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13. Resolution 5001 - Board of Investments Loan - Meters and HydrantsCity of Kalispell Past Office Box 1997 , s 'spell° Fax (406;758-77-58 REPORT TO: Mayor Kennedy and City Council Members FROM: Amy Robertson, Finance Director James Patrick, City Manager SUBJECT: Board of Investments-10 year loan $517,000 for Phase III of the water meter replacement and hydrant upgrade program MEETING DATE: April 4, 2005 BACKGROUND: Approved in the FY2005 budget, funds have been appropriated to purchase meters and hydrants for Phase III of the meter replacement program; $360,000 for meters and $110,000 for the hydrants plus the 10% reserve ($47,000) requirement totals the $517,000 approved by the Board of Investments. Council previously adopted the Reimbursement Resolution. The documents being prepared by Dorsey & Whitney LLP are required any time there is existing debt (bonds payable) in order to insure parity and coverage requirements are met by the City Water Fund on behalf of all the bond holders. Council action is needed to adopt this Resolution authorizing issuance and fixing the terms and conditions of the bond sale. The board of Investments lntercap program is a variable interest program; the current rate is 3.8%. RECOMMENDATION: Adoption of Resolution. FISCAL EFFECTS: Amy Robertson Finance Director Total new revenue is $ 517,000. Report compiled: March 30, 2005 ames . Patrick City Manager RESOLUTION NO.5001 RESOLUTION RELATING TO $517,000 WATER SYSTEM REVENUE BOND, SERIES 2005; AUTHORIZING THE ISSUANCE AND FIXING THE TERMS AND CONDITIONS THEREOF AND THE ,SECURITY THEREFOR. BE IT RESOLVED by the City Council (the "Council") of the City of Kalispell, Montana (the "City"), as follows: Section 1. Authorization and Recitals. 1.01 Authorization. The City pursuant to authority conferred by Montana Code Annotated, Title 7, Chapter 7, Parts 44 and 45, as amended (the "Act"), and other laxvs of the State of Montana, has established and presently owns and operates a municipal water system (the "System"). Under the provisions of the Act, the City is authorized to issue and sell its revenue bonds payable during a term not exceeding forty years from their date of issue, to provide funds for the reconstruction, improvement, betterment and extension of the System and to refund its revenue bonds issued for such purpose; provided that the bonds and the interest thereon are to be payable solely out of the net income and revenues to be derived from rates, fees and charges for the services, facilities and commodities furnished by the undertaking, and are not to create any obligation for the payment of which taxes may be levied except to pay for services provided by the System to the City. 1.02 Outstanding Debt; Definitions. In accordance with the authorization described in Section 1.01, the City has issued and there are outstanding its Water System Revenue Bond (DNRC Drinking Water Revolving Loan Program), Series 2001 (the "Series 2001 Bond"), outstanding in the total principal amount of $653,000, its Water System Revenue Bond, Series 2003 (the "Series 2003 Bond"), outstanding in the total principal amount of $779,072, its Water System Revenue and Refunding Bonds, Series 2004 (the "Series 2004 Bonds"), outstanding in the total principal amount of $1,840,000, and its Water System Revenue Bond, Series 2004A (the "Series 2004A Bond"), outstanding in the total principal amount of $465,500, issued to finance or refinance the costs of certain improvements to the System, pursuant to Resolution No. 4273, adopted by this Council on June 17, 1996, as amended and supplemented by Resolution Nos. 4603, 4758, 4892, and 4927, adopted by this Council on March 5, 2001, December 2, 2002, May 1.7, 2004, and August 16, 2004, respectively (as so amended and supplemented, the "Resolution"). Apart from the Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, and the Series 2004A Bond, there are no other bonds or indebtedness of the City outstanding that are payable in whole or in part from or secured by revenues of the System.. Terms which are defined in the Resolution shall have the same meanings when used herein, unless such terms are also defined in this Supplemental Resolution. 1.03 The Project. The City has determined the necessity of upgrading the System. The Project consists of the acquisition, construction and installation of various improvements to the System, including changing out residential water meters and installation of fire hydrants (the `.Project"). The estimated costs of the Project, including engineering costs (but excluding costs of issuance), are estimated to be $51.7,000, and consist of the following items: Total Costs Water Meters $360,225 Fire Hydrants 110,225 Reserve Account 46,550 Total: $517,000 1.04 Additional Bonds. In Section 6.01 of the Resolution, the City reserved the right to issue Additional Bonds upon certain terms and conditions, including obtaining a certificate or report from an Independent Consultant stating that the Net Revenues in the Fiscal Year immediately preceding the issuance of such Additional Bonds were at least 125% of the maximum Principal and Interest Requirements for any complete Fiscal Year during the term of the then Outstanding Bonds with respect to the Outstanding Bonds and the Series 2005 Bond (as hereinafter defined). It is hereby determined, declared and found that the City is authorized, based on the covenants made in this Supplemental Resolution and the clarification set forth herein under Section 6, to issue $517,000 in aggregate principal amount of Bonds to finance costs of the Project under Section 6.01 of the Resolution (the "Series 2005 Bond"). The City has obtained a certificate of an Independent Consultant in accordance with the previous paragraph of this Section and Section 6.01 of the Resolution. The Series 2005 Bond is an Additional Bond under the Resolution, and shall be and is hereby declared to be secured by a lien on the Net Revenues on a parity with the outstanding Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and any Additional Bonds hereafter issued. 