$25,220,000 Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014

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1 NEW ISSUE BOOK-ENTRY ONLY Rating: Moody s: Aa3 S&P: A+ (See RATINGS herein) In the opinion of Parker Poe Adams & Bernstein LLP, Bond Counsel, under existing law, the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds is (1) assuming compliance by the City with certain requirements of the Internal Revenue Code of 1986, as amended, (a) excludable from gross income for federal income tax purposes, and (b) not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and (2) exempt from State of North Carolina income taxation. See TAX TREATMENT herein. Dated: Date of Delivery $25,220,000 Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 Due: As shown on the inside cover This Official Statement has been prepared by the City of Kannapolis, North Carolina (the City ) to provide information on the Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 (the 2014 Bonds ). Selected information is presented on this cover page for the convenience of the user. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used in this Official Statement, unless otherwise defined herein, have the meanings set out in Appendix C hereto under SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Definitions. Security: Prepayment: Purpose: The 2014 Bonds and all other Bonds outstanding under the Indenture evidence proportionate undivided interests in rights to receive certain Revenues pursuant to the Contract between Kannapolis Capital Corporation (the Corporation ) and the City. The performance by the City of its obligations under the Contract, including the obligation to make Installment Payments thereunder, is secured by a Deed of Trust from the City to the Deed of Trust Trustee granting a lien of record on the Mortgaged Property, subject to Permitted Encumbrances. The Corporation has assigned to the Trustee for the benefit of the registered owners of the 2014 Bonds and all other Bonds outstanding under the Indenture substantially all of its rights under the Contract, including the right to receive Installment Payments, and all of its rights as beneficiary of the Deed of Trust. THE PRINCIPAL OF, PREPAYMENT PREMIUM, IF ANY, AND INTEREST ON THE 2014 BONDS ARE PAYABLE SOLELY FROM AMOUNTS PAYABLE BY THE CITY UNDER THE CONTRACT, AMOUNTS HELD IN CERTAIN FUNDS AND ACCOUNTS UNDER THE INDENTURE AND, TO THE EXTENT PROVIDED IN THE INDENTURE, THE PROCEEDS DERIVED FROM THE EXERCISE OF CERTAIN RIGHTS AND REMEDIES GRANTED UNDER THE CONTRACT, INCLUDING THE FORECLOSURE AND SALE OF THE MORTGAGED PROPERTY PURSUANT TO THE DEED OF TRUST. NO DEFICIENCY JUDGMENT MAY BE RENDERED AGAINST THE CITY IN ANY ACTION FOR BREACH OF ANY CONTRACTUAL OBLIGATION UNDER THE CONTRACT, AND THE TAXING POWER OF THE CITY IS NOT PLEDGED DIRECTLY OR INDIRECTLY TO SECURE ANY MONEYS DUE TO THE OWNERS OF THE 2014 BONDS. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS herein. The 2014 Bonds are subject to optional prepayment and mandatory sinking fund prepayment before maturity as described herein. Proceeds of the 2014 Bonds will be used, together with other available funds of the City, (a) to pay the capital costs of constructing, equipping and furnishing a city hall and law enforcement center to be located on the campus of the North Carolina Research Campus, and (b) to pay the costs related to the execution and delivery of the 2014 Bonds. Interest Payment Dates: Interest with respect to the 2014 Bonds is payable on April 1 and October 1 of each year, beginning April 1, Denominations: $5,000 and any integral multiple thereof. Closing/Delivery Date: On or about August 21, Registration: Trustee: Financial Advisor: Bond Counsel and Corporation Counsel: City Attorney: Underwriters Counsel: Full book-entry only; The Depository Trust Company. U.S. Bank National Association, Charlotte, North Carolina. Davenport & Company LLC, Charlotte, North Carolina. Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina. Walter M. Safrit II, Esq, Kannapolis, North Carolina. Pope Zeigler, LLC, Charlotte, North Carolina. August 8, 2014 PNC Capital Markets LLC BofA Merrill Lynch

2 MATURITY SCHEDULE $25,220,000 Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 Due April 1 Principal Amount Interest Rate Yield CUSIP $ 620, % 0.350% AL ,370, AM ,370, AN ,370, AP ,370, AQ ,370, AR , AS , AT ,365, AU ,365, AV ,365, * AW ,365, * AX ,365, AY ,365, AZ ,365, BA ,365, BB ,365, * BC , * BD , * BE4 $2,730, % Term Bonds due April 1, 2034, Yield 3.760%, CUSIP BF1 * Yield to April 1, 2024 optional call date. 1 CUSIP numbers have been assigned by an independent company not affiliated with the City or the Underwriters and are included solely for convenience of the owners of the 2014 Bonds. None of the City or the Underwriters are responsible for selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the 2014 Bonds or as indicated above. The CUSIP number for a specific maturity is subject to change after issuance of the 2014 Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of the 2014 Bonds.

3 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2014 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. No dealer, broker, salesman or other person has been authorized to give any information or to make any representation other than as contained in this Official Statement, and if given or made, such other information or representation must not be relied upon. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy, nor will there be any sale of the 2014 Bonds by any person in any jurisdiction in which it is not lawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the City and other sources that are deemed to be reliable, but is not guaranteed as to accuracy or completeness by the Underwriters and is not to be construed as a representation by the Underwriters. The electronic distribution of this Official Statement does not constitute an offer to sell or the solicitation of an offer to buy the 2014 Bonds described herein to the residents of any particular state and is not specifically directed to the residents of any particular state. The 2014 Bonds will not be offered or sold in any state unless and until they are either registered pursuant to the laws of such state, or qualified pursuant to an appropriate exemption from registration in such state. NEITHER THE 2014 BONDS NOR THE INDENTURE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION BY REASON OF THE PROVISIONS OF SECTION 3(a)(2) OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 304(a)(4) OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED. THE REGISTRATION OR QUALIFICATION OF THE 2014 BONDS AND THE INDENTURE IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE 2014 BONDS AND THE INDENTURE HAVE BEEN REGISTERED OR QUALIFIED, AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES, WILL NOT BE REGARDED AS A RECOMMENDATION THEREOF. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. All quotations from and summaries and explanations of laws and documents herein do not purport to be complete, and reference is made to such laws and documents for full and complete statements of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the 2014 Bonds will under any circumstances create any implication that there has been no change in the affairs of the City since the date hereof. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as a part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

4 TABLE OF CONTENTS INTRODUCTION... 1 THE 2014 BONDS... 3 General... 3 Book-Entry Only... 3 Prepayment Provisions... 3 THE PLAN OF FINANCE... 5 ESTIMATED SOURCES AND USES OF FUNDS... 5 SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS... 5 General... 5 Installment payments and additional payments... 6 Budget and appropriation... 6 Deed of Trust... 6 Indenture... 7 Enforceability... 7 Additional Bonds... 8 AVAILABLE SOURCES FOR PAYMENT OF THE 2014 BONDS... 8 General... 8 General Fund Revenues... 8 ANNUAL INSTALLMENT PAYMENT REQUIREMENTS... 9 CERTAIN RISKS TO 2014 BOND OWNERS... 9 Limited Obligation of the City... 9 Risk of Nonappropriation... 9 Value of Collateral Uninsured or Underinsured Casualty Environmental Risks Outstanding General Obligation Debt of the City Other Indebtedness Bankruptcy THE CORPORATION THE CITY LEGAL MATTERS Litigation Contingent Liabilities Opinions of Counsel TAX TREATMENT CONTINUING DISCLOSURE UNDERWRITING FINANCIAL ADVISOR RATINGS MISCELLANEOUS Page APPENDIX A THE CITY OF KANNAPOLIS, NORTH CAROLINA... A-1 APPENDIX B FINANCIAL STATEMENTS OF THE CITY OF KANNAPOLIS, NORTH CAROLINA... B-1 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... C-1 APPENDIX D FORM OF OPINION OF BOND COUNSEL... D-1 APPENDIX E BOOK-ENTRY ONLY SYSTEM... E-1

5 $25,220,000 Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 INTRODUCTION The purpose of this Official Statement, which includes the appendices hereto, is to provide information in connection with the execution, sale and delivery of $25,220,000 in aggregate principal amount of Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 (the 2014 Bonds ). The 2014 Bonds evidence proportionate undivided interests in rights to receive certain Revenues (as hereinafter described) which include the installment payments (the Installment Payments ) to be made by the City of Kannapolis, North Carolina (the City ) pursuant to an Installment Financing Contract, dated as of August 1, 2014 ( Contract ), between the City and Kannapolis Capital Corporation, a North Carolina nonprofit corporation (the Corporation ). The 2014 Bonds will be executed and delivered pursuant to an Indenture of Trust, dated as of August 1, 2014 (the Indenture ) between the Corporation and U.S. Bank National Association, as Trustee (the Trustee ). Capitalized terms used in this Official Statement, unless otherwise defined herein, have the meanings set out in Appendix C hereto. This Introduction provides only certain limited information with respect to the contents of this Official Statement and is expressly qualified by the Official Statement as a whole. Prospective investors should review the full Official Statement and each of the documents summarized or described herein. This Official Statement speaks only as of its date, and the information contained herein is subject to change. Authorization. The 2014 Bonds will be executed and delivered pursuant to the Indenture. The 2014 Bonds evidence proportionate undivided interests in the right to receive certain Revenues pursuant to the Contract. The 2014 Bonds are payable solely from the Installment Payments and certain other money as provided in the Indenture. The City is entering into the Contract under the provisions of Section 160A-20 of the General Statutes of North Carolina, as amended. The City Council of the City is expected to authorize the City s execution and delivery of the Contract in a resolution to be adopted on May 26, In addition, the City s entering into the Contract is expected to receive the required approval of the North Carolina Local Government Commission (the LGC ) on June 3, The LGC is a division of the State Treasurer s office charged with general oversight of local government finance in the State of North Carolina (the State ). Its approval is required for substantially all bond issues and other local government financing arrangements in the State. Before approving an installment financing, the LGC must determine, among other things, that (1) the proposed financing is necessary and expedient, (2) the financing, under the circumstances, is preferable to a general obligation or revenue bond issue for the same purpose, and (3) the sums to fall due under the proposed financing are not excessive for the local government. Purpose. The proceeds of the 2014 Bonds will be used, together with other available funds of the City, (1) to pay the capital costs of constructing, equipping and furnishing a city hall and law enforcement center to be located on the campus of the North Carolina Research Campus (the City Hall and Law Enforcement Center ), and (2) to pay the costs related to the execution and delivery of the 2014 Bonds. See THE PLAN OF FINANCE herein. Security. The 2014 Bonds and any additional Bonds outstanding under the Indenture (the Additional Bonds ) evidence proportionate undivided interests in the right to receive certain Revenues under the Contract. The 2014 Bonds are secured by certain money on deposit under the Indenture. The 2014 Bonds are payable solely from the Installment Payments and certain other money as provided in the Indenture. As security for its obligations under the Contract, the City will execute and deliver to a deed of trust trustee (the Deed of Trust Trustee ), for the benefit of the Corporation or its assignee, a Deed of Trust, Security Agreement and Fixture Filing dated as of August 1, 2014 (the Deed of Trust ), granting a lien of record on the site of the City Hall and Law Enforcement Center, and any additions, modifications, attachments, replacements and parts thereof, as more particularly described in the Deed of Trust (the Mortgaged Property ), subject to certain permitted encumbrances as described in the Contract and the Deed of Trust. Only the real property on which the City Hall and

6 Law Enforcement Center are located and the improvements thereon are part of the Mortgaged Property. See SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS Deed of Trust herein. Pursuant to the Indenture, the Corporation will assign to the Trustee for the benefit of the Owners of the 2014 Bonds and any Additional Bonds (a) all rights, title and interest of the Corporation in the Contract (except for certain reserved rights), including its right to receive the Installment Payments thereunder, (b) all rights, title and interest of the Corporation in the Deed of Trust and the Mortgaged Property, and (c) all money and securities from time to time held by the Trustee under the Indenture in any fund or account (except the Rebate Fund). Pursuant to the Contract, the Installment Payments are payable by the City directly to the Trustee. Additional Bonds which would have equal rights in the security available to the Owners of the 2014 Bonds may be executed and delivered in accordance with the provisions of the Indenture. See the captions SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS Additional Bonds herein and SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Indenture Additional Bonds in Appendix C hereto. Under certain conditions, the Deed of Trust Trustee may release portions of the Mortgaged Property from the lien of the Deed of Trust. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS Deed of Trust Release of Security herein and SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Deed of Trust in Appendix C hereto. If a default occurs under the Contract, the Trustee may attempt to dispose of the Mortgaged Property and apply the proceeds received as a result of any such disposition to the payment of the amounts due to the Owners of the 2014 Bonds and any Additional Bonds. No assurance can be given that any such proceeds will be sufficient to pay the principal and interest with respect to the 2014 Bonds. In addition, no deficiency judgment can be obtained against the City if the proceeds from any such disposition (together with other funds that may be held by the Trustee under the Indenture) are insufficient to pay the 2014 Bonds in full. Neither the 2014 Bonds nor the City s obligation to make payments under the Contract constitute a pledge of the City s faith and credit within the meaning of any constitutional provision. See the caption SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS herein. Details of the 2014 Bonds. The 2014 Bonds will be dated the date of initial execution and delivery, and will mature, subject to the prepayment provisions described herein, on April 1 in the years and amounts set forth on the inside cover hereof. Interest on the 2014 Bonds will be payable on each April 1 and October 1, beginning April 1, 2015, at the rates set forth on the inside cover hereof. Individual purchases of the 2014 Bonds will be made in denominations of $5,000 or whole multiples thereof. Book-Entry Form. The 2014 Bonds will initially be delivered as fully registered certificates in book-entry-only form without physical delivery of certificates to the beneficial owners of the 2014 Bonds. The Trustee will make payments of principal and interest on the 2014 Bonds to The Depository Trust Company, New York, New York ( DTC ), which will in turn remit such payments to its participants for subsequent distribution to the beneficial owners of the 2014 Bonds. See Appendix E hereto. Tax Status. In the opinion of Parker Poe Adams & Bernstein LLP, Bond Counsel, under existing law, the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds is (1) assuming compliance by the City with certain requirements of the Internal Revenue Code of 1986, as amended (the Code ), (a) excludable from gross income for federal income tax purposes, and (b) not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and (2) exempt from State of North Carolina income taxation. See TAX TREATMENT herein. Continuing Disclosure. Pursuant to the Contract, the City will undertake to provide continuing disclosure of certain annual financial information and operating data and certain material events. See CONTINUING DISCLOSURE herein. Professionals. PNC Capital Markets LLC, Charlotte, North Carolina, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Charlotte, North Carolina (collectively, the Underwriters ), are underwriting the 2014 Bonds. Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina, is serving as Bond Counsel. Davenport & Company LLC, Charlotte, North Carolina, is serving as Financial Advisor to the City. Pope Zeigler, LLC, Charlotte, 2

7 North Carolina, is serving as counsel to the Underwriters. Walter M. Safrit II, Esq., is the City Attorney. Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina, is serving as counsel to the Corporation. U.S. Bank National Association, Charlotte, North Carolina, is serving as the Trustee and the Registrar and the Paying Agent for the 2014 Bonds. Definitions; Document Summaries. See Appendix C for a summary of certain provisions of the Contract and the Indenture and for the definition of certain capitalized terms used herein. Unless otherwise indicated, capitalized terms used herein and not otherwise defined shall have the same meanings given such terms in the Contract and the Indenture. Additional Information; Copies of Documents. Additional information and copies in reasonable quantity of the principal financing documents may be obtained from the City at 246 Oak Avenue, Kannapolis, North Carolina Copies of such documents can also be obtained during the offering period from PNC Capital Markets LLC at 4720 Piedmont Row, Suite 200, Charlotte, North Carolina After the offering period, copies of such documents may be obtained from the Trustee at 214 North Tryon Street, Suite 2700, Charlotte, North Carolina General THE 2014 BONDS The 2014 Bonds will be dated the date of initial execution and delivery, and will mature, subject to the prepayment provisions described herein, on April 1 in the years and amounts set forth on the inside cover hereof. Interest on the 2014 Bonds will be payable on each April 1 and October 1, beginning April 1, 2015, at the rates set forth on the inside cover hereof. Individual purchases of the 2014 Bonds will be made in denominations of $5,000 or whole multiples thereof. Book-Entry Only The 2014 Bonds will be delivered as fully registered bonds in book-entry-only form through DTC and will be subject to the provisions of the book-entry-only system described in Appendix E. Prepayment Provisions Optional Prepayment. The 2014 Bonds maturing on or before April 1, 2024 are not subject to optional prepayment before maturity. The 2014 Bonds maturing on or after April 1, 2025 are subject to optional prepayment in whole or in part on any date on or after April 1, 2024, at the option of the City, at the prepayment price equal to 100% of the principal amount of such 2014 Bonds to be prepaid, together with accrued interest to the date fixed for prepayment. Mandatory Sinking Fund Prepayment. The 2014 Bonds maturing on April 1, 2034 are subject to mandatory sinking fund prepayment on April 1, 2033 in the amount of $1,365,000 with the remainder to be paid on the maturity date of April 1, 2034 in the amount of $1,365,000, by lot from the principal components of the Installment Payments required to be paid by the City under the Contract with respect to each such prepayment date, at a prepayment price equal to 100% of the principal amount thereof to be prepaid, together with accrued interest with respect thereto to the prepayment date. At its option, to be exercised on or before the 45th day next preceding any mandatory prepayment date, the City may (1) deliver to the Trustee for cancellation 2014 Bonds or portions thereof in any aggregate principal amount desired, or (2) receive a credit in respect of its mandatory prepayment obligation for any 2014 Bonds which before said date have been purchased or prepaid (otherwise than through mandatory prepayment) and canceled by the Trustee and not theretofore applied as a credit against any mandatory prepayment obligation. Each such 2014 Bond or portion thereof so delivered or previously purchased or prepaid and canceled by the Trustee will be credited by the Trustee at 100% of the principal amount thereof against the Installment Payment obligation corresponding to such mandatory prepayment date. To the extent that the aggregate principal amount of such 2014 Bonds or portions 3

8 thereof exceeds the Installment Payment obligation on such mandatory prepayment date, any excess over such amount will be credited against future Installment Payment obligations, as directed by the City, and the principal amount of 2014 Bonds to be prepaid will be accordingly reduced. The City must on or before the 45th day next preceding each such mandatory prepayment date furnish the Trustee with its certificate indicating to what extent the provisions of (1) and (2) of the preceding paragraph are to be availed of with respect to such mandatory prepayment payment. General Prepayment Provisions. If called for prepayment in part, the 2014 Bonds to be prepaid will be prepaid in such order as the City selects and within the same maturity as selected by DTC pursuant to its rules and procedures or, if the book-entry system with respect to the 2014 Bonds is discontinued, by lot within a maturity in such manner as the Trustee in its discretion may determine. Notice of prepayment identifying the 2014 Bonds or portions thereof to be prepaid will be given by the Trustee in writing not less than 30 days nor more than 60 days before the date fixed for prepayment by first class mail, postage prepaid (or, in the case of notice to DTC, by registered or certified mail or otherwise in accordance with DTC s then-existing rules and procedures) (1) to DTC or its nominee or to the then-existing securities depositories, or (2) if DTC or its nominee or another securities depository is no longer the Owner of the 2014 Bonds, to the thenregistered Owners of the 2014 Bonds to be prepaid at their addresses appearing on the registration books maintained by the Trustee, (3) to the LGC, and (4) to the Municipal Securities Rule Making Board (the MSRB ) in an electronic format as prescribed by the MSRB. Notwithstanding the foregoing, (1) if notice is given, the failure to receive an appropriate notice will not affect the validity of the proceedings for such prepayment, (2) the failure to give any such notice or any defect therein will not affect the validity of the proceedings for the prepayment of the 2014 Bonds or portions thereof with respect to which notice was correctly given, and (3) the failure to give any such notice to the parties described in clauses (3) and (4) in the preceding sentence, or any defect therein, will not affect the validity of any proceedings for the prepayment of the 2014 Bonds. In the case of an optional prepayment of 2014 Bonds, the prepayment notice may state that it is conditioned upon the deposit of money with the Trustee on the prepayment date at the time and in an amount equal to the amount necessary to effect the prepayment and such notice will be of no effect unless such money is so deposited. On or before the date fixed for prepayment, funds will be deposited with the Trustee to pay, and the Trustee is authorized and directed to apply such funds to the payment of, the 2014 Bonds or portions thereof called, together with accrued interest with respect thereto to the prepayment date, and any required premium. Upon the giving of notice and the deposit of such funds for prepayment pursuant to the Indenture, interest with respect to the 2014 Bonds or portions thereof so called for prepayment will no longer accrue after the date fixed for prepayment. The 2014 Bonds or portions thereof called for prepayment will be due and payable on the prepayment date at the prepayment price, together with accrued interest with respect thereto to the prepayment date and any applicable prepayment premium. If any required notice of prepayment has been given and money sufficient to pay the prepayment price, together with accrued interest with respect thereto to the prepayment date and any required prepayment premium, have been deposited with the Trustee, the 2014 Bonds or portions thereof so called for prepayment will cease to be entitled to any benefit or security under the Indenture, and the Owners of such 2014 Bonds will have no rights with respect to such 2014 Bonds or portions thereof so called for prepayment except to receive payment of the prepayment price and accrued interest to the prepayment date from such funds held by the Trustee. Upon surrender and cancellation of any 2014 Bonds called for prepayment in part only, a new 2014 Bond or 2014 Bonds of the same maturity and interest rate and of authorized denominations, in an aggregate principal amount equal to the unprepaid portion thereof, will be executed on behalf of the Corporation and authenticated and delivered by the Trustee. If an Event of Default has occurred and is continuing under the Indenture, there will be no prepayment of less than all of the 2014 Bonds Outstanding. 4

