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Tab 06 Preliminary Official StatementPRELIMINARY OFFICIAL S71"ATEMENTdated May 319 2006 NEW ISSUE NOT RATED BOOK -ENTRY ONLY BANK QUALIFIED lzk. Z_ In the opinion of Kennedy & Graven, Chartered, Bond Counsel, under existing laws, regulations, rulings and decisions interest on the Bon& is excludableftom gross income ofthe recipientforfederat inconie tax purposes and State ofMonzana individual income =purposes. Interest on dw Bonds is not includable in the coniputation of the alternative nzininium t=ble income of individuals for purposes of the federal alterwtive minimum tax, however, interest on the Bonds is �z includable in the computation ofthe alten'tative minimum taxable inconze of corporations for purposes ofthe alternative minimum tax imposed under the Internal Revenue Code of 1986, as amendei4 and in certain state =es applicable to corporations. (See "'Tax Exemption and Related Considerations" Itereim) $4952%000 CITY OF KALISPELL, MONTANA ;;ZZ SPECIAL DvIPROVEMENT DISTRICT NO. 344 BONDS, SERIES 2006 Dated- June 15, 2006 Due: July 1, as shown on the inside cover of & its The City of Kalispell, Montana (the "City") provides this Official Statement in connection with the issuance i Special Improvement District No. 344 Bonds, Series 2006 (Old School Station) (the "Bonds"'). The Bonds mature on July 1 in each of the years and amounts set forth on the following page and will bear interest from June 15, 2006 to z Z their respective maturities or prior dates upon which they have been duly called for redemption at the rates per annum TO BE DETERMINED AT THE COMPETITIVE SALE OF THE BONDS ON June 13,2006 at 11:00 A.M. (M.T). 44 The Bonds will beissued under a book -entry system, initially registered to Cede & Co., as nominee of The Depository Trust Company ('OTC"), New York, New York, which will act as securities depository for the Bonds. Individual 4: purchases of the Bonds will be made in the principal amount of $5,000 within a single maturity or integral multiples 7t thereof. Purchasers of the Bonds (the "Beneficial Owners") will- not receive physical bond certificates. Interest on the �-z Bonds will be payable semi-annually on each January I and July 1, commencing January 1, 2007. The City has appointed U.S. Bank National Association to serve as Registrar and Paying Agent (the ""Regisue") for the Bonds. The principal of and interest on the Bonds will be payable by the Re istrar to DTC, which will in turn remit such principal 91 and interest to DTC Participants for subsequent disbursement to the Beneficial Owners of the Bonds. (See 'THE ;01 BONDS - Book -Entry Form" herein.) The Bonds are being issued in accordance with the provisions of Title T, Chapter 12, Parts 41 and 42, Montana Code Annotated, for the purpose of financing the costs of improvements 'in the District (defmed below) together with other E. -z- ad' lable funds legally av The Bonds are special, lirm*ted obligations of the City, payable solely from (i) the collection of :4, -zz special assessments to be levied by the City against the assessable property benefited by the improvements in Special �E Improvement District No. 344 ("SID 344 or the "District' ')as deposited 'in the District Fund, 60 the Reserve Account of the District Fund, (iiio) tax increment revenue to the limited extent available and pledged thereto in the Bond t it Resolution, if available, and (iv) the Special Improvement District Revolving Fund of the City, subject to the limitations contained 'in the Act (the "Revolving Fund"). The special assessments shall be a lien against the 3. benefited property in the District. The improvements in the District consist of the (i) design, grading and construction of underground conveyance lines for water, wastewater and storm water; (ii) design, grading and construction of underground utility lines for gas, electric and telephone services; and (W) design, grading and construction of streets, gutters and sidewalks (the "Improvements"). Proceeds of the Bonds will also be used to fund the establishment of a s:� Reserve Account securing the Bonds in the District Fund, to fund a contribution to Revolving Fund, and to pay costs associated with the sale and issuance of the Bonds and other related costs. The Bonds are not general obligations of the City and the L%xing power of the City, except to the ted extent described in "Security and Sources of Is rmc -!i Payment?' herein, * not pledged to the payment of p 1pal thereof or interest thereon. The Bonds are subject to mandatory and optional redemption as described herein. (See"THE BONDS - Security and Sources of Paymene" and "Redemption/Notice of Redemption" herein.) cz The Bonds are offered when, as and if * sued by the City, subject to prior sale, to withdrawal or modification of the is offer without notice, and to the opinion as to validity and tax exemption of the Bonds by Kennedy & Graven, Chartered, Minneapolis, Minnesota, Bond Counsel, and certain other conditions. The Bonds, in definitive fonn, are z �3 expected to be available for delivery through DTC on or about June 29, 2006. Z T is cover page contains certain info rmationfor quick refiqrence only. It is not a swwnary ofthis issue. Investorsmust h r read the entire Official Statement to obtain informatiahe'ssential to making an infonned investment decision. z Financial Advisor D.A. DAVII)SON & COe $4�5209000 City of Kalispell, Montana Special Improvement District No. 344 Bonds, Series 2606 MATMTY SCHEDULE DATED: June 15,2006 DUE.- July 1, as shown below interest Yield to Pfice Year Amount Rate Maturi!y (% Of PE)---- CUSIP, 2007 $225,000 % % % 2008 2251000 2009 225NO 2010 22531000 2011 2253,000 2012 2251000 2013 225�000 2014 225.)000 2015 225,000 2016 225,000 2017 225)000 2018 2251,000 2019 225,000 2020- 225�000 2021 225�000 2022 225�000 2023 230,000 2024 2309000 2025 230,000 2026 2301000 ' The CUSIP numbers are included on the inside cover of this Preliminary Official Statement for convenience of the holders and potential holders of the Bonds. No assurance can be given that the CUSIP numbers for the Bonds will remain the same after the date of issuance and delivery of the Bonds. CITY OF KALISPELL, MONTANA 3 12 1 st Avenue East P.O. Box 1997 Kalispell, Montana 59903 (406) 758-7701 Certain City Officials: Mayor................................................................................................ Pamela B. Kennedy CityCouncil ................................................................................................. Jim Atkinson Kari Gabn*el Robert Hafferinan Bob Herron Randy Kenyon Tim Kluesner M. Duane Larson Hank Olson City Manager ...................................................................... 0909009-00** ....... James H. Patrick City Attorney .......................................................................................... Charles Harball City Clerk ......... Theresa White Finance Director ........................................................................ Amy Robertson, C.P.A. FireChief ................................................................................................. Randy Brodehl Financial Adv'isor D.A. DAVIDSON & CO. 402 East Main Street Suite 202 Bozeman, Montana 59715 and 8 Third Street North Great Falls, Montana 59401 Bond Counsel KENNEDY & GRAVEN, CHARTERED 470 U.S. Bank Plaza 200 South 6thStreet Minneapolis, Mirmesota, 55402 No dealer, broker, salesman or other person has been authorized by the City 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 representations must not be relied upon as having been authorized by the City. The information in this Official Statement was obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The information and expressions of opinion herein are subject to change without notice and neither the delivery of the Official Statement nor any sale made hereby shall, under any circumstances, create any implication that there has been no change in the affairs of the City since the date hereof D.A. Davidson & Co. is employed as financial advisor to the City in connection with the issuance of the Bonds. The financial advisor's fee for services rendered with respect to the sale of Bonds is contingent upon issuance and delivery of the Bonds. D.A. Davidson & Co. may submit bids for the Bonds either independently or as a member of a syndicate organized to submit a bid for the Bonds. The Underwriter has reviewed the information in this Official Statement in accordance with and as a part of its responsibilities under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of the information. This 1 -ut are not intended as statements of Official Statement contains in part, estimates and matters of op*nion d fact, and no representation or warranty is made as to the correctness of such estimates and opinions or that they will be realized. The following descriptions of summaries of the Bonds and Bond Resolution and all references to other documents or maten* als not claiming to be quoted 'in full are only bri ef outlines of some of the provisions and do not claim to sunnnan'ze or describe all provisions thereof Copies of such documents may be obtained fiom the issuer or Underwriter. THE BONDS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933� AS AMENDED. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. In connection with the offering and issuance of the Bonds, the Underwriter may over -allot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. Certain statements included or incorporated by reference in this Official Statement constitute "forward - looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Act of 1934, as amended, and Section 27A of the United States Securities Act of 19331 as amended. Such statements are generally identifiable by the terminology used such as "'Plan," "believe," "anticipated,37 "intend," "will," "expect," "estimate," "projection," "'budget" or other similar words. The CUSIP numbers are included on the inside cover of this Official Statement for convenience of the holders and potential holders of the Bonds. No assurance can be given that the CUSIP numbers for the Bonds will remain the same after the date of issuance and delivery of the Bonds. TABLE OF CONTENTS " )�UMMARY STATEMENT. . 9 * to. 4. * o o o too a 9 .... ...... ...... to.* ...... ...... ...... 00 ....... 0 e ..... ***eq ....... I ....... * .......... 0 ....... 4 1 THEBONDS Descriptionof the Bonds .............................................................................................. 4 ............... ...... Registrar.................................................................................................................................................................................... 2 Redemptionand Notice of Redemption .................................................................................................................................... 2 Book -Entry Form ...................................................................................................................................................................... 3 Authorization............................................................................................................................................................................ 5 Securityand Sources of Payment .............................................................................................................................................. 6 RISK FACTORS - THE BONDS 1. Special, Lirmited Obligations of the City ............................................................................................................................. 13 2. Special Assessments and the Potential Inadequacy Thereof ............................................................................................... 13 3. Limitations of the Revolving Fund ...................................... .............................................................................................. 13 4. Prepayment of Bonds .......................................................................................................................................................... 15 5. Bankruptcy Proceedings ......................................................................................................................................... ****-to .... *15 6. Likelihood of Redemption ..................... a . * 6 V . . . . 4 1 0 a . 0 . 0 0 9 . . 0 . 0 a 9 4 0 0 1 V 6 0 . d 0 * q I . 4 . * 0 . . . . . . . 0 to 6 . 00 . a . 0 1 9 . f I . 0 . . . . . . & .... 1 5 7. Undeveloped Property and Concentration of Ownership in the District ............................................................................. 16 8. Type of Development Limited in the District .................................................................................................................... 16 9. Limited Nature of Pledge of Tax Increments and Tax Increment Risk Factors ................................................................. 17 10. Absence of Rating ............................................................................................................................................................. 18 Sununary........................................................................................................................................................................... **oo*. 18 THE IMPROVEMENTS GeneralDescription ................................................................................................................................................................ 18 Sourcesand Uses of Funds ...................................................................................................................................................... 19 AssessmentMethods ............................................................................................................................................................... 19 THE DISTRICT GeneralDescription ................................................................................................................................................................ 19 No Delinquent Assessments or Property Taxes ...................................................................................................................... 21 No Other Outstanding Assessments Against Property in the District ..................................................................................... 21 Sununaryof Assessment Roll ................................................................................................................................................. 21 FunBeverage, Inc ............................................................................................................................................................ 9 ... o-.22 Montana Venture Partners, LLC C'The Developer") ................................ ....... ...... *00 ...... toot ... 040.4 ...... *.P0.9.000022 The Master Development Agreement ............. . . . . . . . . 4 4 * . . . . . . . . t - - V . . #*so.,.**23 OUTSTANDING SPECIAL IMPROVEMENT DISTRICT BONDS AND THE REVOLVING FUND GeneralInformation ................................................................................................................................................................ 23 FutureFinancing ..................................................................................................................................................................... 24 Policy Statement Regarding Creation of Special Improvement District ................................................................................. 24 Summary of Outstanding Special Improvement District ......................................................................................................... 24 Special Improvement District Assessment Billings and Collections ....................................................................................... 25 Statement of Changes 'in Fund Balance of the Revolving Fund .............................................................................................. 25 QUALIFIEDTAX-EXEMPT OBLIGATIONS ............................ I ............................................................................................ 26 TAX EXEMPTION AND RELATED CONSIDERATIONS ................................................................................................... 26 TaxExemption ......................................................................... ................... .... *1 .... *4# ..... *I .... 0* .... ..................... *26 RelatedFederal Tax Considerations ...................................................... ...................... w ............................................ w ............ 26 LITIGATION............................ ...... to ...... ........... I .............. LEGALMATTERS ..................................................................................................................... ....... * ...... NOCONFLICTS OF INTEREST ............................................................................................................................................. 27 UNDERWRITING............... *.-o ... . 4 a P . . 04.0.04 . . . . . . . . . * 0 0 * . . 0 0 0 . . 0 . 0 . . . 0 0 . . . . . 0 . . . . . . . . . . . . . . . . 4 . * . . . . . . 0 - * . . * - 4 - - - to Z I SECONDARYMARKET DISCLOSURE ....................................................................... ........................................................ 27 DISCLOSURESTATEMENT ........................................................................................ I ......................................................... 28 ADDITIONAL INFORMATION AND MISCELLANEOUS ................................................................................................... 28 APPROVALOF OFFICIAL STATEMENT ............................................................................................................................. 28 APPENDIX A —MAP OF THE DISTRICT ............... .......... oo ........ ** ....... 4**.*9 .... APPENDIX B - CITY GENERAL AND FINANCIAL INFORMATION .............. o o - * a � * o a .... 000*v#*o.* ... THECITY — GENERAL INFORMATION .................................................... o ............... o ...................... o .............................. B-2 General....................................... 0 ............. 0 ................ 0 ........................ 0 ...... o ......................................................................... B-2 Govenunent............................................................................... o ............... o ................ o ......................................................... B-2 Principal Govemmental Services........ . . . . . . . . . . . . . . . . I . 4 . . . . . . . . . . . . . . ...... *--# B-3 Employment and Employee Relations ........... ...... ... B-3 PensionPlans .................................................................... ............ *00 .............. THE CITY — FINANCIAL INFORMATION,.. .. * * * ' * 4 0 ....... ... 0 ... B-4 Financial Operations, Sources of Revenue and Budgeting Process.... ................ ................................................................. B-4 Valuations, Assessments and Reassessment of Property for Taxation Purposes ..................................................... 0*..*04.0 ... * B-4 2001 Legislative Revisions to System of Municipal Finance ........ o .......... 4 ............................... ........ o ............ o ..................... B-6 FinancialSummary ............................. 4 ................ o ........................................... o .................................................................... B-8 Overlapping General Obligation Indebtedness ........... o ............................................... o ................................................. o ....... B-8 GeneralObligation Debt Ratios .................. o .......................... 4 ..................... o ............. o .............................................. o4 ...... oe-B-9 GeneralObligation Debt Limitations .................. o ........... oo ............... o .................................................................................... B-9 Trendsin Property Valuations ................ ............................................ o ........................................ o .... o .............. o .............. B-9 TaxUvies ................................................. ................................ ..... a ........ -.*o4 .... *#*4 ........ ............ ... B-10 TaxCollections ................. * * . . 6 . . . . . . . 4 . 0 . . * . . . * * . . . . ' 0 . . . * . � . . . 0 4 . . # # 0 . . . . . . . * . . . . . . . . . 0 . . 0 * - 0 V . . . . . . . * * . . . . . . 0 . . a . . P6044-6fe. MajorTaxpayers ......................................................................................................................................... o ....................... B-1 I CityGeneral Fund Summary ............ o .................................................................................. o ............................................... B42 APPENDIX C - ECONOMIC AND DEMOGRAPHIC INFORMATION ............ o ............................... o— .............................. C-1 The Local Economy ... 70—o"" 0010*04 * *"**' ***' 0000"', "'-04 "'1 ... "0"'644, ... ... C-2 ManufacturingIndustries .................................. o ................................... o .......................................................................... C-2 Agriculture......... o ..................................................... 4 ................................................ 0 ...................... 0 ........ ......... ................. C-3 GovermnentalEntities .................................. o4 ................................................ o ............... o ............................................... C-3 TradeCenter Activities .................................................................... 0 ............. ....................................................................... C-3 Tourismand Recreation .................. 0 ..... 44--- . . # . - I w . . 6. . 9 .. 0 . * 0 . . 0 . . . * 0 0 . .. &—.0 . . & . 9 . . . 0.. . . . 0 * . 0 . * . . , , . 6 6 a . .4 a - - 4 # 0 *- . 0 * * * . * 0 . . 0 a 6 0 C-4 PopulationTrends ............... 6...o ................ 4 ....... 4 .................................................... o ................ o ...................................... o ....... C-7 MajorPrivate Employers ...................................... o .......................................... ................................................................... o C-7 Recent Building Permits ............... o---o ................... ....... ......... 0 ...... ........ C-7 HousingMarket Trends ...................................................... o ..................... o ................ o .............. . . 6 O.Q C-8 EarningsBy Industry .................................................................. o ........................................... o...— ...................... ................ C-8 LaborForce and Unemployment .............................. o ........ o . o ............................................... o ......... 4 ..................................... o C-9 PersonalIncome Trends .......... o .............................................................................. o ................................ o-..— ... o .................. C-9 EmploymentBy Major Industry ............................................... 4 ....................................................... o ............. o ................... C-10 APPENDIXD - CONTINUING DISCLOSURE .................................................................................................................. D-1 APPENDIX E - SUMMARY OF THE BOND RESOLUTION .............................................. ......................................... E-1 APPENDIXF - FORM OF LEGAL OPINION ..................................................................................................................... F-I $4,5209000 City of Kalispell, Montana Special Improvement District No. 344 Bonds, Series 2006 SUMMARY STATEMENT The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Preliminary Official Statement. No person is authorized to detach this Summary Statement from this Preffinirury Official Statement or to otherwise use it without this entire Preliminary Official Statement. ISSUER .......... City of Kalispell is located in northwestern Montana and had a 2004 population of 17,381 as estftnated by the United States Census Bureau, an increase of approximately 22.2% since the 2000 Census. (See "APPENDIX B - The City' herein.) INTEREST/ REDEMPTION ............ .....,,,,.Interest is payable semi-annually each January I and July 1, commencing January 1, 2007. For. so long as the Bonds are held in book -entry fonnat, princi al and interest payments will be made as described under the heading "The IP Bonds - Book -Entry Form". The Bonds are subject to mandatory and optional redemption. (See "THE BONDS — Redemption and Notice of Redemption" herein.) AUTHORITY FOR ISSUANCE .................... The Bonds are being issued pursuant to Title 7, Chapter 12, Parts 41 and 42 of the Montana Code Annotated (the "Act! ') and to a resolution to be duly adopted by the City Council of the City of Kalispell on or about June 19, 2006 (the "Bond Resolution"). The Bond Resolution authorizes the issuance of the Bonds and the levy of assessments against benefited property in the District and pledges, on a limited basis, certain tax increment revenues to the payment of the Bonds, if available. (See "THE BONDS - Authorization" herein.) SOURCEOF REPAYMENT .......... The Bonds are special, limited obligations of the City, payable solely from (i) the collection of special assessments to be levied upon the assessable real property withm* SID 344, (ii) monies in the Reserve Account in the District Fund to the extent available, (iii) certain tax *increment revenue to the limited extent necessary and pledged pursuant to the Bond Resolution, if available, and (iv) the Special Improvement District Revolving Fund of the City, subject to the limitations containedm' the Act (the "Revolving Fund7). The special assessments shan be a lien against the benefited property in SID 344. (See "THE BONDS - Security and Sources of Payment" and "RISK FACTORS — THE BONDS" herein.) USE OF PROCEEDS ........ proceeds of the Bonds will be used for the purpose of financing the costs of improvements in the District consisting of the (i) design, grading and construction of underground conveyance lines for water, wastewater and storm water; (ii) design, grading and construction of underground utility lines for gas, electric and telephone services; and (ifi) design, grading and construction of streets, gutters and sidewalks (the "Improvements"). Proceeds of the Bonds will also be used to fund the establishment of a Reserve Account securing the Bonds in the District Fund, to fund a contribution to the City's Special Improvement District Revolving Fund, and to pay costs associated with the sale and issuance of the Bonds and other related costs. (See "THE IMPROVEMENTS" herein.) 11 T BONDS Description of the Bonds The Bonds will be issued as fully registered bonds and will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company C'DTC"') as securities depository of the Bonds. Individual, purchases and sales of the Bonds may be made in book -entry form only, and in the principal amount of $5,000 within a single maturity and 'in integral multiples thereof. The Bonds will be dated, as originally issued as of June 15, 2006. The Bonds shall mature on July 1 in the years and amounts set forth on the 'Inside cover hereof and shall bear interest from the date of original issue to their respective maturities, or prior dates upon which they have been duly called for redemption, at the interest rates per annum to be determined at the COMPETITIVE SALE OF THE BONDS ON JUNE 131 2006. 