1.05 Net Revenues Available. The City is authorized to charge just and equitable fees, rates, charges and rentals for all services directly or indirectly furnished by the System, and to pledge and appropriate to the Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and the Series 2005 Bond the Net Revenues to be derived from the operation of the System, including improvements, betterments or extensions thereof hereafter constructed or acquired. The Net Revenues to be produced by such fees, rates, charges and rentals, as most recently increased, during the term of the Series 2005 Bond, are estimated to be more than sufficient to pay the principal and interest when due on the Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond and the Series 2005 Bond, and to create and maintain reasonable reserves therefor and to provide an allowance for replacement and depreciation, as prescribed by the Resolution. 1.06 Sale and Authorization of Series 2005 Bond. Pursuant to the authority recited in Section 1.01. and for the purpose of financing the cost of the Project, this Council hereby authorizes the issuance of the Series 2005 Bond. The City has received an offer from the Board of Investments of the State of Montana (the "Board of Investments") through its INTERCAP Program to purchase the Series 2005 Bond at a price of $517,000, plus interest accrued on the Series 2005 Bond to the date of delivery, if any, upon the terms and conditions set forth herein. The terms and conditions of the offer are reasonable and advantageous to the City and are hereby accepted. The City is authorized and shall proceed to issue and deliver the Series 2005 Bond in 2 the form and upon the terms and conditions provided in the Resolution, as supplemented by this Supplemental Resolution. 1.07 Recitals. All acts, conditions and things required by the Constitution and laws of the State of Montana to be done, to exist, to happen and to be performed prior to the issuance of the Series 2005 Bond have been done, do exist, have happened, and have been performed in due time, form and manner, wherefore it is now necessary for this Council to establish the form and terms of the Series 2005 Bond and to provide for the security thereof and to issue the Series 2005 Bond. Section 2. Terms Form and Execution of and Security for the Series 2005 Bond. 2.01 General Terms. The City shall forthwith issue the Series 2005 Bond in the principal amount of $517,000. The Series 2005 Bond shall be dated as of the date of its delivery. Upon each disbursement of the Series 2005 Bond proceeds, the Board of Investments shall enter the amount advanced on Schedule A attached thereto under "Advances" and the total amount advanced under this Resolution, including such disbursement, under "Total Amount Advanced." The Series 2005 Bond shall be lettered and numbered R-1 and shall be payable semi-annually, with a final stated maturity date of August 15, 2015, subject to redemption as herein provided, and shall bear interest on the principal amount thereof advanced at the rate per annum equal to the Variable Rate (as hereinafter defined), as such may be adjusted from time to time as hereinafter provided. Interest shall be computed on the basis of the actual number of days in the years and the actual number of days amounts advanced under the Series 2005 Bond are outstanding. Interest Only shall be payable on the outstanding principal amount of the Series 2005 Bond through August 15, 2005, and thereafter installments of principal and interest shall be payable on each February 15 and August 15, commencing February 15, 2006, through the final stated maturity of the Series 2005 Bond, subject to prior redemption as herein provided. All outstanding principal, together with accrued and unpaid interest on the Series 2005 Bond, shall be payable on the final stated maturity of the Series 2005 Bond. Payments of principal of and interest on the Series 2005 Bond shall be made to the registered holder of the Series 2005 Bond, at its address as it appears on the Register on the date such principal and interest are payable, in lawful money of the United States of America. Outstanding principal of the Series 2005 Bond shall bear interest from the date of advancement thereof under the Series 2005 Bond until paid at the Variable Rate, as such may be adjusted from time to time as hereinafter provided. Until the initial Adjustment Date for the Series 2005 Bond (February 16, 2006), the Variable Rate shall be three and eighty hundredths percent (3.50%) per annum. Thereafter, for each Adjustment Period during the term of the Series 2005 Bond, the Variable Rate shall be the rate per annum equal to the then prevailing rate of interest determined by the Board of Investments under the INTERCAP Program (the "Board of Investments Rate''). If for any reason the interest rate cannot be established as so provided or is held invalid or unenforceable by a court