9 THE PLAN OF FINANCE The proceeds of the 2014 Bonds will be used, together with other available funds of the City, (1) to pay the capital costs of constructing, equipping and furnishing the City Hall and Law Enforcement Center, and (2) to pay the costs related to the execution and delivery of the 2014 Bonds. The City Hall and Law Enforcement Center is expected to be a three story, 100,000 square-foot facility located on the campus of the North Carolina Research Campus in the City. The City Hall and Law Enforcement Center is expected to house governmental functions now operated in parts of numerous different buildings. For a description of the North Carolina Research Campus, see Commerce and Industry in Appendix A hereto. Proceeds of the City s Limited Obligation Bonds, Series 2010A and Taxable Limited Obligation Bonds (Build America Bonds), Series 2010B (the 2010 LOBs ) were previously used to defray costs of the acquisition and construction of infrastructure projects to support the North Carolina Research Campus. The Mortgaged Property will consist of the site on which the City Hall and Law Enforcement Center is located and the improvements thereon. See SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS Deed of Trust herein. ESTIMATED SOURCES AND USES OF FUNDS The City estimates the sources and uses of funds for the plan of finance to be as follows: SOURCES: Par Amount of the 2014 Bonds $25,220,000 Net Original Issue Premium on the 2014 Bonds 2,374,618 Contribution of the City 1 5,698,044 TOTAL SOURCES OF FUNDS $33,292,662 USES: Deposit to Acquisition and Construction Fund $32,908,409 Costs of Issuance 2 384,253 TOTAL USES OF FUNDS $33,292,662 1 The City s contribution is made up of cash and proceeds from the 2010 LOBs that were deposited to the Construction Fund related to the 2010 LOBs. 2 Includes legal fees, underwriters discount, rating agency fees, fees and expenses of the Trustee and financial advisor and miscellaneous fees and expenses. General SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS The 2014 Bonds and any Additional Bonds evidence proportionate undivided interests in the rights to receive certain Revenues pursuant to the Contract. The 2014 Bonds will be proportionately and ratably secured with any Additional Bonds executed and delivered pursuant to the Indenture. Revenues are defined in the Contract to mean (a) all Net Proceeds not applied to the replacement of the City Hall and Law Enforcement Center, (b) all Installment Payments, and (c) all investment income on all funds and accounts created under the Indenture (other than the Rebate Fund). Notwithstanding the foregoing, the Owner of each 2014 Bond is not entitled to receive more than the amount of principal and interest represented by such 2014 Bond. 5

10 Installment Payments and Additional Payments Under the Contract, five days before any corresponding payment is due from the Trustee, the City is required to make the Installment Payments directly to the Trustee in amounts sufficient to provide for the payment of the principal (whether at maturity, by prepayment or otherwise) and interest with respect to the 2014 Bonds and any Additional Bonds hereafter executed and delivered under the Indenture as the same become due and payable. The City is also obligated under the Contract to pay as Additional Payments to such persons as are entitled thereto, the reasonable and customary expenses and fees of the Trustee and the Corporation, any expenses of the Corporation in defending an action or proceeding in connection with the Contract or the Indenture and any taxes or any other expenses, including, but not limited to, licenses, permits, state and local income, sales and use or ownership taxes or property taxes which the City or the Corporation is expressly required to pay as a result of the Contract (together with interest that may accrue thereon in the event that the City fails to pay the same). Budget and Appropriation Pursuant to the Contract, the City will (a) cause its budget officer (as statutorily defined) to include the Installment Payments and the reasonably estimated Additional Payments coming due in each Fiscal Year in the corresponding annual budget request, (b) require that the deletion of such funds from the City s final budget or any amended budget be made only pursuant to an express resolution of the City Council which explains the reason for such action, and (c) deliver notice to the Trustee, S&P, Moody s and the LGC within five days after the adoption by the Board of the resolution described in clause (b) above. Nothing contained in the Contract, however, obligates the City to appropriate money contained in the proposed budget for the payment of the Installment Payments or the reasonably estimated Additional Payments coming due under the Contract. In connection with the Installment Payments and the Additional Payments, the appropriation of funds therefor is within the sole discretion of the City Council. Deed of Trust General. In connection with the execution and delivery of the 2014 Bonds, the City will execute the Deed of Trust as security for its obligations under the Contract granting a lien of record on the Mortgaged Property, subject to certain permitted encumbrances as set forth in the Contract and the Deed of Trust. The Deed of Trust authorizes future obligations evidenced by Additional Bonds executed and delivered under the Indenture to be secured by the Deed of Trust, provided that the total amount of present and future obligations secured thereby at any one time does not exceed $100,000,000 and such future obligations are incurred not later than 30 years from the date of the Deed of Trust. The Deed of Trust will be recorded in the office of the Register of Deeds of Cabarrus County, North Carolina, and the liens created thereby will be insured by a title insurance policy. Release of Security. So long as there is no event of default under the Deed of Trust, the Trustee must release the Mortgaged Property or any part thereof from the lien and security interest of the Deed of Trust when and if the following requirements have been fulfilled: (a) in connection with any release of the Mortgaged Property, or any part thereof, there is filed with the Corporation a certified copy of the resolution of the City Council stating the purpose for which the City desires such release of the Mortgaged Property, giving an adequate legal description of the part of the Mortgaged Property to be released, requesting such release and providing for payment by the City of all expenses in connection with such release; (b) in connection with the release of any part of the Mortgaged Property constituting less than the entire Mortgaged Property, either (i) the tax, insured or appraised value of the Mortgaged Property remaining after the proposed release is not less than 50% of the aggregate principal component of the Installment Payments then Outstanding under the Indenture or (ii) the City (A) provides for the substitution of other real property therefor 6

11 and the tax, insured or appraised value of the Mortgaged Property remaining after the proposed substitution is not less than the replacement value of the Mortgaged Property (as determined above) immediately before the proposed substitution, (B) delivers to the Trustee and the Corporation an opinion of Bond Counsel to the effect that the substitution (1) is permitted by law and under the Deed of Trust, and (2) will not adversely affect the tax treatment of the Bonds, and (C) records a modification to the Deed of Trust reflecting such substitution of the Mortgaged Property; (c) in connection with the release of any part of the Mortgaged Property constituting less than the entire Mortgaged Property, such release will not prohibit the City s ingress, egress and regress to and from the remainder of the Mortgaged Property not being released, or materially interfere with the use of the remainder of the Mortgaged Property not being released; and (d) in connection with the release of the entire Mortgaged Property, there is paid to the Corporation an amount sufficient to provide for the payment in full all of the Bonds then Outstanding under the Indenture. No representation is made as to the value of the City s interest in the Mortgaged Property in foreclosure. Indenture Pursuant to the Indenture, the Corporation has assigned to the Trustee for the benefit of the Owners of the 2014 Bonds and any Additional Bonds executed and delivered under the Indenture (a) all rights, title and interest of the Corporation in the Contract (except for certain indemnification rights, certain notice rights and the right to Additional Payments payable to the Corporation), including its rights to receive the Installment Payments thereunder (b) all rights, title and interest of the Corporation in the Deed of Trust and the Mortgaged Property, and (c) all money and securities from time to time held by the Trustee under the Indenture in any fund or account (except the Rebate Fund). Enforceability NEITHER THE CONTRACT NOR THE 2014 BONDS CONSTITUTE A PLEDGE OF THE FAITH AND CREDIT OF THE CITY WITHIN THE MEANING OF ANY CONSTITUTIONAL DEBT LIMITATION. NO DEFICIENCY JUDGMENT MAY BE RENDERED AGAINST THE CITY IN ANY ACTION FOR BREACH OF ANY CONTRACTUAL OBLIGATION UNDER THE CONTRACT, AND THE TAXING POWER OF THE CITY IS NOT PLEDGED DIRECTLY OR INDIRECTLY TO SECURE ANY MONEY DUE THE OWNERS OF THE 2014 BONDS PURSUANT TO THE CONTRACT. The remedies afforded to the Trustee and the Owners of the 2014 Bonds upon a default by the City under the Contract are limited to those specified in the Contract and the Indenture, including exercising the rights of the beneficiary under the Deed of Trust and the rights of the Trustee in the funds held under the Indenture. The 2014 Bonds will not constitute a debt or general obligation of the Corporation and will not give the Owners of the 2014 Bonds any recourse to the assets of the Corporation, but will be payable solely from amounts payable by the City under the Contract, from amounts realized on the foreclosure on the Mortgaged Property pursuant to the Deed of Trust and from funds held in certain funds and accounts under the Indenture for such purpose. The enforceability of the Indenture, the Contract and the Deed of Trust is subject to bankruptcy, insolvency, fraudulent conveyance and other related laws affecting the enforcement of creditors rights generally and, to the extent that certain remedies under such instruments require, or may require, enforcement by a court, to such principles of equity as the court having jurisdiction may impose. See SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Contract Remedies on Default in Appendix C for a more complete description of the rights and powers of the Trustee upon the occurrence of an event of default under the Contract. 7

12 Additional Bonds Under the conditions described in the Indenture and so long as no Event of Default has occurred and is continuing under the Indenture, the Corporation may execute and deliver Additional Bonds under the Indenture without the consent of the Owners of the 2014 Bonds or any Additional Bonds then Outstanding under the Indenture to provide funds to pay (a) the cost of expanding the City Hall and Law Enforcement Center or acquiring, constructing, renovating and equipping other facilities or acquiring equipment and other capital assets for utilization by the City for public purposes; (b) the cost of refunding of all or any portion of the 2014 Bonds or any other installment financing obligations of the City; and (c) the Costs of Issuance relating to the execution, delivery and sale of such Additional Bonds. The 2014 Bonds are payable on a parity with any Additional Bonds hereafter executed and delivered pursuant to the Indenture. The Installment Payments and any Installment Payments with respect to Additional Bonds issued under the Indenture will be deposited as received by the Trustee in the Bond Fund held by the Trustee. Money in the Bond Fund will be withdrawn and used to pay the principal and interest with respect to the 2014 Bonds and any Additional Bonds executed and delivered under the Indenture as the same become due and payable. If on any date the money on deposit in the Bond Fund is insufficient to pay all of the principal and interest with respect to the 2014 Bonds or any Additional Bonds executed and delivered under the Indenture which are due and payable on such date, such money will be used to pay such principal and interest with respect to the 2014 Bonds and any such Additional Bonds entitled to receive principal or interest on such date in the manner provided in the Indenture. See SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The Indenture Application of Money in Appendix C. General AVAILABLE SOURCES FOR PAYMENT OF THE 2014 BONDS The City may pay amounts due under the Trust Agreement from any source of funds available to it in each year and appropriated therefor during the term of the Trust Agreement. See SECURITY AND SOURCES OF PAYMENT FOR THE 2014 BONDS herein. General Fund Revenues The City s general fund revenues for the Fiscal Year ended June 30, 2013 were $34,541,146. The City s general fund revenues for the Fiscal Year ending June 30, 2014 are budgeted at $34,021,527. General fund revenues are derived from various sources including property taxes, which generates 53.6% of the general fund revenue, sales taxes, intergovernmental revenues and fines and forfeitures. For the Fiscal Years ended June 30, 2013, and ending June 30, 2014, the City imposed a property tax of $0.56 per $100 of assessed value in each year. A rate of $0.56 per $100 of assessed value in the Fiscal Year ended June 30, 2013 generated approximately $19,032,093 and in the Fiscal Year ending June 30, 2014 is expected to generate approximately $19,177,768. For the Fiscal Year ending June 30, 2014, a rate of $.01 per $100 of assessed value generates approximately $346,884. The General Statutes of North Carolina permit cities to impose property taxes of up to $1.50 per $100 of assessed value for certain purposes without the requirement of a voter referendum. See Appendix B hereto for a description of the uses of the City s general fund revenues for the Fiscal Year ended June 30,

13 ANNUAL INSTALLMENT PAYMENT REQUIREMENTS The following table sets forth, for each Fiscal Year ending June 30, the amount of principal and interest required to be paid under the Contract with respect to the 2014 Bonds. Installment Payments under the Contract are required to be made five days prior to the corresponding Interest Payment Date with respect to the 2014 Bonds. Fiscal Year Ending June 30 Principal Payments Interest Payments * Total * 2015 $ 0 $ 647,201 $ 647, ,000 1,059,056 1,679, ,370,000 1,040,456 2,410, ,370, ,656 2,355, ,370, ,856 2,300, ,370, ,056 2,246, ,370, ,556 2,177, ,370, ,056 2,109, ,365, ,556 2,040, ,365, ,306 1,972, ,365, ,056 1,904, ,365, ,806 1,835, ,365, ,556 1,767, ,365, ,606 1,726, ,365, ,244 1,682, ,365, ,881 1,637, ,365, ,813 1,591, ,365, ,563 1,523, ,365,000 98,963 1,463, ,365,000 49,481 1,414,481 Total $25,220,000 $11,266,726 $36,486,726 * Totals may not foot due to rounding. Limited Obligation of the City CERTAIN RISKS TO 2014 BOND OWNERS If the Installment Payments to be made by the City are insufficient to pay the principal and interest with respect to the 2014 Bonds and any Additional Bonds, as the same become due or, if any other event of default occurs under the Contract, the Trustee may accelerate the 2014 Bonds and all unpaid principal amounts due by the City under the Contract and foreclose on the City s interest in the Mortgaged Property under the Deed of Trust. The Mortgaged Property includes the site on which the City Hall and Law Enforcement Center will be located and any improvements thereon. No deficiency judgment may be rendered against the City in any action for any breach of the Contract. The taxing power of the City is not and may not be pledged directly or indirectly or contingently to secure any money due under the Contract. The remedies afforded to the Trustee and the Owners of the 2014 Bonds and any Additional Bonds upon a default by the City under the Contract are limited to those of a secured party under the laws of the State, including foreclosing on the City s interest in the Mortgaged Property covered by the Deed of Trust. There can be no assurance that the money available in the funds and accounts held by the Trustee and the proceeds of any such foreclosure will be sufficient to provide for the payment of the principal and interest with respect to the 2014 Bonds and any Additional Bonds outstanding under the Indenture. Risk of Nonappropriation The appropriation of money to make the Installment Payments is within the sole discretion of the City Council. If the City Council fails to appropriate such money, the only sources of payment for the 2014 Bonds will be the 9

14 money, if any, available in the respective funds and accounts held by the Trustee under the Indenture and the proceeds of any attempted foreclosure on the City s interest in the Mortgaged Property under the Deed of Trust. Value of Collateral No special appraisal of the Mortgaged Property has been obtained and the amount of proceeds received through foreclosure of the City s interest in the Mortgaged Property will be affected by a number of factors, including (1) the costs and expenses in enforcing the lien and security, (2) the condition of the Mortgaged Property, (3) the occurrence of any damage, destruction, loss or theft of the Mortgaged Property which is not repaired or replaced and for which there are not received or appropriated money from insurance policies or any risk management program, (4) problems relating to the paucity of alternative uses of the City Hall and Law Enforcement Center arising from its design, zoning restrictions, use restrictions, easements and encumbrances on the Mortgaged Property, and (5) environmental problems and risks with respect to the Mortgaged Property. Parking on the site of the City Hall and Law Enforcement Center is limited and is not sufficient to adequately support the City Hall and Law Enforcement Center. The City is relying on the availability of parking on tracts of land adjacent to the City Hall and Law Enforcement Center, but in the event of foreclosure no assurances can be made that sufficient parking will be available. No representation is made as to the value of the City s interest in the Mortgaged Property in foreclosure. Uninsured or Underinsured Casualty If (a) any portion of the Mortgaged Property is destroyed or damaged by fire or other casualty, (b) title to or the temporary or permanent use of any portion of the Mortgaged Property or the estate of the City or the Corporation or its assignee in any portion of the Mortgaged Property is taken under the power of eminent domain by any governmental authority; (c) a material defect in construction of any portion of the Mortgaged Property becomes apparent; or (d) title to or the use of any portion of the Mortgaged Property is lost by reason of a defect in title thereto, the City may elect not to repair, restore, improve or replace the affected portion of the Mortgaged Property if (1)(a) the Net Proceeds are less than $500,000, and (b) a City Representative certifies to the Corporation that such Net Proceeds are not necessary to restore the affected portion of the Mortgaged Property to its intended use, or (2) the City uses the Net Proceeds, together with any other available funds of the City that may be necessary, to redeem or defease all of the 2014 Bonds outstanding in accordance with the terms of the Indenture. In such event, the City shall direct the Trustee to deposit such Net Proceeds in the Bond Fund to be applied toward the next payment of principal and interest with respect to the 2014 Bonds or in the Prepayment Fund or an escrow fund to effect the redemption or defeasance of the 2014 Bonds outstanding, as the case may be. The Contract requires the City to maintain certain insurance with respect to the Mortgaged Property, but such insurance may not cover all perils to which the Mortgaged Property is subject or provide sufficient Net Proceeds to fully repair or replace the Mortgaged Property. Environmental Risks The Mortgaged Property and surrounding land was the site of a textile mill from at least 1907 until Processes performed at the mill included bleaching, dyeing and finishing. Professional Service Industries, Inc. ( PSI ) delivered a Phase I Environmental Sire Assessment (the Phase I ) with respect to the Mortgaged Property and surrounding areas on September 19, Prior to the delivery of the Phase I, numerous Phase II Environmental Site Assessments (the Phase II s ) were completed on a larger land area including the Mortgaged Property. Additionally, a Brownfields Agreement was executed on June 25, 2008 (the Brownfields Agreement ) between Castle & Cooke North Carolina, LLC, the previous owner of the Mortgaged Property, and the North Carolina Department of Natural Resources ( NCDENR ). The Brownfields Agreement addresses the Mortgaged Property, the parent parcel on which the Mortgaged Property is located and 11 additional congruent parcels. The findings of the Phase II s and the Brownfields Agreement were included in the Phase I. The Phase I identified groundwater impact and soil contaminants above regulatory limits, the site of a former machine shop and the use of hydraulic elevators as recognized environmental conditions. The Phase I also identified several off-site recognized environmental conditions, including nearby underground storage tanks and the site of a former gas station. The Phase I includes the following recommendations from PSI: (i) during the planned grading and construction 10

15 activities, work must be conducted as set forth in the Brownfields Agreement, including soil management plan and land use restrictions (which limits the subject property to mixed use development), (b) groundwater monitoring wells encountered during site grading must be properly abandoned in accordance with local and State regulations, and (c) further communication with NCDENR is needed to determine if additional investigative activities are required. The City has worked, and will continue to work, to ensure that grading and construction activities are conducted as set forth in the Brownfields Agreement and that groundwater monitoring wells encountered during site grading are properly abandoned, and will communicate with NCDENR to ensure continuing environmental compliance. Under the Deed of Trust, the City must undertake whatever environmental remediation may be required by law. For example, if any portion of the Mortgaged Property became a Superfund site under the Comprehensive Environmental Response, Compensation and Liability Act, the federal government may require clean-up and the City may be required to pay all or part of such clean-up costs. If the City were unable to continue operation of any part of the Mortgaged Property because of environmental contamination of the Mortgaged Property, the value of the Mortgaged Property at foreclosure would be reduced by the cost of any clean-up. Outstanding General Obligation Debt of the City Although the City currently has no general obligation indebtedness, the City may issue additional general obligation bonds and notes in the future, in which case it would pledge its faith and credit and taxing power to the payment of its general obligation bonds and notes issued or to be issued. FUNDS WHICH MAY OTHERWISE BE AVAILABLE TO PAY INSTALLMENT PAYMENTS OR ADDITIONAL PAYMENTS OR TO MAKE OTHER PAYMENTS TO BE MADE BY THE CITY UNDER THE CONTRACT MAY BE SUBJECT TO SUCH FAITH AND CREDIT PLEDGE BY THE CITY AND THEREFORE MAY BE REQUIRED TO BE APPLIED TO THE PAYMENT OF ITS GENERAL OBLIGATION INDEBTEDNESS. Other Indebtedness There is no limitation on the City entering into additional contracts which provide for obligations the payment on which is subject to appropriation. See THE CITY Debt Information Other Long-Term Commitments in Appendix A hereto. Bankruptcy Under North Carolina law, a local governmental unit such as the City may not file for bankruptcy protection without (1) the consent of the LGC and (2) the satisfaction of the requirements of 109(c) of the United States Bankruptcy Code. If the City were to initiate bankruptcy proceedings with the consent of the LGC and satisfy the requirements of 11 U.S.C. 109(c), the bankruptcy proceedings could have material and adverse effects on Owners of the 2014 Bonds, including (a) delay in enforcement of their remedies, (b) subordination of their claims to claims of those supplying goods and services to the City after the initiation of bankruptcy proceedings and to the administrative expenses of bankruptcy proceedings, and (c) imposition without their consent of a plan of reorganization reducing or delaying payment of the 2014 Bonds. The effect of the other provisions of the United States Bankruptcy Code on the rights and remedies of the Owners of the 2014 Bonds cannot be predicted and may be affected significantly by judicial interpretation, general principles of equity (regardless of whether considered in a proceeding in equity or at law) and considerations of public policy. THE CORPORATION The Kannapolis Capital Corporation is a nonprofit corporation incorporated under the Nonprofit Corporation Act of the State of North Carolina on May 13, The Corporation s purpose, as stated in its Articles of Incorporation, is to promote the general welfare of the citizens of the City by assisting the City in carrying out its municipal and governmental functions through the acquisition, construction and operation, sale or lease of real estate and improvements, facilities and equipment for the use and benefit of the general public. All of the directors and officers of the Corporation are employees of the City. The Corporation may participate in other financing transactions for the City in the future. 11