0 Interest on the Bonds will be payable semi-annually on January 1 and July 1, commencing January 1, 2007, by wire transfer on the Interest Payment Dates to Cede & Co. Interest on the Bonds will be payable to the Beneficial Owners of record as of the close of business on the 15th day of the month immediately preceding an interest payment date. Principal and interest payments to the Beneficial Owners of the Bonds are to be made as described herein under "Book -Entry Only Fonn". Registrar 0 The City has appointed U.S. Bank National Association, a national banking association organized under the laws of the United States, to serve as Registrar and Paying Agent (the "Registrar) for the Bonds. The, Re istrar is to carry out those duties assignable to it under the Bond Resolution. Except for the contents of 91 this section, the Registrar has not reviewed or participated in the preparation of this Official Statement and assumes no respo nsibility for the nature, contents, accuracy, faimess or completeness of the information set forth MO this Official Statement or for the recitals contained in'the Bond Resolution or the Bonds, or for the validity, sufficiency, or legal effect of any of such documents. The mailing address of the Registrar is U.S. Bank National Association, 1420. Fifth Avenue, Seventh Floor, S eattle Washington 9 8 10 1, Attention.- Corporate Trust Servi ces. Additional inforrnation about the Re istrar 7 91 may be found at its website at hLtp:.//wN.vw.usbank.com/coEporatetrust. The U.S. Bank website is not incorporated into this Official Statement by such reference and is not a part hereof Redemption and Notice of Redemption Mandatory Redemption. The Bonds will be subject to mandatory redemption, in whole or in part, on any interest payment date, whenever, after payment of princi al of or interest on the Bonds on such date, there are ip funds available for this purpose in the Debt Service Account in the Special Improvement District No. 344 Fund, Series 2006 (the "District Fund") from the payment of current or delinquent special assessments or from the prepayment of special assessments levied 'in the District or from unexpended proceeds of the Bonds. Property owners may, as a matter of law, prepay the ir ass essments- in whole, at any time after the assessment is levied, by payment of the remaining principal amount on the special assessments, with interest accrued and to accrue thereon through the next date on which interest on the Bonds is payable. The redemption price is equal, to the amount of the principal installment or installments of the Bonds to be redeemed plus interest accrued thereon to the date of redemption. Tax increment revenue pledged, under the Bond Resolution to regular scheduled debt service on the Bonds, if available, will not be applied for mandatory redemption ...,urposes. Optional Redemption. The Bonds are also subject to redemption at the option of the City from sources of fimds legally available therefore, [including tax increment revenue available therefore], other than the prepayment of special assessments or unexpended proceeds at a price equal to the principal amount being redeemed plus interest accrued to the date of redemption, Without premium,, from the proceeds of refunding bonds; provided, however, that the City has agreed not to call for redemption Bonds from (i) amounts on deposit in the Reserve Account in the District Fund or (ii) the proceeds of refunding bonds prior to July 1, 2013. The Bonds maturing on or after July 1, 2014 are subject to redemption at the option of the City on July 1, 2013 and on any date thereafter. Selection of Bondsfor Redemptiom If less than all of the Bonds are to be redeemed, the Bonds are to be redeemed in order of their stated maturities. If less t1= all Bonds of a stated maturity are to be redeemed, the Bonds of such maturity shall be selected for redemption in $ 5,000 principal amounts selected by the Registrar by lot or other manner it deems fair. The owner of any Bond redeemed in part shall receive, upon surrender of such Bond to the Registrar, one or more new Bonds in authoti zed denominations equal in prm'cipal amount to the unredeemed portion of such Bond so surrendered. Notice and Effect ofRedemptiono-, Notice of redemption will be given not less than 3 0 days before the date of redemption by first-class mail to the re istered owners of the Bonds to be redeemed at their addresses as they 91 appear on the bond register maintained by the Registrar. Interest on principal installments of Bonds called for -edemption will cease to accrue on the date fixed for redemption if funds are available to pay the redemption price.. Book -Entry Form When the Bonds are issued., ownership interest will be available to purchasers only through a book -entry system (the "Book -Entry System") maintained by DTC or such other depository institution designated by the City pursuant to the Bond Resolution. If the Bonds are removed from the Book -Entry Systern and delivered to the persons narned as the re ' stered owners of the Bonds. on the re istration records maintained by the 91 9 Registrar (the "Registered Owners"') 'in physical fonn, as described below, the discussion herein of the Book - Entry System Will not apply. The following information has been provided by DTC, and the City makes no representation as to the accuracy or completeness thereof The Depository Trust Company ("DTC"), New York, NY, 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 bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. 2. DTC, the world's largest depository, is a limited -purpose trustcompany 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 "cleari* ng corporation" within the meardng of the New York Uniform Commercial Code, and a "cleari ng agency" regi* stered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 3 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTG'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 Corporations ("DTCC"'). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Goverrunent Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the Amen* can Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC. system is also available to others'. such as U.S. and non-U.S. securities brokers and dealers, banks, and trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard and 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 www.dtcc.com. 3. 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. Benefici al Owners are, however, expected to receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the,. transaction', as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct or Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interestsin Bonds, except in the event that use of the book -entry system for the Bonds is discontinued. 4. To facilitate subsequent transfers, all Bonds deposited by 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 authori zed 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 Participants will remain responsible for keeping account of their holdings on behalf of their customers. 5. Conveyances 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. 6. Redemption notices, if any, 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. 4 7. Neither DTC nor Cede & Co. (nor such other D.TC nominee), will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC's. Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a 1.1sting attached to the Omnibus Proxy). 8. Redemption proceeds, distributions, and dividend payments 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 0 is to credit Direct Pard * ants' accounts, upon DTC's receipt of funds and corresponding detail cip information from the City on 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 or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as maybe requested by an authorized representative of DTQ 'is the responsibility of the City, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to Beneficial Owners shall be the responsibility of Direct and Indirect Participants. 9. DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City. Under such circumstances in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered. 10. The City 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. The information in this section concerning DTC and DTC's book -entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof Authorization ConstitutionaL Article V111, Section 5(2) of the Montana Constitution empowers the Montana legislature to authorize the creation of special improvement districts for capital improvements and maintenance and to authorize the assessment of the cost thereof against benefited property. Nevertheless, to effectuate the prohibition in both the Umpted States and Montana Constitutions that private property not be taken for public use without just compensation, courts have required that the arnount of a special assessment levied against a particular lot or property not substantially exceed the special benefit conferred on that lot or property by the improvements with respect to which the assessment is levied. Statutory. Title 7, Chapter 12, Parts 41 and 42, as amended, of the Montana Code Annotated (the "Act") authorizes Montana cities to create special 'improvement districts for the purpose of ordering the construction or maintenance of certain local improvements, including street, sidewalk, curb, gutter, alley approach, water 8ystem,, storm sewer and sanitary sewer improvements or to purchase existing 'improvements. Montana statutes provide for the levy of special assessments in such districts to pay the cost of u*nprovements. A 5 special improvement district may be created only after notice of the goverru*ng body's intention to create the district has been published in a local newspaper and mailed to the owners of all real property in the district, a public hearing has been held, and, in most cases, the owners of property representing more than 50% of the costs to be assessed for the cost of the improvements have failed to protest against the proposed work or creation of the district. The Act requires the bids for contracts for construction of the improvements and for the sale of the special improvement district bonds to be issued to finance the cost of the 'improvements be competitively bid after published notice. Pursuant to Montana Code Annotated, Title 7, Chapter 15, Part 42, as amended (the "TIF Act"), the City has the power to establish tax increment districts for various purposes. The Technology Tax Increment District and the Industrial Tax Increment District are both located within the boundaries of the District. Pursuant to Section 7-15-4290 of the TIF Act n the City may pledge tax increment de * ved from an industrial tax increment district (such as the Industrial.. Tax Increment District) or a technology tax increment district (such as the Technology Tax Increment District) to the payment of special assessment bonds (such as the Bonds) issued to pay industrial tax increment district and technology tax increment district costs described in Sections 7-15- 428gand7-15-4289oftheTIFAct. Pursuant to Section 7-15-4288 of the TIF Act., eligible costs to be paid by the City with tax increments include public improvements (such as the Irnprovements) authorized to be made Pursuant to the SID Act. The Tax Increments derived from the Technology Tax Increment District and the Industrial Tax Increment District will be available, to the limited extent provided in the Bond Resolution. City Resolutions. As described below, the City Council has adopted such resolutions and has duly taken the proceedings necessary to create the District to finance construction of the Itnprovernents. On October 3, 2005, the City Council adopted Resolution No. 5063, a Resolution of Int6ntion to Create Special Improvement District No. 344 (the "Resolution of Intention!). The Notice of Passage of the Resolution of Intention was subsequently mailed to each property owner within the District. On October 18, 2005, October 25,2005 and November 1, 2005, the notice was also published in the Daily Inter Lake setting November 7, 2005, as the date for holding a public hearing for the creation of the District. Within the protest period, no protests.were filed with the City Clerk by property owners to -be assessed in the District. Resolution No. 5074, adopted by the City Council on November 7, 2005, created the District. The City has received bids for the construction of the hnprovements, and on March 20, 2006, the City awarded the contracts for construction. The City Council has therefore adopted such resolutions and has duly taken the. proceedings necessary to create the Di strict to finance construction of the Improvements. By adopting the Bond Resolution prior to the date of issuance of the Bonds, the City Council will have authorized the issuance of the Bonds and covenanted 0 V to levy special assessments against benefited property 'in the District m* an aggregate principal amount not less than the aggregate principal amount of the Bonds. Security and Sources of Payment Special, Limited Obligations. The Bonds are payable primarily from the collections of special assessments levied on the lots, parcels or tracts of land within SID 344 benefited by the Improvements. Pursuant to the Bond Resolution,, all collections of such special assessments are to be deposited into the District Fund are pledged to payment of the pn*ncipal of and interest on the Bonds. In the event money on hand in the Reserve Account in the District Fund is insufficient to pay principal of or interest on the Bonds when due and after the application of certain tax 'increments (to the limited extent pledged under the Bond Resolution and if available), the City Council has covenanted in the Bond Resolution to order the transfer of available money on deposit in the City's Revolving Fund to the District Fund to satisfy the deficiency. The City has also' 6 agreed to provide funds for the Revolving Fund by levying a tax or making a loan from the General Fund to the Revolving Fund, subject to the limitations contained in the Act. (See "RISK FACTORS —THE BONDS" .ierein.) Apart from money raised to fund the Revolving Fund and tax increment money generated by property 0 in the District as described herein, if any, payment of the principal of and interest on the Bonds will not be made out of any funds raised by taxation by the City. The Bonds are not general obligations of the City, the State of Montana or any political subdivision thereof and do not represent a charge upon their general credit or taxing powers,, but are payable solely from the sources specified herem*. Bondholders should be aware of the limitations with respect to funding the Revolving Fund as described under "RISK FACTORS — THE BONDS — Limitations of the Revolving Fund" herein and the limited nature of the pledge of the tax m*crements under Bond Resolution, if available, as described under "RISK FACTORS — THE BONDS — Limited Nature of Pledge of Tax Increments". Special Assessments. In the Bond Resolution, the City covenants to take all action necessary for the valid levy of special assessments in an aggregate original principal amount not less than $4,520,000, against benefited property 'in the District. Subject to annual amortization over the then remaining term, the outstanding special assessments will be payable in substantially equal semiannual installments of principal plus interest on November 3 0 and May 3 1 of each fiscal year, and shall become delinquent on such date unless p id in full. The special assessments will bear interest on the balance thereof remaining unpaid at an annual al i rate equal in a fiscal year, to the sum of (i) the average annual interest rate borne by the Bonds over the then remaining term plus (ii) 1/2of 1 % per annum. k special assessment constitutes a pri or lien upon and against the property against which it is levied, from and after the date of passage of the resolution levying the assessment, which lien may be extinguished only by payment of the assessment with all penalties, costs and interest, except as hereinafter described. Delinquent installments of special assessments bear interest at rates established by Montana law, which have changed from time to time. Current law provides that delinquent installments of a special assessment bear interest at a rate0f 5/6of 1 % per month, and a penalty of 2%. The lien of a special assessment is Junior and subordinate to State property tax liens, even if the special assessment lien attaches first, and federal property tax liens for which the underlying federal tax was assessed before certification of the amount of the delinquent assessment and penalty. The lien of the special assessment attaches for each *installment in the year in which it is levied. The lien may also be subordinate to the lien of mortgages securing other municipal bonds (there are no such hens in the case of the Bonds), including those issued on behalf of private entities, filed of record before the attachment of the installment of the special assessment lien. 0 In the event of a delinquency m the payment of a special assessment installment, the City Council, at its option and by resolution, may declare all unpaid installments of the special assessment to be delinquent. If the delinquency is not paid, the property subject to the lien is to be sold by the county in which the property is located (for the City, Flathead County, Montana (the "County")) in the same manner that real property is sold for delinquent property taxes. The tax sale proceeding is the exclusive remedy for the collection of special assessment, neither the City nor the- County may sue or otherwise proceed directly against the owner of the property for the payment of delinquent special assessments. If no good faith purchaser bids at the tax sale, the land is deemed sold to the County and the County receives a tax sale certificate without advancing funds therefore. A property tax lien of the County acquired in this manner must be assigned to a third party upon )aYment of all delinquent taxes and assessments, including penalties, interest and costs. 7 Whenever property subject to the lien of delinquent special assessments has been deemed sold to the County and not assigned, the City may request that the County assign all of the County's rights to the property to the., City, upon payment by the City of any delinquent taxes (excluding assessments) and costs, without penalty or interest. Property thus sold to the City must be held in trust by the City for the special improvement district fund into which the delinquent special assessments are payable. The City may, if the property is not redeerned from the tax sale within the peti od hereinafter described, assign its rights in the property upon payment by the assignee of the purchase price paid by the City, the delinquent assessments, interest on the purchase price and delinquent assessments at the rate of 5/6 of 1% a month, and penalties and interest as provided by law. An assignment by the City in this manner discharges the trust upon deposit of the arnount of delinquent assessments and the interest accrued thereon into the special improvement district fund. The City may sell or lease the property so acquired in the same manner as the County may sell or lease tax -deed property. All money received by the City from the sale or lease of such land, after the costs of sale, not to exceed $25, must be paid into the special improvement district fund to the extent of delinquent assessments, interest and penalties. The surplus, if any, must be paid to the Revolving Fund if it secures the payment of the special assessments. The County is not required to take a tax deed on any property for which it holds a tax sale certificate. If the County takes a tax deed it must, within six months after acquiring title, conduct an auction sale of the property. The property may not be sold for less than its fair market value. In calculating the fair market value, the County is to subtract the principal amount of the outstanding assessments that are a lien on the land from the unencumbered value of the land, but the minimum sale price for a property may not be less than $10. If no bids are received at the sale, the County must conduct another auction sale within six months or may sell the property at private sale at not less than 70% of the appraised value thereof. Tax -deed property may thus be sold at or less than its fair market value which may be less than the amount of the outstanding delinquent special assessments thereon. Property subject to a property tax or assessment lien may be redeemed by the owner, the occupant, a mortgagee, a contract vendor or any other interested party within 36 months after the date of the tax sale or within 60 days after notice of application for a tax deed, whichever is later; provided, however, that if the property is subdivided as a residential or commercial lot upon which no habitable dwelling or commercial structure is situated, redemption must be made within 24 months after the date of the tax sale or within 60 days after notice of application for a tax deed, whichever is later. In the event of foreclosure of the assessment lien when the City Council has not declared all unpaid installments of special asse ssments due and payable, the issuance of the tax deed conveys title to the property subject to the lien of future installments of the special assessment. Enforcement of a special assessment lien may be a lengthy procen, and no assurance can be given that proceeds from the sale or redemption of the property wi11 be available in amounts or at times sufficient to pay the principal of or interest on the Bonds'. Reserve Account. A Reserve Account will be created 'in the Bond Resolution in the District Fund from the proceeds of the Bonds. Upon the issuance of the Bonds, the City will deposit $226,000 in the Reserve Account. In the event money on hand 'in the Debt Service Account in the District Fund is insufficient to pay principal of or interest on the Bonds when due, the Reserve Account of the District Fund will be used to satisfy any deficiency in the District Fund from which the Bonds are payable if necessary to pay principal of and interest on the Bonds 51 to the extent funds are available. Pursuant to the Bond Resolution, money 'in the Reserve Account i's not required to be replenished by the City "if used to pay debt service on the Bonds. The City may not apply any of the Reserve Account balance to pay the principal of or interest on any City 8 obligation. other than the Bonds. The balance in the Reserve Account remaining after payment in full and -retirement of all Bonds shall be transferred to the City's Revolving Fund. If money in the Reserve Account is , . nsufficient to satisfy any deficiency in the District Fund then the City will utilize available tax increment revenue or money available in the Revolving Fund described below. Application of Certain Tax Increments as Securityfor the Bonds. By Ordinance Nos. 1557 and 1558 adopted November 7, 2005, the City Council established, respectively, an industrial tax increment district (the "Industri al Tax Increment District") at Old School Station (within the District and including Lots 11 - 17) and technology tax increment district (the "Technology Tax Increment District") at Old School Station (within the District and including Lots 2- 10). Only one property within the District, Fun Beverage, ]Inc. is not located in either tax increment district. Tax increment revenue (the "Tax Increments") derived from the Industrial Tax Increment District and the Technology Tax Increment District are pledged under the Bond Resolution to the limited extent necessary and a a*lable by the City as security for the Bonds. Tax Increments derived from the Industrial Tax Increment v 1 District or the Technology Tax Increment District will only be utilized by the City to act as security for Bonds allocable to the cost of hnprovements within such tax increment district. In the event that a property owner is delinquent in the payment of special assessments and the City has not received payment of any special assessments allocable to such parcel by the date that is fifteen (15) days prior to any January I or July 1, commencing January 1, 2007 (each a "Payment DaW), the City Finance Director is authorized to transfer, after transfers from the Debt Service Reserve Account,, but pri" or to transfers ftorn the Revolving Fund, any Tax Increments (but only to the extent of such delinquent special assessment payment and to the extent that such funds are on hand 'in the operating account for each tax increment district and are not pledged by the City to other purposes) derived from the tax increment district in which the delinquent property is located, and then on deposit with the City, to the Debt Service Account in the Di strict Fund for the pro-rata portion of the payment allocable the delinquent property that is due and owing on the Bonds on the next Payment Date. A transfer of Tax Increments described in the immediately preceding sentence will not extinguish the lien of any special assessments due with respect to a parcel of property and such transfer does not decrease the amount of special assessments due with respect to any parcel of property. In the event that a property owner pays delinquent special assessments, after the application ofTax Increments to the payment of regularly scheduled debt service on the Bonds, the City Finance Director is authorized to transfer an amount equal to.such prior payments of Tax Increments for such parcel to the applicable TIF Operating Account for the tax increment fund in which such parcel of property is located. Any payment of delinquent special assessments, after the application of Tax Increment to a payment of debt service on the Bonds, will not be applied to the mandatory redemption of the Bonds. In the event that delinquent special assessments are paid after either the Industrial Tax Increment District or the Technology Tax Increment District is terminated and the Bonds are not outstanding the City will transfer such funds to the Revolving Fund. Revolving Fund. The Bonds are also being issued under the provisions of the Special Improvement District .Revolving Fund Law (Montana Code Annotated, Sections 7-12-4221 through 7-12-4229 et. seq.). This law provides for the creation of a revolving fund by any city that has created a special improvement district. e City has created the Special Improvement District Revolving Fund (the "Revolving Fund7) for the purpose of loaning monies to special improvement district funds of the City whenever there are M'sufficient. funds available to pay special improvement district bonds and warrants or any interest thereon. The Bonds will be secured by the Revolving Fund. 9 Money for shortfalls in the Revolving Fund is provided by a transfer of monies from the City's General Fund or by the levy of an ad valorem tax on all taxable property in the City as necessary tomeet the financial, requirements of the Revolving Fund; provided that no such loan from the General Fund or tax levy in any fiscal year may cause the balance in the Revolving Fund to exceed 5% of the principal amount of the city, s then outstanding special improvement district bonds and warrants secured thereby nor may any such tax levy or loan in a single fiscal year equal in aggregate more than 5% of the principal amount of the City's then outstanding bonds or warrants secured by the Revolving Fund. Loans to a special improvement district -ftmd fTom the Revolving Fund constitute a lien upon the special 'improvement district fund, payable from excess funds remaining after the payment of the outstanding bonds and any interest thereon. In the event money on hand in the District Fund (including amounts in the Reserve Account and amounts derived from tax increments) is insufficient to pay principal of or interest on the Bonds when due, the City Council will covenant 'in the Bond Resolution to issue annual orders authorizing loans from the Revolving - Fund to the District Fund to satisfy any deficiency in the District Fund from which the Bonds are payable if necessary to pay principal of and interest on the Bonds, to the extent funds are available. The City has finther agreed to provide funds for the Revolving Fund, as are necessary to cause such payment, by making a loan from the General Fund to the Revolving Fund or by levying a tax upon all taxable property within the City in accordance with the Special Improvement District Revolving Fund Law. In the Bond Resolution, the City will covenant, subject to the foregoing limitations, to maintain or restore the balance in the Revolving Fund at or to an amount equal to 5% of the outstanding principal amount of the bonds or warrants of the City secured thereby. Any property tax levy to be made by the City to provide funds for the Revolving Fund is subject to levy limits under current law (including Senate Bill 184, adopted by the Montana Legislature 'in 1999 (now codified at,, 15 - 10-420 Montana Code Annotated)). The City has agreed in the Bond Resolution to levy- property taxes to provide fimds for the Revolving Fund to the extent described above and, if necessary, to reduce other property tax levies correspondingly to meet its obligations with respect to the Revolving Fund. (See "RISK FACTORS — THE BONDS," and APPENDIX B — "Financial Operations, Sources of Revenue and Budgeting Process" and "Valuations, Assessments and Reassessment of Property for Taxation Purposes" herein.) Since 1983, Montana law has authorized the City, as part of the cost of an improvement,, to deposit up to 5% of the principal amount of special 'improvement district bonds and warrants in the Revolving Fund if such - bonds and warrants are secured by the Revolving Fund. The City generally has required such deposit in connection with the issuance of special improvement districts bonds and warrants, excluding refunding bonds. For bonds issued for districts created after March 24, 1995 1, a 5 % contribution to the Revolving Fund has been required by law for any bonds secured by the Revolving Fund. As of the date of issuance of the Bonds, the City will deposit an amount equal to 5% of the principal amount of the Bonds ($226,000) from the proceeds of the Bonds into the Revolving Fund. As of February 1, 2006, the aggregate principal amount of outstanding special improvernent district bonds and warrants of the City secured by the Revolving Fund equaled $1,161,275, not including the Bonds. Also as of this date, the City had a cash balance of $59,722 in its Revolving Fund. Following the issuance of the Bonds in the principal amount of $4,520,000, the City's cash balance in the Revolving Fund will equal approximately $285,722 and will represent approximately 5.03% of the total outstanding bonds and warrants of the City secured by the Revolving Fund, including the Bonds (for a total of $5,681,275). 