foreign laws. An amount equal to the excess of the purchase price of the Series 2006 Bonds over its stated redemption price at maturity constitutes premium on such Series 2006 Bond. A purchaser of a Series 2006 Bond must amortize any premium over such Series 2006 Bond's term using constant yield principles, based on the purchaser's yield to maturity. As premium is amortized, the purchaser's basis in such Series 2006 Bond is reduced by a corresponding amount, resulting in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes upon a sale or disposition of such Series 2006 Bond prior to its maturity. Even though the purchaser's basis is reduced, no federal income tax deduction is allowed. Purchasers of any Series 2006 Bonds at a premium, whether at the time of initial issuance or subsequent thereto, should consult with their own tax advisors with respect to the determination and treatment of premium for federal income tax purposes and with respect to state and local tax consequences of owning such Series 2006 Bonds. 35

40 LITIGATION There is not now pending any litigation restraining, enjoining, or in any manner questioning or affecting: the creation, organization or existence of the Authority; the title of the present members or officers of the Authority to their respective offices; the validity of the Series 2006 Bonds; the proceedings and authority under which the Series 2006 Bonds are to be issued; or the pledge of the Net System Revenues to the payment of the Series 2006 Bonds. The State of Alabama Department of Revenue audited the Authority in October, The auditors concluded that the Authority had been underpaying state utility privilege license tax on water sales. The underpayment was the result of the misinterpretation of the vaguely worded instructions for the computation of the amount of utility sales tax to be remitted. The State computed the underpayment to be $182,133 and added a penalty of $1,064 and interest of $36,895, for a total balance due of $220,092. This balance was paid, under protest, on April 29, The Authority s legal counsel filed a petition for refund in Circuit Court. The judge ruled in the Authority s favor, and a total of $220,092 in tax was refunded for the period from October 1996 through September In addition, the Authority received $12,283 in interest from the Department of Revenue. FEDERAL BANKRUPTCY CODE The remedies available to the Trustee or the registered owners of the Series 2006 Bonds upon an Event of Default under the Indenture are in many respect dependent upon judicial action whic h is often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including specifically Title 11 of the United States Code (the federal bankruptcy code), the remedies provided in the Indenture may not be readily available or may be limited. The rights and remedies of the registered owners of the Series 2006 Bonds are subject to the provisions of Chapter 9 of Title 11 of the United States Code (Bankruptcy). Title 11 permits under certain specific circumstances (but only after authorization by the legislature or by a governmental officer or organization empowered by state law to give such authorization), a political subdivision of a state, such as the Authority, to file a petition for relief in the U.S. District Court for the district in which the political subdivision is located if it is insolvent or unable to meet its debts as they mature and desires to effect a plan to adjust its debts. Under the Bankruptcy Code, the filing of such a petition operates as an "automatic" stay of the commencement or the continuation of any judicial or other proceeding against the petitioner, its property or any officer or inhabitant of the petitioner. Chapter 9 also permits a political subdivision that files such a petition to issue, with the approval of the Court, certificate of indebtedness having priority over pre-existing obligations. Any political subdivision filing a petition for relief under Chapter 9 must in due course file a plan for the adjustment of its debts, and such plan may include provisions modifying or altering the rights of creditors generally, or any class of them, secured and unsecured. Such plan, when confirmed by the Court, binds all creditors who had timely notice or actual knowledge of the petition or plan and discharges all claims against the petitioning political subdivision provided for in the plan. No plan may, however, be confirmed by the Court unless certain conditions occur, which include either (1) that the plan has been accepted in writing by twothirds (2/3) in the amount and more than fifty percent (50%) in number of the allowed claims of each class 36

41 which is impaired by the plan, or (2) the Court finds that the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims that is impaired under, and has not accepted, the plan. Prospective purchasers of the Series 2006 Bonds should assume that existing Alabama statues authorized the Authority to file a petition for relief under Chapter 9 of Title 11 of the United States Code. APPENDICES The Appendices of this Official Statement contain information concerning the Authority and the Series 2006 Bonds. Each such Appendix is an integral part of this Official Statement and should be read in its entirety. The Appendices include: Appendix A - Appendix B - Appendix C - Appendix D - Appendix E - Appendix F - Appendix G - Audited Financial Statements of Authority for the 2004 Fiscal Year Summary of the Indenture Proposed Opinion of Bond Counsel Preliminary Engineering Report Projected Statements of Operations and Significant Changes in Financial Position Specimen Financial Guaranty Insurance Policy Specimen Debt Service Reserve Insurance Policy The financial statements included in this Official Statement as Appendix A have been examined to the extent set forth in its report by Tucker, Smith & Associates, P.C., Certified Public Accountants, Huntsville, Alabama, and are included in reliance upon the report of such accountants and upon their authority as experts in auditing and accounting. RISK FACTORS An investment in the Series 2006 Bonds involves certain risks which should be carefully considered by investors. Prospective investors should carefully examine this Official Statement and their own financial condition in order to make a judgment as to their ability to bear the economic risk of such an investment and whether or not the Series 2006 Bonds are an appropriate investment for them. Such risks include the following, among others: 1. The sufficiency of revenues to pay debt service on the Series 2006 Bonds may be affected by events and conditions relating generally to, among other things, population trends and economic developments in the service area of the System, litigation, the availability of water to the Authority, federal and state environmental regulations, and other circumstances, the exact nature and extent of which are not presently determinable. 2. The ability of the Authority to pay debt service on the Series 2006 Bonds or to comply with its rate covenant is based on certain estimates of revenues to be derived from the System and estimates as to certain levels of operating expenses. There is no assurance that such estimates will be realized. 37