16 The Corporation s role in the financing described in this Official Statement will be limited. The Corporation s officers, directors and counsel will have the opportunity to review this Official Statement and the principal financing documents and to assist in their preparation. The Corporation s counsel will deliver certain legal opinions in connection with the transaction. The Corporation and the City expect, however, that the Corporation will have no continuing responsibilities or involvement with respect to the Mortgaged Property, its operations or the financing, or with respect to monitoring or providing for compliance with the terms of any of the financing documents. The Corporation has no taxing power, no assets and no employees. The Corporation will not be liable to make any payments of principal, premium or interest with respect to the 2014 Bonds. See Appendix A for a description of the City. THE CITY Litigation LEGAL MATTERS No litigation is now pending or, to the best of the City s knowledge, threatened, against or affecting the City which seeks to restrain or enjoin the authorization, execution or delivery of the 2014 Bonds or which contests the City s creation, organization or corporate existence, or the title of any of the present officers thereof to their respective offices or the authority or proceedings for the City s authorization, execution and delivery of the Contract and the Deed of Trust, or the City s authority to carry out its obligations thereunder or which would have a material adverse impact on the City s condition, financial or otherwise. In addition, no litigation is now pending or, to the best of the Corporation s knowledge, threatened, against or affecting the Corporation which seeks to restrain or enjoin the authorization, execution or delivery of the 2014 Bonds, the Indenture, the Contract or the Deed of Trust or which contests the validity or the authority or proceedings for the adoption, authorization, execution or delivery of the 2014 Bonds or the Corporation s creation, organization or corporate existence, or the title of any of the present officers thereof to their respective offices or the authority or proceedings for the Corporation s authorization, execution or delivery of the 2014 Bonds, the Indenture or the Contract, or the Corporation s authority to carry out its obligations thereunder. Contingent Liabilities The City is not aware of any contingent liabilities that would materially adversely affect the City s ability to meet its financial obligations. Opinions of Counsel Legal matters related to the execution, sale and delivery of the 2014 Bonds are subject to the approval of Parker Poe Adams & Bernstein LLP, Bond Counsel. The opinion of Parker Poe Adams & Bernstein LLP, as Bond Counsel, substantially in the form set forth in Appendix D hereto, will be delivered at the time of the delivery of the 2014 Bonds. Certain legal matters will be passed on for the City by the City Attorney, Walter M. Safrit II, Esq.; for the Corporation by Parker Poe Adams & Bernstein LLP; and for the Underwriters by their counsel, Pope Zeigler, LLC. Parker Poe Adams & Bernstein LLP is serving as Bond Counsel for the City and from time to time such firm and Pope Zeigler, LLC, counsel to the Underwriters, have represented the Underwriters as counsel in other financing transactions. Neither the City nor the Underwriters have conditioned the future employment of either of these firms in connection with any proposed financing issues for the City or for the Underwriters on the successful execution and delivery of the 2014 Bonds. 12

17 TAX TREATMENT On the date of execution and delivery of the 2014 Bonds, Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina ( Bond Counsel ), will render an opinion that, under existing law, the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds is (1) assuming compliance by the City with certain provisions of the Internal Revenue Code of 1986, as amended (the Code ), (a) excludable from gross income for federal income tax purposes, and (b) not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and (2) exempt from State of North Carolina income taxation. The portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds will be taken into account in determining adjusted current earnings of certain corporations (as defined for federal income tax purposes), and such corporations are required to include in the calculation of federal alternative minimum taxable income 75% of the excess of such corporation s adjusted current earnings over its federal alternative minimum taxable income (determined without regard to this adjustment and prior to reduction for certain net operating losses). The Code imposes various restrictions, conditions and requirements relating to the exclusion of interest on obligations, such as the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds, from gross income for federal income tax purposes, including, but not limited to, the requirement that the City rebate certain excess earnings on proceeds and amounts treated as proceeds of the 2014 Bonds to the United States Treasury, restrictions on the investment of such proceeds and other amounts, and restrictions on the ownership and use of the facilities financed or refinanced with proceeds of the 2014 Bonds. The foregoing is not intended to be an exhaustive listing of the post-issuance tax compliance requirements of the Code, but is illustrative of the requirements that must be satisfied by the City subsequent to the execution and delivery of the 2014 Bonds to maintain the excludability of the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds from gross income for federal income tax purposes. Bond Counsel s opinion is given in reliance on certifications by representatives of the City as to certain facts material to the opinion and the requirements of the Code. The City has covenanted to comply with all requirements of the Code that must be satisfied subsequent to the delivery of the 2014 Bonds in order that the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds be, or continue to be, excludable from gross income for federal income tax purposes. The opinion of Bond Counsel assumes compliance by the City with such covenants, and Bond Counsel has not been retained to monitor compliance by the City with such covenants subsequent to the date of execution and delivery of the 2014 Bonds. Failure to comply with certain of such requirements may cause the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds to be included in gross income for federal income tax purposes retroactive to the date of delivery of the 2014 Bonds. No other opinion is expressed by Bond Counsel regarding the federal tax consequences of the ownership of, or the receipt or accrual of interest with respect to, the 2014 Bonds. If the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds subsequently becomes included in gross income for federal income tax purposes due to a failure by the City to comply with any requirements described above, the City is not required to redeem the 2014 Bonds or to pay any additional interest or penalty. The Internal Revenue Service has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includible in gross income for federal income tax purposes. Bond Counsel cannot predict whether the Internal Revenue Service will commence an audit of the 2014 Bonds. Prospective purchasers of the 2014 Bonds are advised that, if the Internal Revenue Service does audit the 2014 Bonds, under current Internal Revenue Service procedures, at least during the early stages of an audit, the Internal Revenue Service will treat the City as the taxpayer, and the owners of the 2014 Bonds may have limited rights, if any, to participate in such audit. The commencement of an audit could adversely affect the market value and liquidity of the 2014 Bonds until the audit is concluded, regardless of the ultimate outcome. Prospective purchasers of the 2014 Bonds should be aware that ownership of the 2014 Bonds and the accrual or receipt of portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds may 13

18 result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property or casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain Subchapter S Corporations with excess net passive income, foreign corporations subject to the branch profits tax, life insurance companies and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry the 2014 Bonds. Bond Counsel does not express any opinion as to any such collateral tax consequences. Prospective purchasers of the 2014 Bonds should consult their own tax advisors as to the collateral tax consequences. Proposed legislation is considered from time to time by the United States Congress that, if enacted, would affect the tax consequences of owning the 2014 Bonds. No assurance can be given that any future legislation, or clarifications or amendments to the Code, if enacted into law, will not contain provisions which could cause the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds to be subject directly or indirectly to federal or State of North Carolina income taxation, adversely affect the market price or marketability of the 2014 Bonds or otherwise prevent the owners of the 2014 Bonds from realizing the full current benefit of the status of the portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds. Bond Counsel s opinion is based on existing law, which is subject to change. Such opinion is further based on factual representations made to Bond Counsel as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinion to reflect any facts or circumstances that may thereafter come to Bond Counsel s attention, or to reflect any changes in law that may thereafter occur or become effective. Moreover, Bond Counsel s opinion is not a guarantee of a particular result, and is not binding on the Internal Revenue Service or the courts; rather, such opinion represents Bond Counsel s professional judgment based on its review of existing law, and in reliance on the representations and covenants that Bond Counsel deems relevant to such opinion. Bond Counsel s opinion expresses the professional judgment of the attorneys rendering the opinion regarding the legal issues expressly addressed therein. By rendering its opinion, Bond Counsel does not become an insurer or guarantor of the result indicated by that expression of professional judgment, of the transaction on which the opinion is rendered, or of the future performance of the City, nor does the rendering of such opinion guarantee the outcome of any legal dispute that may arise out of the transaction. As indicated on the inside cover page, the 2014 Bonds maturing on April 1, 2027 through April 1, 2030, inclusive, and on April 1, 2034 (the OID Bonds ), are being sold at initial offering prices which are less than the principal amount payable at maturity. Under the Code, the difference between (a) the initial offering prices to the public (excluding bond houses and brokers) at which a substantial amount of each maturity of the OID Bonds is sold and (b) the principal amount payable at maturity of such OID Bonds, constitutes original issue discount treated as interest which will be excluded from the gross income of the owners of such OID Bonds for federal income tax purposes. In the case of an owner of an OID Bond, the amount of original issue discount on such OID Bond is treated as having accrued daily over the term of such OID Bond on the basis of a constant yield compounded at the end of each accrual period and is added to the owner s cost basis of such OID Bond in determining, for federal income tax purposes, the gain or loss upon the sale, redemption or other disposition of such OID Bond (including its sale, redemption or payment at maturity). Amounts received upon the sale, redemption or other disposition of an OID Bond which are attributable to accrued original issue discount on such OID Bonds will be treated as interest exempt from gross income, rather than as a taxable gain, for federal income tax purposes, and will not be a specific item of tax preference for purposes of the federal alternative minimum tax imposed on corporations and individuals. However, it should be noted that with respect to certain corporations (as defined for federal income tax purposes), a portion of the original issue discount that accrues to such corporate owners of OID Bonds in each year will be taken into account in determining the adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on such corporations and may result in other collateral federal income tax consequences for certain taxpayers in the year of accrual. Consequently, corporate owners of an OID Bond should be aware that the accrual of original issue discount on any OID Bond in each year may result in a federal alternative minimum tax liability or other collateral federal income tax consequences, even though such corporate owners may not have received any cash payments attributable to such original issue discount in such year. 14

19 Original issue discount is treated as compounding semiannually at a rate determined by reference to the yield to maturity of each individual OID Bond. The amount treated as original issue discount on an OID Bond for a particular semiannual accrual period is equal to (a) the product of (i) the yield to maturity for such OID Bond (determined by compounding at the close of each accrual period) and (ii) the amount which would have been the tax basis of such OID Bond at the beginning of the particular accrual period if held by the original purchaser, less (b) the amount of interest payable on such OID Bond during the particular accrual period. The tax basis is determined by adding to the initial public offering price on such OID Bond the sum of the amounts which have been treated as original issue discount for such purposes during all prior accrual periods. If an OID Bond is sold between semiannual compounding dates, original issue discount which would have accrued for that semiannual compounding period for federal income tax purposes is to be appointed in equal amounts among the days in such compounding period. The Code contains additional provisions relating to the accrual of original issue discount in the case of owners of the OID Bonds who subsequently purchase any OID Bonds after the initial offering or at a price different from the initial offering price during the initial offering of the Bonds. Owners of OID Bonds should consult their own tax advisors with respect to the precise determination for federal and state income tax purposes of the amount of original issue discount accrued upon the sale, redemption or other disposition of an OID Bond as of any date and with respect to other federal, state and local tax consequences of owning and disposing of an OID Bond. It is possible that under the applicable provisions governing the determination of state or local taxes, accrued original issue discount on an OID Bond may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment attributable to such original issue discount until a later year. As indicated on the inside cover page, the 2014 Bonds maturing on April 1, 2016 through April 1, 2026, inclusive, and on April 1, 2031 and April 1, 2032 (the Premium Bonds ), are being sold at initial offering prices which are in excess of the principal amount payable at maturity. The difference between (a) the initial offering prices to the public (excluding bond houses and brokers) at which a substantial amount of the Premium Bonds is sold and (b) the principal amount payable at maturity of such Premium Bonds constitutes original issue premium, which original issue premium is not deductible for federal income tax purposes. In the case of an owner of a Premium Bond, however, the amount of the original issue premium which is treated as having accrued over the term of such Premium Bond is reduced from the owner s cost basis of such Premium Bond in determining, for federal income tax purposes, the taxable gain or loss upon the sale, redemption or other disposition of such Premium Bond (whether upon its sale, redemption or payment at maturity). Owners of Premium Bonds should consult their tax advisors with respect to the determination, for federal income tax purposes, of the adjusted basis of such Premium Bonds upon any sale or disposition and with respect to any state or local tax consequences of owning a Premium Bond. CONTINUING DISCLOSURE The City agrees, in accordance with Rule 15c2-12 ( Rule 15c2-12 ) promulgated by the Securities and Exchange Commission (the SEC ), to provide to the MSRB: (1) by not later than seven months after the end of each Fiscal Year, beginning with the Fiscal Year ending June 30, 2014, the audited financial statements of the City for the preceding Fiscal Year, if available, prepared in accordance with Section of the General Statutes of North Carolina, as it may be amended from time to time, or any successor statute, or if such audited financial statements are not then available, unaudited financial statements of the City for such Fiscal Year to be replaced subsequently by audited financial statements of the City to be delivered within 15 days after such audited financial statements become available for distribution; (2) by not later than seven months after the end of each Fiscal Year, beginning with the Fiscal Year ending June 30, 2014, the financial and statistical data as of a date not earlier than the end of the preceding Fiscal Year for the type of information included under the captions THE CITY Debt Information and Tax Information (including subheadings thereunder) in Appendix A to this Official Statement (excluding in each case any information on overlapping or underlying units); 15

20 (3) in a timely manner not in excess of ten Business Days after the occurrence of the event, notice of any of the following events with respect to the 2014 Bonds: (a) (b) (c) (d) (e) principal and interest payment delinquencies; non-payment related defaults, if material; unscheduled draws on debt service reserves reflecting financial difficulties; unscheduled draws on any credit enhancements reflecting financial difficulties; substitution of any credit or liquidity providers, or their failure to perform; (f) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2014 Bonds or other material events affecting the tax status of the 2014 Bonds; (g) (h) (i) (j) (k) (l) modifications of the rights of the beneficial owners of the 2014 Bonds, if material; call of any of the 2014 Bonds, if material, and tender offers; defeasance of any of the 2014 Bonds; release, substitution, or sale of any property securing repayment of the 2014 Bonds, if material; rating changes; bankruptcy, insolvency, receivership or similar event of the City; (m) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to such actions, other than pursuant to its terms, if material; (n) and appointment of a successor or additional trustee or the change of name of a trustee, if material; (4) in a timely manner, notice of a failure of the City to provide required annual financial information described in (1) or (2) above on or before the date specified. The City agrees in the Contract that its undertaking described above is intended to be for the benefit of the Owners and the beneficial owners of the 2014 Bonds and is enforceable by the Trustee or by any of them, including an action for specific performance of the City s obligations described above, but a failure to comply will not be an Event of Default under the Contract and will not result in acceleration of the principal component of Installment Payments. An action must be instituted, had and maintained in the manner provided in the Contract for the benefit of all of the Owners and beneficial owners of the 2014 Bonds. The City may modify from time to time, consistent with Rule 15c2-12, the information provided or the format of the presentation of such information, to the extent necessary or appropriate in the judgment of the City, but: (1) any such modification may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law or change in the identity, nature or status of the City; (2) the information to be provided, as modified, would have complied with the requirements of Rule 15c2-12 as of the date of this Official Statement, after taking into account any amendments or interpretations of Rule 15c2-12 as well as any changes in circumstances; 16

21 (3) any such modification does not materially impair the interest of the Owners or the beneficial owners, as determined by nationally recognized bond counsel or by the approving vote of the Owners of a majority in principal amount of the 2014 Bonds pursuant to the Indenture as may be amended from time to time. Any annual financial information containing modified operating data or financial information will explain, in narrative form, the reasons for the modification and the impact of the change in the type of operating data or financial information being provided. All documents provided to the MSRB as described above are to be provided in an electronic format as prescribed by the MSRB and accompanied by identifying information as prescribed by the MSRB. The City may discharge its undertaking described above by transmitting those documents or notices in a manner subsequently required by the SEC in lieu of the manner described above. The provisions of this paragraph terminate on payment, or provision having been made for payment in a manner consistent with Rule 15c2-12, in full of the principal of and interest with respect to the 2014 Bonds. The City previously failed to comply with its continuing disclosure obligations by failing to timely file its annual budget for the Fiscal Year ended June 30, On December 13, 2011, the City filed its audited financial statements for the Fiscal Year ended June 30, 2011, however, such filing did not link to CUSIP numbers for one series of the City s outstanding bonds. On January 28, 2013, the City filed a notice of failure to file its annual budget for the Fiscal Year ended June 30, 2012 and a notice of failure to file its audited financial statements for the Fiscal Year ended June 30, On January 3, 2014, the City filed its audited financial statements for the Fiscal Year ended June 30, 2013 and its budget for the Fiscal Year ended June 30, 2014, however, such filing did not link to CUSIP numbers for the City s outstanding Limited Obligation Bonds. On May 28, 2014, the City linked its audited financial statements for the Fiscal Year ended June 30, 2013 and its budget for the Fiscal Year ended June 30, 2014 to the CUSIP numbers for the City s outstanding Limited Obligation Bonds and filed a material event notice disclosing the failure to previously link to such CUSIP numbers. The City is currently in compliance with its continuing disclosure obligations. Since 2008, the rating agencies have periodically downgraded the claims-paying ability of municipal bond insurers several times without giving notice of such downgrades to the City. The City has learned of some downgrades through general media sources and, when it did so, filed the appropriate material event notice related to such ratings downgrades to the extent they are applicable to the City s indebtedness; however, it is possible that the City either was unaware of a downgrade or did not learn of a downgrade in order to file a notice in a timely fashion. UNDERWRITING The Underwriters are offering the 2014 Bonds pursuant to a firm underwriting contract. The Underwriters have agreed to purchase the 2014 Bonds at a price equal to $27,523,245.75, representing the par amount of the 2014 Bonds, plus net original issue premium of $2,374,618.35, less underwriters discount of $71, The obligation of the Underwriters to pay for the 2014 Bond is subject to certain terms and conditions, including the approval of certain legal matters by counsel. The Underwriters intend to offer the 2014 Bonds to the public initially at the offering prices set forth on the inside cover page of this Official Statement, which offering prices may subsequently be changed from time to time by the Underwriters without any requirement of prior notice. The Underwriters may offer and sell the 2014 Bonds to certain dealers (including dealers depositing 2014 Bonds into investment trusts) at prices lower than the public offering prices set forth on the inside cover page of this Official Statement. The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage services. Certain of the Underwriters and their 17

22 respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the City, for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities, which may include credit default swaps) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the City. The Underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments. FINANCIAL ADVISOR Davenport & Company LLC, Charlotte, North Carolina, has served as Financial Advisor to the City in connection with the authorization and delivery of the 2014 Bonds. The Financial Advisor is not contractually obligated to undertake, and has not undertaken to make, an independent verification or to assume the responsibility for, the accuracy, completeness, or fairness of the information contained in this Official Statement. RATINGS Moody s Investors Service, Inc. ( Moody s ) and Standard & Poor s Ratings Services ( S&P ) have assigned ratings of Aa3 and A+, respectively, to the 2014 Bonds. The ratings reflect only the views of such rating agencies, and an explanation of the significance of such ratings may be obtained from such rating agencies. Certain information and materials not included in this Official Statement were furnished to such rating agencies. There is no assurance that such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely if, in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the 2014 Bonds. MISCELLANEOUS Any statements in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended as such and not as representations of fact. The Trustee has not provided, and is not responsible for, any information in this Official Statement. The distribution and use of this Official Statement by the Underwriter has been duly authorized and approved by the City. 18

23 APPENDIX A INFORMATION RELATING TO THE CITY OF KANNAPOLIS, NORTH CAROLINA

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25 APPENDIX A INFORMATION RELATING TO THE CITY OF KANNAPOLIS, NORTH CAROLINA General Description The City covers an area of approximately square miles located in the north central portion of Cabarrus County, North Carolina and the south central portion of Rowan County, North Carolina. Approximately 82% of the City is located in Cabarrus County and 18% in Rowan County. The City is approximately 12 miles northeast of the City of Charlotte, North Carolina and abuts the City of Concord, North Carolina. Demographic Characteristics The United States Department of Commerce, Bureau of the Census, has recorded the population of the City to be as follows: ,303 29,709 36,910 42,625 Per capita income data for Cabarrus County, Rowan County and the State are presented in the following table. Year Cabarrus County 1 Rowan County 1 State 2008 $35,739 $31,410 $35, ,781 29,978 34, ,514 29,560 35, ,478 30,323 36, ,079 31,365 37,910 1 Separate data not available for the City. Source: United States Department of Commerce, Bureau of Economic Analysis. Commerce and Industry A major initiative in the City over the last few years has been the development of the North Carolina Research Campus (the NCRC ). The NCRC is the vision of David H. Murdock and is being developed largely through Castle & Cooke North Carolina, LLC, wholly-owned and managed by Castle & Cooke Holdings, Inc. and owned by Mr. Murdock. Mr. Murdock s vision is to create a multi-purpose campus that houses state-of-the-art research equipment, research space and laboratory space that brings together researchers and scientists from the public and private sector to collaborate on advancements in biotechnology, nutrition and health. Three facilities are open and operating on the NCRC, including the David H. Murdock Core Laboratory (the Core Lab ), the Plants for Human Health Building and the Nutrition Research Building. The Core Lab is the centerpiece of the NCRC and houses the David H. Murdock Research Institute as a provider of advanced research technologies to academic, government and industry scientists, including specialized high-tech equipment such as a 950-megahertz nuclear magnetic resonance spectrometer that has the highest commercially available magnetic field strength currently available in the world. Duke University is managing the M.U.R.D.O.C.K. Study (a large-scale project A-1

