NEW ISSUE DTC BOOK-ENTRY ONLY CUSIP1 NO. 275281 6F5

RATING See "RATING" herein S&P Rating: "SP-1 +"

In the opinion of Quint & Thimmig UP, San Francisco, California, Bond Counsel, subject, however to certain quabfications described herein, under existing law, the interest on the Notes is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, although for the purpose of computing the alternative minimum tax imposed on certain corporations, such interest is taken into account in detennining certain income and earnings. In the further opinion of Bond Counsel, such interest is exempt from California personal income taxes. See "TAX .A1ATTERS" herein.

$14,000,000 EAST SIDE UNION HIGH SCHOOL DISTRICT

(SANTA CLARA COUNTY, CALIFORNIA) 2006 TAX AND REVENUE ANTICIPATION NOTES

Dated: Date of Delivery Due: October 25, 2007

The East Side Union High School District 2006 Tax and Revenue Anticipation Notes (the "Notes") are being issued to finance seasonal cash flow requirements of the East Side Union High School District (the "District") during the fiscal year ending June 30, 2007 (the "Fiscal Year"). The Notes will be initially issued in book-entry form only through the book-entry system of The Deposilory Trust Company, New York, New York ("DTC"). See "THE NOTES-DTC Book-entry Only" herein.

The Notes, in accordance wilh California law, represent the general obligation of the District, but are payable solely from taxes, income, revenue, cash receipts, and other moneys received by or accruing to the General Fund of the District during the Fiscal Year and legally available for the payment of the Notes. The Notes are equally and ratably secured by a pledge of an amount equal to the aggregate principal amount of the Notes, together with an amount sufficient to pay the interest thereon, from the Unrestricted Revenues (defined herein) to be received by the District in the months during the Fiscal Year as described herein (the "Pledged Revenues"). The Notes, to the extent not paid from Pledged Revenues, are payable only from any other taxes, income, revenues, cash receipts and moneys of the District lawjitlly available therefor.

The Notes are legal investments for commercial banks in California and are eligible to secure deposits of public moneys in the State of California.

THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR QUICK REFERENCE ONLY. IT IS NOT INTENDED TO BE A SUMMARY OF ALL FACTORS RELEVANT TO AN INVESTh1ENT IN THE NOTES. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION.

The Notes will be dated October 25, 2006, and will mature on October 25, 2007. The rate of interest and the offering price for the Notes is set forth below. Principal of and interest on the Notes will be paid at maturity by wire transfer to DTC, which in turn is required to remit such principal and interest to the DTC Participants for subsequent disbursement to the Beneficial Owners of the Notes. The Notes are not subject to redemption prior to maturity.

AMOUNT

$14,000,000

MATURITY SCHEDULE

MATURITY

October 25, 2007

COUPON INTEREST RATE

4.00%

REOFFERING YIELD

3.45%

The Notes are being purchased for re-offering by AG Edwards & Sons Inc. as Underwriter of the Notes. The Notes are offered when, as and if issued by the District and received by the Underwriter, subject to approval as to their legality by Quint & Thimmig UP, San Francisco, California, Bond Counsel. It is anticipated that the Notes, in definitive fonn, will be available for delivery through the facilities of DTC in New York, New York on or about October 25, 2006.

This Official Statement is Dated October 11, 2006

1 Copyright 2006, American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of The McGraw­Hill Companies, Inc., and is included for convenience of reference only. The District, the County, and the Underwriter make no representation as to the accuracy or completeness of such information.

NO DEALER, BROKER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED BY THE DISTRICT TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DISTRICT. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL NOR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE NOTES BY A PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE AN OFFER, SOLICITATION OR SALE.

THIS OFFICIAL STATEMENT IS NOT TO BE CONSTRUED AS A CONTRACT WITH THE PURCHASERS OF THE NOTES. STATEMENTS CONTAINED IN THIS OFFICIAL STATEMENT WHICH INVOLVE ESTIMATES, PROJECTIONS, FORECASTS OR MATTERS OF OPINION, WHETHER OR NOT EXPRESSLY SO DESCRIBED HEREIN, ARE INTENDED SOLELY AS SUCH AND ARE NOT TO BE CONSTRUED AS REPRESENTATIONS OF FACT.

THE INFORMATION SET FORTH HEREIN HAS BEEN OBTAINED FROM SOURCES WHICH ARE BELIEVED TO BE RELIABLE, BUT NO INFORMATION IS GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND ANY INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT IS NOT TO BE CONSTRUED AS A REPRESENTATION BY THE UNDERWRITER. THE INFORMATION AND EXPRESSIONS OF OPINION HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE AND NEITHER DELIVERY OF THIS OFFICIAL STATEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE DISTRICT SINCE THE DATE HEREOF.

THIS OFFICIAL STATEMENT IS SUBMITTED WITH RESPECT TO THE SALE OF THE NOTES REFERRED TO HEREIN AND MAY NOT BE REPRODUCED OR USED, IN WHOLE OR IN PART, FOR ANY OTHER PURPOSE, UNLESS AUTHORIZED IN WRITING BY THE DISTRICT. ALL SUMMARIES OF THE DOCUMENTS AND LA \l,'.S' ARE MADE SUBJECT TO THE PROVISIONS THEREFOR AND DO NOT PURPORT TO BE COMPLETE STATEMENTS OF ANY OR ALL SUCH PROVISIONS.

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OW,V EXAMINATION OF THE DISTRICT AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFICIAL STATEMENT.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITER MAY OFFER AND SELL THE NOTES TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS, BANKS OR OTHERS AT PRICES LOWER OR HIGHER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITER.

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$14,000,000 EAST SIDE UNION HIGH SCHOOL DISTRICT

(SANTA CLARA COUNTY, CALIFORNIA) 2006 TAX AND REVENUE ANTICIPATION NOTES

BOARD OF TRUSTEES

J. Manuel Herrera, President Lan Nguyen, Vice-President

Craig Mann, Clerk Patricia Martinez-Roach, Member

George Shirakawa Jr., Member

DISTRICT ADMINISTRATION

Robert Nufiez, Superintendent Jerry Kurr, Interim Assistant Superintendent, Business Services

Karen Khanh Poon, Director of Finance

East Side Union High School District 830 N. Capitol A venue

San Jose, California 95133 ( 408) 929-7351

FINANCIAL ADVISOR

Government Financial Strategies inc. 1228 N Street, Suite 13

Sacramento, California 95814-5609 (916) 444-5100

BOND COUNSEL

Quint & Thimmig LLP One Embarcadero Center, Suite 2420

San Francisco, California 94111 (415) 765-1550

PAYING AGENT

Santa Clara County Director of Finance 70 West Hedding Street

San Jose, California 95110 ( 408) 299-2541

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$14,000,000 EAST SIDE UNION HIGH SCHOOL DISTRICT

(SANTA CLARA COUNTY, CALIFORNIA) 2006 TAX AND REVENUE ANTICIPATION NOTES

TABLE OF CONTENTS

INTRODUCTORY STATEMENT ........................................................................................................................................................... 1 General ................................................................................................................................................................................................... 1 Professionals Involved .......................................................................................................................................................................... 2 Other Information ................................................................................................................................................................................. 2

THE NOTES ............................................................................................................................................................................................... 3 Authority for Issuance .......................................................................................................................................................................... 3 Purpose of Issue .................................................................................................................................................................................... 3 Not Bank Qualified Obligations .......................................................................................................................................................... 3 Description of the Notes ....................................................................................................................................................................... 3 DTC Book-Entry Only ......................................................................................................................................................................... 3 Security for The Notes and Available Sources of Repayment .......................................................................................................... 5 Bankruptcy Risks .................................................................................................................................................................................. 6 Investment of Operating Funds, Note Proceeds, and Repayment Funds .......................................................................................... 6

SANTA CLARA COUNTY INVESTMENT POOL ............................................................................................................................... 7 EAST SIDE UNION HIGH SCHOOL DISTRICT .................................................................................................................................. 9

General Information ............................................................................................................................................................................. 9 The Board of Trustees and Key Administrative Personnel ................................................................................................................ 9 Average Daily Attendance ................................................................................................................................................................... 9 Charter Schools ................................................................................................................................................................................... 10 Employee Relations ............................................................................................................................................................................ 10 Pension Plans ....................................................................................................................................................................................... 10 Other Post-Employment Benefits ...................................................................................................................................................... 10

SCHOOL DISTRICT FINANCIAL INFORMATION .......................................................................................................................... 12 Revenue Limitations ........................................................................................................................................................................... 12 Financial Statements and District Budgets ........................................................................................................................................ 12 Short Tenn Borrowings ...................................................................................................................................................................... 14 Capitalized and Bonded Lease Obligation ........................................................................................................................................ 15 Long Term Borrowings ...................................................................................................................................................................... 15 Alternate Liquidity .............................................................................................................................................................................. 15 Monthly Cash Flow ............................................................................................................................................................................. 16

TAXATION AND APPROPRIATIONS ................................................................................................................................................ 19 Ad Valorem Property Taxation .......................................................................................................................................................... 19 Taxation of State-Assessed Utility Property ..................................................................................................................................... 19 Alternative Method of Tax Apportiomnent ...................................................................................................................................... 19

STATE FUNDING OF PUBLIC EDUCATION ................................................................................................................................... 21 Sources of Revenue for Public Education ......................................................................................................................................... 21 Distribution of Revenue for Public Education .................................................................................................................................. 22 The 2006-07 State Budget .................................................................................................................................................................. 22 Future Budgets .................................................................................................................................................................................... 23

CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES & EXPENDITURES ................. 24 TAX MATTERS ....................................................................................................................................................................................... 27

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LEGAL MATTERS .................................................................................................................................................................................. 28 Legal Opinion ..................................................................................................................................................................................... 28 Absence of Litigation ......................................................................................................................................................................... 28 Legality for Investment ...................................................................................................................................................................... 28

RATINGS .................................................................................................................................................................................................. 29 FINANCIAL ADVISOR .......................................................................................................................................................................... 29 INDEPENDENT AUDITORS ................................................................................................................................................................. 29 UNDERWRITING AND INITIAL OFFERING PRICE ....................................................................................................................... 29 CONTINUING DISCLOSURE ............................................................................................................................................................... 30 ADDITIONAL INFORMATION ............................................................................................................................................................ 30

APPENDIX A-EXCERPTS FROM THE GENERAL PURPOSE FINANCIAL STATEMENTS OF THE DISTRICT AS OF AND FOR THE YEAR ENDING JUNE 30, 2005

APPENDIX B-FORM OF CONTINUING DISCLOSURE CERTIFICATE APPENDIX C-FORM OF OPINION OF BOND COUNSEL

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OFFICIAL STATEMENT

$14,000,000 EAST SIDE UNION HIGH SCHOOL DISTRICT

(SANTA CLARA COUNTY, CALIFORNIA) 2006 TAX AND REVENUE ANTICIPATION NOTES

INTRODUCTORY STATEMENT

The purpose of this Official Statement, which includes the Cover Page and attached Appendices, is to provide certain information concerning the sale and delivery of the East Side Union High School District 2006 Tax and Revenue Anticipation Notes (the "Notes") issued in the aggregate principal amount of $14,000,000.

This introduction is not a summary of this Official Statement. It is only a brief description of and guide to and is qualified by more complete and detailed infonnation contained in the entire Official Statement, which includes the Cover Page and Appendices hereto, and the documents summarized or described herein. A fall review should be made of the entire Official Statement. The offering of the Notes to potential investors is made only by means of this entire Official Statement.

General

This Official Statement has been prepared under the direction of the East Side Union High School District (the "District" or "School District") in order to furnish information with respect to the sale and delivery of the Notes. At the request of the District, the Notes have been authorized pursuant to a resolution (the "Resolution") of the Board of Supervisors (the "County Board") of the County of Santa Clara (the "County") adopted on September 26, 2006, on the behalf of the District

The Notes will be issued in full conformity with the Constitution and laws of the State of California (the "State"), including Article 7.6, Chapter 4, Part 1, Division 2, Title 5 (commencing with Section 53850) of the State of California Govermnent Code (the "Law"), and under such statute the Notes represents the general obligation of the District, but are payable solely from taxes, income, revenue, cash receipts and other moneys of the District attributable to the fiscal year commencing on July 1, 2006, and ending on June 30, 2007, (the "Fiscal Year") and legally available therefor.

The proceeds of the Notes will be used for current general fund expenditures of the District, including but not limited to current expenses, capital expenditures and the discharge of other obligations or indebtedness of the District. The Notes are not subject to redemption prior to their stated maturity date.

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Professionals Involved

Government Financial Strategies inc., Sacramento, California has acted as Financial Advisor with respect to the sale and delivery of the Notes. See "FINANCIAL ADVISOR" herein. All proceedings in connection with the issuance of the Notes are subject to the approving legal opinion of Quint & Thimmig LLP, Bond Counsel, San Francisco, California.

Other Information

This Official Statement may be considered current only as of the dated date affixed to the Cover Page hereto, and the information contained herein is subject to change. Brief descriptions of the Notes, the security for the Notes and the District are included in this Official Statement together with summaries of certain provisions of the Resolution. Such descriptions do not purport to be comprehensive or definitive. All references made herein to the authorizing Resolution adopted by the County Board on September 26, 2006, are qualified in their entirety by reference to such document, and references herein to the Notes are qualified in their entirety by reference to the form thereof delivered to the purchaser.

Information concerning this Official Statement, the Notes, the Districts or any other information relating to the sale and delivery of the Notes, including the Resolution and audited financial statements of the District, are available for public inspection and may be obtained by contacting the District at the address and telephone number set forth on page "iii" of this Official Statement, or by contacting the District's Financial Advisor, Government Financial Strategies inc., 1228 N Street, Suite 13, Sacramento, California 95814-5609, telephone (916) 444-5100, facsimile telephone (916) 444-5109.

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THE NOTES

Authority for Issuance

The Notes are issued under the authority of the Law and pursuant to the Resolution.

Purpose of Issue

Issuance of the Notes will provide moneys to meet the District's fiscal year 2006-07 General Fund expenditures, including but not limited to current expenses, capital expenditures and the discharge of other obligations or indebtedness of the District.

Borrowing is necessary during the fiscal year 2006-07 because the District's General Fund expenditures are expected to occur in relatively level amounts throughout the fiscal Year while receipts are expected to follow an uneven pattern, primarily as a result of an uneven pattern of State and federal apportionments and secured property tax installment payments. Receipts from these three sources account for a significant portion of the District's total annual revenues. As a result, the District's General Fund cash balance is projected to be sufficiently diminished during a portion of the fiscal year 2006-07 to require the issuance of the Notes. The Notes are intended to minimize the likelihood of a cash deficit position occurring within the General Fund during the fiscal year 2006-07.

Not Bank Qualified Obligations

The Notes are not designated as "qualified tax-exempt obligations" within the meaning of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended.

Description of the Notes

The Notes are being issued as fully registered Notes, without coupons, and when delivered will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the Notes. Individual purchases of the Notes will be made in book-entry form only and only in authorized denominations of $1,000 principal amount or any integral multiple thereof. So long as Cede & Co. is the registered owner of the Notes, principal, premium, if any, and interest on the Notes will be payable to Cede & Co., as nominee for DTC, which is obligated to remit such amounts to the Direct or Indirect Participants, as hereinafter defined, for subsequent disbursement to the Beneficial Owners of the Notes. See "THE NOTES-DTC Book-Entry Only" herein.

The Notes will be dated October 25, 2006, and will mature on October 25, 2007. Principal of and the final interest payment on the Notes will be paid, at maturity, at the rate of interest stated on the Cover Page hereof. Interest on the Notes is computed on the basis of a 360-day year consisting of twelve 30-day months. The Notes will not be subject to redemption prior to their stated maturity date.

DTC Book-Entry Only

The following information concerning DTC and DTC's book-entry-only system has been obtained from DTC. The Office takes no responsibility for the accuracy or completeness thereof There can be no assurance that DTC will abide by its procedures or that such procedures will not be changed from time to time.

The following description includes the procedures and record-keeping with respect to beneficial ownership interest in each Note, payment of principal and interest, other payments with respect to each Note to Direct Participants or Beneficial Owners, confinnation and transfer of beneficial ownership interests in such Notes with other related transactions by and between DTC, the Participants, and the Beneficial Owners. However, DTC, the Participants, and the Beneficial Owners should not rely on the following with respect to such matters, but should instead confinn the same with DTC or the Direct Participants, as the case may be.

The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Notes. The Notes will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be

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requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each maturity of the Notes, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world's largest 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. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instrument from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, 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 (NSCC, FICC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, 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 ("Indirect Participants"). DTC has Standard & Poor' s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www .dtcc.com and www.dtc.oro

Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC's records. The ownership interest of each actual purchaser of each Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued.

To facilitate subsequent transfers, all Notes 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 Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC's records reflect only the identity of the Direct Participants to whose accounts such Notes 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 Notes may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Notes, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of Notes may wish to ascertain that the nominee holding the Notes 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 the notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Notes unless authorized by a Direct Participant in accordance with DTC' s Procedures. Under its usual procedures, DT C mails an Omnibus Proxy to the Office as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.' s consenting or voting rights to those Direct Participants to whose accounts Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, distributions, and dividend payments on the Notes 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 Office or Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing

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instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC [nor its nominee], the Trustee, or the Office, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Office or Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Notes at any time by giving reasonable notice to the Office or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

The Office may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered.

Security for The Notes and Available Sources of Repayment

The Notes and the interest thereon are a general obligation of the District, but are payable solely from tax.es, income, revenues, cash receipts and other moneys received by the District during fiscal year 2006-07 and legally available for the payment of current expenses and other obligations of the District (the "Unrestricted Revenues"). Certain Unrestricted Revenues to be received by the District have been specifically pledged, as hereinafter described, to the total repayment of the Notes and the interest thereon.