of law, the interest rate for the Series 2005 Bond for the Adjustment Period shall be a rate equal to the largest integral multiple of five hundredths of one percent (0.05%) that is equal to or Tess than eighty percent (80%) of the average yield, evaluated at par, of United States 'Treasury obligations with a stated or remaining maturity of one year, as reported in The Wall Street Journal (Des Moines Edition) (or, if such paper is no longer published or fails to report such information, in any other financial periodical selected by the City acceptable to the .Board of Investments) on the Adjustment Date or, if the Adjustment Date 3 is not a Business Day (as hereinafter defined), the immediately preceding Business Day, but in no event to exceed fifteen percent (15.00%) per annum. As used herein, "Adjustment Date" means February 16 during the term of the Series 2005 Bond and "Adjustment Period" means the period beginning on an Adjustment Date and ending on the day immediately preceding the next succeeding Adjustment Date or the final stated maturity of the Series 2005 Bond, whichever is earlier; provided that if the Series 2005 Bond is not paid at its final stated maturity, the final Adjustment Period with respect to the Series 2005 Bond shall extend until it is paid or provision has been duly made for its payment. `Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a legal holiday in the State of Montana. If a stated maturity for the payment of any interest on or principal of the Series 2005 Bond or if any redemption date shall be a day which is not a Business Day, then such payment may be made on the next succeeding Business Day, with the same force and effect as if made on such stated maturity or redemption date. 2.02 Registration. The Series 2005 Bond shall be fully registered as to both principal and interest and shall be initially registered in the name of and payable to the Board of Investments. While so registered, principal of and interest on the Bond shall be payable at the office of U.S. Bank National Association, as Trustee for the INTERCAP Program, in Seattle, Washington, or such other place as may be designated by the Board of Investments in writing and delivered to the Finance Director. The Finance Director and his or her successors in office shall act as Registrar for the Series 2005 Bond and as such shall establish and maintain a Bond Register for the purpose of recording the names and addresses of the registered holder or assigns of the Series 2005 Bond, and the date of registration. The City reserves the right to appoint a successor Registrar which may be a financial institution. The City shall pay all fees and charges of such Registrar for such services. 2.03 Redemption. The Series 2005 Bond is subject to redemption at the option of the City on any Business Day, in whole or in part at a Redemption Price equal to the principal amount of the Series 2005 Bond or portions thereof to be redeemed with interest accrued to the date of redemption and without premium. Notice of the call for redemption shall be mailed by the City to the registered holders of the Series 2005 Bond by first-class mail to the addresses of such Holders shown on the registration books maintained by the Bond Registrar not less than 30 days before the date of redemption. It shall not be necessary for the Holder to surrender this the Series 2005 Bond for payment upon the partial redemption hereof. The Holder agrees to note the date and principal amount of any partial redemption of the Series 2005 Bond thereon, but any failure to do so shall not affect the validity of any such redemption. 2.04 Form of Series 2005 Bond. The Series 2005 Bond shall be prepared in substantially the form attached as Exhibit A to this Resolution (which is hereby incorporated herein and made a part hereof) with such appropriate variations, omissions and insertions as are permitted or required by this Resolution. 2.05 Assignment. The Series 2005 Bond shall be transferable by the registered owner or attorney duly authorized in writing upon presentation thereof to the Finance Director together with a written instrument of transfer satisfactory to the Finance Director duly executed by the registered owner or its attorney_ Such transfer shall be noted on the Series 2005 Bond. Upon request of the registered owner or transferee, the City shall execute and deliver another Series 4 2005 Bond of a principal amount equal to the outstanding principal amount of the Series 2005 Bond and maturing at the same time as the Series 2005 Bond so transferred, and the Series 2005 Bond so surrendered for transfer shall be promptly canceled by the Finance Director. No service charge shall be made for such transfer, but the City may require payment of a sum sufficient to cover any tax, fee or governmental charge or other expense incurred by the City with respect to such transfer. Until and unless otherwise provided by resolution of this Council, the following shall be a sufficient written instrument of transfer within the meaning of this Section 2.05: ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto: the Water System Revenue Bond, Series 2005, No. R- , of the City of Kalispell, Montana, and all rights thereunder, and hereby irrevocably constitutes and appoints attorney to transfer the Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated: Registered Owner 2.06 Preparation, Execution and Delivery of Series 2005 Bond. The Series 2005 Bond shall be prepared under the direction of the City Clerk and shall be executed on behalf of the City by the signatures of the Mayor, City Manager and the Finance Director and sealed with the official seal of the City. When the Bond has been executed, the City Clerk shall cause it to be dated as of the date of delivery and delivered to the Board of Investments, as purchaser thereof, upon payment of the purchase price heretofore agreed upon, and the Board of Investments shall not be obligated to see to the application of the purchase price. 