b~2~0~ LAW OFFICES McCALL, PARKHURST & NORTON L.L.P. 717 NORTH HARWOOD SUITE 900 DALLAS, TEXAS 75201-6 587 TELEPHONE: 214 754-9200 FACSIMILE: 214 754-9250 700 N. ST. MARY'S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 210 225-2600 FAC51 M I LE: 21 O 225 - 2984 600 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701-3248 TELEPHONE: 512 478-3805 FACSIMILE: 512 472-0871 May 28, 2008 Jeannie Hargis County Auditor Kerr County, Texas 700 Main Street Kerrville, TX 78028 RE: $1,780,000 KERB COUNTY, TEXAS TAX NOTES, SERIES 2008 Dear Jeannie: In connection with the captioned financing, enclosed for your records is a bound Transcript of Proceedings and a copy of the Transcript on CD. It was a pleasure working with you in bringing this transaction to a successful conclusion. Should you have any questions, please advise. Cordially yours, G~ Kathy S. Cooper /KSC Enclosure r . - (~ ? ..~ y ®~~_.~. xo l ~ PIE~,~, CLERK -- --~- Transcript of Proceedings PERTAIMNG TO $1,780,000 I~RR COUNTY, TEXAS TAX NOTES, SERIES 2008 Notes Delivered March 18, 2008 Transcript of Proceedings LAW OFFICES McCALL, PARKHURST & HORTON L.L.P. 700 NORTH ST. MARY'S SUITIr t 525 SAN ANTONIO, TEXAS 78205-3503 $1,780,000 I~RR COUNTY, TEXAS TAX NOTES, SERIES 2008 Tns E of CoNTEN'CS Tab No )Primary Financing Documents Note Order ................................................................ i Investor Acknowledgment Letter .............................................. 2 Paying Agent/Registrar Agreement ............................................. 3 Specimen Note ............................................................. 4 Certificates of the Issuer Certificate of County Auditor ...................................... . .......... 5 General Certificate .......................................................... 6 Signature Identification and No-Litigation Certificate .............................. 7 Documents Related to Taa Exemption Federal Tax Certificate ...................................................... 8 Form 8038-G .............................................................. 9 ~iscellaaeous Documents Instruction Letters to Attorney General and Comptroller of Public Accounts ............ 10 Closing Memoranducn ....................................................... ti Receipt for Proceeds ........................................................ l2 'n'ons Attorney General's Approving Opinion and Comptroller Registration Certificate ......... 13 Bond Counsel's Opinion ..................................................... 14 $1,780,000 KERR CouNTx, TExas T.a.x NOTES, SERIES 2008 DISTRIBUTION LIST ISSUER: ~URCAASER: gerr County, Tuts The Frost National Bank Kerr County Courthouse 100 West Houston 700 Main Street San Antonio, Texas 78205 Kerrville, Texas 78028 Attn: Jerry Yost Attn: Pat Tinley, County Judge (210) 220-4077 . (830)792-2212 PURCILASER COUNSEL: Jeannie Hargis, County Auditor (830) 792-2275 Andrews Kurth I.LP 600 Travis Street, Suite 42(10 F'ANANCIAL ADVISOR: Houston, TX 77002 RBC Capital Markets Attn: Hoang T. Vu 153 Treeline, Suite L00 (713) 220-3879 San Antonio, Texas 78209 Atm: Dusty Traylor (210)805-1117 BOND COUNSEL: McCaig Parkhurst & Horton L,LP. 700 N. St. Mary's St., Suite 1525 San Antonio, Texas 78205 Attn: Tom Spurgeon (210)225-2800 a Folder C:\Litigation Projects\Estrada\South San Antonio ISD Unlimited Tax Refunding B... Page 1 of 2 ~icCa~~ Parkhurst c~~fortonG,G,~ $1,780,000 Kerr County, Texas Tax Notes Series 2008 Notes Delivered March 18, 2008 Index PDF Document Primary Financing Documents 1. Note Order 2. Investor Acknowledgment 3. Paying Agent/Registrar Agreement 4. Specimen Note Certificates of the Issuer 5. Certificate of County Auditor 5. General Certificate 7. Signature Identification and No-Litigation Certificate Documents Related to Tax Exemption 8. Federal Tax Certificate 9. Farm 8038-G Miscellaneous Documents l0. Instruction Letters to Attorney General and Comptroller of Public Accounts file://D:Aindex.htm 5/30/2008 Folder C:\Litigation Projects\Estrada\South San Antonio ISD Unlimited Tax Refunding B... Page 2 of 2 li. Closing Memorandum 12. Receipts for Proceeds Opinions 13. Attorney General's Approving Opinion arld Comptroller Registration Certificate 14. Band Counsel's Opinion file://D:\index.htm 5/30/2008 CERTIFICATE FOR ORDER THE STATE OF TEXAS § COUNTY OF KERB § I, the undersigned County Clerk of KExiz Cou1v'rY, TExaS (the "Issuer"), hereby certify as follows: 1. The Commissioners Court of the Issuer convened in REGULAR MEETING ON THE 25'x` DAY OF FEBRUARY, 2008 at the Kerr County Courthouse, and the roll was called ofthe duly constituted officers and members of said Commissioners Court, to wit: Pat Tinley, County Judge H.A. "Buster" Baldwin, Commissioner Precinct 1 William "Bill" Williams, Commissioner Precinct 2 Jonathan Letz, Commissioner Precinct 3 Bruce Oehler, Commissioner Precinct 4 and all of said officers and members of said Commissioners Court were present, except the following absentees: .Whereupon, among other business, the following was tr- ansacte at said Meeting: a written ORDER AUTHORIZING THE ISSUANCE OF KERB COUNTY, TEXAS TAX NOTES, SERIES 2008 IN THE AMOUNT OF $1,780,000; AUTHORIZING THE LEVYING OF A TAX FOR THE PAYMENT THEREOF; AUTHORIZING EXECUTION OF A PAYING AGENTlREGISTRAR AGREEMENT; AND AUTHORIZING AND APPROVING OTHER INSTRUMENTS AND PROCEDURES RELATED THERETO was duly introduced for the consideration of said Commissioners Court. It was then duly moved and seconded that said Order be passed and, after due discussion, said motion carrying with it the adoption of said Order, prevailed and carried by the following vote: AYES: ~ NOES: ~ ABSTENTIONS:? 2. A true, full and correct copy of the aforesaid Order adopted at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; the Order has been duly recorded in said Commissioners Court's minutes of said Meeting; the above and foregoing paragraph is a true, full and correct excerpt from said Commissioners Court's minutes of said Meeting pertaining to the passage of said Order; the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of said Commissioners Court as indicated therein; each of the officers and members of said Commissioners Court was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Order would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose, and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. SIGNED D THE 25~ DAY OF FEBRUARY, 2008. ~~gS10N~As .. (SEAL) vo~~~ ~~~ ~,~ _ -+ unty Clerk ~~ti r c.~ LINTY, ORDER AUTHORIZING THE ISSUANCE OF KERR COUNTY, TEXAS TAX NOTES, SERIES 2008 IN THE AMOUNT OF $1,780,000; AUTHORIZING THE LEVYING OF A TAX FOR THE PAYMENT THEREOF; AUTHORIZING EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT; AND AUTHORIZING AND APPROVING OTHER INSTRUMENTS AND PROCEDURES RELATED THERETO DATE OF APPROVAL: FEBRUARY 25, 2008 TABLE OF CONTENTS RECITALS ............................................................. 1 Section 1. AMOUNT AND PURPOSE OF THE NOTES . ....................... 2 Section 2. DESIGNATION, DATE, DENOMINATIONS, NUMBERS, AND MATURITIES OF NOTES ....................................... 2 Section 3. INTEREST .................................................... 2 Section 4. CHARACTERISTICS OF THE NOTES ............................ 3 Section 5. FORM OF NOTE .............................................. 4 Section 6. INTEREST AND SINKING FUND; TAX LEVY ..................... 11 Section 7. CONSTRUCTION FUND ........................................ 12 Section 8. INVESTMENTS ............................................... 12 Section 9. DEFEASANCE OF NOTES ...................................... 12 Section 10. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED NOTES 13 Section 11. CUSTODY, APPROVAL, AND REGISTRATION OF NOTES; BOND COUNSEL'S OPINION, INSURANCE, AND CUSIP NUMBERS 14 Section 12. COVENANTS REGARDING TAX-EXEMPTION OF INTEREST ON THE NOTES ............................................... 15 Section 13. SALE OF NOTES .............................................. 17 Section 14. NO RULE 15c2-12 UNDERTAKING; ANNUAL FINANCIAL STATEMENTS ................................................ 17 Section 15. FURTHER PROCEDURES ...................................... 18 Section 16. ORDER A CONTRACT; AMENDMENTS .......................... 18 Section 17. SECURITY INTEREST ......................................... 19 Section 18. DEFAULTS AND REMEDIES ................................... 19 Section 19. INTERESTED PARTIES ........................................ 20 Section 20. INCORPORATION OF RECITALS ................................ 20 Section 21. SEVERABILITY ............................................... 20 Section 22. EFFECTIVE DATE ............................................. 21 SIGNATURES ............................................................. Exhibit A PAYING AGENT/REGISTRAR AGREEMENT -i- ORDER AUTHORIZING THE ISSUANCE OF KERR COUNTY, TEXAS TAX NOTES, SERIES 2008 IN THE AMOUNT OF $1,780,000; AUTHORIZING THE LEVYING OF A TAX FOR THE PAYMENT THEREOF; AUTHORIZING EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT; AUTHORIZING AND APPROVING OTHER INSTRUMENTS AND PROCEDURES RELATED THERETO; AND DECLARING AN EFFECTIVE DATE STATE OF TEXAS COUNTY OF KERB WHEREAS, KERR COUNTY, TEXAS (the "Issuer") is a political subdivision, and is operating and existing under the Constitution and laws, of the State of Texas; and WHEREAS, the Commissioners Court now deems it necessary to borrow funds to finance the acquisition and construction of the following improvements: (i) acquire information technology equipment including computers, servers and related software and accessories, video teleconferencing equipment and upgrading the camera system for the County Jail, camera/digital system for the Juvenile Detention Center, and additional computer software for human resources and payroll and other software improvements; (ii) expand the Agricultural Barn; (iii) construct improvements to the Courthouse including repairing windows and doors; repairing and refurbushing Courthouse grounds, (including sprinkler replacement, concrete replacement and landscaping ofgrounds); (iv) acquisition of equipment primarily for use by the Road and Bridge Department including a Maintainer to replace a leased vehicle, radios to replace old units, a F-750 truck with mounted box for brush chipping, brush chipper 1800 XL, two 8-yard dump trucks, and two mowing tractors with buckets; (v) acquisition of equipment primarily for use by the Environmental Health Department including two trucks to replace existing vehicles; and (vi) acquisition of equipment primarily for use by the Animal Control Department including two trucks to replace existing vehicles (collectively, the "Projects"); and WHEREAS, pursuant to Chapter 1431, Texas Government Code, as amended (the "Act"), particularly Section 1431.002 thereof, the Commissioners Court of the Issuer, on the recommendation of the County Auditor, is authorized and empowered to issue anticipation notes to pay contractual obligations incurred or to be incurred (i) for the construction of any publ is work, and (ii) forthe purchase ofmaterials,supplies, equipment, machinery, buildings, lands and rights-of--way for the Issuer's authorized needs and purposes; and WHEREAS, in compliance with Section 1431.002 of the Act, the County Auditor of the County has recommended the issuance of the notes authorized in this Order to finance the Projects; and WHEREAS, in accordance with the provisions of the Act, the Commissioners Court hereby finds and determines that anticipation notes should be issued and sold at this time to finance the Projects and to pay costs of issuance of such notes; and WHEREAS, the governing body of the Issuer deems it appropriate to adopt this Order and issue the notes herein authorized as permitted by the Act; and WHEREAS, it is hereby officially found and determined that the meeting at which this Order was adopted was open to the public and public notice of the time, place, and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code; NOW, THEREFORE, BE IT ORDAINED BY THE COMMISSIONERS COURT OF THE KERR COUNTY, TEXAS: SECTION 1. AMOUNT AND PURPOSE OF THE NOTES. The Notes of the Issuer are hereby authorized to be issued and delivered in the aggregate principal amount of $1,780,000 to finance the acquisition and construction of the following improvements: (i) acquire information technology equipment including computers, servers and related software and accessories, video teleconferencing equipment and upgrading the camera system for the County Jail, camera/digital system for the Juvenile Detention Center, and additional computer software for human resources and payroll and other software improvements; (ii) expand the Agricultural Barn; (iii) construct improvements to the Courthouse including repairing windows and doors; repairing and refurbushing Courthouse grounds, (including sprinkler replacement, concrete replacement and landscaping of grounds); (iv) acquisition of equipment primarily for use by the Road and Bridge Department including a Maintainer to replace a leased vehicle, radios to replace old units, a F-750 truck with mounted box for brush chipping, brush chipper 1800 XL, two 8-yard dump trucks, and two mowing tractors with buckets; (v) acquisition of equipment primarily for use by the Environmental Health Department including two trucks to replace existing vehicles; and (vi) acquisition of equipment primarily for use by the Animal Control Department including two trucks to replace existing vehicles; and to pay costs of issuance. SECTION 2. DESIGNATION, DATE, DENOMINATIONS, NUMBERS, AND MATURITIES OF NOTES. Each note issued pursuant to this Order shall be designated: "KERR COUNTY, TEXAS TAX NOTE, SERIES 2008 ", and initially there shall be issued, sold, and delivered hereunder one fully registered note, without interest coupons, dated March 1, 2008, in the principal amount stated in Section 1 above, numbered T-1 (the "Initial Note"), with notes issued in replacement thereof being in denominations of $100,000 and any integral multiple of $5,000 in excess thereof and numbered consecutively from R-1 upward, payable to the initial registered owner thereof (with the Initial Note being payable to the initial purchaser designated in Section 13 hereof), or to the registered assignee or assignees of said Notes or any portion or portions thereof (in each case, the "Registered Owner"), and said Notes shall mature and be payable on February 15, 2013 (subject to mandatory sinking fund redemption on February IS in each of the years 2009 through 2012 in the respective principal amounts set forth in the FORM OF NOTE contained in Section 6 hereof). The term "Notes" as used in this Order shall mean and include collectively the Initial Note initially issued and delivered pursuant to this Order and all substitute notes exchanged therefor, as well as all other substitute notes and replacement notes issued pursuant hereto, and the term "Note" shall mean any of the Notes. SECTION 3. INTEREST. The Notes shall bear interest from the dates specified in the FORM OF NOTE set forth in this Order to their respective dates of maturity or mandatory sinking fund redemption prior to maturity at the rate of 3.30% per annum. -2- SECTION 4. CHARACTERISTICS OF THE NOTES. (a) Registration, Trans er, and Exchange; Authentication. The Issuer shall keep or cause to be kept at the designated corporate trust or commercial banking office of TxE FROST NATIONAL BANK, San Antonio, Texas (the "Paying Agent/Registrar") books or records for the registration ofthe transfer and exchange ofthe Notes (the "Registration Books"), and the Issuer hereby appoints the Paying Agent/Registrar as its registrar and transfer agent to keep such books or records and make such registrations of transfers and exchanges under such reasonable regulations as the Issuer and Paying Agent/Registrar may prescribe; and the Paying Agent/Registrar shall make such registrations, transfers and exchanges as herein provided. Attached hereto as Exhibit A is a copy of the Paying Agent/Registrar Agreement between the Issuer and the Paying Agent/Registrar which is hereby approved in substantially final form, and the County Judge and County Clerk of the Issuer are hereby authorized to execute the Paying Agent/Registrar Agreement and approve any changes in the final form thereof. The Paying Agent/Registrar shall obtain and record in the Registration Books the address of the Registered Owner of each Note to which payments with respect to the Notes shal l be mailed, as herein provided; but it shall be the duty of each Registered Owner to notify the Paying Agent/Registrar in writing of the address to which payments shall be mailed, and such interest payments shall not be mailed unless such notice has been given. To the extent possible and under reasonable circumstances, all transfers of Notes shall be made within three business days after request and presentation thereof. The Issuer shall have the right to inspect the Registration Books during regular business hours of the Paying Agent/Registrar, but otherwise the Paying Agent/Registrar shall keep the Registration Books confidential and, unless otherwise required by law, shall not permit their inspection by any other entity. The Paying Agent/Registrar's standard or customary fees and charges for making such registration, transfer, exchange and delivery of a substitute Note or Notes shall be paid as provided in the FORM OF NOTE set forth in this Order. Registration of assignments, transfers and exchanges ofNotes shall be made in the manner provided and with the effect stated in the FORM OF NOTE set forth in this Order. Each substitute Note shall bear a letter and/or number to distinguish it from each other Note. Except as provided in (d) below, an authorized representative of the Paying Agent/Registrar shall, before the delivery of any such Note, date and manually sign the Paying Agent/Registrar's Authentication Certificate, and no such Note shall be deemed to be issued or outstanding unless such Certificate is so executed. The Paying Agent/Registrar promptly shall cancel all paid Notes and Notes surrendered for transfer and exchange. No additional ordinances, orders, or resolutions need be passed or adopted by the governing body of the Issuer or any other body or person so as to accomplish the foregoing transfer and exchange of any Note or portion thereof, and the Paying Agent/Registrar shall provide for the printing, execution, and delivery ofthe substitute Notes in the manner prescribed herein, and said Notes shall be of type composition printed on paper with lithographed or steel engraved borders of customary weight and strength. Pursuant to Chapter 1201, Texas Government Code, and particularly Subchapter D and Section 1201.067 thereof, the duty of transfer and exchange of Notes as aforesaid is hereby imposed upon the Paying Agent/Registrar, and, upon the execution of such Notes, the transferred and exchanged Notes shall be valid, incon- testable, and enforceable in the same manner and with the same effect as the Notes which initially were issued and delivered pursuant to this Order, approved by the Attorney General, and registered by the Comptroller of Public Accounts. -3- (b) In General. The Notes (i) shall be issued in fully registered form, without interest coupons, with the principal of and interest on such Notes to be payable only to the Registered Owners thereof, (ii) shall be mandatorily redeemed prior to their scheduled maturities, (iii) may be transferred and assigned, (iv) may be exchanged for other Notes, (v) shall have the characteristics, (vi) shall be signed, sealed, executed and authenticated, (vii) the principal of and interest on the Notes shall be payable, and (viii) shall be administered and the Paying Agent/Registrar and the Issuer shall have certain duties and responsibilities with respect to the Notes, all as provided, and in the manner and to the effect as required or indicated, in the FORM OF NOTE set forth in this Order. The Initial Note is not required to be, and shall not be, authenticated by the Paying Agent/ Registrar, but on each substitute Note issued in exchange for the Initial Note issued under this Order the Paying Agent/Registrar shall execute the PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE, in the form set forth in the FORM OF NOTE. In lieu of the executed Paying Agent/Registrar's Authentication Certificate described above, the Initial Note delivered on the closing date (as further described in subparagraph (i) below) shall have attached thereto the Comptroller's Registration Certificate substantially in the form set forth in the FORM OF NOTE below, manually executed by the Comptroller of Public Accounts of the State of Texas or by his duly authorized agent, which certificate shall be evidence that the Initial Note has been duly approved by the Attorney General of the State of Texas and that it is a valid and binding obligation of the Issuer, and has been registered by the Comptroller. (c) Substitute Paving Agent/Re is~ trar. The Issuer covenants with the Registered Owners of the Notes that at all times while the Notes are outstanding the Issuer will provide a competent and legally qualified bank, trust company, financial institution, or other entity to act as and perform the services of Paying Agent/Registrar for the Notes under this Order, and that the Paying Agent/Registrar will be one entity. The Issuer reserves the right to, and may, at its option, change the Paying Agent/Registrar upon not less than 120 days written notice to the Paying Agent/Registrar, to be effective not later than 60 days prior to the next principal or interest payment date after such notice. In the event that the entity at any time acting as Paying Agent/Registrar (or its successor by merger, acquisition, or other method) should resign or otherwise cease to act as such, the Issuer covenants that promptly it will appoint a competent and legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar under this Order. Upon any change in the Paying Agent/Registrar, the previous Paying Agent/Registrarprnmptly shall transfer and deliver the Registration Books (or a copy thereof), along with all other pertinent books and records relating to the Notes, to the new Paying Agent/Registrar designated and appointed by the Issuer. Upon any change in the Paying Agent/Registrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying Agent/Registrar to each Registered Owner of the Notes, by United States mail, first-class postage prepaid, which notice also shall give the address of the new Paying Agent/Registrar. By accepting the position and performing as such, each Paying Agent/Registrar shall be deemed to have agreed to the provisions of this Order, and a certified copy of this Order shall be delivered to each Paying Agent/Registrar. (d) Delivery of Initial Note. On the