As security for the timely payment of the Notes and the interest thereon, the Resolution requires the County, on the behalf of the District, to transfer the Pledged Revenues, as defined below, during the months such moneys are received, to special Note repayment fund designated the "East Side Union High School District 2006 Tax and Revenue Anticipation Note Repayment Fund". The County has committed to deposit in the Repayment Fund (i) an amount equal to one half of the aggregate principal amount of the Notes from the Unrestricted Revenues to be received by the District in the month ending April 30, 2007, and (ii) an amount equal to one half of the aggregate principal amount of the Notes, together with an amount sufficient to pay the interest thereon, from the Unrestricted Revenues to be received by the District in the month ending May 31, 2007, together, if necessary, with an amount sufficient (net of anticipated earnings on the moneys in the District's Repayment Fund) to satisfy and to make up any deficiency therein. The amounts pledged by the County for deposit into the Repayment Fund from the Unrestricted Revenues are referred to as "Pledged Revenues". The principal of the Notes and the interest thereon will constitute a first lien and charge against, and will be payable from, the District's Pledged Revenues and to the extent not so paid will be paid from any other money of the District lawfully available for such purpose.

In the event that there have been insufficient Unrestricted Revenues received by the District by the third business day prior to the end of any month in which a deposit is required to be made to permit the deposit into the District's Repayment Fund of the full amount of the Pledged Revenues required to be deposited with respect to such month, then the amount of any deficiency in the Repayment Fund will be satisfied and made up from any other moneys of the District lawfully available for the payment of the principal of the Notes and the interest thereon (all as provided in Sections 53856 and 53857 of the Govermnent Code) (the "Other Pledged Moneys"), on such date or thereafter on a daily basis, when and as such Pledged Revenues and Other Pledged Moneys are received by the District.

On the maturity date of the Notes, the Paying Agent will apply moneys in the Repayment Fund to pay the principal of and the interest on the Notes, as required. Until the Notes and all interest thereon are paid or until provision has been made for the payment of the Notes at maturity with interest to maturity, the moneys in the Repayment Fund will be applied only for the purpose for which such Repayment Fund has been created, although they may be invested in legal investments, as permitted by the Govermnent Code of the State of California, subject to the limitations contained in the Resolution. See "THE NOTES­Investment of Operating Funds, Note Proceeds, and Repayment Funds" herein. Any moneys in the District's Repayment Fund after payment of all amounts due, or after provision for such payment has been made, will be transferred to the General Fund of the District

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Bankruptcy Risks

The opinion of Bond Counsel with respect to the Notes, attached hereto as "APPENDIX C", is qualified by reference to bankruptcy, insolvency and other laws relating to or affecting creditors' rights. Bankruptcy of the County or the District could affect the security of the owners of Notes, the ability of an owner to be paid in a timely manner, or both.

In connection with the 1994 bankruptcy petition of Orange County, California, the U. S. Bankruptcy Court originally held that the lien securing temporary notes issued by Orange County under the same statutory authority as the Notes did not attach to revenues received by Orange County after the filing of its bankruptcy petition, and therefore that the county was not required following bankruptcy to set aside the revenues it had pledged under the resolution providing for the issuance of its notes. The U.S. District Court reversed the Bankruptcy Court and that decision was appealed. While awaiting a decision from the U. S. Court of Appeals for the Ninth Circuit on the appeal, the parties settled their disputes. Accordingly, it is unclear whether the District could be required following filing of a bankruptcy petition to set aside funds as required by its note resolution.

Because the Treasurer of the County, acting as Paying Agent, is in possession of the taxes and other revenues that the District has agreed to set aside to pay the Notes, and will deposit and invest these funds in the County's pooled investtnent fund, should the District or the County go into bankruptcy, a court might hold that the owners of such Note do not have a valid lien on the funds set aside for payment thereof. In that case, unless the owners could ''trace" the funds, the owners may be merely unsecured creditors of the bankrupt County or District There can be no assurance that the owners could successfully so "trace" the pledged taxes and other revenues.

If the County were to file for bankruptcy, the District may be unable to order payment of the Notes from moneys held by the County in the fund set aside for such payment If the District were to file for bankruptcy, the Treasurer may be enjoined from applying set-aside funds to payment of the Notes, or from setting aside any further moneys of the District for such payment

Investment of Operating Funds Note Proceeds and Repayment Funds

Upon delivery of the Notes, the Treasurer of the County (who is also the Director of Finance, collectively, the "Treasurer") will deposit Note proceeds into the District's Note Proceeds Fund within the County Pool. Substantially all of the proceeds of the Notes will remain in the Santa Clara County Investment Pool (the "Pool") until spent as needed to meet cash flow requirements of that District or invested by the District pursuant to the Resolution. The Resolution permits Note Proceeds and moneys in the District's Repayment Fund to be invested in any investments permitted to the District by the Government Code of the State of California, and certain guaranteed investment contracts, provided that any such investments mature on or before the maturity date of the Notes. The Treasurer will invest the Note Proceeds and Repayment Fund only in securities or investment agreements that meet Standard & Poor's criteria for investments.

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SANTA CLARA COUNTY INVESTMENT POOL

This section provides a general description of the County's Investment Pool. The information has been adapted from material prepared by the County for inclusion in this Official Statement. The District makes no representation as to the accuracy or completeness of such information. Further information may be obtained by contacting the County of Santa Clara, Department of Finance, County Government Center, East Wing, 70 West Hedding Street, San Jose, California 95110, Telephone (408) 299-5200, Facsimile Telephone ( 408) 289-8629.

State law requires that all moneys of the County, school districts, and certain special districts be held in the County Treasury by the Treasurer. The County Treasurer has the authority to implement and oversee the investment of funds held in the Pool in accordance with California Government Code Section 53600 et seq. The moneys on deposit are predominantly derived from local government revenues consisting of property taxes, State and federal funding and other fees and charges. The Treasurer accepts funds only from agencies located within the County.

The following investment objectives, in order of priority, shall be applied in the management of the County's funds:

1. Safety. Safety of principal is the foremost objective of the County's investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. Credit risk is the risk of loss due to the failure of the security issuer. Credit risk may be mitigated by the County by determining on-going credit worthiness of the financial institutions, broker/dealers, intermediaries and advisors with which the County does business; and, diversifying the investment portfolio so that potential losses on individual securities will be minimized. Interest rate risk is the risk that the market value of securities in the portfolio will decrease due to changes in general interest rates. Interest rate risk may be mitigated by structuring the portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities prior to maturity.

2. Liquidity. No investment shall be made that could not appropriately be held to maturity without compromising liquidity requirements. The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Further, since all possible demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity).

3. Yield. The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the County's investment risk constraints and cash flow characteristics. The core of investments will be limited to low risk securities in anticipation of earning afair return relative to the risk being assumed. Securities shall not be sold prior to maturity, except under the following conditions: a declining credit security could be sold early to minimize loss of principal; selling the security would improve quality, yield or target duration of the portfolio; liquidity needs of the portfolio require that the security be sold.

Santa Clara County Investment Pool Composition of Portfolio

As of June 30, 2006

Type Market Value Federal Agency $ 2,235,409,348.76 Treasury Notes $ 24,843,750.00 Corporate Bonds $ 367,264, 147.63 FNCL $ 16,269,286.10 Commercial Papers $ 795,008,090.66 Federal Agency Discount $ 94,314, 136.17 Negotiable CDs $ 14,848,784.64 Local Agency Investment Fund $ 39,903,69840

Total: $ 3,587,861,242.36

Source: County of Santa Clara, Department of Finance

-7-

% of Total 62.3%

0.7% 10.2% 0.5%

22.2% 2.6% 04% 11%

100.0%

The weighted average maturity of the investment portfolio was 478 days, with a weighted average yield to maturity of 4.67%. The maturity distribution of the Pool's portfolio as of June 30, 2006 is set forth in the following table.

Santa Clara County Investment Pool Maturity Distribution As of June 30, 2006

Term to Maturity Cash Equivalent 1 - 30 days 31 - 90 days 91 - 180 days 181 - 365 days 366 - 730 days 731 days - 5 years

Source: County of Santa Clara, Department of Finance

Total:

% of Total

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1% 22% 7%

11% 13% 18% 28%

100%

EAST SIDE UNION HIGH SCHOOL DISTRICT

General Information

The District was established in 1949, and provides secondary education to the residents of the portion of east San Jose that extends from the Milpitas border on the north to the Coyote Narrows on the south, and from the Diablo Mountain Range on the east to the Guadalupe River on the west. The total area served by the District is approximately 142 square miles and has a population of approximately 390,000. The District serves over 24,728 student operating 11 comprehensive high schools (grades 9-12), six alternative education schools, and five continuation schools. The District employs approximately 1,290 certificated employees, approximately 680 classified employees, and approximately 83 non-represented employees.

The District has been very successful in obtaining community support. In March of 2002, the District passed a $298 million general obligation bond measure. The District also receives substantial technical, and financial support from the private sector. The David and Lucille Packard, Noyce, Hewlett, and Sun Microsystem Foundations have contributed significant amounts of funds to drive major education initiatives. Sun Microsystems, 3Com, Pacific Bell, Novell, RF!, NASA, TC!, Cable Connector Warehouse, Applied Materials, Adobe Systems, and Anixter have invested over $2 million in the wiring of East Side schools to enable students and teachers to have access to the internet. The District has also been successful in obtaining grants for student, family and school support More information on the District may be found at http://www.esuhsd.org/.

The Board of Trustees and Key Administrative Personnel

The District Board governs all activities related to public elementary and secondary education within the jurisdiction of the District. The District Board receives funding from local, State and federal government sources and must comply with the concomitant requirements of these funding source entities. The District Board consists of five members. Each District Board member is elected by the public for a four-year term of office, and staggered elections for the District Board are held every two years. The Superintendent of the District is appointed by the District Board and reports to the District Board. The Superintendent is responsible for managing the District's day-to-day operations and supervising the work of other key District administrators. The current members of the District Board, and key administrative personnel are set forth below.

NAME TITLE TERM EXPIRES J. Manuel Herrera President 12/07/2006

Lan Nguyen Vice-President 12/07/2008 Craig Marm Clerk 11/23/2006

Patricia Martinez-Roach Member 12/07/2006 George Shirakawa Jr. Member 12/07/2006

Average Daily Attendance

Student enrollment of a public school district in California determines to a large extent what the school district will receive in terms of funding for program, facilities and staff needs. Average daily attendance ("ADA") is a measurement of the enrollment of the District. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of state funds are made to school districts. See "STATE FUNDING OF PUBLIC EDUCATION" herein. Set forth in the exhibit below is the second period ADA (9-12 ADA excluding adult education and ROP) for the District

P-2ADA

* Estimated. Source: District

P-2 Average Daily Attendance East Side Union High School District

2002-03 2003-04 2004-05

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2005-06* 2006-07*

Charter Schools

There are currently six charter schools operating within the District, all of which are fiscally independent from the District. Charter schools receive revenues from the State and from the District for each student enrolled, and thus effectively reduce revenues available for students enrolled in District schools. The District is required to accommodate charter school students originating in the District in facilities comparable to those provided to regular District students.

Employee Relations

California law provides that employees of public school districts of the State are to be divided into appropriate bargaining units that then are to be represented by an exclusive bargaining agent.

The District has three recognized primary bargaining units for its employees. The East Side Teacher's Association ("ESTA"), the American Federation of Teachers, Local #957 ("AFT"), and the California School Employees Association, Local #187 ("CSEA").

Bargaining Units, Number Of Employees, And Contract Status

BARGAINING UNIT #OFFTEs STATUS

Certificated 1,290 Contract expires August 31, 2008

Oassified 680 Contract expires June 30, 2008

Other 83 Not applicable

Note: FT Es are projected figures used in the 2006-07 Annual Budget

Pension Plans

All full-time employees of the District are eligible to participate under defined benefit retirement plans maintained by agencies of the State. Certificated employees are eligible to participate in the cost-sharing multiple-employer State Teachers' Retirement System ("STRS"). Classified employees are eligible to participate in the multiple-employer Public Employees' Retirement Fund of the Public Employees' Retirement System ("PERS"), which acts as a common investment and adininistrative agent for participating public entities within the State.

STRS operates under the State of California Education Code sections commonly known as the State Teachers' Retirement Law. Membership is mandatory for all certificated employees of California public schools meeting the eligibility requirements. STRS provides retirement, disability and death benefits based on an employee's years of service, age and final compensation. Employees vest after five years of service and may receive retirement benefits at age fifty-five.

All full-time classified employees of the District participate in PERS, which provides retirement, disability and death benefits based on an employee's years of service, age and final compensation. Employees vest after five years of service and may receive retirement benefits at age fifty. These benefit provisions and all other requirements are established by State statute and District resolution. For a more complete description of the District's pension plan and annual contribution requirements, see "APPENDIX A" attached hereto.

Other Post-Employment Benefits

In June 2004, the Governmental Accounting Standards Board ("GASB") pronounced Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions. The pronouncement will require public agency employers providing healthcare benefits to retirees to recognize and account for the costs for providing these benefits on an accrual basis and provide footnote disclosure on the progress toward funding the benefits. The implementation date for this pronouncement will be staggered in three phases based upon the entity's annual revenues, similar to the implementation for GASB Statement No. 34 and 35. GASB Statement No. 45 ("GASB 45") will be effective for the District for the fiscal year ending June 30, 2008, although earlier implementation has been encouraged.

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GASB 45 provides that agencies should establish a reserve fund and annually transfer sufficient funds to this reserve in order to pay for retiree employment benefits other than pensions ("OPEB"), for the period of time agreed in union contracts. Employees who are eligible to receive OPEB while in retirement must meet specific criteria, i.e., age and years with the District. The District provides medical and dental insurance coverage, as prescribed in the various employee union contracts, to retirees meeting plan eligibility requirements.

In May 2006, an actuarial study was completed identifying the District's OPEB liability consistent with GASB 45. The study determined the District OPEB unfunded actuarial accrued liability ("UAAL") as of May 1, 2006 to be $24,500,633. The first year armual required contribution ("ARC") as defined by GASB 45 was calculated to be $2,008,975. The District's pay-as-you-go amount OPEB cost is estimated to be $1,795,925; the additional cost of compliance with GASB 45 is therefore $213,050.

In April 2006, the District authorized the issuance of not-to-exceed $35 million of Other Post-Employment Benefit Bonds to fund the UAAL The District currently plans to issue the Other Post-Employment Benefit Bonds in December 2006.

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SCHOOL DISTRICT FINANCIAL INFORMATION

The information in this section concerning the operations of the District and the District's finances is provided as supplementary information only, and it should not be inferred from the inclusion of this information in this Official Statement that the principal of, premium, if any, or interest on the Bonds is payable from the General Fund of the District. The Bonds are payable from the proceeds of an ad valorem tax required to be levied by the County in an amount sufficient for the payment thereof, See "SECURITY AND SOURCE OF PAYMENT" herein.

Revenue Limitations

The California Constitution, Article XVI, Section 8, requires that from all State revenues there will first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education. California school districts receive a significant portion of their general purpose operating income from State appropriations. As a result, decreases in State revenues may affect appropriations made by the Legislature to school districts.

On the average, California school districts receive most of their income under a formula known as the State Revenue Limit. Annual State apportionments of basic and equalization aid to school districts for general operating purposes are computed up to a revenue limit per unit of average daily attendance ("ADA"). Such apportiomnents will, generally speaking, amount to the difference between a district's revenue limit and the District's local property tax allocation.

Revenue limit calculations are adjusted annually in accordance with a number of factors designed primarily to provide cost of living increases and to equalize revenues among all districts of the same type (i.e., elementary, high school, and unified school districts). California school districts have operated under general purpose revenue limitations since fiscal year 1973-74. For a further discussion of State Revenue Limits, see "STATE FUNDING OF PUBLIC EDUCATION-Distribution of Revenue for Public Education" herein.

Financial Statements and District Budgets

Figures presented in summarized form herein have been gathered from the District's general purpose financial statements. Portions of the audited financial statements of the District for the fiscal year ending June 30, 2005, have been included in the appendix to this Official Statement. See "APPENDIX A" herein. Audited general purpose financial statements for all prior fiscal years are on file with the District and available for public inspection during normal business hours. Copies of general purpose financial statements relating to any year are available to prospective investors and or their representatives upon request by contacting the District or by contacting the District's Financial Advisor at the address and telephone number set forth on page "iii" of this Official Statement.

The District's General Fund finances the legally authorized activities of the District for which restricted funds are not provided. General Fund revenues are derived from such sources as federal and State school apportionments, tax.es, use of money and property, and aid from other governmental agencies.

The District is required by provisions of the State of California Education Code to maintain a balanced budget each year, where the sum of expenditures plus the ending fund balance cannot exceed revenues plus the carry-over fund balance from the previous year. The State of California Department of Education imposes a uniform budgeting format for school districts.

The fiscal year for all school districts is July 1 to June 30. The same calendar applies to the budgets of county offices of education, except that their budgets and reports go to the Superintendent of Public Instruction for review. The State budget, too, is extremely important since school districts depend on it for almost all their revenue. There is a very close timing in the summer between final approval of the State budget, school finance legislation, and the adoption of local district budgets. In some years, the State budget is not approved by the deadline, which forces school districts to begin the new fiscal year with only estimates of the amount of money they will actually receive.

The school district budgeting process involves continuous planning and evaluation. Within the deadlines, school districts work out their own schedules for considering whether or not to hire or replace staff, negotiating contracts with all employees, reviewing programs, and assessing the need to repair existing or acquire new facilities. Decisions depend on the critical estimates of

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enrollment, fixed costs, commitments in contracts with employees as well as best guesses about how much money will be available for elementary and secondary education.