26 studying the long-term health of local citizens). The Plants for Human Health Building houses researchers and staff of Dole Foods, North Carolina State University and Appalachian State University. The Nutrition Research Building houses researchers and staff of The University of North Carolina at Chapel Hill, The University of North Carolina at Greensboro, North Carolina A&T State University and North Carolina Central University. Rowan-Cabarrus Community College s Biotechnology Training Center is located on the NCRC in a three-floor, 62,000 square-foot facility that is a hands-on, realistic training environment. Private and quasi-private sector partners include Carolinas Health Care System, Cabarrus Health Alliance, Data Chambers, Dole Nutrition Institute, General Mills, Monsanto, JC Med LLC and Sensory Spectrum. The NCRC consists of an area of approximately 283 acres within the City. The original development plan for the NCRC contemplated that, when completed, the NCRC would include more than 2 million square feet of office and laboratory space, 600,000 square feet of new retail and commercial space, 400,000 square feet of academic and civic space and approximately 1,100 new residential units. Like many communities across North Carolina and the nation, the City was negatively impacted by the recent economic downturn. The changing economic conditions and the uncertainty of the State budget have slowed the aggressive construction schedule of the NCRC from its original plan. The economic conditions have also impacted the university staffing schedule. With the City s investment in the NCRC and nurturing the growth that has occurred in the western part of Cabarrus County, where a large portion of the City is located, the City has positioned itself to benefit from improving economic conditions as those areas attract new private investment. As of July 30, 2014, the North Carolina House and Senate 2014 budget bills include a directive to the Board of Governors of the University of North Carolina to use $29,000,000 to support activities at the NCRC related to the University of North Carolina. This would be the first year since the NCRC was announced in 2005 that the full amount of funding would be available. This additional funding could increase employment by as many as 200 in The City expects that the long-term stability and growth of the NCRC will be improved with the construction of the City Hall and Law Enforcement Center. The vision for the NCRC has always contemplated the construction of a substantial civic building in the heart of the NCRC. The City Hall and Law Enforcement Center is expected to serve as a strong symbolic, as well as practical, connection between the NCRC and the larger community. More practically, the inclusion of public meeting space in the City Hall building has been designed to specifically support the NCRC via scientific conferences and other business, industry and academic gatherings. There are currently inadequate facilities on the NCRC for this purpose. In recent years, several major businesses have located in the City, including Stanley Works, Home Depot, Royce Apparel, Target, Office Max, Aldi Food Stores, Rug & Home Distribution Center, Fairfield Inn, Mictrotel Inns and Suites, Studio One Hotel, Lowes Foods, Best Western Hotel, IHOP Restaurant, Novant Health Logistics Center, Fifth Third Bank, Golden Gait Trailers and Stewart-Haas Racing. Shoe Show, Inc. s corporate headquarters are in the City. A recent partnership between Childress Klein Properties and the City was established to facilitate a 360,000 square foot speculative industrial building and the potential for a second similar building within 18 months. To attract more companies, the City partnered with a private development firm to build the Kannapolis Gateway Business Park (the Park ). The Park is located on an 85-acre tract west of the City within one mile of I-85. Novant Health occupies a facility in the Park to operate a distribution center that serves its eight hospitals in North Carolina, and Stewart-Haas Racing, home of Danica Patrick, Kevin Harvick, Kurt Busch and Tony Stewart, occupies a 127,497 square-foot racing facility on 26 acres inside the Park. The City s partnering development firm completed a second speculative building (which is A-2

27 fully leased) and a portion of a 12-acre neighborhood retail center inside the Park. The remaining portion of land in the retail center is currently being marketed for additional users. The City s economy also benefits from its proximity to Charlotte (and its international airport) and access to major interstate highways. More than 149,000 persons are employed in Cabarrus and Rowan Counties. The growing population of the City and Cabarrus and Rowan Counties provides a steady flow of workers into the job market. Job training is made possible by the vocational education programs in public schools and by three neighboring community colleges and technical schools. The following table lists some of the major employers in the City as of 2013: Employer Service Approximate Number of Area Employees Kannapolis City Schools Education 750 Shoe Show Shoe Distribution 550 City of Kannapolis Government 381 Cabarrus County Schools Education 376 Wayne Brothers Concrete Contractors 367 Stanley Works Warehousing 219 Cabarrus Health Alliance Health Care 218 Food Lion Grocery 185 Rowan Cabarrus Community College Higher Education 150 Kannapolis Health Care (Transitional) Health Care 150 Source: Cabarrus County Economic Development Corporation. The following table summarizes the number and value of building permits for new construction issued in the City in the Fiscal Years shown: Commercial Residential Number Number Year of Units Value of Units Value Total Value $22,466, $27,553,968 $50,020, ,849, ,303,349 21,153, ,910, ,756,882 28,667, ,482, ,377,026 46,849, ,707, ,022,660 62,729,969 Source: Cabarrus County Building Inspections Department. A-3

28 The following table shows the total taxable retail sales Cabarrus County and Rowan County for the Fiscal Years shown below: Fiscal Year Cabarrus County Rowan County 2009 $1,823,993,530 $739,262, ,007,249, ,836, ,062,851, ,565, ,301,711, ,239, ,446,413, ,331,657 Source: North Carolina Department of Revenue, Sales and Use Tax Division and Cabarrus County EDA. Note: Separate data not available for the City. Employment The North Carolina Employment Security Commission has estimated the percentage of unemployment in Cabarrus County as follows: January 9.3% 12.7% 11.1% 9.3% 8.8% 6.3% February March April May (P) June July August September October November December Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: (P) means Preliminary. A-4

29 The North Carolina Employment Security Commission has estimated the percentage of unemployment in Rowan County as follows: January 10.7% 14.2% 12.6% 10.7% 9.8% 7.1% February March April May (P) June July August September October November December Source: U.S. Department of Labor, Bureau of Labor Statistics. Note: (P) means Preliminary. Government and Major Services Government Structure. The City is governed by the council-manager form of government. The seven-member non-partisan City Council consists of six council members elected at large for four-year staggered terms and the Mayor who is elected at large for a four-year term. The Mayor and City Council serve as the governing body responsible for the City s policies and programs. A city manager appointed by the City Council attends to the day-to-day administration of the City s government. Education. Kannapolis City School Administrative Unit (the City Schools ) serves most of the City s current residents. The Cabarrus County School Administrative Unit (the Cabarrus County Schools ) serves residents in the southern and western parts of the City, and the Rowan County School Administrative Unit (the Rowan County Schools ) serves those near the northern edge of the City. Each school administrative unit is governed by an elected Board of Education, which appoints a school superintendent. The State provides basic minimum funding for public school current expenses. These State funds are supplemented with County and other local and federal funds. The City has no responsibility for and provides no funds to the City Schools, the Cabarrus County Schools or the Rowan County Schools. The following table illustrates the number of schools and the average daily membership ( ADM ) for the past five years in the City Schools: A-5

30 Elementary Grades K-5 Intermediate Grades 5-6 Middle Grades 6-8 Secondary Grades 9-12 School Year Number ADM Number ADM Number ADM Number ADM , , , , , , , , , ,430 Note: ADM (determined by actual records at the schools) is computed by the North Carolina Department of Public Instruction on a uniform basis for all administrative units in the State. The ADM computations are used as a basis for teacher allotments and for distribution of local funds if there is more than one administrative unit within a county. Source: Superintendent s Office of each administrative unit. Within a twenty-five mile radius of the City, City residents have access to colleges, universities and trade schools including the University of North Carolina at Charlotte, Catawba College, Davidson College and Pfeiffer University. Rowan-Cabarrus Community College ( RCCC ) and Shaw University have facilities within the City s boundaries. RCCC played a critical role providing former textile workers basic educational classes, including high school equivalency courses, and retraining opportunities. To take advantage of the opportunities provided by the North Carolina Research Center, RCCC is working with the other campuses in the North Carolina Community College System to begin biotechnology training courses. Transportation. The City is served from the south, north and east by I-85. Major thoroughfares, including US 29/601, Dale Earnhardt Boulevard, Lane Street and the Kannapolis Highway, provide connections to I-85 and route traffic through the City. There are approximately 290 miles of streets within the City, including 205 miles maintained by the City. The remainder are either maintained by the State or by private concerns. The primary funding source for the City s street maintenance budget is State funds. The City also provides street improvements through the use of federal funds. New subdivision streets are primarily constructed by private developers for approval and acceptance for maintenance by the City. Rail service is provided by the Norfolk Southern Company and Amtrak, which maintains a terminal in the City. Bus transportation is provided by Greyhound Trailways and by a private charter bus company with facilities located in the City. Air transportation is available at Charlotte Douglas International Airport, located approximately 35 miles south of the City, and the City of Concord airport located within five miles of the City. Rider, the Concord Kannapolis Transit System, began operating in the spring of 2004 serving both the City and the City of Concord. The system averages over 1,000 passengers per day with a fare of $1 per ride. Medical Facilities. Carolinas Medical Center NorthEast, a 457-bed facility, and its related Medical Mall, are located one mile from the City offering a full range of medical services to residents of the City. CMC-Kannapolis, a 26,000 square-foot, $17 million free-standing emergency department, was constructed in the City in Rowan Regional Medical Center is also available to City residents. Public Service Enterprises. On July 1, 1987, the Kannapolis Sanitary District and the Royal Oaks Sanitary District merged with the City. The City purchased Cabarrus County water lines within and just A-6

31 outside the City in The City owns and operates public water treatment and transmission/distribution facilities, as well as sewer collection and transmission facilities providing utility service to both residential and nonresidential customers within the City limits and surrounding unincorporated areas. The City s water system consists of two raw water pump stations, a 15 million gallon per day water treatment plant, five elevated storage tanks and approximately 310 miles of water transmission and distribution lines. The City s sewer system consists of approximately 325 miles of sewer collection lines and 14 sewer pump stations. The City issued its Water and Sewer System Revenue Bonds, Series 2013 to finance the construction of a new major water line interconnection and certain other water and sewer capital projects. Electrical power systems within the City are owned and operated primarily by Duke Power Company and, to a lesser degree, the Town of Landis. Public Service Company of North Carolina provides gas service to City residents and businesses through a franchise agreement with the City. Other Services. The City also provides police and fire protection, planning and zoning, parks and recreation, refuse collection, street maintenance, street lighting, traffic engineering, code enforcement and community development services. Debt Information Legal Debt Limit. In accordance with the provisions of the State Constitution and The Local Government Bond Act, as amended, allowing for the issuance of all presently authorized bonds, the City had the statutory capacity to incur additional net debt in an approximate amount of $274,000,000 as of June 30, Outstanding General Obligation Debt. The City has no outstanding general obligation debt. General Obligation Debt Information for Overlapping Unit as of June 30, Bonds Authorized and Unissued Total GO Debt Total GO Unit 2012 Population 1 Assessed Valuation Tax Rate Per $100 Utility Other Utility Other Debt Per Capita Cabarrus County 183,806 $18,672,914,917 $ $33,220, $80,395,000 $ Rowan County 138,252 $11,634,062, ,995, North Carolina Office of State Budget and Management. Other Long-term Commitments. The City previously issued its Limited Obligation Bonds, Series 2010A and Taxable Limited Obligation Bonds (Build America Bonds), Series 2010B (collectively, the 2010 Limited Obligation Bonds ). The following table sets forth the annual debt service requirements for the 2010 Limited Obligation Bonds. A-7

32 Fiscal Year Ending June 30 Principal Payments Interest Payments 1 Total $1,585,000 $2,008,668 $3,593, ,655,000 1,945,268 3,600, ,735,000 1,862,518 3,597, ,825,000 1,775,768 3,600, ,915,000 1,684,518 3,599, ,660,000 1,588,768 5,248, ,155,000 1,405,768 3,560, ,255,000 1,248,884 3,503, ,360,000 1,084,720 3,444, ,470, ,912 3,382, ,590, ,096 3,323, ,710, ,544 3,254, ,770, ,256 5,117,256 Total 2 $31,685,000 $17,142,688 $48,827,688 1 Figures include all interest payments due to be paid with respect to the 2010 Limited Obligation Bonds. The City is scheduled to receive federal subsidies of up to 35% of the interest payments due on the 2010 Limited Obligation Bonds in each Fiscal Year. 2 Totals may not foot due to rounding. Annual debt service requirements for the City s governmental activities notes are as follows: Fiscal Year Ending June 30 Principal Payments Interest Payments Total 2015 $ 1,083,329 $153,407 $ 1,236, ,077, ,442 1,207, ,021, ,735 1,129, ,391 88, , ,599, ,884 3,795, ,962 8, , , , , , , , , , , , , , , ,577 Total $10,163,504 $684,346 $10,847,850 A-8

33 Annual debt service requirements for the City s U.S. obligations are set forth below: Fiscal Year Ending June 30 Principal Payments Interest Payments Total 2015 $184,000 $23,568 $207, ,000 19, , ,000 15, , ,000 12,280 62, ,000 22, ,069 Total $827,000 $93,682 $920,682 As of May 1, 2014, the City had outstanding $33,224,348 of revenue bond debt, including its Water and Sewer System Revenue Bonds, Series 2002, Water and Sewer System Revenue Refunding Bond, Series 2011, and Water and Sewer System Revenue Bonds, Series These bonds are special obligations of the City and are secured by and payable solely from the revenues received from operation of the City s water and sewer system. Debt Outlook. In recent years, the City has utilized installment financing to purchase capital equipment for the City s various departments. The City intends to continue this practice in the coming years; however, the City also intends to make a concerted effort to minimize the amount of items financed with short term borrowing by using available cash for smaller capital purchases. The City is in the process of updating its Capital Improvement Plan that addresses its infrastructure needs through the Fiscal Year ending June 30, In its Enterprise Funds (Water & Sewer and Stormwater), the City intends to issue approximately $34 million in debt through revenue bonds. These bond issuances are scheduled to take place in the Fiscal Years ending June 30, 2016, 2019 and There are numerous projects that make up this total amount, but the main purpose for all of these projects will be to install new, or replace old, water, sewer, and stormwater infrastructure. In the General Fund, there is an additional $29 million in identified needs that will be funded through the Fiscal Year ending June 30, These projects are proposed to be funded through private bank placements annually. Needed projects that will be funded through these private placements will include multiple fire stations, greenways and other public safety apparatus. Tax Information General Information. FISCAL YEAR ENDED OR ENDING JUNE 30 Assessed Valuation Assessment Ratio 1 100% 100% 100% 100% 100% Real Property $3,244,822,362 $3,462,272,048 $3,486,066,202 $3,535,916,122 $3,184,460,797 Personal Property 246,649, ,031, ,285, ,820, ,389,228 Public Service Companies 2 57,180,279 55,691,820 56,141,913 64,092,442 64,386,561 Total Assessed Valuation $3,548,651,995 $3,706,995,227 $3,737,493,620 $3,791,828,861 $3,456,236,586 Rate per $ Levy $ 17,617,920 $ 18,189,469 $ 18,392,505 $ 18,741,859 $ 19,330,121 1 Percentage of appraised value has been established by statute. 2 Valuation of railroads, telephone companies and other utilities as determined by the North Carolina Property Tax Commission. A-9

34 Tax Collections. Year Ended June 30 % of Current Year s Levy Collected Collections in Subsequent Years Total Current Levy Current Year s Levy Collected % of Adjusted Levy 2009 $17,617,920 $17,177, % $186, % ,189,469 17,471, , ,392,505 17,638, , ,741,859 18,053, , ,330,121 18,620, Ten Largest Taxpayers for the Year Ended June 30, 2013 Business Type of Enterprise Assessed Valuation % of Total Assessed Valuation Castle & Cooke NCRC Real Estate $196,840, % Castle & Cooke LLC Real Estate 85,901, Atlantic American Properties, Inc./ Club at Irish Creek, LLC Real Estate 52,273, Trinity of Cabarrus LTD/Shoe Show Shoe Distribution 48,775, Afton Ridge Joint Venture LLC/ 1.07 CK Afton Ridge Shopping Center Real Estate 37,077,430 Duke Energy Corporation Utility 33,772, BNP Paribas Leasing Corp. Warehousing 30,839, Integra Springs LLC Real Estate 26,222, The Grand in Kannapolis LLC Real Estate 21,431, Target Corporation Retail 13,428, Total $546,563, % Budget Commentary General Fund. The General Fund budget for the Fiscal Year ended June 30, 2014 kept the ad valorem tax rate at $0.56 per $100 of assessed property valuation. This portion of the City budget accounted for departmental expenditures related to General Government, Public Safety, Public Works, Community Development, Parks and Recreation, Non-Departmental functions and Debt Service. The budget for the Fiscal Year ended June 30, 2014 was $34,021,527, which represented a 2.3% increase from the previous year s originally adopted budget. Public Safety (Police and Fire) accounted for 38% of all General Fund expenditures. Public Works expenditures accounted for an additional 12% of the General Fund expenditures. General fund revenues and expenditures were at their expected levels. By comparison, the City s General Fund revenues for the Fiscal Year ended June 30, 2013 were $34,541,146. General Fund revenues are derived from various sources, including property taxes (which account for approximately 55.1% of the General Fund revenues), sales taxes, fees and charges and intergovernmental revenues. For the Fiscal Year ended June 30, 2013, the City imposed a property tax rate of $0.56 per $100 of assessed value. For the Fiscal Year ended June 30, 2012, the City imposed a property tax rate of $0.49 per $100 of assessed value. The change in rates was due directly to the reduction in property values from the latest property revaluation. The next revaluation will occur in the Fiscal Years ending June 30, 2016 (Rowan County) and 2017 (Cabarrus County). For the Fiscal Year ended June 30, 2014, a rate of $0.01 per $100 of assessed value generated approximately $346,884. A-10

35 Water and Sewer Fund. The budget for the Fiscal Year ended June 30, 2014 for the Water and Sewer Fund was $14,746,836, which represented a 10.3% increase from the previous Fiscal Year budget. The reason for this increase was due to a rate increase required to meet the debt service demands on a major capital construction project designed to provide an adequate supply of drinking water to the City s residents for many years to come. Due to this rate increase, and the spacing of capital needs in the future, the City does not anticipate the need to raise water and sewer user fees within the next five years. The Water and Sewer Fund cash reserves (retained earnings) continue to be strong enough so that no rate increases will be required to meet the City s revenue bond covenants or to meet operational demands. For the Fiscal Year ended June 30, 2013, the City s water and sewer system realized a positive change in net position of approximately $1.3 million Budget Commentary General Fund. The General Fund budget for the Fiscal Year ending June 30, 2015 includes a four cent tax ($0.04) increase in the ad valorem tax rate to $0.60 per $100 of assessed property valuation to assist in paying debt service on the 2014 Bonds. The budget for the Fiscal Year ending June 30, 2015 is $35,772,647, which represents a 2.4% increase from the previous year s originally adopted budget. Public Safety (Police and Fire) accounts for 24.5% of all General Fund expenditures. Public Works expenditures account for an additional 6.8% of the General Fund expenditures. For the Fiscal Year ending June 30, 2015, a rate of $0.01 per $100 of assessed value is expected to generate approximately $354,689. The City also increased user fees in the Stormwater Fund by 8.3% among all tiers, and fees in the Environmental Fund by $2.50 per month per home. The increased revenue in these enterprise funds will further the City s overarching goal of all enterprise funds becoming self sustaining. Water and Sewer Fund. The budget for the Fiscal Year ending June 30, 2015 for the Water and Sewer Fund is $14,909,821, which represents a 1.1% increase from the previous Fiscal Year budget. Pension Plans The City participates in the North Carolina Local Governmental Employees Retirement System (the System ) and other pension plans. The System is a service agency administered through a board of trustees by the State for public employees of counties, cities, boards, commissions and other similar governmental entities. While the State Treasurer is the custodian of System funds, administrative costs are borne by the participating employer governmental entities. The State makes no contributions to the System. The System provides, on a uniform System-wide basis, retirement and, at each employer s option, death benefits from contributions made by employers and employees. Employee members contribute six percent of their individual compensation. Each new employer makes a normal contribution plus, where applicable, a contribution to fund any accrued liability over a 24-year period. The normal contribution rate, uniform for all employers, is currently 6.74% of eligible payroll for general employees and 6.77% of eligible payroll for law enforcement officers. The accrued liability contribution rate is determined separately for each employer and covers the liability of the employer for benefits based on employees service rendered prior to the date the employer joins the System. Members qualify for a vested deferred benefit at age 50 with at least 20 years of service or at age 60 after at least five years of creditable service to the unit of local government. Unreduced benefits are available: at age 65, with at least five years of creditable service; at age 60, with at least 25 years of creditable service; or after 30 years of creditable service, regardless of age. Benefit payments are computed by taking an average of the annual compensation for the four consecutive years of membership A-11