2.07 Rates and Charges. It is expressly understood that the Series 2005 Bond will be payable from and secured by the Net Revenues of the System. The City hereby covenants and agrees with the Holder of the Series 2005 Bond that the City has established fees, rates, charges and rentals for all services directly or indirectly furnished by the System, such that such rates, charges and rentals are reasonable and expected to be sufficient to produce Net Revenues of the System in each Fiscal Year, not less than 125% of the maximum annual principal and interest payable from the Debt Service Account in respect of the Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and the Series 2005 Bond. Section 3. City Covenants. The City covenants and agrees with the holders from time to time of each of the Series 2005 Bond that until the Series 2005 Bond and interest thereon are fully paid: 3.01 Compliance with Covenants. The City will hold the Water System Fund of the City, as trust funds, separate and apart from all of its other funds, and the City, its officers and agents, will comply with all covenants and agreements contained in the Resolution. 5 3.02 Construction of Project. The City will do all acts and things necessary to enforce the provisions of the construction contracts entered into or to be entered into for the Project and to ensure the completion of the Project in accordance with the plans and specifications therefor and within the time therein provided, and will pay all costs thereof promptly as incurred and allowed, out of the Construction Account and within the amount of the bond proceeds appropriated thereto. 3.03 Absence of Litigation. There is now no litigation pending or, to the best knowledge of the City, threatened, questioning the validity or regularity of the Project, any contract for construction of the Project, or the right and powers of the City to issue the Series 2005 Bond, or in any manner questioning the existence of any condition precedent to the exercise of the City's powers in these matters. If any such litigation should be initiated or threatened, the City will forthwith notify in writing the Board of Investments, and will furnish the Board of Investments a copy of all documents, including pleadings, in connection with such litigation. 3.04 Additional Obligations. While the Series 2005 Bond is outstanding, no additional obligations shall be hereafter issued without the prior written consent of the holders of the Series 2005 Bond unless such obligations are secured by a lien on the Net Revenues which is expressly made junior and subordinate to the lien upon the Surplus Net Revenues securing the Series 2005 Bond. Section 4. Security for the Series 2005 Bond. The Series 2005 Bond is issued as an Additional Bond under Section 6.01 of the Resolution and shall, with the Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and any other Additional Bonds issued under the provisions of Section 6.01 of the Resolution, be equally and ratably secured by the provisions of the Resolution and payable out of the Net Revenues appropriated to the Debt Service Account of the Water System Fund, without preference or priority, all as provided in the Resolution, and secured by the Reserve Account, as further provided in Section 7.05 of the Resolution. Upon advancement of principal of the Series 2005 Bond, the Finance Director shall transfer from available funds of the System or proceeds of the Series 2005 Bond, or both, such amount or amounts to the Reserve Account to cause the balance therein to equal the Reserve Requirement, treating such principal amount as Outstanding. Upon the first advance of proceeds of the Series 2005 Bond, the deposit to the Reserve Account shall be sufficient to cause the balance in the Reserve Account to equal the Reserve Requirement in respect of the Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and the principal of the Series 2005 Bond so advanced. The City shall keep, perform and observe each and every one of its covenants and undertakings set forth in the Resolution for the benefit of the registered owners from time to time of the Series 2005 Bond. Section 5. Tax Matters. 5.01 Use of Project and System. The Project is and will be owned and operated by the City and used by the City to provide water services to members of the general public as part of the System. No user of the System is granted any concession, license or special arrangement with respect to the System or any part thereof. The City shall not enter into any lease, use or other agreement with any non -governmental person relating to the use of the Project or the System or security for the payment of the Series 2005 Bond which might cause the Series 2005 6 Bond to be considered a "private activity bond" or a "private loan bond" within the meaning of Section 141. of the Code. 5.02 General Covenant. The City covenants and agrees with the owners from time to time of the Series 2005 Bond that it will not take or permit to be taken by any of its officers, employees or agents any action which would cause the interest on the Series 2005 Bond to become includable in gross income for federal income tax purposes under the Code and applicable Treasury Regulations (the "Regulations"), and covenants to take any and all actions within its powers to ensure that the interest on the Series 2005 Bond will not become includable in gross income for federal income tax purposes under the Code and the Regulations. 