closing date, one Initial Note representing the entire principal amount of the Notes, payable to the initial Registered Owner named in Section 13 of this Order or its designee, executed by manual or facsimile signature of the County Judge and County Clerk of the Issuer, on behalf of the Issuer, approved by the Attorney General of Texas, and registered and manually signed by the Comptroller of Public Accounts of the State of Texas, will be delivered to the initial purchaser or its designee. Upon payment for the Notes, the Paying -4- Agent/Registrar shall cancel the Initial Note and deliver to the initial Registered Owner or its designee one registered definitive Note for each year of maturity of the Notes, in the aggregate principal amount of all of the Notes for such maturity. SECTION 5. FORM OF NOTE. The form of Note, including the form of Paying Agent/Registrar's Authentication Certificate, the form of Assignment and the form of Registration Certificate of the Comptroller of Public Accounts of the State of Texas (to be attached only to the Initial Note shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or required by this Order. FORM OF NOTE R- UNITED STATES OF AMERICA PRINCIPAL STATE OF TEXAS AMOUNT COUNTY OF KERB TAX NOTES, SERIES 2008 $ INTEREST RATE MATURITY DATE DATE OF SERIES 3.30% February 15, 2013 March 1, 2008 REGISTERED OWNER: PRINCIPAL AMOUNT: DOLLARS ON THE MATURITY DATE specified above, KERR COUNTY, TEXAS (the "Issuer"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner specified above, or registered assigns (hereinafter called the "Registered Owner"), the Principal Amount specified above, and to pay interest thereon (calculated on the basis of a 360-day year of twelve 30-day months) from the date of initial delivery (as shown in the records of the Paying Agent/Registrar) at the Interest Rate per annum specified above, payable on February 15, 2009, and semiannually on each February 15 and August l 5 thereafter to the Maturity Date specified above, or the date of mandatory sinking fund redemption prior to maturity; except that if this Note is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such Principal Amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such Principal Amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Note or Notes, if any, for which this Note is being exchanged is due but has not been paid, then this Note shall bear interest from the date to which such interest has been paid in full. -5- THE PRINCIPAL OFAND INTEREST ON THIS NOTE are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Note shall be paid to the Registered Owner hereof upon presentation and surrender of this Note at maturity or upon the date fixed for its mandatory sinking fund redemption prior to maturity at the designated corporate trust or commercial banking office (the "Designated Office") of The Frost National Bank, San Antonio, Texas, which is the "Paying Agent/Registrar" for this Note. The payment of interest on this Note shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each interest payment date by check, dated as of such interest payment date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the order adopted by the Issuer authorizing the issuance of this Note and the series of which it is a part (the "Note Order") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter pro- vided; and such check shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid (or by such other method requested by the Registered Owner hereof and acceptable to the Paying Agent/Registrar), on each such interest payment date, to the Registered Owner hereof, at its address as it appeared on the 15`x' day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. In the event of anon-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar if and when funds for the payment of such interest have been received from the Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest (the "Special Payment Date" which shall be IS days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each Registered Owner appearing on the Registration Books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. The Issuer covenants with the Registered Owner of this Note that on or before each principal payment date and interest payment date for this Note it will make available to the Paying Agent/Registrar, from the "Interest and Sinking Fund" created by the Note Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Notes, when due. IF THE DATE FOR THE PAYMENT of the principal of or interest on this Note shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Office of the Paying Agent/Registrar is located are authorized by law or executive order to close, or the United States Postal Service is not open for business, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close, or the United States Postal Service is not open for business; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS NOTE IS ONE OFA SERIES OF NOTES, dated March 1, 2008, authorized and issued in accordance with the Constitution and laws of the State of Texas, including Chapter 143 l , Texas Government Code, as amended, in the principal amount of $1,780,000 to finance the acquisition and construction of the following improvements: (i) acquire information technology equipment including computers, servers and related software and accessories, video teleconferencing equipment and upgrading the camera system for the County Jail, camera/digital system for the Juvenile Detention Center, and additional computer software for human resources and payroll and other software improvements; (ii) expand the Agricultural Barn; (iii) construct improvements to the -6- Courthouse including repairing windows and doors; repairing and refurbushing Courthouse grounds, (including sprinklerreplacement,concrete replacement and landscaping of grounds); (iv) acquisition of equipment primarily for use by the Road and Bridge Department including a Maintainer to replace a leased vehicle, radios to replace old units, a F-750 truck with mounted box for brush chipping, brush chipper 1800 XL, two 8-yard dump trucks, and two mowing tractors with buckets; (v) acquisition of equipment primarily for use by the Environmental Health Department including two trucks to replace existing vehicles; and (vi) acquisition of equipment primarily for use by the Animal Control Department including two trucks to replace existing vehicles; and to pay costs of issuance. THE NOTES ARE NOT SUBJECT TO OPTIONAL REDEMPTION PRIOR TO MATURITY. THE NOTES ARE SUBJECT TO mandatory sinking fund redemption prior to maturity in part by lot, at a price equal to the principal amount thereof plus accrued interest to the date of redemption in the respective principal amounts shown below: MANDATORY REDEMPTION REDEMPTION DATE AMOUNT February 15, 2009 $135,000 February 15, 2010 200,000 February 15, 201 l 275,000 February 15, 2012 290,000 February 15, 2013 (maturity) 880,000 The principal amount of the Notes required to be redeemed pursuant to the operation of such mandatory redemption requirements may be reduced, at the option of the Issuer, by the principal amount of any such Notes which, prior to the date of the mailing of notice of such mandatory redemption, (i) shall have been acquired by the Issuer and delivered to the Paying Agent/Registrar for cancellation, or (ii) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the Issuer, and not theretofore credited against a mandatory redemption requirement. AT LEAST 30 DAYS PRIOR to the date fixed for any redemption of Notes or portions thereof prior to maturity, a written notice of such redemption shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid, to the Registered Owner of each Note to be redeemed at its address as it appeared on the Registration Books maintained by the Paying Agent/Registrar on the business day next preceding the day such notice of redemption is mailed. Notwithstanding the preceding sentence, as long as The Frost National Bank is the registered owner of all of the Notes, no notice of a mandatory sinking fund redemption shall be required to be given in advance of a mandatory sinking fund redemption date. Any notice of redemption so mailed shall be conclusively presumed to have been duly given irrespective of whether received by the Registered Owner. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption -7- price for the Notes or portions thereof which are to be so redeemed. If such written notice of redemption is sent and if due provision for such payment is made, all as provided above, the Notes or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment. If a portion of any Note shall be redeemed a substitute Note or Notes having the same maturity date, bearing interest at the same rate, in any denomination or denominations of $100,000 of any integral multiple of $5,000 in excess thereof, at the written request of the Registered Owner, and in an aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the Issuer, all as provided in the Note Order. ALL NOTES OF THIS SERIES are issuable solely as fully registered Notes, without interest coupons, in the denomination of $100,000 and any integral multiple of $5,000 in excess thereof (an "Authorized Denomination"). As provided in the Note Order, this Note, or any unredeemed portion hereof, may, at the request ofthe Registered Owner or the assignee or assignees hereof, be assigned, transferred and exchanged for a like aggregate principal amount of fully registered Notes, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having the same Authorized Denomination of Authorized Denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Note to the Paying Agent/Registrar for cancellation, all in accordance with the form and procedures set forth in the Note Order. Among other requirements for such assignment and transfer, the Registered Owner must provide the Issuer and the Paying Agent/Registrartyith an investment letter, executed by the transferee, similar in content and effect to the original investment letter provided by The Frost National Bank (as the original purchaser of this Note), and this Note must be presented and surrendered to the Paying Agent/Registrar at the Designated Office, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing assignment of this Note or any portion or portions hereof in an Authorized Denomination to the assignee or assignees in whose name or names this Note or any such portion or portions hereof is or are to be registered. The form of Assignment printed or endorsed on this Note may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Paying Agent/Registrar may be used to evidence the assignment of this Note or any portion or portions hereof from time to time by the Registered Owner. The Paying Agent/Registrar's reasonable standard or customary fees and charges fortransferringand exchanging any Note or portion thereof shall be paid by the Issuer, but any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer or exchange as a condition precedent to the exercise of such privilege. The Paying Agent/Registrar shall not be required to make any such transfer or exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Note or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date; provided, however, such limitation of transfer shall not be applicable to an exchange by the Registered Owner of an unredeemed balance of a Note called for redemption in part. -8- INTHEEVENT any Paying Agent/Registrar for the Notes is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Note Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Notes. IT IS HEREBY CERTIFIED, RECITED, AND COVENANTED that this Note has been duly and validly authorized, issued, and delivered; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Note have been performed, existed, and been done in accordance with law; that this Note is a general obligation of the Issuer, issued on the full faith and credit thereof; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Note, as such interest comes due, and as such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and have been pledged for such payment within the limits provided by law. THEISSUERALSOHASRESERVED THERIGHTto amend the Note Order as provided therein, and under some (but not all) circumstances amendments thereto must be approved by the Registered Owners of a majority in aggregate principal amount of the outstanding Notes. BYBECOMING THEREGISTERED OWNER ofthis Note, the Registered Owner thereby acknowledges all of the terms and provisions of the Note Order, agrees to be bound by such terms and provisions, acknowledges that the Note Order is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Note and the Note Order constitute a contract between each Registered Owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed with the manual or facsimile signature of the County Judge ofthe Issuer and countersigned with the manual or facsimile signature of the County Clerk of the Issuer, and has caused the official seal of the Issuer to be duly impressed, or placed in facsimile, on this Note. facsimile signature) County Clerk Kerr County, Texas (facsimile si ng ature) County Judge Kerr County, Texas (SEAL) -9- FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Note has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Note has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this (COMPTROLLER'S SEAL) Comptroller of Public Accounts of the State of Texas FORM OF PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Note is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Note has been issued under the provisions of the Note Order described in the text of this Note; and that this Note has been issued in exchange for a note or notes, or a portion of a note or notes of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated: THE FROST NATIONAL BANK San Antonio, Texas Paying Agent/Registrar By Authorized Representative -10- FORM OF ASSIGNMENT: ASSIGNMENT FOR VALUE RECEIVED, the undersigned Registered Owner of this Note, or duly authorized representative or attorney thereof, hereby assigns this Note to (Assignee's Social Security or (Print or typewrite Assignee's name and address, Taxpayer Identification Number) including zip code) and hereby irrevocably constitutes and appoints attorney to register the transfer of the within Note on the books kept for registration thereof, with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Note in every particular, without alteration or enlargement or any change whatsoever. SECTION 6. INTEREST AND SINKING FUND; TAX LEVY. A special Interest and Sinking Fund (the "Interest and Sinking Fund") is hereby created solely for the benefit of the Notes, and the Interest and Sinking Fund shall be established and maintained by the Issuer at an official depository bank of the Issuer for so long as the Notes or interest thereon are outstanding and unpaid. The Interest and Sinking Fund shall be kept separate and apart from all other funds and accounts of the Issuer, and shall be used only for paying the interest on and principal of the Notes. Until expended for the purposes set forth in Section 1 hereof, the proceeds derived from the sale of the Notes shall be held as further security for the timely payment of the principal and interest on the Notes. All ad valorem taxes levied and collected for and on account of the Notes and all accrued interest and premium on the Notes received by the Issuer from the initial purchaser of the Notes shall be deposited, as collected, to the credit of the Interest and Sinking Fund. During each year while any of the Notes or interest thereon are outstanding and unpaid, the Issuer shall compute and ascertain a rate and amount of ad valorem tax which will be sufficient, together with other moneys deposited to the credit of the Interest and Sinking Fund, to raise and produce the money required to pay the interest on the Notes as such interest comes due, and to provide and maintain a sinking fund adequate to pay the principal of its Notes as such principal matures (but never less than 2% of the original principal amount of the Notes as a sinking fund each year); and said tax shall be based on the latest approved tax rolls of the Issuer, with full allowance being made for tax delinquencies and the cost of tax collection. Said rate and amount of ad valorem tax is hereby levied, and is hereby ordered to be levied, against all taxable property in the Issuer for each year while any of the Notes or interest thereon are outstanding and unpaid; and said tax shall be assessed and collected each such year and deposited to the credit of the aforesaid Interest and Sinking Fund. Said ad valorem taxes -11- sufficient to provide for the payment of the interest on and principal of the Notes, as such interest comes due and such principal matures, are hereby pledged for such payment, within the limits provided by law. SECTION 7. CONSTRUCTION FUND. There is hereby created and established in the depository of the Issuer a fund to be called the Kerr County, Texas Tax Notes (Series 2008) Construction Fund (herein called the "Construction Fund"). All proceeds from the sale and delivery of any Note (excluding accrued interest and premium on such Note, if any, which shall be deposited into the Interest and Sinking Fund) shall be deposited into the Construction Fund. Money in the Construction Fund shall be subject to disbursements by the Issuer for payment of all costs incurred in carrying out the purpose for which the Notes are issued and for paying costs of issuance ofthe Notes. All funds remaining on deposit in the Construction Fund upon completion ofpurposes for which the Notes were issued shall be transferred to the Interest and Sinking Fund. SECTION 8. INVESTMENTS. Funds on deposit in the Interest and S inking Fund and the Construction Fund shall be secured by the depository bank of the Issuer in the manner and to the extent required by law to secure other public funds of the Issuer and may be invested from time to time in any investment authorized in the Public Funds Investment Act (Chapter 2256, Texas Government Code) and in compliance with the Issuer's investment policy adopted in accordance with the provisions of the Public Funds Investment Act; provided, however, that investments purchased for and held in the Interest and Sinking Fund shall have a final maturity no later than the date the funds from such investments will be required to pay principal and interest next coming due, and investments purchased for and held in the Construction Fund shall have a final maturity of not later than the date the Issuer reasonably expects the funds from such investments will be required to pay costs of the projects for which the Notes were issued. Income and profits from such investments shall be deposited in the respective Fund which holds such investments; however, any such income and profits from investments in the Construction Fund may be withdrawn by the Issuer and deposited in the Interest and Sinking Fund to pay all or a portion of the interest next coming due on the Notes. It is further provided, however, that any interest earnings on Note proceeds which are required to be rebated to the United States of America pursuant to Section 12 hereof in order to prevent the Notes from being arbitrage bonds shall be so rebated and not considered as interest earnings for the purposes of this Section. SECTION 9. DEFEASANCE OF NOTES. (a) Defeased Notes. Any Note and the interest thereon shall be deemed to be paid, retired and no longer outstanding (a "Defeased Note") within the meaning of this Order, except to the extent provided in subsection (d) of this Section, when payment of the principal of such Note, plus interest thereon to the due date (whether such due date be by reason of maturity or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof, or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar (or another entity permitted by Section 1207.061, Texas Government Code, as amended, or other applicable law, which entity, together with the Paying Agent/Registrar, is referred to collectively in this Section as the "Defeasance Agent"), in accordance with an escrow agreement or other instrument (the "Future EscrowAgreement") for such payment (1) lawful money of the United States of America sufficient to make such payment or (2) Defeasance Securities that mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to provide for such payment, and when proper arrangements have been made by the Issuer with the Defeasance Agent for the payment of its services until all Defeased Notes shall have become due -12- and payable. At such time as a Note shall be deemed to be a Defeased Note hereunder, as aforesaid, such Note and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes or revenues herein levied and pledged as provided in this Order, and such principal and interest shall be payable solely from such money or Defeasance Securities. (b) Investment in Defeasance Securities. Any moneys so deposited with the Defeasance Agent may at the written direction of the Issuer be invested in Defeasance Securities, maturing in the amounts and times as hereinbefore set forth, and all income from such Defeasance Securities received by the Defeasance Agent that is not required for the payment of the Notes and interest thereon, with respect to which such money has been so deposited, shall be turned over to the Issuer, or deposited as directed in writing by the Issuer. Any Future Escrow Agreement pursuant to which the money and/or Defeasance Securities are held for the payment of Defeased Notes may contain provisions permitting the investment or reinvestment of such moneys in Defeasance Securities or the substitution of other Defeasance Securities upon the satisfaction of the requirements specified in subsection (a)(i) or (ii) of this Section. All income from such Defeasance Securities received by the Defeasance Agent which is not required for the payment of the Defeased Notes, with respect to which such money has been so deposited, shall be remitted to the Issuer or deposited as directed in writing by the Issuer. (c) Defeasance Securities. The term "Defeasance Securities" means (i) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America., (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date of the purchase thereof are rated as to investment qual ity by a nationally recognized investment rating firm not less than AAA or its equivalent, (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the Issuer adopts or approves the proceedings authorizing the financial arrangements are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (iv) any other then authorized securities or obligations under applicable state law that may be used to defease obligations such as the Notes. (d) Paving A~;ent/Re~istrar Services. Until all Defeased Notes shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Notes the same as if they had not been defeased, and the Issuer shall make proper arrangements to provide and pay for such services as required by this Order. (e) Selection of Notes for Defeasance. In the event that the Issuer elects to defease less than all of the principal amount of Notes of a maturity, the Paying Agent/Registrar shall select, or cause to be selected, such amount of Notes by such random method as it deems fair and appropriate. SECTION 10. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED NOTES. (a) Replacement Notes. In the event any outstanding Note is damaged, mutilated, lost, stolen, or destroyed, the Paying Agent/Registrar shall cause to be printed, executed, and delivered, anew Note of the same principal amount, maturity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Note, in replacement for such Note in the manner hereinafter provided. -13- (b) Application for Replacement Notes. Application for replacement of damaged, mutilated, lost, stolen, or destroyed Notes shall be made by the Registered Owner thereof to the Paying Agent/Registrar. In every case of loss, theft, or destruction of a Note, the Registered Owner applying for a replacement Note shall furnish to the Issuer and to the Paying Agent/Registrar such security or indemnity as may be required by them to save each of them harmless from any loss or damage with respect thereto. Also, in every case of loss, theft, or destruction of a Note, the Registered Owner shall furnish to the Issuer and to the Paying Agent/Registrar evidence to their satisfaction of the loss, theft, or destruction of such Note, as the case may be. In every case of damage or mutilation of a Note, the Registered Owner shal l surrender to the Paying Agent/Registrar for cancellation the Note so damaged or mutilated. (c) No Default Occurred. Notwithstanding the foregoing provisions of this Section, in the event any such Note shall have matured, and no default has occurred which is then continuing in the payment of the principal of, redemption premium, if any, or interest on the Note, the Issuer may authorize the payment of the same (without surrender thereof except in the case of a damaged or mutilatedNote) instead of issuing a replacementNote,provided security or indemnity is furnished as above provided in this Section. (d) Charge for Issuing Replacement Notes. Prior to the issuance of any replacement Note, the Paying Agent/Registrar shall charge the Registered Owner of such Note with all legal, printing, and other expenses in connection therewith. Every replacement Note issued pursuant to the provisions of this Section by virtue of the fact that any Note is lost, stolen, or destroyed shall constitute a contractual obligation of the Issuer whether or not the lost, stolen, or destroyed Note shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Order equally and proportionately with any and all other Notes duly issued under this Order. (e) Authority for Issuing Replacement Notes. In accordance with Chapter 1206, Texas Government Code, this Section of this Order shall constitute authority for the issuance of any such replacement Note without necessity of further action by the governing body of the Issuer or any other body or person, and the duty of the replacement of such Notes is hereby authorized and imposed upon the Paying Agent/Registrar, and the Paying Agent/Registrar shall authenticate and deliver such Notes in the form and manner and with the effect, as provided in Section 4(a) of this Order for Notes issued in exchange for other Notes. SECTION 11. CUSTODY, APPROVAL, AND REGISTRATION OF NOTES; BOND COUNSEL'S OPINION, INSURANCE, AND CUSIP NUMBERS. The County Judge of the Issuer, on behalf of the Issuer, is hereby authorized to have control of the Notes initially issued and delivered hereunder and all necessary records and proceedings pertaining to the Notes pending their delivery and their investigation, examination, and approval by the Attorney General of the State of Texas, and their registration by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Notes said Comptroller of Public Accounts (or a deputy designated in writing to act for said Comptroller) shall manually sign the Comptroller's Registration Certificate attached to such Notes, and the seal of said Comptroller shall be impressed, or placed in facsimile, on such Certificate. The approving legal opinion of the Issuer's Bond Counsel and the assigned CUSIP numbers, if any, may, at the option of the Issuer, be printed on the Notes issued and delivered under this Order, but neither shall have any legal effect, and shall be solely for the convenience and information of the Registered Owners of the Notes. -14- SECTION 12. COVENANTS REGARDING TAX-EXEMPTION OF INTEREST ON THE NOTES. (a) Covenants. The Issuer covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the Notes as obligations described in section 103 of the Internal Revenue Code of 1986, as amended (the "Code"),the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Issuer covenants as follows: (1) to take any action to assure that no more than 10 percent of the proceeds of the Notes or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than 10 percent of the proceeds or the projects financed therewith are so used, such amounts, whether or not received by the Issuer, with respect to such private business use, do not, under the terms of this Order or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Notes, in contravention of section 141(b)(2) of the Code; (2) to take any action to assure that in the event that the "private business use" described in subsection (1) hereof exceeds 5 percent of the proceeds of the Notes or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used fora "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) ofthe Code, to the governmental use; (3) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Notes (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; (4) to refrain from taking any action which would otherwise result in the Notes being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (5) to refrain from taking any action that would result in the Notes being "federally guaranteed" within the meaning of section 149(b) of the Code; (6) to refrain from using any portion of the proceeds of the Notes, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Notes, other than investment property acquired with -- (A) proceeds of the Notes invested for a reasonable temporary period of 3 years or less or, in the case of a refunding bond, for a period of 30 days or less until such proceeds are needed for the purpose for which the bonds are issued, (B) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1(b) of the Treasury Regulations, and -15- (C) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Notes; (7) to otherwise restrict the use of the proceeds of the Notes or amounts treated as proceeds of the Notes, as may be necessary, so that the Notes do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); and (8) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Notes) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Notes have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(f) of the Code. (b) Rebate Fund. In order to facilitate compliance with the above covenant (8), a "Rebate Fund" is hereby established by the Issuer for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the Registered Owners. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. (c) Proceeds. The Issuer understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, "transferred proceeds" (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Notes. It is the understanding of the Issuer that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Notes, the Issuer will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Notes under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Notes, the Issuer agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Notes under section 103 of the Code. In furtherance of such intention, the Issuer hereby authorizes and directs the Director of Finance to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Issuer, which may be permitted by the Code as are consistent with the purpose for the issuance of the Notes. (d) Allocation of, and Limitation On, Expenditures for the Project. The Issuer covenants to account for the expenditure of sale proceeds and investment earnings to be used for the purposes described in Section 1 of this Order (as used in this Section, the "Project") on its books and records in accordance with the requirements of the Internal Revenue Code. The Issuer recognizes that in order for the proceeds to be considered used for the reimbursement of costs, the proceeds must be allocated to expenditures within 18 months of the later of the date that (1) the expenditure is made, or (2) the Project is completed; but in no event later than three years after the date on which the -16- original expenditure is paid. The foregoing notwithstanding, the Issuer recognizes that in order for proceeds to be expended under the Internal Revenue Code, the sale proceeds or investment earnings must be expended no more than 60 days after the earlier of (1) the fifth anniversary of the delivery of the Notes, or (2) the date the Notes are retired. The Issuer agrees to obtain the advice of nationally-recognized bond counsel if such expenditure fails to comply with the foregoing to assure that such expenditure will not adversely affect the tax-exempt status of the Notes. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes of the interest on the Notes from gross income of the Registered Owners. (e) Disposition of Project. The Issuer covenants that the property constituting the Project will not be sold or otherwise disposed in a transaction resulting in the receipt by the Issuer of cash or other compensation, unless the Issuer obtains an opinion ofnationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Notes. For purposes of the foregoing, the portion of the property comprising persona( property and disposed in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (f) Qualified Tax-Exempt Obli atg_ions. The Issuer hereby designates the Notes as "qualified tax-exempt obligations" as defined in section 265(b)(3) of the Code. In furtherance of such designation, the Issuer represents, covenants and warrants the following: (a) that during the calendar year in which the Notes are issued, the Issuer (including any subordinate entities) has not designated nor will designate bonds or other obligations, which when aggregated with the Notes, will result in more than $10,000,000 of "qualified tax-exempt obligations" being issued; (b) that the Issuer reasonably anticipates that the amount oftax-exempt obligations issued during the calendar year in which the Notes are issued by the Issuer (or any subordinate entities) will not exceed $10,000,000; and, (c) that the Issuer will take such action or refrain from such action as necessary, and as more particularly set forth in this Section, in order that the Notes will not be considered "private activity bonds" within the meaning of section 141 of the Code. SECTION 13. SALE OF NOTES. The Notes are hereby initially sold and shall be delivered to THE FROST NATIONAL BANK, San Antonio, Texas (the "Purchaser"), for cash for the par value thereof and no accrued interest. It is hereby officially found, determined and declared that the terms of this sale are the most advantageous reasonably obtainable. The Notes initially shall be registered in the name of THE FROST NATIONAL BANK. SECTION 14. NO RULE 1502-12 UNDERTAKING; ANNUAL FINANCIAL STATEMENTS. The Issuer has not made an undertaking in accordance with Rule 15c2-12 of the Securities and Exchange Commission (the "Rule") in connection with the issuance of the Notes inasmuch as the Purchaser is not acting as an "underwriter in a primary offering of municipal securities" within the meaning of the Rule. The Issuer is not, therefore, obligated pursuant to the Rule to provide any on-going disclosure relating to the Issuer or the Notes; however, so long as the Purchaser or its assignee is the sole Registered Owner of the Notes, unless waived by the Purchaser, the Issuer shall provide the following to the Purchaser: -17- (a) Audited financial statements, to be provided within 270 days after the close of each Issuer fiscal year ending on and after September 30, 2008; and (b) Such other financial information regarding the Issuer as the Purchaser shall reasonably request. SECTION 15. FURTHER PROCEDURES. The County Judge, County Clerk, County Treasurer and County Auditor of the Issuer and all other officers, employees, and agents of the Issuer, and each of them, shall be and they are hereby expressly authorized, empowered, and directed from time to time and at any time to do and perform all such acts and things and to execute, acknowledge, and deliver in the name and under the corporate seal and on behalf of the Issuer all such instruments, whether or not herein mentioned, as may be necessary or desirable in order to carry out the terms and provisions of this Order and the Notes. In addition, prior to the initial delivery of the Notes, the County Judge and County Clerk of the Issuer, and the Issuer's Bond Counsel are hereby authorized and directed to approve any technical changes or correction to this Order or to any of the instruments authorized and approved by this Order necessary in order to (i) correct any ambiguity or mistake or properly or more completely document the transactions contemplated and approved by this Order, (ii) to conform this Order and the Notes in a manner deemed necessary and appropriate to comply with the terms and payment procedures requested by the Purchaser, or (iii) obtain the approval of the Notes by the Attorney General of the State of Texas. In case any officer whose signature shall appear on any Note shall cease to be such officer before the delivery of such Note, such signature shall nevertheless be valid and sufficient for all purposes the same as if such officer had remained in office until such delivery. Additionally, the County Auditor and County Treasurer are further authorized to pay to the Attorney General of Texas prior to the delivery of the Notes, for the Attorney General's review of the transcript of proceedings related to the Notes, the amount required pursuant to Section 1202.004, Texas Government Code, as amended. SECTION 16. ORDER A CONTRACT; AMENDMENTS. This Order shall constitute a contract with the Registered Owners of the Notes, binding on the Issuer and its successors and assigns, and shall not be amended or repealed by the Issuer as long as any Note remains outstanding except as permitted in this Section. The Issuer may, without the consent of or notice to any Registered Owners (other than the Purchaser as long as the Purchaser is a Registered Owner, in which case the Issuer must receive the Purchaser's prior written consent to), amend, change, or modify this Order as may be required (i) by the provisions hereof, (ii) for the purpose of curing any ambiguity, inconsistency, or formal defect or omission herein, or (iii) in connection with any other change which is not to the prejudice of the Registered Owners. The Issuer may, with the written consent of the Registered Owners of a majority in aggregate principal amount of the Notes then outstanding affected thereby, amend, change, modify, or rescind any provisions of this Order; provided that without the consent of all of the Registered Owners affected, no such amendment, change, modification, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Notes, reduce the principal amount thereof or the rate of interest thereon, (ii) give any preference to any Note over any other Note, (ii) extend any waiver of default to subsequent defaults, or (iv) reduce the aggregate principal amount of Notes required for consent to any such amendment, change, modification, or rescission. Whenever the Issuer shall desire to make any amendment or addition to or rescission of this Order requiring consent of the Registered Owners, the Issuer shall cause notice of the amendment, addition, or rescission to be sent by first class mail, -18- postage prepaid, to the Registered Owners at the respective addresses shown on the Registration Books. Whenever at any time within one year after the date of the giving of such notice, the Issuer shall receive an instrument or instruments in writing executed by the Registered Owners of a majority in aggregate principal amount of the Notes then outstanding affected by any such amendment, addition, or rescission requiring the consent of the Registered Owners, which instrument or instruments shall refer to the proposed amendment, addition, or rescission described in such notice and shall specifically consent to and approve the adoption thereof in substantially the form of the copy thereof referred to in such notice, thereupon, but not otherwise, the Issuer may adopt such amendment, addition, or rescission in substantially such form, except as herein provided. No Registered Owner may thereafter object to the adoption of such amendment, addition, or rescission, or to any of the provisions thereof, and such amendment, addition, or rescission shall be fully effective for all purposes. SECTION 17. SECURITY INTEREST. Chapter 1208, Texas Government Code, applies to the issuance of the Notes and the pledge of the ad valorem taxes granted by the Issuer under Section 6 of this Order, and is therefore valid, effective, and perfected. If Texas law is amended at any time while the Notes are outstanding and unpaid such that the pledge of the ad valorem taxes granted by the Issuer under Section 6 of this Order is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, then in order to preserve to the Registered Owners of the Notes the perfection of the security interest in said pledge, the Issuer agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Texas Business & Commerce Code, and enable a filing to perfect the security interest in said pledge to occur. SECTION 18. DEFAULTS AND REMEDIES. (a) Events of Default. Each of the following occurrences or events for the purpose of this Order is hereby declared to be an "Event of Default": (i) the failure to make payment of the principal of or interest on any of the Notes when the same becomes due and payable; or (ii) default in the performance or observance of any other covenant, agreement or obligation ofthe Issuer, the failure to perform which materially, adversely affects the rights of the Registered Owners of the Notes, including, but not limited to, their prospect or ability to be repaid in accordance with this Order, and the continuation thereof for a period of 60 days after notice of such default is given by any Registered Owner to the Issuer. (b) Remedies for Default. (i) Upon the happening of any Event of Default, then and in every case, any Registered Owner or an authorized representative thereof, including, but not limited to, a trustee or trustees therefor, may proceed against the Issuer, or any official, officer or employee of the Issuer in their official capacity, for the purpose of protecting and enforcing the rights of the Registered Owners under this Order, by mandamus or other suit, action or special proceeding in equity or at law, in any court of competent jurisdiction, for any relief permitted by law, including the specific performance of any covenant or agreement -19- contained herein, or thereby to enjoin any act or thing that may be unlawful or in violation of any right of the Registered Owners hereunder or any combination of such remedies. (ii) It is provided that all such proceedings shall be instituted and maintained for the equal benefit of all Registered Owners of Notes then outstanding. (c) Remedies Not Exclusive. (i) No remedy herein conferred or reserved is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or under the Notes or now or hereafter existing at law or in equity; provided, however, that notwithstanding any other provision of this Order, the right to accelerate the debt evidenced by the Notes shall not be available as a remedy under this Order. (ii) The exercise of any remedy herein conferred or reserved shall not be deemed a waiver of any other available remedy. (iii) By accepting the delivery of a Note authorized under this Order, such Registered Owner agrees that the certifications required to effectuate any covenants or representations contained in this Order do not and shall never constitute or give rise to a personal or pecuniary liability or charge against the officers or employees of the Issuer or the Commissioners Court. (iv) None of the members of the Commissioners Court, nor any other official or officer, agent, or employee of the Issuer, shall be charged personally by the Registered Owners with any liability, or be held personally liable to the Registered Owners under any term or provision of this Order, or because of any Event of Default or alleged Event of Default under this Order. SECTION 19. INTERESTED PARTIES. Nothing in this Order expressed or implied is intended or shall be construed to confer upon, or to give to, any person or entity, other than the Issuer and the Registered Owners of the Notes, any right, remedy or claim under or by reason of this Order or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in this Order contained by and on behalf of the Issuer shall be for the sole and exclusive benefit of the Issuer and the Registered Owners of the Notes. SECTION 20. INCORPORATION OF RECITALS. The Issuer hereby finds that the statements set forth in the recitals of this Order are true and correct, and the Issuer hereby incorporates such recitals as a part of this Order. SECTION 21. SEVERABILITY. The provisions of this Order are severable and if any provision or the applicability thereof to any person or circumstance is ever held by a court of competent jurisdiction to be invalid or unconstitutional for any reason, the remainder of this Order and the application of such provisions to other persons or circumstances shall not be affected thereby. -20- SECTION 22. EFFECTIVE DATE. This Order shall become effective immediately after being adopted on second and final reading. [The remainder of this page intentionally left blank.) -21- ADOPTED BY THE COMMISSIONERS COURT OF KERR COUNTY, TEXAS AT A REGULAR MEETING HELD ON THE 2S"f DAY OF FEBRUARY, 2008. ATTEST: unty Clerk Kerr County, Texas ~~gs1oNERs V~ ~C~G (SEAL) ~~ ~~ ~ ~ ~~ ~ ~~ ~'P •........