The timing of some decisions is forced by legal deadlines. For example, preliminary layoff notices to teachers must be delivered in March, with final notices in May. This necessitates projecting enrollments and determining staffing needs long before a school district will know either their final financial positions for the current year or their income for the next one.

The governing board must submit a budget to the County Superintendent by July 1, and a publicized opportunity for public participation in the budget process is required by law. There are two options for budget adoption. Districts may adopt their budgets by July 1 and then revise and readopt them by September 8 after a public hearing. Alternatively, school districts may decide, by the previous October 31, to hold public hearings before adopting their budgets by July 1. School districts choosing this option revise their revenues and expenditures after the State budget act is adopted, without a second public hearing. All school districts must perform a criteria and standards review before budget adoption. And, those school districts on the alternative schedule for adoption must repeat the review before their revision only if the July 1 budget was disapproved. Recent legislation requires criteria and standards for stringent review of school districts1 finances, focusing primarily on predictions of average daily attendance, operating deficit, and reserves. It tells when and how outside committees, or an appointed trustee in emergency situations, must work with school districts. This oversight is part of an effort to reduce the number of districts in financial trouble and to increase the responsible use of tax dollars.

The County Superintendents monitor all school districts' budgets, ongoing financial obligations and multi-year contracts. They have specific powers for recommending actions to revise budgets. They are not, however, authorized to abrogate existing collective bargaining agreements. School districts must review their financial position for the periods ending October 31 and January 31 in order to certify their abilities to meet commitments through the rest of the school year.

Each school district is required by the State of California Education Code to file these two interim reports each year by not later than December 15 and March 15. The county offices of education must then, within 30 days, evaluate the interim reports and forward their comments to the State of California Department of Education and the State Controller's Office. Included in the report is a certification by the president of the governing board of each school district which classifies the school district according to its ability to meet its financial obligations. The certifications are grouped into three categories: A Positive Certification, which designates that the school district will be able to meet its financial obligations for the remainder of the fiscal year and subsequent two fiscal years; a Qualified Certification, which means that the school district may not be able to meet its financial obligations for the remainder of the fiscal year or the next two fiscal years, based upon current projections; and a Negative Certification, which signifies that the school district will not be able to meet its financial obligations for the remainder of the fiscal year or the next fiscal year, based upon current projection. The District submitted Negative Certifications for its First and Second Interim Report filings for fiscal year 2005-06, and submitted a Qualified Certification for its Third Interim report

The following illustration sets forth certain General Fund information for the District.

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General Fund Activity East Side Union High School District

For The Fiscal Years Indicated

2002-03 2003-04 2004-05 2005-06 2006-07 Audited Audited Audited Unaudited Actuals Adopted Budget

BEGINNING BALANCE $7,985,099 $8,701,611 $1,156,403 $2,848,833 $9,313, 158

REVENUES Revenue Limit Sources $128,967,691 $132,876,166 $141,326,073 $147,292,351 $158,262,480 Federal Revenues $12, 168,046 $13,578,631 $12,663,371 $13,814,912 $12,910,950 Other State Revenues $35,510, 119 $29,810,142 $34,948,694 $31,060,293 $30,749,782 Other Local Revenues $15,559,721 $13,377,894 $13,281,566 $11,616,751 $8,419,391

TOT AL REVENUES $192,205,577 $189,642,833 $202,219,704 $203,784,306 $210,342,603

EXPENDITURES Certificated Salaries $100,499,693 $96,567,567 $98,421,895 $100,804,810 $107,387,231 Classified Salaries $29, 114,205 $28,555,054 $27,377,810 $26,688,641 $28,321,394 Employee Benefits $34,092,873 $37, 143,066 $39,376,586 $41,685,558 $44,989,732 Books and Supplies $8,026,418 $6,983,102 $5,794,067 $5,411,435 $6,267,350 Services & Other Operating Exp $16,760,220 $15,495,813 $15,330,566 $14,303,193 $16,257,539 Capital Outlay $100,500 $1, 143,967 $229,024 $289,898 $22,500 Other Outgo $7,208,632 $11,835,789 $11,497,939 $9,422,010 $10,851,037 Direct support/indirect cost $0 $0 ($662,570) ($681,420) ($691,067)

TOT AL EXPENDITURES $195,802,541 $197,724,358 $197,365,318 $197,924,124 $213,405,717

FINANCING SOURCES (USES) $4,313,476 $536,317 ($3,161,957) $604, 143 $1,894,928

NET CHANGE $716,512 ($7,545,208) $1,692,429 $6,464,325 ($1,168,186)

ENDING BALANCE $8,701,611 $1, 156,403 $2,848,833 $9,313, 158 $8,144,973

Source: East Side Union High School District

Short Term Borrowings

The District has in the past issued short-term tax and revenue anticipation notes. Proceeds from the issuance of notes by the District during previous fiscal years have been used to reduce interlund dependency and to provide the District with greater overall efficiency in the management of its funds. The District has never defaulted on any of its short term borrowings. Set forth below is the history of the short term borrowing program of the District.

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Date of Issuance

July 2, 1996 July 2, 1997 July 2, 1998 July 1, 1999 July 6, 2000 July 3, 2001 July 2, 2002 July 1, 2003

June 30, 2004 October 25, 2005

Recent History Of The East Side Union High School District

Short Term Cash-Flow Financing Program

Amount of Notes

$7,500,000 $11,000,000 $12,500,000 $12,500,000 $17,800,000 $12,700,000

$9,500,000 $11,000,000 $10,500,000

$8,500,000

Capitalized and Bonded Lease Obligation

Moody's I S&P Rating

n/a SP-1+ SP-1+ SP-1+ SP-1+ SP-1+ SP-1+ SP-1+ SP-1+ SP-1+

The District has made use of various capital and bonded lease arrangements in the past under agreements which provide for title of items and equipment being leased to pass to the District upon expiration of the lease period. The District has promised to annually appropriate the amounts necessary to make all future lease payments from available revenues. All lease and capitalized lease obligations of tlie School District as of June 30, 2005, are set fortli in "APPENDIX A" attached hereto.

Long Term Borrowings

As of June 30, 2005, tlie District had $387,000,000 of general obligation bonds outstanding. On March 5, 2002, tlie District's voters approved a general obligation bond autliorization of $298,000,000 (tlie "2002 Autliorization"). On July 9, 2002, tlie District issued $30,000,000 of general obligation bonds from tlie 2002 Autliorization. On July 24, 2002, tlie District issued $30,000,000 of general obligation bonds from a voter approved a general obligation bond autliorization of $80,000,000 (tlie "1999 Autliorization"). On January 29, 2003, tlie District issued $36,795,000 of general obligation refunding bonds. On April 3, 2003, tlie District issued $30,000,000 of general obligation bonds from tlie 2002 Autliorization. Also on April 3, 2003, tlie District issued $24,500,000 of general obligation bonds from tlie 1999 Autliorization, representing tlie final autliorization of tlie 1999 Authorization. In June 2005, the District issued a series of two general obligation bonds from the 2002 Authorization, an issuance of $70,000,000 along witli an issuance of $29,999,529. On June 21, 2006, tlie District issued $50,000,000 of general obligation bonds from tlie 2002 Autliorization. Also on June 21, 2006, tlie District issued $42,665,000 of general obligation refunding bonds. The District's outstanding general obligation bonds are insured, and carry a "BBB+" Standard & Poor's underlying rating. The District has never defaulted on any of its long-term borrowings.

Alternate Liquidity

In tlie event of a "worst case" cash shortfall in tlie General Fund, tlie District maintains tlie ability, subject to approval by tlie District Board, to borrow alternate sources of funds to meet short term contingencies. Any transfer between funds, generally, is repaid to tlie account of origination prior to tlie close of tlie fiscal year. On June 30, 2006, tlie District is projecting an alternate source of funds, in aggregate, as set forth and itemized below.

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Alternate Liquidity

Projected Balance as of Balance as of

Fund June 30, 2006 June 30, 2007 General Reserve $ 6,130,607 $ 6,558,000 Special Reserve 3,225,882 County School Facilities 14,382,426 8,028,000 Capital Facilities 7,490,014 5,339,926

$ 31,228,929 $ 19,925,926

Month! y Cash Fl ow

The District has prepared for use in this Official Statement the following cash flow statements that show unaudited actual cash receipts and disbursements for fiscal year 2005-06, and projected cash receipts and disbursements for fiscal year 2006-07.

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EAST SIDE UNION HIGH SCHOOL DISTRICT ACTUAL MONTHLY CASH FLOW OF THE GENERAL FUND

FISCAL 'YEAR 2005-06

JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN TOTAL

BEGillNING CASH $13,713,324 $4,448,002 $3,253,934 $() $7,512,391 $4,147,110 $13,071,722 $35,638,907 $30,652,728 $24,426,313 $35,720,460 $20,472,732 $13,713,324

RECEIPTS Property Tax $729,112 $504,186 $138,786 $9,171,414 $3,365,633 $18,911,370 $16,093,669 $892,839 $6,788,198 $19,411,441 ($33,950) $11,673,574 $87,646,271 State Aid $() $6,708,978 $7,827,141 $4,652,330 $4,514,929 $() $9,029,858 $9,352,491 $() $9,352,490 $4,676,245 $2,757,070 $58,871,532 Othec $56,556 $68,579 $80,525 $66,120 $73,962 $71,052 $80,208 $73,262 $73,977 $94,670 $77,290 ($41,654) $774,548 Federal Revenues $3,578,044 $127,095 $18,190 $33,500 $1,550,457 $208,388 $134,046 $2,954,784 $118,029 $1,823,191 $533,309 $2,735,878 $13,814,912 Other State Revenues $1,783,357 $879,671 $1,369,481 $2,873,596 $1,635,119 $25,394 $11,283,463 $613,165 $1,005,629 $3,611,489 $250,411 $5,729,519 $31,060,293 Other Local Revenues $948,964 $650,676 $858,788 $475,669 $1,333,158 $453,621 $1,363,704 $112,236 $1,909,252 $524,262 $706,071 $2,536,796 $11,873,196 lnterfund Transfers In $() $() $() $13,789 $() $6,398,535 $352,980 $() $() ($352,980) $() $138,769 $6,551,093 Other Receipts $1,408,117 $1,801,910 $131,172 $1,546,606 $450,759 $251,102 $675,388 $34,606 $556,408 $723,429 $63,406 ($11,261,144) ($3,618,240) TRANs 2005 $() $() $() $8,604,805 $() $() $() $() $() $() $() $() $8,604,805

TOTAL RECEIPTS $8,504,150 $10,741,095 $10,424,083 $27,437,829 $12,924,017 $26,319,461 $39,013,315 $14,033,384 $10,451,493 $35,187,992 $6,272,782 $14,268,807 $215,578,408

DISBURSE11ENTS Certificated Salaries $626,166 $1,854,534 $8,408,081 $8,359,325 $8,657,717 $8,686,925 $8,376,355 $9,207,790 $8,849,343 $10,466,160 $9,128,301 $18,184,112 $100,804,810 Oassified Salaries $1,342,548 $1,952,429 $2,048,298 $2,129,748 $2,280,755 $2,195,305 $2,026,273 $2,252,991 $2,130,880 $2,239,434 $2,338,754 $3,751,226 $26,688,641 Employee Benefits $2,479,885 $1,966,100 $3,672,022 $3,077,678 $3,452,435 $3,501,246 $3,372,035 $3,560,876 $3,492,870 $3,771,750 $3,563,686 $5,774,975 $41,685,558 Supplies/Services $16,706 $834,189 $2,080,240 $1,663,544 $969,626 $1,970,545 $1,381,370 $1,332,360 $2,013,493 $1,926,722 $1,474,846 $4,050,988 $19,714,628 Capital Outlays $() $() $() $() $65,084 $120,000 $() $() $() ($120,000) $() $224,814 $289,898 Other Outgo $94,749 $241,545 $1,627,172 $456,223 $656,905 $872,077 $1,348,576 $2,520,781 $205,086 $260,343 $442,151 $28,771 $8,754,380 lnterfund Transfers Out $() $() $() $() $() $() $() $() $() $() $() $5,933,161 $5,933,161 All Other Financing Uses $() $() $() $() $() $() $() $() $() $() $() $() $() Other Disbursements $13,209,420 $5,086,364 $180,101 ($98,976) $206,774 $48,751 ($58,480) $144,765 ($13,763) $1,099,435 ($38,477) ($18,673,559) $1,092,357 TRANs 2005 $() $() $() $() $() $() $() $() $() 4,250,000 4,611,250 $() $8,861,250

TOTAL DISBURSElvlENTS $17,769,473 $11,935,162 $18,015,913 $15,587,543 $16,289,297 $17,394,849 $16,446,130 $19,019,563 $16,677,908 $23,893,845 $21,520,511 $19,274,488 $213,824,682

NET CHANGE CASH ($9,265,323) ($1,194,067) ($7,591,830) $11,850,286 ($3,365,280) $8,924,612 $22,567,185 ($4,986,179) ($6,226,415) $11,294,148 ($15,247,729) ($5,005,681) $1,753,727

DRAWS ON OTHER FUND $() $() $4,337,896 ($4,337,896) $() $() $() $() $() $() $() $() $()

ENDING CASH $4,448,002 $3,253,934 $() $7,512,391 $4,147,110 $13,071,722 $35,638,907 $30,652,728 $24,426,313 $35,720,460 $20,472,732 $15,467,051 $15,467,051

SOURCE: East Side Union High School District.

2005 NOTE REPAY1vlENT FUND Beginning Balance $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $4,250,000 $8,861,250 $0

Receipts 0 0 0 0 0 0 0 0 0 4,250,000 4,611,250 0 $8,861,250 Disbursements 0 0 0 0 0 0 0 0 0 0 0 0 $()

Ending Balance $() $() $() $() $() $() $() $() $() $4,250,000 $8,861,250 $8,861,250 $8,861,250

EAST SIDE UNION HIGH SCHOOL DISTRICT PROJECTED MONTIJLY CASH FLOW OF THE GENERAL FUND

FISCAL YEAR 2006-07

JDL ADG S.bP OCI FJOIJ DEC ]AN Mo~ MAR APK MA? JON IOI~L

BEGINNJNG CASH $15,467,051 $11,135,619 $6,663,578 $0 $13,331,227 $8,430,163 $16,527,884 $37,620,913 $32,719,286 $23,779,384 $32,881,060 $17,249,395 $15,467,051

RECEIPTS Property Tax $774,328 $350,000 $138,786 $9,000,000 $3,365,633 $18,911,370 $16,093,669 $1,092,839 $6,788,198 $19,822,905 $35,000 $11,100,695 $87,473,422 State Aid $3,717,299 $7,434,597 $8,393,043 $4,988,693 $4,841,358 $0 $9,682,717 $10,028,676 $0 $10,028,675 $5,014,338 $5,905,834 $70,035,230 Other $95,038 $77,939 $80,000 $67,000 $74,000 $71,000 $80,000 $72,000 $72,000 $92,000 $77,000 ($107,826) $750, 151 Federal Revenues $68,335 $1,687,748 $18,190 $33,500 $1,600,000 $210,000 $530,000 $2,800,000 $400,000 $1,800,000 $2,000,000 $3,429,260 $14,577,033 Other State Revenues $242,124 $1,691,116 $1,350,000 $2,900,000 $1,800,000 $725,000 $11,050,000 $1,350,000 $1,300,000 $4,200,000 $1,250,000 $6,891,542 $34,749,782 Other Local Revenues ($100) $2,003,471 $650,000 $520,000 $1,000,000 $500,000 $1,200,000 $588,000 $550,000 $700,000 $1,887,480 $1,692,647 $11,291,498 lnterfund Transfers In $0 $0 $0 $0 $0 $6,550,657 $0 $0 $0 $0 $0 $300,000 $6,850,657 Other Receipts $4,365,476 $282,066 $150,000 $1,550,000 $500,000 $250,000 $675,000 $35,000 $560,000 $750,000 $60,000 ($11,500,000) ($2,322,458) TRANs 2006 $0 $0 $0 $14,072,520 $0 $0 $0 $0 $0 $0 $0 $0 $14,072,520

TOTAL RECEIPTS $9,262,500 $13,526,936 $10,780,019 $33,131,713 $13, 180, 992 $27,218,027 $39,311,385 $15,966,515 $9,670,198 $37,393,580 $10,323,818 $17,712,152 $237,477,835

DISBURSEMENTS Certificated Salaries $569,264 $2,009,610 $9,408,460 $9,323,824 $9,542,491 $9,541,618 $9,232,375 $10,148,778 $9,753,700 $11,137,041 $9,713,425 $19,349,714 $109,730,299 Classified Salaries $1,489,768 $2,120,709 $2,354,223 $2,382,609 $2,538,975 $2,443,850 $2,266,847 $2,508,067 $2,383,875 $2,492,975 $2,603,540 $4,134,582 $29,720,019 Employee Benefits $2,670,437 $2,359,796 $4,274,810 $3,939,220 $4,002,138 $3,984,876 $3,903,842 $4,092,983 $4,007,805 $4,247,415 $4,040,940 $5,724,805 $47,249,067 Supplies/Services $59,655 $1,457,021 $1,668,084 $1,846,032 $1,073,370 $2,221,961 $1,525,293 $1,468,314 $2,269,720 $2,149,472 $1,632,577 $4,514,809 $21,886,306 Capital Outlays $0 $0 $0 $0 $65,084 $0 $0 $0 $0 $0 $0 $224,814 $289,898 Other Outgo $0 $229,627 $1,298,072 $460,000 $660,000 $880,000 $1,350,000 $2,550,000 $210,000 $265,000 $445,000 $381,037 $8,728,736 lnterfund Transfers Out $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $4,955,929 $4,955,929 All Other Financing Uses $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Other Disbursements $8,804,808 $9,822,215 $250,000 $38,750 $200,000 $48,000 ($60,000) $100,000 ($15,000) $1,000,000 ($40,000) ($18,000,000) $2,148,773 TRANs 2006 $0 $0 $0 $0 $0 $0 $0 $0 $0 $7,000,000 $7,560,000 $0 $14,560,000

TOTAL DISBURSEMENTS $13,593,932 $17, 998, 977 $19,253,649 $17,990,435 $18,082,056 $19,120,305 $18,218,356 $20,868,142 $18,610,100 $28,291,904 $25,955,483 $21,285,689 $239,269,028

NET CHANGE CASH ($4,331,432) ($4,472,041) ($8,473,630) $15,141,279 ($4,901,065) $8,097,722 $21,093,029 ($4,901,627) ($8,939,902) $9,101,676 ($15,631,665) ($3,573,537) ($1,791,193)

DRAWS ON OTHER FUND $0 $0 $1,810,052 ($1,810,052) $0 $0 $0 $0 $0 $0 $0 $0 $0

ENDING CASH $11,135,619 $6,663,578 $0 $13,331,227 $8,430,163 $16,527,884 $37,620,913 $32,719,286 $23,779,384 $32,881,060 $17,249,395 $13,675,858 $13,675,858

2006 NOTE REPAYMENT FUND Begmmng Balance $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $7,000,000 $14,560,000 $0

Receipts 0 0 0 0 0 0 0 0 0 7,000,000 7,560,000 0 14,560,000 Disbursements 0 0 0 0 0 0 0 0 0 0 0 0 0

Ending Balance $0 $0 $0 $0 $0 $0 $0 $0 $0 $7,000,000 $14,560,000 $14,560,000 $14,560,000

TAXATION AND APPROPRIATIONS

Ad Valorem Property Taxation

The Board and the Participant Districts utilize the services of the County for the assessment and collection of taxes for Board purposes, except for public utility property which is assessed by the State Board of Equalization. For a description of how properties are presently assessed, see "CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING REVENUES & EXPENDITURES." The State Constitution and sections of various State statutes provide exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, nonprofit hospitals, charitable institutions and for severely handicapped individuals. The State Constitution exempts from ad valorem property taxation $7,000 of full value of owner occupied dwellings, and requires the Legislature to reimburse each local government for revenue lost as a result of the exemption.

