OFFICIAL STATEMENT DATED AUGUST 3, 2010

Transcription

1 OFFICIAL STATEMENT DATED AUGUST 3, 2010 IN THE OPINION OF BOND COUNSEL, INTEREST ON THE BONDS IS EXCLUDABLE FROM GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES UNDER EXISTING LAW AND IS NOT SUBJECT TO THE ALTERNATIVE MINIMUM TAX ON INDIVIDUALS OR CORPORATIONS. SEE LEGAL MATTERS TAX EXEMPTION FOR A DISCUSSION OF THE OPINION OF BOND COUNSEL. THE BONDS HAVE BEEN DESIGNATED QUALIFIED TAX-EXEMPT OBLIGATIONS FOR FINANCIAL INSTITUTIONS. SEE LEGAL MATTERS Qualified Tax Exempt Obligations. NEW ISSUE-Book-Entry-Only $4,575,000 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 (A political subdivision of the State of Texas located within Montgomery County) UNLIMITED TAX BONDS SERIES 2010 The bonds described above (the Bonds ) are obligations solely of Montgomery County Municipal Utility District No. 112 (the District ) and are not obligations of the State of Texas, Montgomery County, the City of Conroe or any entity other than the District. THE PURCHASE AND OWNERSHIP OF THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS AND ALL PROSPECTIVE PURCHASERS ARE URGED TO EXAMINE CAREFULLY THIS ENTIRE OFFICIAL STATEMENT WITH RESPECT TO THE INVESTMENT SECURITY OF THE BONDS, INCLUDING PARTICULARLY THE SECTION CAPTIONED INVESTMENT CONSIDERATIONS. Dated: August 1, 2010 Due: October 1, as shown below Principal of the Bonds is payable at maturity or earlier redemption at the principal payment office of the paying agent/registrar, initially The Bank of New York Mellon Trust Company, N.A., Dallas, Texas (the Paying Agent/Registrar ). Interest on the Bonds accrues from August 1, 2010, and is payable each April 1 and October 1, commencing April 1, 2011, until maturity or prior redemption. The Bonds will be issued only in fully registered form in denominations of $5,000 each or integral multiples thereof. The Bonds are subject to redemption prior to their maturity, as shown below. The Bonds will be registered and delivered only in the name of Cede & Co., as nominee for the Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Bonds. Beneficial Owners (as herein defined) of the Bonds will not receive physical certificates representing the Bonds, but will receive a credit balance on the books of the nominees of such Beneficial Owners. So long as Cede & Co. is the registered owner of the Bonds, the principal of and interest on the Bonds will be paid by the Paying Agent/Registrar, as defined herein, directly to DTC, which will, in turn, remit such principal and interest to its participants for subsequent disbursement to the Beneficial Owners of the Bonds. See BOOK-ENTRY-ONLY SYSTEM. MATURITY SCHEDULE Initial Initial Principal Maturity CUSIP Interest Reoffering Principal Maturity CUSIP Interest Reoffering Amount (October 1) Number(b) Rate Yield(c) Amount (October 1) Number(b) Rate Yield(c) $ 95, Y AA % % $ 145, (a) 61370Y AJ % % 100, Y AB , (a) 61370Y AK , Y AC , (a) 61370Y AL , Y AD , (a) 61370Y AM , Y AE , (a) 61370Y AN , Y AF , (a) 61370Y AP , (a) 61370Y AG , (a) 61370Y AQ , (a) 61370Y AH , (a) 61370Y AR $720,000 Term Bonds due October 1, 2030 (a), CUSIP 61370Y AU3 (b), 5.000% Interest Rate, 5.000% Yield (c) $555,000 Term Bonds due October 1, 2032 (a), CUSIP 61370Y AW9 (b), 5.000% Interest Rate, 5.100% Yield (c) $955,000 Term Bonds due October 1, 2035 (a), CUSIP 61370Y AZ2 (b), 5.100% Interest Rate, 5.200% Yield (c) (a) (b) (c) Bonds maturing on or after October 1, 2018, are subject to redemption prior to maturity at the option of the District, in whole or, from time to time, in part, on October 1, 2017, or on any date thereafter, at a price equal to par plus accrued interest from the most recent interest payment date to the date fixed for redemption. The Term Bonds are also subject to mandatory sinking fund redemption as described herein. See THE BONDS Redemption Provisions. CUSIP Numbers have been assigned to the Bonds by CUSIP Service Bureau and are included solely for the convenience of the purchasers of the Bonds. Neither the District nor the Underwriter (as herein defined) shall be responsible for the selection or correctness of the CUSIP Numbers set forth herein. Initial reoffering yield represents the initial offering yield to the public, which has been established by the Underwriter (as herein defined) for offers to the public and which may be subsequently changed by the Underwriter and is the sole responsibility of the Underwriter. The initial reoffering yields indicated above represent the lower of the yields resulting when priced to maturity or to the first call date. The Bonds, when issued, will constitute valid and legally binding obligations of the District and will be payable from the proceeds of an annual ad valorem tax, without legal limitation as to rate or amount, levied upon all taxable property within the District, as further described herein. The Bonds are offered when, as and if issued by the District, subject, among other things, to the approval of the Bonds by the Attorney General of Texas and the approval of certain legal matters by Coats Rose Yale Ryman & Lee, Houston, Texas, Bond Counsel. Delivery of the Bonds in book-entry form through the facilities of DTC is expected on or about August 31, 2010.

2 TABLE OF CONTENTS USE OF INFORMATION IN OFFICIAL STATEMENT... 3 SALE AND DISTRIBUTION OF THE BONDS... 4 Award of the Bonds... 4 Prices and Marketability... 4 Securities Laws... 4 OFFICIAL STATEMENT SUMMARY... 5 SELECTED FINANCIAL INFORMATION (UNAUDITED)... 7 RISK FACTORS... 8 General... 8 Economic Factors and Interest Rates... 8 Credit Markets and Liquidity in the Financial Markets 8 National Economy... 9 Competition... 9 Maximum Impact on District Tax Rate... 9 Undeveloped Acreage and Vacant Lots... 9 Dependence on Major Taxpayers and the Developer... 9 District Operations Developer Under No Obligation to the District Tax Collections Limitations and Foreclosure Remedies Registered Owners Remedies Bankruptcy Limitation to Registered Owners' Rights 11 Future Debt Environmental Regulation Marketability of the Bonds Continuing Compliance with Certain Covenants THE BONDS General Authority for Issuance Source of and Security for Payment Funds No Arbitrage Redemption Provisions Registration and Transfer Method of Payment of Principal and Interest Replacement of Paying Agent/Registrar Issuance of Additional Debt Financing Recreational Facilities Annexation by the City of Conroe Strategic Partnership Consolidation Remedies in Event of Default Legal Investment and Eligibility to Secure Public Funds in Texas Defeasance BOOK-ENTRY-ONLY SYSTEM USE AND DISTRIBUTION OF BOND PROCEEDS.. 19 THE DISTRICT General Description and Location Land Use Status of Development MANAGEMENT OF THE DISTRICT Board of Directors District Consultants THE DEVELOPER Role of a Developer D. R. Horton, Inc Development Financing THE SYSTEM Water Supply Wastewater Treatment Water Distribution, Wastewater Collection and Storm Drainage Facilities Flood Protection Regulation Waterworks and Sewer System Operating Statement FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Investments of the District Debt Service Requirements Estimated Overlapping Debt Overlapping Taxes TAX DATA Debt Service Tax Maintenance Tax Tax Rate Distribution Historical Tax Collections Tax Roll Information Principal Taxpayers Tax Adequacy for Debt Service TAXING PROCEDURES Authority to Levy Taxes Property Tax Code and County-Wide Appraisal District Property Subject to Taxation by the District Tax Abatement Valuation of Property for Taxation District and Taxpayer Remedies Levy and Collection of Taxes Rollback of Operation and Maintenance Tax Rate District's Rights in the Event of Tax Delinquencies LEGAL MATTERS Legal Opinions No-Litigation Certificate Qualified Tax-Exempt Obligations - Purchase of the Bonds by Financial Institutions No Material Adverse Change Tax Exemption Tax Accounting Treatment of Discount and Premium on Certain Bonds PREPARATION OF OFFICIAL STATEMENT Sources and Compilation of Information Financial Advisor Consultants Updating the Official Statement Certification of Official Statement CONTINUING DISCLOSURE OF INFORMATION Annual Reports Material Event Notices Availability of Information from MSRB Limitations and Amendments Compliance With Prior Undertakings MISCELLANEOUS AERIAL LOCATION MAP PHOTOGRAPHS OF THE DISTRICT APPENDIX A District s Audited Financial Statements for the Fiscal Year Ended December 31,

3 USE OF INFORMATION IN OFFICIAL STATEMENT No dealer, broker, salesman or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon as having been authorized by the District. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. All of the summaries of the statutes, orders, contracts, audited financial statements, engineering and other related reports set forth in this Official Statement are made subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions, and reference is made to such documents, copies of which are available from Coats Rose Yale Ryman & Lee, 3 East Greenway Plaza, Suite 2000, Houston, Texas, upon payment of the costs of duplication therefor. This Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions or matters of opinion, or as to the likelihood that they will be realized. Any information and expressions of opinion herein contained are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described herein since the date hereof. However, the District has agreed to keep this Official Statement current by amendment or sticker to reflect material changes in the affairs of the District and, to the extent that information actually comes to its attention, the other matters described in this Official Statement until delivery of the Bonds to the Underwriter (as herein defined) and thereafter only as specified in PREPARATION OF THE OFFICIAL STATEMENT Updating the Official Statement and CONTINUING DISCLOSURE OF INFORMATION. 3

4 SALE AND DISTRIBUTION OF THE BONDS Award of the Bonds After requesting competitive bids for the Bonds, the District accepted the bid resulting in the lowest net effective interest rate, which bid was tendered by Southwest Securities, Inc. (the Underwriter ) bearing the interest rates shown on the cover page hereof, at a price of 97.20% of the par value thereof plus accrued interest to the date of delivery which resulted in a net effective interest rate of % as calculated pursuant to Chapter 1204, Texas Government Code (the IBA method). Prices and Marketability The delivery of the Bonds is conditioned upon the receipt by the District of a certificate executed and delivered by the Underwriter on or before the date of delivery of the Bonds stating (i) the prices at which a substantial amount of the Bonds of each maturity have been sold to the public, and/or (ii) the price at which the Underwriter reasonably expected to sell a substantial amount of the Bonds of a particular maturity to the public, but for which a substantial amount of such maturity has not been sold to the public. For this purpose, the term public shall not include any person who is a bond house, broker or similar person acting in the capacity of underwriter or wholesaler. Otherwise, the District has no understanding with the Underwriter regarding the initial reoffering yields or prices of the Bonds. Information concerning initial reoffering yields or prices is the responsibility of the Underwriter. The prices and other terms with respect to the offering and sale of the Bonds may be changed from time-to-time by the Underwriter after the Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Bonds into investment accounts. In connection with the offering of the Bonds, the Underwriter may over-allot or effect transactions which stabilize or maintain the market prices of the Bonds at levels above those which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The District has no control over trading of the Bonds in the secondary market. Moreover, there is no guarantee that a secondary market will be made in the Bonds. In such a secondary market, the difference between the bid and asked price of the Bonds may be greater than the difference between the bid and asked price of bonds of comparable maturity and quality issued by more traditional municipal entities, as bonds of such entities are more generally bought, sold or traded in the secondary market. Securities Laws No registration statement relating to the offer and sale of the Bonds has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities laws of any other jurisdiction. The District assumes no responsibility for registration or qualification of the Bonds under the securities laws of any other jurisdiction in which the Bonds may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such other jurisdiction. 4

5 OFFICIAL STATEMENT SUMMARY The following is a brief summary of certain information contained herein which is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Official Statement. The summary should not be detached and should be used in conjunction with more complete information contained herein. A full review should be made of the entire Official Statement and of the documents summarized or described therein. THE DISTRICT Description... The District is a political subdivision of the State of Texas, created on December 21, 2006, by order of the Texas Commission on Environmental Quality (the TCEQ ), and operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended. The District consists of approximately 388 acres of land. See THE DISTRICT. Location... The Developer... Status of Development... Homebuilding... Payment Record... The District is located in southern Montgomery County, entirely in the extraterritorial jurisdiction of the City of Conroe. The District is located approximately 40 miles from the central downtown business district of the City of Houston and approximately eight miles southwest of the City of Conroe s central business district (north of Farm-to- Market 1488 along the east side of Carriage Hill Drive). The District can be accessed from Interstate Highway 45 via Farm-to-Market 1488 and Carriage Hill Drive. See THE DISTRICT and AERIAL LOCATION MAP. The developer of the land within the District is D.R. Horton-Texas, Ltd. (the Developer ), a Texas limited partnership. The Developer is wholly owned by D.R. Horton, Inc., ( D.R. Horton ) a Delaware corporation and publicly held company, the stock of which is listed on the New York Stock Exchange under the ticker symbol DHI. D.R. Horton, through various wholly owned entities, including the Developer, constructs homes in 27 states and 75 metropolitan markets, primarily under the name of D.R. Horton, America s Builder. See THE DEVELOPER. Development in the District began in 2006 and the District is being developed as Jacobs Reserve. The development in the District currently includes 317 single-family residential lots on approximately 97 acres. As of June 1, 2010, 159 homes were constructed (0 unoccupied), 109 homes were under construction (approximately 85 under contract to homebuyers), and 49 vacant developed lots were available for home construction. Homes within the District range in price from approximately $195,000 to $450,000. In addition, 38 lots on approximately 9 acres are under construction with an expected completion date of fall 2010, approximately 3 acres are not developable and approximately 279 acres are undeveloped but developable. See THE DISTRICT Status of Development. The Developer is the sole builder of homes in the District. See THE DEVELOPER Homebuilding. The Bonds are the District s first issuance of unlimited tax bonds. The District will capitalize twenty-four (24) months of interest from Bond proceeds. See USE AND DISTRIBUTION OF BOND PROCEEDS and FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED). THE BONDS Description... Book-Entry-Only System... Montgomery County Municipal Utility District No. 112 Unlimited Tax Bonds, Series 2010, in the aggregate principal amount of $4,575,000 maturing serially on October 1 in each year 2012 through 2027, inclusive, and as term bonds on October 1 in the years 2030, 2032 and 2035 (the Term Bonds ). Interest accrues from August 1, 2010, at the rates per annum set forth on the cover page hereof, and is payable April 1, 2011, and each October 1 and April 1 thereafter until the earlier of stated maturity or redemption. The Bonds will be issued as fully registered bonds, pursuant to an order authorizing the issuance of the Bonds (the Bond Order ), adopted by the Board of Directors of the District (the Board ), in fully registered form only, in denominations of $5,000 or any integral multiple of $5,000. See THE BONDS General. The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC ( Registered Owner ). One fully-registered certificate will be issued for each maturity of the Bonds and will be deposited with DTC. See BOOK-ENTRY-ONLY SYSTEM. 5

6 Redemption... Use of Proceeds... Bonds maturing on or after October 1, 2018, are subject to redemption at the option of the District prior to their maturity dates in whole, or from time to time, in part, on October 1, 2017, or on any date thereafter, at a price of par plus unpaid accrued interest from the most recent interest payment date to the date fixed for redemption. The Term Bonds are also subject to mandatory sinking fund redemption as described herein. See THE BONDS Redemption Provisions. Proceeds from the sale of the Bonds will be used to pay for facilities shown under USE AND DISTRIBUTION OF BOND PROCEEDS herein. In addition, Bond proceeds will be used to capitalize twenty-four (24) months of interest, to pay interest on funds that have been advanced by the Developer on behalf of the District; and to pay legal fees, financial advisory fees, administrative costs and certain other costs and engineering fees related to the issuance of the Bonds and creation of the District. See USE AND DISTRIBUTION OF BOND PROCEEDS and THE SYSTEM. Authority for Issuance... The Bonds are the first series of bonds issued out of an aggregate of $80,000,000 principal amount of unlimited tax bonds authorized by the District's voters on May 12, 2007, for the purpose of providing water, wastewater and storm drainage improvements and facilities to the land within its boundaries. The Bonds are issued pursuant to an order of the TCEQ, the Bond Order, the Texas Constitution and the general laws of the State of Texas. See THE BONDS Authority for Issuance and Issuance of Additional Debt and RISK FACTORS Future Debt. Source of Payment... Municipal Bond Rating Qualified Tax-Exempt Obligations... Principal of and interest on the Bonds (and such additional tax bonds as may hereafter be issued by the District) are payable from the proceeds of a continuing, direct, annual ad valorem tax, without legal limitation as to rate or amount, levied upon taxable property within the District. See THE BONDS Source of and Security for Payment. The District has not applied for an underlying rating or bond insurance nor is it expected that the District would have received bond insurance or an investment grade rating had such application been made. The District has designated the Bonds as qualified tax-exempt obligations pursuant to Section 265(b) of the Internal Revenue Code of 1986, as amended. See LEGAL MATTERS Qualified Tax-Exempt Obligations. Bond Counsel... Coats Rose Yale Ryman & Lee, Bond Counsel, Houston, Texas. See MANAGEMENT OF THE DISTRICT and LEGAL MATTERS. Disclosure Counsel... Financial Advisor... Paying Agent/Registrar... Fulbright & Jaworski L.L.P., Houston, Texas. First Southwest Company, Houston, Texas. See MANAGEMENT OF THE DISTRICT and PREPARATION OF OFFICIAL STATEMENT. The Bank of New York Mellon Trust Company, N.A., Dallas, Texas. See THE BONDS Method of Payment of Principal and Interest. RISK FACTORS THE PURCHASE AND OWNERSHIP OF THE BONDS ARE SUBJECT TO SPECIAL INVESTMENT CONSIDERATIONS AND ALL PROSPECTIVE PURCHASERS ARE URGED TO EXAMINE CAREFULLY THIS ENTIRE OFFICIAL STATEMENT WITH RESPECT TO THE INVESTMENT SECURITY OF THE BONDS, INCLUDING PARTICULARLY THE SECTION CAPTIONED INVESTMENT CONSIDERATIONS. 6