~'''~~Q' ~~NTY, ~ APPROVED: ge, err County, Texas [SIGNATURE PAGE TO NOTE ORDER] EXHIBIT A THE PAYING AGENT/REGISTRAR AGREEMENT IS OMITTED AT THIS POINT AS IT APPEARS IN EXECUTED FORM ELSEWHERE IN TH[S TRANSCRIPT. The Frost National Bank 100 West Houston San Antonio, Texas 78205 INVESTOR ACKNOWLEDGMENT LETTER February 25, 2008 Kerr County, Texas c/o County Judge Kerr County Courthouse 700 Main Street Kerrville, Texas 78028 RBC Capital Markets 153 Treeline, Suite 100 San Antonio, Texas 78209 McCall, Parkhurst & Horton L.L.P. 700 N. St. Mary's St., Suite 1525 San Antonio, Texas 78205 RE: $1,780,000 KERB COUNTY, TEXAS TAX NOTES, SERIES 2008 Ladies and Gentlemen: The undersigned (the "Purchaser"), as purchaser of $1,780,000 in aggregate principal amount of the captioned obligations (the "Notes"), hereby acknowledges and confirms that it has been furnished such financial, statistical and other information with respect to KERR COUNTY, TEXAS (the "Issuer") and the Notes, including a certified copy of the Order of the Commissioners Court of the Issuer which authorized the issuance of the Notes (the "Order"), as the Purchaser deems necessary to enable it to make an informed investment decision with respect to the purchase of the Notes. The Purchaser acknowledges that: 1. The Notes are general obligations of the Issuer, issued on the full faith and credit thereof; and ad valorem taxes sufficient to provide for the payment of interest on and principal of the Notes, as such interest comes due, and such principal matures, have been levied and ordered to be levied, within the limits prescribed by law, against all taxable property in the Issuer, and have been pledged for such payment, all as provided in the Order. Kerr County, Texas Tax Notes, Series 2008 February 25, 2008 Page 2 2. The Purchaser, as a financial institution, has sufficient knowledge and experience in financial and business matters, including purchase and ownership of municipal and other tax-exempt obligations of a nature similar to the Notes to be able to evaluate the risks and merits of the investment represented by the purchase of the Notes. 3. The Purchaser is acquiring the Notes for its own account as evidence of a loan or for the account of institutions which meet the representations set forth herein, and not with a view to, or for sale in connection with, any further distribution of the Notes or any part thereof. The Purchaser has not offered to sell, solicited offers to buy, or agreed to sell the Notes or any part thereof, and the Purchaser has no present intention of reselling or otherwise disposing of the Notes except to persons who are able to and do confirm in writing to the Purchaser and to the Issuer the representations contained in Paragraph 1 through 4 hereof to the same extent as if such paragraph referred to such persons. 4. As a sophisticated investor, the Purchaser has made its own credit inquiry and analysis with respect to the Issuer and the Notes, and has made an independent credit decision based upon such inquiry and analysis. The Issuer has furnished to the Purchaser all the information which the Purchaser as a reasonable investor has requested of the Issuer, and the Purchaser has had the opportunity to ask questions of and receive answers from knowledgeable individuals concerning the Issuer and the Notes. The Purchaser is able and willing to bear the economic risk of the purchase and ownership of the Notes. 5. RBC Capital Markets (the Issuer's financial advisor) and McCall, Parkhurst & Horton L.L.P. (the Issuer's bond counsel) have not undertaken steps to ascertain the accuracy or completeness of information furnished to the Purchaser with respect to the Issuer, and the Purchaser has not looked to either of those firms or entities for, nor have either of them made, any representations to the Purchaser with respect to that information. 6. The Purchaser understands that the Notes have not been rated by any rating agency or registered with any federal or state securities agency or commission. 7. It is understood and agreed that the Purchaser is buying the Notes in a private placement by the Issuer to the Purchaser. The Notes are exempt from any federal securities registration requirements by virtue of Section 3(a)(2) of the Securities Act of 1933. The private placement of the Notes is exempt from the provisions of Rule 15c2-12 of the Securities and Exchange Commission (the "Rule") because the Notes are being sold to the Purchaser pursuant to a private placement and the Purchaser is not acting as a "Participating Underwriter" within the meaning of the Rule; consequently the Issuer has not undertaken to make any on-going disclosures for the benefit of the registered owner of the Notes in accordance with the Rule. Kerr County, Texas Tax Notes, Series 2008 February 25, 2008 Page 3 8. The Issuer will provide the Purchaser or an assignee thereof, with its (i) audited annual financial statements within 270 days after each fiscal year end, (ii) annual budget reports in a form reasonably acceptable to the Purchaser, to be provided within 120 days after approval thereof by the Commissioners Court of the County, and (iii) any other financial information regarding the Issuer that the Purchaser may reasonably request from time to time. [Signatures to Follow] Kerr County, Texas Tax Notes, Series 2008 February 25, 2008 Page 4 Very truly yours, The Frost National Bank By: ~~ ~~ Title: ~ 5 c. n i or U ~ _ ~rc s ~ ~' [PURCHASER'S SIGNATURE PAGE TO INVESTOR ACKNOWLEDGMENT LETTER] FEB-25-2008 05:04P FROM:KERR CG AUDITOR 830-792-2238 T0: 912102252984P242 P.1~1 Kcrr County, Texas Tax Notes, Series 2008 February 2S, 2008 Pa e S ACCEPTANCE ACCEPTED pursuant to the Order adopted by the Commissioners Court of Kerr County, Texas on the 25`h day of February, 2008. _~ _ _ ___ ounty udge, Kerr County, Texas - [ISSUER'S SIGNATURE PAGE TO INVESTOR ACKNOWLEDGMENT LETTER] PAYING AGENT/REGISTRAR AGREEMENT THISAGREEMENT entered into as of March 1, 2008 (this"Agreement"), by and between KERB COUNTY, TEXAS (the"Issuer"), and THE FROST NATIONAL BANK (the"Bank"), a national banking association, with a commercial banking office located in San Antonio, Texas. RECITALS WHEREAS, the Issuer has duly authorized and provided for the issuance of its KERB COUNTY, TEXAS TAX NOTES, SERIES 2008 (the"Securities") in the aggregate principal amount of $1, 780,000, such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchasers thereof on or about March 18, 2008; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on said Securities and with respect to the registration, transfer and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Appointment. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the"Order" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of said Securities and with respect to the transfer and exchange thereof as provided herein and in the Order, a copy of which books and records shall be maintained at an office of the Bank located in the State of Texas or shall be available to be accessed from such office located in the State of Texas. The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. Section 1.02. Compensation. In consideration of the sale of the Securities to the Bank by the Issuer, no compensation will be owing to the Bank for its services hereunder. The Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof. ARTICLE TWO DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the designated corporate trust or commercial banking office of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Issuer Request" and "Issuer Order" means a written request or order signed in the name of the Issuer by the County Judge, the County Treasurer, or the County Auditor of the Issuer, any one or more of said officials, delivered to the Bank. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. "Order" means the resolution, order, or ordinance of the governing body of the Issuer pursuant to which the Securities are issued, certified by the City Secretary or any other officer of the Issuer and delivered to the Bank. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Order). "Redemption Date" when used with respect to any Security to be redeemed means the date fixed for such redemption pursuant to the terms of the Order. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice- Chairman of the Board of Directors, the Chairman or Vice-Chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Order the principal of a Security is scheduled to be due and payable. Section 2.02. Other Definitions. The terms "Bank," "Issuer," and "Securities" (Security) have the meanings assigned to them in the recital paragraphs of this Agreement. The term"Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. ARTICLE THREE PAYING AGENT Section 3.01. Duties of Pang Agent. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States Mail, first class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. Section 3.02. Reporting Requirements. To the extent required by the Code or the Treasury Regulations, the Bank shall report to the Holders and the Internal Revenue Service the amount of interest paid or the amount treated as interest accrued on the Securities which is required to be reported by the Holders on their returns of federal income tax. Section 3.03. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Order. The Issuer agrees to transfer or to cause to be transferred, in immediately available funds, to the Bank to pay principal and/or interest, either or both, by no later than 12:00 noon on the respective payment dates. ARTICLE FOUR REGISTRAR Section 4.01. Security Register -Transfers and Exchanges. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the" Security Register") and, if the Bank Office is located outside the State of Texas, a copy of such books and records shall be kept in the State of Texas, for recording the names and addresses of the Holders of the Securities, the transfer, exchange and replacement of the Securities and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. All transfers, exchanges and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the National Association of Securities Dealers, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect a re- registration, transfer or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereof will be completed and new Securities delivered to the Holder or the assignee ofthe Holder in not more than three (3) business days after the receipt of the Securities to be canceled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. 4 Section 4.02. Securities. The Issuer shall provide an adequate inventory of printed Securities to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities in safekeeping, which shall be not less than the care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that is maintained for its own securities. Section 4.03. Form of Security Register. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. Section 4.04. List of Security Holders. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. The Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order and prior to the release or disclosure of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the court order or such release or disclosure of the contents of the Security Register. Section 4.05. Cancellation of Securities. All Securities surrendered to the Bank, at the designated Bank Office, for payment, redemption, transfer or replacement, shall be promptly canceled by the Bank. Section 4.06. Mutilated Destroyed, Lost or Stolen Securities. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Order, to deliver and issue Securities in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities as long as the same does not result in an overissuance. In case any Security shall be mutilated, or destroyed, lost or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed lost or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity and with the preparation, execution and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost or stolen. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities it has paid pursuant to Section 3.01, Securities it has delivered upon the transfer or exchange of any Securities pursuant to Section 4.01, and Securities it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities pursuant to Section 4.06. ARTICLE FIVE THE BANK Section 5.01. Duties of Bank. The Bank undertakes to perform the duties set forth herein and in the Order and agrees to use reasonable care in the performance thereof. Section 5.02. Reliance on Documents, Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, 6 statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by Issuer. (e) The Bank may consult with counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (~ The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. Section 5.04. May Hold Securities. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. MoneXs Held b~. If the Bank is not the holder of all of the Securities, the Bank shall deposit any moneys received from the Issuer into an account to be held in a fiduciary capacity for the payment of the Securities, with such moneys in the account that exceed the deposit insurance, available to the Issuer, provided by the Federal Deposit Insurance Corporation to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas to secure and be pledged as collateral for such accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such account shall be made by check drawn on such account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. All funds at any time and from time to time provided to or held by the Bank hereunder shall be deemed, construed and considered for all purposes as being provided to or held by the Bank for the benefit of the Security Holders. The Bank acknowledges, covenants and represents that it is acting herein in a fiduciary capacity in relation to such funds, and is not accepting, holding, administering, or applying such funds as a banking depository, but solely as fiduciary for and on behalf of the Security Holders. The Security Holders shall be entitled to the same preferred claim and first lien on the funds so provided as are enjoyed by the beneficiaries of trust funds generally. The funds provided to the Bank hereunder shall not be subject to warrants, drafts or checks drawn by the Issuer and, except as expressly provided herein, shall not be subject to compromise, setoff, or other charge or diminution by the Bank. The Bank shall be under no liability for interest on any money received by it hereunder. Subject to the unclaimed property laws of the State of Texas and any provisions in the Order to the contrary, any money deposited with the Bank for the payment of the principal, premium (if any), or interest on any Security and remaining unclaimed for four years after final maturity of the Security has become due and payable will be paid by the Bank to the Issuer, and the Holder of such Security shall thereafter look only to the Issuer forpayment thereof, and all liability of the Bank with respect to such moneys shall thereupon cease. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. Section 5.07. Interpleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the county in the State of Texas where the administrative offices of the Issuer is located, and agree that service of process by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction located in the county in the State of Texas where the administrative offices of the Issuer is located to determine the rights of any Person claiming any interest herein. Section 5.08. Depository Trust Company Services. It is hereby represented and warranted that, in the event the Securities are otherwise qualified and accepted for"Depository Trust Company" services or equivalent depository trust services by other organizations, and ifthe Bank has the capability, the Bank will, to the extent within its control, comply with the"Operational Arrangements," in effect from time to time, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. ARTICLE SIX MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. Section 6.02. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other. Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed or not. Any corporation or association into which the Bank may be converted or merged, or with which it may be consolidated, or to which it may sell, lease, or transfer its assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation, or transfer to which it is a party, ipso facto, shall be and become successor Paying Agent/Registrar hereunder and vested with all of the powers, rights, obligations, duties, remedies, discretions, immunities, privileges, and all other matters as was its predecessor, without the execution or filing of any instruments or any further act, deed, or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 6.06. Severability. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Order constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between this Agreement and the Order, the Order shall govern. 9 Section 6.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.10. Termination. This Agreement will terminate (i) on the date of final payment ofthe principal of and interest on the Securities to the Holders thereof or (ii) may be earlier terminated by either party upon sixty (60) days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securities, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. Section 6.11. Governing Law. This Agreement shal I be construed in accordance with and governed by the laws of the State of Texas. [The remainder of this page intentionally left blank] 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE FROST NATIONAL BANK By: y ~+~' ',y Titlt`: SN ~ e f' is i.,~,x~ Address: 100 W. Houston San Antonio, Texas 78205 KERB COUNTY, TEXAS By County Judge Attest: Address: Kerr County Courthouse 700 Main Street Kerrville, Texas 78028 County Clerk [SIGNATURE PAGE TO PAYING AGENT/REGISTRAR AGREEMENT] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Attest: ~ p~~1~ unty Clerk THE FROST NATIONAL BANK By: _ Title: Address: 100 W. Houston San Antonio, Texas 78205 KERB COUNTY, TEXAS By n y udge Address: Kerr County Courthouse 700 Main Street Kerrville, Texas 78028 [SIGNATURE PAGE TO PAYING AGENT/REGISTRAR AGREEMENT] T-1 UNITED STATES OF AMERICA STATE OF TEXAS COUNTY OF KERB TAX NOTES, SERIES 2008 INTEREST RATE 3.30% REGISTERED OWNER: PRINCIPAL AMOUNT: MATURITY DATE February 15, 2013 PRINCIPAL AMOUNT $1,780,000 DATE OF SERIES March 1, 2008 T)~IE FRO5T NATIONAL BANK One Million Seven Hundred Eighty Thousand Dollars ON THE MATURITY DATE specified above, SERB COUNTY, TEXAS (the "Issuer"), being a political subdivision of the State of Texas, hereby promises to pay to the Registered Owner specified above, or registered assigns (hereinafter called the "Registered Owner"), the Principal Amount specified above, and to pay interest thereon (calculated on the basis of a 360-day year of twelve 30-day months) from the date of initial delivery (as shown in the records of the Paying Agent/Registrar) at the Interest Rate per annum specified above, payable on February 15, 2009, and semiannually on each February 15 and August 15 thereafter to the Maturity Date specified above, or the date of mandatory sinking fund redemption prior to maturity; except that if this Note is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such Principal Amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such Principal Amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Note or Notes, if any, for which this Note is being exchanged is due but has not been paid, then this Note shall bear interest from the date to which such interest has been paid in full. THE PRINCIPAL OFAND INTEREST ON THIS NOTE are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Note shall be paid to the Registered Owner hereof upon presentation and surrender of this Note at maturity or upon the date fixed for its mandatory sinking fund redemption prior to maturity at the designated corporate trust or commercial banking office (the "Designated Office") of The Frost National Bank, San Antonio, Texas, which is the "Paying Agent/Registrar" for this Note. The payment of interest on this Note shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each interest payment date by check, dated as of such interest payment date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the order adopted by the Issuer authorizing the issuance of this Note and the series of which it is a part (the "Note Order") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such Page 1 of 7 <... f check shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid (or by such other method requested by the Registered Owner hereof and acceptable to the Paying Agent/Registrar), on each such interest payment date, to the Registered Owner hereof, at its address as it appeared on the 15~' day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar if and when funds for the payment of such interest have been received from the Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest (the "Special Payment Date" which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each Registered Owner appearing on the Registration Books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. The Issuer covenants with the Registered Owner of this Note that on or before each principal payment date and interest payment date for this Note it will make available to the Paying Agent/Registrar, from the "Interest and Sinking Fund" created by the Note Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Notes, when due. IF THE DATE FOR THE PAYMENT of the principal of or interest on this Note shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Office ofthe Paying Agent/Registrar is located are authorized by law or executive order to close, or the United States Postal Service is not open for business, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close, or the United States Postal Service is not open for business; and payment on such date shall have the same force and effect as if made on the original date payment was due. THIS NOTE IS ONE OF A SERIES OF NOTES, dated March 1, 2008, authorized and issued in accordance with the Constitution and laws of the State of Texas, including Chapter 1431, Texas Government Code, as amended, in the principal amount of $1,780,000 to finance the acquisition and construction of the following improvements: (i) acquire information technology equipment including computers, servers and related software and accessories, video teleconferencing equipment and upgrading the camera system for the County Jail, camera/digital system for the Juvenile Detention Center, and additional computer software for human resources and payroll and other software improvements; (ii) expand the Agricultural Barn; (iii) construct improvements to the Courthouse including repairing windows and doors; repairing and refurbushing Courthouse grounds, (including sprinkler replacement, concrete replacement and landscaping of grounds); (iv) acquisition of equipment primarily for use by the Road and Bridge Department including a Maintainer to replace a leased vehicle, radios to replace old units, a F-750 truck with mounted box for brush chipping, brush chipper 1800 XL, two 8-yard dump trucks, and two mowing tractors with buckets; (v) acquisition of equipment primarily for use by the Environmental Health Department including two trucks to replace existing vehicles; and (vi) acquisition of equipment primarily for use by the Animal Control Department including two trucks to replace existing vehicles; and to pay costs of issuance. Page 2 of 7 THE NOTES ARE NOT SUBJECT TO OPTIONAL REDEMPTION PRIOR TO MATURITY. THE NOTES ARE SUBJECT TO mandatory sinking fund redemption prior to maturity in part by lot, at a price equal to the principal amount thereof plus accrued interest to the date of redemption in the respective principal amounts shown below: MANDATORY REDEMPTION REDEMPTION DATE AMOUNT February 15, 2009 $135,000 February 15, 2010 200,000 February 15, 2011 275,000 February 15, 2012 290,000 February 15, 2013 (maturity) 880,000 The principal amount of the Notes required to be redeemed pursuant to the operation of such mandatory redemption requirements may be reduced, at the option of the Issuer, by the principal amount of any such Notes which, prior to the date of the mailing of notice of such mandatory redemption, (i) shall have been acquired by the Issuer and delivered to the Paying AgentlRegistraz for cancellation, or (ii) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the Issuer, and not theretofore credited against a mandatory redemption requirement. AT LEAST 30 DAYS PRIOR to the date fixed for any redemption of Notes or portions thereof prior to maturity, a written notice of such redemption shall be sent by the Paying Agent/Registraz by United States mail, first-class postage prepaid, to the Registered Owner of each Note to be redeemed at its address as it appeared on the Registration Books maintained by the Paying Agent/Registraz on the business day next preceding the day such notice of redemption is mailed. Notwithstanding the preceding sentence, as long as The Frost National Bank is the registered owner of all of the Notes, no notice of a mandatory sinking fund redemption shall be required to be given in advance of a mandatory sinking fund redemption date. Any notice of redemption so mailed shall be conclusively presumed to have been duly given irrespective of whether received by the Registered Owner. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registraz for the payment of the required redemption price for the Notes or portions thereof which aze to be so redeemed. If such written notice of redemption is sent and if due provision for such payment is made, all as provided above, the Notes or portions thereof which aze to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the Registered Owner to receive the redemption price from the Paying Agent/Registraz out of the funds provided for such payment. If a portion of any Note shall be redeemed a substitute Note or Notes having the same maturity date, bearing interest at the same Page 3 of 7 SPECIMEN rate, in any denomination or denominations of $100,000 of any integral multiple of $5,000 in excess thereof, at the written request of the Registered Owner, and in an aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Owner upon the surrender thereof for cancellation, at the expense of the Issuer, all as provided in the Note Order. ALL NOTES OF THIS SERIES are issuable solely as fully registered Notes, without interest coupons, in the denomination of $100,000 and any integral multiple of $5,000 in excess thereof (an "Authorized Denomination"). As provided in the Note Order, this Note, or any unredeemed portion hereof, may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred and exchanged for a like aggregate principal amount of fully registered Notes, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case may be, having the same Authorized Denomination of Authorized Denominations as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case maybe, upon surrender of this Note to the Paying Agent/Registrar for cancellation, all in accordance with the form and procedures set forth in the Note Order. Among other requirements for such assignment and transfer, the Registered Owner must provide the Issuer and the Paying Agent/Registrar with an investment letter, executed by the transferee, similar in content and effect to the original investment letter provided by The Frost National Bank (as the original purchaser of this Note), and this Note must be presented and surrendered to the Paying Agent/Registrar at the Designated Office, together with proper instruments of assignment, in form and with guarantee of signatures satisfactory to the Paying Agent/Registrar, evidencing assignment of this Note or any portion or portions hereof in an Authorized Denomination to the assignee or assignees in whose name or names this Note or any such portion or portions hereof is or are to be registered. The form of Assignment printed or endorsed on this Note may be executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Paying Agent/Registrar may be used to evidence the assignment of this Note or any portion or portions hereof from time to time by the Registered Owner. The Paying Agent/Registrar'sreasnnable standard or customary fees and charges for transferring and exchanging any Note or portion thereof shall be paid by the Issuer, but any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer or exchange as a condition precedent to the exercise of such privilege. The Paying Agent/Registrar shall not be required to make any such transfer or exchange (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or, (ii) with respect to any Note or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date; provided, however, such limitation of transfer shall not be applicable to an exchange by the Registered Owner of an unredeemed balance of a Note called for redemption in part. IN THE EVENT any Paying Agent/Registrar for the Notes is changed by the issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Note Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Notes. Page 4 of 7 IT IS HEREBY CERTIFIED, RECITED, AND COVENANTED that this Note has been duly and validly authorized, issued, and delivered; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Note have been performed, existed, and been done in accordance with law; that this Note is a general obligation of the Issuer, issued on the full faith and credit thereof; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Note, as such interest comes due, and as such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and have been pledged for such payment within the limits provided by law. THE ISSUER ALSO HAS RESERVED THE RIGHT to amend the Note Order as provided therein, and under some (but not all) circumstances amendments thereto must be approved by the Registered Owners of a majority in aggregate principal amount of the outstanding Notes. BYBECOMING THE REGISTERED OWNER of this Note, the Registered Owner thereby acknowledges all of the terms and provisions of the Note Order, agrees to be bound by such terms and provisions, acknowledges that the Note Order is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Note and the Note Order constitute a contract between each Registered Owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed with the manual or facsimile signature of the County Judge of the Issuer and countersigned with the manual or facsimile signature of the County Clerk of the Issuer, and has caused the official seal of the Issuer to be duly impressed, or placed in facsinle, on this Note. . ~~ unty Clerk Kerr County, Texas JI"CLl ICI CIV __ --- f._ e Kerr County, Texas ~~5g10NERS ~ ~~a ~~ ~ ~ Page 5 of 7 COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Note has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Note has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this (COMPTROLLER'S SEAL) ~IF~K s ~, ~:sQa 1~~it~ ~~ Comptroller of Public Accounts of the State of Texas PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE (To be executed if this Note is not accompanied by an executed Registration .Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Note has been issued under the provisions of the Note Order described in the text of this Note; and that this Note has been issued in exchange for a note or notes, or a portion of a note or notes of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated: THE FROST NATIONAL BANK San Antonio, Texas Paying Agent/Registrar SPECIMEN By Authorized Representative Page 6 of 7 ASSIGNMENT FOR VALUE RECEIVED, the undersigned Registered Owner of this Note, or duly authorized representative or attorney thereof, hereby assigns this Note to / ~ (Assignee's Social Security or (Print or typewrite Assignee's name and address, Taxpayer Identification Number) including zip code) and hereby irrevocably constitutes and appoints attorney to register the transfer of the within Note on the books kept for registration thereof, with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. SPECIMEN NOTICE: The signature above must correspond with the name of the Registered Owner as it appears upon the front of this Note in every particular, without alteration or enlargement or any change whatsoever. Page 7 of 7 CERTIFICATE OF COUNTY AUDITOR STATE OF TEXAS COUNTY OF KERB I, Jeannie Hargis, County Auditor of KExIt CotnvZ'Y, TE~c.~,S, hereby certify in connection with the issuance of $1,780,000 in principal amount flfKERtt COUNTY, TEXAS TAX NOTES, SERIES 2008 (the "Notes")that in my capacity as County Auditor, and in compliance with Section 1431.002, Texas Government Code (which provides that the Commissioners Court may authorize the issuance of the Notes "on the recommendation of the county auditor"), I recommended to the Commissioners Court the issuance of the Notes on the financial terms, and for the purpose of financing the "Projects", set forth in the Order authorizing the issuance of the Notes approved by the Commissioners Court on February 25, 2008. Executed this 25~' day of February, 2008 GPI , eannie Hargis County Auditor Ken County, Texas GENERAL CERTIFICATE THE STATE OF TEXAS COUNTY OF KERB We, the undersigned officers of KERB COUNTY, TEXAS (the "Issuer"), hereby certify as follows: 1. This certificate is executed for and on behalf of the Issuer with reference to the issuance of the proposed KERB COUNTY, TEXAS TAX NOTES, SERIES 2008, dated March I, 2008, in the principal amount of $1,780,000 (the "Notes"). 2. All meetings of the Commissioners Court of the County at which action was taken in preparation for or in connection with the issuance of the Notes occurred at the usual designated meeting place, being the Kerr County Courthouse. 3. No litigation of any nature has ever been filed pertaining to, affecting, questioning, or contesting: (a) the ordinance which authorized the Notes; (b) the issuance, execution, delivery, payment, security or validity of the Notes, (c) the authority of the Commissioners Court and the officers of the Issuer to issue, execute and deliver the Notes, (d) the validity of the corporate existence of the Issuer, or (e) the current tax rolls of the Issuer; and no litigation is pending pertaining, affecting, questioning, or contesting the current boundaries of the Issuer. 4. Attached to this certificate and marked Exhibit A is a true, full and correct schedule and statement of the proposed Notes, and of all presently outstanding tax indebtedness of the Issuer, and attached hereto as Exhibit B is a combined debt service schedule for all outstanding tax bond indebtedness of the Issuer. 5. The currently effective ad valorem tax appraisal roll of the Issuer (the "Tax Roll") is the Tax Roll prepared and approved during the calendar year 2008, being the most recently approved Tax Roll of the Issuer; the taxable property in the Issuer has been appraised, assessed, and valued as required and provided by the Texas Constitution and Property Tax Code (collectively, "Texas law"); the Tax Roll for said year has been submitted to the Commissioners Court of the Issuer as required by Texas law, and has been approved and recorded by the Commissioners Court; and according to the Tax Roll for said year the net aggregate taxable value of taxable property in the Issuer (after deducting the amount of all applicable exemptions required or authorized under Texas law), upon which the annual ad valorem tax of the Issuer has been or will be imposed and levied, is $2,628,237, 894. SIGNED AND SEALED this the 25~' day of February, 2008. unty Clerk Kerr County, Texas (SEAL) ~~,`P~S'~ E~co ~ ~ ~'~~~ ~Y; $ ~ r n udge Kerr County, Texas [SIGNATURE PAGE TO GENERAL CERTIFICATE] EXHIBIT A THE PROPOSED OBLIGATIONS: Tax Notes, Series 2008, dated March 1, 2008, to be outstanding in the principal amount of $1,780,000, bearing interest and maturing as set forth in the Order authorizing said Notes. ALL PRESENTLY OUTSTANDING TAX INDEBTEDNESS: TITLE OF, OUTSTANDINGOBLICATION5 DATED' DATE CURRENT OUTSTANDING PRINCIPAL AMOUNT Limited Tax General Obligation Bonds, Series 1994 02/01/1994 $1,970,000 Certificates of Obligation, Series 2005 01/15/2005 765,000 EXHIBIT B A,~ 1~` W l ~ ~. ~ ~ r.+ a O ~ c~ I~1 6~ a .~ ~ _ x u'sri~ ~"'vr°nnr°~°o°o°o°oo°g~'o°o°oS°oggOO°op°po Yt ~' O~ O O O O O O O O O O O O O O O O S O O C O .~. 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Y E _` ~ ~ N " X ~ ~ Q E ~ C ~ Z ~ w U N ~ ~ ~ ~ ~ A C ~ T ~ O ~ U fQ N °-' y E C7 U 3 N ~~~~ ~ ._ C ~ U ~ Q ~ i l0 o ~ N ~ N ~ C ,N ~ C N d w ~ O_ .fA = ~ N ~ U 0 C E N N N N 7 t t L t N F- F- I- H Q •" N C7 C N b0 0. Kerr County, Texas $1,780,000 Tax Notes, Series 2008 Maturity Bond Coupon Interest Total Dates Maturities Rate Yield Amount Debt Service 2/15/2009 $ 135,000 3.30 3.30 $ 79,356 $ 214,356 2/15/2010 200,000 3.30 3.30 50,985 250,985 2/15/2011 275,000 3.30 3.30 43,148 318,148 2/15/2012 290,000 3.30 3.30 33,825 323,825 2/15/2013 880,000 3.30 3.30 14,520 894,520 $ 1,780,000 $ 221,834 $ 2,001,834 Page 3 SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE We, the undersigned County Judge and County Clerk, respectively, of KERR COUNTY, TEXAS (the "Issuer"), hereby certify as follows: (a) This certificate is executed and delivered with reference to the KERR COUNTY, TExas Tax NOTES, SERIES 2008, dated March 1, 2008, in the aggregate principal amount of $1,780,000, authorized by an order passed by the Commissioners Court of the Issuer on February 25, 2008 (the "Notes"). (b) Each of us signed the Notes by manually executing or causing facsimiles of our manual signatures to be printed or lithographed on each of the Notes, and we hereby adopt said facsimile signatures as our own, respectively, and declare that said facsimile signatures constitute our signatures the same as if we had manually signed each of the Notes. (c) The Notes are substantially in the form, and each of them has been duly executed and signed in the manner, prescribed in the ordinance authorizing the issuance thereof. (d) At the time we so executed and signed the Notes we were, and at the time of executing this certificate we are, the duly chosen, qualified, and acting officers indicated therein, and authorized to execute and sign the same. (e) No litigation of any nature has been filed or is now pending or, to our knowledge, threatened, to restrain or enjoin the issuance or delivery of any of the Notes, or which would affect the provision made for their payment or security, or in any manner questioning the proceedings or authority concerning the issuance of the Notes, and that so far as we know and believe no such litigation is threatened. (f) Neither the corporate existence nor boundaries of the Issuer is being contested; no litigation has been filed or is now pending or, to our knowledge, threatened, which would affect the authority of the officers of the Issuer to issue, execute, sign, and deliver any of the Notes; and no authority or proceedings for the issuance of any of the Notes have been repealed, revoked, or rescinded. (g) We have caused the official seal of the Issuer to be impressed, or printed, or lithographed on each of the Notes; and said seal on each of the Notes has been duly adopted as, and is hereby declared to be, the official seal of the Issuer. EXECUTED and delivered this MANUAL SIGNATURES MAID 18 1~8 OFFICIAL TITLES Pat Tinley, County Judge Jannett Pieper, County Clerk Before me, on this day personally appeared the foregoing individuals, known to me to be the officers whose true and genuine signatures were subscribed to the foregoing instrument in my presence. Given under my hand and seal of office this ~ '-d"S ' ~ ~ Notary Public ~~ r\ p1T ,~,P40~~~ ELSA TREVINO ~5~ 1 ~(° ~ l ~v ~: ~~ Typed Name _ Notary Public, State of Texas sa;.. ;,+s My Commission Expires ~ _ ~ ~ ~-\ ~ r °~!'~~F,E~r July 15, zoos (My Commission Expires V~-,1 (Notary Seal) [SIGNATURE PAGE TO SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE] FEDERAL TAX CERTIFICATE In General. 1.1. The undersigned is the County Judge of Kerr County, Texas (the "Issuer") 1.2. This Certificate is executed for the purpose of establishing the reasonable expectations ofthe Issuer as to future events regarding the Issuer's Tax Notes, Series 2008 (the "Notes"). The Notes are being issued pursuant to an order of the Issuer (the "Order") adopted on the date of sale of the Notes. The Order is incorporated herein by reference. 1.3. To the best of the undersigned's knowledge, information and belief, the expectations contained in this Certificate are reasonable. 1.4. The undersigned is an officer of the Issuer delegated with the responsibility of issuing and delivering the Notes. 1.5. The undersigned is not aware of any facts or circumstances that would cause him to question the accuracy of the representations made by The Frost National Bank, San Antonio, Texas (the "Purchaser") in Section 5 of this Certificate. The Purpose of the Notes and Useful Lives of Proiects. 2.1. The Notes are being issued pursuant to the Order (a) to provide for the payment of costs of issuing the Notes and (b) to (i) acquire information technology equipment including computers, servers and related software and accessories, video teleconferencing equipment and upgrading the camera system for the County Jail, camera digital system for the Juvenile Detention Center, and additional computer software for human resources and payroll and other software improvements; (ii) expand the Agricultural Barn; (iii) construct improvements to the Courthouse including repairing windows and doors; repairing and refurbushing Courthouse grounds, (including sprinkler replacement, concrete replacement and landscaping of grounds); (iv) acquire equipment primarily for use by the Road and Bridge Department including a Maintainer to replace a leased vehicle, radios to replace old units, a F-750 truck with mounted box for brush chipping, brush chipper 1800 XL, two 8-yard dump trucks, and two mowing tractors with buckets; (v) acquire equipment primarily for use by the Environmental Health Department including two trucks to replace existing vehicles; and (vi) acquire equipment primarily for use by the Animal Control Department including two trucks to replace existing vehicles (collectively, the "Projects"). 2.2. The Issuer expects that the aggregate useful lives of the Projects exceed 5 years from the later of the date the Projects are placed in service or the date on which the Notes are issued. 23. All earnings, such as interest and dividends, received from the investment of the proceeds of the Notes during the period of acquisition and construction of the Projects and not used to pay interest on the Notes, will be used to pay the costs of the Projects, unless required to be rebated and paid to the United States in accordance with section 148(f) of the Internal Revenue Code of 1986 (the "Code"). The proceeds of the Notes, together with any investment earnings thereon, are expected not to exceed the amount necessary for the governmental purpose of the Notes. The Issuer expects that no disposition proceeds will arise in connection with the Projects or the Notes. Expenditure of Notes Proceeds and Use of Projects. 3.1. The Issuer will incur, within six months after the date of issue of the Notes, a binding obligation to commence the Projects, either by entering into contracts for the construction of the Projects or by entering into contracts for architectural or engineering services for such Projects, or contracts for the development, purchase of construction materials, or purchase of equipment, for the Projects, with the amount to be paid under such contracts to be in excess of five percent of the proceeds which are estimated to be used for the cost of the Projects. 3.2. After entering into binding obligations, work on such Projects will proceed promptly with due diligence to completion. 3.3. All original proceeds derived from the sale of the Notes to be applied to the Projects and all investment earnings thereon (other than any amounts required to be rebated to the United States pursuant to section 148(f) of the Code) will be expended for the Projects no later than a date which is three years after the date of issue of the Notes. 3.4. The Order provides that allocations of proceeds to expenditures for the Projects are expected not to be later than 18 months after the later of the date of the expenditure or the date that the Projects are placed in service, but, in any event, not longer than 60 days after the earlier of five years of the date hereof or the date the Notes are retired. 3.5. The Issuer will not invest the proceeds prior to such expenditure in any guaranteed investment contract or other non-purpose investment with a substantially guaranteed yield for a period equal to or greater than four years. 3.6. Other than members ofthe general public, the Issuer expects that throughoutthe lesser ofthe term of the Notes, or the useful lives of the Projects, the only user of the Projects will be the Issuer or the Issuer's employees and agents. The Issuer will be the manager of the Projects. In no event will the proceeds of the Bonds in an amount greater than $15 million or facilities financed therewith be used for private business use. 3.7. Except as stated below, the Issuer expects not to sell or otherwise dispose of property constituting the Projects prior to the earlier of the end of such property's useful life or the final maturity of the Notes. The Order provides that the Issuer will not sell or otherwise dispose of the Projects unless the Issuer receives an opinion ofnationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Notes. 