Taxation of State-Assessed Utility Property

A portion of property tax revenue of the Board and each Participant District is derived from utility property subject to assessment by the State Board of Equalization ("SBE"). State-assessed property, or "unitary property," is property of a utility system with components located in many taxing jurisdictions assessed as part of a "going concern" rather than as individual parcels of real or personal property. Unitary and certain other state-assessed property is allocated to the counties by the SBE, taxed at special county-wide rates, and the tax revenues distributed to taxing jurisdictions (including the Board and each Participant District) according to statutory formulae generally based on the distribution of taxes in the prior year.

Recent changes in the California electric utility industry structure and in the way in which components of the industry are regulated, including the sale of electric generation assets to largely umegulated, nonutility companies, may affect how utility assets are assessed in the future, and which local agencies are to receive the property taxes. Neither the Board or each Participant District is able to predict the impact of these changes on its utility property tax revenues, or whether future legislation or litigation may affect the State's methods of assessing utility property and allocating tax revenues to local taxing agencies, including such Board and each Participant District.

Because neither the Board nor the Participant Districts are basic aid issuers, any taxes lost due to a reduction in, or transfer to another jurisdiction of, utility property assessed valuation will be compensated by the State under the State's school financing formula. See "STATE FUNDING OF EDUCATION" herein.

Alternative Method of Tax Apportiomnent

The County Board approved implementation of the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the "Teeter Plan"), pursuant to sections 4701 through 4717 of the State's Revenue & Taxation Code. This action of the County Board came pursuant to the endorsement of the Teeter Plan by the taxing districts of the County. The Teeter Plan guarantees distribution of 100% of the general taxes levied to the taxing entities within the County, with the County retaining all penalties and interest affixed upon delinquent properties and redemptions of subsequent collections. The purpose of utilizing the Teeter Plan is to simplify the tax-levying and tax-apportioning process and to provide increased flexibility in the use of available cash resources.

The County Treasurer1s cash position is protected by a special fund, known as the ''Tax Loss Reserve Fund," which accumulates moneys from tax and penalty collections. In each fiscal year, the Tax Loss Reserve Fund is funded in the amount of either 1 % of the previous fiscal year's net secured tax roll or 25% of the previous fiscal year's net Teeter delinquencies, whichever formula the County chooses to use. Amounts exceeding the amount required to be maintained in the Tax Loss Reserve Fund may be credited to the County1s general fund. Amounts required to be maintained in the tax loss reserve fund may be drawn on to the extent of the amount of uncollected taxes credited to each agency in advance of receipt.

A county electing to utilize the Teeter Plan may elect to discontinue its use for any tax levying agency if the rate of secured tax delinquencies in any fiscal year exceeds 3% of the total of all taxes levied on the secured roll of that agency. Otherwise, the Teeter Plan is to remain in effect unless the County Board orders its discontinuance or unless, prior to the commencement of any fiscal year, the County Board receives a petition for its discontinuance joined in by resolutions adopted by at least two-thirds of the participating revenue districts in the County, in which event the County Board is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. If the Teeter Plan is discontinued subsequent to its implementation, only those secured property taxes actually collected would be allocated to political subdivisions, including the Board and the

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Participant Districts. Further, the Board's and the and the Participant Districts' tax revenues would be subject to taxpayer delinquencies, and the Board and the and the Participant Districts would realize the benefit of interest and penalties collected from delinquent taxpayers, pursuant to law.

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STATE FUNDING OF PUBLIC EDUCATION

Sources of Revenue for Public Education

Sources of Revenue. The State's K-12 education system is supported primarily from State revenues, mostly sales and income taxes. The availability of State funds for public education is a function of constitutional provisions affecting school district revenues and expenditures (see "CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING SCHOOL DISTRICT REVENUES & EXPENDITURES). As a result, changes in State revenues may affect appropriations made by the State to school districts. State revenue sources for school districts are supplemented with local property taxes, federal aid, local miscellaneous funds, and the California lottery.

In recent years, approximately 58% of all funds for California K-12 public education came from the State budget, which is required to be proposed by the Governor by January 10 and adopted by June 15 of each year (although the State often is late adopting the budget). Approximately 21 % of funding for K-12 education comes from local property taxes. The California Constitution limits property taxes to one percent of the value of property; property taxes may only exceed this limit to repay voter approved debt

Statewide, approximately 13% of school districts' revenues come from the federal government, and about 6% come from local miscellaneous sources. The latter category includes items such as food sales, money for debt repayment, interest on reserves and, in some cases, more significant sources such as developer fees and parcel tax.es. Developer fees are fees that school districts can levy on new residential or commercial development within their boundaries to finance the construction or renovation of school facilities. Many school districts also seek grants or contributions, sometimes channeled through private foundations established to solicit donations from local families and businesses. School districts that still have unused school buildings or sites can lease or sell them for miscellaneous income as well. A significant number of school districts have secured the required two-thirds approval from local voters to levy special taxes on parcels or residences and/or have won voter approval, with either a two-thirds vote or a 55% majority, to sell general obligation bonds or to establish special taxing districts for the construction of schools. Use of such taxes is restricted by law.

The final revenue source for school districts is the California State Lottery. Approved by voters in late 1984, the lottery generates about 1 % of total school revenues. Every three months the Lottery Commission calculates 34% of lottery proceeds for all public education institutions, the minimum according to the lottery law. Every K-14 school district receives the same amount of lottery funds per pupil from the State, which may be spent for any instructional purpose, excluding capital projects.

No other source of general purpose revenue is currently permitted for schools. Proposition 13 eliminated the possibility of raising additional ad valorem property taxes for general school support, and the courts have declared that fees may not be charged for school-related activities other than for busing services.

The State Revenue Limit. The State Revenue Limit was first instituted in 1973-74 to provide a mechanism to calculate the amount of general purpose revenue a school district, community college district or county board of education is entitled to receive from State and local sources. Each school district has its own target amount of funding from State funds and local property taxes per Average Daily Attendance (the "ADA"). The ADA is the average number of pupils attending school over the year. This target is known as revenue limit, and the funding from this calculation forms the bulk of all school districts1 income. The State Legislature usually grants armual cost-of-living adjusttnents (COLAs) to revenue limits. The exact amount depends on whether the school district is an elementary, high school or a unified school district

Apportionments for revenue limits are calculated three times a year for each school district, community college district and county board of education. The first calculation is performed for the February 20th First Principal Apportiomnent, the second calculation for the June 25th Second Principal Apportiomnent, and the final calculation for the end of the year Annual Apportiomnent Calculations are reviewed by the county and submitted to the State Departtnent of Education with respect to school districts and to the Chancellor of the California Community Colleges with respect to community college districts, which, respectively, reviews the calculations for accuracy, calculates the amount of state aid owed to such school district or community college district, as the case may be, and notifies the State Controller of the amount, who then distributes the state aid.

School districts that receive their revenue limit income entirely from property tax.es are called "basic aid" school districts. They are permitted to keep all their property tax money (even if it exceeds their revenue limit). As guaranteed in the California Constitution, the State must apportion $120 per pupil. However, the categorical aid (see below) that school districts receive counts toward this requirement.

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Distribution of Revenue for Public Education

General Purpose. The largest part of each school district's revenue funds general operating expenses associated with providing education, including salaries, benefits, supplies, textbooks and regular maintenance. As previously mentioned, the Revenue Limit governs the amount each school district receives. Each school district also receives some State and federal money for special programs, special costs, or categories of children with particular educational needs, called "categorical aid."

Categorical Aid. This special support goes into a school district's General Fund, but its expenditure is restricted to the purpose for which it is granted. About seventy-five percent (75%) of the total money generated for education is for general purposes, and about twenty-five percent (25%) is for categorical aid. The complex allocation system is adjusted somewhat by the State Legislature almost every year, with unpredictable effects on individual school districts.

There are a number of major federal and State categorical aid programs. Some allocations come automatically to school districts, while others require an application. Some programs are based on the characteristics of the children or families in a particular school district, such as gifted and talented, non-English speaking, migrant, low income or handicapped students. Others programs are for specific activities or expenses, such as transportation, textbooks or childcare. Each year a large amount of aid is allocated directly to the State Teachers' Retirement System (STRS) fund. For the past several years, supplemental grants have been directed to equalizing school districts1 income from revenue limits plus specific categoricals. Most of the federal funds flow through the California Department of Education, which retains a certain percentage for administration.

In terms of dollars and the number of children served, the largest categorical aid program is Special Education for the Handicapped. According to court decisions and federal and California law, school districts are responsible for the appropriate education of each handicapped child from age 3 to 21 who lives within their boundaries. The allocations do not cover the cost of educating them. School districts are required to contribute a certain amount of general purpose funds for Special Education, and many spend much more. This is known as "encroachment."

School Facilities. Growing enrollments and/or aging facilities require school districts to build or make major renovations to school buildings. The income from developer fees on residential or commercial property is insufficient to fund all facilities costs. Voter approved general obligation bond moneys may only be used for purchase or improvement of real property, while Mello­Roos taxes can be used for this as well as for ongoing maintenance or purchase of needed equipment. A majority of voters has regularly approved state bond measures for the construction or reconstruction of schools.

The 2006-07 State Budget

The infonnation in this section has been compiled from publicly available information through the California Department of Finance. Neither the District, nor the County, nor the Underwriter assumes any responsibility for the accuracy of such information as set forth or incorporated by reference herein, although they believe that the information provided by the above­Zisted sources is reliable.

On June 30, 2006, the Governor signed the 2006-07 Budget Act (the "2006-07 Budget"), allowing the State to enter the new fiscal year with a budget in place for the first time in six years. The 2006-07 Budget incorporates more positive revenue assumptions than the 2005-06 Budget, due to tax policy changes, tax amnesty-related assumptions, and revenue revisions, which are primarily the result of strong personal and corporate income tax collections in recent months. In general, the 2006-07 Budget allows the State to pay down its debt and increase funding towards education.

The State General Fund. There are $103.4 billion in total resources available for the fiscal year 2006-07, which includes $9.5 billion from prior year balance plus budgeted revenues and transfers for fiscal year 2006-07 of $93.9 billion. This represents an increase of $1.2 billion, or about a 1 % , from the 2005-06 revised total resources level. General fund spending is budgeted to increase from $92.7 billion in 2005-06 to $101.3 billion in 2006-07. Part of this increase is due to the early retirement of Economic Recovery Bonds. The resulting operating deficit in a 2006-07 is more than $7 billion. The 2006-07 year-end general fund balance is budgeted to be $2.2 billion, with a reserve of $2.1 billion (which includes the $472 million available in the Budget Stabilization Account).

Funding for Education. As a result of higher than expected State revenues, the 2006-07 Budget substantially increases education spending for the fiscal year 2006-07 and restores full Proposition 98 funding. In addition, on May 10, 2006, State Superintendent of Public Instruction Jack O'Connell armounced that he reached an agreement to settle a lawsuit he filed jointly with the California Teachers Association against Governor Arnold Schwarzenegger over Proposition 98 funding (CTA and O'Connell vs.

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Schwarzenegger lawsuit). See "CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES & EXPENDITURES - Proposition 98/11 J" for more details. The Governor agreed to repay the $2.9 billion the State owed the education community for the fiscal year 2004-05 Proposition 98 funding suspension. The $2.9 billion would be paid back over a period of six fiscal years, starting in 2007-08 through 2013-14.

The 2006-07 Budget provides $55.1 billion in Proposition 98 funding for K-12 and community colleges, an increase of 3.3% from the revised 2005-06 spending levels. For K-12, Proposition 98 per pupil funding is budgeted to increase to $8,288 in 2006-07, which is an increase of $510 from the revised 2005-06 level.

Total funding from all sources available for K-12 is budgeted to increase by $2.9 billion over the revised 2005-06 level to $67.1 billion. 2006-07 total per pupil expenditure for K-12 schools is budgeted to be $11,264, an increase of $516 from the revised 2005-06 funding level, and an increase of $939 from the 2005-06 originally budgeted level. Because of the one-time nature of the unexpected tax revenues the State received from personal and corporate income taxes this April, increases in education funding are allocated mainly towards one-time programs rather than ongoing programs. The 2006-07 cost of living adjustment ("COLA") for K-12 programs is 5.92%. The 2006-07 Budget provides for a net increase of $2.3 billion to school districts and county offices of education revenue limits. This net increase includes:

• decreased funding due to anticipated ADA decline • increase due to COLA factor (total of $2.6 billion in funding to provide for the 5.92% COLA) • adjustment for revised local revenues • $308.6 million to eliminate the deficit factor for school districts and county offices of education revenue limits • $350 million for school district revenue limit equalization

Some K-12 Proposition 98 General Fund expenditure highlights include: • a $500 million arts, music and physical education one-time equipment grant • $200 million to fund supplemental school counseling program • a $533.5 million discretionary block grant • mandate costs funding of $957 million, of which $927 million funds prior year claims

For higher education, the 2006-07 Budget provides funding for the University of California, the California State University, and California's community colleges. The 2006-07 Budget provides for total Higher Education funding of $19.1 billion from all revenue sources. Community college funding totals over $8.7 billion, including approximately $6.2 billion from General Fund and Proposition 98 sources, for a net increase of $439.7 million above the revised 2005-06 level. Some ongoing Proposition 98 General Fund adjustments for community colleges include:

• $294.4 million increase to provide for the 5.92% COLA • $159.4 million for equalization • $97.5 million increase to provide 2% growth in apportionment • $40 million increase to backfill a reduction in student fees from $26 per unit to $20 per unit, effective with the Spring

2007 semester, holding colleges harmless for the loss in fee revenue

Future Budgets

The District carmot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the District will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State1s ability to fund schools as budgeted. Continued State budget shortfalls in future fiscal years could have an adverse financial impact on the District.

For more information on the State Budget, please refer to the California Department of Finance's website at \V\V\v.dof.ca. oov and to the Legislative Analyst's Office's website at \V\V\v.lao.ca. gov.

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CONSTITUTIONAL & STATUTORY PROVISIONS AFFECTING DISTRICT REVENUES & EXPENDITURES

Article XIIIA. In an election held on June 6, 1978, the voters of the State approved an initiative amendment to the State Constitution. The amendment added Article XIIIA to the State Constitution, commonly known as Proposition 13, which limits the taxing powers of California public agencies. Except as described in the following paragraph, Article XIIIA provides that the maximum ad valorem tax on real property cannot exceed one percent of the ''full cash value" which is defined as the "county assessor's valuation of real property as shown on the 1975-76 tax bill under 'full cash value' or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment," subject to exceptions for certain circumstances of transfer or reconstruction. The ''full cash value" is subject to annual adjustments to reflect increases not to exceed two percent per year, or decreases in the consumer price index or comparable local data, or to reflect reduction in property value caused by damage, destruction or other factors.

Article XIIIA requires a vote of two-thirds of the qualified electorate to impose special taxes, and except as described in the following sentence, prohibits the imposition of any additional ad valorem, sales or transaction tax on real property. As amended by Proposition 46, on June 3, 1986, Article XIIIA exempts from the one percent tax limitation ad valorem taxes required to pay debt service on indebtedness approved by the voters prior to July 1, 1978, or on bonded indebtedness approved by two-thirds of those voting thereon, after July 1, 1978, the proceeds of which are applied to the acquisition or improvement of real property.