7 SELECTED FINANCIAL INFORMATION (UNAUDITED) 2009 Certified Taxable Assessed Valuation... $27,354,823 (a) 2010 Certified Taxable Assessed Valuation... $46,916,613 (a) Estimated Taxable Assessed Valuation as of May 1, $50,029,739 (b) Gross Direct Debt Outstanding (the Bonds)... $4,575,000 (c) Estimated Overlapping Debt... 1,595,679 (d) Gross Direct Debt Outstanding and Estimated Overlapping Debt... $6,170,679 Ratios of Gross Direct Debt to: 2010 Certified Taxable Assessed Valuation % Estimated Taxable Assessed Valuation as of May 1, Ratios of Gross Direct Debt and Estimated Overlapping Debt to: 9.14% 2010 Certified Taxable Assessed Valuation % Estimated Taxable Assessed Valuation as of May 1, % Funds Available for Debt Service: Capitalized Interest (Twenty-Four Months)... $ 423,255 (e) Funds Available in the General Operating Fund as of July 6, $55, Tax Rate (All Maintenance)... $ Anticipated Debt Service Tax Rate of the District... $ Anticipated Maintenance Tax Rate of the District Total 2010 Tax Rate... $1.10 (f) Average Annual Debt Service Requirement ( )... Maximum Debt Service Requirement (2034)... $327,111 (g) $353,405 (g) Tax Rates Required to Pay Average Annual Debt Service ( ) at a 90% Collection Rate: 2010 Certified Taxable Assessed Valuation... $0.78 (g) Estimated Taxable Assessed Valuation as of May 1, $0.73 (g) Tax Rates Required to Pay Maximum Debt Service (2034) at a 90% Collection Rate: 2010 Certified Taxable Assessed Valuation... $0.84 (g) Estimated Taxable Assessed Valuation as of May 1, $0.79 (g) Status of Development as of June 1, 2010 (h): Total Homes Completed (0 unoccupied) Homes Under Construction or owned by Builder (85 under contract) Lots Under Construction Vacant Developed Lots Available for Home Construction Estimated Population (i) (a) As certified by the Montgomery County Appraisal District (the Appraisal District ). (b) Provided by the Appraisal District for information purposes only. Such amount reflects the estimated value of improvements on May 1, Taxes are levied based on value as certified by the Appraisal District as of January 1 of each year. No taxes will be levied upon such amount until it is certified by the Appraisal District. (c) After issuance of the Bonds. (d) See FINANCIAL INFORMATION CONCERNING THE DISTRICT Overlapping Debt. (e) The District will capitalize twenty-four (24) months of interest from Bond proceeds. See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Debt Service Requirements. (f) The District has authorized the publication of the 2010 proposed tax rate and expects to adopt such tax rate in August (g) See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Debt Service Requirements and TAX DATA Tax Adequacy for Debt Service. (h) See THE DISTRICT Land Use Status of Development. (i) Based upon 3.5 persons per occupied single-family residence. 7

8 OFFICIAL STATEMENT $4,575,000 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 (A political subdivision of the State of Texas located within Montgomery County) UNLIMITED TAX BONDS SERIES 2010 This OFFICIAL STATEMENT provides certain information in connection with the issuance by Montgomery County Municipal Utility District No. 112 (the District ) of its $4,575,000 Unlimited Tax Bonds, Series 2010 (the Bonds ). The Bonds are issued pursuant to the Texas Constitution, the general laws of the State of Texas, an order authorizing the issuance of the Bonds (the Bond Order ) adopted by the Board of Directors of the District (the Board ) and an order of the Texas Commission on Environmental Quality (the TCEQ ). This Official Statement includes descriptions, among others, of the Bonds and the Bond Order, and certain other information about the District, D.R. Horton Texas Ltd. (the Developer ) and development activity in the District. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each document. Copies of documents may be obtained from Coats Rose Yale Ryman & Lee ( Bond Counsel ), 3 East Greenway Plaza, Suite 2000, Houston, Texas upon payment of the costs of duplication therefor. General RISK FACTORS The Bonds are obligations solely of the District and are not obligations of the City of Conroe, Montgomery County, the State of Texas, or any entity other than the District. Payment of the principal of and interest on the Bonds depends upon the ability of the District to collect taxes levied on taxable property within the District in an amount sufficient to service the District's bonded debt or in the event of foreclosure, on the value of the taxable property in the District and the taxes levied by the District and other taxing authorities upon the property within the District. See THE BONDS Source of and Security for Payment. The collection by the District of delinquent taxes owed to it and the enforcement by registered owners of the District's obligation to collect sufficient taxes may be a costly and lengthy process. Furthermore, the District cannot and does not make any representations that continued development of taxable property within the District will accumulate or maintain taxable values sufficient to justify continued payment of taxes by property owners or that there will be a market for the property or that owners of the property will have the ability to pay taxes. See Registered Owners' Remedies below. Economic Factors and Interest Rates A substantial percentage of the taxable value of the District results from the current market value of single-family residences and developed lots. The market value of such homes and lots is related to general economic conditions in the Houston region and the national economy and those conditions can affect the demand for residences. Demand for lots of this type and the construction of residential dwellings thereon can be significantly affected by factors such as interest rates, credit availability, construction costs, energy availability and the prosperity and demographic characteristics of the urban center toward which the marketing of lots is directed. Decreased levels of construction activity would tend to restrict the growth of property values in the District or could adversely impact such values. See Credit Markets and Liquidity in the Financial Markets and National Economy below and THE DEVELOPER. Credit Markets and Liquidity in the Financial Markets Interest rates and the availability of mortgage and development funding have a direct impact on the construction activity, particularly short-term interest rates at which developers are able to obtain financing for development costs. Interest rate levels may affect the ability of a landowner with undeveloped property to undertake and complete construction activities within the District. Because of the numerous and changing factors affecting the availability of funds, particularly the liquidity in the national credit markets, the District is unable to assess the future availability of such funds for continued construction within the District. In addition, since the District is located approximately 40 miles from the central downtown business district of the City of Houston, the success of development within the District and growth of District taxable property values are, to a great extent, a function of the Houston metropolitan and regional economies and national credit and financial markets. A continued downturn in the economic conditions of Houston and further decline in the nation s real estate and financial markets could continue to adversely affect development and home-building plans in the District and restrain the growth of the District's property tax base. 8

9 National Economy Nationally, there has been a significant downturn in new housing construction, resulting in a decline in housing market values. The Houston area has experienced reduced levels of home construction. While the District has not yet experienced reduced levels of home construction, the District cannot predict what impact, if any, a continued downturn in the national housing market and financial markets may have on the Houston area market. Competition The demand for and construction of single-family homes in the District, which is 40 miles from downtown Houston, could be affected by competition from other residential developments, including other residential developments located in Montgomery County and the northern portion of the Houston metropolitan area. In addition to competition for new home sales from other developments, there are numerous previously-owned homes in the area of the District and in more established neighborhoods closer to downtown Houston. Such homes could represent additional competition for new homes proposed to be sold within the District. The competitive position of the Developer in the sale of homes and the construction of single-family residential houses within the District is affected by most of the factors discussed in this section. Such a competitive position directly affects the growth and maintenance of taxable values in the District and tax revenues to be received by the District. The District can give no assurance that building and marketing programs in the District by the Developer will be implemented or, if implemented, will be successful. Maximum Impact on District Tax Rate Assuming no further development, the value of the land and improvements currently within the District will be the major determinant of the ability or willingness of owners of property within the District to pay their taxes. The 2010 Certified Taxable Assessed Valuation is $46,916,613. After issuance of the Bonds, the maximum debt service requirement will be $353,405 (2034), and the average annual debt service requirement will be $327,111 ( inclusive). Assuming no increase or decrease from the 2010 Certified Taxable Assessed Valuation, the issuance of no additional debt, and no other funds available for the payment of debt service, tax rates of $0.84 and $0.78 per $100 of appraised valuation at a ninety percent (90%) collection rate would be necessary to pay the maximum debt service requirement and the average annual debt service requirement, respectively. The Estimated Taxable Assessed Valuation as of May 1, 2010 is $50,029,739, which reduces the above calculations to $0.79 and $0.73, respectively. See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Debt Service Requirements. No representation or suggestion is made that the estimated values of land and improvements provided by the Appraisal District as of May 1, 2010 will be certified as taxable value by the Appraisal District, and no person should rely upon such amounts or their inclusion herein as assurance of their attainment. Undeveloped Acreage and Vacant Lots There are approximately 279 developable acres of land within the District that have not been provided with water, sanitary sewer, storm sewer, park, road and other facilities necessary for the construction of taxable improvements and, approximately 9 acres of which utility construction and/or paving has been provided or partially provided for 38 lots. In addition, there are 49 vacant developed lots. The District makes no representation as to when or if development of the undeveloped acreage will occur or that the lot sales and building program will be successful. See THE DISTRICT Land Use Status of Development. Dependence on Major Taxpayers and the Developer The ten principal taxpayers represent $10,366,530 or 37.90% of the 2009 Certified Taxable Assessed Valuation of $27,354,823, which represents ownership as of January 1, The Developer represents $6,215,030 or % of such value. Principal taxpayer lists related to the 2010 Preliminary Taxable Assessed Valuation and the Estimated Taxable Assessed Valuation as of May 1, 2010 are not available. If the Developer or another principal taxpayer were to default in the payment of taxes in an amount which exceeds the balance in the District s Debt Service Fund, the ability of the District to make timely payment of debt service on the Bonds would be dependent on the ability of the District to enforce and liquidate its tax lien, which is a time-consuming process, or to sell tax anticipation notes. Failure to recover or borrow funds in a timely fashion could result in the District being forced to set an excessive tax rate, hindering growth and leading to further defaults in the payment of taxes. The District is not required by law or the Bond Resolution to maintain any specified amount of surplus in its Debt Service Fund. See Tax Collection Limitations and Foreclosure Remedies in this section, TAXING PROCEDURES Levy and Collection of Taxes. The Developer has informed the Board that its current plans are to develop the remaining undeveloped land and to continue building homes in the District. However, neither the Developer nor any future developer is obligated to implement development plans on any particular schedule or at all. Thus, the furnishing of information related to any proposed development should not be interpreted as such a commitment. The District makes no representation about the probability of development continuing in a timely manner or about the ability of the Developer or any other landowner within the District to implement any plan of development. Furthermore, there is no restriction on any landowner s right to 9

10 sell land. The District can make no prediction as to the effects that current or future economic or governmental circumstances may have on any plans of the Developer or any other landowner. See THE DEVELOPER. District Operations The District levied a 2009 maintenance and operations tax at the rate of $1.10 per $100 of assessed valuation and expects to levy a 2010 maintenance and operations tax at the rate of $0.40 per $100 of assessed valuation. The revenue produced from the maintenance tax in combination with the water and sewer revenue currently being produced by the District s water and wastewater system may not be sufficient to offset the projected operating expenses of the District. The District s General Fund balance as of July 6, 2010 was $55,553. Continued maintenance of a positive General Fund balance may depend upon operating advances from the Developer, increased amounts of maintenance tax revenue as a result of growth in the assessed value, and increased water and sewer revenue. See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED). Developer Under No Obligation to the District The Developer has informed the Board that its current plan is to continue developing the remaining undeveloped land and building homes in the District. However, neither Developer nor any future developer or homebuilder is obligated to build homes on vacant lots nor to implement development plans on any particular schedule or at all. Thus, the furnishing of information related to any proposed development should not be interpreted as such a commitment. The District makes no representation about the probability of development continuing in a timely manner or about the ability of the Developer to implement any plan of development. Furthermore, there is no restriction on the Developer s right to sell land. The District can make no prediction as to the effects that current or future economic or governmental circumstances may have on any plans of the Developer. See THE DEVELOPER. Tax Collections Limitations and Foreclosure Remedies The District's ability to make debt service payments may be adversely affected by its inability to collect ad valorem taxes. Under Texas law, the levy of ad valorem taxes by the District constitutes a lien in favor of the District on a parity with the liens of all other local taxing authorities on the property against which taxes are levied, and such lien may be enforced by judicial foreclosure. The District's ability to collect ad valorem taxes through such foreclosure may be impaired by (a) cumbersome, time-consuming and expensive collection procedures, (b) a bankruptcy court's stay of tax collection procedures against a taxpayer, or (c) market conditions affecting the marketability of taxable property within the District and limiting the proceeds from a foreclosure sale of such property. Moreover, the proceeds of any sale of property within the District available to pay debt service on the Bonds may be limited by the existence of other tax liens on the property (see FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Overlapping Taxes ), by the current aggregate tax rate being levied against the property, and by other factors (including the taxpayers' right to redeem property within two years of foreclosure for residential and agricultural use property and six months for other property). Finally, any bankruptcy court with jurisdiction over bankruptcy proceedings initiated by or against a taxpayer within the District pursuant to the Federal Bankruptcy Code could stay any attempt by the District to collect delinquent ad valorem taxes assessed against such taxpayer. In addition to the automatic stay against collection of delinquent taxes afforded a taxpayer during the pendency of a bankruptcy, a bankruptcy could affect payment of taxes in two other ways: first, a debtor s confirmation plan may allow a debtor to make installment payments on delinquent taxes for up to six years; and, second, a debtor may challenge, and a bankruptcy court may reduce, the amount of any taxes assessed against the debtor, including taxes that have already been paid. Registered Owners Remedies If the District defaults in the payment of principal, interest, or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Bond Resolution, or defaults in the observation or performance of any other covenants, conditions, or obligations set forth in the Bond Resolution, the Registered Owners have the right to seek of a writ of mandamus issued by a court of competent jurisdiction requiring the District and its officials to observe and perform the covenants, obligations, or conditions prescribed in the Bond Resolution. Except for mandamus, the Bond Resolution does not specifically provide for remedies to protect and enforce the interests of the Registered Owners. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. Further, there is no trust indenture or trustee, and all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the Registered Owners. Statutory language authorizing local governments such as the District to sue and be sued does not waive the local government s sovereign immunity from suits for money damages so that in the absence of other waivers of such immunity by the Texas Legislature, a default by the District in its covenants in the Bond Order may not be reduced to a judgment for money damages. If such a judgment against the District were obtained, it could not be enforced by direct levy and execution against the District's property. Further, the Registered Owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. The enforceability of the rights and remedies of the Registered Owners may further be limited by a State of Texas statute reasonably required to attain an important public purpose or by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions, such as the District. 10

11 Bankruptcy Limitation to Registered Owners' Rights The enforceability of the rights and remedies of Registered Owners may be limited by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions such as the District. Texas law requires municipal utility districts such as the District, to obtain the approval of the TCEQ as a condition to seeking relief under the Federal Bankruptcy Code. If a petitioning district were allowed to proceed voluntarily under Chapter 9 of the Federal Bankruptcy Code, it could file a plan for an adjustment of its debts. If such a plan were confirmed by the bankruptcy court, it could, among other things, affect Registered Owners by reducing or eliminating the amount of indebtedness, deferring or rearranging the debt service schedule, reducing or eliminating the interest rate, modifying or abrogating collateral or security arrangements, substituting (in whole or in part) other securities, and otherwise compromising and modifying the rights and remedies of the Registered Owners' claims against a district. Future Debt A district may not be forced into bankruptcy involuntarily. The District has the right to issue obligations other than the Bonds, including tax anticipation notes and bond anticipation notes, and to borrow for any valid corporate purpose. After the issuance of the Bonds, the District will continue to owe the Developer approximately $7,500,000 plus interest for advances made for engineering and construction of water, sewer and drainage facilities, which will be financed with future bond issues. A total of $80,000,000 principal amount of unlimited tax bonds have been authorized by the District's voters and after the issuance of the Bonds, $75,425,000 of such unlimited tax bonds for water, sewer and drainage purposes will remain authorized but unissued. In addition, voters may authorize the issuance of additional bonds secured by ad valorem taxes. The District is also authorized to issue bonds to refund or redeem its outstanding debt. Voters of the District have also authorized a total of $3,000,000 principal amount of unlimited tax bonds for financing and constructing recreational facilities and authorized a maintenance tax not to exceed $0.10 per each $100 of assessed valuation for maintenance of recreational facilities and $2,500,000 principal amount of unlimited tax bonds for the purpose of financing roads. The District does not employ any formula with respect to appraised valuations, tax collections or otherwise to limit the amount of parity bonds which it may issue. The issuance of additional bonds is subject to approval by the TCEQ pursuant to its rules regarding issuance and feasibility of bonds. In addition, future changes in health or environmental regulations could require the construction and financing of additional improvements without any corresponding increases in taxable value in the District. See THE BONDS Issuance of Additional Debt. The issuance of additional obligations may increase the District's tax rate and adversely affect the security for, and the investment quality and value of, the Bonds. Environmental Regulation Wastewater treatment, water supply, storm sewer facilities and construction activities within the District are subject to complex environmental laws and regulations at the federal, state and local levels which may require or prohibit certain activities that affect the environment, such as: Requiring permits for construction and operation of water wells, wastewater treatment and other facilities; Restricting the manner in which wastes are treated and released into the air, water or soils; and Requiring remedial action to prevent or mitigate pollution. Sanctions against a municipal utility district for failure to comply with environmental laws and regulations may include a variety of civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements and issuance of injunctions to ensure future compliance. Environmental laws can also inhibit growth and development within the District. Air Quality Issues: Air quality control measures required by the EPA and the TCEQ may impact new industrial, commercial and residential development in Houston and adjacent areas. Under the Clean Air Act ( CCA ) Amendments of 1990, the eight-county Houston-Galveston area ( HGB area ) Harris, Galveston, Brazoria, Chambers, Fort Bend, Waller, Montgomery and Liberty counties was originally designated by the EPA as a moderate ozone nonattainment area for the 8-hour ozone standard. Such areas are required to demonstrate progress in reducing ozone concentrations each year until the EPA s 8-hour ozone standards are met. To provide for reductions in ozone concentrations, the EPA and the Commission have imposed increasingly stringent limits on sources of air emissions and require any new source of significant air emissions to provide for a net reduction of air emissions. If the HGB area fails to demonstrate progress in reducing ozone concentrations or fails to meet EPA s standards, EPA may impose a moratorium on the awarding of federal highway construction grants and other federal grants for certain public works construction projects, as well as severe emissions offset requirements on new major sources of air emissions of which construction has not already commenced. 11