36 service yielding the highest average. This average is then adjusted by a percentage formula, by a total years of service factor, and by an age service factor if the individual is not eligible for unreduced benefits. Contributions to the System are determined on an actuarial basis. The City administers a public employee retirement system (the Separation Allowance ), a singleemployer defined benefit pension plan that provides retirement benefits to the City s qualified full-time employees. The Separation Allowance is equal to.85% of the annual equivalent of the base rate of compensation most recently applicable to the employee for each year of creditable service. All full-time employees of the City are covered by the Separation Allowance. For information concerning the City s participation in the System and other pension plans see the Note 2B to the City s basic financial statements included in Appendix B. Financial statements and required supplementary information for the System are included in the Comprehensive Annual Financial Report ( CAFR ) for the State. Please refer to the State s CAFR for additional information. Other Post-Employment Benefits The City currently provides group medical and dental benefits to employees eligible to retire under the requirements of the System. The benefit provided by the City varies from 0% to 75% of the monthly premium, depending on years of service. The retiree is required to make up the difference in the benefit provided and the actual cost of the insurance. The coverage provided is the same type as was in effect immediately preceding the retirement date. If the retiree is or becomes eligible for Medicare, the City provides a Medicare supplement that transitions retirees off of the City s plan that results in substantial savings to the City. The City finances these benefits on a pay-as-you-go basis. For the year ended June 30, 2012, expenditures under the plan were $800,152, and for the year ended June 30, 2013, expenditures under the plan were $303,804. As of December 31, 2012, the most recent actuarial valuation date, the plan was not funded. The actuarial accrued liability for the benefits and thus, the unfunded actuarial accrued liability was $28,628,936. The annual required contribution of the employer ( ARC ), an amount actuarially determined in accordance with the parameters of GASB Statement 45 to represent the level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortized any unfunded liabilities over a period not to exceed thirty years, was $2,789,218 for the Fiscal Year ended June 30, The City has determined not to fund the ARC at the present time and expects to continue to fund its other post-employment benefits on a pay-as-you-go basis. The City has also elected to provide death benefits to employees through the Death Benefit Plan for members of the System who die in active service after one year of contributing membership in the System or who die within 180 days after retirement or termination of service and have at least one year of contributing membership service in the System at the time of death. The contributions to the Death Benefit Plan cannot be separated between the post employment benefit amount and the other benefit amount. The City considers these contributions to be immaterial. For additional information concerning the City s obligation to provide such health care benefits and death benefits, see Note 2 to the City s basic financial statements included in Appendix B. A-12

37 Financial Information The financial statements of the City have been audited by certified public accountants for the Fiscal Year ended June 30, Copies of these financial statements containing the unqualified report of the independent certified public accountants are available in the office of the City of Kannapolis, 246 Oak Avenue, Kannapolis, North Carolina 28082, attention: Finance Director (704) The financial statements in Appendix B are the General Purpose Financial Statements of the City and the notes thereto, taken from the audited Comprehensive Annual Financial Report of the City for the year ended June 30, The City will certify at the time that there has been no material adverse change in the City s financial position since June 30, Contingent Liabilities The City Attorney is unaware of any litigation or other contingent liabilities with respect to which there is a reasonable expectation of a loss that could result in a material adverse impact on the City s financial position or its ability to meet its financial obligations. A-13

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39 APPENDIX B FINANCIAL STATEMENTS OF THE CITY OF KANNAPOLIS, NORTH CAROLINA

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41 MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS (net position) Water and Sewer Revenue Bonds Limited Obligation Bonds 13 B-1

42 OVERVIEW OF FINANCIAL STATEMENTS Required Components of Annual Financial Report Figure 1 SUMMARY BASIC FINANCIAL STATEMENTS DETAIL Government-Wide Financial Statements. Fund Financial Statements. 14 B-2

43 notes required supplemental information supplementary information GOVERNMENT-WIDE FINANCIAL STATEMENTS net position Statement of Net Position Statement of Activities FUND FINANCIAL STATEMENTS 15 B-3

44 Governmental Funds. 16 B-4

45 Proprietary Funds. Fiduciary Fund. Notes to the Financial Statements. Other Information. Government-Wide Financial Analysis. 17 B-5

46 City of Kannapolis' Net Position Assets: Governmental Activities Business-Type Activities Total Liabilities: Deferred Inflows of Resources Net Position: 18 B-6

47 City of Kannapolis Changes in Net Position Revenues: Expenses: Net Position: Governmental Activities Business-Type Activities Total 19 B-7

48 Governmental Activities. Revenues by Source Governmental Activities 20 B-8

49 Government Activities Expenses Business-Type Activities. 21 B-9

50 Revenues by Source - Business-Type Activities FINANCIAL ANALYSIS OF THE CITY'S FUNDS Governmental Funds 22 B-10

51 General Fund Budgetary Highlights Proprietary Funds CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets 23 B-11

52 City of Kannapolis' Capital Assets Governmental Activities Business-Type Activities Total Long-Term Debt Governmental Activities Business-Type Activities Total B-12

53 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES 25 B-13

54 REQUESTS FOR INFORMATION 26 B-14

55 Basic Financial Statements Basic Financial Statements B-15

56 This page left blank intentionally. B-16

57 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit A STATEMENT OF NET POSITION JUNE 30, 2013 Assets: Primary Government Governmental Business-Type Activities Activities Total Liabilities: Deferred Inflows of Resources: Net Position: The accompanying notes are an integral part of the financial statements. 27 B-17

58 CITY OF KANNAPOLIS, NORTH CAROLINA STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 Functions/Programs Primary Government: Governmental Activities: Program Revenues Operating Capital Charges for Grants and Grants and Expenses Services Contributions Contributions Business-Type Activities: General Revenues: Net Position: The accompanying notes are an integral part of the financial statements. 28 B-18

59 Exhibit B Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Business-Type Activities Activities Total The accompanying notes are an integral part of the financial statements. 29 B-19

60 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit C BALANCE SHEET - GOVERNMENTAL FUNDS JUNE 30, 2013 Assets: Major Funds Nonmajor Funds NCRC Project Other Total General Development Governmental Governmental Fund Financing 2010 Funds Funds Liabilities, Deferred Inflows of Resources, and Fund Balances: Liabilities: Deferred Inflows of Resources: Fund Balances: The accompanying notes are an integral part of the financial statements. 30 B-20

61 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit D STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2013 Revenues: Nonmajor Major Funds Funds NCRC Project Other Total General Development Governmental Governmental Fund Financing 2010 Funds Funds Expenditures: Other Financing Sources (Uses): Fund Balances: The accompanying notes are an integral part of the financial statements. 31 B-21

62 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit E RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 The accompanying notes are an integral part of the financial statements. 32 B-22

63 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit F GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL FOR THE YEAR ENDED JUNE 30, 2013 Revenues: Variance with Budgeted Amounts Final Budget Original Final Actual Over/Under Expenditures: Other Financing Sources (Uses): Fund Balance: The accompanying notes are an integral part of the financial statements. 33 B-23

64 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit G STATEMENT OF NET POSITION PROPRIETARY FUNDS JUNE 30, 2013 Assets: Nonmajor Enterprise Fund Total Water and Stormwater Environmental Business-Type Sewer Fund Fund Services Fund Activities Major Enterprise Funds Business-Type Activities Liabilities: Net Position: The accompanying notes are an integral part of the financial statements. 34 B-24

65 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit H STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2013 Operating Revenues: Business-Type Activities Major Enterprise Funds Total Water and Stormwater Environmental Business-Type Sewer Fund Fund Services Fund Activities Operating Expenses: Non-Operating Revenues (Expenses): Capital contributions Transfers: Net Position: The accompanying notes are an integral part of the financial statements. 35 B-25

66 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit I STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2013 Cash Flows from Operating Activities: Major Enterprise Funds Nonmajor Enterprise Fund Total Water and Stormwater Environmental Business-Type Sewer Fund Fund Services Fund Activities Business-Type Activities Cash Flows from Non-Capital Financing Activities: Cash Flows from Capital and Related Financing Activities: Cash Flows from Investing Activities: Cash and Cash Equivalents: Reconciliation of Operating Income (Loss) to Provided (Used) By Operating Activities: Summary of Non-Cash Activities: The accompanying notes are an integral part of the financial statements. 36 B-26

67 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit J STATEMENT OF FIDUCIARY NET POSITION FIDUCIARY FUND JUNE 30, 2013 Assets: Liabilities: Net Position: Separation Pay Fund The accompanying notes are an integral part of the financial statements. 37 B-27

68 CITY OF KANNAPOLIS, NORTH CAROLINA Exhibit K STATEMENT OF CHANGES IN FIDUCIARY NET POSITION FIDUCIARY FUND FOR THE YEAR ENDED JUNE 30, 2013 Additions: Deductions: Net Position: Separation Pay Fund The accompanying notes are an integral part of the financial statements. 38 B-28

69 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, Summary of Significant Accounting Policies A. Reporting Entity B. Basis of Presentation - Fund Accounting Government-Wide Statements. governmental business-type activities Fund Financial Statements. governmental, proprietary, and fiduciary 39 B-29

70 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 General Fund. NCRC Project Development Financing Community Development Block Grant Fund. Transit Tax Fund. Cemetery/Village Park Parking Lot Fund. Capital Equipment Firefighters Assistance Fund. Dakota Street Bridge Improvements Fund. Village Park Train Fund. Three Bridge Project. James Street Area Plan. 40 B-30

71 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Irish Buffalo Creek Greenway Fund. Stadium Drive Bridge Repairs Fund. FEMA Pre-Disaster Mitigation Grant - Patterson Branch Fund. FY 10 and FY '11 Recovery Act Byrne Grant. Tropical Storm Fay Damage Fund. Dale Earnhardt Blvd Sidewalk. Historic Preservation. Rogers Lake Road RR Crossing Improvement. City Office/Public Safety Building. Orphanage Rd Bridge/Greenway. Water and Sewer Fund. 41 B-31

72 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Stormwater Fund. Environmental Services Fund. Fiduciary Funds Pension Trust Fund Separation Pay Fund C. Measurement Focus and Basis of Accounting Government-Wide, Proprietary, and Fiduciary Fund Financial Statements 42 B-32

73 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Governmental Fund Financial Statements 43 B-33

74 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 D. Budgetary Data E. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Equity Deposits and Investments 44 B-34

75 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Cash and Cash Equivalents Restricted Assets Ad Valorem Taxes Receivable and Deferred Revenues Allowance for Doubtful Accounts Interfund Receivables/Payables Prepaid Items 45 B-35

76 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Capital Assets Estimated Assets Useful Lives Deferred Outflows/Inflows of Resources 46 B-36

77 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Long-Term Obligations Compensated Absences Net Position/Fund Balances Net Position 47 B-37

78 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Fund Balances Non-Spendable Fund Balance Prepaid Items Restricted Fund Balance Stabilization for State Statute Restricted for Streets - Powell Bill Restricted for Public Safety Restricted for Community Development 48 B-38

79 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Other General Governmental Purpose Fund Funds Restricted, All Other: Committed Fund Balance Committed for Community Development Committed for Capital Projects Other NCRC Project Governmental Development Purpose Funds Financing 2010 Assigned Fund Balance 49 B-39

80 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Unassigned Fund Balance Revenues, Expenditures, and Expenses Other Resources Management Estimates 50 B-40

81 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, Detail Notes on All Funds A. Assets Deposits Investments Less Than Investment Type Fair Value One Year 51 B-41

82 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Interest Rate Risk. Credit Risk. Receivables Due from Other Accounts Taxes Governments Total Governmental Activities: Business-Type Activities: 52 B-42

83 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Capital Assets Balance Transfers/ Balance July 1, 2012 Additions Retirements June 30, 2013 Non-Depreciable Capital Assets: Depreciable Capital Assets: Less Accumulated Depreciation: 53 B-43

84 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Balance Transfers/ Balance July 1, 2012 Additions Retirements June 30, 2013 Water-Sewer Fund: Non-Depreciable Capital Assets: Depreciable Capital Assets: Less Accumulated Depreciation: 54 B-44

85 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Stormwater Fund: Non-Depreciable Capital Assets: Balance Transfers/ Balance July 1, 2012 Additions Retirements June 30, 2013 Depreciable Capital Assets: Less Accumulated Depreciation: Proprietary Intangible Assets Balance Balance July 1, 2012 Additions Retirements June 30, 2013 Intangible Assets: 55 B-45

86 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 B. Liabilities Pension Plan Obligations Local Governmental Employees' Retirement System Plan Description. Funding Policy. Law Enforcement Officers' Special Separation Allowance Plan Description. 56 B-46

87 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Summary of Significant Accounting Policies Basis of Accounting. Method Used to Value Investments. Contributions. Annual Pension Cost and Net Pension Obligation. 57 B-47

88 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Three-Year Trend Information Annual Percentage Net Year Ended Pension of APC Pension June 30 Cost (APC) Contributed Obligation Funded Status and Funding Progress. Supplemental Retirement Income Plan Law Enforcement Officers Plan Description. Funding Policy. 58 B-48

89 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Firemen s and Rescue Squad Workers' Relief Fund Plan Description. Funding Policy. Deferred Compensation Plan Other Post-Employment Benefits Plan Description. 59 B-49

90 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Law General Enforcement Employees Officers Firefighters Funding Policy. Summary of Significant Accounting Policies. Annual OPEB Cost and Net OPEB Obligation. annual required contribution of the employer 60 B-50

91 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Annual Percentage of Net Year Ended OPEB Annual OPEB OPEB June 30 Cost Cost Contributed Obligation Funding Status and Funding Progress. 61 B-51

92 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Actuarial Methods and Assumptions. Other Employment Benefits 62 B-52

93 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Deferred Inflows of Resources Unavailable Unearned Revenues Revenues General Fund: Other Governmental Funds: Long-Term Obligations Changes in Long-Term Debt Governmental Funds Balance Balance Current July 1, 2012 Additions Retirements June 30, 2013 Portion 63 B-53

94 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Governmental Activities - Notes Payable 64 B-54

95 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Annual Payments Balance June 30, 2013 Date Interest Maturity General Enterprise General Enterprise Issued Rate Date Fund Fund Fund Fund Year Ending June 30 Principal Interest Total Total 65 B-55

96 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Governmental Activities - U.S. Government Obligations Year Ending June 30 Principal Interest Total Limited Obligation Bonds 66 B-56

97 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Governmental Activities Limited Obligation Bonds Year Ending June 30 Principal Interest Total 67 B-57

98 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Changes in Long-Term Debt - Business-Type Activities Balance Balance Current July 1, 2012 Additions Retirements June 30, 2013 Maturities Revenue Bonds 68 B-58

99 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Year Ending June 30 Principal Interest Total 69 B-59

100 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, B-60

101 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Business-Type Activities - Notes Payable 71 B-61

102 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 Year Ending June 30 Principal Interest Total Operating Leases Year Ending June 30 Amount 3. Interfund Balances and Activity Receivable (Payable) Due To/ From Fund Amount Purpose 72 B-62

103 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2013 From To Purpose 73 B-63

104 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, Revenues, Expenditures, and Expenses On-Behalf Payments for Fringe Benefits and Salaries 5. Jointly Governed Organizations 6. Significant Economic Dependence 7. Risk Management 74 B-64

105 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, B-65

106 CITY OF KANNAPOLIS, NORTH CAROLINA NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, Claims and Judgments 9. Summary Disclosure of Significant Contingencies 10. Change in Accounting Principle 76 B-66

107 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

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109 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS The following is a brief summary of the provisions of the Contract and the Indenture. This summary is not intended to be definitive and is qualified in its entirety by reference to each of the aforementioned documents for the complete terms thereof. Copies of said documents are available from the City on request. DEFINITIONS Acquisition and Construction Fund means the special fund created under the Indenture. Additional Bonds means Bonds or other obligations issued in accordance with the Indenture. Additional Payments means the reasonable and customary expenses and fees of the Trustee and the Corporation, any expenses of the Corporation in defending an action or proceeding in connection with the Contract or the Indenture and any taxes or any other expenses, including, but not limited to, licenses, permits, state and local income, sales and use or ownership taxes or property taxes which the City or the Corporation is expressly required to pay as a result of the Contract (together with interest that may accrue thereon if the City fails to pay the same). Arbitrage and Tax Regulatory Agreement means the Arbitrage and Tax Regulatory Agreement executed by and among the City, the Corporation and the Trustee to signify the acceptance of certain covenants and obligations necessary for the exclusion of interest with respect to the 2014 Bonds from the gross income of the owners thereof under the Code. Bonds means the 2014 Bonds and any Additional Bonds. Bond Fund means the special fund created under the Indenture. Business Day means a day on which the Trustee or the City is not required or authorized by law to remain closed. Cede & Co. means Cede & Co., the nominee of DTC or any successor nominee of DTC with respect to the Bonds. City means the City of Kannapolis, North Carolina or any successor to its functions. City Representative means (1) the City Manager, the Deputy City Manager, Finance Director or the person or persons at the time designated to act on behalf of the City for the purpose of performing any act under the Contract by a written certificate furnished to the Trustee and the Corporation containing the specimen signatures of such person or persons and signed on behalf of the City by the City Manager and the Finance Director of the City, or (2) if any or all of the City s rights and obligations are assigned thereunder, the person or persons at the time designated to act on behalf of the City and the assignee by a written certificate similarly furnished and of the same tenor. Code means the Internal Revenue Code of 1986, as amended, including regulations promulgated thereunder. C-1

110 Contract means the Installment Financing Contract dated as of August 1, 2014 between the Corporation and the City and any amendments or supplements thereto, including the Exhibits attached thereto. Corporation means Kannapolis Capital Corporation or any successor thereto. Corporation Representative means any person or persons at the time designated to act on behalf of the Corporation for purposes of performing any act on behalf of the Corporation under the Contract and the Indenture by a written certificate furnished to the City and the Trustee containing the specimen signature of such person or persons and signed on behalf of the Corporation by its President. items: "Cost of Acquisition and Construction" includes payment of or reimbursement for the following (a) the Costs of Issuance; (b) obligations incurred or assumed for the Project in connection with the acquisition, construction, renovation, equipping and financing thereof, including, without limitation, costs of obtaining title insurance and a survey of the Mortgaged Property; and (c) all other costs which are considered to be a part of the cost of acquisition, construction, renovation, equipping and financing of the Project in accordance with generally accepted accounting principles and which will not affect the exclusion from gross income for federal income tax purposes of the designated interest component of Installment Payments payable by the City, including sums required to reimburse the City for advances made by the City that are properly chargeable to the construction, renovation, equipping and financing of the Project. Costs of Issuance means the costs incurred in connection with the initial issuance of the Bonds, including, without limitation, all printing expenses in connection with the Indenture, the Contract, and the documents and certificates contemplated by the Indenture, the Preliminary Official Statement and the Official Statement for the Bonds, and the Bonds, legal fees and expenses of counsel to the Corporation, special counsel, counsel to the City, other counsel, counsel to the purchaser or purchasers of the Bonds, rating agency fees, any accounting expenses incurred in connection with determining that the Bonds are not arbitrage bonds within the meaning of the Code, the Trustee s initial fees and expenses (including attorney s fees), and state license fees, on the submission of requisitions by the City signed by a City Representative stating the amount to be paid, to whom it is to be paid and the reason for such payment, and that the amount of such requisition is justly due and owing and has not been the subject of another requisition which was paid and is a proper expense of issuing the Bonds. Deed of Trust means the Deed of Trust, Security Agreement and Fixture Filing dated as of August 1, 2014 from the City to the deed of trust trustee named therein for the benefit of the Corporation or its assignees, all of the terms, definitions, conditions and covenants of which are incorporated herein by reference and are made a part of the Contract as if fully set forth therein. DTC means The Depository Trust Company, a limited purpose company organized under the law of the State of New York, and its successors and assigns. DTC Participant or DTC Participants means securities brokers and dealers, banks, trust companies, clearing corporations and certain other corporations which have access to the DTC system. C-2

111 Event of Default means those events of default specified in the Contract and the Indenture, as applicable. Federal Securities means, to the extent such investments qualify under Section of the General Statutes of North Carolina as amended from time to time, (a) direct obligations of the United States of America, obligations the principal of and interest on which are guaranteed by the United States of America or obligations of any agency or instrumentality of the United States of America, in each case for the payment of which the full faith and credit of the United States of America are pledged (including any securities issued or held in the name of the Trustee in book entry form on the books of the Department of the Treasury of the United States of America) which obligations are held by the Trustee and are not subject to prepayment or purchase before maturity at the option of anyone other than the holder; (b) any bonds or other obligations of any state or territory of the United States of America or of any agency, instrumentality or local governmental unit of any such state or territory which are (1) not callable before maturity or (2) as to which irrevocable instructions have been given to the trustee or escrow agent of such bonds or other obligations by the obligor to give due notice of prepayment and to call such bonds for prepayment on the date or dates specified, and which are rated by Moody s and S&P within its highest rating category and which are secured as to principal, prepayment premium, if any, and interest by a fund consisting only of cash or bonds or other obligations of the character described in clause (a) of this definition which fund may be applied only to the payment of such principal of and interest and prepayment premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified prepayment date or dates pursuant to such irrevocable instructions, as appropriate; or (c) evidences of ownership of proportionate interests in future interest and principal payments on specified obligations described in clause (a) or (b) held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor on the underlying obligations described in clause (a) or (b), and which underlying obligations are not available to satisfy any claim of the custodian or any person claiming through the custodian or to whom the custodian may be obligated. Fiscal Year means a twelve-month period commencing on the first day of July of any year and ending on the 30th day of June of the succeeding year, or such other twelve-month period which may subsequently be adopted as the Fiscal Year of the City. Indenture means the Indenture of Trust dated as of August 1, 2014 between the Corporation and the Trustee, as amended or supplemented from time to time, pursuant to which the Bonds are issued. Installment Payments means those payments made by the City to the Corporation as described in the Contract and in the Payment Schedule attached thereto. Interest Payment Date means each April 1 and October 1, beginning April 1, Moody s means Moody s Investors Service, its successors and their assigns, and, if such entity for any reason no longer performs the function of a securities rating agency, Moody s will be deemed to refer to any other nationally recognized securities rating agency designated by the Corporation. Mortgaged Property means the property subject to the lien and security interest created by the Deed of Trust, as more particularly described therein. Net Proceeds, means, when used with respect to any (1) proceeds from policies of insurance which are payable to the Corporation or the Trustee, (2) proceeds from any payment and performance bond maintained pursuant to the Installment Financing Contract, (3) proceeds of any condemnation award arising out of the condemnation of all or any portion of the Mortgaged Property or the (4) proceeds from C-3