Proposition 39: On November 7, 2000, California voters approved an amendment (commonly known as Proposition 39) to the California Constitution. This amendment (1) allows school facilities bond measures to be approved by 55 percent (rather than two-thirds) of the voters in local elections and permits property tax.es to exceed the current 1 percent limit in order to repay the bonds, and (2) changes existing statutory law regarding charter school facilities. The local school jurisdictions affected by this proposition are K-12 school districts, including the District, community college districts, and county offices of education. The 55 percent vote requirement would apply only if the local bond measure presented to the voters includes: (1) a requirement that the bond funds can be used only for construction, rehabilitation, equipping of school facilities, or the acquisition or lease of real property for school facilities; (2) a specific list of school projects to be funded and certification that the school board has evaluated safety, class size reduction, and information technology needs in developing the list; and (3) a requirement that the school board conduct annual, independent financial and perlormance audits until all bond funds have been spent to ensure that the bond funds have been used only for the projects listed in the measure.

Legislation approved in June 2000 places certain limitations on local school bonds to be approved by 55 percent of the voters. These provisions require that the tax rate levied as the result of any single election be no more than $60 (for a unified school district), $30 (for a high school or elementary school district), or $25 (for a community college district), per $100,000 of taxable property value. The Governor can change these limitations with a majority vote of both houses of the Legislature and approval; unlike constitutional amendments, which may be changed only with another statewide vote of the people. The statutory provisions could be changed by a majority vote of both houses of the Legislature and approval by the Governor, but only to further the purposes of the proposition.

Finally, Article XIIIA requires the approval of two-thirds of all members of the State Legislature to change any State laws for the purpose of increasing tax revenues.

Article XIIIB. In a special election held on November 6, 1979, the voters of the State approved an initiative constitutional amendment. This amendment added Article XIIIB to the State Constitution. Article XIIIB limits the armual appropriations of the State and of any city, county, school district, special district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted for changes in the cost of living, population and services rendered by the govermnent entity. The "base year" for establishing such appropriation limit is the 1978-79 fiscal year and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by these public agencies.

Appropriations subject to Article XIIIB include generally the proceeds of taxes levied by the State or by any other entity of local government, exclusive of certain State subventions, refunds or tax.es, benefit payments from retirement, unemployment insurance and disability insurance funds but excludes taxes to pay voter approved bonds. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to an entity of government from (1) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (2) the investment of tax revenues. Article XIIIB includes a requirement that if an entity1s revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. State law provides that in the event a school district's appropriations will exceed its limit, the district may assume from the State a portion of the State1s appropriations limit.

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Proposition 98/111: On November 8, 1988, voters of the State approved Proposition 98, a combined initiative constitutional amendment and statute called the "Classroom Instructional Improvement and Accountability Act". Proposition 98 changed State funding of public education below the university level and the operation of the State's appropriations limit, primarily by guaranteeing K-14 schools a minimum share of General Fund revenues. Under Proposition 98 (as modified by Proposition 111, which was enacted on June 5, 1990, hereinafter defined as "Proposition 98/111"), K-14 schools are guaranteed the greater of (a) the percentage of General Fund revenues appropriated for school districts in Fiscal Year 1986-87 ("Test 1"); (b) the amount of State and local proceeds of taxes appropriated to K-14 schools in the prior year, adjusted for changes in the cost of living (measured as in Article XIII B by reference to State per capila personal income) and enrollment ("Test 2"); or (c) a third test, which would replace Test 2 in any year in which the percentage growth in State per capita personal income is greater than the percentage growth on per capita General Fund revenues plus one-half of one percent ("Test 3").

Under Test 3, schools would receive the amount of State and local proceeds of taxes appropriated to K-14 schools in the prior year adjusted for changes in enrollment and per capita General Fund revenues, plus an additional small adjustment factor. If Test 3 is used in any year, the difference between Test 3 and Test 2 would become a "credit" to schools which would be the basis of payments in future years when per capita General Fund revenue growth exceeds per capita personal income growth. Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to be 40.3% of the General Fund tax revenues, based on 1986-87 appropriations. However, that percentage has been adjusted to 34% to account for a subsequent redirection of local property taxes, since such redirection directly affects the share of General Fund revenues to schools.

Proposition 98/111 permits the Legislature by two-thirds vote of both houses, with the Governor1s concurrence, to suspend the K-14 schools' minimum funding formula for a one-year period. This guarantee was suspended in 2004-05, initially with the agreement of the Education Coalition (an alliance of major education interest groups), and effectively reduced the amount schools received by $2 billion. The Legislature ratified the suspension in Senate Bill 1101. However, the Education Coalition agreed to the suspension under the terms that Proposition 98 funding would be reduced for only one year, the year of the State budget crisis, by a maximum of $2 billion; and if the situation were to improve, funding would be restored. But when the State's finances did improve, funding was not restored to the same level it at which it would have been, had the suspension not occurred. Subsequently, the State Superintendent of Public Instruction Jack O'Connell filed a lawsuit jointly with the California Teachers Association against Governor Arnold Schwarzenegger over this loss in Proposition 98 funding. On May 10, 2006, the two sides reached an agreement whereby, in effect, the State would repay all losses incurred due to the suspension, with payments to be made armually through 2013-14.

Since Proposition 98/111 is unclear in some details, there can be no assurance that the Legislature or a court might not interpret it to require a different percentage of General Fund revenues to be allocated to K-14 districts or to apply the relevant percentage to the State1s budget in a different way. Proposition 98/111 may place increasing pressure on the State1s budget in future years, potentially reducing resources available for other State programs, especially to the extent that the Article XIIIB spending limit would restrain the State1s ability to fund these other programs by raising taxes.

Proposition 98/111 also changes how tax revenues in excess of the State's appropriations limit are distributed. Any excess State tax revenues up to a specified amount would, instead of being returned to tax.payers, be transferred to K-14 districts. Such transfer would be excluded from the appropriations limits for K-14 districts and the K-14 schools' appropriations limits for the next year would automatically be increased by the amount of such transfer. These additional moneys would enter the base funding calculation for K-14 districts for subsequent years, creating further pressure on other portions of the State budget, particularly if revenues decline in a year following an Article XIIIB surplus. The maximum amount of excess tax revenues which could be transferred to schools is four percent of the minimum State spending for education mandated by Proposition 98/111, as described above.

Article XIIIC and Article XIIID. On November 5, 1996, the voters of the State approved Proposition 218, the so-called "Right to Vote on Taxes Act" Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local agencies, including school districts, to levy and collect both existing and future taxes, assessments, fees and charges. Among other things, Article XIIIC establishes that every tax is either a "general tax" (imposed for general governmental purposes) or a "special tax" (imposed for specific purposes); prohibits special purpose government agencies such as school districts from levying general taxes except as allowed by Article XIIIA; and prohibits any local agency from imposing, extending or increasing any special tax beyond its maximum authorized rate without a two-thirds vote. Article XIIID also provides that no tax may be assessed on property other than ad valorem property taxes imposed in accordance with Articles XIII and XIIIA of the California Constitution and special taxes approved by a two-thirds vote under Article XIIIA, Section 4.

- 25 -

Article XIIIC also provides that the initiative power shall not be limited in matters of reducing or repealing local taxes, assessments, fees and charges. The State Constitution and the laws of the State impose a duty on the county treasurer/tax collector ( of each county) to levy a property tax sufficient to pay debt service on general obligation bonds coming due in each year. Legislation adopted in 1997 provides that Article XIIIC will not be construed to mean that any Owner or Beneficial Owner of a municipal security assumes the risk of or consents to any initiative measure, which would constitute an impairment of contractual rights under the contracts clause of the U.S. Constitution.

Article XIIID deals with assessments and property-related fees and charges. Article XIIID explicitly provides that nothing in Article XIIIC or XIIID shall be construed to affect existing laws relating to the imposition of fees or charges as a condition of property development; however it is not clear whether the initiative power is therefore unavailable to repeal or reduce developer and mitigation fees imposed by school districts.

The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of the matters discussed above, and it is not possible at this time to predict with certainty the outcome of such determination.

Possible Future Actions. Article XIIIA, Article XIIIB and Propositions 39, 46, 98, 111 and 218 were each adopted as measures that qualified for the ballot pursuant to California1s initiative process. From time to time other initiative measures could be adopted, further affecting K-14 school districts1 revenues or such districts1 ability to expend revenues. There is no assurance that the California electorate or Legislature will not at some future time approve additional limitations which could reduce property or other tax revenues and adversely affect the revenues of school districts or require additional expenditures.

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- 26 -

TAX MATTERS

In the opinion of Quint & Thimmig LLP, San Francisco, California, Bond Counsel, subject, however to the qualifications set forth below, under existing law, the interest on the Notes is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, provided, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings.

The opinions set forth in the preceding paragraph are subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986 that must be satisfied subsequent to the issuance of the Notes in order that such interest be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of issuance of the Notes.

In the further opinion of Bond Counsel, interest on the Notes is exempt from California personal income taxes.

Owners of the Notes should also be aware that the ownership or disposition of, or the accrual or receipt of interest on, the Notes may have federal or state tax consequences other than as described above. Bond Counsel expresses no opinion regarding any federal or state tax consequences arising with respect to the Notes other than as expressly described above.

Purchases should be aware that the Internal Revenue Service has issued Notice 94-84 that may have federal income tax consequences with respect to the Notes. This Notice provides generally that, in the case of short-term tax-exempt obligations (such as the Notes), the Service is studying whether interest payable at a maturity on the obligations should, or should not, be included in stated redemption price at maturity, for purposes of the rule that original issue discount represents the excess of stated redemption price at maturity over issue price.

Notice 94-84 states that until the Internal Revenue Service provides further guidance, taxpayers may treat stated interest on certain short-term obligations, such as the Notes, either as includable in stated redemption price at maturity or as not included in stated redemption price at maturity. A taxpayer, however, must treat stated interest payable at maturity on all short-term tax­exempt bonds in a consistent manner. A short-term tax-exempt bond is defined as a tax-exempt bond with a term that is not more than 1 year from the date of issue.

Purchasers of the Notes are cautioned that the opinion of Bond Counsel does not identify the amount of interest that is excluded from gross income for federal income tax purposes.

Purchasers of the Notes should consult their tax advisors regarding effects of Notice 94-84 upon individual tax circumstances.

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- 27 -

LEGAL MATTERS

Legal Opinion

The validity of the Notes and certain other legal matters are subject in each case to the approving opinion of Quint & Thimmig LLP, Bond Counsel. A complete copy of the proposed form of Bond Counsel opinion is set forth in "APPENDIX C - FORM OF OPINION OF BOND COUNSEL" to this Official Statement Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

Absence of Litigation

No litigation is pending with service of process having been accomplished, or to the knowledge of the District, threatened against the District concerning the validity of the Note, and a Certificate of the District to that effect will be furnished to the initial purchaser or purchasers at the time of the original delivery of the Notes. The District is not aware of any litigation pending or threatened against the District questioning its political existence, contesting its ability to receive or accrue for the General Fund taxes, income, revenues, cash receipts and other moneys, or contesting its ability to issue and retire the Notes.

Legality for Investment

Under provisions of the California Financial Code, the Notes is a legal investment for commercial banks in California to the extent that such Notes, in the informed opinion of such bank, is prudent for the investment of funds of its depositors, and the Notes are eligible to secure deposits of public moneys in California under provisions of the California Government Code.

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- 28 -

RATINGS

Standard & Poor's Ratings Services, a Division of the McGraw-Hill Companies, Inc., has assigned the Notes the rating affixed to and made a part of the Cover Page hereof. Generally, Standard & Poor's bases its rating on such information and materials and also on such investigations, studies and assumptions that it may undertake independently. Such ratings reflect only the views of such organization and an explanation of the significance of such ratings may be obtained from Standard & Poor' sat the following address: Standard & Poor's Ratings Services, 55 Water Street, New York, New York 10041. There is no assurance that any such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by the rating agency, if in the judgment of the rating agency, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Certificates.

FINANCIAL ADVISOR

Government Financial Strategies inc., has been employed by the District to perlorm financial advisory services in relation to the sale and delivery of the Notes. Government Financial Strategies inc., in its capacity as Financial Advisor, has read and participated in drafting certain portions of this Official Statement. Government Financial Strategies inc. has not, however, independently verified nor confirmed all of the information contained within this Official Statement. Government Financial Strategies inc. will not participate in the underwriting of the Notes. All fees charged by Government Financial Strategies inc. are based on an hourly fee arrangement. Fees charged by Government Financial Strategies inc. are not contingent upon the sale of the Notes.

INDEPENDENT AUDITORS

The general purpose financial statements of the District as of June 30, 2005, and for the fiscal year then ending, have been audited by Vavrinek, Trine, Day & Co., Certified Public Accountants, San Jose, California. Excerpts from the financial statements of the District as of and for the year ending June 30, 2005, are set forth in "APPENDIX A" attached hereto. Complete copies of past and current financial statements may be obtained from the District. See "THE DISTRICT -Financial Statements and District Budgets" herein.

UNDERWRITING AND INITIAL OFFERING PRICE

The Notes were sold to AG Edwards & Sons Inc. (the "Underwriter"), pursuant to a note purchase agreement by and among the District, the County, and the Underwriter, for an amount equal to the principal amount of the Notes, plus a premium of $72,520, for a total purchase price of $14,072,520, at a True Interest Cost (TIC) to the District of 3.434566%.

The Underwriter has certified to the District and to Bond Counsel the initial price at which the Notes have been reoffered to the general public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters or wholesalers), and at which at least ten percent (10%) of the Notes were sold. The reoffering price or corresponding yield to maturity is as set forth on the Cover Page hereof. The initial offering price stated on the Cover Page to this Official Statement may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Notes to certain dealers (including dealers depositing Notes into investment trusts), dealer banks, banks acting as agents and others at prices lower than said public offering prices.

- 29 -

CONTINUING DISCLOSURE

The District has covenanted for the benefit of the owners of the Notes to give notice of the occurrence of certain enumerated events, if material. See "APPENDIX B-FORM OF CONTINUING DISCLOSURE CERTIFICATE" herein. Notices of material events will be filed by the issuing District with each Nationally Recognized Municipal Securities Information Repository or the Municipal Securities Rulemaking Board, and with the State Information Depository, if any. This covenant of the District has been made to assist the purchasing underwriter of the Notes in complying with S.E.C. Rule 15c2-12(b)(5). The District has never failed to comply in all material respects with regard to said Rule to provide annual reports or notices of material events.

ADDITIONAL INFORMATION

Additional information concerning the District, the Notes or any other matters concerning the sale and delivery of the Notes may be obtained from the District by contacting the District at the address and telephone number set forth on page "iii" of this Official Statement, or by contacting the Districts1 Financial Advisor, Government Financial Strategies inc., 1228 "N" Street, Suite Thirteen, Sacramento, California 95814-5609, telephone (916) 444-5100, facsimile telephone (916) 444-5109.

All of the preceding summaries of the Resolution, other applicable legislation, agreements and other documents are made subject to the provisions of such documents respectively, and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to documents on file with the District for further information in connection with the District and the Notes. Further, this Official Statement does not constitute a contract with the purchasers of either Note, and any statements made in this Official Statement involving matters of opinion or of estimates, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized.

The execution and delivery of this Official Statement by the District has been duly authorized by its governing Board, and this Official Statement may be signed in counterpart.

EAST SIDE UNION HIGH SCHOOL DISTRICT

By: /s/ Robert Nunez Superintendent

- 30 -

APPENDIX A

EXCERPTS FROM THE GENERAL PURPOSE FINANCIAL STATEMENTS OF THE OFFICE AS OF AND FOR THE YEAR ENDING JUNE 30, 2005

EAST SIDE UNION HIGH SCHOOL DISTRICT

ANNUAL FINANCIAL REPORT

JUNE 30, 2005

Vavrinek, Trine, Day & Co., LLP Certified Public Accou11tants & Gonsultanls

INDEPENDENT AUDITORS' REPORT

Board of Trustees East Side Union High School District San Jose, California

VALUE THE DIFFERENCE

We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund infonnation of the East Side Union High School District (the "District") as of and for the year ended June 30, 2005, which collectively comprise the District's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's management. Our responsibility is to express opinions on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the 2004-05 Standards and Procedures for Audits of California K-12 Local Educational Agencies, prescribed in the California Code of Regulations, Title 5, Section 19810 and following. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

lo our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the East Side Union High School District, as of June 30, 2005, and the respective changes in financial positions and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated January 25, 2006, on our consideration of the District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in conjunction with this report in considering the results of our audit.

260 Sheridan Avenue. Su rte 440 Palo Alto, CA 94306 Tel: 650.462.0400 Fax: 650.462.0500 www.vtdcpa.com

FRESNO • LAGUNA HILLS • PALO ALTO • PLEASANTON • RANCHO CUCAMONGA

The required supplementary inforniation, such as management's discussion and analysis on pages 3 through 11 and budgetary comparison information on page 46 are not a required part of the basic financial statements, but are supplementary information required by the accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District's basic financial statements. The other supplementary information listed in the table of contents, including the Schedule of Expenditures of Federal awards which is required by U.S. Office of Management and Budget Circular A-133, Audits ofState, Local Governments. and Non-Profit Organizations, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such info1mation has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Palo Alto, California January 25, 2006

2

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

This section of East Side Union High School District's (District) annual financial report presents our discussion and analysis of the District's financial perfonnance during the fiscal year that ended on June 30, 2005. Please read it in conjunction with the District's financial statements, which immediately follow this section.