5.03 Arbitrage Certification. The Mayor, the City Manager and the City Finance Director, being the officers of the City charged with the responsibility for issuing the Series 2005 Bond pursuant to this resolution, are authorized and directed to execute and deliver to the Board of Investments a certificate in accordance with the provisions of Section 148 of the Code, and the Treasury Regulations, Sections 1.148-2(b), stating that on the basis of facts, estimates and circumstances in existence on the date of issue and delivery of the Series 2005 Bond, it is reasonably expected that the proceeds of the Series 2005 Bond will be used in a manner that would .not cause the Series 2005 Bond to be an "arbitrage bond" within the meaning of Section 148 of the Code and the Regulations. 5.04 Arbitrage Rebate. The City acknowledges that the Series 2005 Bond is subject to the rebate requirements of Section 148(f) of the Code. The City covenants and agrees to retain such records, make such determinations, file such reports and documents and pay such amounts at such times as are required under said Section 148(f) and applicable Treasury Regulations to preserve the exclusion of interest on the Series 2005 Bond from gross income for federal income tax purposes, unless the Series 2005 Bond qualifies for the exception from the rebate requirement under Section 148(f)(4)(B) of the Code and no "gross proceeds" of the Series 2005 Bond (other than amounts constituting a "bona fide debt service fund") arise during or after the expenditure of the original proceeds thereof. In furtherance of the foregoing, the Finance Director is hereby authorized and directed to execute a Rebate Certificate, substantially in the form of the Rebate Certificate prepared by Bond Counsel and the City hereby covenants and agrees to observe and perform the covenants and agreements contained therein, unless amended or terminated in accordance with the provisions thereof. 5.05 Information Reporting. The City shall file with the Secretary of the Treasury, not later than August 15, 2005, a statement concerning the Series Bond containing the information required by Section 149(e) of the Code. 5.06 Qualified Tax -Exempt Obli ation. Pursuant to Section 265(b)(3)(B)(ii) of the Code, the City hereby designates the Series 2005 Bond as a "qualified tax-exempt obligation" for purposes of Section 265(b)(3) of the Code. The City has not designated any obligations in 2005 other than the Series 2005 Bond and its $3,000,000 General Obligation Bonds, Series 2005, under Section 265(b)(3). The City hereby represents that it does not anticipate that obligations bearing interest not includable in gross income for purposes of federal income taxation under Section 103 of the Code (including refunding obligations as provided in Section 265(b)(3) of the Code and including "qualified 501(c)(3) bonds" but excluding other "private activity bonds," as 7 defined in Sections 141(a) and 145(a) of the Code) will be issued by or on behalf of the City and all "subordinate entities" of the City in 2005 in an amount greater than $10,000,000. Section 6. Restatement of Clarification to Certain Provisions of the Resolution. By Resolution No. 4758 duly adopted by the City Council on December 2, 2002, the Resolution was amended and supplemented as follows: "To apply and construe certain provisions of the Resolution in view of the variable rate of interest on the Series 2003 Bond, such as Section 6.01 of the Resolution, Sections 8.09 of Resolution No. 4273 and 2.07 of this Supplemental Resolution, provisions pertaining to the Reserve Requirement, and any other provisions of the Resolution that establish tests based on principal of and interest on the Bonds, such sections and provisions are hereby amended as set forth in this Section. With respect to the Series 2003 Bond and any other water system revenue bonds purchased or proposed to be purchased under the Board of Investments' 1NTERCAP Program, and that bear or will bear interest at a variable or floating rate (collectively, the "Water System Bonds"), interest on such Water System Bonds shall be calculated by assuming that the interest rate then borne by such Water System Bonds is the average annual rate of interest on loans made by the Board of Investments pursuant to the INTERCAP Program calculated by reference to the then current annual rate of interest on the Water System Bonds and the annual rates of interest on such bonds in each of the immediately preceding four years (with each of such previous years being the 12-month period ending on February 15)." The Montana Department of Natural Resources, as the holder of the Series 2001 Bond, and the BOl consented to the above amendment and they then collectively held more than two- thirds of the Outstanding Bonds (as defined in the Resolution); therefore, pursuant to Section 9.02 of the Resolution, such amendment was duly approved. Section 7. Amendments to Resolution. As long the Series 2005 Bond is outstanding, the terms, conditions and covenants of this Supplemental Resolution may be amended only with the written consent of the City