12 In order to comply with the EPA s standards for the HGB area, the TCEQ has established a state implementation plan ( SIP ) setting emission control requirements, some of which regulate the inspection and use of automobiles. These types of measures could impact how people travel, what distances people are willing to travel, where people choose to live and work, and what jobs are available in the HGB area. The EPA has designated the HGB area to be a severe ozone attainment area for the 8-hour standard with an attainment date of June 15, It is possible that additional controls will be necessary to allow the HGB to reach attainment by June 15, These additional controls could have a negative impact on the HGB area s economic growth and development. Marketability of the Bonds The District has no understanding with the Underwriter regarding the reoffering yields or prices of the Bonds and has no control over trading of the Bonds in the secondary market. Moreover, there is no assurance that a secondary market will be made in the Bonds. If there is a secondary market, the difference between the bid and asked price of the Bonds may be greater than the difference between the bid and asked price of bonds of comparable maturity and quality issued by more traditional issuers as such bonds are more generally bought, sold or traded in the secondary market. Continuing Compliance with Certain Covenants Failure of the District to comply with certain covenants contained in the Bond Order on a continuing basis prior to the maturity of the Bonds could result in interest on the Bonds becoming taxable retroactive to the date of original issuance. See LEGAL MATTERS Tax Exemption. General THE BONDS Following is a description of the terms and conditions of the Bonds, which description is qualified in its entirety by reference to the Bond Order of the Board authorizing the issuance and sale of the Bonds. The Bond Order authorizes the issuance and sale of the Bonds and prescribes the terms, conditions, and provisions for the payment of the principal of and interest on the Bonds by the District. The Bonds will be dated and accrue interest from August 1, 2010, with interest payable on each April 1 and October 1 commencing April 1, 2011 (eight months of interest), until the earlier of maturity or prior redemption. The Bonds mature on October 1 in the amounts and years shown on the cover page of this Official Statement. Interest calculations are based on a 360-day year comprised of twelve 30-day months. Authority for Issuance At a bond election held within the District on May 12, 2007, the voters of the District authorized the issuance of a total of $80,000,000 principal amount of unlimited tax bonds for the purpose of providing water, wastewater and storm drainage improvements and facilities to the land within its boundaries. At a bond election held within the District on November 6, 2007, the voters of the District authorized the issuance of a total of $2,500,000 principal amount of unlimited tax bonds for roads. See Issuance of Additional Debt below. The TCEQ has authorized the District to sell the Bonds for the purposes described in THE SYSTEM Use and Distribution of Bond Proceeds. The Bonds are issued by the District pursuant to the terms and provisions of the Bond Order, an Order of the TCEQ, Article XVI, Section 59 of the Texas Constitution, and Chapters 49 and 54 of the Texas Water Code, as amended. Source of and Security for Payment While the Bonds or any part of the principal thereof or interest thereon remain outstanding and unpaid, the District covenants in the Bond Order to levy a continuing, direct, annual ad valorem tax, without legal limit as to rate or amount, upon all taxable property in the District sufficient to pay the principal of and interest on the Bonds, with full allowance being made for delinquencies and costs of collection. The Bonds are obligations of the District and are not the obligations of the State of Texas, Montgomery County, the City of Conroe or any entity other than the District. Funds In the Bond Order, the Debt Service Fund is created, and the proceeds from all taxes levied, assessed and collected for and on account of the Bonds authorized by the Bond Order shall be deposited, as collected, in such fund. In addition, twenty-four (24) months of interest capitalized from Bond proceeds will be deposited into the Debt Service Fund. 12

13 Accrued interest and twenty-four (24) months of capitalized interest on the Bonds shall be deposited into the Debt Service Fund upon receipt. The remaining proceeds from sale of the Bonds, including interest earnings thereon, shall be deposited into the Capital Projects Fund, to pay the costs of acquiring or constructing District facilities and for paying the costs of issuing the Bonds. See THE SYSTEM Use and Distribution of Bond Proceeds for a more complete description of the use of Bond proceeds. No Arbitrage The District will certify as of the date the Bonds are delivered and paid for that, based upon all facts and estimates now known or reasonably expected to be in existence on the date the Bonds are delivered and paid for, the District reasonably expects that the proceeds of the Bonds will not be used in a manner that would cause the Bonds, or any portion of the Bonds, to be arbitrage bonds under the Internal Revenue Code of 1986, as amended (the Code ), and the regulations prescribed thereunder. Furthermore, all officers, employees, and agents of the District have been authorized and directed to provide certifications of facts and estimates that are material to the reasonable expectations of the District as of the date the Bonds are delivered and paid for. In particular, all or any officers of the District are authorized to certify to the facts and circumstances and reasonable expectations of the District on the date the Bonds are delivered and paid for regarding the amount and use of the proceeds of the Bonds. Moreover, the District covenants in the Bond Order that it shall make such use of the proceeds of the Bonds, regulate investment of proceeds of the Bonds, and take such other and further actions and follow such procedures, including, without limitation, calculating the yield on the Bonds, as may be required so that the Bonds shall not become arbitrage bonds under the Code and the regulations prescribed from time to time thereunder. Redemption Provisions Mandatory Redemption: The Bonds maturing on October 1 in each of the years 2030, 2032 and 2035 ( Term Bonds ), shall be redeemed, at a price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption (the Redemption Date ), on October 1 in each of the years and in the principal amounts set forth in following schedule (less the principal amount of such Term Bonds as may have been previously redeemed through the exercise of the District s reserved right of optional redemption, as provided below): $720,000 Bonds $555,000 Bonds $955,000 Bonds Due October 1, 2030 Due October 1, 2032 Due October 1, 2035 Principal Principal Principal Year Amount Year Amount Year Amount 2028 $ 225, $ 270, $ 300, , (maturity) 285, , (maturity) 255, (maturity) 335,000 Notice of the mandatory redemption of the Term Bonds will be provided in accordance with the procedures of DTC so long as the Bonds are registered in accordance with the Book-Entry-Only System. See BOOK-ENTRY-ONLY SYSTEM. Optional Redemption: The District reserves the right, at its option, to redeem the Bonds maturing on or after October 1, 2018, prior to their scheduled maturities, in whole or from time to time in part, in integral multiples of $5,000, on October 1, 2017, or on any date thereafter, at a price of par plus accrued interest on the principal amounts called for redemption to the date fixed for redemption. If fewer than all of the Bonds are redeemed at any time, the particular maturities of Bonds to be redeemed shall be selected by the District. If less than all the Bonds of any maturity are redeemed at any time, the particular Bonds within a maturity to be redeemed shall be selected by the Paying Agent/Registrar by lot or other customary method of selection (or by DTC in accordance with its procedures while the Bonds are in book-entry-only form). Notice of any redemption identifying the Bonds to be redeemed in whole or in part shall be given by the Paying Agent/Registrar at least thirty (30) days prior to the date fixed for redemption by sending written notice by first class mail to the Registered Owner of each Bond to be redeemed in whole or in part at the address shown on the register. Such notices shall state the redemption date, the redemption price, the place at which the Bonds are to be surrendered for payment and, if fewer than all the Bonds outstanding within any one maturity are to be redeemed, the numbers of the Bonds or the portions thereof to be redeemed. Any notice given shall be conclusively presumed to have been duly given, whether or not the Registered Owner receives such notice. By the date fixed for redemption, due provision shall be made with the Paying Agent/Registrar for payment of the redemption price of the Bonds or portions thereof to be redeemed, plus accrued interest to the date fixed for redemption. When Bonds have been called for redemption in whole or in part and due provision has been made to redeem the same as herein provided, the Bonds or portions thereof so redeemed shall no longer be regarded as outstanding except for the purpose of receiving payment solely from the funds so provided for redemption, and the rights of the Registered Owners to collect interest that would otherwise accrue after the redemption date on any Bond or portion thereof called for redemption shall terminate on the date fixed for redemption. 13

14 Registration and Transfer So long as any Bonds remain outstanding, the Paying Agent/Registrar shall keep the register at its principal payment office in Dallas, Texas and, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of Bonds in accordance with the terms of the Bond Order. While the Bonds are in the Book-Entry-Only system, the Bonds will be registered in the name of Cede & Co. and will not be transferred. See BOOK-ENTRY-ONLY SYSTEM. Method of Payment of Principal and Interest The Board has appointed the Bank of New York Mellon Trust Company, N.A., having its principal corporate trust office and its principal payment office in Dallas, Texas, as the initial Paying Agent/Registrar for the Bonds. The principal of and interest on the Bonds shall be paid to DTC, which will make distribution of the amounts so paid to the Beneficial Owners of the Bonds. See BOOK-ENTRY-ONLY SYSTEM. Replacement of Paying Agent/Registrar Provision is made in the Bond Order for replacement of the Paying Agent/Registrar. If the Paying Agent/Registrar is replaced by the District, the new paying agent/registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any paying agent/registrar selected by the District shall be a national or state banking institution, a corporation organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise trust powers, and subject to supervision or examination by federal or state authority, to act as Paying Agent/Registrar for the Bonds. Issuance of Additional Debt The District may issue additional bonds, with the approval of the TCEQ, necessary to provide and maintain improvements and facilities consistent with the purposes for which the District was created. After issuance of the Bonds, the District will have $75,425,000 of unlimited tax bonds for water, sewer and drainage facilities authorized but unissued and $3,000,000 of unlimited tax bonds for park and recreational facilities authorized but unissued. The Bond Order imposes no limitation on the amount of additional parity bonds which may be authorized for issuance by the District's voters or the amount ultimately issued by the District. See THE SYSTEM Future Debt. Voters of the District have also authorized a total of $3,000,000 principal amount of unlimited tax bonds for financing and constructing recreational facilities and authorized a maintenance tax not to exceed $0.10 per each $100 of assessed valuation for maintenance of recreational facilities and $2,500,000 principal amount of unlimited tax bonds for the purpose of financing roads. After approval by the District s voters, the City of Conroe and the TCEQ, the District also has the power to issue unlimited tax bonds for the purpose of providing fire-fighting facilities. Financing Recreational Facilities On September 3, 2003, an amendment to the Texas Constitution was adopted that authorized conservation and reclamation districts, such as the District, in certain counties to develop and finance with property taxes certain recreational facilities after a district election has been successfully held to approve a maintenance tax to support recreational facilities and/or the issuance of bonds payable from taxes. The Texas legislature enacted legislation, effective September 13, 2003, allowing the District to levy an operation and maintenance tax to support recreational facilities at a rate not to exceed $0.10 per $100 of assessed valuation of taxable property within the District, after such tax is approved at an election. On May 12, 2007, the voters of the District approved such tax. The District intends to finance the maintenance and operation of its recreational facilities from funds in its General Fund. In addition, the District is authorized to issue bonds payable from an ad valorem tax to pay for the development and maintenance of recreational facilities if (i) the District duly adopted a plan for the facilities; (ii) the bonds are authorized at an election; (iii) the bonds payable from any source do not exceed 1% of the taxable property in the District at the time of issuance of the bonds, or an amount greater than the estimated cost of the plan, whichever amount is smaller; (iv) the District obtains any necessary governmental consents allowing the issuance of such bonds; and (v) the bonds are approved by the Attorney General of Texas. The District may issue bonds for such purposes payable solely from the net operating revenues without an election. The issuance of such bonds is subject to the rules and regulations to be adopted by the TCEQ. At an election held on May 12, 2007, the District voters authorized the issuance of $3,000,000 of bonds for parks and recreational purposes payable from ad valorem taxes. 14

15 Annexation by the City of Conroe Under existing Texas law, since the District lies wholly within the extraterritorial jurisdiction of the City of Conroe, the District must conform to a City of Conroe ordinance consenting to the creation of the District. In addition, except as set forth below under Strategic Partnership, the District may be annexed by the City of Conroe without the District's consent. Annexation of territory by the City of Conroe is a policy-making matter within the discretion of the Mayor and City Council of the City of Conroe, and therefore, the District makes no representation that the City of Conroe will ever annex the District and assume its debt, nor does the District make any representation concerning the ability of the City of Conroe to pay debt service on the District s bonds if annexation were to occur. See Strategic Partnership, below. Strategic Partnership Texas Local Government Code Section authorizes the governing body of a municipality and a municipal utility district to negotiate and enter into a strategic partnership agreement by mutual consent. The District has entered into a strategic partnership agreement ( SPA ) with the City of Conroe (the City ), whereby the City may impose its Sales and Use Tax within the District upon its limited purpose annexation of the District. To date, the City has not exercised its right to annex the District for limited purposes, but it may exercise this right at any time. After the date of the limited purpose annexation the City shall pay to the District an amount equal to 50% of the Sales and Use Tax revenues that are reported on the monthly sales tax report provided by the Comptroller and received by the City from the Comptroller. The limited purpose annexation shall be automatically converted to full purpose annexation upon the earlier of the following: 1. The date, not earlier than December 31, 2027, on which all debt of the District that is payable from ad valorem taxes is fully paid; or 2. December 31, Upon the full purpose annexation conversion date the land included within the boundaries of the District shall be deemed to be within the full purpose boundary limits of the City without the need for any further action. Upon such date all taxable property within the territory of the District shall become subject to ad valorem taxation by the City. If the debt of the District remains outstanding on the full purpose annexation conversion date, then the District shall become a limited district and shall continue for a term not to exceed ten (10) additional years, or until all outstanding debt of the limited district has been fully paid. The City may extend the existence of the limited district for successive ten (10) year terms for so long as any debt of the limited district remains. At any time on or after December 31, 2027, the City may, in its sole discretion, annex all of the land within the District for full purposes, dissolve the District and assume the debt of the District as provided in Texas Local Government Code, Section Annexation pursuant to this section shall not result in the creation of a limited district. Consolidation A district (such as the District) has the legal authority to consolidate with other districts and, in connection therewith, to provide for the consolidation of its assets, such as cash and the utility system, with the water and wastewater systems of districts with which it is consolidating as well as its liabilities (which would include the Bonds). No representation is made concerning the likelihood of consolidation. Remedies in Event of Default If the District defaults in the payment of principal, interest, or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Bond Order, or defaults in the observation or performance of any other covenants, conditions, or obligations set forth in the Bond Order, the Registered Owners have the statutory right of a writ of mandamus issued by a court of competent jurisdiction requiring the District and its officials to observe and perform the covenants, obligations, or conditions prescribed in the Bond Order. Except for mandamus, the Bond Order does not specifically provide for remedies to protect and enforce the interests of the Registered Owners. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. Further, there is no trust indenture or trustee, and all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the Registered Owners. Statutory language authorizing local governments such as the District to sue and be sued does not waive the local government s sovereign immunity from suits for money damages, so that in the absence of other waivers of such immunity by the Texas Legislature, a default by the District in its covenants in the Bond Order may not be reduced to a judgment for money damages. If such a judgment against the District were obtained, it could not be enforced by direct levy and execution against the District's property. Further, the Registered Owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. The enforceability of the rights and remedies of the Registered Owners may further be limited by a State of Texas statute reasonably required to attain an important public purpose or by laws relating to bankruptcy, reorganization or other similar laws of general application affecting the rights of creditors of political subdivisions, such as the District. See RISK FACTORS Registered Owners' Remedies and Bankruptcy Limitations. 15

16 Legal Investment and Eligibility to Secure Public Funds in Texas The following is quoted from Section of the Texas Water Code, and is applicable to the District: (a) All bonds, notes, and other obligations issued by a district shall be legal and authorized investments for all banks, trust companies, building and loan associations, savings and loan associations, insurance companies of all kinds and types, fiduciaries, and trustees, and for all interest and sinking funds and other public funds of the state, and all agencies, subdivisions, and instrumentalities of the state, including all counties, cities, towns, villages, school districts, and all other kinds and types of districts, public agencies, and bodies politic. (b) A district's bonds, notes, and other obligations are eligible and lawful security for all deposits of public funds of the state, and all agencies, subdivisions, and instrumentalities of the state, including all counties, cities, towns, villages, school districts, and all other kinds and types of districts, public agencies, and bodies politic, to the extent of the market value of the bonds, notes, and other obligations when accompanied by any unmatured interest coupons attached to them. The Public Funds Collateral Act (Chapter 2257, Texas Government Code) also provides that bonds of the District (including the Bonds) are eligible as collateral for public funds. No representation is made that the Bonds will be suitable for or acceptable to financial or public entities for investment or collateral purposes. No representation is made concerning other laws, rules, regulations or investment criteria which apply to or which might be utilized by any of such persons or entities to limit the acceptability or suitability of the Bonds for any of the foregoing purposes. Prospective purchasers are urged to carefully evaluate the investment quality of the Bonds as to the suitability or acceptability of the Bonds for investment or collateral purposes. Defeasance The Bond Order provides that the District may discharge its obligations to the Registered Owners of any or all of the Bonds to pay principal, interest and redemption price thereon in any manner permitted by law. Under current Texas law, such discharge may be accomplished either (i) by depositing with the Comptroller of Public Accounts of the State of Texas a sum of money equal to the principal of, premium, if any, and all interest to accrue on the Bonds to maturity or redemption or (ii) by depositing with any place of payment (paying agent) of the Bonds or other obligations of the District payable from revenues or from ad valorem taxes or both, amounts sufficient to provide for the payment and/or redemption of the Bonds; provided that such deposits may be invested and reinvested only in (a) direct obligations of the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the District adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the District adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and which mature and/or bear interest payable at such times and in such amounts as will be sufficient to provide for the scheduled payment and/or redemption of the Bonds. Upon such deposit as described above, such Bonds shall no longer be regarded as outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the District to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the Bonds for redemption is not extinguished if the District: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. There is no assurance that the current law will not be changed in the future in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Bonds. 16

17 BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company, New York, New York, ( DTC ) while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry- Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District and the Financial Advisor believe the source of such information to be reliable, but neither of the District or the Financial Advisor takes any responsibility for the accuracy or completeness thereof. The District cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for each maturity of the Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them. 17

18 Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Principal, premium, if any, interest payments and redemption proceeds on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the District or the Paying Agent/Registrar, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent/Registrar, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, if any, interest payments and redemption proceeds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the District or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, printed certificates for the Bonds are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC. Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to Registered Owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to Registered Owners under the Bond Order will be given only to DTC. 18

19 USE AND DISTRIBUTION OF BOND PROCEEDS The construction costs below were compiled by Edminster, Hinshaw, Russ & Associates, Inc, the District's engineer (the Engineer ), and were submitted to (and approved by) the TCEQ. Non-construction costs are based upon either contract amounts or estimates of various costs by the Engineer and First Southwest Company (the Financial Advisor ). The actual amounts to be paid by the District and the non-construction costs will be finalized after the sale of the Bonds and review by the District's auditor. Surplus funds, if any, may be expended for any lawful purpose for which surplus construction funds may be used, if approved by the TCEQ where required. CONSTRUCTION COSTS Water Supply and Storage Facility... $2,301,820 Clearing, Grubbing, Site Fill and Grading to Serve the Water Plant ,883 Wastewater Lift Station ,596 Engineering ,865 Land Acquisition... 35,226 TOTAL CONSTRUCTION COSTS... $2,915,390 NON-CONSTRUCTION COSTS Legal Fees... $124,375 Financial Advisory Fees... 91,500 Capitalized Interest (a) ,255 Issuance Expense... 36,929 Creation Costs... 83,860 Underwriter s Discount (a) ,100 Developer Interest (b) ,497 Bond Application Report... 33,936 Attorney General Fee... 4,575 Market Study... 12,500 TCEQ Fee... 11,438 Contingency (a) ,645 TOTAL NON-CONSTRUCTION COSTS... $1,659,610 TOTAL BOND ISSUE REQUIREMENT... $4,575,000 (a) (b) Contingency represents the difference between estimated and actual capitalized interest and Underwriter s discount. The TCEQ approved a maximum of twenty-four (24) months of interest at an estimated 6.50% per annum and a maximum Underwriter s discount of 3.0%. TCEQ rules permit Developer to be paid for interest costs associated with advancing funds on behalf of a district, with certain time limitations, at the net effective rate of interest on the Bonds. This figure represents estimated interest on that portion of funds advanced by the Developer on the District's behalf for certain expenditures listed above, as approved by the TCEQ. THE DISTRICT General The District is a municipal utility district created by an order of the Texas Commission on Environmental Quality (the TCEQ ), dated December 21, 2006, and operates pursuant to Chapters 49 and 54 of the Texas Water Code, as amended, and other general statutes of Texas applicable to municipal utility districts. The District, which lies wholly within the extraterritorial jurisdiction of the City of Conroe, is subject to the continuing supervisory jurisdiction of the TCEQ. The District is empowered, among other things, to finance, purchase, construct, operate and maintain all works, improvements, facilities and plants necessary for the supply and distribution of water; the collection, transportation, and treatment of wastewater; and the control and diversion of storm water. The District may issue bonds and other forms of indebtedness to purchase or construct such facilities. The District may also provide solid waste disposal and collection services. The District is also empowered to establish, operate, and maintain fire-fighting facilities, independently or with one or more conservation and reclamation districts, after approval by the TCEQ and the voters of the District. Additionally, the District may, subject to certain limitations, develop and finance recreational facilities and roads. See THE BONDS Issuance of Additional Debt and Financing Recreational Facilities. 19