OVERVIEW OF THE FINANCIAL STATEMENTS

The Financial Statements

The financial statements presented herein include all of the activities of the East Side Union High School District (the District) and its component units using the integrated approach as prescribed by GASB Statement Number 34 (The Statement).

The Government-Wide Financial Statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accounting. They present governmental activities and business-type activities separately. These statements include all assets of the District as well as all liabilities (including long-tern1 debt). Additionally, certain eliminations have occurred as prescribed by the statement in regards to interfund activity, payables and receivables.

The Fund Financial Statements include statements for each of the three categories of activities: governmental, proprietary, and fiduciary.

The Governmental Activities are prepared using the current financial resources measurement focus and the modified accrual basis of accounting.

The Proprietary Activities are prepared using the economic resources measurement focus and the accrual basis of accounting.

The Fiduciary Activities are agency funds, which only report a balance sheet and do not have a measurement focus.

Reconciliation of the Fund Financial Statements to the Government-Wide Financial Statements is provided to explain the differences created by the integrated approach.

The Primary unit of the government is the East Side Union High School District.

3

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

FINANCIAL HIGHLIGHTS OF THE PAST YEAR

General Fund restricted balances and activities decreased by approximately 2.2 million.

;;> The District had been carrying an accounts receivable of $560,000 from a Federal Program that ceased. This was written off in 2004-2005.

;;> Federal Title 1 Program was under expended from the previous year by $770,000 which was carried forward to 2005-2006 state fiscal year.

;;> End of Local Grant for $1.07 million.

REPORTING THE DISTRICT AS A WHOLE

The Statement of Net Assets and the Statement of Activities

The Statement of Net Assets and the Statement of Activities report information about the District as a whole and about its activities. These statements include all assets and liabilities of the District using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid.

These two statements report the District's net assets and changes in them. Net assets are the difference between assets and liabilities, one way to measure the District's financial health, or financial position. Over time, increases or decreases in the District's net assets are one indicator of whether its financial health is improving or deteriorating. Other factors to consider are changes in the District's property tax base and the condition of the District's facilities.

The relationship between revenues and expenses is the District's operating results. Since the Board's responsibility is to provide services to our students and not to generate profit as commercial entities do, one must consider other factors when evaluating the overall health of the District. The quality of the education and the safety of our schools will likely be an important component in this evaluation.

In the Statement of Net Assets and the Statement of Activities, we separate the District activities as follows:

Governmental activities - Most of the District's services are reported in this category. This includes the education of kindergarten through grade twelve students, adult education students, the operation of child development activities, and the on-going effort to improve and maintain buildings and sites. Property taxes, state income taxes, user fees, interest income, federal, state and local grants, as well as general obligation bonds, finance these activities.

Business-type activities - The District charges fees to help it cover the costs of certain services it provides. The District's food services are included bere.

4

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

REPORTING THE DISTRICT'S MOST SIGNIFICANT FUNDS

Fund Financial Statements

The fund financial statements provide detailed information about the most significant funds - not the District as a whole. Some funds are required to be established by State law and by bond covenants. However, management establishes many other funds to help it control and manage money for particular purposes or to show that it is meeting legal responsibilities for using certain taxes, grants, and other money that it receives from the U.S. and State Department of Education.

Governmental funds - Most of the District's basic services are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using an accounting method called modified accrual accounting, which measures cash and all other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the District's general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future to finance the District's programs. The differences of results in the governmental fund financial statements to those in the government-wide financial statements are explained in a reconciliation following each governmental fund financial statement.

Proprietary funds - When the District charges users for the services it provides, whether to outside customers or to other departments within the District, these services are generally reported in proprietary funds. Proprietary funds are reported in the same way that all activities are reported in the Statement of Net Assets and the Statement of Activities. In fact, the District's enterprise funds are the same as the business-type activities we repo1i in the government-wide statements but provide more detail and additional information, such as cash flows, for proprietary funds. We use internal service funds (the other component of proprietary funds) to report activities that provide supplies and services for the District's other programs and activities - such as the District's Self­lnsurance Fund. The internal service funds are repo1ied with governmental activities in the government-wide financial statements.

THE DISTRICT AS TRUSTEE

Reporting the District's Fiduciary Responsibilities

The District is the trustee, or fiduciary, for funds held on behalf of others, like our funds for associated student body activities and scholarships. The District's fiduciary activities are reported in separate Statements of Fiduciary Net Assets. We exclude these activities from the District's other financial statements because the District cannot use these assets to finance its operations. The District is responsible for ensuring that the assets reported in these funds are used for their intended purposes.

5

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

THE DISTRICT AS A WHOLE

Net Assets

The District's net assets were $37.8 and $34.3 million for the fiscal years ended June 30, 2005 and 2004. There was a $5.6 million unrestricted deficit as of June 30, 2005. Restricted net assets are reported separately to show legal constraints from debt covenants and enabling legislation that limit the School Board's ability to use those net assets for day-to-day operations. Our analysis below focuses on the net assets (Table l) and change in net assets (Table 2) of the District's governmental activities.

Current and other assets

Capital assets

Total Assets Current liabilities

Long-term debt Total Liabilities

Net assets In vested in capital assets, net of related debt

Restricted Unrestricted

Total Net Assets

Changes in Net Assets

$

$

Table 1

2005

Governmental

Activities

256,523,878 $

214,831,796

2004 145,098,319

170,537,199

471 355,674 315,635,518 40,692,606

392,839,207

433,531,813

7,456,846

35,932,551 (5,565,536)

34,011,718

247,291,236 281,302,954

19,902,406 16,406,203 (1,976,045)

$

2005

Business-Type Activities

863,992 $ 276,320

1,140,312 I, 140,312

1,140,312

276,320 108,955

(385,275)

2004 696,576

300,758

997,334 997,334

997,334

300,758 80,520

(381,278)

37,823,861 $ 34,332,564 =$~==== =$~====

The results of this year's operations for the District as a whole are reported in the Statement of Activities in the audited financial statements. Table 2 takes the information from the Statement and rearranges them slightly so you can see our total revenues for the year.

6

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

Table 2

Governmental

Activities

2005 2004

Revenues Program revenues

Charges for services $ 1,635,199 $ 1,784,246

Operating grants and contributions 55,577,006 58,110,946

Capital grants and contributions 412,422 15,422,l 17

General revenues:

State and federal sources 59,020,913 33,830,106

Taxes l 06, 124,662 118,527,107

Other general revenues 26,754,489 18,231,486

Total Revenues 249,524,691 245,906,008

Expenses Instruction related l 51,906,23 7 143,340,192

Student support services 18,646,238 18,239,197

Administration 12,924,379 12, I 70,264

Maintenance and operations 34,344,489 18,838,563

Other outgo 12,788,006 l l,524,347

Interest and other 15,424,045 17,998,997

Total Expenses 246,033,394 222,111,560 Change in Net Assets $ 3,491,297 $ 23,794,448

Governmental Activities

Business-Type

Activities

2005 2004

$ 2,777,482 $ 2,702,125

2,614,512 2,596,591

5,391,994 5,298,716

5,391,994 5,298,716

5,391,994 5,298,716 $ $

As reported in the Statement of Activities in the audited financial statements, the cost of all of our governmental activities this year was $246.0 million. However, the amount that our taxpayers ultimately financed for these activities through local taxes and other unrestricted revenues was only $188.4 million because the cost was paid by those who benefited from the programs ($1.6 million) or by other governments and organizations who subsidized certain programs with grants and contributions ($56 million). We paid for the remaining "public benefit" portion ofour governmental activities with $ I 06. l million in taxes, and the remaining in State and Federal funds and with other revenues, like interest and general entitlements.

7

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

In Table 3, we have presented the net cost ofeacb of the District's six largest functions - regular program instruction and instruction related services, pupil services, maintenance and operations, administration and interest and other. As discussed above, net cost shows the financial burden that was placed on the District's taxpayers by each of these functions. Providing this information allows our citizens to consider the cost of each function in comparison to the benefits they believe are provided by that function.

Instruction and related services

Pupil services General administration

Maintenance and operations Interest

Other Totals

THE DISTRICT'S FUNDS

Table 3

Total Governmental Cost

of Services

$

$

113,224,124 12,354,773

8,536,325

32,105,096 11,740,116

10,448,333

188,408,767

As the District completed this year, our governmental funds reported a combined fund balance of$222.0 million, which is a increase of$109.7 million from last year.

The primary reasons for these increases are: a. Our General Fund is our principal operating fund. The fund balance in the General Fund increased $1.6

million to $2.8 million. This increase is due to:

1. Increased State revenues.

2. Use of property sale proceeds to offset previously General Fund Obligations.

3. Increase in special education unfunded mandates.

b. The Building fund showed an increase of approximately $92.9 million attributed to the issuance of new General Obligation Bonds, offset by capital expenditures made in the current year.

c. The Bond Interest and Redemption Fund increased by $8. 7 due collection of property taxes for future payment of the General Obligation Bonds.

8

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

General Fund Budgetarv Highlights

Over the course of the year, the District revises its budget as it attempts to deal with unexpected changes in revenues and expenditures. The final amendment to the budget was adopted on June 16, 2005. (A schedule showing the District's original and final budget amounts compared with amounts actually paid and received is provided in our annual report).

l> Significant revenue revisions made to the 2004-2005 Budget were due to additions to Federal and State grants.

l> Budgeted expenditures increased by $3.5 million due primarily to increase in benefits costs and additions to Federal and State grants.

CAPITAL ASSET & DEBT ADMINISTRATION

Capital Assets

At June 30, 2005, the District had $214.8 million in a broad range of capital assets, including land, buildings, and furniture and equipment. This amount represents a net increase (including additions, deductions and depreciation) of $44.2 million, or 26 percent, from last year.

Land $

Construction in progress

Buildings and improvements Furniture and Equipment

Total Assets Less Accumulated Depreciation

Totals $

Table 4

Governmental

Activities 2005 2004 5,206,087 $ 5,206,087

49,365,833 105,606,287

217,727,696 112,121,408

10,915,238 10,915,238

283,214,854 233,849,020

68,383,058 63,311,821

214,831,796 $ 170,537,199

$

Business Activities

2005

505,422 505,422

229,102

$

2004

490,256

490,256

189,498 $ 276,320 $ 300,758

Several capital projects are planned for the 2005-06 year. We anticipate capital additions to be approximately $100 million for the 2005-06 year. We present more detailed information about our capital assets in Note 4 to the audited financial statements.

9

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

Long-Tenn Debt

At the end of this year, the District had $387.0 million in bonds outstanding versus $240 million last year, an increase of 61 percent. Those bonds consisted of current interest and capital appreciation bonds.

General obligation bonds

Capital Leases Retiree Incentive

Accumulated vacation - net Totals

Table 5

$

$

2005 Governmental

Activities 387,017,347

834,294

3,037,992

1,949,574 392,839,207

2004 Governmental

Activities $ 240,030,099

1,062,911 4,212,037

1,986, 189

$ 247,291,236

The District's general obligation bond rating continues to be "AAA." The State limits the amount of general obligation debt that District's can issue to 2.5 percent of the assessed value of all taxable property within the District's boundaries. The District's outstanding general obligation debt of$387 million is significantly below the statutorily - imposed limit.

Other obligations include compensated absences payable and other long-tenn debt. We present more detailed information regarding our long-term liabilities in Note 8 of the financial statements.

SIGNIFICANT ACCOMPLISHMENTS OF FISCAL YEAR 2003-04 ARE NOTED BELOW:

The District completed several projects in fiscal year 2005 such as new classrooms project in Andrew Hill, Modernization projects in Independence as well as the Gym renovation.

ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES

In considering the District Budget for the 2005-2006 year, the District Board and management used the following criteria: The key assumptions in our revenue forecast are:

L Revenue Limit income. 2. Interest earnings will increase slightly due to an anticipated improvement in market interest rates. 3. Developer fee collections are based on our estimate of new housing units to be constructed. 4. Federal income will remain approximately the same. 5. State income will remain approximately the same. 6. Anticipate Health Benefit premium rate increases to start leveling down.

10

EAST SIDE UNION HIGH SCHOOL DISTRICT

MANAGEMENT'S DISCUSSION AND ANALYSIS JUNE 30, 2005

Expenditures are based on the following forecasts:

Staffing Ratio Grades nine through twelve 33:l

The new items specifically addressed in the budget are:

Enrollment 24,778

Due to the past trend in deficit spending, it has been necessary for the District to make major budget reductions for 2004-2005. Since 90% of the Unrestricted General Fund expenditures are for personnel, it is impossible to make major budget reductions without reducing staff. For 2005-06 school years, the staffing ratio was increased from 30: 1 to 33: l, resulting in a reduction of approximately 45 classroom-teaching positions not considering growth.

CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT

This financial report is designed to provide our citizens, taxpayers, students, and investors and creditors with a general overview of the District's finances and to show the District's accountability for the money it receives. If you have questions about this report or need any additional financial infmmation, contact the Chief Financial Officer, Business Services, at East Side Union High School District, 830 North Capitol Avenue, San Jose, California.

11

EAST SIDE UNION HIGH SCHOOL DISTRICT

STATEMENT OF NET ASSETS JUNE 30, 2005

Governmental Business-type Assets Activities Activities Total

Deposits and investments $ 238,367,[31 $ 12,448 $ 238,379,579

Receivables 14,772,768 742,589 15,5[5,357

Due from other funds 214,732 214,732

Deferred charges 2,977,864 2,977,864

Stores inventories 19l,383 I 08,955 300,338

Capital assets not depreciated 54,571,920 54,571,920

Capital assets depreciated 228,642,934 505,422 229,148,356

Less: Accumulated depreciation (68,383,058) (229,102) (68,612,160)

Total assets $ 471,355,674 $ 1,140,312 $ 4 72,495,986

Liabilities Overdrafts $ 1,393,839 $ 904,701 $ 2,298,540

Accounts payable 24,750,988 20,879 24,771,867

Due to other funds 214,732 214,732

Deferred revenue 5,489,049 5,489,049

Claim liability 490,521 490,521

Bond premium 8,568,209 8,568,209

Current portion of long-term obligations I 0,714,422 10,714,422

Noncurrent portion of long-term obligations 382,124,785 382, 124,785

Total liabilities 433,531,813 1,140,312 434,672, 125

Net Assets Invested in capital assets, net of related debt 7,456,846 276,320 7,733,166

Restricted for:

Legally restricted 3,968,409 108,955 4,077,364

Debt service I 0,425,286 I 0,425,286

Special revenue 7,362,794 7,362,794

Capital projects 14,176,062 14, 176,062

Unrestricted (5,565,536) (385,275) (5,950,811)

Total net assets $ 37,823,861 $ $ 37,823,861

The accompanying notes are an integral part of these financial statements.

12

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EAST SIDE UNION HIGH SCHOOL DISTRICT

STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2005

Program Revenues Charges for Operating Capital Services and Grants and Grants and

Functions/Programs Expenses Sales Contributions Contributions -::,-~~~~-,----:--,-,c--~"--~~~~~~-~~~~~--~~~~-Governmental activities: Instruction Instruction related activities:

Supervision of instruction Instructional library, media and technology School site administration

Pupil services: Home-to-school transportation Food services All other pupil services

General administration: Data processing All other general administration

Plant services Ancillary services Conununity services Enterprise services Interest on long-term debt Other outgo

Total governmental-type activities Business-type activities

Food services Total District

$121,165,090 $ 306,037 $ 25,185,156 $

11,754,871 2,374,456

16,611,820

3,187,564 25,551

15,276,093

2,943,813 9,980,566

34,344,489 2,039,453

400,708 1,400,798

11,740,116 12,788,006

246,033,394

5,391,994 $251,425,388

130,067 229

88,070

826,462

100,279

171,533 12,522

1,635,199

2,777,482 $ 4,412,681

7,991,630 102,311

4,466,191

1,714,680 17,332

3,475,682

250,203 3,966,318 2,226,871

1,039

6,179,593 55,577,006

2,614,512 $ 58,191,518

General revenues and subventions: Property taxes, levied for general purposes Property taxes, levied for debt service Taxes levied for other specific purposes

$

412,422

412,422

412,422

Federal and State aid not restricted to specific purposes Interest and investment earnings Miscellaneous

Subtotal, general revenues Change in net assets

Net assets - beginning, as restated Net assets - ending

The accompanying notes are an integral part of these financial statements.

13

Net (Expenses) Revenues and Changes in Net Assets

Business-Governmental Type

Activities Activities Total

$ (95,261,475) $ $ (95,261,4 75)

(3,633,174) (3,633, 174) (2,271,916) (2,27 l ,9 l 6)

(12,057,559) (12,057,559)

(646,422) (646,422) (8,219) (8,219)

(l l,700,132) (l l,700,132)

(2,693,610) (2,693,610) (5,842,715) (5,842,715)

(32, 105,096) (32,105,096) (2,038,414) (2,038,414)

(400,708) (400,708) (1,400, 798) ( 1,400, 798)

(ll,740,ll6) (11,740,116) (6,608,413) (6,608,413)

(188,408,767) (188,408,767)

(188,408,767) (188,408,767)

87,409,364 87,409,364 18,646,413 l 8,646,413

68,885 68,885 59,020,913 59,020,913

2,948, l l 5 2,948, 115 23,806,374 23,806,374

191,900,064 191,900,064 3,491,297 3,491,297

34,332,564 34,332,564 $ 37,823,861 $ $ 37,823,861

13

EAST SIDE UNION HIGH SCHOOL DISTRICT

GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2005

Non Major Total General Building Governmental Governmental

Fund Fund Funds Funds

ASSETS Deposits and investments $ 17,450,503 $ 165,958,982 $ 54,631,394 $ 238,040,879

Receivables 8,504, 152 672,770 4,025,991 13,202,913

Due from other funds 214,732 214,732

Stores inventories 191,383 191,383

Total assets $ 26,360,770 $ 166,631,752 $ 58,657,385 $ 251,649,907

LIABILITIES AND FUND BALANCES

Liabilities: Overdrafts $ $ $ 733,327 $ 733,327

Accounts payable 18,363,540 2,555,835 2,529,708 23,449,083

Deferred revenue 5,148,398 340.65 l 5,489,049

Total liabilities 23,511,938 2,555,835 3,603,686 29,671,459

Fund Balances: Reserved for:

Stores inventories 191,383 191,383

Other reservations 3,777,026 3,777,026

Unreserved:

Undesignated, reported in:

General fund (1,119,577) (1,119,577)

Special revenue funds 7,362,794 7,362,794

Debt service funds 17,114,069 17,114,069

Capital projects funds 164,075,917 30,576,836 194,652,753

Total fund balance 2,848,832 164,075,917 55,053,699 221,978,448

Total Liabilities and Fund Balances $ 26,360,770 $ 166,631,752 $ 58,657,385 $ 251,649,907

The accompanying notes are an integral part of these financial statements.