and the Board of Investments. Section 8. Authentication of Transcd t. The officers of the City are hereby authorized and directed to furnish to the Board of Investments and to the attorneys approving the legality of the Series 2005 Bond certified copies of all proceedings relating to the issuance of the Series 2005 Bond and such other certificates and affidavits as may be required to show the right, power and authority of the City to issue the Series 2005 Bond, and all statements contained in and shown by such instruments, including any heretofore furnished, shall constitute representations of the City as to the statements contained therein. Section 9. RePeals and Effective Date. 9,01 Real. All provisions of other resolutions and other actions and proceedings of the City and this Council that are in any way inconsistent with the terms and provisions of this resolution are repealed, amended and rescinded to the full extent necessary to give full force and effect to the provisions of this resolution. 8 9.02 Effective Date. This Supplemental Resolution shall be in full force and effect from and after its passage. PASSED AND APPROVED BY THE CITY COUNCIL AND SIGNED BY THE MAYOR OF THE CITY OF KALISPELL THIS 4TH DAY OF APRIL, 2005. ATTEST: Theresa White City Clerk Pamela B. Kennedy Mayor 9 EXHIBIT A UNITED STATES OF AMERICA STATE OF MONTANA COUNTY OF FLATHEAD CITY OF KALISPELL WATER SYSTEM REVENUE BOND SERIES 2005 Interest at the rate per anDum specified below payable February 15 and August 15 through the final stated maturity or upon redemption thereof No. R-1 $51.7,000 FOR VALUE RECEIVED, THE CITY OF KALISPELL (the "City"), a municipal corporation and political. subdivision of the State of Montana, acknowledges itself to be indebted and hereby promises to pay to the BOARD OF INVESTMENTS OF THE STATE OF MONTANA (the "Board of Investments') or registered assigns (the "Holders"), but solely from the Water System Fund (the "Fund") hereinafter specified, the principal amount of FIVE HUNDRED SEVENTEEN THOUSAND AND NO/100 DOLLARS ($517,000.00), or so much thereof as is advanced, and to pay interest thereon, solely from the Fund, on the principal amounts advanced hereunder from the respective dates of such advances, at an interest rate per annum equal to the Variable Rate (as hereinafter defined), all subject to the provisions of this Bond permitting the redemption hereof prior to maturity. Interest only on the outstanding principal of this Bond shall be payable on August 15, 2005, and thereafter outstanding principal and interest thereon shall be payable in equal 'installments of principal with interest thereon on each February 15 and August 15, commencing February 15, 2006 through August 15, 2015 (the Final stated maturity), to the Holder of this Bond appearing in the registration books of the City as of the date of such payment. Interest hereon shall be computed on the basis of the actual number of days in the years and the actual number of days that this Bond is outstanding at the Variable Rate (as hereinafter defined). The installments of principal and interest are payable at the office of the U.S. Bank National Association, Seattle, Washington, or such other place as the Board of Investments shall designate in writing, except that in the event that the Board of Investments has assigned this Bond, the installments of principal and interest are payable to the Holder at his address as it appears on the Bond Register of the City. Principal and interest are payable in any coin or currency of the United States of America which on the respective dates of payment is legal tender for public and private debts. This Bond comprises an issue of "Water System Revenue Bond, Series 2005" of the City, and is issued in the maximum authorized principal amount of $517,000. This Bond is issued pursuant to and in full conformity with the Constitution and laws of the State of Montana thereunto enabling, including Montana Code Annotated, Title 7, Chapter 7, Parts 44 and 45, as amended, and Resolution No. 4273, adopted by the City Council of the City (the "City Council") A-1 on June 17, 1996, as amended and supplemented by Resolution Nos. 4603, 4758, 4892, and 4927, adopted by the City Council on March 5, 2001, December 2, 2002, May 17, 2004, and August 16, 2004, respectively (collectively, the "Original Resolution"), as amended and supplemented by Resolution No. , adopted by the City Council on April 4, 2005 (the "Supplemental Resolution") (the Original Resolution, as amended and supplemented by the Supplemental Resolution, the "Resolution"). This Bond (sometimes referred to herein as the "Series 2005 Bond") is issued for the purpose of financing the construction, improvement, extension and rehabilitation of certain elements of the municipal water system of the City (the "System"), including changing out residential water meters and installation of fire hydrants, and related improvements, all pursuant to and in full conformity with the Constitution and laws of the State of Montana and resolutions of the City thereunto enabling, including the Act and the Resolution, to which Resolution reference is made for the terms and conditions, other than those herein stated, upon which this Bond is issued and secured. The Series 2005 Bond, including the interest thereon, is payable solely from the revenues pledged to the payment thereof and does not constitute a debt of the City within the meaning of any constitutional or statutory limitation or provision. Apart from the Series 2005 