20 The District is required to observe certain requirements of the City of Conroe which limit the purposes for which the District may sell bonds to the acquisition, construction, and improvement of waterworks, wastewater, drainage, recreational, road and firefighting facilities and the refunding of outstanding debt obligations; limit the net effective interest rate on such bonds and other terms of such bonds; require approval by the City of Conroe of District construction plans; and permit connections only to lots and reserves described in plats which have been approved by the City of Conroe and filed in the real property records of Montgomery County, Texas. The District is also required to obtain TCEQ approvals prior to acquiring, constructing and financing road and fire-fighting facilities. Construction and operation of the District's drainage system is subject to the regulatory jurisdiction of additional State of Texas and local agencies. See THE SYSTEM Regulation. Description and Location The District consists of approximately 388 acres of land. The District is located in southern Montgomery County, entirely in the extraterritorial jurisdiction of the City of Conroe. The District is located approximately 40 miles from the central downtown business district of the City of Houston and approximately eight miles southwest of the City of Conroe s central business district north of Farm-to-Market 1488 along the east side of Carriage Hill Drive. The District can be accessed from Interstate Highway 45 via Farm-to-Market 1488 and Carriage Hill Drive. See AERIAL LOCATION MAP herein. Land Use The following table has been provided by the Engineer and represents the current land use within the District. Approximate Acres Lots Single-Family Residential The Grove at Jacobs Reserve The Arbors at Jacobs Reserve The Woods at Jacobs Reserve The Forest at Jacobs Reserve The Pines at Jacobs Reserve... Section One Section Two (a) Subtotal Future Development Undevelopable (a) Total (a) Utility construction has recently commenced and is expected to be complete in the fall of (b) Consists of street easements, drainage detention, parks and recreation space and utility sites. Status of Development Development in the District began in 2006 and the District is being developed as Jacobs Reserve. The development in the District currently includes 317 single-family residential lots on approximately 97 acres. As of June 1, 2010, 159 homes were constructed (0 unoccupied), 109 homes were under construction (approximately 85 under contract to homebuyers), and 49 vacant developed lots were available for home construction. Homes within the District range in price from approximately $195,000 to $450,000. In addition, 38 lots on 9 acres are under construction with an expected completion date of fall 2010, approximately 3 acres are not developable and approximately 279 acres are undeveloped but developable. The estimated population within the District is 672, based upon 3.5 persons per occupied single-family residence. 20

21 MANAGEMENT OF THE DISTRICT Board of Directors The District is governed by the Board consisting of five (5) directors, which has control over and management supervision of all affairs of the District. Directors are elected to staggered four-year terms and elections are held on the first Saturday of May of even numbered years. None of the Board members reside within the District; however all of the Board Members own land within the District. The current members and officers of the Board along with their titles and terms, are listed as follows: District Board Term Name Title Expires Dr. Robert C. Schucker President May 2014 Carla J. Haddox Vice President May 2012 Pamela Collins Secretary May 2012 Pam Madrigal Assistant Secretary May 2014 Vacant District Consultants The District does not have a general manager or other full-time employees, but contracts for certain necessary services as described below. Bond Counsel and General Counsel: Coats Rose Yale Ryman & Lee serves as Bond Counsel to the District. The fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent upon the sale and delivery of the Bonds. In addition, Coats Rose Yale Ryman & Lee serves as general counsel to the District on matters other than the issuance of bonds. Financial Advisor: First Southwest Company serves as the District's Financial Advisor. The fee for services rendered in connection with the issuance of the Bonds is based on a percentage of the Bonds actually issued, sold and delivered and, therefore, such fee is contingent upon the sale and delivery of the Bonds. The Financial Advisor has been authorized through an order of the Board to submit a bid for the purchase of the Bonds. Auditor: The District's audited financial statements for the year ended December 31, 2009, were prepared by McCall Gibson Swedlund Barfoot PLLC, Certified Public Accountants. See APPENDIX A for a copy of the District's December 31, 2009, audited financial statements. A copy of the Management Letter from the District s auditor to the District s Board of Directors relating to the District s financial reporting under Statement of Auditing Standards No. 112, including the District s response thereto, is also included in APPENDIX A. Engineer: The District's consulting engineer is Edminster, Hinshaw, Russ & Associates, Inc. Tax Appraisal: The Montgomery Central Appraisal District has the responsibility of appraising all property within the District. See TAXING PROCEDURES. Tax Assessor/Collector: The District has appointed an independent tax assessor/collector to perform the tax collection function. Mr. Tommy Lee of Assessments of the Southwest (the Tax Assessor/Collector ) has been employed by the District to serve in this capacity. Bookkeeper: The District has contracted with Myrtle Cruz, Inc. (the Bookkeeper ) for bookkeeping services. Operator: The operation and maintenance of the District s water and wastewater systems are overseen by Municipal Operations. Disclosure Counsel: Fulbright & Jaworski L.L.P. serves as Disclosure Counsel to the District in connection with the issuance of the Bonds. 21

22 THE DEVELOPER Role of a Developer In general, the activities of a landowner or developer in a municipal utility district such as the District include designing the project, defining a marketing program and setting building schedules; securing necessary governmental approvals and permits for development; arranging for the construction of streets and the installation of utilities; and selling or leasing improved tracts or commercial reserves to other developers or third parties. In most instances, a landowner or developer will be required by the TCEQ to pay thirty percent (30%) of the cost of constructing the water distribution, wastewater collection, and storm drainage facilities in a district, exclusive of water supply and storage and wastewater treatment plants of which the district incurs one hundred percent (100%) of the cost. While a developer is required by the Commission to pave streets in areas being financed with bond proceeds, a developer is under no obligation to a district to undertake development activities according to any particular plan or schedule. Furthermore, there is no restriction on a developer's right to sell any or all of the land which the developer owns within a district. In addition, the developer is ordinarily the major taxpayer within the district during the early stages of development. The relative success or failure of a developer to perform in the above-described capacities may affect the ability of a district to collect sufficient taxes to pay debt service and retire bonds. D. R. Horton, Inc. The developer of the land within the District is D.R. Horton-Texas, Ltd. (the Developer ), a Texas limited partnership. The Developer is wholly owned by D.R. Horton, Inc., ( D.R. Horton ) a Delaware corporation and publicly held company, the stock of which is listed on the New York Stock Exchange under the ticker symbol DHI. D.R. Horton, through various wholly owned entities, including the Developer, constructs homes in 27 states and 75 metropolitan markets, primarily under the name of D.R. Horton, America s Builder. DR Horton is subject to the information requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith files reports and other information with the Securities and Exchange Commission ( SEC ). Reports, proxy statements and other information filed by DR Horton can be inspected at the office of the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C , and at the Regional Office of the SEC located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois Copies of such material can be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C , at prescribed rates. Copies of the above reports, proxy statements and other information may also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York The SEC maintains a World Wide Web site on the Internet at that contains reports, proxy information statements and other information regarding registrants that file electronically with the SEC. In addition, DR Horton makes available on its web site hhtp:// its annual reports on Form 10- K, quarterly reports on Form 10-Q and current reports on Form 8-K (and any amendments to those reports) filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as practicable after they have electronically filed with the SEC as well as other financial institutions. Unless otherwise specified, information contained on DR Horton s website, available by hyperlink from DR Horton s website or on the SEC s website, is not incorporated into this Official Statement. The Developer has developed or is currently developing approximately 88 acres in the District with 317 singlefamily residential lots and is building homes ranging in price from $195,000 to $450,000. The Developer continues to own approximately 229 of undeveloped but developable acres, which are expected to be developed as future sections of Jacobs Reserve. The Developer is the sole builder of homes in the District. Neither the Developer, DR Horton nor any affiliates of DR Horton are responsible for, liable for, or have made any commitment for payment of the Bonds or other obligations of the District. Neither the Developer, DR Horton, nor any affiliates of DR Horton have any legal commitment to the District or the holders of the Bonds to continue development of the land within the District, and the Developer may sell or otherwise dispose of property within the District, or any assets, at any time. Further, the financial condition of the Developer and DR Horton is subject to change, and financial information concerning such entities will not be provided by the District after the sale of the Bonds except as described herein under CONTINUING DISCLOSURE OF INFORMATION. 22

23 Development Financing All funds required by the Developer for development activities are provided by DR Horton, affiliates of DR Horton, or from lot sales. The Developer s ability to continue development within the District is dependent in part on its continued receipt of funds from DR Horton or affiliates of DR Horton. Neither DR Horton nor such affiliates are legally obligated to continuing providing funds for the development of the District, to provide funds to pay taxes on property in the District owned by the Developer, or to pay any other obligations of the Developer. Water Supply THE SYSTEM Water supply for the District is provided by a water plant located within the boundaries of the District, which is adequate to serve up to 815 equivalent single-family connections. The District s water plant consists of a a 900 gallon per minute ( gpm ) water well, a 30,000 gpm pressure tank, a 163,000 gallon ground storage tank and 2,000 gpm of booster pump capacity. As of June 1, 2010, the District was serving 268 active connections, including builder connections and irrigation. Lone Star Groundwater Conservation District: The District is located within the boundaries of the Lone Star Groundwater Conservation District (the Conservation District ) which was created by the Texas Legislature to conserve, protect and enhance the groundwater resources of Montgomery County (the County ). The Conservation District has adopted rules and a regulatory plan for the conservation, preservation, protection, recharge and prevention of waste of groundwater, groundwater reservoirs or their subdivisions and to control subsidence caused by the withdrawal of groundwater from those groundwater resources or their subdivision. The Conservation District requires persons and entities, including the District, that pump groundwater from wells to apply for and obtain permits for the withdrawal of groundwater under terms and conditions provided in the regulatory plan. The plan calls for the reduction of groundwater withdrawal throughout Montgomery County to volumes that do not exceed the recharge capabilities of aquifers in Montgomery County to prevent the long term depletion of the aquifers. The regulatory plan allows for the creation of management zones within Montgomery County to facilitate conservation of use of groundwater and development of other water resources from surface water or re-use of treated effluent. Large water users, including the District, were required to prepare and submit a Water Resources Assessment Plan ( WRAP ) which identifies methods and plans for reduction of groundwater usage through the development of alternate water resources, including the design and construction of infrastructure facilities to purchase and transport water to affected areas within Montgomery County. The District has participated with the San Jacinto River Water Authority (the SJRA ) which heretofore prepared and submitted to the Conservation District a WRAP which preliminarily addressed many of the items to be included in a groundwater reduction plan sufficient to meet the Conservation District s requirements. Further, the District has entered into an agreement with the SJRA for the purpose of achieving overall compliance with the WRAP. The District cannot predict the amount or level of fees or charges, which may be due to the SJRA in the future, but anticipates the need to pass such fees through to its customers resulting in higher water rates. In addition, the conversion to surface water could necessitate improvements to the system which could require the issuance of additional bonds by the District. Wastewater Treatment The District s wastewater is treated by a temporary package treatment plant with 100,000 gallons per day ( gpd ) of treatment capacity. The temporary treatment plant will adequately serve 330 equivalent single-family connections. As of June 1, 2010, the District was serving 268 active connections and actual treatment flows in the wastewater treatment plant were averaging 22,980 gpd. Water Distribution, Wastewater Collection and Storm Drainage Facilities Water distribution, wastewater collection and storm drainage facilities have been constructed to serve 317 singlefamily residential lots in the District and utility construction has recently commenced on an additional 38 single-family residential lots. Flood Protection According to the Engineer, none of the land located within the developable portions of the District is located within the 100 Year Flood plain or the 500 Year Flood plain. 23

24 Regulation Construction and operation of the District's water, wastewater and storm drainage system as it now exists or as it may be expanded from time to time is subject to regulatory jurisdiction of federal, state and local authorities. The TCEQ exercises continuing, supervisory authority over the District. Discharge of treated sewage into Texas waters is also subject to the regulatory authority of the TCEQ and the United States Environmental Protection Agency. Montgomery County, the City of Conroe, and the Texas Department of Health also exercise regulatory jurisdiction over the District's water, wastewater and storm drainage facilities. Waterworks and Sewer System Operating Statement General Fund: The Bonds are payable solely from the levy of an ad valorem tax, without legal limitation as to rate or amount, upon all taxable property in the District. Nevertheless, net revenues from operations of the District's water and wastewater system, if any, are available for any legal purpose, including the payment of debt service on the Bonds, upon Board action. However, it is not anticipated that net revenues will be used or would be sufficient to pay debt service on the Bonds. The following statement sets forth in condensed form the General Fund as derived from the District's audited financial statements for the periods ending December 31, 2008 and December 31, 2009, and an unaudited summary prepared by the Bookkeeper as of June 30, Accounting principles customarily employed in the determination of net revenues have been observed and in all instances exclude depreciation. Reference is made to APPENDIX A for further and complete information. Fiscal Year Ended 1/1/2010 to 6/30/ /31/ /31/2008 (unaudited) REVENUES: Property Taxes $ 235,000 $ 187,333 $ 7,382 Water Service 25,127 26,932 16,827 Wastewater Service 27,739 29,213 16,243 Regional Water Fee 499 2,397 1,647 Penalty and Interest 186 3, Tap Connection and Inspection Fees 41, ,715 40,185 Investment Revenues Miscellaneous Revenues 4,600 29,684 1,530 TOTAL REVENUES $ 334,305 $ 392,665 $ 84,194 EXPENDITURES: Professional Fees $ 57,027 $ 106,633 $ 64,704 Contracted Services 62,593 68,170 45,278 Operating Lease 29,700 59,400 39,600 Utilities 20,691 31,686 32,902 Repairs and Maintenance 49, ,636 45,612 Other 23,343 97,788 88,047 Capital Outlay ,672 TOTAL EXPENDITURES $ 243,177 $ 471,313 $ 733,815 NET REVENUES $ 91,128 $ (78,648) $ (649,621) Other Sources of Revenue 13,222 25, ,557 Revenues and Other Financing Sources Over Expenditures 104,350 (53,648) (64) FUND BALANCE, BEGINNING OF YEAR $ (39,602) $ 14,046 $ 14,110 FUND BALANCE, END OF YEAR $ 64,748 $ (39,602) $ 14,046 24

25 FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) 2009 Certified Taxable Assessed Valuation... $27,354,823 (a) 2010 Certified Taxable Assessed Valuation... $46,916,613 (a) Estimated Taxable Assessed Valuation as of May 1, $50,029,739 (b) Gross Direct Debt Outstanding (the Bonds)... $4,575,000 (c) Estimated Overlapping Debt... 1,595,679 (d) Gross Direct Debt Outstanding and Estimated Overlapping Debt... $6,170,679 Ratios of Gross Direct Debt to: 2010 Certified Taxable Assessed Valuation % Estimated Taxable Assessed Valuation as of May 1, Ratios of Gross Direct Debt and Estimated Overlapping Debt to: 9.14% 2010 Certified Taxable Assessed Valuation % Estimated Taxable Assessed Valuation as of May 1, % Funds Available for Debt Service: Capitalized Interest (Twenty-Four Months)... $ 423,255 (e) Funds Available in the General Operating Fund as of July 6, $55,553 (a) As certified by the Montgomery County Appraisal District (the Appraisal District ). (b) Provided by the Appraisal District for information purposes only. Such amount reflects the estimated value of improvements on May 1, Taxes are levied based on value as certified by the Appraisal District as of January 1 of each year. No taxes will be levied upon such amount until it is certified by the Appraisal District. (c) After issuance of the Bonds. (d) See FINANCIAL INFORMATION CONCERNING THE DISTRICT Overlapping Debt. (e) The District will capitalize twenty-four (24) months of interest from Bond proceeds. See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Debt Service Requirements. Investments of the District The District has adopted an Investment Policy as required by the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended. The District's goal is to preserve principal and maintain liquidity while securing a competitive yield on its portfolio. Funds of the District will be invested in short term U.S. Treasuries, certificates of deposit insured by the Federal Deposit Insurance Corporation ( FDIC ) or secured by collateral evidenced by perfected safekeeping receipts held by a third party bank, and public funds investment pools rated in the highest rating category by a nationally recognized rating service. The District does not currently own, nor does it anticipate, the inclusion of long term securities or derivative products in the District s investment portfolio. 25

26 Debt Service Requirements The following sets forth the debt service on the Bonds. This schedule does not reflect the fact that the twenty-four (24) months of interest will be capitalized from Bond proceeds for payment of debt service. See USE AND DISTRIBUTION OF BOND PROCEEDS. Debt Service on the Bonds Year Principal Interest Total 2011 $ 246, $ 246, $ 95, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 89, , ,000 76, , ,000 62, , ,000 48, , ,000 33, , ,000 17, , Total $ 4,575, $ 3,602, $ 8,177, Average Annual Debt Service Requirements ( )... $327,111 Maximum Annual Debt Service Requirement (2034)... $353,405 26