10 Montana law regards as surplus money amounts on deposit in the Revolving Fund in excess of the amount of -oroceeds of speci al 'improvement district bonds deposited therein, 5% of the principal amount of the special .mprovement district bonds and warrants of the City secured thereby and then outstanding, and the amount then necessary for the payment or redemption of outstanding bonds or the interest thereon. The City Council may transfer such surplus money to the General Fund of the City upon vote of all members of the City Council, or apply such surplus moneys to the purchase of property that is then encumbered with delinquent special assessments, either at a sale of the property for delinquent taxes or assessments, from the County. The proceeds of the disposition of such property or tax certificates are to be deposited M' the Revolving Fund. The following table shows for the last nine fiscal years at fiscal year end and as of February 1, 2006, the cash balance in the City's Revolving Fund, the principal amount of outstanding bonds and warrants secured thereby and the cash balance. expressed as a percentage of such outstanding principal arnount. Followm*g the issuance of the Bonds, the Revolving Fund balance will be $285,722 or 5.03% of the City's outstanding special improvement district bonds of $5,681,275. Fiscal Year End Revolving Fund Principal (Lune ;�O) _ Cash Balance' Amount of Bonds Percent�ge' February I � 2006 $5910722 $1 � 161 275 5.14% 2005 64)260 11256�498 5.11 2004 71.7803 12341 �913 5.35 2003 707487 114967139 4.71 2002 86�249 11667�590 5.17 2001 877155 1 �7981275 4.85 2000 16)1614 2622903 6.32 2 1999 161,709 288)080 5.802 1998 224194 354.7597 6.26 1997 3 1 �532 4142983 7.60 ' The City has generally transferred excess fund ftorn the Revolving Fund to the General Fund when the balance in the Revolving Fund equaled more than 5% of the outstanding bonds secured thereby. During the fiscal years shown, the City trawferred the following amounts to the General Fund- $16,318 in 1998; $9,384 in 1999; $18,146 in 2003 and $10,000 in 2005. 2 10 The City made short-term loans to other City funds in anticipation of collections to be received May 3 1. Due to posting delays, collections are not actually received by the City until July 15. In 1999, the loan amount was $3,471 and the $2,576. in 2000. When money is lent from the Revolving Fund to a special improvement district fund, the Revolving Fund has a lien therefor on all money thereafter deposited M* the special improvement district fund to the extent of the loan plus interest accrued thereon at the rate of interest borne by the bond with respect to which the loan was made. The loan is to be repaid upon order by the City Council whenever there is money in the special improvement district fund not necessary for the payment of principal of or interest on bonds payable from the special improvement district fund. Any money remaining in a special improvement district fund after payment of the principal of and interest on all bonds payable therefrom and repayment of any loans to the Revolving Fund are to be transferred to the Revolving Fund; provided that proceeds of special improvement district bonds remaim'ng on deposit in the Revolving Fund may, in the discretion of the City Council, be disbursed to the owners of the property in the District m' proportion to the original assessment levied against such property or transferred to the General Fund of the City. 11 The Revolving Fund secures, equally and ratably, a number of special u'nprovement district bonds and warrants of the City. The City is obligated to loan money from the Revolving Fund to the funds of these., districts in the event of delinquencies in the payment of special assessments levied therein. If the amount on hand in the Revolving Fund is insufficient to make loans at any time required, the City is obligated to advance funds to each of the special improvement district funds then incum*ng a deficiency, pro rata, in proportion to the amount of the deficiency in the special improvement district fund. The adequacy of money in the Revolving Fund available to be lent to the District Fund to satisfy a deficiency, ansing from delinquencies in collections of special assessment levied on the benefited property "in the District is affected by a number of factors that the City has no control over, including, without limitation, the following: (1) the amount of delinquent special assessments in other special improvement district funds of the City from which then outstanding special improvement district bonds or warrants are payable and which are secured by the Revolving Fund; (2) the principal amount of special u*nprovement district bonds or warrants of the City secured by the Revolving Fund and then outstanding, which limits the amount that may be levied or lent from the Revolving Fund; (3) the amounts of delinquencies in the collection of property taxes levied by the City for purposes of meeting the financial requirements of the Revolving Fund, which may or may not be levied *in an arnount to anticipate any shortfalls an' sing from the nonpayment of property taxes; and (4) the rate of interest earned on balances from time to time on deposit in the Revolving Fund. The delinquency rate in the payment of any special assessments depends on a variety of factors, which may vary in importance in each special improvement district. Such factors include, among others, the extent and character of development of property in the district, the financial circurnstances of the owners ofthe property, the arnount of the special assessment and other special assessments and property taxes levied against the property in relation to the market value of the property, the value and marketability of the property, permitted uses of the property under applicable zoning. and land use ordinance's, the availability of or need for other public improvements or utilities serving the property and local and national economic conditions. Although, as described in the preceding paragraphs, funds raised by taxation for the Revolving Fund may, subject to limitation, be applied to the payment of principal of or interest on the Bonds in the event of delinquencies in the payment of special assessments levied against benefited property in the District, no assurance can be given that such money will be available 'in amounts or at times sufficient to provide for the prompt payment of such principal and interest. The Bonds and interest thereon are payable from special assessments levied against benefited property *in the District and those considering an investment in the Bonds should look to the property owners of the assessable property as providing the principal security for payment of the Bonds. (See "THE DISTRICT" herein.) . 12 R.11SK FACTORS - THE BONDS �3 . rospective investors in the Bonds should carefully consider the following n* sk factors, which is not intended to be inclusive, as well as the other information contained in this Official Statement. 1, Special, L=`ted Obligations of the City The Bonds are payable pru"narily from the collections of outstanding special assessments levied on the lots, parcels or tracts of land within the District benefited by the Improvements. While the City will agree in the Bond Resolution that it will make transfers from the Reserve Account in the District Fund and loans or advances from applicable Tax Increments to the limited extent available and from funds in the Revolving Fund of the City to the District Fund from which the Bonds are payable, 'if necessary to pay principal and interest on the Bonds, no assurance can be given that such money will be -available in amounts or at times sufficient to provide for the prompt payment of such principal and interest. The Bonds are not general obligations of the City, the State of Montana or any political subdivision thereof and do not represent a charge upon their general credit, but are payable solely from the sources specified herein. (See "THE BONDS - Security and Sources of Payment" and "APPENDEK E— Summary of the Bonds Resolution7' herein.) 2. Special Assessments and the Potential Inadequacy Thereof The Bonds and interest thereon are payable primarily from the outstanding special assessments levied against the benefited property in the District, and those considering an investment in the Bonds should look to the 9 property owners and the property assessed as providing the principal security for payment of the Bonds. (See "THE DISTRICT" herein.) Under Montana law, if an installment of a special assessment is not paid 'in fall when due, the delinquent installment bears a penalty and interest at a delinquent -rate and, if not paid, the property is sold at tax sale. The property owner has up to three years in most cases to redeem the property from the tax sale. As a result of this and of factors relating to the character and ownership of the assessed property, the collections of the special assessments by the City may not be sufficient to pay principal of and 'interest on the Bonds when due. The special assessments levied to pay principal and interest on the Bonds will, however, bear interest at a rate 1/2of 1 % in excess of the average interest rate on the outstanding Bonds, which amount will be applied to the payment of principal of and interest on the Bonds. (See "THE BONDS - Security and Sources of Paymenf herein.) 3. Lindtations of the Revolving Fund Pursuant to the Act, the City Council has created the Revolving Fund for the purpose of securing payment of special improvement district bonds and warrants of the City, including the Bonds. Under the Act, the balance in the Revolving Fund may not be increased *in a fiscal year by funds derived ftom. taxation or by loans from the General Fund of the City to a balance exceeding 5% of the aggregate principal amount of the City's outstanding bonds and warrants secured thereby, nor may such tax levies or loans from the General Fund for such purpose exceed in the aggregate in any single fiscal year 5% of the aggregate principal amount of the then outstanding bonds and warrants of the City secured thereby. 13 Any property tax levy to be made by the City to provide funds for the Revolving Fund is subject t6levy limits under current law (including Senate Bill 184, adopted by the Montana Legislature in 1999). The City is not authorized to levy an additional or excess tax for purposes of funding the Revolving Fund. The primary source of money to fund the Revolving Fund is amounts available in the City's General Fund or the City's regular (non -voted) property tax. (See APPENDIX B — "Valuations, Assessments and Reassessment of Property for Taxation Purposes" herein for a discussion of the City"s regular property tax collection limitations and procedures.) Because regular property tax revenues are the primary source of revenues to operate the City, a pledge to fandthe Revolving Fund has the pote . ntial to directly affect the City's operating budget. Consequently, any money budgeted to fund the Revolving Fund is necessarily diverted from other City services. The City has agreed in the Bond Resolution to levy property taxes to provide fimds for the Revolving Fund to the extent described above and, if necessary, to reduce other property tax levies correspondingly to meet applicable levy limits. All bonds and warrants of the City secured by the Revolving Fund are equally and ratably secured by moneys on deposit M* the Revolving Fund. Therefore, the City may from time to time create additional special improvement districts or sidewalk, curb, gutter and alley approach projects and issue bonds drawn against such special improvement districts or warrants secured by assessments levied against lots benefited by such projects that will be secured on a parity with the Bonds and other special improvement district bonds now outstanding. The timeliness of the payment of special assessments in special improvement districts of the City and *in special improvement districts created in the futurel,.which depends on, among other things, the degree of development in the special u*nprovement district and the market value of the lots in relation to the amount of the assessment, may affect the adequacy of the Revolving Fund to make loans to the District Fund in amounts necessary to pay debt service on the Bonds when due. If the amount on hand in the Revolving Fund is insufficient to make loans at any time required to special improvement district funds secured thereby, the City is obligated to advance money to each of the special improvement district funds then incurring a deficiency, pro rata, in proportion to the amount of the deficiency in the special improvement district fand. The Act requires that prior to issuing bonds secured by a revolving fund, a municipality must take into consideration the following items: the estimated market value of the lots in the district at the time the district is created in comparison to the estimated market value of the lots after the improvements are made; the district"s diversity of ownership of property; the amount of special assessments per lot in comparison to the estimated market value per lot after the improvements are made; the arnount of any outstanding special assessments against property in the district; the amount of delinquencies in the payment of outstanding special assessments or property taxes levied against property in the district; the public benefit of the proposed improvements and in the case of a district created to make u*nprovements in a newly platted subdivision, the prior subd ivision development experience and credit history of the developer and any contribution by property owners to the costs of the improvements or any security 'ven by property owners to secure payment of special 91 assessments levied in.the district. See "OUTSTANDING SPECIAL IMPROVEMENTDISTRICT BONDS AND THE REVOLVING FUND" herein. The liability of the Revolving Fund terminates on the earlier of.- (1) the date on which all bonds or warrants of the issue and interest on the bonds or warrants have been fully paid or discharged in a bankruptcy case in which the special 'improvement district is the debtor; or (2) the date that is the later of: (a) the final stated maturity date of the bonds or warrants; or (b) the date on which all special assessments levied in the district have been either paid or discharged. 14 4. Prepayment of Bonds 'he Bonds are subject to Mandatory and Optional. Redemption as described herein. (See "THE BONDS — Redemption and Notice of Redemption" herein.) The Bonds are subject to Mandatory Redemption from the. payment of current or delinquent special assessments or from the Prepayment of special assessments leviedm' the District or from unexpended Bond proceeds. If properties are sold by the Developer, the new property owner(s) may elect to prepay their assessments,, which would cause a Prepayment of the applicable portion of the Bonds. The Bonds maturing on or after July 1, 2014 are subject to Optional Redemption at the option of the City on July 1, 2013 and on any date therefore from sources of ftmds legally available therefore including tax increment revenue as described herein. If tax increment revenue is generated from the development of property 'in the District, the City may elect to use any such available tax increment revenue to redeem outstanding Bonds. 5. Bankruptcy Proceedings A city is authorized under Montana law to file a petition for relief as a debtor under Chapter 9 of the United States Bankruptcy Code for the adjustment of its debts. The United States Bankruptcy Court has held that a Montana municipality may file a petition on behalf of a special improvement district of the municipality. In the event of a district's insolvency and if the city were to successfully file a petition under the Bankruptcy Code on behalf of the district, the Bankruptcy. Code could bumit the ability of bondholders to seek Judicial -iction to enforce the lien of special assessments against benefited property. As part of the bankruptcy proceeding, the city would have to file a plan for adjustment of the debts of the districts. Any plan, in order to be confirmed by the bankruptcy court, would have to be determined to be in the best interests of creditors and feasible, and either be accepted by the creditors of each class impaired thereby or, if not so accepted, be determined to be fair and equitable and not to discriminate unfairly in favor of any class of claims or interests. Consequently, it is possible that a plan of adjustment could be confirmed by a bankruptcy court without the consent of all bondholders that would, among other things, extend the time for payment of principal of or interest on the bonds, reduce the interest payable on the bonds below the originally stated rates of interest or reduce the amount of principal payable on the bonds. In the event that a property owner is the subject of a bankruptcy proceeding, it 'is possible that the lien of special assessments levied against the owner's property in a special knprovement district may be discharged in the bankruptcy proceeding without payment or provision for payment of the special assessment in full. 6. Liketihood of Redemption Property owners may, as a matter of law, prepay their assessments in whole, at any time after the assessment is leviedl by payment of the assessment, with interest accrued and to accrue thereon through the next date on which interest on the Bonds is payable. The City is required by law to redeem, on anyinterest. payment date, outstanding principal installments of the Bonds in order of their registration, in an amount which, together with the interest thereon to the date of redemption, will equal the amount on deposit in the District Fund from the prepayment of special assessments or from unexpended bond proceeds. The City has agreed not to call for redemption Bonds from the proceeds of refund* bonds pn* or to July 1, 2013. However, the City has the Mg 15 option to redeem Bonds maturing on and after July 1, 2014 on July 1, 2013 and on any date thereafterin order of principal installments from proceeds of refunding special u'uprovernent district bonds,, from applicable tax increment revenue to the extent available or other legally available sources. Consequently, there can be no,: assuranc e the Bonds will remam* outstanding to their stated maturity dates. 7. Undeveloped Property and Concentration of Ownership in the District The District 'is currently comprised of undeveloped parcels. Of the 17 lots in the District, 16 are currently owned by Montana Venture Partners, LLC (the "Developer"). The Developer indicates that at least three lots are currently in the process of being sold and the sales are expected to be finalized by December of 2006. As of the date of this Official Statement the likelihood of the final sale of any property in the District cannot be determined. As lots are sold in the District, the new owners will become responsible for the payment of the assessments against such property. The Developer has represented to the City that it 'Intends to sell all of the lots to private parties that will then develop industTial, co iercial and technology business facilities in the District. The Developer is financing and contracting for the extension of the City water and wastewater services from the main City limits to the boundary of the District in the amount of $3.5 million. The extension of water and wastewater services has- commenced and is scheduled to be complete by October of 2006. Assessments against the 16 lots owned by the Developer equal $3,519,476 or 77.85% ofthe total assessments in the District of $4,520,000. These 16 lots encompass a total of 1,607,363 square feet, ranging from a low of 3 9,63 9 to a high of 3 06,227 square feet. Financial information about the Developer is not publicly available. The Developer's principals, Mr, Andrew Miller and Mr. Paul Wachholz, are Kalispell area resi dents that have been m*volved in a number of successfal business. ventures and developments as described herein, see "THE DISTRICT - Montana Venture Partners, LLC (the "Developer"). The other property in the District 'is owned by Fun Beverage, Inc. Fun Beverage is currently building an estimated $ 10 million facility in the District and will have an assessment of $1,000,523 or 22.14% of the District. (See "THE DISTRICT — Fun Beverage, Inc." herein.) According to the Resolution of Intent to Create the District, the City has determined that the 2005 estimated market value of the District for tax purposes after the Improvements will be approximately $712251078. Following completion of the Improvements, market valuation in the District will be increased by at least the value of the Improvements. See "THE DISMCT" herein for a more detailed description of the District.. 8. Type of Development Limited in the District Only one property within the District, Fun Beverage, Inc. is not located in either tax increment district. Because the remau* ='g 16 properties in the District are located within either the Industrial Tax Increment District or the Technology Tax Increment District, the type of development will be limited to the uses allowed by State law. The permitted uses for the seven lots. (lots 11- 17) in the Industrial Increment District generally consist of secondary, value -adding industries. The permitted businesses for the nine lots (lots 2-10) in the Technology Increment District, pursuant to the TIF Act, are required to be businesses which through the employment of knowledge or labor added value to a product, process, or export service for which at least 50% of the sales of the business or organization occur outside of Montana or the business or organization is a 16 manufacturing company with at least 50% of its sales to other Montana companies that have 50% of their sales occurring outside of Montana. The limitations on development in the District relating to tax increment .aw may hinder sales and development of lots in the Districts. 9. Limited Nature of Pledge of Tax Increments and Tax Increment Risk Factors Limited Nature ofPledge of Tax Increments. Pursuant to the Bond Resolution, the pledge of Tax Increments as security for the Bonds is limited in nature. The Bond Resolution does not require the deposit of any Tax Increments directly into the District Fund. In addition, the Bond Resolution only requires application of Tax Increments, to the extent available,'to the payment of regularly scheduled debt service on the Bonds in the event that special assessments deposited in the District Fund and amounts on deposit in the Reserve Account are not sufficient to make such payments. The ability of the City to issue additional bonds to which the Tax Increments are pledged is not restricted by the Bond Resolution. There is no requirement in the Bond Resolution that the City maintains a balance in its funds and accounts for either the Technology Tax Increment District or the Industrial Tax Increment District. See "APPENDIX E — Summary Of The Bond Resolution." Limited Area . The Technology Tax Increment District currently includes 9 separate tax parcels and contains approximately 27.8 assessable acres of land. The Industrial Tax Increment District currently includes 7 separate tax parcels and contains approximately 9.2 assessable acres of land. The Tax Increments pledged as secunty for the payment of the Bonds are denved solely from the Technology Tax Increment District and the Industrial Tax Increment District. There is no pledge of tax increment revenues that may be derived from any -)ther tax. increment financing districts of the City. Fun Beverage, the owner of the largest parcel in SID 344, is not located in either the Technology Tax Increment District or the Industrial Tax Increment District. Removal ofParcels. The Bond Resolution does not restrict (i) the removal of tax parcels from the Technology Tax Increment District or the Industrial Tax Increment District or (ii) the release Tax Increments from the pledge created by the Bond Resolution. The removal of tax parcels from either the Technology Tax Increment District or the Industrial Tax Increment District could affect a -mount of Tax Increments that the City receives from such tax increment district. Variable Nature of Rece't of Tax Increments. The recei t of Tax Increments by. the City will be highly IP ip dependent upon the ability of the Developer to develop the District in a timely manner. No assurance can be given that Tax Increments will be generated in future years as the District is currently undeveloped property. The Tax Increments derived from the Technology Tax Increment District and the Industrial Tax Increment District in each year will be dependent, among others, on the following. factors: (i) the extent to which the various parcels of real property in the District are subject to real property taxes under applicable Montana law; (ii) the market value of the taxable parcels in the Technology Tax Increment District or the Industrial Tax Increment D istrict; (iii) the extent to which property taxes are paid in a timely manner by the owners of the tax parcels in the District; and (I'v) changes in law which affect any of the foregoing factors. Reliance on District Taxpayers. Each taxpayer of the District will own substantial portions of the land in the tri n tri of the limited size of Technology Tax Increment D'strict and the Indus al Tax I crement Dis ct because such tax "increment districts. Therefore, the amounts of Tax Increments maybe disproportionately dependent apon the viability and creditworthiness of each of the taxpayers in the Technology Tax Increment District and the Industrial Tax Increment District. 