Bond, there are currently outstanding cinder the Resolution the City's Water System Revenue Bond (DNRC Drinking Water Revolving Loan Program), Series 2001 (the "Series 2001 Bond"), its Water System Revenue Bond, Series 2003 (the "Series 2003 Bond"), its Water System Revenue and Refunding Bonds, Series 2004 (the "Series 2004 Bonds"), and its Water System Revenue Bond, Series 2004A (the "Series 2004A Bond"). The Series 2001 Bond, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and the Series 2005 Bond are payable solely, and equally and ratably, from the Net Revenues of the System and on a parity with any Additional Bonds that may hereafter be issued on a parity therewith under the Resolution (collectively, the "'Bonds"). Outstanding principal of this Bond shall bear interest from the date it is advanced hereunder until paid at the Variable Rate (as hereinafter defined), as such may be adjusted from time to time as hereinafter provided. Until the initial Adjustment Date (as hereinafter defined), the Variable Rate shall be three and eighty hundredths percent (3.80%) per annum. Thereafter, for each Adjustment Period (as hereinafter defined), the Variable Rate shall be the rate per annum equal to the Board of Investments Rate (as defined in the Resolution). If for any reason the interest rate cannot be established as so provided or is held invalid or unenforceable by a court of law, the interest rate for this Bond for the Adjustment Period shall be a rate equal to the largest integral multiple of five hundredths of one percent (0.05%) that is equal to or less than eighty percent (80%c) of the average yield, evaluated at par, of United States Treasury obligations with a stated or remaining maturity of one year, as reported in The Wall Street Journal (Des Moines Edition) (or, if such paper is no longer published or fails to report such information, in any other financial periodical selected by the City and acceptable to the Holder) on the Adjustment Date or, if the Adjustment Date is not a Business Day (as hereinafter defined), the immediately preceding Business Day, but in no event to exceed fifteen percent (15.00%) per annum. As used herein, `:Adjustment Date" means February 16, during the term of the Series 2005 Bond, and "Adjustment Period" means the period beginning on the Adjustment Date and ending on the day immediately preceding the next succeeding Adjustment Date or the final stated maturity of this Bond, whichever is earlier, provided that if this Bond is not paid at its final stated maturity, the final Adjustment Period shall extend until all principal installments hereof are paid or provision has been duly made for their payment. The initial Adjustment Date shall be A-2 February 16, 2006. As used herein, "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a legal holiday in the State of Montana. Upon each disbursement of the Series 2005 Bond proceeds, the Board of Investments shall enter the amount advanced on Schedule A attached thereto under "Advances" and the total amount advanced under the Resolution, including such disbursement, under ".Total Amount Advanced." This Series 2005 Bond is not a general obligation of the City and the City's general credit and taxing powers are not pledged to the payment of this Series 2005 Bond or interest thereon. This Series 2005 Bond does not constitute an indebtedness of the City within the meaning of any constitutional. or statutory provisions. This Bond is subject to redemption at the option of the City on any Business Day, in whole or in part at a Redemption Price equal to the principal amount of this Bond or portions thereof to be redeemed with interest accrued to the date of redemption and without premium. Notice of the call for redemption shall be mailed by the City to the registered Holders of this Bond by first-class mail to the addresses of such Holders shown on the registration boobs maintained by the Bond Registrar not less than 30 days before the date of redemption. It shall not be necessary for the Holder to surrender this Bond for payment upon the partial redemption hereof. The Holder agrees to note the date and principal amount of any partial redemption hereof hereon, but any failure to do so shall not affect the validity of any such redemption. The City has designated this Bond as a "qualified tax-exempt obligation" within the meaning of Section 265(b) of the Internal Revenue Code of 1986, as amended. This Bond shall be registered in the name of the holder on the Bond register of the City kept by the Finance Director as Bond Registrar. This Bond is transferable by the registered holder or its attorney duly authorized in writing, upon presentation hereof with a written instrument of transfer satisfactory to the City and duly executed by the registered holder or its attorney. Such transfer shall be noted on the Bond register and on the reverse hereof. The City will, upon request, issue to the registered holder or transferee, upon surrender of this Bond, one or more other Bonds of the same series, of an aggregate principal amount equal to the principal amount hereof then remaining unpaid and maturing at the same time or times as the then unpaid principal installments hereof, subject to reimbursement for any tax, fee or governmental charge or other expense incurred by the City with respect to such exchange. The City may treat the person in whose name this Bond is registered as the absolute owner hereof, whether this Bond is overdue or not, for the purpose of receiving payment of principal and