14

EAST SIDE UNION HIGH SCHOOL DISTRICT

GOVERNMENTAL FUNDS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2005

Amounts Reported for Governmental Activities in the Statement of Net Assets are Different Because:

Total Fund Balance - Governmental Funds

Capital assets used in governmental activities are not financial resources and, therefore, are not reported as assets in governmental funds.

The cost of capital assets is

Accumulated depreciation is

In the governmental funds, the receipt of the special education mandate settlement is reported as revenue in the year received.

On the statement of net assets, the settlement amount is recorded as a receivable and payment received in the current year reduces the receivable amount.

Bond issuance premiums from the sale of bonds is a revenue source

in the governmental funds, but it should be recorded as deferred revenue and amortized to operations in the government-wide statements. Debt issuance costs are expensed in the governmental funds. On the

government-wide statements, they are deferred and amortized over

the life of the related debt.

Jn governmental funds, unmatured interest on long-term debt is recognized in the period when it is due. On the government-wide statements, unmatured interest on long-term debt is recognized

when it is incurred.

An internal service fund is used by the District's management to charge the costs of the workers' compensation insurance program to the individual funds. The assets and liabilities of the internal service fund are included with governmental activities.

Long-term liabilities, including bonds payable, are not due and payable in

the current period and, therefore, are not reported as liabilities in the funds.

Long-term liabilities at year end consist of:

Bonds payable

Capital leases payable

Retiree incentive

Compensated absences (vacations) Total Net Assets - Governmental Activities

The accompanying notes are an integral part of these financial statements.

15

$283,214,854

(68,383,058)

$387,017,347

834,294

3,037,992

1,949,574

$ 2 21,978,448

214,831,796

624,042

(8,568,209)

2,977,864

( 1,098,438)

(82,435)

(392,839,207)

$ 37,823,861

EAST SIDE UNION HIGH SCHOOL DISTRICT

GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE

FOR THE YEAR ENDED JUNE 30, 2005

Nonmajor Total

General Building Governmental Governmental

Fund Fund Funds Funds

REVENUES Revenue limit sources $ 141,326,073 $ $ 6,652,987 $ 147,979,060

Federal sources 12,663,371 780,606 13,443,977

Other state sources 34,948,694 3,934,946 38,883,640

Other local sources 13.281,566 2,052,960 46,881, 185

Total Revenues 202,219, 704 2,052,960 42,915, 198 247,187,862

EXPENDITURES [nstruction 112,631,709 5,420,116 118,051,825

Instruction related activities: Supervision of instniction 10,730,225 708,271 11,438,496

Instructional library, media and technology 2,310,549 2,310,549

School site adn1inistration 13,684,393 2,480,330 16, 164,723

Pupil Services: Home-to school transportation 3,101,773 3, 101,773

Food services 31,273 5,498 36,771

All other pupil services 14,678,612 186,334 14,864,946

General administration: Data processing 2,864,582 2,864,582

All other general administration 9,044,315 510,600 9,554,915

Plant services 19,000,139 13,741,829 1,602,521 34,344,489

Facility acquisition and constn1ction 139,854 45,482,112 3,743,868 49,365,834

Ancillary services 1,984,562 1,984,562

Community services 389,923 389,923

Other outgo 11,497,939 11,497,939

Debt service Principal 293,704 5,060,000 5,353,704

Interest and other 10,284,732 10,284,732

Total Expenditures 202.383,552 59,223,941 30,002,270 291,609,763

Excess (deficiency) of revenues over expenditures (163,848) (57,170,981) 12,912,928 (44,421,901)

Other Financing Sources (Uses): Transfers in 6,181,257 13,634,492 19,815,749

Other sources 65,087 149,999,529 5,299,051 155,363,667

Transfers out ( 4,390,067) (16,715,749) (21,105,816)

Net Financing Sources (Uses) 1,856,277 149,999,529 2,217,794 154,073,600

NET CHANGE IN FUND BALANCES 1,692,429 92,828,548 15,130,722 109,651,699

Fund Balance - Beginning I, 156,403 71,247 ,369 39,922,977 112,326,749

Fund Balance - Ending $ 2,848,832 $ 164,075,917 $ 55.053,699 $ 221,978,448

The accompanying notes are an integral part of these financial statements.

16

EAST SIDE UNION HIGH SCHOOL DISTRICT

RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE DISTRICT-WIDE STATEMENT OF ACTIVITIES (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2005

Total Net Change in Fund Balances - Governmental Funds

Amounts Reported for Governmental Activities in the Statement of Activities are Different Because:

Capital outlays to purchase or build capital assets are reported in governmental funds as expenditures, however, for governmental activities, those costs are shown in the statement of net assets and allocated over their estimated useful lives as annual depreciation expenses in the statements of activities.

This is the amount by which capital outlays exceed depreciation in the period.

Depreciation expense

Capital outlays

In the statement of activities, certain operating expenses - compensated absences (vacations) are measured by the amounts earned during the year. In the governmental funds, however, expenditures for these iten1s are measured by the amount of financial resources used (essentially, the amounts actually paid). Vacation used was more than the amounts earned by $36,615.

Proceeds received from the sale of bond is a revenue in the governmental funds, but it increases long-term liabilities in the statement of net assets and does not affect the statement of activities.

Bond issuance costs paid for the issuance of bonds are an expenditure in the governmental funds, but is capitalized as a deferred charge in the statement of net assets and amortized over the life of the bond in the statement of activities.

Bond premium proceeds received from issuance of bonds are a revenue source in the governmental funds, but they increase long-term liabilities in the statement of net assets and do not affect the statement of activities.

Amortization of premiu1ns of the bonds is not a revenue in the governmental funds, but is reflected as a revenue in the statement of activities.

An1ortization of debt issuance cost is not recognized in the governmental funds. In the government-wide statements, it is capitalized and amortized over

the life of the related bond.

In the governmental funds, the receipt of the special education settlement is reported as revenue in the year received. On the statement of net assets, the amount is recorded as a receivable and payment received in the current year reduces the receivable amoµnt.

Proceeds fron1 capital leases is a revenue source in the governmental funds, but it increases liabilities in the statement of net assets.

Accretion of interest on capital appreciation bonds is recorded as an expense in the government-wide statement of activities, but is not recorded in the governmental funds.

Repayment of the long~term debt is an expenditures in the governmental funds. but it reduces long-term liabilities in the staten1ent of net assets and does not affect the state1nent of activities. Debt repayment for the year \Vere as follows:

General Obligation Bonds

Capital Leases

Retiree Incentive

The accompanying notes are an integral part of these financial statemettts.

17

$(5,071,237)

49,365,834

5,060.000

293,704

1, 174,045

$ 109,651,699

44,294,597

36,615

(149,999,529)

3,!0l.942

(8,400.993)

362,526

(124,078)

(167,461)

(65,087)

(2,047,719)

6.527.749

EAST SIDE UNION HIGH SCHOOL DISTRICT

RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE DISTRICT-WIDE STATEMENT OF ACTIVITIES (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2005

Interest on long-term debt in the statement of activities differs from the amount

reported in the governmental funds because interest is recorded as an expenditure in the funds when it is due, and thus requires the use of current financial resources. [n the statement of activities, however, interest expense is recognized as the interest

accrues, regardless of \vhen it is due. The additional interest reported in the

statement of activities is the net result of these two factors.

An internal service fund is used by the District's management to charge the costs of the unemployment compensation insurance program to the individual funds. The net gain of the internal service fund is reported with the government-\.vide activities.

Change in Net Assets - Governrnent-\\'idc Activities

The accompanying notes are an integral part of these financial statements.

18

(457,632)

778,668

$ 3,491,297

EAST SIDE UNION HIGH SCHOOL DISTRICT

PROPRIETARY FUNDS STATEMENTS OF NET ASSETS JUNE 30, 2005

Governmental Business-Type Activities •

Activities- Internal Enterprise Fund Service Fund

ASSETS Current Assets

Deposits and investments $ 12,448 $ 326,252

Receivables 742,589 945,813

Stores inventories 108,955

Total Current Assets 863,992 1,272,065

Noncurrent Assets Furniture and equipment (net) 276,320

Total Assets l,140,312 1,272,065

LIABILITIES Current Liabilities

Overdrafts 904,70 I 660,5 [2

Accounts payable 20,879 203,467

Due to other funds 214,732

Claim Liabilities 490,521

Total Current Liabilities l,140,312 l ,354,500

NET ASSETS Invested in capital assets, net of related debt 276,320

Restricted I 08,955

Unrestricted (385,275) (82,435)

Total Net Assets $ $ (82,435)

The accompanying notes are an integral part of these financial statements.

19

EAST SIDE UNION HIGH SCHOOL DISTRICT

PROPRIETARY FUNDS STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS FOR THE YEAR ENDED JUNE 30, 2005

OPERA TING REVENUES

Federal grants

State grants

Sales

lndistrict contributions

Other local revenue

Total Operating Revenues

OPERATING EXPENSES

Payroll costs

Supplies and materials

Equipment rental

Claims expense

Other operating cost

Total Operating Expenses

Operating Income (Loss)

NONOPERATING REVENUES (EXPENSES)

Interest income

Transfers In Total Nonoperating

Revenues (Expenses)

Change in net assets

Total Net Assets - Beginning

Total Net Assets - Ending

Business-Type

Activities­

Enterprise Fund

$

$

2,141,902

148,933

2,777,483

33,537

5,101,855

2,894,359

1,939,067

13,596

544,972

5,391,994

(290, 139)

72 290,067

290, 139

The accompanying notes are an integral part of these financial statements.

20

$

$

Governmental

Activities -

Internal

Service Fund

3,303,137

1,141,764

4,444,90 I

82,098

477

3,545,548

1,038,110

4,666,233

(221,332)

1,000,000

1,000,000

778,668

(861,103)

(82,435)

EAST SIDE UNION HIGH SCHOOL DISTRICT

PROPRIETARY FUNDS STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2005

Governmental Business- Activities -

Type Activities- Internal

Enterprise Fund Service Fund

CASH FLOWS FROM OPERATING ACTIVITIES Cash received [rom user charges, grants and transfers $ 5,265,361 $ 4,537,188

Cash payments for insurance claims (4, 100,710)

Cash payments to suppliers for goods and services (5,896,846)

Net Cash Provided By (Used In) Operating Activities (631,485) 436,478

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES

Acquisition of capital assets (15,166)

Net increase (decrease) in cash and cash equivalents ( 646,651) 436,478

Cash and cash equivalents - Beginning (245,602) ( 110,226)

Cash and cash equivalents - Ending $ (892,253) $ 326,252

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED

BY (USED IN) OPERATING ACTIVITIES:

Change in net assets $ $ 778,668

Adjustments to reconcile operating income (loss)

to net cash provided (used) by operating activities:

Depreciation 39,604

Changes in assets and liabilities: Receivables (126,633) (907,713)

Inventories (28,435)

Account Payable 20,273 565,523

Due to other fund (536,294)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (631,485) $ 436,478

The accompanying notes are an integral part of these financial statements.

21

EAST SIDE UNION HIGH SCHOOL DISTRICT

FIDUCIARY FUNDS STATEMENT OF FIDUCIARY NET ASSETS JUNE 30, 2005

ASSETS Deposits and investments

Total assets

LIABILITIES

Due to student groups Total liabilities

NET ASSETS Unreserved

Total Net Assets

The accompanying notes are an integral part of these financial statements.

22

Other

Private· Purpose

Trust

$ I 07,082 $ l 07,082

l 07,082 $ !07,082

Agency

Funds

$ 3,082,!60 $ 3,082,160

$ 3,082,160 $ 3,082,l 60

EAST SIDE UNION HIGH SCHOOL DISTRICT

FIDUCIARY FUNDS STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FOR THE YEAR ENDED JUNE 30, 2005

ADDITIONS Private donations

Change in Net Assets Net Assets - Beginning Net Assets - Ending

The accompanying notes are an integral part of these financial statements.

23

Other Private-Purpose

Trust $ 6,957

6,957 I 00, 125

$ 107,082

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATElYIENTS JUNE 30, 2005

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Reporting Entity

The East Side Union High School District was organized in 1949 under the laws of the State of California. The District operates under a locally-elected five-member Board form of government and provides educational services to grades 9 -12 as mandated by the State and/or Federal agencies. The District operates 11 high schools, 2 adult education sites, three independent study programs, and five continuation schools.

A reporting entity is comprised of the primary government, component units, and other organizations that are included to ensure the financial statements are not misleading. The primary government of the District consists of all funds, departments, boards, and agencies that are not legally separate from the District. For the District, this includes general operations, food service, and student related activities of the District. The District detem1ined that there are no potential component units that meet the criteria for inclusion within the reporting entity.

Other Related Entities

Joint Powers Agencies and Public Entity Risk Pools The District is associated with two public entity risk pools. These organizations do not meet the criteria for inclusion as component units of the District. These organizations are:

Northern California Regional Liability Excess Fund JPA (Nor-Cal ReLiEF) Santa Clara County Schools Insurance Group (SCCSIG)

Basis of Presentation - Fund Accounting

The accounting system is organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The District's funds are grouped into three broad fund categories: governmental, proprietary, and fiduciary.

Governmental Funds Governmental funds are those through which most governmental functions typically are financed. Governmental fund reporting focuses on the sources, uses, and balances of current financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they will be paid. The difference between governmental fund assets and liabilities is reported as fund balance. The following are the District's major governmental funds:

24

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Major Governmental Funds

General Fund The general fund accounts for all financial resources except those required to be accounted for in another fund. The general fund balance is available to the District for any purpose provided it is expended or transferred according to the general laws of California.

Building Fund The Building Fund exists primarily to account separately for proceeds from sale of bonds and acquisition of major governmental capital facilities and buildings.

Other Non-Major Governmental Funds

Special Revenue Funds The Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. The district maintains the following special revenue funds:

Adult Education Fund The Adult Education Fund is used to account for resources committed to adult education programs maintained by the District.

Child Development Fund The Child Development Fund is used to account for resources committed to child development programs maintained by the District.

Deferred Maintenance Fund The Deferred Maintenance Fund is used for the purpose of major repair or replacement of District property.

Special Reserve Fund The Special Reserve Fund for Other Than Capital Outlay Projects is used primarily to provide for the accumulation of General Fund moneys for general operating purposes other than for capital outlay.

Debt Service Funds The Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal, interest, and related costs. The District maintains the following debt service funds:

Bond Interest and Redemption Fund The Bond Interest and Redemption Fund is used to account for the accumulation of resources for, and the repayment of, district bonds, interest, and related costs.

Capital Projects Funds The Capital Projects Funds are used to account for the acquisition and/or constrnction of all major governmental general fixed assets. The District maintains the following capital projects funds:

Capital Facilities Fund The Capital Facilities Fund is used to account for resources received from developer impact fees assessed under provisions of the California Environmental Quality Act (CEQA).

County School Facilities Fund The county school facilities fund is a capital projects fund that received state funding to be used for the acquisition, construction, or improvement of major capital facilities.

State School Building Lease-Purchase Fund The State School Building Lease-Purchase Fund is used primarily to account for State apportionments provided for construction and reconstruction of school facilities (Education Code Sections 17070-17080).

25

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Special Reserve Capital Outlay The Special Reserve Fund is used to account for funds set aside for Board designated construction projects.

Proprietary Funds Proprietary fund reporting focuses on the determination of operating income, changes in net assets, financial position, and cash flows. The District applies all GASB pronouncements, as well as the Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Proprietary funds are classified as enterprise or internal service. The District has the following proprietary funds:

Enterprise Fund Enterprise funds may be used to account for any activity for which a fee is charged to external users for goods or services. The only enterprise fund of the District accounts for the financial transactions related to the Food Service Operations of the District.

Internal Service Fund Internal service funds may be used to account for any activity for which goods or services are provided to other funds of the District in return for a fee to cover the cost of operations. The District operates a dental and vision insurance program that is accounted for in an internal service fund.

Fiduciary Funds Fiduciary fund reporting focuses on net assets and changes in net assets. The fiduciary fund category is split into four classifications: pension trust funds, investment trnst funds, private-purpose trust funds, and agency funds.

The District operates trust and agency fund types. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The District's agency fund accounts for student body activities (ASB). Trust funds are used to account for the assets held by the District under a trust agreement for individuals and therefore not available to support the District's own programs. The District's trust fund is the Student Scholarship Fund.

Basis of Accounting - Measurement Focus

Government-Wide Financial Statements The government-wide statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This is the same approach used in the preparation of the proprietary fund financial statements, but differs from the manner in which governmental fund financial statements are prepared.