27 Estimated Overlapping Debt The following table indicates the outstanding debt payable from ad valorem taxes of governmental entities within which the District is located and the estimated percentages and amounts of such indebtedness attributable to property within the District. Debt figures equated herein to outstanding obligations payable from ad valorem taxes are based upon data obtained from individual jurisdictions or Texas Municipal Reports compiled and published by the Municipal Advisory Council of Texas. Furthermore, certain entities listed below may have issued additional obligations since the date listed and may have plans to incur significant amounts of additional debt. Political subdivisions overlapping the District are authorized by Texas law to levy and collect ad valorem taxes for the purposes of operation, maintenance and/or general revenue purposes in addition to taxes for the payment of debt service, and the tax burden for operation, maintenance and/or general revenue purposes is not included in these figures. The District has no control over the issuance of debt or tax levies of any such entities. Taxing Outstanding Overlapping Jurisdiction Bonds As of Percent Amount Montgomery County... $409,285,000 9/30/ % $327,428 Conroe Independent School District ,385,000 8/31/ % 1,177,939 Lone Star College System ,560,000 8/31/ % 90,312 Total Estimated Overlapping Debt... $1,595,679 The District's Total Direct Debt (a)... 4,575,000 Total Direct and Estimated Overlapping Debt... $6,170,679 Direct and Estimated Overlapping Debt as a Percentage of: 2010 Certified Taxable Assessed Value of $46,916, % Estimated Taxable Assessed Value as of May 1, 2010 of $50,029, % (a) The Bonds. Overlapping Taxes Property within the District is subject to taxation by several taxing authorities in addition to the District. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest imposed on such property. The lien exists in favor of each taxing unit, including the District, having the power to tax the property. The District s tax lien is on a parity with tax liens of taxing authorities shown below. In addition to ad valorem taxes required to pay debt service on bonded debt of the District and other taxing authorities (see Estimated Overlapping Debt above), certain taxing jurisdictions, including the District, are also authorized by Texas law to assess, levy and collect ad valorem taxes for operation, maintenance, administrative and/or general revenue purposes. Set forth below are the taxes levied for the 2009 tax year by all entities overlapping the District and the District. No recognition is given to local assessments for civic association dues, fire department contributions or any other levy of entities other than political subdivisions Tax Rate Per $100 Appraised Valuation Montgomery County... $ Conroe Independent School District Montgomery County Hospital District Emergency Services District No Lone Star College System Total Overlapping Tax Rate... $ The District (a) Total Tax Rate... $ (a) See TAX DATA Debt Service Tax Maintenance Tax. 27

28 TAX DATA Debt Service Tax The Board covenants in the Bond Order to levy and assess, for each year that all or any part of the Bonds remain outstanding and unpaid, a tax adequate to provide funds to pay the principal of and interest on the Bonds. In its order authorizing the issuance of the Bonds, the TCEQ recommended a debt service tax of not less than $0.73 for the tax year following the issuance of the Bonds. See Tax Rate Distribution and Tax Roll Information below. Maintenance Tax The Board has the statutory authority to levy and collect an annual ad valorem tax for the operation and maintenance of the District, if such a maintenance tax is authorized by the District's voters. A maintenance tax election was conducted May 12, 2007, and voters of the District authorized the Board, among other things, to levy a maintenance tax at a rate not to exceed $1.35 per $100 appraised valuation. A maintenance tax is in addition to taxes which the District is authorized to levy for paying principal of and interest on the Bonds. See Debt Service Tax above. Tax Rate Distribution Anticipated 2010(a) Debt Service Tax $0.82 $0.00 $0.00 $0.00 Maintenance Tax Total $1.10 $1.10 $1.10 $1.10 (a) The District has authorized the publication of the 2010 proposed tax rate and expects to adopt such tax rate in August Historical Tax Collections The following statement of tax collections sets forth in condensed form the historical tax experience of the District. Such table has been prepared for inclusion herein based upon information obtained from the Tax Assessor/Collector. Reference is made to such statements and records for further and complete information. See Tax Roll Information below. Net Certified Taxable Assessed Tax Total (b) Total Collections As of 5/31/2010 Valuation (a) Rate Tax Levy Amount Percent 2007 $ 671,090 $ 1.10 $ 7,382 $ 7, % ,030, , , % ,354, , , % (b) (c) Net valuation represents final gross appraised value as certified by the Appraisal District less any exemptions granted. See Tax Roll Information below for gross appraised value, deferments and exemptions granted by the District and the Appraisal District. Represents actual tax levy, including any adjustments by the Appraisal District, as of the date hereof. 28

29 Tax Roll Information The District's appraised value as of January 1 of each year is used by the District in establishing its tax rate. See TAXING PROCEDURES Valuation of Property for Taxation. The following represents the composition of property comprising the 2007 through 2010 Certified Assessed Valuation. A breakdown of the Estimated Taxable Assessed Valuation of $50,029,739, as of May 1, 2010, is not available Certified 2008 Certified 2009 Certified 2010 Certified Assessed Valuation Assessed Valuation Assessed Valuation Assessed Valuation Land $ 1,763,190 $ 10,992,170 $ 11,618,410 $ 13,587,310 Improvements 31,040 6,030,820 15,688,300 33,373,520 Personal Property - 39,638 90, ,710 Total Appraised Valuation $ 1,794,230 $ 17,062,628 $ 27,397,442 $ 47,086,540 Exemptions (1,123,140) (32,368) (42,619) (169,927) Total Taxable Appraised Valuation $ 671,090 $ 17,030,260 $ 27,354,823 $ 46,916,613 Principal Taxpayers The following table represents the principal taxpayers and their taxable appraised value as a percentage of the 2009 Certified Taxable Assessed Valuation of $27,354,823, which represents ownership as of January 1, A principal taxpayer list related to the 2010 Preliminary Assessed Valuation of $42,724,503 or the Estimated Taxable Assessed Valuation of $50,029,739, as of May 1, 2010, are not available Percentage Certified Taxable of 2009 Certified Taxpayer Assessed Valuation Taxable Assessed Valuation D.R. Horton Texas Ltd. (a) $6,215, % Houston Intercontinental Trade (b) 1,064, % Individual 425, % Individual 424, % Individual 410, % Individual 402, % Individual 395, % Individual 393, % Individual 319, % Individual 315, % Total $10,366, % (a) (b) See THE DEVELOPER. No longer a property owner in the District. Tax Adequacy for Debt Service The tax rate calculations set forth below are presented to indicate the tax rates per $100 appraised valuation which would be required to meet average annual and maximum debt service requirements if no growth in the District's tax base occurred beyond the 2010 Certified Taxable Assessed Valuation of $46,916,613, or the Estimated Taxable Assessed Valuation as of May 1, 2010 of $50,029,739. The calculations contained in the following table merely represent the tax rates required to pay principal and interest on the Bonds when due, assuming no further increase or any decrease in taxable values in the District, collection of ninety percent (90%) of taxes levied, and the sale of no additional bonds. See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Debt Service Requirements. Average Annual Debt Service Requirement ( )... $327,111 $0.78 Tax Rate on 2010 Certified Taxable Assessed Valuation... $329,355 $0.73 Tax Rate on Estimated Taxable Assessed Valuation as of May 1, $328,695 Maximum Annual Debt Service Requirement (2034)... $353,405 $0.84 Tax Rate on 2010 Certified Taxable Assessed Valuation... $354,690 $0.79 Tax Rate on Estimated Taxable Assessed Valuation as of May 1, $355,711 29

30 No representation or suggestion is made that the Estimated Taxable Assessed Valuation as of May 1, 2010, for the District will be certified as taxable value by the Appraisal District, and no person should rely upon such amounts or their inclusion herein as assurance of their attainment. See "TAXING PROCEDURES." Authority to Levy Taxes TAXING PROCEDURES The Board is authorized to levy an annual ad valorem tax, without legal limitation as to rate or amount, on all taxable property within the District in an amount sufficient to pay the principal of and interest on the Bonds and any additional bonds payable from taxes which the District may hereafter issue (see RISK FACTORS Future Debt ) and to pay the expenses of assessing and collecting such taxes. The District agrees in the Bond Order to levy such a tax from year to year as described more fully herein under THE BONDS--Source of and Security for Payment. Under Texas law, the Board may also levy and collect an annual ad valorem tax for the operation and maintenance of the District and its water and wastewater system and for the payment of certain contractual obligations. See TAX DATA. Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the Property Tax Code ) specifies the taxing procedures of all political subdivisions of the State of Texas, including the District. Provisions of the Property Tax Code are complex and are not fully summarized here. The Property Tax Code requires, among other matters, county-wide appraisal and equalization of taxable property values and establishes in each county of the State of Texas an appraisal district with the responsibility for recording and appraising property for all taxing units within a county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The Montgomery County Appraisal District (the Appraisal District ) has the responsibility for appraising property for all taxing units within Harris County, including the District. Such appraisal values are subject to review and change by the Montgomery County Appraisal Review Board (the Appraisal Review Board ). Property Subject to Taxation by the District Except for certain exemptions provided by Texas law, all real property, tangible personal property held or used for the production of income, mobile homes and certain categories of intangible personal property with a tax situs in the District are subject to taxation by the District. Principal categories of exempt property include, but are not limited to: property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; certain goods, wares and merchandise in transit; farm products owned by the producer; certain property of charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; travel trailers; and most individually owned automobiles. In addition, the District may by its own action exempt residential homesteads of persons sixty-five (65) years or older and of certain disabled persons to the extent deemed advisable by the Board. The District does not currently grant any exemptions. Qualifying surviving spouses of persons 65 years of age and older would be entitled to receive an exemption equal to the exemption received by the deceased spouse. The District may be required to offer such an exemption if a majority of voters approve it at an election. The District would be required to call such an election upon petition by twenty percent (20%) of the number of qualified voters who voted in the preceding election. The District is authorized by statute to disregard exemptions for the disabled and elderly if granting the exemption would impair the District's obligation to pay tax supported debt incurred prior to adoption of the exemption by the District. Furthermore, the District must grant exemptions to disabled veterans or certain surviving dependents of disabled veterans, if requested, of between $5,000 and $12,000 depending on the disability rating of the veteran. Effective June 19, 2009, a veteran who receives a disability rating of 100% is entitled to an exemption for the full amount of the veteran s residential homestead. See TAX DATA. Residential Homestead Exemptions: The Property Tax Code authorizes the governing body of each political subdivision in the State of Texas to exempt up to twenty percent (20%) (not less than $5,000) of the appraised value of residential homesteads from ad valorem taxation. Where ad valorem taxes have previously been pledged for the payment of debt, the governing body of a political subdivision may continue to levy and collect taxes against the exempt value of the homesteads until the debt is discharged, if the cessation of the levy would impair the obligations of the contract by which the debt was created. The adoption of a homestead exemption may be considered each year, but must be adopted by May 1. The District currently does not grant a homestead exemption. See TAX DATA. 30

31 Freeport Goods and Goods-in-Transit Exemptions: Freeport goods are goods, wares, merchandise, other tangible personal property and ores, other than oil, natural gas and other petroleum products, which have been acquired or brought into the state for assembling, storing, manufacturing, repair, maintenance, processing or fabricating purposes, or used to repair or maintain aircraft of a certified air carrier, and shipped out of the state within one hundred seventy-five (175) days. Freeport goods are exempt from taxation by the District. Effective January 1, 2008, a Goods-in-Transit Exemption may apply to certain tangible personal property that is acquired in or imported into Texas for assembling, storing, manufacturing or fabrication purposes which is destined to be forwarded to another location in Texas not later than 175 days after acquisition or importation, so long as the location where said goods are detained is not directly or indirectly owned by the owner of the goods. The District has taken action to allow taxation of goods-in-transit, and accordingly, the exemption is not available within the District. A taxpayer may not claim both a Freeport Goods Exemption and a Goods-in-Transit Exemption on the same property. Tax Abatement Montgomery County or the City of Conroe may designate all or part of the area within the District as a reinvestment zone. Thereafter, Montgomery County, Conroe Independent School District, the District, and the City of Conroe (if it were to annex the District), at the option and discretion of each entity, may enter into tax abatement agreements with owners of property within the zone. Prior to entering into a tax abatement agreement, each entity must adopt guidelines and criteria for establishing tax abatement, which each entity will follow in granting tax abatement to owners of property. The tax abatement agreements may exempt from ad valorem taxation by each of the applicable taxing jurisdictions, including the District, for a period of up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with the terms of the tax abatement. Each taxing jurisdiction has discretion to determine terms for its tax abatement agreements without regard to the terms approved by the other taxing jurisdictions. Valuation of Property for Taxation Generally, property in the District must be appraised by the Appraisal District at market value as of January 1 of each year. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the District in establishing its tax rolls and tax rate. Generally, assessments under the Property Tax Code are to be based on one hundred percent (100%) of market value, as such is defined in the Property Tax Code. In determining market value, either the replacement cost or the income or the market data method of valuation may be used, whichever is appropriate. Nevertheless, certain land may be appraised at less than market value under the Property Tax Code. Increases in the appraised value of residence homesteads are limited by the Texas Constitution to a cumulative 10 percent annual increase regardless of the market value of the property. The Property Tax Code permits land designated for agricultural use, open space or timberland to be appraised at its value based on the land's capacity to produce agricultural or timber products rather than at its market value. The Property Tax Code permits under certain circumstances that residential real property inventory held by a person in the trade or business be valued at the price all such property would bring if sold as a unit to a purchaser who would continue the business. Provisions of the Property Tax Code are complex and are not fully summarized here. Landowners wishing to avail themselves of the agricultural use, open space or timberland designation or residential real property inventory designation must apply for the designation and the appraiser is required by the Property Tax Code to act on each claimant's right to the designation individually. A claimant may waive the special valuation as to taxation by some political subdivisions while claiming it as to another. If a claimant receives the agricultural use designation and later loses it by changing the use of the property or selling it to an unqualified owner, the District can collect taxes based on the new use, including taxes for the previous three (3) years for agricultural use and taxes for the previous five (5) years for open space land and timberland. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three (3) years. It is not known what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or county-wide basis. The District, however, at its expense has the right to obtain from the Appraisal District a current estimate of appraised values within the District or an estimate of any new property or improvements within the District. While such current estimate of appraised values may serve to indicate the rate and extent of growth of taxable values within the District, it cannot be used for establishing a tax rate within the District until such time as the Appraisal District chooses formally to include such values on its appraisal roll. District and Taxpayer Remedies Under certain circumstances taxpayers and taxing units (such as the District) may appeal the orders of the Appraisal Review Board by filing a timely petition for review in State district court. In such event, the value of the property in question will be determined by the court or by a jury if requested by any party. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Property Tax Code. The Property Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property value, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. 31

32 Levy and Collection of Taxes The District is responsible for the levy and collection of its taxes unless it elects to transfer such functions to another governmental entity. The rate of taxation is set by the Board of Directors, after the legally required notice has been given to owners of property within the District, based upon: a) the valuation of property within the District as of the preceding January 1, and b) the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. Taxes are due October 1, or when billed, whichever comes later, and become delinquent if not paid before February 1 of the year following the year in which imposed. However, a person who is 65 years of age or older or disabled is entitled by law to pay current taxes on his residential homestead in installments or to receive a deferred or abatement of delinquent taxes without penalty during the time he owns or occupies his property as his residential homestead. A delinquent tax incurs a penalty of six percent (6%) of the amount of the tax for the first calendar month it is delinquent, plus one percent (1%) for each additional month or portion of a month the tax remains unpaid prior to July 1 of the year in which it becomes delinquent. If the tax is not paid by July 1 of the year in which it becomes delinquent, the tax incurs a total penalty of twelve percent (12%) regardless of the number of months the tax has been delinquent and incurs an additional penalty for collection costs of an amount established by the District and a delinquent tax attorney. For those taxes billed at a later date and that become delinquent on or after June 1, they will also incur an additional penalty for collection costs of an amount established by the District and a delinquent tax attorney. The delinquent tax accrues interest at a rate of one percent (1%) for each month or portion of a month it remains unpaid. The Property Tax Code makes provisions for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances which, at the option of the District, may be rejected. Rollback of Operation and Maintenance Tax Rate The qualified voters of the District have the right to petition for a rollback of the District s operation and maintenance tax rate only if the total tax bill on the average residence homestead increases by more than eight percent. If a rollback election is called and passes, the rollback tax rate is the current year s debt service and contract tax rates plus 1.08 times the previous year s operation and maintenance tax rate. Thus, debt service and contract tax rates cannot be changed by a rollback election. District's Rights in the Event of Tax Delinquencies Taxes levied by the District are a personal obligation of the owner of the property as of January 1 of the year for which the tax is imposed. On January 1 of each year, a tax lien attaches to property to secure the payment of all state and local taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State of Texas and each local taxing unit, including the District, having power to tax the property. The District's tax lien is on a parity with tax liens of such other taxing units. See FINANCIAL INFORMATION CONCERNING THE DISTRICT (UNAUDITED) Overlapping Taxes. A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien; however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the District is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the cost of suit and sale, by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights (a taxpayer may redeem property within six (6) months for commercial property and two (2) years for residential and all other types of property after the purchaser's deed issued at the foreclosure sale is filed in the county records) or by bankruptcy proceedings which restrict the collection of taxpayer debts. The District s ability to foreclose its tax lien or collect penalties or interest on delinquent taxes may be limited on property owned by a financial institution which is under receivership by the Federal Deposit Insurance Corporation pursuant to the Federal Deposit Insurance Act, 12 U.S.C. 1825, as amended. See RISK FACTORS Tax Collection Limitations. 32

33 LEGAL MATTERS Legal Opinions Issuance of the Bonds is subject to (i) the approving legal opinion of the Attorney General of Texas to the effect that the Bonds are valid and binding obligations of the District payable from a continuing, direct annual ad valorem tax levied without limit as to rate or amount upon all taxable property within the District, and (ii) the legal opinion of Bond Counsel, based upon examination of the transcript of the proceedings incident to authorization and issuance of the Bonds, to the effect that the Bonds are valid and legally binding obligations of the District payable from the sources and enforceable in accordance with the terms and conditions described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors' rights or the exercise of judicial discretion in accordance with general principles of equity, and are payable from annual ad valorem taxes, which are not limited by applicable law in rate or amount, levied against all property within the District which is not exempt from taxation by or under applicable law. Bond Counsel's opinion also will address the matters described below under Tax Exemption. The legal opinion of Bond Counsel will be printed on the Bonds. Such opinion will express no opinion with respect to the sufficiency of the security for or the marketability of the Bonds. In addition to serving as Bond Counsel, Coats Rose Yale Ryman & Lee also acts as counsel to the District on matters not related to the issuance of bonds. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds are based upon a percentage of Bonds actually issued, sold and delivered and, therefore, such fees are contingent upon the sale and delivery of the Bonds. No-Litigation Certificate The District will furnish the Underwriter a certificate, dated as of the date of delivery of the Bonds, executed by both the President and Secretary of the Board, to the effect that no litigation of any nature is then pending against or, to the best knowledge of the certifying officers, threatened against the District contesting or attacking the Bonds or the Bond Order; restraining or enjoining the authorization, execution or delivery of the Bonds; affecting the provisions made for the payment of or security for the Bonds; in any manner questioning the authority of proceedings for the authorization, execution or delivery of the Bonds; or affecting the validity of the Bonds, the Bond Order, the corporate existence or boundaries of the District or the titles of the then present officers of the Board. Qualified Tax-Exempt Obligations - Purchase of the Bonds by Financial Institutions The Code requires a pro rata reduction in the interest expense deduction of a financial institution to reflect such financial institution's investment in tax-exempt obligations acquired after August 7, An exception to the foregoing provision is provided in the Code for "qualified tax-exempt obligations" which include tax-exempt obligations, such as the Bonds, (a) designated by the issuer as "qualified tax-exempt obligations" and (b) issued by a political subdivision for which the aggregate amount of tax-exempt obligations (not including private activity bonds other than qualified 501(c) (3) bonds) to be issued during the calendar year is not expected to exceed $30,000,000. The District will designate the Bonds as "qualified tax-exempt obligations" and will represent that the aggregate amount of tax-exempt obligations (including the Bonds) issued by the District and entities aggregated with the District under the Code during calendar year 2010 is not expected to exceed $30,000,000 and that the District and entities aggregated with the District under the Code have not designated more than $30,000,000 in "qualified tax-exempt obligations" (including the Bonds) during calendar year Notwithstanding this exception, financial institutions acquiring the Bonds will be subject to a twenty percent (20%) disallowance of allocable interest expense. No Material Adverse Change The obligations of the Underwriter to take and pay for the Bonds, and of the District to deliver the Bonds, are subject to the condition that, up to the time of delivery of and receipt of payment for the Bonds, there shall have been no material adverse change in the condition (financial or otherwise) of the District subsequent to the date of sale from that set forth or contemplated in the Official Statement, as it may have been supplemented or amended through the date of sale. Tax Exemption Delivery of the Bonds is subject to an opinion of Coats Rose Yale Ryman & Lee, Houston, Texas, Bond Counsel, to the effect that, pursuant to section 103 of the Internal Revenue Code of 1986 (the Code ), as amended to the date of issuance of the Bonds, existing regulations, published rulings, and court decisions, interest on the Bonds (1) will be excludable from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes assuming continuing compliance by the District with the provisions of the Bond Order subsequent to the issuance of the Bonds, and (2) will not be included in the alternative minimum taxable income of the owners thereof which are individuals or corporations. The statutes, regulations, rulings, and court decisions on which the opinion is based are subject to change. 33