17 Changes in Law. The laws of the State of Montana relating to real property taxation may be changed through legislative enactment, Judicial interpretation, or administrative ruling. Moreover, in the past, the Montana,, Legislature has made regular changes and amendments to the real property taxation system in Montana. Such legislative changes may reduce the maximum amount of property tax levies that may be imposed by various taxing Jurisdictions, substitute alternative revenue sources for property taxes as. a method of financing government services, expand the types of property that are exempt from property taxes, adversely affect market value, limit the taxable value of property, shift the burden of paying property taxes between various types of property, or modify remedies for collecting taxes. Any one or more of these changes in the property tax laws of Montana may result in a significant or material reduction in Tax Increment thatis available for the payment of debt service on the Bonds in the event that special assessments and amounts on deposit in the Reserve Account are not sufficient for such purposes. 10. Absence of Rating 9 The Bonds have not been rated by a rating agency and there 'is no expectation that the Bonds will be assigned a rating in the future. The absence of a rating may adversely affect the marketability of the Bonds in the secondary market. Summary The forego M*g is intended only as a summary of certain risk factors attendant to an investment in the Bonds. In order for potential investors to identify risk factors and -make an 'informed investment decision, potential investors should be thoroughly familiar with this entire Official Statement and the Appendices hereto. THEIMPROVEMENTS General Descripti 0 on The proceeds of the Bonds will be used to finance the costs of certain improvements within the boundaries of the District to include the (i) design, grading and construction of underground conveyance lines for water, wastewater and storm water- (ii) design, grading and construction of underground utility lines for gas, electric and telephone services; and (iii) design, grading and construction of streets, gutters and sidewalks (the "hnprovements"). In addition, proceeds from the Bonds will be used to. fund a contribution to the Reserve Account in the District Fund and the City's Revolving Fund and to pay costs related to the sale and issuance of the Bonds. The Bonds will be payable primarily from special assessments to be levied against property in the District. The general character of the Improvements consists of: (i) grading and utility improvements, consisting of planning, design and performing site grading for the construction within the District of Schoolhouse Loop, Schoolhouse Drive and Schoolhouse Circle (including, Without limitation, potable water mains and services, sewer mains and services, a storm drainage system, telephone, natural gas, and electrical utilities), and (ii) surface improvements, consisting of surfacing Schoolhouse Loop, Schoolhouse Drive and Schoolhouse Circle and installing related surface improvement, such as without limitation, curbing, aprons, sidewalks, gutters and landscaping. IUI*b Sources and Uses of Funds A is estimated by the City that the proceeds of the Bonds (less accrued interest, if any) will be used as shown in the table that follows. Sources of Funds: Proceeds of the Bonds Total Sources of Funds Uses of Funds': Improvement and Engineering Costs Revolving Fund (5.00%) Reserve Account (5-00%) City Admim*stration Fee Bond Discount (2.00%) Costs of Issuance and Roundinj Total Uses of Funds TOTAL $4,5202000.00 $4t5203000-00 $318721000.00 226,000.00 226,000.00 40,000.00 90,400.00 65,600.00 $41520 0 ' Preliminary; subject to change. 2 Includes the Financial Advisor fees, Bond Counsel fees, costs of printing and distributing the Preliminary and Final Official Statements, advertising costs and any miscellaneous costs. Assessment Methods The costs of the Improvements and other costs financed by the proceeds of the Bonds in the total amount of $4.,520,000 will be assessed against the property in the District benefited by the Improvements. Theproperty included within the boundaries of the District, whether or not abutting all of the Improvements, is benefited by certain of the Improvements, and has been determined by the City Council to be the property that will be assessed and taxed for the costs of the Improvements. All properties in the District will be assessed for their proportionate share of the costs of the specific Improvements benefiting the respective properties. For the purposes of equitably apportioning special benefit to each parcel in the District, the special assessments will be based on the total actual area of each parcel, exclusive of streets, avenues, alleys, storm water detention ponds and like features (the. "Assessment Area7). The special assessments are payable over a term not exceeding 20 years, each in equal semi-annual installments of principal with interest due on the outstanding balance. The total area to be assessed in the District is estimated to be 2,064,308 square feet and the costs per square foot are estimated not exceed $2.19. See "THE DISTRICT —Summary of Assessment Roll" herein for a breakdown of the actual assessments against the properties. THE DISTRICT General Description The District encompasses land that is located within the City just east of Highway 93 on Demersville Road, approximately 1.9,rm*les south of the Four Comers intersection and directly east of the Rocky Cliff Road intersection. The District is comprised of approximately 55 acres of land that is primarily used for agricultural purposes and is known as "Old School Station". The District will not be required to be rezoned for the future use and development. Old School Station will be developed as the area's first high-tech industrial/conunercial park. 19 The Improvements include widened road sections, curb and gutter, underground drainage rather than open ditches, sidewalks, handicap ramps, a walking path, street lighting, and street trees and landscaping. (See "The IMPROVEMENTS" herein.) Generally, the Improvements include pedestrian facilities and an automobile roadway that do not currently exist in needed locations. The construction of the Improvements will promote safe and functional access to the businesses that will be located within the District and firther increase public safety and public welfare in the area. The Improvements will enhance the economic development of the City and provide for better traffic circulation and.roadway efficiency in and around the District and provide for safe access to and from Demersville Road. According to the Resolution of Intent to Create the District, the City has detennined that the 2005 estimated market value of the District for tax purposes after the hnprovements will be approximately $7,225,078. Following completion of the Improvements, market valuation in the District will be increased by at least the value of the Improvements and market value is substantially less than the actual resale.of such property. In addition to the District, the C ity has established an industrial tax increment district ("Old School Station Industrial Tax Increment District') and a technology tax increment district ("Old School Station Technology Tax Increment Districf) for the purposes of (i) offsetting the amount of special improvement district assessments necessary to pay debt service on the Bonds, to the extent available (see "THE DISTRICT — The Master Developer Agreement' '.herein), (ii) paying debt service on the Bonds to the extent necessary due to delinquent assessments as described in "Security and Sources of Payment" herein, (Ili) financing infrastructure, and (iv) encouraging the location and retention of industrial and technology development projects in the City. SID 344 was created upon the request of Montana Venture Partners, LLC (the "Developer"). The District is comprised of a total of 17 parcels, of which 16 are currently owned by the Developer. The Developer's 16 parcels (including parcels currently being sold, to Osprey Media and others as described herein) encompass 1,6071,364 square feet and willbe assessed an aggregate of $3,519,477 (77.85%) of the total assessment of $4,520,000. (See "THE DISTRICT - Montana Venture Partners, LLC (the "Developer') herein.) The other property in the District not owned by the Developer is owned by Fun Warehousers 11, LLC ("Fun Beverage"), which is currently building a new building at the site for approximately $ 10 million. Fun Beverage purchased lot number one from the Developer for approximately $650,090. Fun Beverage has one lot that encompasses 457,380 square feet and will be assessed $1,000,523.32 (22.14%) of the total assessments of $4,520,000 and 'is currently constructing an estimated $10 million beverage distribution center. (See "The DISTRICT — Fun Beverage" herein for a description of Fun Beverage). The Developer has represented that it intends to sell all parcels to private parties that will develop industrial, commercial and technology facilities in the District. The lots in the District are currently being marketed at between $3.65 per square foot to $4.95 per square foot. As lots are sold in the District, the new owners will become responsible for the payment of the assessments against such property. The Developer expects that with completion of the Improvements at least three of the properties 'in the District will be sold by the end of 2006. As of the date of this Official Statement the likelihood of the final sale ofproperty in the District cannot be determined. Currently, all of the 17 parcels witbin the District are undeveloped. Based on information provided to the City by the Developer, it is anticipated the District will be fully developed within six years with industrial, commercial and technology facilities. PA No Delinquent Assessments or Property Taxes As of the date of the assessment rolls, none of the parcels in the District had delinquent property taxes or assessments. No Other Outstanding Assessments Against Property in the District As of the date of the assessment rolL none of the properties within the District were located in another special 0 .- improvement district or were responsible for assessments for 'improvements in another special improvement district. Summary of Assessment Roll The following table shows the two current property owners in the District, the total assessable square footage of each parcel, the assessment for each parcel and the percent of the total assessments in the District. The Developer owns 16 lots and represents that at least three lots are in the process of being sold and the sales are expected to be finalized by the end of the calendar year. As the lots are sold in the District, the new owner(s) will be responsible for the assessments against each parcel. As of the date of this Official Statement the likelihood of the final sale of property in the District cannot be determined. The lots 'in the District are currently being marketed at between $3.65 per square foot to $4.95 per square foot. y Owner PE�pSrt Lot No. Assessable S Tooj��ge_ Principal Assessment % of Total Assessments Fun Warehousers 11, LLC (Fun Beverage, Inc.) 1 4562944.31 $1 � 000, 5 23.3 2 22.14% Montana Venture Partners, LLC (the "Developer")' 2 19%940.36 $437�788-56 9,69% 3 306,226.74 67%512.76 14.83 4 206)038-76 45IJ41,59 9.98 5 781843.59 172fi35.58 3.82 6 65�775.59 144�021.94 3.19 7 65�339-99 1437068.16 3.17 8 116�305-18 25401.32 5.63 9 1181,047-58 258,476.47 5.72 10 533143-19 1161362.11 2.57 11 44,866-79 985240.13 2.17 12 42,688-79 933471.20 2.07 13 44�431.19 973286.34 2.15 14 104,108.38 227)955.26 5.04 15 802585.98 176,450.73 3.90 16 397639.58 86�794.68 1.92 17 41 X2.00 902609.85 2.00 The Developer Total 126071363.69 $3�5191476.68 77.85% -Total 210642308.00 $4352000.00 100-00% Source: Based on the City assessment roll for the District. 21 Fun Beverage, Inc. Fun Beverage, Inc. is currently building a new building at the site for approximately $10 million. Fun' Beverage purchased lot number one from the Developer for approximately $650,000. Founded in 1981 by Paul Wachholz and Dale Collins when they purchased B&B. Distributing, Fun Beverage is a diversified wholesale beverage distributor of beer, wine and non alcoholic beverages, representing over 100 different suppliers to over 400 accounts. In 1983, Fun Beverage acquired Frontier Coors and Ralston Wines. In 1998 and 1999, Fun Beverage also acquired Vehrs Mountain States Beverage, Lee Distributing and CL Wines. Primary suppliers for Fun Beverage are Coors, Miller, Pabst, Gallo, Constellation, Beringer, Mondavi, Snapple and Red Bull. Fun Beverage services Flathead and Lincoln counties as well as parts of Lake, Missoula and Glacier counties. Fun Beverage currently employs over 70 full-time employees. Montana Venture Partners, LLC e'The Developer") The District is currently comprised of 17 undeveloped parcels and all but one of the parcels (16) are currently owned by the Developer. The Developer represents that at least three properties in the District are currently in the process of being sold with expected closings to occur by the end of 2.006. The lots in the District are currently being marketed at between $3.65 per square foot to $4.95 per square foot.' The Developer is financing and contracting for the extension of the City water and wastewater services from the main City limits to the boundary of the District at an estimated cost of $3.5 million. The extension of water and wastewater services has commenced and is scheduled to be complete by October of 2006. Mr. Paul Wachholz and Mr. Andrew Miller are the principals of the Developer. Financial information about the Developer and the Developer's principals is not publicly available. The Developer's principals are Kalispell area residents that have been involved in a number of successful business ventures and developments as described below. Mr. Paul Wachhok. Mr. Paul Wachholz is a real estate expert in Northwest Montana. Mr. Wachholz was the owner/President of Coldwell Banker Wachholz & Company from 1981 to 2002 and currently serves as a broker and consultant to the business. Coldwell Banker Wachholz & Company is the largest real estate office in Northwest Montana with five offices and 85 employees workIng in the business of selling conunerciaL land and residential real estate. Mr. Wachholz is a shareholder of (and has been the Chahman of the Board) of Fun beer and non-alcoholic beverage distributorship serving five Beverage, Inc., which is a wholesale wine, counties in Northwest Montana and the largest property owner in the District. Mr. Wachholz graduated from Northern Colorado University and then graduated from the Colorado School of banking at the University of Colorado and prior to his career in real estate was an officer for several banks during a 20 year period in Colorado and Montana. Mr. Wachholz is a past President of the Kalispell Chamber of Commerce, Kalispell Network Organization and the Kalispell Development Corporation where he still serves as a Board Member. He also serves on the Board of Directors for Jobs Now, Inc. as well as the Funding. Foundation for the Flathead Valley Community College among other advisory boards in the community. In 1998, Mr. Wachholz was honored as the Business Man of the Year for Northwest Montana. Mr. Andrew Miller. Mr. Andrew Miller has been an entrepreneur and real estate developer for over twenty- six years in developing industrial./commercial properties in the Southern California, Utah and Montana. Mr. Miller graduated from the Ohio State University with a Bachelor of Science degree in Chemistry and Physics with advanced Business Management Education at the University of Michigan. Mr. Miller worked at the 22 General Motors Tech Center in Detroit, Michigan and later with GM management teams in New York City and Chicago, Illinois. In 1980, Mr. Miller formed A.J. Miller Consulting, Inc. where he began public and private speaking engagements on Entrepreneurship and his real estate development career. Mr. Miller moved to the Flathead Valley in 2004 as a permanent resident and currently serves on the boards of Flathead Valley Community College Foundation, Montana West Economic Development, and is actively involved in the Flathead community. Mr. Miller is one of the three Princi als of Osprey Media. Osprey Media anticipates closing on a lot in the ip District before the end of 2006 and commencing development of the lot by the spring of 2007 with the construction of a 57,000 square foot building to house a media production center. As of the date of this Official Statement the likelihood of the final sale of property cannot be determined. Additional infonnation regarding Osprey Me dia may be obtam'ed at its website http--://www.oWr edia.net. The Osprey Media website is not incorporated into this Official Statement by such reference and is not a part hereof The City does not make any representation or warranty with respect to the accuracy of any information contained on the website of Osprey Media. The Master Development Agreement The City currently anticipates that it will enter into a Master Develo- pment Agreement, dated on or about July 11 2006 (the "Development Agreement"'), with the Developer that provides certain'economic development incentives for businesses (excluding Fun Beverage) to locate in the District. Pursuant to the Development Agreement, the Developer will be required to take specific actions for the development of the District; and the Development Agreement also provides minimum criteria for the development of the District as a prerequisite to the City granting economic. development incentives to the Developer or the owner of any lot in the District. The Development Agreement also provides, among other items, for the application of tax increment revenues (if generated from the development of the District and to the event not pledged to other eligible uses by the City) derived from the Industrial Tax Increment District and the Technology Tax Increment District as a credit against the payment of special assessment payments by property owners (subject to the restrictions that will be contained in the Developm'ent Agreement). The amount of tax increments to be generated by both the Industrial Tax Increment District and the Technology Tax Increment District cannot be determined at this time and is highly dependent upon the ability of the Developer to timely develop the District. See "RISK FACTORS — THE BONDS - Limited Nature of Pledge of Tax Increments and Tax Increment Risk Factors." In addition, the City also anticipates that it may enter into one or more individual development agreements with future owners of parcels in the District with respect to the development of individual parcels in the District. OUTSTANDING SPECIAL IMPROVEMENT DISTRICT BONDS AND THE REVOLVING FUND General Information In addition to the District, the City has created three speciatimprovement districts and seven sidewalk, curb and gutter districts, which have outstanding special assessment bonds and warrants drawn against them and which are secured by the Revolving Fund. The City had cash on hand in its Revolving Fund in the amount of $59,722 as of February 1, 2006, which amount secured $1,161,275 in outstanding special improvement district bonds of the City, not *including the Bonds. After giving effect to the issuance of the Bonds, the City 23 will have approximately $285,722 or 5.03% on hand in its Revolving Fund, which amount will secure approximately $5,681,275 'in principal amount of outstanding bonds and warrants of the City. Furthermore, the City may create additional special improvement districts and may issue additional bonds or warrants that are secured by the Revolving Fund as described below. Future Financing The City ordinarily creates special improvement districts or undertakes sidewalk, curb and gutter projects at the request of property owners. As a result, the City cannot predict with any certainty the number of special improvement districts to be created or sidewalk, curb, gutter and alley approach projects to be undertaken in the future or the principal amount of bonds to be issued, although it is clear that additional districts and projects will be created and undertaken and additional bonds and warrants will be issued within the foreseeable future. The City has not created a special improvement district or authorized a sidewalk, curb and gutter project for which special improvement district bonds or warrants have not been issued and for which it is expected that such bonds or warrants will be issued. Policy Statement Regarding Creation of Special Improvement Districts The City Council does not have a formal policy statement regarding the creation of Special hnprovement Districts. The City has not created a SID *in which bonds or warrants have not been issued and for which the City expects that such bonds or warrants will be issued. Summary of Outstandm*g Special Improvement Districts The following table sets forth the amount of special improvement district bonds outstanding as 'of February 1, 2006, the final stated maturity dates thereof and the special assessments outstanding in the respective special improvement districts and anticipated to be available to pay the respective bonds at or prior to maturity. The schedule does not include sidewalk and curb warrants. As of June 30, 2005, the City had- $ 1 in ,,200,000inoutstand' g local improvement district bonds (SID 342, SID 341, and SID 343). The Revolving Fund also secures seven City sidewalk, curb and gutter districts that as of June 3 0, 2005 . had total outst g assessments bonds or warrants in the amount of $56,499. Ori inal Maturity Bonds Cash Delinquent 91 Bond Issue Amount Date Outstandi!ia----. Balance Assessments SID No. 341 $1002000 7/1/11 SID No. 342 2095,000 7/1/11 SID No. 343 17581 �500 7/1/21 Total $11,890,500 $25�000 $101415 $0 25�000 62925 12142 L0905000 75)609 0 ZZE"M= $11140�000 $92,949 $12142 As of the date of issuance of the Bonds, delinquent assessments for special improvement districts within the City comprised approxunately 0.06% of the original principal amount of Bonds issued. 24 Special Improvement District Assessment Billings and Collections Set forth in the following table are the special improvement dishict assessment billing and collection history for the City for the fiscal years ending June 30, 2001 through 2005. For fiscal year 2005/06, the City's assessment billing was $152,650, of which $75,540 (49.5%) had been collected as of February I � 2006. The second half collection billing for 2005/06 is due May 31, 2006. Fiscal Year Assessment 2004/05 $159,254 2003/04 2002/03 2001/02 2000/01 1721Y958 187,544 202,014 373277 * Includes delinquent assessment collections and prepayments. Source: The City Finance Department Total Annual Collections' Amount Percent $15%704 1 91 017 214)103 211,3924 45A6 Statement of Changes in Fund Balance of the Revolving Fund 100.3% 110.4 114.2 104.9 121.5 Set forth in the following table 'is a summary of the changes in fund balance of the Revolving Fund for the period June 30, 2001 through June 30, 2005. Beginning Balance — July I Receipts Over Disbursements Equity Tranfers' Ending Balance — June 3 0 Assets: Cash Receivables Due from other City funds Total Assets 2000/01 2001/02 2002/03 2003/04 2004/05 $18,787 $99,196 101 980 172�940 $731,924 80A09 27784 2364 984 15890 0 0 (3_1�204).___ 0 (103922) $99,196 $1015980 $725940 $737924 $641,892 $872155 $86,249 $70A88 $711803 $641259 12 1 0 0 0 121041 152731 21)452 2,121 633 $99,208 $101,981 $72)940 $73,294 $64�892 Total Liabilities (Deferred Revenue) $12 $1 $0 $0 $0 Total Fund Balances 995196 101,980 727940 733,294 645892 Total Liabilities/Fund Balances $991,208 $101 �9 81 $725940 $73 �294 $64�892 I -- Equity trawfers were made from the Revolving Fund to the General Fund for amounts in excess of 5% of outstanding bonds ($18,146 in 2002/03 and $10,000 in 2004/05). 25 QUALIFIED TAX-EXEMPT OBLIGATIONS The City has designated the Bonds as "qualified tax-exempt obligations" within the meaning of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended (the "'Code""). TAX EXEMPTION AND RELATED CONSIDERATIONS Tax Exemption In the opinion of Kennedy & Graven, Chartered, as Bond Counsel, under federal and State of Montana laws, regulations, rules and decisions in effect on the date of issuance of the Bonds, interest on the Bonds is excludable from gross income for federal income tax purposes and for State of Montana individual income tax purposes. Interest on the Bonds is not excludable, however, from the computation of income for purposes of the Montana corporate 'income tax and the Montana corporate license tax. Certain provisions of the Code, however,, impose continuing requirements that must be met after the issuance of the Bonds 'in order for interest thereon to be and remain not includable in gross income for purposes of federal income taxation. Noncompliance with such requirements by the City may cause the interest on the Bonds to be includable in gross income for purposes of federal income taxation,, prospectively or retroactive to the date of issuance of the Bonds, irrespective in some cases of the date on which such noncompliance occurs or is ascertained, No provis 'ion has been made for redemption of or for an increase in the interest rate on the Bonds in the event that interest on the Bonds becomes includable *in federal gross income or Montana taxable net income. See "Appendix F — Form of Legal Opinion". Related Federal Tax Considerations Interest on the Bonds is not an item of tax preference included in alternative minimum taxable income for purposes of the federal alternative minimum tax applicable to all taxpayers, but such interest is includable in adjusted current earnings in determining the alternative taxable *income of corporations for purposes of the federal alternative mini'murn taxes. Section 86 of the Code law reqin*res recipients of certain Social Security and railroad retirement benefits to take into account M'terest on the Bonds in determining the taxability of such benefits. Passive *investment income, 'including interest on the Bonds, may be subject to taxation under Section 13 7 5 of the Code for an S corporation that has accumulated eamings and profits at the close of the taxable year if more than twentyfive percent of 'its gross receipts is passive investment income. Interest on the Bonds may be includable M' the income of a foreign corporation for purposes of the branch profits tax osed by Section 884 of the Code and is includable in the net investment income of foreign imp insurance companies for purposes of Section 842(b) of the Code. In the case of an insurance company subject to the tax imposed by Section 831 of the Code, the amount which otherwise would be taken into account as losses incurred under Section 832(b)(5) of the Code must be reduced by an amount equal to fifteen percent of the interest on the Bonds that is received or accrued during the taxable year, The foregom*g is not intended to be an exhaustive discussion of collateral tax consequences arising from receipt of interest on the Bonds. Prospective purchasers or Bondholders should consult their tax advisors with respect to collateral tax consequences, including without limitation the determination of gain or loss on the sale of a Bond, the calculations of alternative minimum tax liability, the inclusion of Social Security or other retirement payments 'in taxable income, the disallowance of deductions for certain expenses attributable to the Bonds, and the state and local tax rules 'in states other than Montana. 