112 any sale or lease of the Mortgaged Property pursuant to the Deed of Trust or otherwise subsequent to an Event of Default, the amount remaining after deducting from the gross proceeds thereof all expenses (including, without limitation, attorneys fees and costs) incurred in the collection of such proceeds. Opinion of Counsel means an opinion in writing of legal counsel, who may be counsel to the Trustee, the City or the Corporation. Outstanding or Bonds Outstanding means all Bonds which have been issued, except: (a) (b) Bonds canceled or which have been surrendered to the Trustee for cancellation; Bonds in lieu of which other Bonds have been authenticated under the Indenture; (c) Bonds which have been prepaid as provided in the Indenture (including Bonds prepaid on a partial prepayment); and (d) Bonds which have been deemed paid under the Indenture. Owner or Owners means, initially, Cede & Co., as nominee for DTC, and if the book entry system of evidence and transfer of ownership in the Bonds is discontinued, the registered owner or owners of any Bond fully registered as shown in the registration books of the Trustee. Payment Schedule means the document attached to the Contract which sets forth the City s Installment Payments. Permitted Investments means Federal Securities and any other investments which are qualified under Section of the General Statutes of North Carolina, as amended from time to time. Person or person means natural persons, firms, associations, corporations and public bodies. Prepayment Fund means the special fund of that name created under the Indenture. Project means the acquisition, construction, equipping and furnishing of a city hall and law enforcement center to be located on the campus of the North Carolina Research Center, as may be amended in connection with any other project financed or refinanced with the proceeds of Additional Bonds issued under the Indenture. Purchase Price means the amount advanced by the Corporation to enable the City to finance the Project, as such price may be adjusted in connection with the issuance of Additional Bonds under the Indenture. Rebate Fund means the special fund of that name created under the Indenture. Revenues means (a) all Net Proceeds not applied to the replacement of the Project; (b) all Installment Payments; and (c) all investment income on all funds and accounts created under the Indenture (other than the Rebate Fund). S&P means Standard and Poor s Rating Services, its successors and their assigns, and, if such entity for any reason no longer performs the function of a securities rating agency, S&P will be deemed to refer to any other nationally recognized securities rating agency designated by the Corporation. State means the State of North Carolina. C-4

113 Trustee means U.S. Bank National Association, acting in the capacity of trustee for the Owners pursuant to the Indenture, and any successor thereto appointed under the Indenture. Trust Estate means the property, pledged and assigned to the Trustee pursuant to and defined as such in the granting clauses of the Indenture. Trustee Representative means the person or persons at the time designated to act on behalf of the Trustee for purposes of performing any act on behalf of the Trustee under the Indenture by a written certificate furnished to the City and the Corporation containing the specimen signature of such person or persons and signed on behalf of the Trustee by any duly authorized officer of the Trustee Bonds means the Limited Obligation Bonds (City of Kannapolis North Carolina), Series 2014 evidencing proportionate undivided interests in rights to receive certain Revenues pursuant to the Contract. Underwriter means PNC Capital Markets LLC, on its own behalf and on behalf of Merrill Lynch, Pierce, Fenner & Smith Incorporated. THE CONTRACT Advancement. In the Contract, the Corporation agrees to make an advance to the City of the Purchase Price, and the City accepts from the Corporation the Purchase Price to be applied in accordance with the terms and conditions of the Contract. The City will use the proceeds of the Purchase Price to finance the Project and to pay certain costs incurred in connection with the execution and delivery of the 2014 Bonds. Title; Release of Security Interest. Title to the Mortgaged Property and any and all additions, repairs, replacements or modifications thereto will be in the City from and after the date of execution and delivery of the Contract. The Mortgaged Property is subject only to the security interest created under the Contract. The City will own the Mortgaged Property free and clear of any lien or security interest created by the Contract and the Deed of Trust, as applicable, on the repayment in full of the Purchase Price and the payment of all other amounts due under the Contract. The City will deliver to the Trustee the Deed of Trust simultaneously with the execution and delivery of the Contract and will cause the Deed of Trust to be recorded in the Cabarrus County Registry. On payment in full of all of the City s obligations under the Contract, including the Purchase Price and all other payments due thereunder, the Corporation or its assignee, at the City s expense and request, will discharge the Indenture and release the lien on the Mortgaged Property, at which time the Contract will terminate. Installment Payments; Additional Payments. As consideration for the Corporation s advance of the Purchase Price to the City, the City will repay to the Trustee, as assignee of the Corporation, the Purchase Price in installments with interest as provided in the Contract and the Payment Schedule attached to the Contract (each an Installment Payment ). Each installment will be deemed to be an Installment Payment and will be paid in the amounts and at the times set forth on the Payment Schedule except as provided in the Contract. There will be credited against the amount of Installment Payments otherwise payable under the Contract amounts equal to (1) earnings derived from the investment of the Bond Fund and the Prepayment Fund and (2) any other money not constituting Installment Payments required to be deposited in the Bond Fund. Installment Payments must be sufficient in the aggregate to repay the Purchase Price together with interest thereon. As further consideration for the Corporation s advance of the Purchase Price to the City, the City will also pay the Additional Payments, as required in the Contract, on a timely basis directly to the person or entity to which such Additional Payments are owed. C-5

114 Limited Obligation of the City. NOTWITHSTANDING ANY PROVISION OF THE CONTRACT, THE INDENTURE OR THE DEED OF TRUST WHICH MAY BE TO THE CONTRARY, NO PROVISION OF THE CONTRACT, THE INDENTURE OR THE DEED OF TRUST WILL BE CONSTRUED OR INTERPRETED AS CREATING A PLEDGE OF THE FAITH AND CREDIT OF THE CITY WITHIN THE MEANING OF THE CONSTITUTION OF THE STATE. NO PROVISION OF THE CONTRACT, THE DEED OF TRUST OR THE INDENTURE WILL BE CONSTRUED OR INTERPRETED AS CREATING A DELEGATION OF GOVERNMENTAL POWERS NOR AS A DONATION BY OR A LENDING OF THE CREDIT OF THE CITY WITHIN THE MEANING OF THE CONSTITUTION OF THE STATE. THE CONTRACT, THE DEED OF TRUST OR THE INDENTURE WILL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE CITY TO MAKE ANY PAYMENTS BEYOND THOSE APPROPRIATED IN THE SOLE DISCRETION OF THE CITY FOR ANY FISCAL YEAR IN WHICH THE CONTRACT IS IN EFFECT; PROVIDED, HOWEVER, ANY FAILURE OR REFUSAL BY THE CITY TO APPROPRIATE FUNDS WHICH RESULTS IN THE FAILURE BY THE CITY TO MAKE ANY PAYMENT COMING DUE UNDER THE CONTRACT WILL IN NO WAY OBVIATE THE OCCURRENCE OF THE EVENT OF DEFAULT RESULTING FROM SUCH NONPAYMENT. NO DEFICIENCY JUDGMENT MAY BE RENDERED AGAINST THE CITY IN ANY ACTION FOR BREACH OF A CONTRACTUAL OBLIGATION UNDER THE CONTRACT, AND THE TAXING POWER OF THE CITY IS NOT AND MAY NOT BE PLEDGED DIRECTLY OR INDIRECTLY OR CONTINGENTLY TO SECURE ANY MONEY DUE UNDER THE CONTRACT. NO PROVISION OF THE CONTRACT, THE DEED OF TRUST OR THE INDENTURE WILL BE CONSTRUED TO PLEDGE OR TO CREATE A LIEN ON ANY CLASS OR SOURCE OF THE CITY S MONEY, NOR WILL ANY PROVISION OF THE CONTRACT, THE INDENTURE OR THE DEED OF TRUST RESTRICT THE FUTURE ISSUANCE OF ANY OF THE CITY S BONDS OR OBLIGATIONS PAYABLE FROM ANY CLASS OR SOURCE OF THE CITY S MONEY. THIS PROVISION WILL TAKE PRIORITY OVER ANY PROVISION OF THE CONTRACT, THE DEED OF TRUST OR THE INDENTURE THAT CONFLICTS WITH ITS TERMS. Damage, Destruction or Condemnation; Use of Net Proceeds. If, during the term of the Contract, (1) any portion of the Mortgaged Property is destroyed or damaged by fire or other casualty; (2) title to or the temporary or permanent use of any portion of the Mortgaged Property or the estate of the City or the Corporation or its assignee in any portion of the Mortgaged Property is taken under the power of eminent domain by any governmental authority; (3) a material defect in construction of any portion of the Mortgaged Property becomes apparent; or (4) title to or the use of any portion of the Mortgaged Property is lost by reason of a defect in title thereto, then the City continues to be obligated, subject to the provisions set forth below, to pay the amounts specified in the Contract at the respective times required. Subject to the provisions set forth below, the Trustee will cause the Net Proceeds of any insurance policies, performance or payment bonds, if any, condemnation awards or Net Proceeds made available by reason of any occurrence described above, to be deposited in a separate fund held by the Trustee. Except as set forth in below, all Net Proceeds so deposited will be applied to the prompt repair, restoration, modification, improvement or replacement of the Mortgaged Property on receipt of requisitions acceptable to the Trustee approved by a City Representative stating with respect to each payment to be made: (a) the requisition number; (b) the name and address of the person, firm or corporation to whom payment is due; (c) the amount to be paid; and (d) that each obligation mentioned therein has been properly incurred, is a proper charge against such separate fund, and has not been the basis of any previous withdrawal and specifying in reasonable detail the nature of the obligation, accompanied by a bill or a statement of account for such obligation. The Trustee will cooperate with the City in the administration of such separate fund and will not unreasonably withhold its approval of requisitions under these provisions. If the Net Proceeds (plus any amount withheld therefrom by reason of any deductible clause) are insufficient to pay in full the cost of any repair, restoration, modification, improvement or replacement of the Mortgaged Property, the City may complete the work and pay any cost in excess of the amount of the Net Proceeds, and the City agrees that, if by reason of any such insufficiency of the Net Proceeds, the City will make any payments pursuant to the provisions of the Contract, the City is not entitled to any reimbursement therefor from the Corporation, the Trustee or the Owners nor is the City entitled to any diminution of the amounts payable under the Contract. Any repair, C-6

115 restoration, modification, improvement or replacement paid for in whole or in part out of such Net Proceeds will be the property of the City, subject to the Deed of Trust to the extent it relates to the Mortgaged Property, and will be included as part of the Mortgaged Property as set forth in the Contract. On the occurrence of an event described above with respect to the Mortgaged Property, the City may elect not to repair, restore, improve or replace the affected portion of the Mortgaged Property if (1) (a) the Net Proceeds are less than $500,000 and (b) a City Representative certifies to the Corporation that such Net Proceeds are not necessary to restore the affected portion of the Mortgaged Property to its intended use or (2) the City uses the Net Proceeds, together with any other available funds of the City that may be necessary, to redeem or defease all of the Outstanding Bonds in accordance with the terms of the Indenture. In such event, the City shall direct the Trustee to either deposit such Net Proceeds in the Bond Fund to be applied toward the next payment of principal and interest with respect to the Bonds or in the Prepayment Fund or an escrow fund to effect the redemption or defeasance of the Outstanding Bonds, as the case may be. Within 90 days of the occurrence of an event specified above, the City will commence the repair, restoration, modification, improvement or replacement of the Mortgaged Property, or will elect, by written notice to the Trustee, to proceed under the provisions of the immediately preceding paragraph. For purposes of these provisions, "commence" will include the retention of an architect or engineer in anticipation of repair, restoration, modification, improvement or replacement of the Mortgaged Property. Care and Use. Subject to the provisions of applicable law and the terms of the Contract, the City will use the Mortgaged Property in a careful and proper manner, in compliance with all applicable laws and regulations, and, at its sole cost and expense, will service, repair and maintain the Mortgaged Property so as to keep the Mortgaged Property in good condition, repair, appearance and working order for the purposes intended, ordinary wear and tear excepted. The City will replace any part of the Mortgaged Property as may from time to time become worn out, unfit for use, lost, stolen, destroyed or damaged. Any and all additions to or replacements of the Mortgaged Property and all parts thereof will constitute accessions to the Mortgaged Property and will be subject to all the terms and conditions of the Contract and included in the term Mortgaged Property and as used in the Contract. General Tax Covenant. In the Contract, the City covenants that it will not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest portion of the Installment Payments created by the Contract under Section 103 of the Code. The City will not directly or indirectly use or permit the use of any proceeds of any fund created under the Indenture, or take or omit to take any action that would cause the obligation created by the Contract to be an arbitrage bond within the meaning of Section 148(a) of the Code. To that end, the City and the Corporation have executed the Arbitrage and Tax Regulatory Agreement and will comply with all requirements of Section 148 of the Code to the extent applicable. The City further represents and covenants that the Installment Payments created by the Contract are not and will not constitute a private activity bond as defined in Section 141 of the Code. Property Insurance. The City will continually maintain or cause to be maintained insurance to the full insurable value of the Mortgaged Property against loss by fire, wind damage, hazards customarily included in the term extended coverage with responsible and reputable insurance companies and will promptly pay all premiums therefor when due. All insurance policies and renewals thereof will name the Corporation and the Trustee as parties insured thereunder, as the respective interests of each of such parties may appear, and have attached thereto a mortgagee long form loss payable clause in favor of the Trustee, and provide that no such policy can lapse or be canceled, substantially modified or terminated without at least 30 days prior notice to the Trustee and that any loss payable thereunder will be made payable and will be applied as provided in the Contract. In the event of loss, the City will give immediate C-7

116 notice by mail to the Trustee, who may, but will not be obligated to, make proof of loss. In the event of a foreclosure of the Deed of Trust or other transfer of title to the Mortgaged Property, all right, title and interest of the City in any insurance policies then in force will pass to the Trustee. Additionally, during the term of the Contract, the City will continually maintain standard liability insurance as is customarily maintained by like entities with respect to facilities similar to the Mortgaged Property. The City may provide for and maintain the insurance required under the Contract partially or wholly by means of an adequate risk retention fund. Reserves for a risk retention fund will be determined by using actuarial principles. Any risk retention fund will be reviewed annually by the City s risk manager or an independent insurance consultant or actuarial consultant. The Trustee may rely on a letter of the City s risk manager or an independent insurance consultant or actuarial consultant as to the adequacy of any risk retention fund. Assignment. The City may not sell, assign, lease, sublease, pledge or otherwise encumber or suffer a lien or encumbrance on or against any interest in the Contract or the Mortgaged Property (except for Permitted Encumbrances) without the Trustee s prior written consent. Notwithstanding the foregoing, the City may lease all or a portion of the Mortgaged Property subject to the following conditions: (a) the obligation of the City to make Installment Payments and Additional Payments under the Contract will remain obligations of the City; (b) the City will furnish or cause to be furnished to the Trustee a true and complete copy of such lease at least 30 days before the execution and delivery of any such lease; (c) no lease will cause the interest component of Installment Payments relating to any Bonds intended to be excludable from gross income of the recipient thereof for federal income tax purposes to become includable in gross income for federal income tax purposes; and (d) the Trustee will have received an opinion of Counsel to the City to the effect that such lease is subordinate in all respects to the lien of the Deed of Trust and that such lease is subject to immediate termination at the direction of the Trustee following an Event of Default by the City under the Contract. Amendments and Modifications. --Without Consent of the Owners. The Indenture provides that the Corporation and the Trustee may, with the written consent of the City, but without the consent of or notice to the Owners, consent to any amendment, change or modification of the Contract or the Deed of Trust that does not materially adversely affect the interests of the existing Owners as may be required (a) by the provisions of the Contract, the Deed of Trust or the Indenture; (b) for the purpose of curing any ambiguity or formal defect or omission in the Contract or the Deed of Trust; (c) to more precisely identify the Mortgaged Property or to add or substitute improvements acquired in accordance with the Contract, the Deed of Trust and the Indenture; (d) to issue Additional Bonds as provided in the Indenture; (e) to amend the City s continuing disclosure obligation as provided in the Contract; or (f) in connection with any other change therein which, in the judgment of the Trustee, does not materially adversely affect the interests of the existing Owners. --With Consent of the Owners. The Indenture provides that, except for the amendments, changes or modifications permitted by the above provision, neither the Corporation nor the Trustee will consent to any other amendment, change or modification of the Contract or the Deed of Trust without the giving of notice thereof to the LGC and to the Owners and receipt of consent by the LGC and by the Owners of not C-8

117 less than a majority in aggregate principal amount of the Bonds at the time Outstanding given and procured as provided in the Indenture. If the City and the Corporation requests the consent of the Trustee to any such proposed amendment, change or modification of the Contract or the Deed of Trust, the Trustee will, on being satisfactorily indemnified with respect to expenses, cause notice of such proposed amendment, change or modification to be given in the same manner as provided in the Indenture. Such notice will briefly set forth the nature of such proposed amendment, change or modification and will state that copies of the instrument embodying the same are on file at the designated corporate trust office of the Trustee for inspection by all Owners. The written consent by the purchaser of a series of Additional Bonds constitutes the consent of the Owners of that series of Additional Bonds. Events of Default. The occurrence of the following are considered Events of Default under the Contract: (a) The City fails to make any Installment Payment on the date such Installment Payment is due under the Contract; (b) The City fails to budget and appropriate money sufficient to pay all Installment Payments and the reasonably estimated Additional Payments coming due in any Fiscal Year; (c) The City fails to perform or observe any term, condition or covenant of the Contract on its part to be observed or performed, other than as referred to in (a) or (b) above, or of the Deed of Trust on its part to be observed or performed, or breaches any warranty by the City therein contained, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Trustee unless the Trustee agrees in writing to an extension of such time prior to its expiration; provided, however, that if the failure cannot be corrected within the stated period, Trustee will not unreasonably withhold consent for an extension not longer than 180 days; (d) Any bankruptcy, insolvency or reorganization proceedings or similar litigation, is instituted by the City, or a receiver, custodian or similar officer is appointed for the City or any of its property, and such proceedings or appointments are not vacated or fully stayed within 90 days after the institution or occurrence thereof; or (e) Any representation or statement made by the City in the Contract, in the Deed of Trust or in any other document executed or delivered in connection therewith is found to be incorrect or misleading in any material respect on the date made. Remedies on Default. On the occurrence of any Event of Default, the Trustee may, and if required by a majority in aggregate principal amount of the Owners of the Bonds, the Trustee will, to the extent permitted by applicable law and the terms of the Contract, exercise any one or more of the following remedies as the Trustee elects or as will be directed by a majority in aggregate principal amount of the Owners of the Bonds: (a) Declare the unpaid portion of the principal and interest components of Installment Payments immediately due and payable without notice or demand to the City; (b) Proceed by appropriate court action to enforce performance by the City of the applicable covenants of the Contract or to recover for the breach thereof; or C-9

118 (c) Exercise or direct the Deed of Trust trustee to exercise all the rights and remedies of a secured party or creditor under the Uniform Commercial Code of the State and the general laws of the State with respect to the enforcement of the security interest granted or reserved under the Contract and the Deed of Trust including, without limitation, to the extent permitted by law, re-enter and take possession of the Mortgaged Property without any court order or other process of law and without liability for entering the premises and sell, lease, sublease or make other disposition of the same in a commercially reasonable manner for the account of the City, and apply the proceeds of any such sale, lease, sublease or other disposition, after deducting all costs and expenses, including court costs and attorneys fees, incurred with the recovery, repair, storage and other sale, lease, sublease or other disposition, toward the balance due under the Contract and, thereafter, will pay any remaining proceeds to the City. NOTWITHSTANDING ANY OTHER PROVISIONS IN THE CONTRACT TO THE CONTRARY, IT IS THE INTENT OF THE PARTIES TO THE CONTRACT TO COMPLY WITH GENERAL STATUTES OF NORTH CAROLINA SECTION 160A-20. NO DEFICIENCY JUDGMENT MAY BE RENDERED AGAINST THE CITY IN VIOLATION OF SECTION 160A-20 INCLUDING, WITHOUT LIMITATION, ANY DEFICIENCY JUDGMENT FOR AMOUNTS THAT MAY BE OWED UNDER THE CONTRACT WHEN THE SALE OF ALL OR ANY PORTION OF THE MORTGAGED PROPERTY IS INSUFFICIENT TO PRODUCE ENOUGH MONEY TO PAY IN FULL ALL REMAINING OBLIGATIONS UNDER THE CONTRACT. THE INDENTURE Funds and Accounts. The Indenture creates (1) the Bond Fund; (2) the Prepayment Fund; (3) the Rebate Fund; and (4) the Acquisition and Construction Fund, to be held in trust by the Trustee. --The Bond Fund. There has been created and established with the Trustee a special fund to be designated City of Kannapolis 2014 Installment Financing Contract Bond Fund (the Bond Fund ), the money in which is to be used to pay the principal, premium, if any, and interest with respect to the Bonds. Within the Bond Fund, there are hereby created and ordered established an Interest Account and a Principal Account, the money in each of which is to be used as set forth in the Indenture. --The Interest Account. There is to be deposited into the Interest Account of the Bond Fund (1) that portion of each payment of Installment Payments which is designated and paid as interest under the Contract; (2) investment earnings on the Bond Fund and the Prepayment Fund, as provided in the Indenture; (3) Net Proceeds from any lease of the Mortgaged Property, including after an Event of Default to the extent required to pay the next installment of interest or any previous installment of interest not paid; (4) all money required to be deposited therein in accordance with the Indenture; and (5) all other money received by the Trustee under the Indenture accompanied by directions from the City that such money is to be deposited into the Interest Account of the Bond Fund. The Trustee will credit all amounts deposited into the Interest Account of the Bond Fund, including the amounts set forth in the Contract, toward the interest component of the Installment Payment then due and payable under the Contract. The Trustee will notify the City of all amounts credited toward such Installment Payments within 30 days of such credit. --The Principal Account. There is to be deposited into the Principal Account of the Bond Fund (1) that portion of each payment of Installment Payments which is designated and paid as principal with respect to the 2014 Bonds under the Contract; (2) Net Proceeds from any lease of the Mortgaged Property, including after an Event of Default after the deposit described under the first paragraph of the caption --The Interest Account above; (3) all money required to be deposited therein in accordance with the Indenture; and (4) all other money received by the Trustee under the Indenture accompanied by directions from the City that such money is to be deposited into the Principal Account of the Bond Fund. C-10