34 In rendering such opinion, Bond Counsel will rely upon representations and certifications of the District made in a certificate pertaining to the use, expenditure, and investment of the proceeds of the Bonds and certain other funds and will assume continuing compliance by the District with the representations and warranties in and covenants of the Bond Order subsequent to the issuance of the Bonds. Failure to comply with any of these covenants would cause interest on the Bonds to be includable in the gross income of the owners thereof from the date of issuance of the Bonds. Except as described above, Bond Counsel will express no other opinion with respect to any other federal, state or local tax consequences under present law or proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Prospective purchasers of the Bonds should be aware that the ownership of taxexempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, S corporations with subchapter C earnings and profits, owners of interests in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry (or who have paid or incurred certain expenses allocable to) tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. Tax Accounting Treatment of Discount and Premium on Certain Bonds The initial public offering price of certain Bonds (the Discount Bonds ) is less than the amount payable on such Bonds at maturity. An amount equal to the difference between the initial public offering price of a Discount Bond (assuming that a substantial amount of the Discount Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes original issue discount to the initial purchaser of such Discount Bond. A portion of such original issue discount allocable to the holding period of such Discount Bond by the initial purchaser will, upon the disposition of such Discount Bond (including by reason of its payment at maturity), be treated as interest excludable from gross income, rather than as taxable gain, for federal income tax purposes, on the same terms and conditions as those for other interest on the Bonds described above under Tax Exemption. Such interest is considered to be accrued actuarially in accordance with the constant interest method over the life of a Discount Bond, taking into account the semiannual compounding of accrued interest, at the yield to maturity on such Discount Bond and generally will be allocated to an initial purchaser in a different amount from the amount of the payment denominated as interest actually received by the initial purchaser during his taxable year. However, such interest may be required to be taken into account in determining the amount of the branch profits tax applicable to certain foreign corporations doing business in the United States, even though there will not be a corresponding cash payment. In addition, the accrual of such interest may result in certain other collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of interests in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Moreover, in the event of the redemption, sale or other taxable disposition of a Discount Bond by the initial owner prior to maturity, the amount realized by such owner in excess of the basis of such Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Discount Bond was held) is includable in gross income. Owners of Discount Bonds should consult with their own tax advisors with respect to the determination for federal income tax purposes of accrued interest upon disposition of Discount Bonds and with respect to the state and local tax consequences of owning Discount Bonds. It is possible that, under applicable provisions governing determination of state and local income taxes, accrued interest on Discount Bonds may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment. The initial public offering price of certain Bonds (the Premium Bonds ) may be greater than the amount payable on such Bonds at maturity. An amount equal to the difference between the initial public offering price of a Premium Bond (assuming that a substantial amount of the Premium Bonds of that maturity are sold to the public at such price) and the amount payable at maturity constitutes premium to the initial purchaser of such Premium Bonds. The basis for federal income tax purposes of a Premium Bond in the hands of such initial purchaser must be reduced each year by the amortizable bond premium. Such reduction in basis will increase the amount of any gain or decrease the amount of any loss to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Bond. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser's yield to maturity. Purchasers of the Premium Bonds should consult with their own tax advisors with respect to the determination of amortizable bond premium with respect to the state and local tax consequences of owning Premium Bonds. 34

35 Sources and Compilation of Information PREPARATION OF OFFICIAL STATEMENT The financial data and other information contained in this Official Statement has been obtained primarily from the District's records, the Developer, the Engineer, the Tax Assessor/Collector, the Appraisal District and information from other sources. All of these sources are believed to be reliable, but no guarantee is made by the District as to the accuracy or completeness of the information derived from such sources, and its inclusion herein is not to be construed as a representation on the part of the District to such effect except as described below under Certification of Official Statement. Furthermore, there is no guarantee that any of the assumptions or estimates contained herein will be realized. The summaries of the agreements, reports, statutes, orders, engineering and other related information set forth in this Official Statement are included herein subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions, and reference is made to such documents for further information. Financial Advisor First Southwest Company is employed as the Financial Advisor to the District to render certain professional services, including advising the District on a plan of financing and preparing the Official Statement, the Official Notice of Sale and the Official Bid Form for the sale of the Bonds. In its capacity as Financial Advisor, First Southwest Company has compiled and edited this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as a part of, its responsibilities to the District and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. Consultants In approving this Official Statement the District has relied upon the following consultants that have provided information used herein. Engineer: The information contained in this Official Statement relating to engineering and to the description of the System and, in particular that information included in the sections entitled THE DISTRICT and THE SYSTEM has been provided by Edminster, Hinshaw, Russ & Associates, Inc., Consulting Engineers, and has been included herein in reliance upon the authority of said firm as experts in the field of civil engineering. Appraisal District: The information contained in this Official Statement relating to the historical breakdown of the certified taxable appraised valuations and the Estimated Taxable Assessed Valuation, have been provided by the Montgomery Central Appraisal District and have been included herein in reliance upon the authority of such entity as experts in assessing the values of property in Montgomery County, including the District. Tax Assessor/Collector: The information contained in this Official Statement relating to the historical breakdown of the certified taxable appraised valuations, tax collection rates, principal taxpayers and certain other historical data concerning tax rates and tax collections has been provided by Tommy Lee of Assessments of the Southwest and is included herein in reliance upon the authority of such person as an expert in assessing property values and collecting taxes. Auditor: The District's audited financial statements for the year ended December 31, 2009, were prepared by McCall Gibson Swedlund Barfoot PLLC, Certified Public Accountants. See APPENDIX A for a copy of the District's December 31, 2009 audited financial statements. A copy of the Management Letter from the District s auditor to the District s Board of Directors relating to the District s financial reporting under Statement of Auditing Standards No. 112, including the District s response thereto, is also included in APPENDIX A. Updating the Official Statement If, subsequent to the date of the Official Statement, the District learns, through the ordinary course of business and without undertaking any investigation or examination for such purposes, or is notified by the Underwriter, of any adverse event which causes the Official Statement to be materially misleading, and unless the Underwriter elects to terminate its obligation to purchase the Bonds, the District will promptly prepare and supply to the Underwriter an appropriate amendment or supplement to the Official Statement satisfactory to the Underwriter; provided, however, that the obligation of the District to so amend or supplement the Official Statement will terminate when the District delivers the Bonds to the Underwriter, unless the Underwriter notifies the District on or before such date that less than all of the Bonds have been sold to ultimate customers, in which case the District's obligations hereunder will extend for an additional period of time (but not more than 90 days after the date the District delivers the Bonds) until all of the Bonds have been sold to ultimate customers. 35

36 Certification of Official Statement The District, acting through its Board in its official capacity, hereby certifies, as of the date hereof, that the information, statements, and descriptions or any addenda, supplement and amendment thereto pertaining to the District and its affairs contained herein, to the best of its knowledge and belief, contain no untrue statement of a material fact and do not omit to state any material fact necessary to make the statements herein, in the light of the circumstances under which they are made, not misleading. With respect to information included in this Official Statement other than that relating to the District, the District has no reason to believe that such information contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein, in the light of the circumstances under which they are made, not misleading; however, the Board has made no independent investigation as to the accuracy or completeness of the information derived from sources other than the District. In rendering such certification, the official executing this OFFICIAL STATEMENT may state that he has relied in part on his examination of records of the District relating to matters within his own area of responsibility, and his discussions with, or certificates or correspondence signed by, certain other officials, employees, consultants and representatives of the District. CONTINUING DISCLOSURE OF INFORMATION The offering of the Bonds qualifies for the Rule 15c2-12(d)(2) exemption from Rule 15c2-12(b)(5) regarding the District's continuing disclosure obligations because the District has not issued more than $10,000,000 in aggregate amount of outstanding bonds and no person is committed by contract or other arrangement with respect to payment of the Bonds. As required by the exemption, in the Bond Resolution, the District has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The District is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board (the MSRB ). The MSRB has established the Electronic Municipal Market Access ( EMMA ) System. Annual Reports The District will provide certain financial information and operating data which is customarily prepared by the District and is publicly available, annually to the MSRB. In addition, the District has agreed to provide information with respect the Developer, any person or entity to whom the Developer voluntarily assigns (except as collateral) the right to receive a payment out of the proceeds from the sale of the bonds of the District, and each other person or entity, if any, to whom the District voluntarily makes or agrees or has agreed to make a payment out of such proceeds. The District will be obligated to provide information concerning the Developer and any such other person or entity only if and so long as (1) such person owns more than 20% of the taxable property within the District by value, as reflected by the most recently certified tax rolls (and without effect to special valuation provisions), (2) such person has made tax or other payments to the District which were used or available to pay more than 20% of the District's debt service requirements in the applicable fiscal year, or (3) at the end of such fiscal year such person is obligated to the District to provide or pay for District facilities or debt in an amount which exceeds 20% of the amount of the District's bonds then outstanding. The financial information and operating data which will be provided with respect to the District is found in the APPENDIX A [the Audit and certain supplemental information], and with respect the Developer is found under TAX DATA Principal Taxpayers. The District will update and provide this information within six months after the end of each of its fiscal years ending in or after The District will provide the updated information to the MSRB. The District may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12 (the Rule ). The updated information will include audited financial statements for the applicable person, if it commissions an audit and the audit is completed by the required time. If the audit of such financial statements is not complete within such period, then the District shall provide unaudited financial statements for the applicable fiscal year to the MSRB within such six month period, and audited financial statements when the audit report on such statements becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in the Bond Order, or such other accounting principles as the District may be required to employ from time to time pursuant to state law or regulation. The District's current fiscal year end is December 31. Accordingly, it must provide updated information by June 30 in each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify the MSRB of the change. Material Event Notices The District will also provide timely notices of certain events to the MSRB. The District will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the taxexempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) 36

37 release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes of the Bonds. In addition, the District will provide timely notice of any failure by it to provide information, data, or financial statements in accordance with its agreement described above under Annual Reports. Availability of Information from MSRB The District has agreed to provide the foregoing information only to the MSRB. The MSRB makes the information available to the public without charge through its Electronic Municipal Market Access internet portal at Limitations and Amendments The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the District to comply with its agreement. The District may amend its continuing disclosure agreement from time to time to adapt the changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, if but only if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering made hereby in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or any person unaffiliated with the District (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. The District may amend or repeal the agreement in the Bond Resolution if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction determines that such provisions are invalid or unenforceable, but only to the extent that its right to do so would not prevent the Underwriters from lawfully purchasing the Bonds in the initial offering. If the District so amends the agreement, it has agreed to include with any financial information or operating data next provided in accordance with its agreement described above under Annual Reports an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. Compliance With Prior Undertakings The District has not previously made a continuing disclosure agreement in accordance with SEC Rule 15c2-12. MISCELLANEOUS All estimates, statements and assumptions in this Official Statement and the APPENDIX hereto have been made on the basis of the best information available and are believed to be reliable and accurate. Any statements in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended as such and not as representations of fact, and no representation is made that any such statements will be realized. This OFFICIAL STATEMENT was approved by the Board of Directors of Montgomery County Municipal Utility District No. 112, as of the date shown on the cover page. ATTEST: /s/ Dr. Robert C. Schucker President, Board of Directors /s/ Pamela Collins Secretary, Board of Directors 37

38 AERIAL LOCATION MAP (Approximate Boundaries as of May 2010)

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40 PHOTOGRAPHS OF THE DISTRICT (Taken May 2010)

41 PHOTOGRAPHS OF THE DISTRICT (Taken May 2010)

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47 APPENDIX A Financial Statements of the District for the year ended December 31, 2009 The information contained in this appendix includes the Annual Audit Report of Montgomery County Municipal Utility District No. 112 and certain supplemental information for the fiscal year ended December 31, 2009.

48 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MONTGOMERY COUNTY, TEXAS ANNUAL FINANCIAL REPORT DECEMBER 31, 2009 McCALL GIBSON SWEDLUND BARFOOT PLLC Certified Public Accountants

49

50 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MONTGOMERY COUNTY, TEXAS ANNUAL FINANCIAL REPORT DECEMBER 31, 2009

51 REQUIRED TABLE OF CONTENTS INI)EPENDENT AUDITOR S REPORT 1-2 MANAGEMENT S DISCUSSION AND ANALYSIS 3-7 STATEMENT OF NET ASSETS ANI) GOVERNMENTAL FUNDS BALANCE SHEET 8 RECONCIIJATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS 9 STATEMENT OF ACTIVITIES AND GOVERNMENTAL FUNDS REVENUES, EXPENDITURES AND CHANGES in FUND BALANCES 10 RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES in FUND BALANCES TO THE STATEMENT OF ACTIVITIES 11 PAGE NOTES TO BASIC FINANCIAL STATEMENTS REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE-BUDGET AND ACTUAL-GENERAL FUND 23 SUPPLEMENTARY INFORMATION - BY THE WATER DISTRICT FINANCIAL MANAGEMENT GUIDE NOTES REQUIRED BY THE WATER DISTRICT FINANCIAL MANAGEMENT GUIDE (Included in the notes to basic financial statements) SERVICES AND RATES GENERAL FUNI) EXPENDITURES investments (NOT APPLICABLE) TAXES LEVIED AND RECEIVABLE LONG-TERM DEBT SERVICE REQUIREMENTS (NOT APPLICABLE) CHANGE IN LONG-TERM BOND DEBT (NOT APPLICABLE) COMPARATIVE SCHEDULE OF REVENUES AND EXPENDITURES GENERAL FUND AND DEBT SERVICE FUND - FIVE YEARS BOARD MEMBERS, KEY PERSONNEL AND CONSULTANTS

52 McCALL GIBSON SWEDLUND BARFOOT PLLC Certified Public Accountants Worthain Center Drive 7801 N. capital of Texas Hwy. Suite 235 Suite 350 Houston, Texas Austin, Texas (713) (512) Fax (713) Fax: (512) www. in gsbpllc. coin Board of Directors Montgomery County Municipal Utility District No. 112 Montgomery County, Texas Independent Auditor s Report We have audited the accompanying financial statements of the governmental activities and each major fund of Montgomery County Municipal Utility District No. 112 (the District ), as of and for the year ended December 31, 2009, which collectively comprise the District s basic financial statements as listed in the preceding table of contents. These financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audit. We have conducted our audit in accordance with auditing standards generally accepted as promulgated within the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and each major fund of the District as of December 31, 2009, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. Member of American Institute of Certified Public Accountants Texas Society of Cert(fled Public Accountants

53 Budget General Board of Directors Montgomery County Municipal Utility District No. 112 The Management s Discussion and Analysis on pages 3 through 7 and the Schedule of Revenues, Expenditures, and Changes in Fund Balance and Actual Fund on page 23 are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District s basic financial statements. The supplementary information required by the Texas Commission on Environmental Quality as published in the Water District Financial Management Guide is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information, excluding that portion marked Unaudited on which we express no opinion, has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. 7)ULjLJ gqfcc McCall Gibson Swedlund Barfoot PLLC Certified Public Accountants April 6,

54 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2009 Our discussion and analysis of Montgomery County Municipal Utility District No. 112 s (the District ) financial performance provides an overview of the District s financial activities for the year ended December 31, Please read it in conjunction with the District s financial statements, which begin on page 8. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The basic financial statements include: (1) combined fund financial statements and government-wide financial statements and (2) notes to the financial statements. The combined fund financial statements and governmentwide financial statements combine both: (1) the Statement of Net Assets and Governmental Funds Balance Sheet and (2) the Statement of Activities and Governmental Funds Revenues, Expenditures and Changes in Fund Balances. This report also includes other supplementary information in addition to the basic financial statements. GOVERNMENT-WIDE FINANCIAL STATEMENTS The District s annual report includes two financial statements combining the government-wide financial statements and the fund financial statements. The government-wide portion of these statements provides both long-term and short-term information about the District s overall status. Financial reporting at this level uses a perspective similar to that found in the private sector with its basis in full accrual accounting and elimination or reclassification of internal activities. The first of the government-wide statements is the Statement of Net Assets. This information is found in the Statement of Net Assets column on page 8. The Statement of Net Assets is the District-wide statement of its financial position presenting information that includes all of the District s assets and liabilities, with the difference reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the District as a whole is improving or deteriorating. Evaluation of the overall health of the District would extend to other non-financial factors. The government-wide portion of the Statement of Activities on page 10 reports how the District s net assets changed during the current period. All current period revenues and expenses are included regardless of when cash is received or paid. -3-

55 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2009 FUND FINANCIAL STATEMENTS The combined statements also include fund financial statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District has one governmental fund type. The General Fund accounts for resources not accounted for in another fund, customer service revenues, costs and general expenditures. Since the government-wide focus includes the long-term view, comparisons between these two perspectives may provide insight into the long-term impact of short-term financing decisions. The adjustments columns, the Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets on page 9 and the Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances to the Statement of Activities on page 11 explain the differences between the two presentations and assist in understanding the differences between these two perspectives. NOTES TO THE BASIC FINANCIAL STATEMENTS The accompanying notes to the basic financial statements provide information essential to a full understanding of the government-wide and fund financial statements. The notes to the basic financial statements can be found on pages 12 through 21 in this report. OTHER INFORMATION In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information ( RSI ). The budgetary comparison schedule is included as RSI for the General Fund. Governmental funds are reported in each of the financial statements. The focus in the fund statements provides a distinctive view of the District s governmental funds. These statements report short-term fiscal accountability focusing on the use of spendable resources and balances of spendable resources available at the end of the year. They are useful in evaluating annual financing requirements of the District and the commitment of spendable resources for the nearterm. -4-