26 LITIGATION There is no controversy or litigation of any nature now pending, or to the knowledge of the City, threatened, restraining. or enjoini ng the 'issuance, sale, execution or delivery of the Bonds, or in any way contesting or 11n, affecting the validity of the Bonds, or any. proceedings of the City taken with respect to the issuance or saie. thereof LEGAL MATTERS Legal matters relating to the authorization and issuance of the Bonds are subject to the approving opinion of Kennedy & Graven, Chartered, as Bond Counsel, which will be delivered with the Bonds. (See "APPENDIX F — Form of Legal Opim* on" herein.) NO CONFLICTS OF INTEREST The City is not aware of the existence of any actual or potential conflict of interests, breach of duty or less than arm's-length transaction regarding the selection of the underwriter of the Bonds, the City's engineer and other participants in the offering of the Bonds. D.A. Davidson & Co. as Financial Advisor has obtained written permission from the City to submit a bid 'in its behalf at the public sale for the purchase of the Bonds. UNDERWRITING (the "Underwriter") has agreed, subject to the terms of the Notice of Sale, to purchase theBonds from the City at an aggregate purchase price of % of the par value of the Bonds, plus accrued interest. The Bonds are being offered for sale to the public at the price shown on the inside cover of this Official Statement. The irlitial offering price is subject to change after the date hereof SECONDARY MARIKET DISCLOSURE In order to permit participating underwriters in the primary offering of the Bonds to comply with paragraph (b)(5) of Rule 15c2-12 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Rule"), because the aggregate principal amount of the Bonds and any other securities required to be integrated with the Bonds is more than $ 10,000, 000, the City will covenant and agree, for the benefit of the registered holders or beneficial owners from time to time of the outstanding Bonds, in the Disclosure Certificate, to provide annual reports of specified information and notice of the occurrence of certain events, if material, as hereinafter described (the "Disclosure Covenants"). The information to be provided on an annual basis, the events as to which notice is to be given, if material, and the form of Disclosure Certificate 'is set forth in Appendix. D to this Official Statement. Breach of the Disclosure Covenants will not constitute a default or an "Event of Defaulf ' under the Bonds or the Bond Resolution. A broker or dealer is to consider a known breach of the Disclosure Covenants, however, before recommending the purchase or sale of the Bonds in the secondary market. Thus, a failure on the part of the Issuer to observe the Disclosure Covenants may adversely affect the transferability and liquidity of the - Bonds and their market price. 27 DISCLOSURE STATEMENT The City Will deliver to the Underwriter at the time of the delivery of the.Bonds statements substantially to the effect that the- information contained in this Offi cial Statement and 'in an'y supplements or amendments hereto, delivered by the City do not, as of the date of delivery of the Bonds to the Underwriter(s), contain any untrue statement of a material fact or omit to state a material fact where necessary to make a statement therem* not misleading in light of the circumstances under which it was made. ADDITIONAL INFORMATION AND MISCELLANEOUS The descriptions herein of the Bond Resolution and otlier documents are brief sununaries of certain provisions thereof. Such sun-unaries do not purport to be complete, and reference is made to such documents and contracts, copies of which are available, upon request and upon payment to the City a charge for copying, mailing and handlm*g, from the City. Additional information concerning the Bonds, the City and the District may be obtained by contacting the City, 312 1st Avenue East, P.O. Box 1997, Kalispell, Montana 59903, Attn., City Clerk, telephone (406) 758-7701. The summaries and descriptions contained in this Official Statement and the. Appendices hereto of the provisions of the Bonds, the Bond Resolution and all references to other materials not purporting to be quoted in full are only bn" ef outlines of some of the provisions thereof and do not purport to summ e or describe all of the provisions thereof This Official Statement is not to be construed as a contract or agreement between 9 the City and the Underwnter(s) or holders of any of the Bonds. Any statements made in this Official Statement involving matters of opinion or estimates, whether or not so expressly stated, are set forth as such and not as representations of fact. No representation is made that any of such statements will be realized. APPROVAL OF OFFICIAL STATEMENT The City, through a duly authona zed official, has deemed this Preliminary Official Statement "final" as of its date, except for the omission of information dependent on the pricing of this issue, for purposes of compliance with Securities and Exchange Commission Rule 15c2-12. The execution and delivery of this Official Statement have been duly authorized by the City. ATTEST: M Theresa White City Clerk PT: CITY OF KALISPELL, MONTANA I -Own Pamela B. Kennedy Mayor APPENDIX A Map of the District 0 [This Page Intentionally Left Blank.] VA,(M,�,M Mat OC VW%WPW"A'4r OLE) SCHOMSTATION si, in)a A24W, PAk. ft"'am 7 0=w U—V W.4 d"w wsa�va 0* p4m tur 9 wwo Ark= M"on PJFM 2 b*ft Lar 18 1LOT 0 6L 10A- *QLS ham" fka 400 r 0:44 0 'be !00 AM 49 4b A6&42 tar Technology Indust(fal W Arft '2 " P Al. Tax Tax J.* AM U*Ar -11 Increment Increment toy *A Aa%, 1 A4" lot w District District tor 0 0 Lcr, 4 4 ;Rol VOL. for 1 LOT 2 t0T 3 tk [This Page Intentionally Left Blank.] APPENDIX B City General and Financial Information Th e inform ation p resen te d un der th is h eading ispro v ided to give p rospective in vesto rs an overview ofth e gen eral organ ization and economic status of the City. However, inclusion of this information is not intended to imply that owners ofthe Bonds will be able to look to anyfund other than the DislHct Fund (including the Reserve Account), applicable tax increment revenue if available or the Revolving Fund for payment of the Bonds. The Bonds are not general obligations of the City and the unlimited taxing powers of the City are not pledged to the payment of princ, al thereof or interest thereon. (See "THE BONDS - Security and Sources ofPayment " herein.) THE CITY - GENERAL INFORMATION General The City of Kalispell (the "City") is located at the junction of U.S. Highways 2 and 93 in northwestern Montana, 115 miles north of the City of Missoula, 64 miles south of the United S tate/Canadian border and 23 8 miles east of the City of Spokane, Washington. The City is the County Seat of Flathead County (the "County") and encompasses a land area of 2,5 00 acres. The City had an estimated population of 17,3 81 as of the 2004 estimates, as reported by the U.S. Census Bureau. Located in northwestern Montana, the County is Montana's third most populous county with approximately 83,172 residents in 2005 according to the U.S. Census Bureau. Primary components of the area's economy include manufacturing industries (largely in the wood products industry), agriculture, industries associated with the area's status as a trade center and tourism and recreation based industries. Government sources also comprise a significant portion of the area's economic base. Government The City is a municipal corporation organized underthe laws of the State of Montana. A Council/Manager form of government governs the City with a nine member Council compn* sed of a Mayor and eight Council members. The City's executive, legislative, and policy -making body is the City Council who are elected every two years and serve overlapping four-year terms. The current Council members and the expiration of their respective terms of office are as follows: Elected Official Title Years on Council Expiration of Term Pamela B. Kennedy Mayor 4 years 12/31/09 Jim Atkinson Council Member 17 years 12/31/09 Kari Gabriel Council Member 2 years 12/3 1 /07 Robert Hafferman Council Member 4 years 12/31/09 Bob Herron Council Member 2 years 12/31/07 Randy Kenyon Council Member 6 years 12/31/07 Tim Kluesner Council Member V2year 12/31/09 M. Duane Larson Council Member 15 years 12/31/07 Hank Olson Council Member 4 years 12/31/09 The chief administrative officer of the City is the City Manager who is hired by, responsible to, and serves at f the pleasure of the City Council. The City Manager is responsible for carrying out Council policy, administering the affairs of the City and directing, organizing3, establishing, supervising and administering all departments, agencies, and offices of the City. The City Manager also prepares and presents the Citybudget to the City Council for its approval. James Patrick has served as City Manager since November 2004. Pn* or to working for the City of Kalispell, Mr. Patrick was employed as the City Manager of Vermillion,, South Dakota. In addition', Mr. Patrick has been recognized as a Credentialed Manager by the International City and County Managers Association. Ms. Amy Robertson, C.P.A., is the City Finance Director. Ms. Robertson has been employed as the City Finance Director since 1989 and has been employed by the City since 1985. Principal Governmental Services The City provides a number of basic services to its residents which include police and fire protection, municipal water, sewer and sanitation systems, public works, ambulance, planning, building inspection, zoning enforcement and parks and recreation. Employment and Employee Relations As of February 1, 2006, the City employed 176 permanent full-time and 80 seasonal employees. e State law requires municipalities to bargain collectively with formally recognized collective bargaining units. Currently, three unions represent approximately 73% of the City's permanent full-time employees. The bargaining organization, number of employees represented and the contract expiration are shown in the table below. The City considers its employee relations to be satisfactory. Number of Expiration BEg�j*ning Unit Epaployees of Contract Kalispell Police Association 30 June 30, 2007 AFSCME — Local 256 70 June 30, 2006 International Association of Fire Fighters #547 29 June 30,, 2008 Pension Plans All Ul-time City employees are required to participate in one of the cost -sharing retirement plans listed below. These multiple -employer plans are administered by the State of Montana for a number of public entities in the State. The City made the following contributions in fiscal year 2004/05 on behalf of the City employees who participated in the plans listed below. Public Employees' Retirement System (PERS) Firefighters' Unified Retirement System (FURS) Municipal Police Officers' Retirement System (MPORS) Number of 2004/05 City Pa-fticipants Contribution III $245�330 32 1931135 32 2021)507 THE CITY - FINANCIAL INFORMATION Financial Operations, Sources of Revenue and Budgeting Process GeneraL Since their inception, Montana local governments have relied on local property taxes as the principal source for fundm'g their general operations under rules prescribed by the State Legislature. Historically, cities were permitted by law to levy an all-purpose property tax not to exceed 65 mills, plus special purpose levies for pension, insurance, debt service, and other categories pennitted by State law. The mill levy rate ("mills") is determined by dividing the tax receipts budgeted to be received by a taxing W j 0 unsdiction by the taxable value of all taxable property within such juri sdiction. The tax on each property 'is then detennined by applying the mills to the taxable value of said property. The fiscal year of the City and other taxing bodies in the State commences July 1 of each year and ends June 3 0 of the following year. Taxes are payable in two installments, due on November 3 0 and May 31 of each fiscal year. If not paid on or before these dates, taxes become delinquent and accrue interest at a rate of 5/6 of I% per month from and after such de linquency until paid, plus 2% as a penalty. For fiscal year ended June 30, 2006, the City levied 137.00 mills in the general fund, which constituted 41.3% of the City's general -fund budget. Other sources of fimding for Montana cities include State, County, and Federal revenues, fines, special assessments, charges for services, license and permit fees and investment earnings. Local governments, even home rule muni*cipalities, do not have the authority to impose taxes unless specifically granted by the State Legislature. (See "APPENDIX B - City General Fund Summar/' herein.) Budget Process. The financial operations of the City are conducted primarily through its General Fund, Special Revenue Fund, Debt Servi*ce Fund, Capital Projects Fund, Enterprise Funds, and Internal Service Funds. All revenues not attributable to any other fund are accounted for in the General Fund and recorded therein,, and any lawful expenditure of the City may be made from its General Fund. The Local Government Budget Act stipulates that money, other than payments from agency funds, cannot be drawn from the city treasurer except pursuant to an appropriation. Therefore, a legally adopted budget is required for all funds, with the exception of agency funds. The City Manager is responsible for preparation of the preliminary annual budget. The City Council modifies and/or approves this budget. The City Council must meet prior to the budget adoption for the purpose of holding a public hearing on the final budget. This hearing can be continued until the budget is finally approved and adopted. State law requires that on or before the second Monday in August, the City Council will fix the tax levy for each fund. The City Finance Director forwards a copy of the final budget to the State Department of Commerce no later than October 1 - Valuations, Assessments and Reassessments of Property for Taxation Purposes GeneraL As a general rule, all real and personal property in the State of Montana is subject to taxation by the State and its counties, municipalities and other political subdivisions to finance various general and special govemmental ftmctions. This rule is subject to exceptions in the case of specified classes of exempt property, including public property, property of churches, schools, hospitals, cemeteries and charities, household goods, certain agn' cultural products, automob 'Iles, smaller trucks, bus iness inventory, money and credits. Property is classified accordm*g to its use and character, and the different classes of property are taxed at different percentages of their market valuation. [=A All taxable property except farmland and mines is to be assessed at 100 percent of market value, as such market value is determined by the Montana Department of Revenue (the "Department of Revenue"). In practice, market value is generally less than the property's appraised value for resale purposes. The Montana Constitution requires that property tax values be equalized across the State. The Department of Revenue administers and supervises a program for the revaluation of all taxable property within classes three, four and ten property pursuant to a written plan. (See "APPENDIX B - Tax Rates — Calculation of Taxable Value" herein for discussion of class iffications for property tax purposes). The plan provided that all class three, four and ten property in each county was revalued by January 1, 2003 and each succeeding six years, with the next reappraisal to be complete by January 1, 2009 effective for January 1, 2009. The resulting valuation changes must be phased in each year until the next reappraisal at a rate of 16.66% per year unless otherwise specified. Other property valuations are based on comprehensive appraisals of all taxable property perfonned by the Department of Revenue each year. The Department of Revenue is required by law to furnish market and taxable values to each taxing jurisdiction prior to the first Monday in August for purposes of preparing fiscal year budgets. The heavy reliance on property tax as the source of fanding for local governments and public school systems resulted in the late 1980s and through the 1990s in numerous attempts both legislative and through voter initiated legislative initiatives and constitutional amendments to limit the property tax. Montana local governments have been sub W ect to a legislatively imposed property tax limitation since 1986. During that J same period of time, in efforts to spur economic development and achieve other purposes, the Le islature 91 frequently revised (usually reducing) rates of taxation on various classes of property and reallocated property tax revenues of different kinds between the state and local governments. The reductions in the rate of taxation for various classes of property resulted in a reduction of revenues for local governments, which the State attempted to reimburse to them or allow for increases above the statutory property tax limitations, in an effort to at least keep the level of local goveniment support. Tax Rates - Cakulation of Taxable Value. The taxable value for property is determined by applying a statutorily established percentage ratio to the market value of the property according to a system of classification established by State statute. Currently, there are 13 classifications of property for tax purposes. For most Montana taxing jurisdictions, the bulk of the property tax base is in Class Four (residential and commercial); Class Five (livestock and personal property); Class Seven (property owned by rural cooperatives serving less than 15% of electricity consumers in an incorporated town; electric transformers and machines, electric light and power station machines, natural gas measuring and regulating station equipment owned by non -centrally assessed public utilities),- Class Eight (mining and manufacturing machinery, fixtures, equipment); Class Nine (allocations for centrally assessed gas and electrical distribution systems); Class Twelve (centrally assessed railroad property); and. Class Thirteen (electrical generation facilities and centrally assessed telecommunications companies). The 1997 and 1999 Legislatures, -in an effort to prevent large property tax increases from the 1997 reappraisal, provided for phased -in (1) market valuation exemptions and (2) property tax rate reductions. The 2003 Legislature adopted this same policy for the 2003 reappraisal and therefore any increases in valuation resulting from the reappraisal are to be phased -in each year at a rate of 16.66% until the next reappraisal. During this phase -in,, period, a portion of the market value of Class Four property will become exempt from taxation in the amounts of 3 1.0% in 2003, 31.4% in 2004, 32.0% in 2005, 32.6% in 2006, 33.2% in 2007 and 34.0% in 2008 and subsequent years for residential property C'homestead exemption") and for commercial property (the "comstead exemption") the annual exemptions are 13.0% in 2003,13.3% in 2004,13.8% in 2005, 14.2% in 2006, 14.6% in 2007 and 15.0% in 2008 and thereafter. The increase in exemption for Class Four property over a period of six years will also be matched with changes in the tax rate from the rate of 3.46% in 2002 to 3.40% in 2003 and adjusted downward each year as follows, 3.30% in 20042 3.22% in 2005, 3.14% in 2006, 3.07% in 2007 and 3.01 % in 2008 and thereafter. (Prior to 1999, the rate of taxation for Class Four property had been 3.86% for many years). The 1999 Legislature also- made many other significant revisions to property tax rates as applied to other classes of property. It reduced the tax rate on Class Eight property from 6% to 3%. The tax rate on Class Thirteen property was reduced from 12% to 6%, the tax rate on Class F ive property was reduced from 8% to 3% and the tax on Class Six property was eliminated. The 1999 Legislature also reduced the tax rate on automobiles and light trucks from 2% of the vehicle value to 1.4% with further reductions possible in the following years to prevent increases in revenue from this tax. The tax rate on forestland (Class Ten property) was reduced from 0.79% of its forest production value to 0.35%. The 2005 Legislature (pursuant to Senate Bill 48) removed targets set during the 2003 Legislative Session to further decrease the level of taxation on Class Eight property to 0% and provided that Class Eight property remain taxed at 3% each year and increased the threshold amount of Class Eight property that an entity may own and be exempt from property taxation from $5,000 to $20,000 of market value. Reimbursement Provisions. The result of the tax changes by the 1999 and 2003 Legislatures described above is a reduction in the taxable valuation and ultimately the taxes received by local governments. However since enactment of such changes, the State has reimbursed local govenunents for property tax and other tax losses that are attributable to reductions in the tax rates on business equipment, oil and g as production, telecommunications prop erty� electrical generating facilities, and mining transportation costs but will not reimburse local govemments for property tax losses attributable to the reduction in the tax rates on r 'dential and commercial real estate. esi Interim Property Tax Reappraisal and Tax Reform Study Committees (2005 Legislative Session). The 2003 Legislature formed two committees to study property taxes: an interim property tax reappraisal committee and a tax reform study committee. Each committee submitted a report in November of 2004 that included recommendations and proposed legislation necessary to implement such proposals. The 59th Montana Legislative Session commenced January of 2005 and adjourned on April 21, 2005. No major legislation passed during the 2005 Le islative Session that will have a significant change on property taxes 91 in the State. An interim committee was designated during the 2005 Legislative Session to examine the current methods used for the classification and valuation of agricultural land for property tax purposes and to examine altemative methods of classification and valuation. All aspects of the study are to be concluded before September 15, 2006. 2001 Legislative Revisions to System of Municipal Finance Pursuant to HB 124 enacted by the 2001 Legislature effective, for the most par� July 1, 2001 , the State replaced its system of reimbursement for lost property tax revenue by local governments with a system of local government entitlements and block grants. Pn*or to HB124, local govermuent personal property tax reduction reimbursements contained in HB20 and SB417 from prior sessions were being reduced 10% a year starting in fiscal 2000 and tax reduction reimbursements contained in SB 184 from the 1999 Legislature were sunset June 30, 2001. To fund the entitlements and block grant programs, the State will retain various tax and revenues for the general fund that were previously allocated to the local governments, including sources such as gaming revenues,, beer and wine taxes, and automobile licensing and registration fees. HB 124 is expected to provide a more predicable, stable funding source for local government and more flexibility and decision making at the local level. HB 124 combines a number of different reimbursements and other revenue sources controlled by the State into one "Entitlement Share" which is not tied to any specific revenue source, but rather to the general economic condition of the State. This allows the State legislature to make tax changes and revenue reallocations withoutimpacting the revenue for local government, since the local government "Entitlement Share is not tied to any particular revenue source or revenue allocation. Therefore, the local government revenue base, which will vary with the State's economy, can continue at a fairly predictable level and not be radically changed every two years by the Le islature, by a decision of the Legislature to reduce or eliminate a 91 source of taxation in which local governments rely. Ultimately, the Legislature still has the power to change the "Entitlement Share". SummaryofHB124. The main provisions of HB124 include: 1. Revenue that was appropriated to local goveniments from various sources will continue in a single statutory appropriation: certain motor vehicles; gaming-, financial institutions; alcohol taxes; district court fees; other miscellaneous revenues; and SB 184 reimbursements. 2. The entitlement share payment for local governments will provide for predictable, stable revenue flows based on previous revenue plus a growth factor allowing all areas of the State to share in the overall state revenue growth. 3. Ties the entitlement share growth rate to the Montana economy based on an annual calculation using Montana Gross State Product plus Montana Personal Income - 4 year average growth and the following percentages: cities-3.00%; consolidated governments- 2.65%; counties-2.30%. Annual "growth" of the Entitlement Share is distributed 50% on population and 50% on each local government's share of the base year entitlement calculation. 4. A provision providing that if the future revenues fall below 95% of the base year revenues due to causes other than legislative action that local governments share in the revenue loss. 5. The State assumes financial liability for the portion of district courts and welfare expenses previously funded by counties. 6. Provides an overall property tax cap on local government growth but provides for growth at 1/z the rate of inflation and provides new flexibility 'in levying the maximum number of mills. 7. Strengthens current law so . that the state cannot put unfunded mandates on local governments and provides block grants for school districts and countywide school transportation and retirement funds. The entitlement share was expected to grow at a rate of 2.3 %-3.0% dependent upon the performance of the State economy. The City believes this growth rate is a more predictable revenue source than the various revenue sources assumed by the State. The City's budget for fiscal year July 1, 2005/06 imposed a total mill levy of 170.00 mills for all funds with 137.00 mills allocated to the General Fund. The City's budgeted General Fund revenues are estimated to be comprised of 45% local property tax receipts, 22% Entitlement Share from the State and 33% other sources. Financial $ummary (As of the date of 'issuance of the Bonds) 2004 Population Estimate ........................................................................... V, 4 & 0 4 * a * * 0 171,381 2005/06 Market Valuation .................... 4 .................................................... $893�657,7570 2005/06 Taxable Valuation ......................................................................... $28�65IJ67 General Obligation Bonds Outstanding ................................................ .*4, $62345,000 Other General Obligation Debt Outstanding (Notes/Loans Payable)' $1,517,152 Total Direct Debt ............................................... 