3.8. For purposes of Section 3.7 hereof, the Issuer has not included the portion of the Projects comprised of personal property that is disposed in the ordinary course at a price that is expected to be less than 25 percent ofthe original purchase price. The Issuer, upon any disposition of such property, will transfer the receipts from the disposition of such property to the general operating fund and expend such receipts within six months for other governmental programs. Interest and Sinking Fund. 4.1. A separate and special Interest and Sinking Fund has been created and established solely to pay the principal of and interest on the Notes, with a portion of the Interest and Sinking Fund constituting a bona fide debt service fund for the Notes, and money deposited into the Interest and Sinking Fund for the Notes will not be invested at a yield higher than the yield on the Notes, except during the thirteen month period beginning on the date of each such deposit of money, and the amounts received from the investment of money in the Interest and Sinking Fund will not be invested at a yield higher than the yield on the Notes, except during the one year period beginning on the date of receipt of such amounts; provided, however, and except that, if any money so deposited, and any amounts received from the investment thereof, are accumulated in the Interest and Sinking Fund and remain on hand in the Interest and Sinking Fund after thirteen months from the date of deposit of any such money or one year after the receipt of any such amounts from the investment thereof, such money and amounts, to the extent of an aggregate not exceeding the lesser of five percent of the proceeds of the Notes or $100,000 will not be subject to investment yield restrictions, and shall constitute a separate portion of the Interest and Sinking Fund. 4.2. It is expected that a portion ofthe Interest and Sinking Fund will be used primarily to achieve a proper matching of revenues collected for the Notes and debt service on the Notes within each bond year, and it is expected that such portion of the Interest and Sinking Fund will be depleted once ayear on afirst-in - first-out basis, except for a possible carryover amount which will not exceed the greater of one year's earnings on such fund or 1/12 of annual debt service payable from such fund, but any money and amounts which may be accumulated in the Interest and Sinking Fund, to constitute a debt service reserve fund for the Notes as described in Section 4. I, above, shall constitute a separate portion of the Interest and Sinking Fund, and will not be depleted annually, and will not be subject to yield restrictions; provided that in no event will such debt service reserve fund portion of the Interest and Sinking Fund ever exceed the lesser of five percent of the proceeds of the Notes or $100,000. 5. Yield. All of the Notes have been purchased by the Purchaser, who is acquiring as the first buyer of the Notes and not for the present purposes of resale, at a purchase price equal to 100 percent of the stated principal amount thereof. The Purchaser neither has nor will offer the Notes to the public. The Purchaser is not acquiring the Notes from the Issuer inconsideration for the payment of property, other than money. Invested Sinking Fund Proceeds. Replacement Proceeds. 6. I . The Issuer has, in addition to the moneys received from the sale of the Notes, certain other moneys that are invested in various funds which are pledged for various purposes. These other funds are not available to accomplish the purposes described in Section Z of this Certificate. 6.2. Other than the Interest and Sinking Fund, there are, and will be, no other funds or accounts established, or to be established, by or on behalf of the Issuer (a) which are reasonably expected to be used, or to generate earnings to be used, to pay debt service on the Notes, or (b) which are reserved or pledged as collateral for payment of debt service on the Notes and for which there is reasonable assurance that amounts therein will be available to pay such debt service ifthe Issuer encounters financial difficulties. Accordingly, there are no other amounts constituting "gross proceeds" of the Notes, within the meaning of section 148 of the Code. Other Obli atg ions. There are no other obligations of the Issuer that (a) are sold at substantially the same time as the Notes, i.e., within ] 5 days of the date of sale of the Notes, (b) are sold pursuant to a common plan of financing with the Notes, and (c) will be payable from the same source of funds as the Notes. Federal Tax Audit Responsibilities. The Issuer acknowledges that in the event of an examination by the Internal Revenue Service (the "Service") to determine compliance ofthe Notes with the provisions ofthe Code as they relate totax-exempt obligations, the Issuer will respond, and will direct its agents and assigns to respond, in a commercially reasonable manner to any inquiries from the Service in connection with such an examination. The Issuer understands and agrees that the examination may be subject to public disclosure under applicable Texas law. Record Retention. The Issuer has covenanted in the Order that it will comply with the requirements of the Code relating to the exclusion of the interest on the Notes under section 103 of the Code. The Service has determined that certain materials, records and information should be retained by the issuers oftax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under section 103 of the Code. ACCORDINGLY, THE ISSUER SHALL TAKE STEPS TO ENSURE THAT ALL MATERIALS, RECORDS AND INFORMATION NECESSARY TO CONFIRM THE EXCLUSION OF THE INTEREST ON THE NOTES UNDER SECTION 103 OF THE CODE ARE RETAINED FOR THE PERIOD BEGINNING ON THE ISSUE DATE OF THE NOTES AND ENDING THREE YEARS AFTER THE DATE THE NOTES ARE RETIRED. The Issuer acknowledges receipt of the letter attached hereto as Exhibit "B" which, in part, discusses specific guidance by the Service with respect to the retention of records relating to tax-exempt bond transaction. The Issuer also acknowledges that the letter does not constitute an opinion of Bond Counsel as to the proper record retention policy applicable to any specific transaction. 10. Rebate to United States. The Issuer has covenanted in the Order that it will comply with the requirements of the Code, including section 148(f) of the Code, relating to the required rebate to the United States. Specifically, the Issuer will take steps to ensure that all earnings on gross proceeds of the Notes in excess of the yield on the Notes required to be rebated to the United States will be timely paid to the United States. The Issuer acknowledges receipt of the memorandum attached hereto as Exhibit "A" which discusses regulations promulgated pursuant to section 148(f) of the Code. This memorandum does not constitute an opinion of Bond Counsel as to the proper federal tax or accounting treatment of any specific transaction. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] DATED: MAK 1 ~' ~~QB KERB COUNTY, TEXAS B~ udge The undersigned represents that, to the best of the undersigned's lrnowledge, information and belief, the representations contained in Section 5 of this Federal Tax Certificate are accurate. THE FROST NATIONAL BANK By. t~` erald E. Y ,Senior Vice President Exhibit "A" LAW OFFICES M~CALL, PARKHURST & NORTON L.L.P. 600 CONORESS AVENUE 717 NORTH HARW000 700 N. ST. MARY'S STREET 1250 ONE AMERICAN CENTER NINTH FLOOR 1525 ONE RIVERWALK PLACE AUSTIN, TEXAS 78701-72A8 DALLAS, TEXAS 75201-8587 SAN ANTONIO, TEXAS 78205-~50~ TELEPHONE: (512) 478-3805 TELEPHONE: (214) 754-9200 TELEPHONE: (210) 2252800 FACSIMILE: (512) 472-0871 FACSIMILE: (214) 7549250 FACSIMILE: (210) 225-2994 January 1, 2006 ARBITRAGE REBATE REGULATIONS© The arbitrage rebate requirements set forth in section 148(f) of the Internal Revenue Code of 1986 (the "Code") generally provide that in order for interest on any issue of bonds' to be excluded from gross income (i.e.,tax-exempt) the issuer must rebate to the United States the sum of, (1) the excess of the amount earned on all "nonpurpose investments" acquired with "gross proceeds" of the issue over the amount which would have been earned if such investments had been invested at a yield equal to the yield on the issue, and (2) the earnings on such excess earnings. On June 18, 1993, the U.S. Treasury Department promulgated regulations relating to the computation of arbitrage rebate and the rebate exceptions. These regulations, which replace the previously-published regulations promulgated on May 15, 1989, and on May 18, 1992, are effective for bonds issued after June 30, 1993. This memorandum was prepared by McCall, Parkhurst & Horton L.L.P. and provides a general discussion of these arbitrage rebate regulations. This memorandum does not otherwise discuss the general arbitrage regulations, other than as they may incidentally relate to rebate. This memorandum also does not attempt to provide an exhaustive discussion of the arbitrage rebate regulations and should not be considered advice with respect to the arbitrage rebate requirements as applied to any individual or governmental unit or any specific transaction. Any tax advice contained in this memorandum is of a general nature and is not intended to be used, and should not be used, by any person to avoid penalties under the Code. McCall, Parkhurst & Horton L.L.P. remains available to provide legal advice to issuers with respect to the provisions of these tax regulations but recommends that issuers seek competent financial and accounting assistance in calculating the amount of such issuer's rebate liability under section 148(f) of the Code and in making elections to apply the rebate exceptions. 1 In this memorandum the word "bond" is defined to include any bond, note, certificate, financing lease or other obligation of an issuer. Copyright 2006 by Harold T. Flanagan, McCall, Parkhurst & Horton L.L.P. All rights reserved. Effective Dates The regulations promulgated on June 18,1993, generally apply to bonds delivered after June 30, 1993, although they do permit an issuer to elect to apply the rules to bonds issued prior to that date. The temporary regulations adopted by the U.S. Treasury Department in 1989 and 1992 incorporated the same effective dates which generally apply for purposes of section 148(f) of the Code. As such, the previous versions of the rebate regulations generally applied to bonds issued between August 1986 and June 30,1993 (or, with an election, to bonds issued prior to August 15, 1993). The statutory provisions of section 148(f) of the Code, other than the exception for construction issues, apply to all bonds issued after August 15, 1986, (for private activity bonds) and August 31, 1986, (for governmental public purpose bonds). The statutory exception to rebate applicable for construction issues generally applies if such issue is delivered after December 19, 1989. The regulations provide numerous transitional rules for bonds sold prior to July 1,1993. Moreover, since, under prior law, rules were previously published with respect to industrial development bonds and mortgage revenue bonds, the transitional rules contained in these regulations permit an issuer to elect to apply certain of these rules for computing rebate onpre- 1986 bonds. The regulations provide for numerous elections which would permit an issuer to apply the rules (other than 18-month spending exception) to bonds which were issued prior to July 1, 1993 and remain outstanding on June 30, 1993. Due to the complexity of the regulations, it is impossible to discuss in this memorandum all circumstances for which specific elections are provided. If an issuer prefers to use these final version of rebate regulations in lieu of the computational method stated under prior law (e.g., due to prior redemption) or the regulations, please contact McCall, Parkhurst & Horton L.L.P. for advice as to the availability of such options. Future Value Comautation Method The regulations employ an actuarial method for computing the rebate amount based on the future value of the investment receipts (i.e., earnings) and payments. The rebate method employs atwo-step computation to determine the amount of the rebate payment. First, the issuer determines the bond yield. Second, the issuer determines the arbitrage rebate amount. The regulations require that the computations be made at the end of each five-year period and upon final maturity of the issue (the "computation dates"). THE FINAL MATURITY DATE WILL ACCELERATE IN CIRCUMSTANCES IN WHICH THE BONDS ARE OPTIONALLY REDEEMED PRIOR TO MATURITY. AS SUCH, IF BONDS ARE REFUNDED OR OTHERWISE REDEEMED, THE REBATE MAY BE DUE EARLIER THAN INITIALLY PROJECTED. In orderto accommodate accurate record-keeping and to assure that sufficient amounts will be available for the payment of arbitrage rebate liability, however, we recommend that the computations be performed at least annually. Please refer to other materials provided by McCall, Parkhurst & Horton L.L.P. relating to federal tax rules regarding record retention. Underthe future value method, the amount of rebate. is determined by compounding the aggregate earnings on all the investments from the date of receipt by the issuer to the computation date. Similarly, a payment for an investment is future valued from the date that the payment is made to the computation date. The receipts and payments are future valued at a discount rate equal to the yield on the bonds. The rebatable arbitrage, as of any McCall, Parkhurst 8~ Horton L.L.P. -Page 2 computation date, is equal to the excess of the (1) future value of all receipts from investments (i.e., earnings), over (2) the future value of all payments. The following example is provided in the regulations to illustrate how arbitrage rebate is computed under the future value method for affixed-yield bond: "On January 1, 1994, City A issues a fixed yield issue and invests all the sale proceeds of the issue ($49 million). There are no other gross proceeds. The issue has a yield of 7.0000 percent per year compounded semiannually (computed on a 30 day month/360 day year basis). City A receives amounts from the investment and immediately expends them for the governmental purpose of the issue as follows: Date Amount 2/1/1994 $ 3,000,000 4/1 /1994 5,000,000 6/1 /1994 14,000,000 9/1 /1994 20,000,000 7/1 /1995 10,000,000 City A selects a bond year ending on January 1, and thus the first required computation date is January 1, 1999. The rebate amount as of this date is computed by determining the future value of the receipts and the payments for the investment. The compounding interval is each 6-month (or shorter) period and the 30 day month/360 day year basis is used because these conventions were used to compute yield on the issue. The future value of these amounts, plus the computation credit., as of January 1, 1999, is: Date Receiats (PaXments) FY (7.0000 percent) 01/1/1994 ($49,000,000) ($69,119,339) 02/1 /1994 3,000,000 4,207,602 0411 /1994 5,000,000 6,932,715 06/1 /1994 14,000,000 19,190,277 09/1 /1994 20,000,000 26,947,162 01!1/1995 (1,000) (1,317) 07/1 /1995 10,000,000 12,722,793 01 /1 /1996 (1,000) X1,229) Rebate amount (01/01/1999) General Method for Computing Yield on Bonds $878.664" In general, the term "yield," with respect to a bond, means the discount rate that when used in computing the present value of all unconditionally due payments of principal and interest and all of the payments for a qualified guarantee produces an amount equal to the issue price of the bond. The term "issue price" has the same meaning as provided in sections McCall, Parkhurst 8~ Horton L.L.P. -Page 3 1273 and 1274 of the Code. That is, if bonds are publicly offered (i.e., sold by the issuer to a bond house, broker or similar person acting in the capacity of underwriter or wholesaler), the issue price of each bond is determined on the basis of the initial offering price to the public (not to the aforementioned intermediaries) at which price a substantial amount of such bond was sold to the public (not to the aforementioned intermediaries). The "issue price" is separately determined for each bond (i.e., maturity) comprising an issue. The regulations also provide varying periods for computing yield on the bonds depending on the method by which the interest payment is determined. Thus, for example, yield on an issue of bonds sold with variable interest rates (i.e., interest rates which are reset periodically based on changes in market) is computed separatelyforeach annual period ending on the first anniversary of the delivery date that the issue is outstanding. In effect, yield on a variable yield issue is determined on each computation date by "looking back" at the interest payments for such period. The regulations, however, permit an issuer of avariable-yield issue to elect to compute the yield for annual periods ending on any date in order to permit a matching of such yield to the expenditure of the proceeds. Any such election must be made in writing, is irrevocable, and must be made no later than the earlier of (1) the fifth anniversary date, or (2) the final maturity date. Yield on a fixed interest rate issue (i.e., an issue of bonds the interest rate on which is determined as of the date of the issue) is computed over the entire term of the issue. Issuers of fixed-yield issues generally use the yield computed as of the date of issue for all rebate computations. Such yield on fixed-yield issues generally is recomputed only if (1) the issue is sold at a substantial premium, may be retired within five years of the date of delivery, and such date is earlier than its scheduled maturity date, or (2) the issue is astepped-coupon bond. In such cases, the regulations require the issuer to recompute the yield on such issues by taking into account the early retirement value of the bonds. Similarly, recomputation may occur in circumstances in which the issuer or bondholder modify or waive certain terms of, or rights with respect to, the issue or in sophisticated hedging transactions. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL. PARKHURST & NORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. For purposes of determining the principal or redemption payments on a bond, different rules are used for fixed-rate and variable-rate bonds. The payment is computed separately on each maturity of bonds rather than on the issue as a whole. In certain circumstances, the yield on the bond is determined by assuming that principal on the bond is paid as scheduled and that the bond is retired on the final maturity date for the stated retirement price. For bonds subject to early redemption or stepped-coupon bonds, described above, or for bonds subject to mandatory early redemption, the yield is computed assuming the bonds are paid on the early redemption date for an amount equal to their value. Premiums paid to guarantee the payment of debt service on bonds are taken into account in computing the yield on the bond. Payments for guarantees are taken into account by treating such premiums as the payment of interest on the bonds. This treatment, in effect, raises the yield on the bond, thereby permitting the issuer to recover such fee with excess earnings. McCall, Parkhurst 8~ Horton L.L.P. -Page 4 The guarantee must be an unconditional obligation of the guarantor enforceable by the bondholder for the payment of principal or interest on the bond yr the tender price of a tender bond. The guarantee may be in the form of an insurance policy, surety bond, irrevocable letter or line of credit, or standby purchase agreement. Importantly, the guarantor must be legally entitled to full reimbursement for any payment made on the guarantee either immediately or upon commercially reasonable repayment terms. The guarantor may not be a co-obligor of the bonds or a user of more than 10 percent of the proceeds of the bonds. Payments for the guarantee may not exceed a reasonable charge for the transfer of credit risk. This reasonable charge requirement is not satisfied unless it is reasonably expected that the guarantee will result in a net present value savings on the bond (i.e., the premium does not exceed the present value of the interest savings resulfing by virtue of the guarantee). If the guarantee is entered into after June 14, 1989, then any fees charged for the nonguarantee services must be separately stated or the guarantee fee is not recoverable. The regulations also treat certain "hedging" transactions in a manner similar to qualified guarantees. "Hedges" are contracts, e.g., interest rate swaps, futures contracts or options, which are intended to reduce the risk of interest rate fluctuations. Hedges and other financial derivatives are sophisticated and ever-evolving financial products with which a memorandum, such as this, can not readily deal. /N SUCH CIRCUMSTANCES. ISSUERS ARE ADVISED TO CONSULT McCALL PARKHURST 8 NORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Earnings on Nonpurpose Investments The arbitrage rebate provisions apply only to the receipts from the investment of "gross proceeds" in "nonpurpose investments." Forthis purpose, nonpurpose investments are stock, bonds or other obligations acquired with the gross proceeds of the bonds for the period prior to the expenditure of the gross proceeds for the ultimate purpose. For example, investments deposited to construction funds, reserve funds (including surplus taxes or revenues deposited to sinking funds) or other similarfunds are nonpurpose investments. Such investments include only those which are acquired with "gross proceeds." For this purpose, the term "gross proceeds" includes original proceeds received from the sale of the bonds, investment earnings from the investment of such original proceeds, amounts pledged to the payment of debt service on the bonds or amounts actually used to pay debt service on the bonds. The regulations do not provide a sufficient amount of guidance to include an exhaustive list of "gross proceeds" for this purpose; however, it can be assumed that "gross proceeds" represent all amounts received from the sale of bonds, amounts earned as a result of such sale or amounts (including taxes and revenues) which are used to pay, or secure the payment of, debt service for the bonds. The total amount of "gross proceeds" allocated to a bond generally can not exceed the outstanding principal amount of the bonds. The regulations provide that an investment is allocated to an issue for the period (1) that begins on the date gross proceeds are used to acquire the investment, and (2) that ends on the date such investment ceases to be allocated to the issue. In general, proceeds are allocated to a bond issue until expended for the ultimate purpose for which the bond was issued or for which such proceeds are received (e.g., construction of abond-financed facility or payment of debt service on the bonds). Deposit of gross proceeds to the general fund of the McCall, Parkhurst & Horton L.L.P. -Page 5 issuer (or other fund in which they are commingled with revenues or taxes) does not eliminate or ameliorate the Issuer's obligation to compute