119 --Use of Money in Bond Fund. Money in the Interest Account of the Bond Fund will be used for the payment of the interest with respect to the Bonds as the same becomes due and payable. Money in the Principal Account of the Bond Fund will be used for the payment of the principal with respect to the Bonds. Investment earnings on money on deposit in the Bond Fund will be applied to the next payment of Installment Payments with respect to the Bonds. If the Bonds are to be prepaid in whole pursuant to the Indenture, any money remaining in the Interest Account and the Principal Account of the Bond Fund will be applied to such prepayment along with other money held by the Trustee for such purpose. --The Prepayment Fund. There has been created and established with the Trustee a special fund to be designated the City of Kannapolis 2014 Installment Financing Contract Prepayment Fund (the Prepayment Fund ).The Trustee will deposit into the Prepayment Fund money provided by the City as a prepayment of Installment Payments. Money on deposit in the Prepayment Fund will be disbursed for prepayment of the Bonds as provided in the Indenture. Any income from investment of money in the Prepayment Fund will be deposited into the Interest Account of the Bond Fund and applied to the interest component of the next payment of the Installment Payments. Whenever any money on deposit in the Prepayment Fund are disbursed for prepayment of less than all of the Outstanding Bonds, the Installment Payments set forth in the Contract will be recalculated by the Trustee to reflect the reduction in the outstanding principal amount of the Bonds after such prepayment. --The Rebate Fund. If the City informs the Trustee that funds are to be set aside in a separate account of the Trustee to be held for the payment of rebate payments to the Federal Government pursuant to the terms of the Arbitrage and Tax Regulatory Agreement, the Trustee will create and establish the City of Kannapolis 2014 Installment Financing Contract Rebate Fund (the Rebate Fund ). The Trustee will deposit in the Rebate Fund the amounts as directed by the City. The City will make or cause to be made the calculation or calculations required by the Arbitrage and Tax Regulatory Agreement and will direct the Trustee to make deposits and disbursements from the Rebate Fund in accordance therewith. The Trustee will invest the Rebate Fund as directed by the City. --The Acquisition and Construction Fund. There has been created and established with the Trustee a special fund to be designated City of Kannapolis 2014 Installment Financing Contract Acquisition and Construction Fund (the Acquisition and Construction Fund ). The Trustee will deposit in the Acquisition and Construction Fund the amount set forth in the Indenture. In addition, the Trustee will deposit into the Acquisition and Construction Fund such amounts as the City may designate in a certificate signed by a City Representative in connection with the execution and delivery of Additional Bonds under the Indenture. Any money held in the Acquisition and Construction Fund or any account thereof will be invested and reinvested by the Trustee in accordance with the Indenture, and the income therefrom will be retained in the Acquisition and Construction Fund or any account thereof and used (together with all other money held in the Acquisition and Construction Fund) to pay the Cost of Acquisition and Construction attributable to the Project, as directed by the City in accordance with the Contract. The Trustee will create accounts within the Acquisition and Construction Fund on the City s written direction. Investment of Money. All money held as part of the Bond Fund, the Prepayment Fund, the Acquisition and Construction Fund or any other fund or account created under the Indenture or the Contract except the Rebate Fund will be deposited or invested and reinvested from time to time by the Trustee, at the written direction of the City as agent of the Corporation, in deposits or investments, which are Permitted Investments subject to the following restrictions: (a) Money in the Acquisition and Construction Fund will be invested only in obligations which will by their terms mature not later than the date the City estimates, in a writing C-11

120 provided to the Trustee, the money represented by the particular investment will be needed for withdrawal from the Acquisition and Construction Fund; (b) Money in the Bond Fund will be invested only in obligations which will by their terms mature on such dates as to ensure that on the date of each interest and principal payment, there will be in the Bond Fund from matured obligations and other money already in the Bond Fund, cash to pay the interest and principal payable on such payment date; and (c) Money in the Prepayment Fund will be invested in obligations which will by their terms mature, or will be subject to prepayment at the option of the owner thereof, on or before the date funds are expected to be required for expenditure or withdrawal. The Rebate Fund will be invested and reinvested by the Trustee, at the written direction of the City, in accordance with the Arbitrage and Tax Regulatory Agreement. Any and all such deposits or investments will be held by or under the control of the Trustee. The Trustee may make any and all such deposits or investments through its own investment department or the investment department of any bank or trust Corporation under common control with the Trustee. The Trustee is specifically authorized to enter into agreements with itself or any other person, which agreements guarantee the repurchase of specific Permitted Investments at specific prices. Except as expressly provided in the Indenture, deposits or investments, will at all times be a part of the fund or account from which the money used to acquire such deposits or investments will have come, and all income and profits on such deposits or investments will be credited to, and losses thereon will be charged against, such fund or account. In computing the amount in any fund or account held under the provisions of the Indenture, obligations purchased as a deposit or investment of money therein will be valued at the market price thereof, exclusive of accrued interest. The Trustee will sell and reduce to cash a sufficient amount of such deposits or investments whenever the cash balance in any fund or account created under the Indenture is insufficient to satisfy the purposes of such fund or account. Additional Bonds. So long as the Contract remains in effect and no Event of Default has occurred and is continuing, additional Bonds or other obligations (the Additional Bonds ) may be issued on the terms and conditions provided in the Indenture. Additional Bonds may be delivered by the Trustee at the direction of the Corporation to provide funds to pay: (1) the cost of expanding the Project, acquiring, constructing, renovating and equipping other facilities or acquiring Mortgaged Property and other capital assets for utilization by the City for public purposes; (2) the cost of refunding of all or any portion of the Bonds then Outstanding or any other financing obligations of the City; or (3) the Costs of Issuance relating to the issuance and sale of the Additional Bonds. Additional Bonds may be issued only on there being filed with the Trustee: (a) Originally executed counterparts of a supplemental indenture and an amendment to the Contract adopted in accordance with the requirements of the Indenture and approved by the Local Government Commission of the State, if so required by law, including requirements regarding approval of the Owners, if applicable, expressly providing that the Additional Bonds being issued as well as any Bonds and Additional Bonds theretofore issued will be secured on a parity as provided in the Indenture, except that the date or dates of the Additional Bonds, the rate or rates of interest with respect to the Additional Bonds, the time or times of payment of the principal and interest with respect thereto, and provisions for the prepayment thereof, if any, all will be as provided in the supplemental indenture and amendment to the Contract, and further C-12

121 providing for an increase in the Purchase Price and the Installment Payments required or authorized to be paid to the Trustee under the Contract in such amount as will be necessary to pay (assuming that no Event of Default will occur), the principal, premium, if any, and interest with respect to the Additional Bonds. (b) A written opinion or opinions of nationally recognized bond counsel and mutually acceptable to the City, the Corporation and the Trustee, to the effect that the amendment to the Contract and the authentication of the Additional Bonds have been duly authorized, that the amendment to the Contract is valid and enforceable against the City and that the exclusion from gross income for federal income tax purposes of the interest component of the Installment Payments will not be adversely affected by the issuance of the Additional Bonds, and that the issuance and sale of the Additional Bonds will not constitute a default under the Contract or the Indenture or cause any violation of the covenants, agreements or representations under the Contract or the Indenture. (c) A written order to the Trustee to deliver the Additional Bonds to the purchaser or purchasers therein identified on payment to the Trustee of a specified sum plus accrued interest, if any. Each of the Additional Bonds issued pursuant to the Indenture will evidence a proportionate undivided interest in rights to receive certain Revenues under the Contract, as amended, proportionately and ratably secured with the Bonds originally issued and all other issues of Additional Bonds, if any, issued pursuant to the Indenture, without preference, priority or distinction of any Bond or Additional Bond over any other. Supplemental Indentures. --Consent of Owners Not Required. The Trustee and the Corporation may, with the written consent of the City, but without the consent of, or notice to, the Owners, enter into such indentures supplemental thereto for any one or more or all of the following purposes, as long as such supplemental indenture does not adversely affect the interests of the Owners: (a) To add to the covenants and agreements of the Corporation contained in the Indenture other covenants and agreements to be thereafter observed by the Corporation; (b) To cure any ambiguity, or to cure, correct or supplement any defect or omission or inconsistent provision contained in the Indenture, or to make any provisions with respect to matters arising under the Indenture or for any other purpose if such provisions are necessary or desirable and do not adversely affect the interests of the Owners; or (c) To issue Additional Bonds. --Consent of Owners Required. Exclusive of supplemental indentures covered under the caption --Consent of Owners Not Required above, the written consent of the City, the LGC and the consent of the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding is required for the execution by the Corporation and the Trustee of any indenture or indentures supplemental thereto; provided, however, that without the consent of the LGC and the Owners of all the Bonds at the time Outstanding affected thereby nothing contained in the Indenture will permit, or be construed as permitting: C-13

122 (a) A change in the terms of prepayment or maturity of the principal or the interest with respect to any Outstanding Bond, or a reduction in the principal or premium payable with respect to any prepayment of any Outstanding Bond or the rate of interest with respect thereto; (b) The deprivation of the Owner of any Bond then Outstanding of the lien created by the Indenture (other than as originally permitted thereby); (c) A privilege or priority of any Bond or Bonds over any other Bond or Bonds; or (d) A reduction in the aggregate principal amount of the Bonds required for consent to such supplemental indenture. If at any time the City or the Corporation requests the Trustee to enter into such supplemental indenture for any of the purposes described above, the Trustee will, on being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such supplemental indenture to be mailed by first class mail to the Owners of the Bonds then Outstanding at the address shown on the registration books maintained by the Trustee. Such notice will briefly set forth the nature of the proposed supplemental indenture and will state that copies thereof are on file at the designated corporate trust office of the Trustee for inspection by all Owners. If, within 60 days or such longer period as is prescribed by the City following the giving of such notice, the Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding at the time of the execution of any such supplemental indenture have consented to and approved the execution thereof as provided in the Indenture, no Owner will have any right to object to any of the terms and provisions contained therein, or in the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Trustee or the Corporation from executing the same or from taking any action pursuant to the provisions thereof. The written consent by the purchaser of a series of Additional Bonds constitutes the consent of the Owners of that series of Additional Bonds. Any consent or request by the Owners of any Bond is conclusive and binding on such Owner and on all future Owners of the Bonds and of any Bonds executed and delivered on the transfer of any Bond, whether or not notation of such consent or request is made on the Bond. --Consent of Initial Purchaser, Underwriter or Remarketing Agent. Notwithstanding anything in the Indenture to the contrary, (1) any initial purchaser, underwriter or remarketing agent holding any Bonds may, regardless of its intent to sell or distribute such Bonds in the future, consent as the Owner of such Bonds to any amendment or supplemental indenture as required by the Indenture, including any amendment or supplemental indenture that adversely affects the interests of other Owners and (2) any such holder providing its consent under this Section will not be entitled to receive, nor will the City be required to provide, any prior notice or other documentation regarding such amendment or supplemental indenture. Exclusion of Bonds Held By or For the City and the Corporation. In determining whether the Owners of the requisite principal amount of Bonds Outstanding have given any request, demand, authorization, direction, notice, consent or waiver under the Indenture, Bonds owned by the City and the Corporation will be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee is protected in relying on any such request, demand, authorization, direction, notice, consent or waiver, only Bonds which the Trustee actually knows to be so owned will be disregarded. C-14

123 Events of Default. Any of the following events are defined as and will be deemed an Event of Default under the Indenture: (a) Default in the payment of the principal or premium, if any, with respect to any Bond when the same becomes due and payable, whether at the stated maturity thereof or on proceedings for prepayment. (b) Default in the payment of any installment of interest with respect to any Bond when the same becomes due and payable. (c) The occurrence of an Event of Default under the Contract. Remedies on Default. (a) On the occurrence and continuance of an Event of Default, the Trustee may, and shall, if required by a majority in aggregate principal amount of the Owners of the Bonds, by written notice to the City, declare the obligations of the City as to the principal and interest components of Installment Payments and the aggregate principal amount with respect to the Bonds and the accrued interest with respect thereto to be immediately due and payable, whereupon they will, without further action, become due and payable. (b) The provisions of the preceding paragraph are subject, to the condition that if, after the principal with respect to any of the Installment Payments and the Bonds has been so declared to be due and payable, and before the earlier of (1) the exercise of rights granted under the Deed of Trust or (2) to the extent permitted by the Indenture and applicable law, any judgment or decree for the payment of the money due has been obtained or entered, the defaulting party (the Defaulting Party ) will cause to be deposited with the Trustee a sum sufficient to pay all matured installments of the principal and interest with respect to all Bonds which have become due otherwise than by reason of such declaration (with interest on such overdue installments of principal and interest, to the extent permitted by law, at the rate or rates per annum borne by the Bonds) and such amount as is sufficient to cover reasonable compensation and reimbursement of expenses payable to the Trustee, and all Events of Default under the Indenture other than nonpayment of the principal or interest with respect to the Bonds which have become due by said declaration have been remedied, then, in every such case, such Event of Default will be deemed waived and such declaration and its consequences rescinded and annulled, and the Trustee will promptly give written notice of such waiver, rescission or annulment to the Defaulting Party and will give notice thereof by first class mail to all Owners; but no such waiver, rescission and annulment will extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. The provisions of paragraph (a) are further subject to the condition that any waiver of any event of default under the Contract and a rescission and annulment of its consequences will constitute a waiver of the corresponding Event of Default under the Indenture and a rescission and annulment of the consequences thereof. If notice of such event of default under the Contract has been given as provided in the Indenture, the Trustee will promptly give written notice of such waiver, rescission or annulment to the Defaulting Party and will give notice thereof by first class mail to all Owners; but no such waiver, rescission and annulment will extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. (c) On the occurrence and continuance of any Event of Default and on the written direction of Owners of not less than a majority in principal amount of the Bonds Outstanding and C-15

124 receipt of indemnity to the Trustee s satisfaction, the Trustee shall, to the extent permitted by the Indenture and applicable law, in its own name and as the Trustee of an express trust: (1) by mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the Owners, and require the Defaulting Party to carry out any agreements with or for the benefit of the Owners and to perform its or their duties under the Contract and the Indenture, provided that any such remedy may be taken only to the extent permitted under the applicable provisions of the Contract or the Indenture, as the case may be; (2) take whatever action at law or in equity is permissible and may appear necessary or desirable to enforce its rights against the Defaulting Party or the Mortgaged Property held as security therefor. No right or remedy is intended to be exclusive of any other rights or remedies, but each and every such right or remedy will be cumulative and in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or by statute. If any Event of Default has occurred and if requested by the Owners of a majority in aggregate principal amount of Bonds then Outstanding and indemnified as provided in the Indenture, the Trustee is obligated to exercise, to the extent permitted by the Indenture and applicable law, such one or more of the rights and powers conferred by the Indenture as the Trustee, being advised by counsel, will deem most expedient in the interests of the Owners. Application of Money. All money received by the Trustee pursuant to any right given or action taken under the provisions of the Indenture after an Event of Default will, after payment of the costs and expenses of the proceedings resulting in the collection of such money and of the expenses, liabilities and advances incurred or made by the Trustee, be deposited in the Bond Fund and applied as follows: (a) Unless the principal with respect to all of the Bonds have become or have been declared due and payable, all such money will be applied: FIRST - To the payment to the persons entitled thereto of all installments of interest then due with respect to the Bonds, in the order of the maturity of the installments of such interest beginning with the earliest such maturity and, if the amount available is not sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or privilege; and SECOND - To the payment to the persons entitled thereto of the unpaid principal and premium, if any, with respect to any of the Bonds which have become due (other than Bonds matured or called for prepayment for the payment of which money is held pursuant to the provisions of the Indenture), in the order of their due dates and beginning with the earliest due date and, if the amount available is not sufficient to pay in full Bonds due on any particular date, then to the payment ratably, according to the amount of principal due on such date, to the persons entitled thereto without any discrimination or privilege; and THIRD - To the payment to the persons entitled thereto of interest on overdue installments of principal, premium, if any, and interest, to the extent permitted by law, and if the amount available is not sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such particular installment, to the persons entitled thereto, without any discrimination or privilege; and C-16

125 FOURTH - To be held for the payment to the persons entitled thereto, as the same become due, of the principal, premium, if any, and interest with respect to the Bonds which may thereafter become due in accordance with the terms of the Indenture. (b) If the principal with respect to all of the Bonds have become due or have been declared due and payable, all such money will be applied to the payment of the principal and interest then due and unpaid with respect to the Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due, respectively, for principal and interest, to the persons entitled thereto without any discrimination or privilege, with interest on overdue installments of interest or principal, to the extent permitted by law. Whenever money is to be applied pursuant to the provisions described above, such money will be applied at such times, and from time to time, as the Trustee determines, having due regard to the amount of such money available for application and the likelihood of additional money becoming available for such application in the future. Whenever the Trustee applies such funds, it will fix the date (which will be an Interest Payment Date unless it deems another date more suitable) on which such application is to be made and on such date interest on the amounts of principal to be paid on such dates will cease to accrue. The Trustee will give such notice as it may deem appropriate of the deposit with it of any such money and of the fixing of any such date, and will not be required to make payment to the Owner of any Bond until such Bond is presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Whenever the principal, premium, if any, and interest with respect to all of the Bonds have been paid and all expenses and charges of the Trustee have been paid, any balance remaining in the Bond Fund will be paid to the City. Defeasance. If, when the Bonds secured by the Indenture become due and payable in accordance with their terms or otherwise as provided in the Indenture, the whole amount of the principal, premium, if any, and interest due and payable with respect to all of the Bonds will be paid or provision has been made for the payment of the same, together with all other sums payable under the Indenture, then the right, title and interest of the Trustee in and to the Trust Estate and all covenants, agreements and other obligations of the Corporation to the Trustee and the Owners will then cease, terminate and become void and be discharged and satisfied. In such event, on the request of the City, the Trustee will transfer and convey to the City all property assigned or pledged to the Trustee by the Corporation then held by the Trustee pursuant to the Indenture, and the Trustee will execute such documents as may be reasonably required by the City and will turn over to the City any surplus in any fund created under the Indenture other than the Rebate Fund. Outstanding Bonds will, before the maturity or prepayment date thereof, be deemed to have been paid within the meaning and with the effect expressed in the above paragraph if (a) in case said Bonds are to be prepaid on any date before their maturity, the City has given to the Trustee in form satisfactory to the Trustee irrevocable instructions to give on a date, in accordance with the provisions of the Indenture, notice of prepayment of such Bonds on said prepayment date, (b) there has been deposited with the Trustee either money in an amount which will be sufficient, or Federal Securities which do not contain provisions permitting the prepayment thereof at the option of the issuer thereof, the principal of and the interest on which when due, and without any reinvestment thereof, will provide money which, together with the money, if any, deposited with or held by the Trustee at the same time, sufficient to pay when due the principal, premium, if any, and interest due and to become due with respect to said Bonds on and before the prepayment date or maturity date thereof, as the case may be, and (c) in the event said Bonds are not by their terms subject to prepayment within the next 60 days, the City has given the Trustee in C-17