69* **moved *44*0 0004444 so 06904 $71862� 152 Overlapping General Obligation Debt Outstanding ........... $277852,397 Total Direct and Overlapping General Obligation Debt .................. $35JI4,549 Special Assessment Bonds Outstanding (including the Bonds) .................... $5,681 �275 1 Includes five loans outstanding in the aggregate atnount of $1,517,152. Overlappm*g General Obligation Indebtedness The following infortuation sets forth the general obligation indebtedness of the City following the issuance of the Bonds and of taxing entities with boundaries that overlap the boundaries of the City. General Outstanding Debt Chargeable to Obligation Bonds Property Within the City Outstanding Percent Amount Kalispell High School District $45 ffl 3 �229 32.71% $141728,275 Kalispell Elementary District 14�9102399 67.75 102102ffl2 Flathead Valley Community College 175583�294 17.19 310225090 Total Overlapping General Obligation Debt $27)852�397 Total Direct Debt 7,862�152 Total Direct and Overlapping General Obligation Debt $351,7145549 General Obligation Debt Ratios DirectDebt Per Capita ........................................................................................................................ $452 Direct and Overlapping Debt Per Capita ......................................................................... 0&*&*****q**eqq9$2�055 Direct Debt to Market Valuation ..................................................................................................... 0.88% Direct and Overlapping Debt to Market Valuation ............................................................... 4*00% Direct Debt to Taxable Valuation .................................................................................................. 27,44% Direct and Overlapping Debt to Taxable Valuation ..................................................................... 124.65% Market Valuation Per Capita ......................................................................................................... $51,416 Taxable Valuation Per Capita .......................................................................................................... $1 fi48 General Obligation Debt Linuftations Except for special provisions concerning general obligation indebtedness m*curred for purposes ofproviding sewer and water service, the limit on aggregate outstanding and unpaid general obligation indebtedness for 0 cities cannot exceed 1. 5 1 % of the total assessed value of taxable property as ascertained by the last assessment for state and county taxes. The 2005/06 total assessed valuation for the City was $893,657,570. The total amount of debt the City may incur is according to State law is $13,494,229. Given the outstanding debt in the amount of $7,862,152, the City.has $5,632,077 of debt capacity remaining. Special Improvement District Bonds are not general obligations bonds and do not apply to the general obligation indebtedness outstanding or general obligation debt capacity remaining. Trends in Property Valuations Set forth in the following table are the market valuations and taxable valuations of real and personal property, including tax increment districts, located within the City for the fiscal years 2001/02 through 2005/06. Since 2001/02, market valuation in the City has grown 43.5% and taxable valuation has grown 22.4%. See "APPENDIX B - Valuations, Assessments and Reassessments of Property for Taxation Purposes" herein for a des tion of recently enacted property tax legislation. CnP Fiscal Market Taxable Year Valuation Valuation 2005/06 $8935657,570 $28fi5IJ67 2004/05 818051572 26�9143123 2003/04 7431,576�508 26�0871616 2002/03 6781031,534 231858�317 2001/02 622fil %786 231411 � 193 Source: Department of Revenue Appraisal and Assessment Office — Flathead County Tax Levies The following table shows the mill rates per $ 1,000 of taxable value of property for a taxpayer in the City for the years shown. ------------- Fiscal Year ---------------- Taxing Entity 2001/02 2002/03 2003/04 2004/05 2005/06 State University Mill Levy 6.00 6.00 6.00 6.00 6.00 State Statewide School Equalization 40.00 40.00 40.00 40.00 40.00 General Countywide School Levy 94.88 96.89 102.42 100-76 101.03 Flathead County 64.67 66-79 63.16 68.81 70.47 County Health Insurance 0.00 0.00 1.65 2.71 3.62 Flathead Valley Community College 12.03 11.76 11-57 11.14 14.31 Kalispell Elementary School District 149.84 152.04 153-12 147.31 160.77 Kalispell High School District 78.04 80.35 80.00 77.81 99.40 City of Kalispell 129.42 140.60 134.43 142.00 157.50 City of Kalispell Health Insurance 0.00 12.00 10.22 13.00 12-50 Weed 1.71 1.71 1.70 1.83 1.73 Sheriff 23.16 25.11 29-10 29.17 29.62 Mosquito 0.42 0.50 0.51 0.52 0.00 Board of Health 4.65 4.93 5.09 5.00 5.30 Total 604.82 638.68 638.97 646.06 702.25 Source: Department of Revenue Appraisal and Assessment Office - Flathead County Tax Collections Set forth in the following table are the real and personal property tax levies and collections for the City General Fund for the fiscal years ending June 3 0, 2 001 through 2005. For fiscal year ending June 3 0, 2006, the City levied $3,849,4721, of which $1 942,712 has been collected as of Febru-ary 1, 2006. The second half property tax collections for 2005/06 are due on May 31, 2006. Taxes Collected in Total Annual Tax Year Levied' Collections' Fiscal Year Tax Levy Amount Percent Amount Percent 2004/05 3 $333371,436 $321862625 95.5% $3,495,2530 104.7% 2003/04 21197,562 250212757 92.0 2�2441771 102.2 2002/03 22125�749 179551689 92.0 21,115,245 99.5 2001/02 1 1932fios 11777�999 92.0 1,19687781 101.9 2000/01 155682725 13443,227 92.0 1,6232520 103.5 Due to timing of collection of the second half taxes, the, Cityrnust make accruals has historically assumed 8% will be collected in the following year; however, in fiscal year 2004/05 and for subsequent years the City assumes 4.5% will collected in the following year. 2 Includes real and personal property collections, delinquencies, penalties and interest. 3 The City combined levies for Compensation insurance, Health and Retirement with the General Fund levy for fiscal year 2005. This increased the levy from 87.5 mills for the General Fund for fiscal year 2004 to 130 mills for the General Fund in fiscal year 2005. Separate funds with separate levies for insurance and retirement will no longer be utilized. Source: City Finance Department F Major Taxpayers The following table lists the major taxpayers within the City for fiscal year 2005/06, in declining order of taxable value. 2005/06 Business Taxable Value 1. Centurytel Teleconununications $922�371 2. Flathead Electric utility 8711584 3. Flathead Hospital Development Healthcare 723�288 4. Northwestern Energy' utility 5851958 5. West Coast Limited Shopping Mall 492� 181 6. Lowes Retail 3412757 7. Target Retail 243,044 8. Home Depot Retail 238fflO 9. Northwest Healthcare Healthcare 193,110 1 O.Flathead County Economic Development Authon*ty Economic Development 135,010 Total.............. 0 9 0 9 0 0 0 4 9 a * 0 a 0 . a a 0 0 & a 9 9 9 9 . 0 0 0 0 0 a * 0 0 * 0 8 d 6 0 9 a a a 4 . 0 0 4 & 4 0 0 0 a & 9 0 4 a 1 0 0 9 # V 0 & 4 4 * a 0 a $4J47,133 2 1 Northwestern Energy emerged from Chapter 11 Bankruptcy on November 1, 2004. Northwestern Energy filed for Chapter 11 bankruptcy in September 2003 and filed a plan of reorganization in the Bankruptcy Court and a hearing was held in June 2004. On October 20, 2004, the Bankruptcy Court entered a written order confirming the second amended and restated plan of reorganization with the effective date for emergence of Chapter I I November 1, 2004. Babcock & Brown Infi-astructure C'BBI"19 an Australian investment group, has agreed to purchase Northwestern Energy for approximately $2.2 billion. The purchase must be approved by the Montana Public Service Conu-nission and BBI anticipates filing a formal request by July 2006 that could take up to 9-months for a decision. The City cannot predict when a sale, if any, would become final. 2 Represents 16.68% of the City's total 2004/05 taxable value of $28,651,167. Source: Department of Revenue Appraisal and Assessment Office — Flathead County [The remainder of this page intentionally left blank.] B-I I City General Fund Summary The following table is a sununary of the statements of revenues collected, expenditures paid, and changes in the General Fund balance for the fiscal years ended June 30, 2001 through 2005. Audited Audited Audited Audited Audited 2000/01 2001/02 2002/03 2003/04 2004/05 Revenues: Taxes/special assessments K704�359 $17968�979 $2,3115�245 $222442771 $3,4952530 Licenses and permits 177A76 843� 118 14950104 134.7583 11 6�257 Entergovernmental Revenue' L571J58 119071,895 234983,686 215933,221 21882,3364 Charges for services 879,585 902�P045 6937544 7202295 8417492 Fines and forfeitures 386�341 39%861 453�892 443,646 535,875 Miscellaneous revenues 873302 69�770 682470 632502 111,485 Investment and royalty earnings 2241985 121,540 85,638 28��929 2529293 Total Revenue $5303 1 �206 $5�4542208 $6,064,579 $69228,947 $8�2357296 Expenditures: Current: General government $901,080 -$151233124 $171132424 $171812677 $1,5241123 Public safety 21409,829 217212230 324952649 3�7097528 53078�904 Public works and health 5412889 574fiV 5621,189 3393,745 423,469 Culture and recreation 6547806 673512 7491069 7485777 8919469 Miscellaneous 565 2�254 27254 11320 1517 Capital outlay 1543730 248,7005 147,029 234�802 1372836 Debt service 30)769 36X5 252739 291,370 411,958 Total Expenditures $4)693fi68 $5137%667 $6,10953,353 $6,2457219 $8�0991276 Excess of Revenues Over $3372538 $74�541 $(303774) $(16�272) $136�020 (Under) Expenditures Other Financing Sources (Uses) $(27�440) $(78�332) $(61�818) $46�913 $810,1850 Fund Balance (July 1) $9071446 $112301681 $12228,215 $1�2002450 $1�2247330 Residual equity transfers/Adjustments 13J37 11325 641Y827 (6J6 1) 96,044 Fund Balance, June 30 $11230fi8l $1,2282215 $11200�450 $1,224�330 $2,267,244 1 The 2001 Legislature enacted HB 124, which resulted in significant changes that include several non -levy revenue sources (motor vehicle fees and taxes) corporate license taxes,, aeronautics fees, state land payments in lieu of taxes and SB 184 property reimbursements) being replaced by local government entitlements and state block grants. It is unknown if the local government entitlements and state block grants will completely offset the lost non -levy revenue sources. See "APPENDIX B - 2001 Legislative Revisions to System of Finance" herein. Source: The City's Audits and Financials B-12 APPENDIX C Economic and Demographic Information C-1 ECONOMIC AND DEMOGRAPHIC INFORMATION The Local Economy The City of Kalispell (the "City") is the County Seat of Flathead County (the "County) and had an estimated population of 17,3 81 as of the 2004 estimates, as reported by the U.S. Census Bureau. Located in northwestern Montana, the County is Montana's third most populous county with approximately 83,172 residents in 2005 according to the U.S. Census Bureau. The greater Kalispell area is the trade center of northwest Montana. The area is renowned for its Flathead Cherries and Christmas tree farms. It is also a gateway to Glacier National Park. Primary components of the area's economy "include manufacturing industries (largely in the wood products industry), agn'culture, industries associated with the area's status as a trade center and tourism. and recreation -based industries. Government sources also compri'se a significant portion of the area's economic base. Manufacturing Industries Manufacturing in the County accounted for $156.2 million of total earnings by industry in 2004 and comprised over 6.7% of total County earned income by industry, due largely to the strong presence of the wood products industry and to a lesser extent to primary metal refining in the area. The County generally leads all Montana counties in the amount of timber processed. Approximately 6.3% of the employees in the County are employed by the manufacturing industries, particularly the wood products industry. Plum Creek Timber Co. and Semitoob Inc. are two of -the major private employers in the County (see "APPENDIX C - Major Private Employers"' herein) with 1, 140 and 700 employees, respectively. Prior to recent electricity shortages and declining metal prices, Columbia Falls Aluminum Co. had been a major employer of the County. Plum Creek Timber Co. Plum Creek is one of the largest, private timberland owners in the U.S. The company concentrates on forestry management, harvesting techniques, value-added products, and zero -waste manufacturing techniques nationwide. Plum Creek's current operations include 6 sawmills, 2 plywood plants, 1 medium dens ity fiberboard ("MDF') facility and 2 remanufacturing plants. The company employs approximately 2,5 00 people in the northwest, 1, 140 of which are employed in the County. Plum Creek also has land holdings in excess of 3 million acres. Semitool, Inc. Semitool., Inc. currently has approximately 450 employees at its corporate headquarters located adjacent to the City. Semitool currently employs over 1,000 people company -wide, with approximately 725 located 'in the Kalispell area. Semitool delivers automated tools for copper deposition, thermal process 'Ing, chemical processing, and wafer carrier cleaning to semiconductor manufacturers around the world. Sernitool also has many subsidiaries around the globe to conduct operations. Columbia Falls Aluminum Coo Columbia Falls Alum -mum ("CFAC') is a privately owned and operated company located in Columb ia Falls, approximately 15 miles north ofthe City. The company was established in 1952 by beginning construction on two pothnes with total capacity of 67,500 tons per year at a cost of $65,000,000. Nearly three years later, the first aluminum was produced. Today, CFAC has five potlines, and at full capacity produces 160,000 tons of aluminum ingot per year. The potline buildings reportedly form the largest single building in Montana, covering approximately 1,740,000 square feet (40 acres). The 9 company has the ability to employ 600 people when at full capacity. C-2 In 2001, CFAC completely shutdown operations and resold available electricity to western utilities. All CFAC employees affected by the shutdown received full wages through the end of 2001. At that time, CFAC accounted for one -fifth of all of the State's electrical usage. After a 13-month shutdown, CFAC restarted one potline in March 2002. In April 2002,, CFAC restarted another 1.5 potlines bringing total production up to 2.5 potlines, or 50 percent of the plant capacity and was fully operational by July 2002. Lower power prices and higher metal prices prompted the move by CFAC. In March 2003 CFAC announced it was laying off 175 employees and would reduce its operations by approximately 67%. Primary factors prompting the decision included escalating aluminum prices, high-energy prices and low-water levels,, which affects hydropower that CFAC depends upon. CFAC employed approxn*nately 340 people pnor to the most recent layoffs. As of August 2005, CFAC employed approximately 160 employees and was operating one pot -line or 20% of plant capacity. CFAC, together with other entities, is working on solutions to its power problems. The City cannot predict future trends in the wholesale electrical power market and the effect such trends may have on the operation of CFAC. Agriculture Cash receipts from the sale of principal agricultural products and government payments in the County totaled close to $29 million dollars in 2003. The County has approximately 1,075 farms that encompass 234,861 of the County's 2,262,936 total acres. 'fhe primary agricultural products of the area include evergreen tree nursery stock, Christmas trees, cherries, potatoes, grain, hay and livestock. In 2004, the County ranked 5 th of th - the 56 counties in the State for the production of milk cows/heifers, 13 in alfalfa hay production, 22d. for all other hay production and 23d in barley and oats production. 0 Below are summanzed cash receipt figures, in thousands, for agricultural marketings in the County for the years shown according to.the Montana Agriculture Statistics Service. � � w - - � � - - w - - � - � Agricultural Cash Receipts (000's) ------------- Sources 1999 2000 2001 2002 2003 . .. . ... ......... Livestock and Products $8,528 $9�426 $93990 $8,1244 $9,478 Crops 16�350 15�542 16,168 17� 152 18,286- Government Payments 111915 11938 19312 851 11199 TOTALS $267793 $263906 $271470 $26�247 $28,963 Source: Montana Agriculture Statistics Service Governmental Entities As of 2004, government sources comprised 9.6% of total earnings by industry and 9.0% of total employment in the County. The U.S. Forest Service, local school districts, the State, and local municipalities comprise some of the largest public employers in the County. Trade Center Activities The industries that employ the most people in the County include services and wholesale and retail trade. In 2004 the health care services industry employed 9.7% of the total employed population within the County. The area has a fall range of medical services. Kalispell Regional Medical Center,, a 109-bed acute care C-3 facility with numerous outpatient services and clinics, is the referral center for a large area of northwestern Montana. Kalispell Regional offers helicopter sem*ce for medical and trauma situations. Kalispell Regional Medical Center is the largest employer in the County with approximately 1,400 employees. In December 2002, North Valley Hospital in Whitefish completed the purchase of a 45-acre property for $1.365 million for its new hospital, which is expected to be completed by late 2006 or early 2007, The new hospital (including the land) is expected to cost $21 MI'llion. Also in 2004, wholesale and retail trade employed 15.7% of the County" s labor force. The wholesale and retail trade industries comprised approximately 9.3% of total earnings by industry in the County 'in 2004. The strong influence of both the services industry and wholesale and retail trade on the area's economy emphasizes the 'importance and influence of tourism in the County as discussed below. A development located north of the City includes a Home Depot and Target stores that recently opened. Additional retailers that occupy space in the development include Border's and Ross Dress for Less. The Spring Prairie Center retail complex that broke ground in Apri I of 2004 with Lowe's being the first anchor tenant, which built a 134,552 square foot store across the street from Home Depot and opened *in January of 2004. Walgreens opened a new retail store in February 2005. Costco built a 136,000 square foot facility that opened in October of 2005. The Spring Prairie Center, when complete, will include 60 acres of land and approximately 480,000 square feet of retail space. Other major national retailers M* and around the City include Wal-Mart, Shopko, Herbergers, JC Penney's and The Buckle, Joann Fabrics and Sears. Teletech. It was announced *in December 2003 that Teletech, Inc. ("Teletech"), a customer service firm that provides customer services and technical support to computer and internet related companies, finalized a lease with the City to occupy the space previously occupied by the Stream International M* the Gateway Mall West. Teletech initial plans were to provide approximately 125 jobs, 100 which would be full-time, with the number ofjobs planned toincrease to a total of 425 positions, 340 which would be full-time. As of February 2005, Teletech employs approximately 200 people. Under the proposed lease Teletech would occupy the space in Gateway West Mall for a minimum of five years begl*nning February 1, 2004. The lease also calls for Teletech to receive 100% rent elimination from the City in the first year in exchange for creating and maintaining a minimum of 125 jobs in the first year, 250 Jobs in the second year and 425 jobs in the subsequent years and have at least 80% of the jobs be full-time and paying a minimum $8 per hour in addition to'a benefits package equal to 20% of the minimum wage of $8 per hour. In addition, under the lease Stream International would be required to buy out the remainder of its financial obligations which include a lump -sum payment of $1.36 million to cover rent for 6 Y2years, repay $767,000 to cover the balance of a loan the City provided Stream, pay up to $50,000 to cover any transaction costs, and to pay the brokerage fee the Cityincurred to find a new tenant whi ch could reach as much as $300,000. Teletech will guarantee a minimum property tax payment to the City in the amount of $140,000 per year. In return to meet Teletech's parking requirements, the City and Flathead County Port Authority (co-owner of the mall space) will develop a parking area. Resource Label Group. Resource Label Group ("RLG") is a Tennessee -based company that is currently constructing a 16,000 square foot building estimate to cost $4.5 million dollars near the City of Whitefish and is expect to employ 40-50 people within four years of opening. RLG designs and prints custom labels for products such as shampoo, agricultural chemicals, automobiles and lunch boxes. RLG has additional plants located in Memphis and Franklin, Tennessee which employ a combined 100 people. It is expected that RLG will providejobs. starting at approximately $30,000 per year, with some sales positions expected to pay in the six figures. RLG opened in early 2004 and employs approximately 12 people as of November 2004. C-4 Tourism and Recreation The tourism industry is an important source of economic activity for the area. Visitors are attracted to the area s scenic beauty and outdoor recreational opportunities. Tourism in the area is anchored by Big Mountain Ski and Summer Resort aci �, GI 'er National Park, the Bob Marshall and Great Bear Wilderness areas, the National Bison Range and Flathead Lake, Whitefish Lake and other area waterways. Big Mountain Ski and Summer Resort Outdoor sports are popular in the area. Big Mountain Ski and Summer Resort, located approximately 22 miles north of the City, offers down hill and cross -county skiing among many summer activities. With more than 3,000 skiable acres, Big Mountain Ski Resort is one of the largest ski resorts in the U.S. and Canada. Big Mountain currently has eleven lifts, two high-speed quads servicing 2,500 vertical feet and 83 marked runs. The readers of Ski Magazine (October 2001 issue) rated Big Mountain Ski Resort number 21 in North America and the best resort in Montana. Wildemess trails are located throughout the area for the enjoyment of cross-country skiing and snowmobiling. Big Mountain Resort, which is owned and operated by Winter Sports, is in a growth phase of its village. Hines Resorts, an 'International real estate firm, was selected as the developer of the new $300 million Glacier Village in 2001. In July of 2004, Hines Resorts parted ways with Winter Sports to pursue other commercial development and the Project was turned over to Walker Corporation based out of Sydney, Australia. The improvements 'are scheduled to be completed over an eight to ten year period. The Glacier Village plan calls for a pedestrian -friendly village with retail shops and restaurants lini'ng the streets, year- round services and a hotel and state of the art conference center that will offer 4 1,000 -square feet in three stories, Hines reported brisk sales of its offerings, selling over $35 million in single-family home sites, townhomes and condomim'urns since September 11, 2001. Construction began in 2002 on the $15-million five -story Morning Eagle Lodge, which opened in December of 2003. The first floor of Morning Eagle Lodge is for commercial space, The Lodge will also *include underground parking and condomim*um configurations ranging from 500-square-foot studio units that sold for $190,000 to 1,500-square-foot tluee- bedroom units that average $525,000. The ski-in/ski-outhome-site developments at Glacier Village include Northern Lights (with all 18 home sites sold in less than a year), The Glades (with 11 of 13 home sites sold the first day of offering) and Slopes'ide (a 24-townhouse unit with 6 released last fall and all anticipated to be completed by December 2006). The Glades and Northern Lights subdivisions have been completed with the village area currently under construction. Winter Sports also recently announced construction of 10 reasonably priced apartments ($350-$650 per month) to be built on Big Mountain with 20 more to follow based on demand. Blacktail Mountain Ski Area. Blacktail Mountain Ski Area ("Blacktail") is located 28 miles south of the City. Blacktail has more than 1,000 acres to ski, with the longest run at I %miles. Blacktail offers two double -chair and one. triple -chair lift and a handle tow. The lodge is a three-story building that contains the ticket office, rental shop, a retail shop, a caf6 and a restaurant pub. Glacier National Park. Glacier National Park is located approximately 33 miles northeast of the City. The area was designated a Forest Preserve in 1900. In 1910, President Taft signed the bill establishing Glacier as the country' s I e national park. The construction of the Going -to -the -Sun Road through a remote section of Glacier National Park was completed in 1932 after I I years of work. The road, a National Historic Landmark, is considered an engineering feat and 'is one of the most scenic roads in North America. With over 1, 5 00 square miles of wildernes s, many glaciers and lakes including Lake McDonald and more than 700 miles of trails'. Glacier National Park is a popular destination for recreationalists. The Park reported approximately 1,937,042 visitors in 2005. C-5 0 Just across the border 2 in Canada, is Waterton Lakes National Park. In 1932, the UnIfted States and Canadian governments voted to designate the parks as Waterton -Glacier International Peace Park, the world"s first, as a symbol of peace and friendship. More recently, the parks have received two other international honors. The parks are both Biosphere Reserves, and were named as a World Heritage Site in 1995. Between Waterton Lakes National Park and Glacier National Park, there are over 850 miles of maintained hiking trails. Bob Marshall and Other Wilderness Areas. Known as the flagship of the nation's wildemess fleet, the "Bob" is one of the largest and best-known Wilderness areas in the country. Together with the Great Bear and Scapegoat wilderness areas, it forms a contiguous wild lands complex of more than 3 million acres that straddle the Continental Divide. These Wilderness areas contain roughly 1,800 miles of trails. Accessible only by trail, the complex offers fishing, hunting, camping, horseback riding and river -floating. Flathead Lake, ff%itefish Lake and other Waterways. Flathead Lake, located in the County approximately 9 miles south of the City, is a popular vacation destination. Flathead Lake encompasses approximately 200 miles and is the largest freshwater lake west of the Mississippi. Flathead Lake offers a variety of fish including cutthroat, mackinaw, largemouth bass and yellow perch. There are many other lakes and rivers in the area that draw recreationalists. The waterways allow a number of outdoor sports to be enjoyed including boating, fishing and swimming. Whitefish Lake is located 15 m des north of the City near Big Mountain Ski and Summ Resort. South, Middle d North Forks of the i er an Flathead River, near Glacier Park, form the nation's longest wild and scenic river system, stretching 219 miles across some of Montana's most rugged backcountry Area GW Courses. A number of golf courses are located in the County and surrounding area. Those located in the County include: Buffalo Hill's; Eagle Bend Golf Club; Glacier View Golf Club; Mountain Crossroads Golf Course- Par 3 on 93 Golf Course,- Whitefish Lake Golf Club; Meadow Lake Golf Resort; Big Mountain Golf Club; and Village Green Golf Course, which all are public with the exception of the Glacier View Golf Club, which is semi-pnvate. Buffalo Hill's offers the 9-hole Cameron Course and 18- hole Championship Course, which- was ranked by Go�fDigest as the 3d "Best in State"' in 1997/98. The Eagle Bend Golf Club offers the 9-hole. Eagle Bend Course and 18-hole Lake Ridge Course, which was ranked by Go�fDigest as the "Best in State" 'in 1995/96 and rated it 3 1 " of the "Top 7 5 Public Courses" in 1990. The Whitefish Lake Golf Club has two 18-hole courses available, the South Course and the North Course that was rated by Go6CDigest as the 4h"Best in State" in 1995/96 and 2 nd in 1997/98 and as the 2 nd "'Best Public Coursd"' in the State in 1996. The Glacier View Golf Club, Meadow Lake Golf Resort, which was rated by Go�(Digest as the 6th"Best Public Course'in the State for 1996, Big Mountain Golf Club and Village Green Golf Course all offer 18-hole courses, while the Mountain Crossroad Golf Course and Par 3 on 93 offer 9-hole courses. C-6 Population Trends Historical population figures for the City, the County and the State of Montana since 1980 are set forth below to show population trends in the area. City of Percent of Flathead Percent of State of Percent of Year KaliTell Change C9 Change Montana ChanLe 2005' 177381 22.2% 83�172 11.7% 9351Y670 3.7% 2000 145,223 19.4 74471 25.8 9 0 21 1.07 55 12.9 1990 11.7917 11.5 592218 14.0 799PO65 1.6 1980 10,689 1.5 512966 31.7 786,690 13.3 ' Represents the intercensal estimates as of July 1, 2005. The City estimate is as of July 1, 2004. The city/town estimates for 2005 were not available as of the date of this Official Statement. Source: United States Census Bureau Major Private Employers The major private employers in the County as of December 2004 were as follows. Approx. Number of -Employer Type of Business Kmployees 1. Kalispell Re ional Medical Center 91 Health Care 1 �400 1 1 Plum Creek T*mber Wood Products L140 Semitool, Inc. Electronics Equipment 450 4. Winter Sports, Inc. Big Mountain Operator 450 5. Workplace, Inc. Professional Employer Organization 440 6. Wal-Mart Retail 350 7. Burlington Northern Railroad 300 8. LC Staffing Service Employment Agency 300 9. Immanuel Lutheran Home Nursing Home 270 10. North Valley Hospital Health Care 235 Source., Flathead Economic Development Authority, local chambers of commerce and telephone survey Recent Building Pernlits Shown in the table below, are the building permit trends for the City of Kalispell for the past five years. New Commercial Permits Residential and Other Permits Year Number Value Number Value 2005 68 $541303,976 340 $353491,255 2004 31 362615,537 320 41)796)390 2003 36 15�728�081 206 23�75.41,745 2002 28 47�1073,163 208 19)5021083 2001 44 26,8582773 142 16,2241.546 Source.