rebate in most cases. As such, proceeds commingled with the general revenues of the issuer are not "freed-up" from the rebate obligation. An exception to this commingling limitation for bonds, other than private activity bonds, permits "investment earnings" (but not sale proceeds or other types of gross proceeds) to be considered spent when deposited to a commingled fund if those amounts are reasonably expected to be spent within six months. Other than for these amounts, issuers may consider segregating investments in orderto more easily compute the amount of such arbitrage earnings by not having to allocate investments. Special rules are provided for purposes of advance refundings. These rules are too complex to discuss in this memorandum. Essentially, the rules relating to refundings, however, do not require that amounts deposited to the escrow fund to defease the prior obligations of the issuer be subject to arbitrage rebate to the extent that the investments deposited to the escrow fund do not have a yield in excess of the yield on the bonds. Any loss resulting from the investment of proceeds in an escrow fund below the yield on the bonds, however, may be recovered by combining those investments with investments deposited to other funds, e.g., reserve or construction funds. The arbitrage regulations also provide an exception to the arbitrage limitations for the investment of bond proceeds in tax-exempt obligations. As such, investment of proceeds in tax exempt bonds eliminates the Issuer's rebate obligation. A caveat; this exception does not apply to gross proceeds derived allocable to a bond, which is not subject to the alternative minimum tax under section 57(a)(5) of the Code, ifinvested intax-exempt bonds subject to the alternative minimum tax, i.e., "private activity bonds." Such "AMT-subject" investment is treated as a taxable investment and must comply with the arbitrage rules, including rebate. Earnings from these tax-exempt investments are subject to arbitrage restrictions, including rebate. Similarly, the investment of gross proceeds in certain tax-exempt mutual funds are treated as a direct investment in the tax-exempt obligations deposited in such fund. While issuers may invest in such funds for purposes of avoiding arbitrage rebate, they should be aware that if "private activity bonds" are included in the fund then a portion of the earnings will be subject to arbitrage rebate. Issuers should be prudent in assuring that the funds do not contain private activity bonds. The arbitrage regulations provide a number of instances in which earnings will be imputed to nonpurpose investments. Receipts generally will be imputed to investments that do not bear interest at an arm's-length (i.e., market) interest rate. As such, the regulations adopt a "market price" rule. In effect, this rule prohibits an issuer from investing bond proceeds in investments at a price which is higher than the market price of comparable obligations, in order to reduce the yield. Special rules are included for determining the market price for investment contracts, certificates of deposit and certain U.S. Treasury obligations. For example, to establish the fair market value of investment contracts a bidding process between three qualified bidders must be used. The fair market value of certificates of deposit which bear a fixed interest rate and are subject to an early withdrawal penalty is its purchase price if that price is not less than the yield on comparable U.S. Treasury obligations and is the highest yield available from the institution. In any event, a basic "common sense" rule-of-thumb that can be used to determine whether a fair market value has been paid is to ask whether the general McCall, Parkhurst & Horton L.L.P. -Page 6 funds of the issuer would be invested at the same yield or at a higher yield. An exception to this market price rule is available for United States Treasury Obligations -State or Local Government Series in which case the purchase price is always the market price. Reimbursement and Working Capital The regulations provide rules for purposes of determining whether gross proceeds are used for working capital and, if so, at what times those proceeds are considered spent. In general, working capital financings are subject to many of the same rules that have existed since the mid-1970s. For example, the regulations generally continue the 13-month temporary period. By adopting a "proceeds-spent-last" rule, the regulations also generally require that an issuer actually incur a deficit (i.e., expenditures must exceed receipts) for the computation period (which generally corresponds to the issuer's fiscal year). Also, the regulations continue to permit an operating reserve, but unlike prior regulations the amount of such reserve may not exceed five percent of the issuer's actual working capital expenditures for the prior fiscal year. Another change made by the regulations is that the issuer may not finance the operating reserve with proceeds of atax-exempt obligation. Importantly, the regulations contain rules for determining whether proceeds used to reimburse an issuer for costs paid prior to the date of issue of the obligation, in fact, are considered spent at the time of reimbursement. These rules apply to an issuer who uses general revenues for the payment of all or a portion of the costs of a project then uses the proceeds of the bonds to reimburse those general revenues. Failure to comply with these rules would result in the proceeds continuing to be subject to federal income tax restrictions, including rebate. To qualify for reimbursement, a cost must be described in an expression (e.g., resolution, legislative authorization) evidencing the issuer's intent to reimburse which is made no later than 60 days after the payment of the cost. Reimbursement must occur no later than 18 months after the later of (1) the date the cost is paid or (2) the date the project is placed in service. Except for projects requiring an extended construction period or small issuers, in no event can a cost be reimbursed more than three years after the cost is paid. Reimbursement generally is not permitted forworking capital; only capital costs, grants and loans may be reimbursed. Moreover, certain anti-abuse rules apply to prevent issuers from avoiding the limitations on refundings. IN CASES INVOLVING WORKING CAPITAL OR REIMBURSEMENT, ISSUERS ARE ADVISED TO CONTACT McCALL, PARKHURST & HORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION. Rebate Payments Rebate payments generally are due 60 days after each installment computation date. The interim computation dates occur each fifth anniversary of the issue date. The final computation date is on the latest of (1) the date 60 days after the date the issue of bonds is no longer outstanding, (2) the date eight months after the date of issue for certain short-term obligations (i.e., obligations retired within three years), or (3) the date the issuer no longer reasonably expects any spending exception, discussed below, to apply to the issue. On such McCall, Parkhurst 8~ Horton L.L.P. -Page 7 payment dates, other than the final payment date, an issuer is required to pay 90 percent of the rebatable arbitrage to the United States. On the final payment date, an issuer is required to pay 100 percent of the remaining rebate liability. Failure to timely pay rebate does not necessarily result in the loss of tax-exemption. Late payments, however, are subject to the payment of interest, and unless waived, a penalty of 50 percent (or, in the case of private activity bonds., other than qualified 501(c)(3) bonds,100 percent) of the rebate amount which is due. IN SUCH CIRCUMSTANCES, ISSUERS ARE ADVISED TO CONSULT McCALL, PARKHURST & NORTON L.L.P. TO ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THESE TRANSACTIONS. Rebate payments are refundable. The issuer, however, must establish to the satisfaction of the Commissioner of the Internal Revenue Service that the issuer paid an amount in excess of the rebate and that the recovery of the overpayment on that date would not result in additional rebatable arbitrage. An overpayment of less than $5,000 may not be recovered before the final computation date. Alternative Penalty Amount In certain cases, an issuer of a bond the proceeds of which are to be used for construction may elect to pay a penalty, in lieu of rebate. The penalty may be elected in circumstances in which the issuer expects to satisfy the two-year spending exception which is more fully described under the heading "Exceptions to Rebate." The penalty is payable, if at all, within 80 days after the end of each six-month period. This is more often than rebate. The election of the alternative penalty amount would subject an issuer, which fails the two-year spend-out requirements, to the payment of a penalty equal to one and one-half of the excess of the amount of proceeds which was required to be spent during that period over the amount which was actually spent during the period. The penalty has characteristics which distinguish it from arbitrage rebate. First, the penalty would be payable without regard to whether any arbitrage profit is actually earned. Second, the penalty continues to accrue until either (1) the appropriate amount is expended or (2) the issuer elects to terminate the penalty. To be able to terminate the penalty, the issuer must meet specific requirements and, in some instances, must pay an additional penalty equal to three percent of the unexpended proceeds. Exceptions to Rebate The Code and regulations provide certain exceptions to the requirement that the excess investment earnings be rebated to the United States. a. Small Issuers. The first exception provides that if an issuer (together with all subordinate issuers) during a ca/endaryeardoes not issue tax-exempt bondsZ in an aggregate z For this purpose, "private activity bonds" neither are afforded the benefit of this exception nor are taken into account for purposes of determining the amount of bonds issued. McCall, Parkhurst 8 Horton L.L.P. -Page 8 face amount exceeding $5 million, then the obligations are not subject to rebate. Only issuers with general taxing powers may take advantage of this exception. Subordinate issuers are those issuers which derive their authority to issue bonds from the same issuer, e.g., a city and a health facilities development corporation, or which are controlled by the same issuer, e.g., a state and the board of a public university. In the case of bonds issued for public school capital expenditures, the $5 million cap may be increased to as much as $15 million. For purposes of measuring whether bonds in the calendar year exceed these dollar limits, current refunding bonds can be disregarded if they meet certain structural requirements. Please contact McCall, Parkhurst & Horton L.L.P. for further information. b. Spending Exceptions. Six-Month Exception. The second exception to the rebate requirement is available to alt tax-exempt bonds, all of the gross proceeds of which are expended during six months. The six month rule is available to bonds issued after the effective date of the Tax Reform Act of 1986. See the discussion of effective dates on page two. For this purpose, proceeds used for the redemption of bonds (other than proceeds of a refunding bond deposited to an escrow fund to discharge refunded bonds) can not be taken into account as expended. As such, bonds with excess gross proceeds generally can not satisfy the second exception unless the amount does not exceed the lesser of five percent or $100,000 and such de minimis amount must be expended within one year. Certain gross proceeds are not subject to the spend-out requirement, including amounts deposited to a bona fide debt service fund, to a reserve fund and amounts which become gross proceeds received from purpose investments. These amounts themselves, however, may be subject to rebate even though the originally expended proceeds were not. The Code provides a special rule far tax and revenue anticipation notes (i.e., obligations issued to pay operating expenses in anticipation of the receipt of taxes and other revenues). Such notes are referred to as TRANS. To determine the timely expenditure of the proceeds of a TRAN, the computation of the "cumulative cash flow deficit" is important. If the "cumulative cash flow deficit" (i.e., the point at which the operating expenditures of the issuer on a cumulative basis exceed the revenues of the issuer during the fiscal year) occurs within the first six months of the date of issue and must be equal to at least 90 percent of the proceeds of the TRAN, then the notes are deemed to satisfy the exception. This special rule requires, however, that the deficit actually occur, not that the issuer merely have an expectation that the deficit will occur. In lieu of the statutory exception for TRANs, the regulations also provide a second exception. Under this exception, 100 percent of the proceeds must be spent within six months, but before note proceeds can be considered spent, all other available amounts of the issuer must be spent first ("proceeds-spent-last" rule). In determining whether all available amounts are spent, a reasonable working capital reserve equal to five percent of the prior year's expenditures may be set aside and treated as unavailable. 18-Month Exception. The regulations also establish anon-statutory exception to arbitrage rebate if all of the gross proceeds (including investment earnings) are expended within 18 months afterthe date of issue. Underthis exception,15 percent of the gross proceeds must be expended within asix-month spending period, 60 percentwithin a 12-month spending period and 100 percent within an 18-month spending period. The rule permits an issuer to rely on its reasonable expectations for computing investment earnings which are included as gross McCall, Parkhurst & Horton L.L.P. -Page 9 proceeds during the first and second spending period. A reasonable retainage not to exceed five percent of the sale proceeds of the issue is not required to be spent within the 18-month period but must be expended within 30 months. Rules similar to the six-month exception relate to the definition of gross proceeds. Two Year Exception. Bonds issued after December 19, 1989 (i.e., the effective date of the Omnibus Reconciliation Act of 1989), at least 75 percent of the net proceeds of which are to be used for construction, may be exempted from rebate if the gross proceeds are spent within two years. Bonds more than 25 percent of the proceeds of which are used for acquisition or working capital may not take advantage of this exception. The exception applies only to governmental bonds, qualified 501(c)(3) bonds and private activity bonds for governmentally- owned airports and docks and wharves. The two-year exception requires that at least 10 percent of the available construction proceeds must be expended within six months after the date of issue, 45 percent within 12 months, 75 percent within 18 months and 100 percent within 24 months. The term "available construction proceeds" generally means sale proceeds of the bonds together with investmen# earnings less amounts deposited to a qualified reserve fund or used to pay costs of issuance. Under this rule, a reasonable retainage not to exceed five percent need not be spent within 24 months but must be spent within 36 months. The two-year rule also provides for numerous elections which must be made not later than the date of issuance of the bonds. Once made, the elections are irrevocable. Certain elections permit an issuer to bifurcate bond issues, thereby treating only a portion of the issue as a qualified construction bond; and, permit an issuerto disregard earnings from reserve funds for purposes of determining "available construction proceeds." Another election permits an issuer to pay the alternative penalty amount discussed above in lieu of rebate if the issuer ultimately fails to satisfy the two-year rule. Issuers should discuss these elections with their financial advisors priarto issuance of the bonds. Of course, McCall, Parkhurst & Horton L.L.P. remains available to assist you by providing legal interpretations thereof. Debt Service Funds. Additionally, an exception to the rebate requirement, whether or not any of the previously discussed exceptions are available, applies for earnings on "bona fide debt service funds." A "bona fide debt service fund" is one in which the amounts are expended within 13 months of the accumulation of such amounts by the issuer. In general, most interest and sinking funds (other than any excess taxes or revenues accumulated therein) satisfy these requirements. For private activity bonds, short term bonds (i.e., have a term of less than five years) or variable rate bonds, the exclusion is available only if the gross earnings in such fund does not exceed $100,000, for the bond year. For other bonds issued after November 11, 1988, no limitation is applied to the gross earnings on such funds for purposes of this exception. Therefore, subject to the foregoing discussion, the issuer is not required to take such amounts into account for purposes of the computation. FOR BONDS ISSUED AFTER THE EFFECTIVE DATE OF THE TAX REFORM ACT OF 1986 WHICH WERE OUTSTANDING AS OF NOVEMBER 11, 1988, OTHER THAN PRIVATE ACTIVITY BONDS, SHORT TERM BONDS OR VARIABLE RATE BONDS, AONE-TIME ELECTION MAY BE MADE TO EXCLUDE EARNINGS ON "BONA FIDE DEBT SERVICE FUNDS" WITHOUT REGARD TO THE $100,000, LIMITATION. THE ELECTION MUST BE MADE IN WRITING (AND MAINTAINED AS PART OF THE ISSUER'S BOOKS AND McCall, Parkhurst & Horton L.L.P. -Page 10 RECORDS) NO LATER THAN THE LATER OF MARCH 21,1990, OR THE FIRST DATE A REBATE PAYMENT IS REQUIRED. Conclusion McCall, Parkhurst 8~ Horton L.L.P. hopes that this memorandum will prove to be useful as a general guide to the arbitrage rebate requirements. Again, this memorandum is not intended as an exhaustive discussion nor as specific advice with respect to any specific transaction. We advise our clients to seek competent financial and accounting assistance. Of course, we remain available to provide legal advice regarding all federal income tax matters, including arbitrage rebate. If you have any questions, please feel free to contact either Harold T. Flanagan or Faust N. Bowerman at (214) 754-9200. McCall, Parkhurst & Horton L.L.P. -Page 11 Exhibit "B" M 600 CONGRESS AVENUE 1800 ONE AMERICAN CENTER AUSTIN, TEXAS 78701-3248 TELEPHONE: (512) 478-3805 FACSIMILE: (512) 472-0871 LAW OFFICES c_CALL, PARKHURST & H 717 NORTH HARWOOD NINTH FLOOR DALLAS, TEXAS 75201-6587 TELEPHONE: (214) 754-9200 FACSIMILE: (214) 754-9250 DRTON L.L.P. 700 N. ST. MARY'S STREET 1525 ONE RIVERWALK PLACE SAN ANTONIO, TEXAS 78205.3503 TELEPHONE: (210) 225-2800 FACSIMILE: (210) 225-2984 February 25, 2008 Mr. Pat Tinley County Judge 700 E. Main Street Kerrville, Texas 78028 Re: Kerr County, Texas Tax Notes, Series 2008 Dear Judge Tinley: As you know, Kerr County, Texas (the "Issuer") will issue the captioned Notes in order to provide for the acquisition and construction of the projects described in the order authorizing the issuance of the Notes. As a result of that issuance, the federal income tax laws impose certain restrictions on the investment and expenditure of amounts to be used for the projects or to be deposited to the interest and sinking fund for the captioned notes. The purpose of this letter is to set forth, in somewhat less technical language, those provisions of the tax law which require the timely use of bond proceeds and that investment of these amounts be at a yield which is not higher than the yield on the captioned notes. For this purpose, please refer to line 21(e) of the Form 8038-G included in the transcript of proceedings for the yield on the captioned notes. Generally, the federal tax laws provide that, unless excepted, amounts to be used for the projects or to be deposited to the interest and sinking fund must be invested in obligations the combined yield on which does not exceed the yield on the notes. Importantly, for purposes of administrative convenience, the notes, however, have been structured in such a way as to avoid, for the most part, this restriction on investment yield. They also contain certain covenants relating to expenditures of proceeds designed to alert you to unintentional failures to comply with the laws affecting expenditures of proceeds and dispositions ofproperty. IMPORTANTLY, THE PROCEEDS OF THE NOTES MAY NOT BE USED TO FINANCE EMPLOYEE COMPENSATION, INCLUDING SALARIES OR RETIREMENT PAYMENTS, OR TO PAY SERVICE CONTRACT EXPENSES WITHOUT SUBJECTING THE NOTES TO ADDITIONAL FEDERAL INCOME TAX REQUIREMENTS. First, the sale and investment proceeds to be used for the projects may be invested for up to three years without regard to yield. (Such amounts, however, may be subject to rebate.) Thereafter, they must be invested at or below the bond yield. Importantly, expenditure of these proceeds must be accounted in your books and records. Allocations of these expenditures must occur within l 8 months of the later of the date paid or the date the projects are completed. The foregoing notwithstanding, the allocation should not occur later than 60 days after the earlier of (1) of five years after the delivery date of the notes or (2) the date the notes are retired unless you obtain an opinion of bond counsel. Second, the interest and sinking fund is made up of amounts which are received annually for the payment of current debt service on all the Issuer's outstanding notes. Any taxes or revenues deposited to the interest and sinking fund which are to be used for the payment of current debt service on the captioned notes, or any other outstanding notes, are not subject to yield restriction. By definition, current debt service refers only to debt service to be paid within one year of the date of receipt of these amounts. For the most part, this would be debt service in the current fiscal year. These amounts deposited to the account for current debt service may be invested without regard to any constraint imposed by the federal income tax laws. Third, a portion of the interest and sinking fund is permitted to be invested without regard to yield restriction as a "minor portion." The "minor portion" exception is available for de minimis amounts of taxes or revenues deposited to the interest and sinking fund. The maximum amount that may be invested as part of this account may not exceed the lesser of five percent of the principal amount of the notes or $100,000. Accordingly, you should review the current balance in the interest and sinking fund in order to determine if such balance exceeds the aggregate amounts discussed above. Additionally, in the future it is important that you be aware of these restrictions as additional amounts are deposited to the interest