interest and all other purposes, and shall not be affected by any notice to the contrary. IT IS HEREBY CERTIFIED, RECITED, COVENANTED AND AGREED that the City will fix, establish and collect reasonable rates, fees, tolls, rents and charges for the services and facilities afforded by the System; subject to applicable law, and has created a special Water System Fund into which the gross revenues of the System, including all additions thereto and replacements and .improvements thereof subsequently constructed or acquired, will be paid, and a separate and special Debt Service Account in the Fund, into which Debt Service Account there shall be credited out of the Net Revenues of the System then on hand (the gross revenues remaining after payment of operating expenses of the System) monthly an amount equal to not A-3 less than one -sixth of the interest due within the next six months on all Bonds then Outstanding and one -twelfth of the principal, if any, to become due within the next twelve months on all Outstanding Bonds (whether due at a stated maturity, upon mandatory sinking fund redemption of Term Bonds or otherwise); except for payments to the Rebate Account, that the Debt Service Account will be used only to pay the principal of, premium, if any, and interest on Bonds as such principal, premium and interest respectively become due; that rates, fees, tolls, rents and charges, if any, will from time to time be made and kept sufficient to provide gross income and revenues adequate for prompt payment of the reasonable and current expenses of operation and maintenance of the System and to produce in each fiscal year Net Revenues, in excess of such current expenses, equal to 1.25% of the maximum Principal and Interest Requirements (as such term is modified by Section 6 of Resolution No. 4758) on the Series 2001 Bond, the Series 2003 Bond, the Series 2004Bonds, the Series 2004A Bond, this Series 2005 Bond and on any Additional Bonds hereafter issued made payable from said Net Revenues in all Fiscal Years during which any of the Bonds will be Outstanding, and to establish and maintain the Reserve Requirement, to pay promptly current Operating Expenses, to pay any Subordinate Obligations, and to provide reserves for the repair and replacement of the System, as further provided in the Resolution; that, except as additional or refunding parity bonds are expressly authorized in the Resolution, no other obligation will be incurred and made payable from the Net Revenues of the System, unless the lien thereof shall be expressly made subordinate to the lien of the Series 2001 Bonds, the Series 2003 Bond, the Series 2004 Bonds, the Series 2004A Bond, and this Series 2005 Bond on such Net Revenues; that all provisions for the security of the holder of this Bond set forth in the Resolution will be punctually and faithfully performed as therein stipulated; that all acts, conditions and things required by the Constitution and laws of the State of Montana and the resolutions of the City to be done, to exist, to happen and to be performed in order to make this Series 2005 Bond a valid and binding special, limited obligation of the City according to its terms have been done, do exist, have happened and have been performed as so required; and that the issuance of this Series 2005 Bond does not cause the indebtedness, whether general or special, of the City to exceed any constitutional or statutory limitation. IN WITNESS WHEREOF, the City of Kalispell, Montana, by its City Council, has caused this Bond to be executed on its behalf by the signatures of the Mayor, City Manager and Finance Director, sealed with the official corporate seal of the City, and has caused this Bond to be dated as of , 2005. (SEAL) CITY OF KALISPELL, MONTANA By Mayor By City Manager By Finance Director A-4 PROVISIONS FOR REGISTRATION OF TRANSFER The ownership of this Bond and of the interest payable hereon may be transferred to a bona fide purchaser only by delivery with an assignment duly executed by the registered owner or his attorney or legal representative, and the City may treat the registered owner as the person exclusively entitled to receive payments of principal of and interest on this Bond and to exercise all the rights and powers of an owner until this Bond is presented to the Finance Director of the City of Kalispell, as Bond Registrar, accompanied by said assignment and by assurance of the nature provided by law that the same is genuine and effective, and until such transfer is registered on the books of the City and noted hereon by the Finance Director. REGISTER The ownership of the unpaid Principal Balance of this Bond and the interest accruing thereon is registered on the books of the City of Kalispell, Montana in the name of the registered holder appearing on the first page hereof or as last noted below: Date of Name and Address of Registration Registered Holder Board of Investments 2401 Colonial Dr. P.O. Box 200126 Helena, MT 59620-0126 Finance Director NO WRITING HEREON EXCEPT BY FINANCE DIRECTOR AS BOND REGISTRAR The Finance Director has transferred on the books of the City of Kalispell, Flathead County, Montana, on the date last noted below, to the registered assign noted opposite said date, ownership of the principal amount of and interest on this Bond, except the amounts of principal and interest theretofore paid: Date of Transfer Signature of Registered Assign Bond Registrar A-5 SCHEDULE A SCHEDULE OF AMOUNTS ADVANCED Total Amount Date Advances Advanced Notation Made B A-6