-, City Building Department C-7 Housing Market Trends According to Kelley Appraisal, located 'in the City, as of 2 00 5 the County was the most subdivided countyin the State with approximately 36,201 residential parcels on the tax rolls, which includes 33,599 urban, rural and agricultural single-family homes and 2,479 condominiums and townhouses. Of the 36,201 residential parcels, approximately 85% are sent to addresses in the Countywith 15% distributed to addresses outside the County. The Kelley Appraisal reported that the County had 20,786 vacant parcels (on the tax rolls but do not have taxable improvements), which is 3 .294 more than the 2 d highest county in the State, Yellowstone County with 17,492 vacant parcels. The City Kalispell had approximately 233 SFRs, 25 duplexes, 86 townhouses and 34 multi -family structures built in 2005. The County, including all incorporated cities, had 1,102 SFRs, 33 duplexes, 145 townhouses and 203 multi -family structures completed in 2005. According the Kelley Appraisal the median home price as of 2004 was $189,000 for the City. Earnings By Industry 10 The following table shows County total personal income, wage and salary, labor and propri" etors' earnings by major industry type for the years 2001 through 2004. Figures shown are in thousands. 2001 2002 2003 2004 Total Personal Income $L984�353 $2�0395407 $2� 159,703 $223197678 Earnings by Industry: Farm 31,849 67633 6�513 7�722 Non-fann 1)3607188 114102149 131525X2 1,655�818 Private L1771598 1�214�290 12316,775 1 �4321146 Ag. Services, Forestry & Fishing 242155 252833 .242425 25)435 Mining 14�932 157731 132588 162730 Utilities 282206 332192 4450335 477136 Construction 1353025 1421P431 1633547 1911207 Manufacturing 171,852 157)396 148.7754 156)230 Wholesale Trade 29,816 33)417 372472 42�705 Retail Trade 141,944 1512935 158�956 1727750 Transportation & Warehousm*g 562848 55,125 56.?518 591�864 Information 24�1327 242746 261533 29�533 Finance, Insurance & Real Estate 57,024 671,205 83,373 861692 Real Estate and Rental and Leasing 812726 66,251 8%741 107�204 Professional & Technical Services 90,686 871807 86,001 81,928 Management.of Compam'es 5ffl7 52188 52712 52538 Admm*istrative & Waste Services 447627 495047 54X8 62J84 Educational Services 7J46 83,131 101384 113658 Healthcare and Social Assistance 143,374 162J10 1751263 189)674 Arts, Entertainment & Recreation 181622 213151 23,104 24fi27 Accommodation & Food Services 62ffl9 66YO83 691,907 742177 Other Services 392362 411511 441,234 462874 Govermnent 1825,590 195X9 2083557 223fi72 Federal/Civilian 521,364 54,565 58,490 621285 Mihtw 6)830 81872 12,714 13�733 State and Local 1232396 132A22 1377353 147fi54 Source: U.S. Department of Commerce Bureau of Economic Analysis, Re ional Economic 91 Information System. Labor Force and Unemployment The table below shows Flathead County employment figures as well as County, State of Montana, and United States unemployment rates since 1995. UnSTLIO Rates -------- Flathead State of Year Labor Force Emplo)2nent CojLn� Montana United States 2004 41,868 39.1625 5.4% 4.4% 5.5% 2003 40,648 38.1408 5.5 4.7 6.0 2002 3%996 37,961 5.1 4.6 5.8 2001 4%0 16 37,936 5.2 4.6 4.8 2000 3%292 377215 5.3 4.9 4.0 1999 372416 341,741 7. 1 5.2 4.2 1998 37,836 341,868 7.8 5.6 4.5 1997 37,3290 34,539 7.4 5.4 4.9 1996 367781 33�954 7.7 5.3 5.4 1995 36,147 33A38 7.5 5.9 5.6 Source: Montana Department of Labor and Industry. Personal Income Trends The following table shows total and per capita personal income growth in the County from 1995 through 2004. Total Personal Percent of Per Cap'ita Percent of -Year Income (000's) Change Income Change 2004 $21319,678 7.41% $28�598 5.19% 2003 27159,703 5.90 27J 88 3.25 2002 2103%407 2.77 262332 1.00 2001 11984,353 11.29 26,071 9.27 2000 1 �7821999 10.12 23)859 8.49 1999 1 M91168 (0.90) 21,992 (2.36) 1998 17633�933 10-18 222524 9.87 1997 1 A671541 4,52 2%301 3.41 1996 1 A0112 5 5 5.05 193608 2.88 1995 1 3P3 3 0,623 5.79 19,043 2.61 Source,, U.S. Department of Commerce, Regional Economic Information System, Bureau of Economic Analysis C-9 Employment by Major Industry The table below sets forth the total number of full-time and part-time employees in the County for the years and industries as shown. Employment by Place of Work: Total Employment By Type: Wage and Salary Proprietor Farm Non -Farm By Industry: Farm Non -Farm Private Ag. Services, Forestry, Fish. & Other Mining Utilities Construction Manufacturing Wholesale Trade Retail Trade Transportation and Warehousing Information Finance, Insurance & Real Estate Real Estate and R ental and Leasing Professional and Technical Services Management of Companies Administrative and Waste Services Educational Services Healthcare and Social Assistance Art, Entertainment and Recreation Accommodation and Food Services Other Services Government & Government Enterprises Federal/Civilian Military State and Local 2001 2002 2003 2004 50,674 512499 52,678 54,674 36,039 36�535 14,635 142964 994 12013 13)641 13�951 1,115 12133 491,559 50,366 441Y840 45�558 881 967 3 A T 314 176 183 4M5 41984 4J80 31621 939 966 61,805 71,031 L398 128 728 695 11790 11939 21356 2,454 3�379 31293 123 132 2�784 25,937 457 490 43,432 47803 130634 19747 49707 41668 21922 3�006 41719 4P8 829 856 404 415 3A86 31P537 37�262 38,678 15,416 15,996 993 993 1430423 153,003 11106 110109 5 1 572 53�565 462734 483664 834 803 354 412 186 202 52397 5,882 37342 3�456 11004 11111 7J45 75462 13,289 130328 726 792 2�091 21224 2fi57 2M4 32054 21757 135 104 3,152 31,368 547 601 5.7106 5�297 12830 15894 42827 4�948 3,058 31YI79 41838 42901 867 880 419 416 3�552 32605 Source: U.S. Department of Commerce, Regional Economic Information System, Bureau of Economic Analysis C-10 APPENDIX D Continuing Disclosure D-1 $4)520,000 City of Kalispell, Montana Special Improvement District No. 344 Bonds Series 2006 CONTINUING DISCLOSURE UNDERTAKING June 2006 This Continuing Disclosure Undertaking (the "Disclosure Undertaking"") is executed and delivered by the City of Kalispell, Montana,, a municipal corporation and a political subdivision of the State of Montana (the "Issuee'), in connection with the issuance of its Special Improvement District No. 344 Bonds, Series 2006 (the "Bonds"), in the original aggregate princi al amount of $4,520,000. The Bonds are being issued pursuant to (i) an authorizing ip resolution adopted by the City Council of the Issuer on April 3, 2006, (ii) an award resolution adopted by the City Council of the Issuer on June 13, 2006, and (iiii) a bond resolution adopted by the City Council of the Issuer on June 19, 2006 (collectively, the "Resolutions") and delivered to the Purchaser (defined herein) on the date hereof Pursuant to the Resolutions, the Issuer has coverianted and agreed to provide continuing disclosure of certain financial information and operating data and timely notices of the occurrence of certain events. The Issuer is an "obligated person" with respect to the Bonds, within the meaning of SEC Rule 15c2-12(b)(5) (the "Rule"). In addition, the Issuer hereby covenants and agrees as follows: Section 1. Pumose of the Disclosure Underta�king. This Disclosure Undertaking is being executed and delivered by tile Issuer for the benefit of the Holders (defined herein) of the Bonds 'in order to assist the Participating Underwriters (defined herein) in complying with the Rule promulgated by the Securities and Exchange Commission (the "SEC"), This Disclosure Undertaking, together with the Resolutions, constitutes the written agreement or contract for the benefit of the Holders of the Bonds that is required by the Rule. If the Issuer fails to comply with any provisions of this Disclosure Undertaking, any person aggrieved thereby, including the Owners of any Outstanding Bonds, may take whatever action at law or *in equity may appear necessary or appropriate to enforce performance and observance of any agreement or covenant, contained in this Disclosure Undertaking, including an action for a writ of mandamus or speciffic performance. Direct� indirect, consequential and punitive damages shall not be recoverable for any default hereunder. Notwithstanding anything to the contrary contained herein, in no event shall a default under this Disclosure Undertaking constitute a default under the Bonds or under any other provision of the Resolutions. Section 2. Definitions. In addition to the defmed terms set forth *in the Resolutions, which apply to any capitalized term used *in this Disclosure Undertaking unless otherwise defined in this Section, the following capitalized terms shall have the following meanings: "Annual Reporf'means any annual report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of this Disclosure Undertaking. "Audited Financial Statements" means the Issuees annual- financial statements, prepared in accordance with generally accepted accounting principles ("GAAP"") for Governmental Units as Prescribed by the Governmental Accounting Standards Board ("GASB"). "Bonds"' means the Issuer's Special Improvement District No. 344 Bonds, Series 2006, in the original aggregate principal amount of $4,520,000. D-2 "Disclosure Information"" means the same as defined in Section 4 hereof. "Disclosure Representative" shall mean the City Finance Director of the Issuer or his or her designee, or such other person as the Issuer shall designate from time to time. "Dissemination Agenf ' shall mean any Dissemination Agent designated in writing by the Issuer and which has filed with the Issuer a written acceptance of such designation. "Final Official Statement"' means the deemed final Preliminary Official Statement, dated May 30, 2006, plus the Official Statement, dated June , 2006, which constitutes the final official statement delivered in connection with the Securities, which is available from the MSRB. "Fiscal Yee' means the fiscal year of the Issuer, which currently ends on June 3 0. "Holder" means the person 'in whose name a security is registered or a beneficial owner of a Security. "Issuer" means the City of Kalispell, Montana which is the obligated person with respect to the Securities. "Material Event" means any of the events listed *in Section 5(a) of this Disclosure UnderLiking. "MSRB" means the Munic' al Securities Rulernakin Board located at 1900 Duke Street, Suite 600, Alexandria, ip 9 VA 22314. 'NRMSHV'means any nationally recognized munici al securities information repository as recognized from time ip to time by the SEC for purposes of the Rule. "Participating Underwriter" means any of the oniginal underwriter(s) of the Bonds (including the Purchaser(s)) required to comply with the Rule in connection with the offering of the Bonds. "Purchaser" means "Repository" means each NRMSIR and each SID, if any. "Rule"' means SEC Rule 1 5c2-12(b)(5) promulgated by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time, and including written M*terpretations thereof by the SEC. "SEC"' means Securities and Exchange Corm-nission. "'Securities" means the Bonds. "SID" means any public or private repository or entity designated by the State of Montana as a state information depository for the purpose of the Rule. As of the date of this Certificate, there is no SED. "State"' means the State of Montana. "Tax Exemption" shall mean the interest component of the payment on the Bonds that is excludable from gross income for federal income tax purposes, whether or not such interest is includable as an item of tax preference or otherwise includable directly or indirectly for purposes of calculating any other tax liability, including any alternative minimum tax or environmental tax. D-3 Section 3. Delivery of Annual RpRorts. The Issuer will at least annually provide the information required in Section 4. The Disclosure Information may be in the form of Audited Financial Statements or may be unaudited and which, for financial statement *information, shall be for the most recent Fiscal Year of the Issuer, commencing for the Fiscal Year ended June 30, 2006 (if in response to a request, the most recent Fiscal Year ending not less than 270 days before the date of the request), and, for other such information, the information most recently compiled by the Issuer on a customary basis and publicly available under applicable data privacy or other laws. Section 4. Content of Annual Reports. The Issuer's Annual Report shall contain or incorporate by reference the following financial information and operating data (the "Disclosure Information" in the Annual Report for the Issuer: (A) the Audited Financial Statements of the Issuer for the most recent Fiscal Year and the audit report and opinion of the accountant or government auditor relating thereto, as permitted or required by the laws of the State, containing balance sheets as of the end of such Fiscal Year and a statement of operations, changes in fund balances and cash flows for the Fiscal Year then ended for required funds, prepared in accordance with generally accepted accounting principles promulgated by the Financial Accounting Standards Board as modified in accordance with the governmental accounting standards promulgated by the Governmental Accounting Standards Board or as otherwise provided under State law, as in effect f�om time to time, or, if and to the extent such financial statements have not been prepared in accordance with such generally accepted accounting principles for reasons beyond the reasonable control of the Issuer, noting the discrepancies therefrom and the effect thereof, and certified as to accuracy and completeness in all material respects by the Disclosure Representative; and (B) to the extent not included in the, financial statements referred to in paragraph (A) hereof, the information of the type set forth below contam*ed *in the Official Statement for such Fiscal Year or for the period most recently available, which information may be unaudited, but is to be certified as to accuracy and completeness in all material respects by the Disclosure Representative to the best of his or her knowledge which certification may be based on the reliability of information obtained from third party sources: updated information for the then most recent completed fiscal year as provided in the table in the Official Statement under the section captioned "Revolving Fund" concerning the Revolving Fund Cash Balance and outstanding Bonds secured thereby; (2) a description of any special improvement district bonds issued by the Issuer during the Fiscal Year; (3) the current balance 'in each of the TIF Operating Accounts that would be available to pay debt service on the Bonds; the number of property owners in the District; updated information for the then most recent completed Fiscal Year in format similar to the table under the section captioned "Special Improvement District Assessment Billings and Collections" in the Official Statement-, (6) updated information for the then most recent completed Fiscal Year as provided in the table under the section captioned ""Statement of Changes in Fund Balance of the Revolving Fund"" of the Official Statement; (7) the market and taxable valuations of the City for the then current Fiscal Year; and 1 (8) tax collection information for the then most recent completed Fiscal Year in format similar to the table under the section captioned "Tax Collections" in the Official Statement. IM., Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues of the Issuer or related public entities, which have been submitted to each of the Repositories, the SIOD, or the SEC. If the document incorporated by reference is a final official statement, it must be available from the MSRB. The Issuer shall clearly identify each such other document so incorporated by reference. Section 5. ReRorting..of Material Events. (a) Material Events. T.his Section 5(a) shall govern the giving of notices of the occurrence of any of the following applicable events (each a "Material Event"): G) principal and interest payment delinquencies; (ii) non-payment related defaults; (iii) unscheduled draws on debt service reserves reflecting financial difficulties; (iv) unscheduled draws on credit enhancements reflecting financial difficulties; (v) substitution of credit or liquidity providers,.or their failure to perform-, (vi) adverse tax opinions or events affecting the tax-exempt status of the security-, (vii) modifications to rights of security holders; (viii) Bond calls other than for a scheduled sinking fund redemption; (ix) defeasances; (x) release, substitution or sale of property securing repayment of the securities- and (xi) rating changes. Whenever a Material Event occurs, the Issuer shall as soon as possible determm*e if such event would constitute material 'information for Owners of Bonds, provided, that any event under subsection subsections (a)(viii), (ix) or (xi) will always be deemed to be material. If the Issuer has determined that the occurrence of a Material Event would be material, the Issuer shall file a V notice of such occurrence with the MSRB and each SED if any. (b) Other Events. In a timely manner, the Issuer shall give notice of the occurrence of any of the following events or conditions: (i) the failure of the Issuer to provide the Annual Report at the time specified under "Delivery of Annual Reports" in Section 3; (ii) the amendment or supplementing of this Disclosure Undertaking, together with a copy of such amendment or supplement and any explanation provided by the Issuer under "Amendments; Waiver" below; (iii) the termination of the obligations of the Issuer under this Disclosure Undertaking; and (iv) any change in the Fiscal Year of the Issuer. D-5 (c) Manner f closure. The issuer agreed to make available the information described above in this Section 5 and 'in Section 4 to the following entities by telecopy, overnight delivery, mail, electronic mail, or other means, as appropriate-, W the Disclosure Information, to each of the Repositories, the SID, if any, or, if no SID then exists as was the case in State as of the date of the Final Official Statement, to any person or entity upon request; the information in Sections 5(a) and 5(b), to the MSRB and to the SID, if any, and (ill) the Disclosure Information and the information *in Sections 5 (a) and 5 (b), to any rating agency then maintaining a rating of the Bonds and to any bondowner, at the expense of such bondowner, who requests king such information at the time of the transmission under clauses (c)(i) or (cXi') above as the case may in VM I be, or, if such Disclosure Infonnation or information is transmitted with a subsequent time of release, at the time such Disclosure Information or information is to be released. Any filing under this Disclosure Undertaking may be made solely by transmitting such filing to the Texas Municipal Advisory Council (the "MAC"') as provided at http://www.disclosureusa.org unless the SEC has withdrawn the interpretive advice in its letter to the MAC dated September 7, 2004. Section 6. Termination of Raorting_Obligation. The Issuer's obligations under the Resolutions and this Disclosure Undertaking shall terminate upon the legal defeasance, or upon the redemption or payment in full of all the Bonds. Section 7. Dissemination . The Issuer may, from time to time, appom*t or engage a Dissemination Agent to assist it in carrymig out its obligations under the Resolutions and this Disclosure Undertaking, and may discharge any Dissemination Agent, with or without appointing a successor Dissemination Agent, Section 8. AmendmentLWaiver. Notwithstanding any other provision of the Resolutions or this Disclosure Undertaking, the Issuer may amend this Disclosure Undertaking, and anyprovision of this Disclosure Undert-iking may be if such amendment or waiver is supported by an op M*1on of nationally recognized bond counsel to the effect that waived, such amendment or waiver would not *in and of itself, cause the undeftakings herein to violate the Rule if such amendment or waiver had been effective on the date hereof but taking into account any subsequent change in or official interpretation of the Rule Section 9. Additional Information. Nothing in this Disclosure Undertaking shall be deemed to prevent the Issuer from disseminating any otherm'formation, using the means of dissemination set forth in this Disclosure Undertaking or any other means of communication, or *including any other *information in any Annual Report or notice of occurrence of a Material Event, in addition to that which is required by this Disclosure Undertaking. If the Issuer chooses to *include any information in any Annual Report or notice of occurrence of a Material Event in addition to that which is specifically required by this Disclosure Undertaking, the Issuer shall have no obligation under this Disclosure Undertaking to update such information or include it in any future Annual Report or notice of occurrence of a Material Event. Section 10.. Default. In the event of a failure of the Issuer to comply with any provision of this Disclosure Undertaking any Holder of the Bonds may take such actions as may be necessary and appropriate, including seeking mandamus or specific performance by court order, to cause the Issuer to comply with its obligations under the Resolutions and this Disclosure Undertaking, A default under this Disclosure Undertaking shall not be deemed an event of default with respect to the Bonds and the sole remedy under this Disclosure Undertaking in the event of any failure of the Issuer to comply with this Disclosure Undertaking shall be an action to compel performance. Section I I - Beneficiaries. This Disclosure Undertaking shall inure solely to the benefit of the Issuer, the Participating Underwriters and Holders from time to time of the Bonds, and shall create no rights in any other person or entity. Section 12. Count . This Disclosure Undertaking may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 13. Governing Law. This Disclosure Undertaking shall be interpreted in accordance with the laws of the State of Montana. Section 14. Sever If any portion of this Disclosure Undertaking shall be held invalid or inoperative, then, so far as is reasonable and possible (i) the remainder of this Disclosure Undertaking shall be considered valid and operative, and (ii) effect shall be given to the intent manifested by the portion held invalid or inoperative. IN WITNESS WHEREOF, the following officials of the City of Kalispell, Montana have executed this CONTR�T�G DISCLOSURE UNDERTAKING as of the date and year first written above. CITY OF KALISPELL, MONTANA By Its (SEAL) Mayor By Its City Clerk By Its KA225-1 (BWJ) 281136v.2 City Finance Director D-7 [This Page Intentionally Left Blank.] APPENDIX E Sununary of the Bond Resolution E-1 DEFINITIONS OF CERTAIN TERMS In addition to the words and terms defined elsewhere in this Official Statement., thefollowing words and terms as used in the Bond Resolution will have thefollowing meanings unless the context or use clearly indicates another or different meaning or intent. Act or SID Act means Montana Code Annotated, Title 7, Chapter 12, Parts 41 and 42, as amended. Bond. Registration Act means the Model Public Obligations Registration Act of Montana, as amended. Bond Resolution means a resolution approved by the City Council of the City on June 19, 2006, relating to the Bonds, as the same may be from time to time modified, amended, or supplemented. Bonds means the City's Special Improvement District No. 344 Bonds, Series 2006, in the original aggregate principal amount of $4,520,000. means the City of Kalispell, Montana, its successors and assigns. Code means Internal Revenue Code of 1986, as amended. Construction Account means the separate account within the District Fund established by the Bond Resolution. Co means Flathead County, Montana, its successors and assigns. Debt Service Account means the separate account within the District Fund established by the Bond Resolution. District or District 344 means Special Improvement District No. 344 of the City. District Fund means Special Improvement District No. 344 Fund established by the Bond Resolution for the District, DTC means The Depository Trust Company of New York, New York- 1�mRrovements means certain public infrastructure improvements of special benefit to the properties within District 344 and financed with proceeds of the Bonds, as more fully described in the Official Statement. Industrial District means the industrial tax increment district established by the City widiin the boundaries of District 344. Intent Resolution means Resolution No. 5063, adopted by the City Council of the City on October 3, 2005, declaring the intention of the City Council to create the District for the purpose of making the Improvements for the special benefit of property owners in the District, as the same may be from time to time modified, amended, or supplemented. Official Statement means the Preliminary Official Statement, dated May 31, 2006, relating to the Bonds and any addendum or final Official Statement relating to the Bonds. Ordinance No. 75 9 means the ordinance undertaken by the City to provide fimds for establishment of the Revolving Fund. P nt Date means each January I and July 1, cornmencing January 1, 2007. Reizistrar means U.S. Bank National Association, of Seattle, Washington, its successors and assigns. Reserve Account means the means the separate account within the District Fund established by the Bond Resolution that secures the Bonds. Revolving Fund means the Special Improvement District Revolving Fund established by the City to secure the payment of certain of its special improvement district bonds, including the Bonds. E-2 State means the State of Montana, its successors and assigns. Technology District means technology tax increment district established by the City within the boundaries of District 344. TIF Act means Montana Code Annotated, Title 7,, Chapter 15,, Part 42, as amended. SUMMARY OF CERTAIN PROVISIONS OF THE BOND RESOLUTION