and sinking fund. The amounts in this fund which are subject to yield restriction would only be the amounts which are in excess of the sum of (1) the current debt service account and (2) the "minor portion" account. Moreover, to the extent that additional notes are issued by the Issuer, whether for new money projects or for refunding, these amounts will change in their proportion. The Order contains covenants that require the Issuer to comply with the requirements of the federal tax laws relating to the tax-exempt obligations. The Internal Revenue Service (the "Service")has determined that certain materials, records and information should be retained by the issuers oftax-exempt obligations for the purpose of enabling the Service to confirm the exclusion of the interest on such obligations under the Internal Revenue Code. Accordingly, the Issuer should retain such materials, records and information for the period beginning on the issue date of the captioned notes and ending three years after the date the captioned notes are retired. Please note this federal tax law standard may vary from state law standards. The material, records and information required to be retained will generally be contained in the transcript of proceedings for the captioned notes, however, the Issuer should collect and retain additional materials, records and information to ensure the continued compliance with federal tax law requirements. For example, beyond the transcript of proceedings for the notes, the Issuer should keep schedules evidencing the expenditure of note proceeds, documents relating to the use ofbond-financed property by governmental and any private parties (e.g., leases and management contracts, if any) and schedules pertaining to the investment of note proceeds. In the event that you have questions relating to record retention, please contact us. Finally, you should notice that the order contains a covenant that limits the ability of the Issuer to sell or otherwise dispose of bond-financed property for compensation. Beginning for obligations issued after May 15, 1997 (including certain refunding notes), or in cases in which an issuer elects to apply new private activity bond regulations, such sale or disposition causes the creation of a class of proceeds referred to as "disposition proceeds." Disposition proceeds, like sale proceeds and investment earnings, are tax-restricted funds. Failure to appropriately account, invest or expend such disposition proceeds would adversely affect the tax-exempt status of the notes. In the event that you anticipate selling property, even in the ordinary course, please contact us. Obviously, this letter only presents a fundamental discussion of the yield restriction rules as applied to amounts deposited to the interest and sinking fund. Moreover, this letter does not address the rebate consequences with respect to the interest and sinking fund and you should review the memorandum attached to the Federal Tax Certificate as Exhibit "A" for this purpose. If you have certain concerns with respect to the matters discussed in this letter or wish to ask additional questions with regards to certain limitations imposed, please feel free to contact our firm. Thank you for your consideration and we look forward to our continued relationship. Very truly yours, McCALL, PARKHURST & HORTON L.L.P. cc: Mr. Thomas K. Spurgeon Fwm 8~3$-G Information Return for Tax-Exempt Governmental Obligations - Under Internal Revenue Code section 149(e) OM8 No. 1545-o7zo (Rev. November 2000) - See separate Instructions. Iet~tReven~ue~ Tservice~ Caution: if the issue price is under $700,000, use Form 8038-GC. ' Re ortin Authorit If Amended Return, check here - [ 1 Issuer's name 2 Issuer's empbyer identification number KERR COUNTY, TEXAS 74.6001494 3 Number and street (or P.O. box if mail is not delivered to street address) Room/suite 4 Report number 700 E. MAIN STREET 3 01 5 City, town, w post office, state, and ZIP code 6 Date of issue KERRVILLE, TEXAS 78028 03/18/2008 7 Name of issue TAX NOTES, SERIES 2008 8 CUSIP number NONE 9 Name and title of officer or legal representative whom the IRS may call fw more information 10 Telepfbrre rpuntter of officer a legal representative PAT TINLEY, COUNTY JUDGE ( 830 ) 792-2211 ' T e of Issue (check applicable box(es) and enter the issue price) See instructions and attach schedule 11 ^ Education , 12 ^ Health and hospital _~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ' 13 ^ Transportation ~ ~ ~ ~ ~ ~ ~ ~ ' 14 ^ Public safety. ~ ~ ~ ~ ~ 15 ^ Environment Including sewage bonds) . 16 ^ Housing 17 ^ Utilities 18 Gl7 Other. Describe - VARIOUS MUNICIPAL PROJECTS ~ ~ ~ ~ ~ ~ ~ ~ ~ ' 19 If obligations are TANs or RANs,.check box - ^ If obligations are BANS, check box - ^ 20 If obligations are in the form of a lease or installment sale check box - ^ -.,.~_.~ vcab~, uanr yr vl~rl aitons. t,om fete ror the entire issue for which this form is (a) Final maturity date ~) Issue pd~ (c) Stated redemption (d) yyEyyM~ price at maturity average maturity 21 02/15/2013 $ 1,780,000 $ 1,780,000 3.795 ea ' Uses of Proceeds of Bond Issue tncludin underwriters' discou 22 Proceeds used for accrued interest _ 23 Issue price of entire issue (enter amount from line 21, column (b)j . 24 Proceeds used for bond issuance costs Including underwriters' discount) 24 30,000 25 Proceeds used for credit enhancement . 25 -0- 28 Proceeds allocated to reasonably required reserve or replacement fund 28 -0- 27 Proceeds used to currently refund prior issues 27 -0- 28 Proceeds used to advance refund prior issues _ 28 -0- 29 Total (add lines 24 through 28) . 30 Nonrefundinq proceeds of the issue (subtract line 29 from line 23 and enter amn~~nt ha~at 1,780,000 (e) Yield 3.2944 -0- 1 30,000 31 Enter the remaining weighted average maturity of the bonds to be currently refunded . - Years 32 Enter the remaining weighted average maturity of the bonds to be advance refunded - Years 33 Enter the last date on which the refunded bonds will be called . - 34 __ Enter the dates the refunded bonds were issued - ~ ~ ~ ~ ~ ~ ~ ' ee u 35 Enter the amount of the state volume cap allocated to the issue under section 141(b)(5) 35 -0- 36a Enter the amount of gross proceeds invested or to be irrvested in a guaranteed investment contract (see instructions) 36a -0- b Enter the final maturity date of the guaranteed investment contract - 37 Pooled financings: a Proceeds of this issue that are to be used to make loans to other governmental units 37a -0- b If this issue is a loan made from the proceeds of another tax-exempt issue, check box - ^ and enter the name of the issuer - and the date of the issue - NA 38 If the issuer has designated the issue under section 265(b)(3)(B)I)(III) (small issuer exception), check box _ - 39 if the issuer has elected to pay a penalty in lieu of arbitrage rebate, check box - ^ 40 If the issuer has identified a hed e, check box - ^ Under penalties of perjury, I declare that I have examined this return and accompanying schedules and staterr~rtts, and to the ties[ of my knowledge and belief, they are true, rnrrect, and complete. Sign ~,,.~.~~ ~ Here i - --~e~w ~>a+a ~ auuronzea represen[anve \ pate For Paperwork Reduction Act Notice, see page 2 of the Instructions. 3-18-08 _' PAT TiNLEY, COUNTY JUDGE Type «print name and title Cat No. 637735 Form 8038-G (Rev. tt-zooo) LAW OFFICES M~CALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701-3248 TELEPHONE: 512 478.3805 FACSIMILE: 512 472.0871 717 NORTH HARW000 SUITE 900 DALLAS, TEXAS 75 201-8 5 87 TELEPHONE: 214 754-9200 FACSIMILE: 214 754-9250 700 N. ST. MARY~S STREET SUITE 1525 SAN ANTONIO, TEXAS 78205-3503 TELEPHONE: 210 225 2800 FACSIMILE: 210 225 - 2984 April 16, 2008 CERTIFIED MAII. RRR: 7006 2150 0000 2172 8182 Internal Revenue Service Center Ogden, Utah 84201 Re: Information Reporting -Tax-Exempt Bonds Kerr County, Texas Tax Notes, Series 2008 Ladies and Gentlemen: Pursuant to the requirements of Section 149(e) of the Internal Revenue Code of 1986, enclosed please find an original and a photocopy of Form 8038-G which is hereby submitted to you for the above-captioned bonds issued March 18, 2008. Please file the original and return the receipted copy of Form 803 8-G to the undersigned in the enclosed self-addressed, postage paid envelope. Sincerely, McCALL, PARKF-IUR.ST & HORTONL.L.P. Harold T. Flanagan HTF: ved Enclosures cc: Mr. Thomas K. Spurgeon February 25, 2008 Attorney General of the State of Texas Public Finance Division 300 W. 15 Street, 9~' Floor Austin, Texas 78701 RE: $1,780,000 KERB COUrrrY, TEXAS TAX NOTES, SERIES 2008 Ladies and Gentlemen: The captioned Notes are being sent to your office, and it is requested that you examine and approve the Notes in accordance with law. After such approval, please deliver the Notes to the Comptroller of Public Accounts for registration. Enclosed herewith is a signed but undated copy of the SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE for said Notes. You are hereby authorized and directed to date said CERTIFICATE concurrently with the date of approval of the Notes. If any litigation or contest should develop pertaining to the Notes or any other matters covered by said CERTIFICATE, the undersigned will notify you thereof immediately by telephone. With this assurance you can rely on the absence of any such litigation or contest, and on the veracity and currency of said CERTIFICATE, at the time you approve the Notes, unless you are notified otherwise as aforesaid. Sincerely yours, KERB COUNTY, TEXAS B oun y Judge February 25, 2008 Texas State Comptroller of Public Accounts Cash and Securities Management Division Thomas Jefferson Rusk Building 208 East 10th Street, 4th Floor, Room 448 Austin, Texas 78701-2407 Attn: Melissa Mora RE: $1,780,000 KEItIt COUNTY, TExAS TAX NOTES, SERIES 2008 Ladies and Gentlemen: The Attorney General will deliver to you the above described issues of obligations. At such time as you have registered such obligations, this will be your authority to deliver them to an authorized representative of McCall, Parkhurst & Horton L.L.P., who will deliver said obligations to the bank of delivery for delivery to the purchasers thereof. At the time you have registered the obligations, please release to an authorized representative of McCall, Parkhurst & Horton L.L.P., five copies of the Attorney General's opinion and the Comptroller's Signature Certificate covering said issue of obligations. Sincerely yours, KERB COUNTY, TEXAS By t ounty edge cc: Attorney General of Texas RBC ' . I~~3C~E'~ V4t1DUt ~': AkG SCRMtC[5 Ol16'.N[p BY 4@C [ARIk 4ku SGNF.@ ~kC. M€M@CN kvkE~S~PC. FINAL DELIVERY, SETTLEMENT & CLOSING PROCEDURES for Kerr County, Texas $1,780,000 Tax Notes, Series 2008 Closing Date Closing: Tuesday, March 18, 2008 The closing on the above-referenced notes (the "Notes") will be held on Tuesday, March 18, 2008, at 11:00 A.M., CDT (the "Closing") via teleconference at the offices of McCall, Parkhurst & Horton L.L.P. 1525 One River Walk Place, San Antonio, Texas 78205, Attn: Tom Spurgeon. Those parties expected to participate include: Party Title/Role Comaanv Phone Judge Pat Tinley County Judge Kerr County (830) 792-2212 Ms. Paula J. Hargis, CPA County Auditor Kerr County (830) 792-2275 Mr. Robert Henderson Financial Advisor RBC Capital Markets (210) 805-1118 Mr. Dusty Traylor Financial Advisor RBC Capital Markets (210) 805-1117 Mr. Tom Spurgeon Bond Counsel McCall, Parkhurst & Horton L.L.P. (210) 225-2800 Ms. Kathy Cooper Bond Counsel McCall, Parkhurst & Horton L.L.P. (210) 225-2800 Mr. Noel Valdez Bond Counsel McCall, Parkhurst & Horton L.L.P. (210) 225-2800 Mr. Jerry Yost Purchaser Frost Bank (210) 220-4077 Ms. Diane Lewis Purchaser/Paying AgenURegistrar Frost Bank (210) 220-4579 Hoang T. Vu Purchaser's Counsel Andrews Kurth LLP (7l3) 220-3879 Sources and Uses of Funds Tax Notes Sources of Funds Series 2008 Principal Amount ofthe Notes $1,780,000.00 Total Sources $1,780,000.00 Uses of Funds Deposit to Project Fund $1,750,720.00 Costs of Issuance $29,280.00 Total Uses $1,780,000.00 Kerr County, Texas Page 2 RECEIPT OF FUNDS 1. Pursuant to the terms of the private placement letter, The Frost National Bank, San Antonio, Texas (the "Purchaser"), as the Purchaser of the Notes will internally transfered to the Paying AgendRegistrar on the Closing Date the total purchase price amount of $1,780,000.00 (representing the original principal amount of the Notes) and no accrued interest. Upon transfer of said funds, the Paying Agent/Registrar shall promptly confirm such transfers via a telephone call to Bond Counsel. Proceeds of The Notes: $ 1,780,000.00 Total Wire/'I'ransferRmount from Purchaser: $ 1,780,000.00 DISBURSEMENT OF FUNDS 1. The Paying Agent/Registrar will transfer to Kerr County the amount listed below representing construction funds to Security State Bank and Trust, Kerrville, Texas, ABA#: 114-921-949, Account#: 1013531, Account Name: Kerr County\Treas Account. Deposit to Project Fund $ 1,750,720.00 2. The Paying Agent/Registrar will wire transfer to RBC Capital Markets the amount listed below representing Financial Advisor Fees & Expenses to U.S. Bank, Minneapolis, MN, ABA: 091 000 022, Account#: 1-602-3009-7208, FFC: 2178-271550 FN00014640. Financial Advisory Fees and Expenses: $ 19,750.00 3. The Paying Agent will transfer to McCall, Parkhurst & Horton L.L.P., San Antonio, Texas the amounts listed below representing Bond Counsel fees and expenses to Colonial Bank (Wire Transfer Name: Colonial BHAM), ABA 0620-0131-9, Account No: 0000001529, For Credit To: McCall, Parkhurst & Horton L.L.P., Operating Account, Reference Number 3448.009. Bond Counsel and Expenses $ 7,030.00 4. The Paying Agent/Registrar will wire transfer to Andrews Kurth LLP the amount listed below representing Purchaser's Counsel fees and expesenses to JPMorgan Chase Bank, Houston, Texas, Account No. 00100184952; ABA Code 113000609, Please include Client Matter No. 24827/180620, Attention: Misty Dibrell, Client Service Group. Purchaser's Counsel Fees & Expenses $ 2,500.00 Total Disbursement of Funds 1,780,000.00 5. Upon direction from the authorized representative of the County and Bond Counsel, the Notes will be released to the Purchaser. RECEIPT FOR PROCEEDS STATE OF TEXAS § COUNTY OF KERB § The undersigned hereby certifies as follows: (a) This certificate is executed and delivered with reference to KERB COUNTY, TEXAS TAX NOTES, SERIES 2008, dated March 1, 2008, in the principal amount of $1,780,000 (the "Notes"). (b) The undersigned is duly authorized to execute this receipt for proceeds of the Notes. (c) All of the Notes have been duly delivered to the purchaser thereof, namely; TIIE FROST NATIONAL BANK (d) All of the Notes have been paid for in full by said purchaser concurrently with the delivery of this certificate, and the issuer of the Notes has received, and hereby acknowledges receipt of, the agreed purchase price for the Notes, being $1, 780, 000 (which amount is equal to the principal amount of the Notes and no accrued interest}. M~K 1 8 20D8 EXECUTED and delivered this County Tr urer t~ , ~~'' ~~~ ~, 1~TTORNEY GENERAL OF TEXAS GREG ABBOTT March 12, 2008 THIS IS TO CERTIFY that the Kerr County, Texas (the "Issuer"}, has submitted to me Kerr CountX, Texas Tax Note. Series 2008 (the "Note"), in the principal amount of $1,780,000, for approval. The Note is dated March 1, 2008, numbered T-1, and was authorized by an Order of the Issuer passed on February 25, 2008. I have examined the law and such certified proceedings and other papers as I deem necessary to render this opinion. As to questions of fact material to my opinion, I have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials fixmished to me without undertaking to verify the same by independent investigation. I express no opinion relating to any official statement or any other offering material relating to the Note. Based on my examination, I am of the opinion, as of the date hereof and under existing law, as follows: (1) The Note has been issued in accordance with law and is a valid and binding obligation of the Issuer. (2) The Note is payable from the proceeds of an annual ad valorem tax levied, against all taxable property within the Issuer, within the limits prescribed by law. Therefore, the Note is approved. No. 47589 Book No. 2008A JCH :~ ,, ~~ ~ ', -~ Attu ey Genera of the State of Texas POST' OFFICL BOX 12548, f~USTIN, Texas 7871 t-2548 "r Fa.:(512)463-2100 WWW.OAG.STA"f L'.'I"X.US An Eqursl Employment Opportunity Employer ~ Printed on Eerycled Paper OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Susan Combs, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the: Kerr County Texas Tax Note, Series 2008 numbered TT=1, of the denomination of $ 1,780,000, dated March 1.2008, as authorized by issuer, interest 3.30 percent, under and by authority of which said note was registered in the office of the Comptroller, on the 12th day of March 2008, under Registration Number 74018. Given under my hand and seal of office, at Austin, Texas, the 12th day of March 2008. SUSAN COMBS Comptroller of Public Accounts of the State of Texas OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Amy Fuller, ~ Bond Clerk ~X Assistant Bond Clerk in the office of the Comptroller of the State of Texas, do hereby certify that, acting under the direction and authority of the Comptroller on the 12th day of March 2008, I signed the name of the Comptroller to the certificate of registration endorsed upon the: Kerr County, Texas Tax Note, Series 2008, numbered TT=1, dated March 1, 2008, and that in signing the certificate of registration I used the following signature: ~ ~~ "Vx('J~ {/~~ IN WITNESS WHER OF I have cuted this certificate this the 12th day of March 2008. I, Susan Combs, Comptroller of Public Accounts of the State of Texas, certify that the person who has signed the above certificate was duly designated and appointed by me under authority vested in me by Chapter 403, Subchapter H, Government Code, with authority to sign my name to all certificates of registration, and/or cancellation of bonds required by law to be registered and/or cancelled by me, and was acting as such on the date first mentioned in this certificate, and that the bonds described in this certificate have been duly registered in the office of the Comptroller, under Registration Number 74018. GIVEN under my hand and seal of office at Austin, Texas, this the 12th day of March 2008. ~-- SUSAN COMBS Comptroller of Public Accounts of the State of Texas LAW OFFICES M~CALL, PARKHURST & NORTON L.L.P. 717 NORTH HARWOOD 700 N. ST. MARY'S STREET 600 CONGRESS AVENUE SUITE 900 SUITE 1525 SUITE 1800 DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 AUSTIN, TEXAS 7 8701-3248 TELEPHONE: 214754-9200 TELEPHONE: 210 225-2800 TELEPHONE: 512 478-3605 FACSIMILE: 214 754-9250 FACSIMILE: 210 225-2984 FACSIMILE: 512 472-0871 March 18, 2008 KERB COUNTY, TEXAS TAX NOTES, SERIES 2008 DATED AS OF MARCH 1, 2008 IN THE AGGREGATE PRINCIPAL AMOUNT OF $1,780,000 AS BOND COUNSEL FOR KERR COUNTY, TEXAS (the "County") in connection with the issuance of the Tax Notes described above (the "Notes"), we have examined into the legality and validity of the Notes, which bear interest from the dates specified in the text of the Notes until maturity, at the rates, and payable on the dates, all in accordance with the terms and conditions stated in the text of the Notes. The Notes are not subject to optional redemption prior to maturity. WEHAVEEXAMINED the applicable and pertinent provisions of the Constitution and laws of the State of Texas, and a transcript of certified proceedings of the County, and other pertinent instruments authorizing and relating to the issuance of the Notes including (i) the order authorizing the issuance of the Notes (the "Order"), (ii) one of the executed Notes (Note No. T-1), and (iii) the County's Federal Tax Certificate of even date herewith. IT IS OUR OPINION that the Notes have been authorized, issued and delivered in accor- dance with law; that the Notes constitute valid and legally binding general obligations of the County in accordance with their terms except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws now or hereafter enacted relating to creditors' rights generally; that the County has the legal authority to issue the Notes and to repay the Notes; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of the Notes, as such interest comes due, and as such principal matures, have been levied and ordered to be levied against all taxable property in the County, and have been pledged for such payment, within the limits prescribed by law, all as provided in the Order. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Notes is excludable from the gross income of the owners thereof for federal income tax purposes under the statutes, regulations, published rulings and court decisions existing on the date of this opinion. We are further of the opinion that the Notes are not "specified private activity bonds" and that, accordingly, interest on the Notes will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on certain representations, the accuracy ofwhich we have not independently verified, and assume compliance with certain covenants, regarding the use and investment of the proceeds of the Notes and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or upon a failure by the County to comply with such covenants, interest on the Notes may become includable in gross income retroactively to the date of issuance of the Notes. Kerr County, Texas Tax Notes, Series 2008 March 1$, 2008 Page 2 EXCEPTASSTATEDABOVE, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Notes. WECALL YOURATTENTIONTO THEFACTthatthe interest ontax-exempt obligations, such as the Notes, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. OUR SOLE ENGAGEMENT in connection with the issuance of the Notes is as Bond Counsel for the County, and, in that capacity, we have been engaged by the County for the sole purpose of rendering an opinion with respect to the legality and validity of the Notes under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Notes for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the County, or the disclosure thereof in connection with the sale of the Notes, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Notes, and we have relied solely on Notes executed by officials of the County as to the current outstanding indebtedness of, and assessed valuation of taxable property within, the County. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of a result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Notes. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the County as the taxpayer. We observe that the County has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Notes as includable in gross income for federal income tax purposes. Respectfully, ~ ~. ~%~ /~ °L~~~