56 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2009 GOVERNMENT-WIDE FINANCIAL ANALYSIS Net assets may serve over time as a useful indicator of the District s financial position. case of the District, liabilities exceeded assets by $730,692 as of December 31, In the A portion of the District s net assets reflects its investments in capital assets (e.g. water, wastewater and drainage facilities), less any debt used to acquire those assets that is still outstanding. The District uses these assets to provide water and wastewater services. The following is a comparative analysis of government-wide changes in net assets: Summary of Changes in the Statement of Net Assets Change Positive (Negative) Current and OtherAssets $ 420,682 $ 225,483 $ 195,199 Capital Assets (Net of Accumulated Depreciation) 9,100,434 6,348,614 2,751,820 Total Assets $ 9,521,116 $ 6,574,097 $ 2,947,019 Due to Developer $ 9,791,524 $ 6,789,842 $ (3,001,682) Other Liabilities 460, ,437 (248,847) Total Liabilities $ 10,251,808 $ 7,001,279 $ (3,250,529) Net Assets: Invested in Capital Assets, Net of Related Debt $ (394,545) $ (169,683) $ (224,862) Unrestricted (336,147) (257,499) (78,648) Total Net Assets $ (730,692) $ 427,182) $

57 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2009 GOVERNMENT-WIDE FINANCIAL ANALYSIS (Continued) The following table provides a summary of the District s operations for the years ended December 31, 2009, and December 31, The District s net assets decreased by $303,510 during the year ended December 31, Summary of Changes in the Statement of Activities 2009 Change Positive 2008 (Negative) Revenues: Property Taxes Charges for Services Other Revenues $ 187, ,524 29,808 $ 7,382 75,048 1,764 $ 179, ,476 28,044 Total Revenues $ 392,665 $ 84,194 $ 308,471 Expenses for Services 696, ,941 (212,234) Change in Net Assets $ (303,510) $ (399,747) $ 96,237 Net Assets, Beginning of Year (427,1 82) (27,435) (399,747) Net Assets, End of Year $ (730,692) 427, ,510) FINANCIAL ANALYSIS OF THE DISTRICT S GOVERNMENTAL FUNDS The General Fund fund balance decreased by $53,648. Fund fund balance was a deficit of $39,602. As of December 31, 2009, the General GENERAL FUND BUDGETARY HIGHLIGHTS The Board of Directors did not amend the budget during the year ended December 31, Actual revenue was $117,926 more than budgeted revenue. Actual expenditures were more than budgeted expenditures by $93,413. In addition, developer advances were less than budgeted. See the budget to actual comparison on page

58 detention MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2009 CAPITAL ASSETS The District s investment in capital assets as of December 31, 2009, amounts to $9,100,434 (net of accumulated depreciation). This investment in capital assets includes the water, wastewater and drainage systems. Significant capital asset events during the current fiscal year included the following: Water Plant in Jacob s Reserve Land pond site Capital Assets At Year-End, Net of Accumulated Depreciation Land and Land Improvements $ 329,589 Equipment 5,412 Water System 3,396,208 Wastewater System 1,802,875 Drainage System 3,566,350 Total Net Capital Assets $ 9, Additional information on the District s capital assets can be found in Note 4 on page 18 of this report. LONG TERM DEBT ACTIVITY As of December 31, 2009, the District has not incurred any long-term bond debt. However, the District has recorded an amount due to the Developer of $9,791,524. This amount relates to construction projects and advances that the Developer has funded on behalf of the District as of December 31, The District anticipates reimbursing the Developer for these costs from future bond proceeds. CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This financial report is designed to provide a general overview of the District s finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to Montgomery County Municipal Utility District No. 112, c/o Coats, Rose, Yale, Ryman & Lee, P.C., 3 Greenway Plaza, Suite 2000, Houston, Texas

59 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 STATEMENT OF NET ASSETS AND GOVERNMENTAL FUNDS BALANCE SHEET DECEMBER 31, 2009 Statement of General Fund Adjustments Net Assets ASSETS Cash,Note3 $ 158,105 $ $ 158,105 Receivables: Property Taxes 206, ,055 Service Accounts (Net of Allowance for Doubtful Accounts $-0-) 8,075 8,075 Prepaid Costs 48,447 48,447 Land, Note 4 329, ,589 Capital Assets (Net of Accumulated Depreciation), Note 4 8,770, ,845 TOTALASSETS 420,682 $ 9,100,434 $ 9,521,116 LIABILITIES Accounts Payable $ 143,422 $ $ 143,422 Due to Developer, Note 8 9,791,524 9,791,524 Due to Taxpayers 4,709 4,709 Security Deposits 11,250 11,250 Deferred Tax Revenue 300, ,903 TOTAL LIABILITIES $ 460,284 $ 9,791,524 $ 10,251,808 FUND BALANCE/NET ASSETS FUND BALANCE Reserved for Prepaid Costs $ 48,447 $ (48,447) $ Unreserved: Undesignated (88,049) 88,049 TOTAL FUND BALANCE $ (39.602) $ $ TOTAL LIABILITIES AND FUND BALANCE NET ASSETS Invested in Capital Assets, Net of Related Debt $ (394,545) $ (394,545) Unrestricted (336,147) (336,147) TOTAL NET ASSETS $ ( ) $ ( ) The accompanying notes to basic financial statements are an integral part of this report. -8-

60 Governmental Governmental MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS DECEMBER 31, 2009 Total Fund Balance Fund $ (39,602) Amounts reported for governmental activities in the Statement of Net Assets are different because: Land used in governmental activities is not a financial resource and therefore is not reported as an asset in governmental funds. 329,589 Capital assets used in governmental activities are not financial resources and therefore are not reported as assets in the governmental funds. 8,770,845 Govermnental funds do not record a long-term liability to the Developer for completed projects and operating advances; however, in the Statement of Net Assets, the liability for completed projects and operating advances is recorded. (9, ) Total Net Assets Activities S ( ) The accompanying notes to basic financial statements are an integral part of this report. -9-

61 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 STATEMENT OF ACTIVITIES AND GOVERNMENTAL FUNDS REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED DECEMBER 31, 2009 Statement of General Fund Adjustments Activities REVENUES PropertyTaxes $ 187,333 $ $ 187,333 Water Service 26,932 26,932 Wastewater Service 29,213 29,213 Conservation District Fees 2,397 2,397 Penalty and Interest 3,267 3,267 Tap Connection and Inspection Fees 113, ,715 Investment Revenues FEMA Reimbursement, Note 12 25,404 25,404 Miscellaneous Revenues 4, TOTAL REVENUES $ 392,665 $ $ 392,665 EXPENDITURES/EXPENSES Service Operations: Professional Fees $ 106,633 $ $ 106,633 Contracted Services 68,170 68,170 Operating Lease, Note 6 59,400 59,400 Repairs and Maintenance 107, ,636 Utilities 31,686 31,686 Depreciation, Note 4 224, ,862 Other ,788 TOTAL EXPENDITURES/EXPENSES $ 471,313 $ 224,862 $ 696,175 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES/EXPENSES S (78,648) $ (224,862) $ (303,510) OTHER FINANCING SOURCES (USES) Developer Advances, Note 8 $ $ (25,000) $ -0- NET CHANGE IN FUND BALANCE $ (53,648) $ 53,648 $ CHANGES IN NET ASSETS (303,510) (303,510) FUND BALANCE/NET ASSETS - JANUARY 1, ,046 (441,228) (427,182) FUND BALANCE(DEFICIT)/NET ASSETS - DECEMBER31,2009 (39.602) $ ( ) $ ( ) The accompanying notes to basic financial statements are an integral part of this report

62 Governmental MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2009 Net Change in Fund Balance - Fund $ (53,648) Amounts reported for governmental activities in the Statement of Activities are different because: Governmental funds do not account for depreciation. However, in the Statement of Net Assets, capital assets are depreciated and depreciation expense is recorded in the Statement of Activities. (224,862) Governmental funds report Developer Advances as other financing sources. However, in the Statement of Net Assets, Developer Advances, net any amount paid to the Developer, are recorded as a liability. (25,000) Change in Net Assets - Governmental Activities $ ( ) The accompanying notes to basic financial statements are an integral part of this report. -11-

63 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 1. CREATION OF DISTRICT Montgomery County Municipal Utility District No. 112 (the District ) was created effective January 9, 2007, by an Order of the Texas Commission on Environmental Quality, (the Commission ). Pursuant to the provisions of Chapters 49 and 54 of the Texas Water Code, the District is empowered to purchase, operate and maintain all facilities, plants and improvements necessary to provide water, sanitary sewer service, storm sewer drainage, irrigation, roads, solid waste collection and disposal, including recycling, and to construct parks and recreational facilities for the residents of the District. The District is also empowered to contract for or employ its own peace officers with powers to make arrests and to establish, operate and maintain a fire department to perform all fire-fighting activities within the District. The Board of Directors held its first meeting on January 31, NOTE 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying basic financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as promulgated by the Governmental Accounting Standards Board. In addition, the accounting records of the District are maintained generally in accordance with the Water District Financial Management Guide published by the Commission. The Governmental Accounting Standards Board has established the criteria for determining whether or not a given entity is a component unit. The criteria are: (1) is the potential component unit a legally separate entity, (2) does the primary government appoint a voting majority of the potential component unit s board, (3) is the primary government able to impose its will on the potential component unit, (4) is there a financial benefit or burden relationship. The District was created as an independent municipality. The District does not meet the criteria for inclusion as a component unit of any entity nor does any other entity meet the component unit criteria for inclusion in the District s basic financial statements. Financial Statement Presentation These financial statements have been prepared in accordance with Governmental Accounting Standards Board (GASB) Statement No. 34-Basic Financial Statements and Management s Discussion and Analysis-for State and Local Governments. The financial statements include: A Management s Discussion and Analysis (MD&A) section providing an analysis of the District s overall financial position and changes in financial position. Government-wide financial statements prepared using the accrual basis of accounting for all of the District s governmental activities

64 This This This MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Statement Presentation (Continued) GASB Statement No. 34 established standards for external financial reporting for all state and local government entities, which include a requirement for a Statement of Net Assets and a Statement of Activities. It requires the classification of net assets into three components: Invested in Capital Assets, Net of Related Debt; Restricted; and Unrestricted. These classifications are defined as follows: Invested in Capital Assets, Net of Related Debt component of net assets consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvements of those assets. Restricted Assets component of net assets consists of external constraints placed on the use of net assets imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulation of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted Net Assets component of net assets consists of net assets that do not meet the definition of Restricted or Invested in Capital Assets, Net of Related Debt. When both restricted and unrestricted resources are available for use, generally it is the District s policy to use restricted resources first. Government-Wide Financial Statements The Statement of Net Assets and the Statement of Activities display information about the District as a whole. The District s Statement of Net Assets and Statement of Activities are combined with the governmental fund financial statements. The District is viewed as a specialpurpose government and has the option of combining these financial statements. The Statement of Net Assets is reported by adjusting the governmental fund types to report on the full accrual basis, economic resource basis, which recognizes all long-term assets and receivables as well as long-term debt and obligations. Any amounts recorded due to and due from other funds are eliminated in the Statement of Net Assets. The Statement of Activities is reported by adjusting the governmental fund types to report only items related to current year revenues and expenditures. Items such as capital outlay are allocated over their estimated useful lives as depreciation expense. Internal activities between governmental funds, if any, are eliminated by adjustment to obtain net total revenue and expense of the government-wide Statement of Activities

65 - 14 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Fund Financial Statements As discussed above, the District s fund financial statements are combined with the governmentwide statements. The fund statements include a Balance Sheet and Statement of Revenues, Expenditures and Changes in Fund Balances. Governmental Funds The District has one major governmental fund. General Fund - To account for resources not required to be accounted for in another fund, customer service revenues, costs and general expenditures. Basis of Accounting The District uses the modified accrual basis of accounting for governmental fund types. The modified accrual basis of accounting recognizes revenues when both measurable and available. Measurable means the amount can be determined. Available means collectable within the current period or soon enough thereafter to pay current liabilities. The District considers revenue reported in governmental funds to be available if they are collectable within sixty (60) days after year end. Also, under the modified accrual basis of accounting, expenditures are recorded when the related fund liability is incurred, except for principal and interest on long-term debt, which are recognized as expenditures when payment is due. Property taxes considered available by the District and included in revenue include the 2008 tax levy collections during the period October 1, 2008 to December 31, The 2009 tax levy has been fully deferred to meet the planned expenditures in the 2010 fiscal year. Amounts transferred from one fund to another fund are reported as another financing source or use. Loans by one fund to another fund and amounts paid by one fund for another fund are reported as interfund receivables and payables in the Governmental Funds Balance Sheet if there is intent to repay the amount and if the debtor fund has the ability to repay the advance on a timely basis. Capital Assets Capital assets, which include property, plant, equipment, and infrastructure assets, are reported in the government-wide Statement of Net Assets. All capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated assets are valued at -

66 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Capital Assets (Continued) their fair market value on the date donated. Repairs and maintenance are recorded as an expenditure in the governmental fund incurred and as an expense in the government-wide Statement of Activities. Capital asset additions, improvements and preservation costs that extend the life of an asset are capitalized and depreciated over the estimated useful life of the asset. Interest costs, including developer interest, engineering fees and certain other costs are capitalized as part of the asset. Assets are capitalized, including infrastructure assets, if they have an original cost greater than $10,000 and a useful life over two years. Depreciation is calculated on each class of depreciable property using the straight-line method of depreciation. Estimated useful lives are as follows: Budgeting Years Buildings 40 Water System Wastewater System Drainage System All Other Equipment 3-20 In compliance with governmental accounting principles, the Board of Directors annually adopts an unappropriated budget for the General Fund. The budget was not amended during the year ended December 31, Pensions The District has not established a pension plan as the District does not have employees. The Internal Revenue Service has determined that Directors are considered to be employees for federal payroll tax purposes only. Measurement Focus Measurement focus is a term used to describe which transactions are recognized within the various financial statements. In the government-wide Statement of Net Assets and Statement of Activities, the governmental activities are presented using the economic resources measurement focus. The accounting objectives of this measurement focus are the determination of operating income, changes in net assets, financial position, and cash flows. All assets and liabilities associated with the activities are reported. Fund equity is classified as net assets

67 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) Measurement Focus (Continued) Governmental fund types are accounted for on a spending or financial flow measurement focus. Accordingly, only current assets and current liabilities are included on the Balance Sheet, and the reported fund balances provide an indication of available spendable or appropriable resources. Operating statements of governmental fund types report increases and decreases in available spendable resources. Fund balances are included on the Balance Sheet as follows: Reserved: To indicate fund equity which is legally segregated for a specific future use. Unreserved: Designated - To indicate fund equity for which the District has made tentative plans. Undesignated - To indicate fund equity which is available for use in future periods. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. NOTE 3. DEPOSITS AND INVESTMENTS Deposits Custodial credit risk is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The District s deposit policy for custodial credit risk requires compliance with the provisions of Texas statutes. Texas statutes require that any cash balance in any fund shall, to the extent not insured by the Federal Deposit Insurance Corporation or its successor, be continuously secured by a valid pledge to the District of securities eligible under the laws of Texas to secure the funds of the District, having an aggregate market value, including accrued interest, at all times equal to the uninsured cash balance in the fund to which such securities are pledged. At fiscal year end, the carrying amount of the District s deposits was $158,105 and the bank balance was $149,130. The bank balance was fully covered by federal depository insurance

68 - 17 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 3. DEPOSITS AND INVESTMENTS (Continued) Deposits (Continued) The carrying values of the deposits are included in the Governmental Funds Balance Sheet and the Statement of Net Assets at December 31, 2009, as listed below: Investments Cash TOTAL DEPOSITS $ Under Texas law, the District is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity and that address investment diversification, yield, maturity, and the quality and capability of investment management, and all District funds must be invested in accordance with the following investment objectives: understanding the suitability of the investment to the District s financial requirements, first; preservation and safety of principal, second; liquidity, third; marketability of the investments if the need arises to liquidate the investment before maturity, fourth; diversification of the investment portfolio, fifth; and yield, sixth. The District s investments must be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. No person may invest District funds without express written authority from the Board of Directors. Texas statutes include specifications for and limitations applicable to the District and its authority to purchase investments as defined in the Public Funds Investment Act. Authorized investments are summarized as follows: (1) obligations of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instrumentalities, (3) certain collateralized mortgage obligations, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States or its agencies and instrumentalities, (5) certain A rated or higher obligations of states, agencies, counties, cities, and other political subdivisions of any state, (6) bonds issued, assumed or guaranteed by the State of Israel, (7) insured or collateralized certificates of deposit, (8) certain fully collateralized repurchase agreements secured by delivery, (9) certain bankers acceptances with limitations, (10) commercial paper rated A-i or P-i or higher and a maturity of 270 days or less, (ii) no-load money market mutual funds and no-load mutual funds with limitations, (12) certain guaranteed investment contracts, (13) certain qualified governmental investment pools and (14) a qualified securities lending program. As of December 31, 2009, the District had no investments. -

69 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 4. CAPITAL ASSETS Capital asset activity for the year ended December 31, 2009: Capital Assets Not Being Depreciation January 1, 2009 Increases December 31, 2009 Land and Land Improvements $ $ 329,589 $ 329,589 Construction in Progress Total Capital Assets Not Being Depreciation $ -0- $ 329,589 $ 329,589 Capital Assets at Historical Cost Subject to Depreciation Equipment $ 9,572 $ $ 9,572 Water System 862,712 2,647,093 3,509,805 Wastewater System 1,890,633 1,890,633 Drainage System 3,753,495 3,753,495 Total Capital Assets at Historical Costs Subject to Depreciation $ 6,516,412 $ 2, $ 9,163,505 Less Accumulated Depreciation Equipment $ 2,245 $ 1,915 $ 4,160 Water System 23,137 90, ,597 Wastewater System 38,682 49,076 87,758 Drainage System 103,734 83, ,145 Total Accumulated Depreciation $ 167,798 $ 224,862 $ 392,660 Total Depreciable Capital Assets, Net of Accumulated Depreciation $ 6,348,614 $ 2.422,23 1 $ 8,770,845 Total Capital Assets, Net of Accumulated Depreciation $ 6.348,614 $ $ 9.100,434 NOTE 5. MAINTENANCE TAX On May 12, 2007, the voters of the District approved the levy and collection of a maintenance tax at a maximum rate of $1.35 per $100 of assessed valuation of taxable property within the District. The maintenance tax is to be used by the General Fund to pay expenditures of operating the District s waterworks and wastewater system. During the year ended December 31, 2009, the District levied an ad valorem maintenance tax at the rate of $1.10 per $100 of assessed valuation, which resulted in a tax levy of $300,903 on the taxable valuation of $27,354,823 for the 2009 tax year. The 2009 tax levy has been fully deferred. On May 12, 2007, the voters of the District approved the levy and collection of a recreational facilities maintenance tax not to exceed $0.10 per $100 of assessed valuation of taxable property within the District. This maintenance tax is to be used by the General Fund to pay expenditures of maintaining the District s recreational facilities. The District did not levy an ad valorem recreational facilities maintenance tax during the current year