42 3. Recent studies conducted by various study teams, task forces and other state-related agencies have indicated that the quantity of potable water in Alabama is less than has been available in earlier years and, in the future, restrictions on use of water, availability of water supplies and other such matters which could have an adverse impact on the revenues of the Authority and more restrictive rules as to usage may be imposed by state or federal regulatory agencies. 4. More stringent standards of water quality and testing to assure such standards are maintained than have heretofore been applicable may impose additional costs on the Authority in the treatment of water prior to its sale and increase the cost of water to the Authority. This may reduce the amount of revenues of the Authority available for debt service to the extent it is not able to pass those increased costs on to its customers through increases in its rates. 5. The Authority faces risks of competition for customers from surrounding water systems. 6. The construction of the Series 2006 Improvements has certain risks inherent to any construction project. There may be no assurance that the Series 2006 Improvements will be constructed within budget or that such Series 2006 Improvements will satisfy the purposes for which they were intended. CONTINUING DISCLOSURE UNDERTAKING (a) The Authority has agreed, in the Indenture and in accordance with the requirements of Rule 15c2-12 (the "Rule") promulgated by the Securities and Exchange Commission (the "Commission"), pursuant to the Securities Exchange Act of 1934, to provide, or cause to be provided, in the case of audited financial statements referred to in clause (1) below, when available and in all other cases, within 180 days after the close of each fiscal year of the Authority, the following (1) to the Insurer, to the appropriate state information depository ("SID"), if any, for the State of Alabama and to each nationally recognized municipal securities information repository ("NRMSIR"), designated by the Commission in accordance with the Rule, audited general purpose financial statements of the Authority and notes thereto, prepared in accordance with generally accepted accounting principles; and (2) unless included in the audited financial statements referred to in clause (1) above, unaudited operating information with respect to the Authority generally as set forth in this Official Statement under the section entitled "THE SYSTEM" and other general operating information as set forth therein. The Authority has also agreed, in a timely manner, to notify to the Insurer, the SID, if any, each NRMSIR or the MSRB notice of a failure by the Authority to provide the required annual financial information on or before the specified date. The Authority has further agreed, in a timely manner, to provide to to the Insurer, to each NRMSIR, to the Municipal Securities Rulemaking Board ("MSRB"), and to the SID, notice of the occurrence of any of the following events with respect to the Series 2006 Bonds, if, in the judgement of the Authority, such event is material: (i) principal and interest payments delinquencies, (ii) non- 38

43 payment related defaults, (iii) unscheduled draws on debt servic e reserves reflecting financial difficulties, (iv) unscheduled draws on credit enhancements reflecting financial difficulties, (v) substitution of credit or liquidity providers, or their failure to perform, (vi) adverse tax opinions or events affecting the tax-exempt status of the Series 2006 Bonds, (vii) modifications to rights of holders of the Series 2006 Bonds, (viii) calls for redemption, (ix) defeasances, (x) rating changes, and (xi) release, substitution or sale of property securing repayment of the securities. (b) The Authority has reserved the right to modify from time to time the specific types of information provided or the format of the presentation of such information, to the extent necessary or appropriate in the judgement of the Authority; provided that, the Authority has agreed that any such modification will be done in a manner consistent with the Rule. (c) The Authority has reserved the right to terminate its obligation to provide financial information and notices of material events, as set forth above, if and when the Authority no longer remains an obligated person with respect to the Series 2006 Bonds within the meaning of the Rule. (d) The Authority has agreed that its undertaking pursuant to the Rule set forth herein is intended to be for the benefit of the registered owners of the Series 2006 Bonds and shall be enforceable by the registered owners; provided that, the registered owners' rights to enforce the provisions of this undertaking shall be limited to a right to obtain specific enforcement of the Authority's obligations hereunder and any failure by the Authority to comply with the provisions of this undertaking shall not be an event of default with respect to the Series 2006 Bonds and shall not subject the Authority to money damages in any amount, whether compensatory, penal or otherwise. (e) The Authority has agreed that the following person has been designated as the contact person on behalf of the Authority from whom the foregoing information, data, and notices can be obtained. The name, address and telephone number of the initial contact persons are: Roger Raby, General Manager Harvest-Monrovia Water, Sewer and Fire Protection Authority, Inc Wall-Triana Highway Harvest, AL Telephone: (256) Fax: (256) rraby@hmwater.org 39

44 MISCELLANEOUS Neither this Official Statement nor any statement which may have been made orally or in writing is to be construed as a contract with the registered owners of any of the Series 2006 Bonds. All estimates, whether or not so stated, are not to be construed as representations that they will be realized. This Official Statement has been approved by the Board of Directors of the Authority. HARVEST-MONROVIA WATER, SEWER AND FIRE PROTECTION AUTHORITY, INC. By /s/ Scott Schrimsher Chairman 40

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