126 form satisfactory to it (1) irrevocable instructions to give, as soon as practicable in the same manner as the notice of prepayment is given, a notice to the Owners of such Bonds that the deposit required by (b) above has been made with the Trustee and that said Bonds are deemed to have been paid in accordance with the Indenture and stating such maturity or prepayment date on which money is to be available for the payment of the principal, premium, if any, and interest with respect to said Bonds, (2) verification from an independent accountant or other nationally recognized expert not unacceptable to the Trustee that the money or Federal Securities deposited with the Trustee will be sufficient to pay when due the principal, premium, if any, and interest due and to become due with respect to the Bonds on and before the prepayment date or maturity date thereof, and (3) an opinion of nationally recognized bond counsel that such deposit of money or Federal Securities will not adversely affect the exclusion from gross income for federal income tax purposes of interest with respect to the Bonds. Neither the Federal Securities nor money deposited with the Trustee or principal or interest payments on any such Federal Securities will be withdrawn or used for any purpose other than, and such Federal Securities or money will be held in trust for, the payment of the principal, premium, if any, and interest with respect to said Bonds; provided any cash received from such principal or interest payments on such Federal Securities deposited with the Trustee, if not then needed for such purpose, will, to the extent practicable, be reinvested in Federal Securities of the type described in clause (b) of this paragraph maturing at the times and in amounts sufficient (together with any other money or Federal Securities then held by the Trustee as described above) to pay when due the principal, premium, if any, and interest to become due with respect to said Bonds on or before such prepayment date or maturity date thereof, as the case may be. At such time as any Bonds will be deemed paid as aforesaid, such Bonds will no longer be secured by or entitled to the benefits of the Indenture and the Contract, except for the purpose of exchange and transfer and any payment from such money or Federal Securities deposited with the Trustee. The release of the obligations of the Corporation described in the preceding paragraph is without prejudice to the rights of the Trustee to be paid reasonable compensation for all services rendered by it under the Indenture and all its reasonable expenses, charges and other disbursements incurred with respect to the administration of the trust created by the Indenture and the performance of its powers and duties under the Indenture. THE DEED OF TRUST Deed of Trust and Security Interest. To secure (1) the obligation of the City to make the Installment Payments and (2) the payment and performance of all the other liabilities and obligations, whether now existing or hereafter arising, of the City to the Corporation under the Contract and the Deed of Trust, the City has granted and conveyed to the Deed of Trust Trustee for the benefit of the Beneficiary, its successors and assigns all right, title and interest that the City now has or may hereafter acquire in the Premises as more fully described in the Deed of Trust. City s Continuing Obligation. The City will remain liable for full payment and performance, as the case may be, of all obligations secured by the Deed of Trust, notwithstanding the occurrence of any event or circumstance whatsoever. However, no deficiency judgment may be rendered against the City in favor of the Beneficiary in violation of 160A-20 of the North Carolina General Statutes, including, without limitation, any deficiency judgment for amounts that may be owed under the Contract or the Deed of Trust when the sale of all or any portion of the Mortgaged Property is insufficient to produce enough money to pay in full all remaining obligations under the Contract or the Deed of Trust. Release of Mortgaged Property. Notwithstanding any other provisions of the Deed of Trust to the contrary, at any time so long as there is no Event of Default, the Deed of Trust Trustee must release the Mortgaged Property or any part thereof from the lien and security interest of the Deed of Trust when and if the following requirements have been fulfilled: C-18

127 (a) In connection with any release of the Premises, or any part thereof, there will be filed with the Beneficiary a certified copy of the resolution of the Board of Commissioners for the City stating the purpose for which the City desires such release of the Premises, giving an adequate legal description of the part of the Mortgaged Property to be released, requesting such release and providing for the payment by the City of all expenses in connection with such release. (b) In connection with the release of any part of the Mortgaged Property constituting less than the entire Mortgaged Property, either (1) the tax, insured or appraised value of the Mortgaged Property remaining after the proposed release is not less than 50% of the aggregate principal components of the Installment Payments then Outstanding under the Indenture or (2) the City (i) provides for the substitution of other real property therefor and the tax, insured or appraised value of the Mortgaged Property remaining after the proposed substitution is not less than the replacement value of the Mortgaged Property (as determined above) immediately before the proposed substitution, (ii) delivers to the Deed of Trust Trustee and the Corporation an opinion of Bond Counsel to the effect that the substitution (A) is permitted by law and under the Deed of Trust and (B) will not adversely affect the tax treatment of the Bonds, and (iii) records a modification to the Deed of Trust reflecting such substitution of the Mortgaged Property. (c) In connection with the release of any part of the Mortgaged Property constituting less than the entire Mortgaged Property, such release will not prohibit City s ingress, egress and regress to and from the remainder of the Mortgaged Property not being released, or materially interfere with the use of the remainder of the Mortgaged Property not being released. (d) In connection with the release of all property constituting the entire Mortgaged Property, there is paid to the Beneficiary an amount sufficient to provide for the payment in full of all Outstanding Bonds in accordance with the Indenture. Grant and Release of Easements. Notwithstanding any other provisions of the Deed of Trust, at any time so long as there is no Event of Default, with the consent of the Trustee, the City may at any time or times grant easements, licenses, rights of way and other rights and privileges in the nature of easements with respect to any part of the Mortgaged Property and the City may release existing interests, easements, licenses, rights of way and other rights or privileges with or without consideration. The Beneficiary agrees that it shall execute and deliver and will cause, request or direct the Deed of Trust Trustee to execute and deliver any instrument reasonably necessary or appropriate to grant or release any such interest, easement, license, right of way or other right or privilege but only upon receipt of (a) a copy of the instrument of grant or release, (b) a written request of the City requesting such instrument and (c) a certificate executed by the City that the grant or release is not detrimental to the proper conduct of the operations of the City at the Mortgaged Property and will not impair the effective use, nor decrease the value, of the Mortgaged Property. Release of Fixtures. Notwithstanding any other provisions of the Deed of Trust, at any time so long as there is no Event of Default, with the consent of the Deed of Trust Trustee, the City may at any time or times release Fixtures to be added to the Mortgaged Property from the security interest created hereby with or without consideration. The Beneficiary agrees that it shall execute and deliver and will cause, request or direct the Deed of Trust Trustee to execute and deliver any instrument reasonably necessary or appropriate to release any such Fixture but only upon receipt of (a) a copy of the instrument of release, (b) a written request of the City requesting such instrument and (c) a certificate executed by the City that the release is not detrimental to the proper conduct of the operations of the City at the Mortgaged Property and will not impair the effective use, nor decrease the value, of the Mortgaged Property. C-19

128 Amendments. See THE CONTRACT--Amendments above. Events of Default. The term Event of Default as used in the Deed of Trust, will mean any one or more of the following events: (a) The occurrence of any Event of Default under the Contract; or (b) Failure by the City to perform or observe any term, condition or covenant of the Deed of Trust on its part to be observed or performed, other than as referred to in (a) above, or breach of any warranty by the City therein contained, for a period of 30 days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Deed of Trust Trustee or the Beneficiary unless the Deed of Trust Trustee or the Beneficiary agrees in writing to an extension of such time before its expiration; provided, however, that if the failure cannot be corrected within the stated period, the Deed of Trust Trustee or the Beneficiary will not unreasonably withhold consent for an extension not longer than 180 days. Acceleration on Default; Additional Remedies. If an Event of Default has occurred and is continuing, the Beneficiary will, at the direction of a majority in aggregate principal amount of the Owners of the Outstanding Bonds, declare all Indebtedness to be due and payable and the same will thereupon become due and payable in accordance with the Contract and the Deed of Trust without any presentment, demand, protest or notice of any kind. Thereafter, the Beneficiary may, to the extent permitted by applicable law and subject to the Contract: (a) Either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court and without regard to the adequacy of its security, enter upon and take possession of the Mortgaged Property, or any part thereof, in its own name or in the name of Deed of Trust Trustee, and do any acts which it deems necessary or desirable to preserve the value, marketability or rentability of the Mortgaged Property, or part thereof or interest therein, increase the income therefrom or protect the security thereof, and, with or without taking possession of the Mortgaged Property, sue for or otherwise collect the rents and issues thereof, including those rents and issues past due and unpaid, and apply the same, less costs and expenses of operation and collection including attorney s fees, upon any Indebtedness, all in such order as the Beneficiary may determine. The entering upon and taking possession of the Mortgaged Property, the collection of such rents and issues and the application thereof as aforesaid, will not cure or waive any Event of Default or notice of Event of Default under the Deed of Trust or invalidate any act done in response to such Default or pursuant to such notice of Default and notwithstanding the continuance in possession of the Mortgaged Property or the collection, receipt and application of rents and issues, the Deed of Trust Trustee or the Beneficiary, to the extent permitted by applicable law and subject to the Contract, will be entitled to exercise every right provided for in any instrument securing or relating to the Indebtedness or by law upon occurrence of any Event of Default, including the right to exercise the power of sale; (b) Commence an action to foreclose the Deed of Trust as a mortgage, specially enforce any of the covenants of the Deed of Trust, or cause the Deed of Trust Trustee to foreclose the Deed of Trust by power of sale; and (c) To the extent permitted by applicable law and the terms of the Contract, exercise any or all of the remedies available to a secured party under the Uniform Commercial Code of North Carolina or under any other applicable laws. C-20

129 NOTWITHSTANDING ANY PROVISIONS CONTAINED IN THE DEED OF TRUST, IT IS THE INTENT OF THE PARTIES TO COMPLY WITH THE PROVISIONS OF NORTH CAROLINA GENERAL STATUTES SECTION 160A-20. NO DEFICIENCY JUDGMENT MAY BE RENDERED AGAINST THE CITY IN FAVOR OF THE BENEFICIARY IN VIOLATION OF SECTION 160A-20, INCLUDING, WITHOUT LIMITATION, ANY DEFICIENCY JUDGMENT FOR AMOUNTS THAT MAY BE OWED UNDER THE CONTRACT OR THE DEED OF TRUST WHEN THE SALE OF ALL OR ANY PORTION OF THE MORTGAGED PROPERTY IS INSUFFICIENT TO PRODUCE ENOUGH MONEY TO PAY IN FULL ALL REMAINING OBLIGATIONS UNDER THE CONTRACT OR THE DEED OF TRUST. NOTWITHSTANDING ANY PROVISION TO THE CONTRARY IN THE DEED OF TRUST, NO DEFICIENCY JUDGMENT MAY BE RENDERED AGAINST THE CITY IN ANY ACTION TO COLLECT ANY OF THE INDEBTEDNESS SECURED BY THE DEED OF TRUST AND THE TAXING POWER OF THE CITY IS NOT AND MAY NOT BE PLEDGED DIRECTLY OR INDIRECTLY OR CONTINGENTLY TO SECURE ANY MONIES DUE OR SECURED UNDER THE DEED OF TRUST. C-21

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131 APPENDIX D FORM OF OPINION OF BOND COUNSEL

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133 APPENDIX D FORM OF BOND COUNSEL OPINION [Letterhead of Parker Poe Adams & Bernstein LLP] August, 2014 Kannapolis Capital Corporation Kannapolis, North Carolina City of Kannapolis, North Carolina Kannapolis, North Carolina U.S. Bank National Association Charlotte, North Carolina Ladies and Gentlemen: $25,220,000 Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 evidencing proportionate undivided interests in rights to receive certain Revenues pursuant to an Installment Financing Contract between Kannapolis Capital Corporation and the City of Kannapolis, North Carolina We have acted as Bond Counsel in connection with the execution and delivery of $25,220,000 aggregate principal amount of Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014 (the 2014 Bonds ), evidencing proportionate undivided interests in rights to receive certain Revenues pursuant to an Installment Financing Contract dated as of August 1, 2014 (the Contract ) between Kannapolis Capital Corporation, a nonprofit corporation organized and existing under the Constitution and laws of the State of North Carolina (the Corporation ), and the City of Kannapolis, North Carolina (the City ). The 2014 Bonds are being executed and delivered pursuant to an Indenture of Trust dated as of August 1, 2014 (the Indenture ) between the Corporation and U.S. Bank National Association, as trustee (the Trustee ). The Corporation has assigned to the Trustee pursuant to the Indenture all of its rights, title and interest in and to the Contract, including the right to receive Installment Payments, but excluding certain reserved rights described in the Indenture. Each capitalized term used but not defined herein has the meaning given to such term in the Contract and the Indenture, as applicable. The proceeds of the 2014 Bonds will be disbursed by the Trustee to pay (1) the capital costs of acquiring, constructing, equipping and furnishing a city hall and law enforcement center to be located on the campus of the North Carolina Research Center and (2) the costs related to the execution and delivery of the Contract. The City has agreed under the Contract to pay its Installment Payments required thereunder directly to the Trustee. D-1

134 Kannapolis Capital Corporation City of Kannapolis, North Carolina U.S. Bank National Association August, 2014 Page 2 In our capacity as Bond Counsel, we have examined executed copies of the Indenture and the Contract, a specimen of the 2014 Bonds and such law and certified proceedings, instruments, opinions and other documents as we have deemed necessary to render the opinions hereinafter expressed. As to questions of fact material to the opinions hereinafter expressed, we have relied on representations of the Corporation and the City contained in the Contract and the related documents thereto, the certified proceedings and other certifications of public officials and others furnished to us, including certifications furnished to us by or on behalf of the Corporation and the City, without undertaking to verify the same by independent investigation. We have also relied on the opinion of Walter M. Safrit, II, Esq., as City Attorney, dated the date hereof, with respect to the due authorization, execution and delivery of the Contract by the City. We have assumed the accuracy and truthfulness of all public records and of all certifications, documents and other proceedings that we have examined that have been executed or certified by public officials acting within the scope of their official capacities and have not verified the accuracy or truthfulness thereof. We have also assumed the genuineness of the signatures appearing upon such public records, certifications, and documents and proceedings. On the basis of the foregoing, we are of the opinion, under existing law, that: 1. The Indenture has been duly authorized, executed and delivered by the Corporation and is a valid, binding and enforceable obligation of the Corporation and, assuming the due authorization, execution and delivery by the Trustee, creates a valid lien on the Revenues in favor of the Trustee for the benefit of the Owners of the 2014 Bonds. 2. The Contract has been duly authorized, executed and delivered by the City and the Corporation and is a valid, binding and enforceable obligation of the City and the Corporation. 3. The 2014 Bonds have been duly authorized, executed and delivered for the purposes described above. The 2014 Bonds evidence valid and legally binding proportionate undivided interests in the Revenues pursuant to the Contract, enforceable in accordance with their terms. The 2014 Bonds are entitled to the benefits and security of the Indenture for the payment thereof from certain amounts to be paid under the Contract in accordance with the terms of the Indenture and the Contract. 4. The portion of Installment Payments designated and paid as interest with respect to the 2014 Bonds, as provided in the Contract, is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for the purpose of computing federal alternative minimum tax imposed on certain corporations. The opinion set forth in the preceding sentence is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended, that must be satisfied subsequent to the initial execution and delivery of the Contract in order that the interest components of the Installment Payments designated and paid as interest with respect to the 2014 Bonds, as provided in the Contract, be, or continue to be, excludable from gross income for federal income tax purposes. The City has covenanted to comply with all such requirements. Failure to comply with certain of such requirements may cause the interest components of Installment Payments designated and paid as interest with respect to the 2014 Bonds, as provided in the Contract, to be included in gross income for federal income tax purposes retroactive to the date of the initial execution and delivery of the Contract. We express no opinion regarding other federal tax consequences arising with respect to the interest components of Installment Payments designated and paid as interest with respect to the 2014 Bonds, as provided in the Contract. D-2

135 Kannapolis Capital Corporation City of Kannapolis, North Carolina U.S. Bank National Association August, 2014 Page 3 5. The portion of the Installment Payments designated and paid as interest with respect to the 2014 Bonds, as provided in the Contract, is exempt from State of North Carolina income taxation. It is to be understood that the rights of the Owners of the 2014 Bonds and the enforceability of the Indenture, the Contract and the 2014 Bonds may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, liquidation, readjustment of debt and other similar laws affecting creditors rights and remedies generally, and by general principles of equity, whether such principles are considered in a proceeding at law or in equity. We express no opinion herein as to the accuracy, adequacy or completeness of the Preliminary Official Statement or the Official Statement relating to the 2014 Bonds. This opinion is delivered to you and for your benefit in connection with the above transaction; it may not be relied upon by you for any other purposes and may not be relied upon by, nor may copies be provided to, any other person, firm, corporation or other entity without our prior written consent. Respectfully submitted, PARKER POE ADAMS & BERNSTEIN LLP D-3

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137 APPENDIX E BOOK-ENTRY ONLY SYSTEM

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139 APPENDIX E BOOK-ENTRY ONLY SYSTEM Beneficial ownership interests in the 2014 Bonds will be available only in a book-entry system. The actual purchasers of the 2014 Bonds (the Beneficial Owners ) will not receive physical bonds representing their interests in the 2014 Bonds purchased. So long as The Depository Trust Company ( DTC ), New York, New York, or its nominee is the registered owner of the 2014 Bonds, references in this Official Statement to the Owners of the 2014 Bonds shall mean DTC or its nominee and shall not mean the Beneficial Owners. THE FOLLOWING DESCRIPTION OF DTC, OF PROCEDURES AND RECORD KEEPING ON BENEFICIAL OWNERSHIP INTERESTS IN THE 2014 BONDS, PAYMENT OF INTEREST AND OTHER PAYMENTS ON THE 2014 BONDS TO DTC PARTICIPANTS OR TO BENEFICIAL OWNERS, CONFIRMATION AND TRANSFER OF BENEFICIAL OWNERSHIP INTERESTS IN THE 2014 BONDS, AND OR OTHER TRANSACTIONS BY AND BETWEEN DTC, DTC PARTICIPANTS AND BENEFICIAL OWNERS IS BASED ON INFORMATION FURNISHED BY DTC. DTC will act as securities depository for the 2014 Bonds. The 2014 Bonds will be registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered bond in the aggregate principal amount of each maturity of the 2014 Bonds of each series will be issued and deposited with DTC. SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE 2014 BONDS, AS DTC S PARTNERSHIP NOMINEE, REFERENCE HEREIN TO THE OWNERS OR REGISTERED OWNERS OF THE 2014 BONDS SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE 2014 BONDS. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transaction in deposited securities through electronic computerized bookentry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities bonds. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation and Emerging Markets Clearing Corporation as well as by the New York Stock Exchange, Inc., the American Stock Exchange, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the Indirect Participants and collectively with the Direct Participants, the Participants ). DTC has a Standard & Poor s rating of: AA+. The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission. Purchases of 2014 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2014 Bonds on DTC s records. The ownership interest of each actual purchaser of the 2014 Bonds defined above is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation form DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2014 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial owners will not receive physical 2014 Bonds representing their ownership interests in 2014 Bonds, except in the event that use of the book-entry system for the 2014 Bonds is discontinued. E-1

140 To facilitate subsequent transfers, all 2014 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of 2014 Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the identities of the actual Beneficial Owners of the 2014 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such 2014 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the 2014 Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the 2014 Bonds, such as redemptions, defaults and proposed amendments to the security documents. For example, Beneficial Owners of the 2014 Bonds may wish to ascertain that the nominee holding the 2014 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the 2014 Bonds within a maturity of a series are being redeemed, DTC s practice is to determine by lot the amount o the interest of each Direct Participant in the 2014 Bond to be prepaid. Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the 2014 Bonds unless authorized by a Direct Participant in accordance with DTC s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting and voting rights to those Direct Participants to whose accounts the 2014 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). BECAUSE DTC IS TREATED AS THE OWNER OF THE 2014 BONDS FOR SUBSTANTIALLY ALL PURPOSES UNDER THE TRUST AGREEMENTS, BENEFICIAL OWNERS MAY HAVE A RESTRICTED ABILITY TO INFLUENCE IN A TIMELY FASHION REMEDIAL ACTION OR THE GIVING OR WITHHOLDING OF REQUESTED CONSENTS OR OTHER DIRECTIONS. IN ADDITION, BECAUSE THE IDENTITY OF BENEFICIAL OWNERS IS UNKNOWN TO THE CITY, TO THE TRUSTEE OR TO DTC, IT MAY BE DIFFICULT TO TRANSMIT INFORMATION OF POTENTIAL INTEREST TO BENEFICIAL OWNERS IN AN EFFECTIVE AND TIMELY MANNER. BENEFICIAL OWNERS SHOULD MAKE APPROPRIATE ARRANGEMENTS WITH THEIR BROKER OR DEALER REGARDING DISTRIBUTION OF INFORMATION REGARDING THE 2014 BONDS THAT MAY BE TRANSMITTED BY OR THROUGH DTC. Principal, and interest payments with respect to the 2014 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the City on each payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participants and not of DTC (nor its nominee) or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the City s responsibility, disbursement of such payments to Direct Participants is DTC s responsibility, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. THE CITY CANNOT AND DOES NOT GIVE ASSURANCE THAT DIRECT AND INDIRECT PARTICIPANTS WILL PROMPTLY TRANSFER PAYMENTS TO BENEFICIAL OWNERS. DTC may discontinue providing its services as securities depository with respect to the 2014 Bonds at any time by giving reasonable notice to the City. Under such circumstances, in the event that a successor depository is not obtained, physical 2014 Bonds are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, physical bonds will be printed and delivered to DTC. E-2

141 THE CITY HAVE NO RESPONSIBILITY OR OBLIGATION TO DTC, THE DIRECT PARTICIPANTS, THE INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY PARTICIPANT, OR THE MAINTENANCE OF ANY RECORDS; (2) THE PAYMENT BY DTC OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE 2014 BONDS, OR THE SENDING OF ANY TRANSACTION STATEMENTS; (3) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TRUST AGREEMENTS TO BE GIVEN TO OWNERS; (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENTS UPON ANY PARTIAL REDEMPTION OF THE 2014 BONDS; OR (5) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF THE 2014 BONDS, INCLUDING ANY ACTION TAKEN PURSUANT TO AN OMNIBUS PROXY. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources the City believes to be reliable, but the City takes no responsibility for accuracy thereof. E-3

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144 CITY OF KANNAPOLIS Limited Obligation Bonds (City of Kannapolis, North Carolina), Series 2014