Thefollowing is a summary ofcertain provisions ofthe Bond Resolution. This summary is qualified in its entirety by reference to the Bond Resolution. A co of the Bond Resolution is available durin the offeringperiod and after the date of Py 9 issuance of the Bondsfrom the City. Capitalized tenns employed in this summary are defined in this APPENDIXE under the caption "'DEFINITIOIVS OF CERTAIN TERMS yo Costs The total costs and expenses of the Improvements is estimated to be $4,520,000 and that the costs and expenses to be assessed against properties benefited by the Improvements, including costs ofpreparation of plans, specifications, maps, profiles, engineering superintendence and inspection, preparation of assessment rolls, expenses of making the assessments, the cost of work and materials under the construction contract and all other costs and expenses, including the deposits ofproceeds in the Revolving Fund and in the Reserve Account in the District Fund, will be $4,520,000. Such amount will be levied and assessed upon the assessable real property within the District on the actual area method of assessment for the Improvements. The City will not contribute funds to the construction of the Improvements, other than from proceeds of the Bonds. This City Council has jurisdiction and is required by law to levy and assess $4,520,000, together with interest thereon, to collect such special assessments and credit the same to the special improvement district fund created for the District (the District Fund), which fund is to be maintained on the official books and records of the City separate from all other City funds, for the payment of principal and interest when due on the bonds in the Bond Resolution authorized. Principal Amount, Maturities, Denominations, Registration The Bonds are payable solely from amounts deposited in the District Fund and the accounts established therein. The Bonds will be denominated "Special Improvement District No. 344 Bonds, Series 2006"'. The Bonds will be dated, as originally issued, and be registered as of June 15, 2006, will each be in the denomination of $5,000 or any integral multiple, will mature on July I in the years and principal amounts set forth on the inside front cover of the Official Statement. The Bonds will bear interest from the date of original registration (June 15) until paid or duly called for redemption at the rates per annum set forth on the inside front cover of the Official Statement. - Payment Dates. Interest on the Bonds will be payable on each Payment Date, commencing January 1, 2007, to the owners of record thereof as such appear on the bond register maintained by the Registrar at the close of business on the fifteenth (15TH) day of the immediately preceding month, whether or not such day is a business day. Method ofPayment. The Bonds will be issued only in fully registered form. The interest on and principal of the Bonds will be payable upon surrender thereof at the operations center of the Registrar. The principal of each Bond will be payable by check or draft drawn on the Registrar. Registration. The City will appoint U.S. Bank National Association, of Seattle, Washington, to act as Registrar for the Bonds. The City reserves the right to appoint a successor Registrar, transfer agent or paying agent, as authorized by the Bond Registration Act. The City will agree to pay the reasonable and customary charges of the Registrar for services performed with respect to the Bonds. The Bond Resolution also establishes a system of registration for the Bonds as required by the Bond Registration Act Book -Entry Only System. The Bonds shall be ninitially issued as separately authenticated fully registered Bonds, and one 3ond shall be issued in the principal amount of each stated maturity of the Bonds. Upon initial issuance, the ownership of such Bonds shall be registered in the Bond register in the name of Cede & Co., as nominee of DTC. The Registrar and the City may E-3 +*-,m Uvat DTC (or its nominee) as the sole and exclusive owner of the Bonds registered in its name for the purposes of payment of the i i principal of or interest on the Bonds, selecting the Bonds or portions thereof to be redeemed, if any, giving any notice permitted or required to be given to registered owners of Bonds, registering the transfer of Bonds, and for all other purposes whatsoever; and neither the Registrar nor the City will be affected by any notice to the contrary. Redemption The Bonds are subject to redemption as follows: Mandatory Redemption. If on any Payment Date there will be a balance in the District Fund after payment of the principal and interest due on all Bonds drawn against it, either from (i) the prepayment of special assessments levied in the District or (ii) from the transfer of surplus money from the Construction Account to the Debt Service Account, the City Finance Director will call for redemption on the Payment Date outstanding Bonds, or portions thereof, in an amount which, together with the interest thereon to the Payment Date, will equal the amount of such funds on deposit in the District Fund on that date. The redemption price will equal the amount of the principal amount of the Bonds to be redeemed plus interest accrued to the date of redemption. Tax Increments (as defined in the Bond Resolution) will not be applied to a mandatory redemption of the Bonds as described in this paragraph. Optional Redemption. The Bonds with stated maturities on or after July 1, 2014 are subject to redemption, in whole or in part, on July 1, 2013, and any date thereafter, at the option of the City, in whole or in part, from sources of funds (including Tax Increments) available therefor other than those described under the heading "Mandatory Redemption", at a redemption price equal to the principal amount thereof to be redeemed plus interest accrued to the redemption date, without premium. However, the Bonds will not be called for redemption (i) from amounts on deposit in the Reserve Account or (ii) before July 1, 2013, from the proceeds of refunding special improvement district bonds or warrants. Selection ofBondsfor Redemption; Partial Redemption. If less than all of the B onds are to be redeemed, Bonds will be redeemed in order of the stated maturities thereof. If less than all Bonds of a stated maturity are to be redeemed, the Bonds of such maturity will be selected for redemption in $5,000 principal amounts selected by the Registrar by lot or other manner it deems fair. Upon partial redemption of a Bond, a new Bond or Bonds will be delivered to the registered owner without charge, representing the remaining principal amount thereof outstanding. Notice and Effect ofRedemption. The date of redemption and the principal amount of the Bonds will be fixed by the City Finance Director, who will give notice thereof to the Registrar in sufficient time for the Registrar to give notice, by first class mail, postage prepaid, or by other means required by the securities depository, to the owner or owners of such Bonds at their addresses appearing in the bond register, of the numbers of the Bonds or portions thereof to be redeemed and the date on which payment will be made,, which date will be not less than thirty (30) days after the date of mailing notice. On the date so fixed interest on the Bonds or portions -thereof so redeemed will cease. The District Fund; Accounts Created Therein; Special Assessments; and Application of Tax Increments The District Fund. The Bond Resolution creates and establishes the District Fund which will be maintained by the City Finance Director on the books and records of the City separate and apart from all other funds of the City. Within the District Fund there will be created and maintained three separate accounts, designated as the "Construction Account," ""Debt Service Accounf" and "Reserve Account,," respectively. Construction Account. There will be credited to the Construction Account proceeds of the sale of the Bonds to provide for the construction of the Improvements. Any earnings on *investment of money in the Construction Account will be retained in the Construction Account. All costs and expenses of constructing the Improvements to be paid from proceeds of the Bonds will be paid from time to time as incurred and allowed from the Construction Account in accordance with the provisions of applicable law, and money in the Construction Account will be used for no other purpose; provided that upon completion of the Improvements and after all. claims and expenses with respect to the Improvements have been fully paid and satisfied, any amount of money remammg in the Construction Account will be transferred to the Debt Service Account and used to redeem Bonds as provided under the head* s "Redemption -Mandatory Redemption" and "Debt Service Account -Deposits to the Debt Service Accounf' mg E-4 Debt Service Account. Debt Service Account Generally, Money *in the Debt Service Account will be used only for (i) payment of the principal of and interest on the Bonds as such payments become due or (1i) to redeem Bonds. Deposits to Debt ServiceAccount. From the proceeds of the Bonds, there will be deposited in the Debt Service Account the accrued interest on the Bonds. Interest income on money in the Debt Service Account will be retained theremi and used as any other funds therein. Any installment of a special assessment paid prior to its due date with interest accrued thereon to the next succeeding Payment Date will be credited with respect to prmicipal and interest payments in the same manner as other assessments are credited to the District Fund. All money in the Debt Service Account will be used first to pay interest due, and any remaining money will be used to pay Bonds then due and, ifmoney is available, to redeem Bonds in accordance with the provisions of the heading "Redemption -Mandatory Redemption"; provided that any money transferred to the Debt Service Account from the Construction Account pursuant to the provisions of the heading "The District Fund; Accounts Created Therein; Special Assessments; and Application of Tax Increments -The Construction Accounf 'will be applied to redeem Bonds to the extent possible on the next Payment Date for which notice of redemption may properly be given pursuant to Section 2.05(a). Provided, however, that Tax Increments will not be available to redeem Bonds pursuant to the provisions of the heading "Redemption -Mandatory Redemption". Redemption of Bonds will be as provided under the heading "Redemption" above, and interest will be paid as accrued thereon to the date of redemption, in accordance with the provisions of Section 7-12-4206 of the Act. Application of Tax Increments as Security for the Bonds. (i) Tax Increments derived from the Industrial District and the Technology District will be pledged, to the extent provided Mi the Bond Resolution, by the City as ity for the Bonds. Tax Increments derived from the Industrial District or the Technology District will only be secun utilized by the City to act as security for Bonds allocable to the cost of Improvements within the applicable tax increment district. (ii) In the event that a property owner is delinquent in the payment of special assessments and the City has not received payment of any special assessments allocable to such parcel by the date that is fifteen (15) days prior to any Payment Date, the City Finance Director is authorized to transfer, after transfers from the Debt Service Reserve Account, but prior to transfers from the Revolving Fund, any Tax Increments (but only to the extent of such delinquent special assessment payment, to the extent that such funds are on hand in the operating account for each tax increment district and are not pledged by the City to other purposes) derived from the tax increment district in which the property is located, and then on deposit with the City, to the Debt Service Account for the pro-rata portion of the payment allocable the delinquent property that is due and owing on the Bonds on the next Payment Date. A transfer of Tax Increments described in the immediately preceding sentence will not extinguish the lien of any special assessments due with respect to a parcel of property and such transfer does not decrease the amount of special assessments due with respect to any parcel of property. (iii) In the event that a property owner pays delinquent special assessments, after the application of Tax Increments pursuant to Section 3.03(c)(ii) above, to the payment of regularly scheduled debt service on the Bonds, the City Finance Director is authorized to transfer an amount equal to such prior payments of Tax Increments for such parcel to the applicable operating account for the tax increment fund in which such parcel is located. Any payment of delinquent special assessments, after the application of Tax Increment pursuant to Section 3.03(c)(ii) above, to a payment of debt service on the Bonds will not be applied to the mandatory redemption of the Bonds pursuant to Section 2.05 (a). In the event that delinquent special assessments are paid after either the Industrial District or the Technology District is terminated and the Bonds are not outstanding, the City will transfer such funds to the Revolving Fund. Reserve Account. Money in Reserve Account will be applied on any Payment Date to payment of principal of and interest on the Bonds at the stated maturity thereof if funds on hand in the Debt Service Account, prior to the application of Tax Increments. Funds in Reserve Account must be used for such purpose before a loan is made by the Revolving Fund therefor. If money is on hand in Reserve Account and all Bonds have been paid or discharged, such money will be transferred to the Revolving Fund, as required by Section 7-12-4169(3). ne Revolving Fund and Loansfrom the Revolving Fund. The City Council will annually or more often if necessary issue an order authorizing a loan or advance from the Revolving Fund to the District Fund in an amount sufficient to replenish any E-5 deficiency then existing in the Debt Service Account and will issue an order authorizing a loan or advance ftoin the Revolving Fund to the District Fund in an amount sufficient to make good any deficiency then existing in the Debt Service Accountmi such order to the extent that money is available in the Revolving Fund. Provided, however, that at the time any such loan or advance is to be made, Reserve Account will have been or will remain depleted on the next Payment Date. A deficiency will be deemed to exist in the Debt Service Account if the money on deposit therein, together with any funds on deposit in Reserve Account, on any June 15 or December 15 (excluding amounts in the Debt Service Account representing prepaid special assessments) is less than the amount necessary to pay Bonds due (other than upon redemption), and interest on all Bonds payable, on the next succeeding Payment Date. Pursuant to Ordinance No. 759., the City has undertaken and agreed to provide funds for the Revolving Fund by levying such tax or making such loan from the General Fund as authorized by Section 7-12-4222 of the Act. In the event that the balance on hand in the Revolving Fund fifteen (15) days prior to any date when interest is due on special improvement district bonds or wan -ants of the City is not sufficient to make good all deficiencies then existing in the special improvement district funds for which die City has covenanted to make loans from the Revolving Fund, the balance on hand in the Revolving Fund will be allocated to the fimds of the special improvement districts in which such deficiencies then exist in proportion to the amounts of the deficiencies on the respective dates of receipt of such money, until all interest accrued on such special improvement district bonds or warrants of the City has been paid. On any� date when all accrued interest on special uinprovement district bonds and warrants of the City payable from funds for which the City has covenanted to make loans from the Revolving Fund has been paid, any balance remaining in the Revolving Fund will be lent or advanced to the special improvement district funds for payment and redemption of bonds to the extent the special improvement district funds are deficient for such purpose, and, if money in the Revolving Fund is insufficient therefor, pro rata, 'in an amount proportionate to the amount of such deficiency. The City covenants and agrees to levy the property tax described in the immediately preceding paragraph to provide funds for the Revolving Fund so long as any Bonds are outstanding to the extent required under the provisions of this Resolution and the Actl even though such property tax levy may, under applicable law (including SB 184, adopted by the Montana Legislature in 1999) or provisions of the home rule'charter of the City, require that property tax levies of the City for other purposes be reduced 9 correspondi ly. In addition, the City covenants to comply with the requirements ofthe Code and the Regulations in order that the Ing. Reserve Account and the Revolving Fund comply and continue to qualify as "reasonably required7 debt service reserve fund(s) for the Bonds. Covenants The City agrees to make the following covenants with the owners from time to time of each of the Bonds that until all the Bonds and interest thereon are fully paid. Levy ofAssessments. The City will do all acts and things necessary for the final and valid levy of special assessments upon all assessable real property within the boundaries of the District in accordance with the Constitution and laws of the State and the Constitution of the United States, in an aggregate principal amount not less than $4,520,000. The special assessments will be levied on the basis set forth in the Intent Resolution (actual area method)- and will be payable in equal, semiannual installments over a period of twenty (20) years,, with interest on the whole amount remaining unpaid at an annual rate equal to the sum of: (i) the average annual interest rate borne by the Bonds, plus (ii) one-half of one percent (0-50%) per annum, interest being payable with principal installments. The special assessments to be levied will be payable on the 3 Oth day of'November in each of the years 2006 through 2025, and on the 3 1 st day of May *in the years 2007 through 202 6, inclusive, if not theretofore paid, and will become delinquent on such date unless paid mi full. The first partial payment of each special assessment will include interest on the entire special assessment from the date of original registration of the Bonds to Janury 1, 2007 and each subsequent partial payment will include interest for six (6) months on that payment and the then remaining balance of the'special assessment. The special assessments will constitute a lien upon and against the property against which they are made and levied, which lien may be extinguished only by payment of the assessment with all penalties, cost and interest as provided in Section 7-12-4191 of the Act. No tax deed issued with respect to any lot or parcel of land will operate as payment of any installment of the assessment thereon which is payable after the execution of such deed, and any tax deed so issued will convey title subject only to the lien of said future installments, as provided in Montana Code Annotated, Section 15-18-214. Reassessment. If at any time and for whatever reason any special assessment or tax in the Bond Resolution agreed to be levied is held invalid, the City arid this City Council, its officers and employees, will take all steps necessary to correct the same and to reassess and re -levy the same, including the ordering of work, with the same force and effect as ifmade at the time provided E-6 by law, ordinance or resolution relating thereto, and will reassess and re -levy the same with the same force and effect as an onginal ievy thereof, as authorized in Section 7-124186 of the Act. Any special assessment, or reassessment or re -levy will, so far as is practicable, be levied and collected as it would have been if the first levy had been enforced including the levy and collection of any interest accrued on the first levy. Application of Certain Tax Increments. The Tax Increments are pledged as security for the Bonds as set fordi in above under the heading "The District Fund; Accounts Created Therein; Special Assessments; and Application of Tax Increments -Debt Service Accoun"vailable Tax Increments. The City will collect and account for the Tax Increments as required by the TIF Act. The City acknowledges that certami Tax Increments are pledged to the payment of the Bonds and the City covenants to maintami the existence of the Industrial District and the Technology District as required by the TEF Act and Montana law. (The remainder of this page is intentionally left blank.) E-7 [This Page Intentionally Left Blank.] APPENDIX F Form of Legal Opinion F-1 10 .CHARTERED 470 U.S. Bank Plaza 200 South Sixth Street Minneapolis MN 55402-1458 (612) 337-9300 telephone (612)� 337-93 10 fax www.kemedy-graven.com $49520,000 Clity of Kalispell, Montana Special Improvement District No. 344 Bonds Series 2006 We have acted as Bond Counsel to the City of Kalispell, Montana (the "City") 'in connection with the authorization, issuance and sale by the City of the above -referenced obligations (the "Bonds"), dated as of June 15, 2006. In that capacity, we have examined certified copies of certain proceedings taken, and certificates and affidavits furnished, by the City in the authorization, sale and issuance of the Bonds, including a resolution (the "Resolution") adopted by the City Council of the City on June 19, 2006, prescribing the form of and security for the Bonds, As to questions of fact material to our opinion, we have assumed the authenticity of and relied upon the proceedings and certificates fumished to us without undertaking to verify the same by independent investigation. From our examination of such proceedings and other documents, assuming the genuineness of the signatures thereon and the accuracy of thefacts stated therein, and based upon federal and State of Montana laws, regulations, rulings, and decisions in effect on the date hereof, it is our opinion that: W.&F 1. The City has validly created Special Improvement District No. 344 (the "District"), provided for the construction of various improvement projects of special benefit to the District (collectively, the "Improvements"). The City has coverianted to levy special assessments against such benefited lots or parcels in an amount not less ffian the costs of the Improvements financed with proceeds of the Bonds, estimated at $4,520,000. The special assessments are to be payable in installments, with interest on the balance of the special assessments remaining unpaid, and collections thereof are to be deposited in the Special Improvement District No. 344 Fund of the City (the "District Fund"). The Bonds are payable solely from funds on deposit in the District Fund. 2. The City has agreed, to the extent permitted by and 'in accordance with the Resolution and to the extent necessary for the payment of the Bonds (as described in the Resolution), to further secure the payment of the principal of and 'interest due on the Bonds with tax increment revenues deposited in the District Fund (the "Tax Incremen&) that are derived from certain tax increment districts established in the City. The City has validly pledged Tax Increments (to the extent such funds are on deposit in the District Fund) to the payment of debt service on the Bonds in accordance with the Resolution; provided, however, we express no opinion as to the priority of such pledge or its effect against third parties. 3. The City has validly established its Special Improvement District Revolving Fund (the "Revolving Fund") to further secure the payment of certain of its special improvement district bonds, including the Bonds. Pursuant to the . Resolution, the City has agreed, to the extent permitted by Montana Code Annotated, Title 7, Chapter 12, Parts 41 and 42, as amended (the "SID Act"), to issue orders. annually authorizing loans or advances from the Revolving Fund to the District Fund, in amounts sufficient to make good any deficiency in the District Fund, to the extent that funds are available therefor in the Revolving Fund. The City has also agreed to the extent necessary to provide funds for the Revolving Fund by annually making a tax levy or loan fTom the general fund of the City in an F-2 mount sufficient for that purpose, subject to the limitation that no such tax levy or loan may in any year cause the oalance 'in the Revolving Fund to exceed five percent (5%) of the principal amount of the City's then outstanding special improvement district bonds secured by the Revolving Fund. The pledge of the Revolving Fund to the payment of debt service on the Bonds is subject to the durational limit set forth in the SID Act and any property tax levy to be made by the City to provide funds for the Revolving Fund is subject to levy limits under current Montana law. The City has agreed in the Resolution to levy property taxes to provide funds for the Revolving Fund to the extent required to replenish the Revolving Fund and to the extent described M" the immediately preceding paragraph and; if necessary, the City has also agreed to reduce other property tax levies correspondingly to meet applicable levy limits. The Bonds are not general obligations of the City and, except to the limited extent described in this paragraph (3), the taxing power of the City is not pledged to the Bonds. 4. The Bonds are valid and binding special, Iftnited obligations of the City enforceablemi accordance with their terms and the provisions of the Constitution and laws of the State ofMontana now 'in force, including the SID Act, and the Resolution. 5. Interest on the Bonds is excludable from gross income for federal income tax purposes and i's not an item of tax preference includable in alternative minimum taxable income for purposes of the federal alternative 4 minimum tax applicable to all taxpayers. Interest on the Bonds is includable in the computation of "adjusted current earnings" used M' the calculation of determining alternative minimum taxable income for purposes of the federal alternative minimum tax' osed on corporations. Interest on the Bonds is excludable from gross income for State of IMP Montana individual income tax purposes, but 'is includable in the computation of income for purposes of the Montana corporate income tax and the Montana corporate license tax. The opinions expressed in the immediately preceding paragraph with respect to federal tax matters are subject to the condition of the City's compliance with all requirements of the Internal Revenue Code of 1986, as amended (the '"Code'), that must be satisfied subsequent to the 'issuance of the Bonds 'in order that interest may be, and continue to be, excluded from gross income for federal income tax purposes. The City has covenanted to comply with these continuing requirements. The City's failure to do so could result in the inclusion of interest in gross income for federal income tax purposes,, retroactive to the date of issuance of the Bonds. Except as stated in this opinion, we express no opinion regarding federal, state or other tax consequences to the owners of the Bonds. 6. The Bonds have been designated by the City as "qualified tax exempt obligations" for purposes of Section 265(b)(3) of the Code. The rights of the owners of the Bonds and the enforceability of the Bonds - may be limited by bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting creditor 3�s rights generally and by equitable principles, whether considered at law or 'in equity. We have not been engaged and have not undertaken to review the Official Statement or any other offering materials relating to the Bonds and, accordingly, we express no opinion with respect to the accuracy, completeness or sufficiency thereof Dated at Minneapolis, Minnesota, June 2006. F-3