70 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 5. MAINTENANCE TAX (Continued) Levy Date Lien Date - Due Date - Delinquent Date - October 1, or as soon thereafter as practicable. January 1. Not later than January February 1, at which time the taxpayer is liable for penalty and interest. NOTE 6. OPERATING LEASE On September 5, 2007, the District entered into a thirty-six (36) month lease agreement to lease a 100,000 gallon per day prepackaged wastewater treatment plant commencing on the first day of the month following substantial completion of the installation and start up of the leased equipment. Substantial completion occurred in April 2008, with lease payments commencing May The installation of the leased equipment was completed at a cost of $409,811, which cost was paid by a developer within the District. The monthly lease payments are $4,950 with interest accruing at 8% on the unpaid balance. Upon payment of each monthly lease payment, 2,700 gallons per day sewage treatment capacity will be reserved for the District s sole use and benefit. During the current fiscal year, the District recorded lease expenditures in the amount of $59,400. After the initial thirty-six (36) month lease has ended, the District may extend the lease on a month to month basis at $4,500 per month. The agreement includes a purchase option whereby the District can purchase the plant at any time in accordance with the provisions outlined in the agreement. The District is responsible for insuring the leased property. The District does not intend to purchase the plant. The following is a schedule of minimum lease payments. Fiscal Year Total Payment , ,800 79,200 NOTE 7. LONE STAR GROUNDWATER CONSERVATION DISTRICT The District is located within the boundaries of the Lone Star Groundwater Conservation District (the Conservation District ). The Conservation District was created under Article 16, Section 59 of the Texas Constitution by House Bill 1842 (the Act ), as passed by the Texas Legislature, in The Act empowers the Conservation District for purposes including the acquisition and provision of surface water and groundwater for residential, commercial, industrial, agricultural, and other uses, the reduction of groundwater withdrawals, the conservation, preservation,

71 - 20 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 7. LONE STAR GROUNDWATER CONSERVATION DISTRICT (Continued) protection, recharge, and prevention of waste of groundwater, and of groundwater reservoirs or their subdivisions, and the control of subsidence caused by withdrawal of water from those groundwater reservoirs or their subdivisions. The Conservation District is overseeing that its participants comply with subsidence district pumpage requirements. The District is required to convert its water supply to surface water over a period of time. A nine-member board of directors governs the Conservation District. The directors serve staggered four-year terms. Each director must qualify to serve as director in the manner provided by Section of the Water Code. The Conservation District charges a fee, currently $0.07 per 1,000 gallons, based on the amount of water pumped from a well, to the owner of wells located within the boundaries of the Conservation District, unless exempted. This fee enables the Conservation District to fulfill its purpose and regulatory functions. The District recorded an expenditure of $1,954 for permit fees assessed during the current fiscal year. NOTE 8. UNREIMBURSED COSTS The District has executed reimbursement agreements with Developers within the District. The agreements call for the Developers to fund costs associated with water, wastewater and drainage facilities until such time as the District can sell bonds. As of December 31, 2009, the Developers within the District indicated that approximately $10,967,000 had been expended on behalf of the District in relation to the agreements. The District has recorded a liability in the amount of $9,494,979 for projects that have been completed as of December 31, This liability has been recorded in the Statement of Net Assets. The agreements also call for the Developers to fund operating costs of the District. To date, the Developers have advanced a total of $296,545, $25,000 during the current year ended December 31, 2009, which has not been repaid by the District. This liability has been recorded in the Statement of Net Assets. NOTE 9. RISK MANAGEMENT The District is exposed to various risks of loss related to torts; theft of damage to and destruction of assets; errors and omissions; and natural disasters for which the District carries commercial insurance. There have been no significant reductions in coverage from the prior year and settlements have not exceeded coverage since inception. -

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73 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2009 NOTE 10. BONDS VOTED At an election within the District on May 12, 2007, voters approved for the District to issue water and sewer bonds up to a maximum of $80,000,000. On May 12, 2007, the voters approved for the District to issue recreational facilities bonds in the amount of $3,000,000. On November 6, 2007, the voters of the District approved for the District to issue $2,500,000 in road bonds. NOTE 11. ECONOMIC DEPENDENCY AND DEFICIT FUND BALANCE The District recorded a deficit fund balance of $39,602 as of December 31, The District s Developer owns a substantial portion of the taxable property within the District. The District is dependant upon the Developer for operating advances to meet operating needs and eliminate deficits as they occur. The Developer s ability to make full and timely payments of taxes will directly affect the District s ability to meet its financial obligations. NOTE 12. FEMA REIMBURSEMENT During the current year, the District was awarded $25,404 from the Texas Department of Public Safety s Division of Emergency Management. These funds were pass-through funds from the Federal Emergency Management Agency ( FEMA ) to reimburse the District for costs associated with damage caused by Hurricane Ike on September 13, NOTE 13. PENDING BOND SALE On December 1, 2009, the District approved an order authorizing an application to the TCEQ for approval of project and issuance of bonds in the amount of $4,575,000. The proceeds will be used to reimburse a developer within the District for costs related to the purchase of land and the construction of a water plant. As of the date of this report, the District s application has not been approved

74 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 REQUIRED SUPPLEMENTARY INFORMATION DECEMBER 31, 2009

75 - 23 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL - GENERAL FUND FOR THE YEAR ENDED DECEMBER 31, 2009 Variance Original Positive Budget Actual (Negative) REVENUES Property Taxes $ 179,739 $ 187,333 $ 7,594 Water and Wastewater Service 25,000 56,145 31,145 Conservation District Fees 2,397 2,397 Penalty and Interest 3,267 3,267 Tap Connection and Inspection Fees 70, ,715 43,715 Investment Revenues FEMA Reimbursement 25,404 25,404 Miscellaneous Revenue TOTAL REVENUES $ 274,739 $ 392,665 $ 117,926 EXPENDITURES Service Operations: Professional Fees $ 82,000 $ 106,633 $ (24,633) Contracted Services 51,000 68,170 (17,170) Operating Lease 59,400 59,400 Utilities 35,000 31,686 3,314 Repairs and Maintenance 50, ,636 (57,636) Other ,788 2,712 TOTAL EXPENDITURES $ 377,900 $ 471,313 $ (93,413) EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES $ (103,161) $ (78,648) $ OTHER FINANCING SOURCES (USES) Developer Advances $ 100,000 $ 25,000 $ (75,000) NET ChANGE IN FUND BALANCE $ (3,161) $ (53,648) $ (50,487) FUND BALANCE - JANUARY 1, ,046 14,046 FUND BALANCE (DEFICIT) - DECEMBER31, 2009 $ 10,885 $ (39,602) $ (50,487) See accompanying independent auditor s report. -

76 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 SUPPLEMENTARY INFORMATION - REQUIRED BY THE WATER DISTRICT FINANCIAL MANAGEMENT GUIDE DECEMBER 31, 2009

77 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 SERVICES AND RATES FOR THE YEAR ENDED DECEMBER 31, SERVICES PROVIDED BY THE DISTRICT DURING THE FISCAL YEAR: X Retail Water Wholesale Water X Drainage X Retail Wastewater Wholesale Wastewater Irrigation X Parks/Recreation Fire Protection X Security X Solid Waste/Garbage Flood Control X Roads Participates in joint venture, regional system and/or wastewater service (other than emergency interconnect) Other (specifi): 2. RETAIL SERVICE PROVIDERS a. RETAIL RATES FOR A 5/8 METER (OR EQUIVALENT): Based on the rate order effective September 8, Flat Rate per 1,000 Minimum Minimum Rate Gallons over Charge Usage Y/N Minimum Use Usage Levels WATER: $ ,000 N $0.50 8,001 to 20,000 $ ,001 to 30,000 $ ,001 to 40,000 $3.50 Over 40,000 WASTEWATER: $20.60 Y SURCHARGE: Solid Waste/ Garbage Groundwater $ 0.07 per 1,000 gallons + 10% Conservation District Other District employs winter averaging for wastewater usage? Yes X No Total monthly charges per 10,000 gallons usage: Water: $12.00 Wastewater: $20.60 Surcharge: $0.77 Total: $33.37 See accompanying independent auditor s report

78 3 x MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 SERVICES AND RATES FOR THE YEAR ENDED DECEMBER 31, RETAIL SERVICE PROVIDERS (Continued) b. WATER AND WASTEWATER RETAIL CONNECTIONS: (Unaudited) Total Active ESFC Active Meter Size Connections Connections Factor ESFCs Unmetered x 1.0 <¼ x x25 3 1Y2 x x x x x x115.0 Total Water Connections Total Wastewater Connections x TOTAL WATER CONSUMPTION DURING THE FISCAL YEAR ROUNDED TO THE NEAREST THOUSAND: (Unaudited) Gallons billed to customers: 31,441,000 Water Accountability Ratio: 94.6% (Gallons billed/gallons pumped) Gallons pumped in system: 33,387,000 Estimated water loss: 150,000 See accompanying independent auditor s report

79 No MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 SERVICES AND RATES FOR THE YEAR ENDED DECEMBER 31, STANDBY FEES (authorized only under TWC Section ): Does the District have Debt Service standby fees? Yes X Does the District have Operation and Maintenance standby fees? Yes No X 5. LOCATION OF DISTRICT: Is the District located entirely within one county? Yes X No County or Counties in which District is located: Montgomery County, Texas Is the District located within a city? Entirely Partly Not at all X Is the District located within a city s extra territorial jurisdiction (ETJ)? Entirely X Partly Not at all ETJ in which the District is located: City of Conroe, Texas Are Board Members appointed by an office outside the District? Yes No X See accompanying independent auditor s report

80 - 28 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 GENERAL FUND EXPENDITURES FOR THE YEAR ENDED DECEMBER 31, 2009 PERSONNEL EXPENI)ITURES (Including Benefits) $ -0- PROFESSIONAL FEES: Auditing $ 8,000 Engineering 45,359 Legal 52,606 Legal - Delinquent Taxes 668 TOTAL PROFESSIONAL FEES $ 106,633 PURCHASED SERVICES FOR RESALE $ -0- CONTRACTED SERVICES: Appraisal District $ 1,548 Bookkeeping 5,950 Operations and Billing 6,783 Tax Assessor/Collector TOTAL CONTRACTED SERVICES $ 17,881 UTILITIES: Electricity $ 31,686 REPAWS AND MAINTENANCE $ 107,636 ADMINISTRATIVE EXPENDITURES: Director Fees $ 3,750 Insurance 9,927 Legal Notices 567 Office Supplies and Postage 14,942 Operating Lease 59,400 Payroll Taxes and Administration 264 Travel and Meetings 326 Other 276 TOTAL ADMINISTRATIVE EXPENDITURES $ 89,452 CAPITAL OUTLAY: Capitalized Assets $ Expenditures not Capitalized TOTAL CAPITAL OUTLAY $ -0- TAP CONNECTION EXPENDITURES $ SOLID WASTE DISPOSAL $ 11,584 FIRE FIGHTING $ -0- See accompanying independent auditor s report. -

81 - 29 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 GENERAL FUND EXPENDITURES FOR THE YEAR ENDED DECEMBER 31, 2009 PARKS ANI) RECREATION $ -0- SECURITY $ 38,705 OTHER EXPENDITURES: Chemicals $ 1,501 Laboratory Fees 15,937 Permit Fees 3,304 Reconnection Fees 695 Regulatory Assessment 277 Inspection Fees 10,180 Sludge Hauling 660 TOTAL OTHER EXPENDITURES $ 32,554 TOTAL EXPENDITURES $ 47L313 Number of persons employed by the District -0- Full-Time -0- Part-Time See accompanying independent auditor s report. -

82 JANUARY DECEMBER - 30 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 TAXES LEVIED AND RECEIVABLE FOR THE YEAR ENDED DECEMBER 31, 2009 Maintenance Tax TAXES RECEIVABLE 1, 2009 $ 174,221 Adjustments to Beginning Balance S 174,221 Original 2009 Tax Levy $ 300,903 Adjustment to 2009 Tax Levy 300,903 TOTAL TO BE ACCOUNTED FOR S 475,124 TAX COLLECTIONS: Prior Years S 174,221 Current Year 94, ,069 TAXES RECEIVABLE - 31, 2009 $ 206,055 See accompanying independent auditor s report. -

83 Maximum MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 TAXES LEVIED AND RECEIVABLE FOR THE YEAR ENDED DECEMBER 31, PROPERTY VALUATIONS Land $ 11,618,410 $ 10,992,170 $ 1,763,190 Improvements 15,786,160 6,030,820 31,040 Personal Property 90,732 39,638 Exemptions (140,479) (32,368) (1.123,140) TOTAL PROPERTY VALUATIONS $ 27,354,823 $ 17,030,260 $ 671,090 MAINTENANCE TAX RATE PER $100 VALUATION ADJUSTED TAX LEVY* $ 300,903 $ PERCENT OF TAXES COLLECTED TO TAXES LEVIED % % % * Based upon adjusted tax at time of audit for the fiscal year in which the tax was levied. Maximum Tax tax rate of $1.35 per $100 of assessed valuation approved by voter on May 12, See accompanying independent auditor s report

84 - 32 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 COMPARATIVE SCHEDULE OF REVENUES AND EXPENDITURES GENERAL FUND - FIVE YEARS Amounts * 2007 REVENUES Property Taxes $ 187,333 $ 7,382 $ Water Service 26,932 16,827 Wastewater Service 29,213 16,243 Conservation District Fees 2,397 1,647 Penalty and Interest 3, Tap Connection and Inspection Fees 113,715 40,185 Investment Revenues Miscellaneous Revenues 29,684 1,530 TOTAL REVENUES $ 392,665 $ 84,194 $ EXPENDITURES Professional Fees $ 106,633 $ 64,704 $ Contracted Services 68,170 45,278 Operating Lease 59,400 39,600 Utilities 31,686 32,902 Repairs and Maintenance 107,636 45,612 Other 97,788 88,047 Capital Outlay 417,672 TOTAL EXPENDITURES $ 471,313 $ 733,815 $ EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES $ (79,648) $ (649,621) $ OTHER FINANCING SOURCES (USES) Developer Advances $ 25,000 $ 649,557 $ NET CHANGE IN FUND BALANCE $ (53,648) $ (64) $ BEGINNING FUND BALANCE 14,046 14,110 ENDING FUND BALANCE $ (39.602) $ S N/A * First audit was for year ended December 31, See accompanying independent auditor s report. -

85 - 33 Percent_of Total_Revenue * $ $ 47.7% 8.8% $ $ 100.0% 100.0% $ $ 27.2% 76.9% $ $ 120.1% 871.7% $ $ (20.1)% (771.7)% NIA J4IA $ $ $ $ $ N/A $ N/A See accompanying independent auditor s report. -

86 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 COMPARATIVE SCHEDULE OF REVENUES AND EXPENDITURES DEBT SERVICE FUND - FIVE YEARS Amounts * 2007 REVENUES Property Taxes $ $ $ Penalty and Interest Investment Revenues Miscellaneous Revenues TOTAL REVENUES $ $ $ EXPENDITURES Tax Collection Expenditures $ $ $ Debt Service Principal Debt Service Interest and Fees TOTAL EXPENDITURES $ $ $ EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES $ $ $ BEGINNING FUND BALANCE ENDING FUND BALANCE S N/A $ N/A $ N/A TOTAL ACTIVE RETAIL WATER CONNECTIONS N/A TOTAL ACTIVE RETAIL WASTEWATER CONNECTIONS N/A * First audit was for year ended December 31, See accompanying independent auditor s report

87 Percent of Total Revenue * $ $ $ $ $ $ $ $ $ $ NLA NLA N/A NIA NLA $ N/A $ N/A N/A N/A N/A N/A See accompanying independent auditor s report

88 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 BOARD MEMBERS, KEY PERSONNEL AND CONSULTANTS DECEMBER 31, 2009 District Mailing Address - District Telephone Number - Montgomery (713) County Municipal Utility District No. 112 do Coats, Rose, Yale, Ryman & Lee, P.C. 3 Greenway Plaza, Suite 2000 Houston, TX Term of Expense Office Fees of Office reimbursements for (Elected or for the year ended the year ended Board Members Appointed) December 31, 2009 December 31, 2009 Title Dr. Robert C. Schucker 05/07- $ 1,050 $ 19 President 05/10 (Elected) Carla J. Haddox 05/0 8- $ 900 $ 17 Vice 05/12 President (Elected) Pamela Collins 05/07- $ 1,050 $ 246 Secretary 05/10 (Elected) Pam Madrigal 09/09- $ 450 $ 38 Assistant 05/12 Secretary (Appointed) Notes: No Director has any business or family relationships (as defined by the Texas Water Code) with major landowners in the District, with the District s developers or with any of the District s consultants. The submission date of the most recent District Registration Form was (TWC Sections and ): April 6, The limit on Fees of Office that a Director may receive during a fiscal year is $7,200 as set by Board Resolution (TWC Section ) on January 31, Fees of office are the amounts actually paid to a Director during the District s current fiscal year. See accompanying independent auditor s report. -36-

89 MONTGOMERY COUNTY MUNICIPAL UTILITY DISTRICT NO. 112 BOARD MEMBERS, KEY PERSONNEL AND CONSULTANTS DECEMBER 31, 2009 Fees for the year ended December 31, Consultants: Date Hired 2009 Title Coats, Rose, Yale, Ryman & Lee, P.C. 01/31/07 $ 52,606 Attorney! 3 Greenway Plaza, Suite 2000 $ 668 Delinquent Houston, TX Tax Attorney McCall Gibson Swedlund Barfoot PLLC 12/09/08 $ 8,000 Auditor Certified Public Accountants Wortham Center Drive, Suite 235 Houston, TX Myrtle Cruz, Inc. 01/31/07 $ 6,763 Bookkeeper 1621 Milan, 3rd Floor Houston, TX Montgomery County Appraisal District Legislative $ 1,548 Central 109 Gladstell Street, Suite 2233 Action Appraisal Conroe, TX District Edminster, Hinshaw, Russ & Associates, Inc. 01/31/07 $ 69,979 Engineer Westoffice Drive Houston, TX Mary Jarmon 01/31/07 $ -0- Investment 1621 Milam, 3 Floor Officer Houston, TX Municipal Operations & Consulting 03/08/07 $ 142,905 Operator 230 Spring Hill Drive, Suite 325 Spring, TX Assessments of the Southwest 09/01/07 $ 4,607 Tax P. 0. Box 1368 Assessor! Friendswood, TX Collector See accompanying independent auditor s report