The government-wide statement of activities presents a comparison between expenses, both direct and indirect, and program revenues for each segment of the business-type activities of the District and for each governmental program. Direct expenses are those that are specifically associated with a service, program, or department and are therefore clearly identifiable to a particular function. The District does not allocate indirect expenses to functions in the Statement of Activities. Program revenues include charges paid by the recipients of the goods or services offered by the programs and grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. Revenues that are not classified as program revenues are presented as general revenues. The comparison of program revenues and expenses identifies the extent to which each program or business segment is self-financing or draws from the general revenues of the District.

Net assets should be reported as restricted when constraints placed on net asset use are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or Jaws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The net assets restricted for other activities result from special revenue funds and the restrictions on their net asset use.

26

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Fund Financial Statements Fund financial statements report detailed information about the District. The focus of governmental and enterprise fund financial statements is on major funds rather than reporting funds by type. Each major fund is presented in a separate column. Nonmajor funds are aggregated and presented in a single column. The internal service and food service funds are presented in a single column on the face of the proprietary fund statements.

Governmental Funds All governmental funds are accounted for using a flow of current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. The statement of revenues, expenditures, and changes in fund balance reports on the sources (revenues and other financing sources) and uses (expenditures and other financing uses) of current financial resources. This approach differs from the manner in which the governmental activities of the government-wide statements are prepared. Governmental fund financial statements therefore include reconciliations with brief explanations to better identify the relationship between the government-wide statements and governmental funds statements.

Proprietary Funds Proprietary funds are accounted for using a flow of economic resources measurement focus and the accrual basis of accounting. All assets and all liabilities associated with the operation of this fund are included in the statement of net assets. The statement of changes in fund net assets presents increases (revenues) and decreases ( expenses) in net total assets. The statement of cash flows provides infom1ation about how the District finances and meets the cash flow needs of its proprietary fund.

Fiduciary Funds Fiduciary funds are accounted for using the flow of economic resources measurement focus and the accmal basis of accounting.

Revenues - Exchange and Non-Exchange Transactions Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. On a modified accrual basis, revenue is recorded in the fiscal year in which the resources are measurable and become available. Available means that the resources will be collected within the current fiscal year or are expected to be collected soon enough thereafter to be used to pay liabilities of the current fiscal year. For the District, available means expected to be received within 90 days of fiscal year-end.

Non-exchange transactions, in which the District receives value without directly giving equal value in return, include property taxes, certain grants, entitlements, and donations. Revenue from property taxes is recognized in the fiscal year in which the taxes are received. Revenue from certain grants, entitlements, and donations is recognized in the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements include time and purpose requirements. On a modified accrual basis, revenue from non-exchange transactions must also be available before it can be recognized.

Under the modified accrual basis, the following revenue sources are considered to be both measurable and available at fiscal year-end: State apportionments, interest, certain grants, and other local sources.

Deferred Revenue Deferred revenue arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition in the current period or when resources are received by the District prior to the incurrence of qualifying expenditures. In subsequent periods, when both revenue recognition criteria are met, or when the District has a legal claim to the resources, the liability for deferred revenue is removed from the combined balance sheet and revenue is recognized.

27

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Certain grants received before the eligibility requirements are met are recorded as deferred revenue. On the governmental fund financial statements, receivables that will not be collected within the available period are also recorded as deferred revenue. Expenses/Expenditures On the accrual basis of accounting, expenses are recognized at the time they are incurred. The measurement focus of governmental fund accounting is on decreases in net financial resources (expenditures) rather than expenses. Expenditures are generally recognized in the accounting period in which the related fund liability is incurred, if measurable. Principal and interest on long-term debt, which has not matured, are recognized when paid in the governmental funds. Allocations of costs, such as depreciation and amortization, are not recognized in the governmental funds.

Cash and Cash Equivalents

The District's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Cash equivalents also include cash with county treasury balances for purposes of the statement of cash flows.

Investments

Investments held at June 30, 2005, with original maturities greater than one year are stated at fair value. Fair value is estimated based on quoted market prices at year-end. All investments not required to be reported at fair value are stated at cost or amortized cost.

Prepaid Expenditures

Prepaid expenditures (expenses) represent amounts paid in advance of receiving goods or services. The District has the option of reporting an expenditure in governmental funds for prepaid items either when purchased or during the benefiting period. The District has chosen to report the expenditures when incurred.

Stores Inventory

Inventories consist of expendable food and supplies held for consumption and unused donated commodities. Inventories are stated at cost, on the weighted average basis. The costs of inventory items are recorded as expenditures in the governmental type funds and expenses in the proprietary type funds when used.

Capital Assets and Depreciation

The accounting and reporting treatment applied to the capital assets associated with a fund are determined by its measurement focus. in general, capital assets are long-lived assets of the District as a whole. The District maintains a capitalization threshold of $5,000. The District does not possess any infrastructure. lmprovements are capitalized; the costs of normal maintenance and repairs that do not add to the value of the asset or materially extend an asset's life are not capitalized, but are expensed as incurred.

When purchased, such assets are recorded as expenditures in the governmental funds and capitalized. The valuation basis for general capital assets are historical cost, or where historical cost is not available, estimated historical cost based on replacement cost. Donated capital assets are capitalized at estimated fair market value on the date donated.

Capital assets in the proprietary funds are capitalized in the fund in which they arc utilized. The valuation basis for proprietary fund capital assets are the same as thos~ used for the general capital assets.

28

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Depreciation is computed using the straight-line method. Estimated useful lives of the various classes of depreciable capital assets are as follows: buildings and improvements, 20 to 50 years; equipment, 2 to IO years. lnterfund Balances

On fund financial statements, receivables and payables resulting from short-term interfund loans are classified as "interfund receivables/payables." These amounts are eliminated in the governmental and business-type activities columns of the statement of net assets, except for the net residual amounts due between governmental and business-type activities, which are presented as internal balances.

Compensated Absences

Accumulated unpaid vacation benefits are accrued as a liability as the benefits area earned. The 'entire compensated absence liability is reported on the government-wide financial statements. For governmental funds, the current portion of unpaid compensated absences is recognized upon the occtmence of relevant events such as employee resignations and retirements that occur prior to year end that have not yet been paid with expendable available financial resources. These amounts are reported in the fund from which the employees who haw accumulated leave are paid.

Sick leave is accumulated without limit for each employee at the rate of one day for each month worked. Leave with pay is provided when employees are absent for health reasons; however, the employees do not gain a vested right to accumulated sick leave. Employees are never paid for any sick leave balance at termination of employment or any other time. Therefore, the value of accumulated sick leave is not recognized as a liability in the District's financial statements. However, credit for unused sick leave is applicable to all classified school members who retire after January I, 1999. At retirement, each member will receive .004 year of service credit for each day of unused sick leave.

Accrued Liabilities and Long-Term Obligations

All payables, accrued liabilities, and long-term obligations are reported in the government-wide financial statements. In general, governmental fund payables and accrued liabilities that, once incurred, are paid in a timely manner and in full from current financial resources arc reported as obligations of the funds.

However, claims and judgments, compensated absences, special termination benefits, and contractually required pension contributions that will be paid from governmental funds are reported as a liability in the fund financial statements only to the extent that they are due for payment during the current year. Bonds, capital leases, and long-term loans are recognized as a liability on the fund financial statements when due.

Fund Balance Reserves and Designations

The District reserves those portions of fund equity which are legally segregated for a specific future use or which do not represent available expendable resources and therefore are not available for appropriation or expenditure. Unreserved fund balance indicates that portion of fund equity which is available for appropriation in future periods. Fund equity reserves have been established for revolving cash accounts, stores inventories. prepaid expenditures (expenses), and legally restricted grants and entitlements.

Designations of fund balances consist of that portion of the fund balance that has been designated (set aside) by the governing board to provide for specific purposes or uses. Fund equity designations have been established for economic uncertainties, and other purposes.

29

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEJHENTS JUNE 30, 2005

Net Assets

Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any bonowings used for the acquisition, construction or improvement of those assets. Net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the District or through external restrictions imposed by creditors, grantors, or laws or regulations of other governments. The District applies restricted resources when an expense is incrmed for purposes for which both restricted and unrestricted net assets are available.

Operating Revenues and Expenses

Operating revenues are those revenues that are generated directly from the primary activity of the proprietary funds. For the District, these revenues are food service sales and indistrict contributions to the internal service fund. Operating expenses are necessary costs incuned to provide the good or service that is the primary activity of the fund.

lnterfund Activity

Transfers between governmental and business-type activities on the government-wide statements are reported in the same manner as general revenues.

Exchange transactions between funds are reported as revenues in the seller funds and as expenditures/ expenses in the purchaser funds. Flows of cash or goods from one fund to another without a requirement for repayment are reported as interfund transfers. Interfund transfers are reported as other financing sources/uses in governmental funds and after non-operating revenues/expenses in proprietary funds. Repayments from funds responsible for particular expenditures/expenses to the funds that initially paid for them are not presented on the financial statements.

Estimates

The preparation of the financial statements in confom1ity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

Budgetary Data

The budgetary process is prescribed by provisions of the California Education Code and requires the governing board to hold a public hearing and adopt an operating budget no later than July l of each year. The District governing board satisfied these requirements. The adopted budget is subject to amendment throughout the vear to give consideration to unanticipated revenue and expenditures primarily resulting from events unknown at the time of budget adoption with the legal restriction that expenditures cannot exceed appropriations by major object account.

30

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

The amounts reported as the original budgeted amounts in the budgetary statements reflect the amounts when the original appropriations were adopted. The amounts reported as the final budgeted amounts in the budgetary statements reflect the amounts after all budget amendments have been accounted for. For purposes of the budget, on-behalf payments by the State for PERS have not been included as revenue and expenditures as required under generally accepted accounting principles.

Property Tax

Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are payable in two installments on November I and February I and become delinquent on December IO and April 10, respectively. Unsecured property taxes are payable in one installment on or before August 31. The County of Santa Clara bills and collects the taxes on behalf of the District. Local property tax revenues are recorded when received.

New Accounting Pronouncements

In March 2003, the Governmental Accounting Standards Board (GASB) issued GASBS No. 40, Deposit and Investment Risk Disclosures an amendment of GASE Statement No. 3. This Statement addressed common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk. As an element of interest rate risk, this Statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. Deposit and investment policies related to the risks identified in the Statement also should be disclosed. As such, the District has made the applicable required disclosures.

In November 2003, GASB issued GASES No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. This Statement establishes guidance for accounting and reporting for impairment of capital assets and for insurance recoveries, whether associated with an impaired capital asset or not. This Statement is effective for periods beginning after December 31, 2004, or during the 2005-06 fiscal year. The District has not determined the impact of this pronouncement on the financial statements.

In July 2004, GASB issued GAS BS No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This Statement will require local governmental employers who provide other postemployment benefits (OPEB) as part of the total compensation offered to employees to recognize the expense and related liabilities (assets) in the government-wide financial statements of net assets and activities. This Statement establishes standards for the measurement, recognition, and display ofOPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of State and local governmental employers.

Current financial reporting practices for OPEB generally are based on pay-as-you-go financing approaches. They fail to measure or recognize the cost of OPEB during the periods when employees render the services or to provide relevant infom1ation about OPEB obligations and the extent to which progress is being made in funding those obligations.

This Statement generally provides for prospective implementation - that is, that employers set the beginning net OPEB obligation at zero as of the beginning of the initial year. The District will be required to implement the provisions of this Statement for the fiscal year ended June 30, 2009. The District is in the process of determining the impact that the implementation of this Statement will have on the government-wide statement of net assets and activities.

31

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

NOTE 2 - DEPOSITS AND INVESTMENTS

Summary of Deposits and Investments

Deposits and investments as of June 30, 2005 are classified in the accompanying financial statements as follows:

Governmental activities

Proprietary Fiduciary funds Overdraft

Total Deposits and Investments

Deposits and investments as of June 30, 2005, consists of the following:

Cash on hand and in banks Cash in revolving Investments Overdraft

Total Deposits and Investments

Policies and Practices

$ 238,040,879 338,700

3,189,242 (2,298,540)

$ 239 ,270,28 l

$ 3,420,760 2,600

238, l 45,46 l (2,298,540)

$ 239,270,281

The District is authorized under California Government Code [or the Entity's investment policy if different] to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations.

Investment in County Treasury - The District is considered to be an involuntary participant in an external investment pool as the District is required to deposit all receipts and collections of monies with their County Treasurer (Education Code Section 41001 ). The fair value of the District's investment in the pool is reported in the accounting financial statements at amounts based upon the District's pro-rata share of the fair value provided by the County Treasurer for the entire portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by the County Treasurer, which is recorded on the amortized cost basis.

32

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

General Authorizations

Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedules below:

Maximum Maximum Maximum

Authorized Remaining Percentage Investment

Investment Ti::ee Maturity of Portfolio In One Issuer

Local Agency Bonds, Notes, Warrants 5 years None None

Registered State Bonds, Notes, Warrants 5 years None None

U.S. Treasury Obligations 5 years None None

U.S. Agency Securities 5 years None None

Banker's Acceptance 180 days 40% 30%

Commercial Paper 270 days 25% 10%

Negotiable Certificates of Deposit 5 years 30% None

Repurchase Agreements I year None None

Reverse Repurchase Agreements 92 days 20% of base None

Medium-Tenn Notes 5 years 30% None

Mutual Funds NIA 20% 10%

Money Market Mutual Funds NIA 20% 10%

Mortgage Pass-Through Securities 5 years 20% None

County Pooled Investment Funds NIA None None

Local Agency Investment Fund (LAIF) NIA None None

Joint Powers Authority Pools NIA None None

Interest Rate Risk

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity ofan investment, the greater the sensitivity of its fair value to changes in market interest rates. The District manages its exposure to interest rate risk by depositing substantially all of its funds in the County Treasury Pool. The fair value of the deposits with County Treasurer at June 30, 2005 was $235, 144,097 and the weighted average maturity of the pool was . 79 years.

Custodial Credit Risk - Deposits

This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District does not have a policy for custodial credit risk for deposits. However, the California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law. As of June 30, 2005, the District's bank balance of $2,693,323 was exposed to custodial credit risk because it was uninsured and collateralized with securities held by the pledging financial institution's trust department or agent, but not in the name of the District.

33

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

NOTE 3 - RECEIVABLES

Receivables at June 30, 2005, consisted of intergovernmental grants, entitlements, interest and other local sources. All receivables are considered collectible in full.

Nonmajor General Building Funds Total Proerietary

Federal Government Categorical aid $ 2,380,554 $ $ 324,721 $ 2,705,275 $ 742,589

State Government Apportionment 2,160,671 2,160,671

Categorical aid 2,049,271 168,575 2,217,846

Lottery 1.567,422 1,567,422

Local Government Interest 294,302 672,770 228,007 1,195,079

Other Local Sources 2,212,603 1,144,017 3,356,620 945,813 Total $ 152 $ 672,770 $4,025,991 $ 13,202,913 $ 1,688,402

The District also had $624,042 in mandated special education long-term receivables recorded in the government­wide statements.

34

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

NOTE 4 - CAPITAL ASSETS

Capital asset activity for the fiscal year ended June 30, 2005, was as follows:

Balance June 30, 2004 Additions

Governmental Activities Capital Assets not being depreciated:

Land $ 5,206,087 $ Construction in Progress 105,606,287 49,365,834

Total Capital Assets not being depreciated 110,812,374 49,365,834

Capital Assets being depreciated: Buildings 106,854,852 105,606,288

Site Improvement 5,266,556

Equipment 10,915,238

Total Capital Assets being depreciated 123,036,646 105,606,288

Total Capital Assets 233,849,020 154,972,122

Less Accumulated Depreciation: Buildings 54,259,749 4,394,525

Site Improvement 306,502 210,663

Equipment 8,745,570 466,049

Total Accumulated Depreciation 63,311,821 5,071,237

Governmental Activities Capital Assets, Net $ 170,537,199 $ 149,900,885

Business-Type Activities Furniture and Equipment $ 490,256 $ 15,166

Less Accumulated Depreciation 189,498 39,604

Business-Type Activities Capital Assets, Net $ 300,758 $ (24,438)

35

Balance Deductions June 30, 2005

$ $ 5,206,087 I 05,606,288 49,365,833

I 05,606,288 54,571,920

212,461,140 5,266,556

10,915,238 228,642,934

105,606,288 283,214,854

58,654,274 517,165

9,211,619 68,383,058

$ l 05,606,288 $214,831,796

$ $ 505,422 229,102

$ $ 276,320

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Depreciation expense was charged as a direct expense to governmental functions as follows:

Governmental Activities Instruction Supervision of Instruction Instructional Library & Media School Site Administration Home to School Transporation Food Services All Other Pupil Services Anciliary Services

Community Services Enterprise Activities All General Administration Data Processing Services

Total Depreciation Expenses All Activities

NOTE 5 - INTERFUND TRANSACTIONS

Interfund Receivables/Payables (Due To/Due From)

$ 3,149,880 316,375

63,907 447,097

85,791 145,810 411,147

54,891 I 0,785 37,702

268,621 79,231

$ 5,071,237

Interfund receivable and payable balances at June 30, 2005, between major and nonmajor governmental funds, nonmajor enterprise funds, internal service funds, and fiduciary funds are as follows:

Due To Proprietary

$ 214,732

All balances resulted from the time lag between the date that (J) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made,

36

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATE!WENTS JUNE 30, 2005

Operating Transfers

lntcrfund transfers for the year ended June 30, 2005, consisted of the following:

Transfer To General

General $ Nonmajor governmental 3, I 00,000

Enterprise 290,067 Internal service 1,000,000

Total 54,390,067

The General fund tranferred to the Special Reserve- Capital for land sale payment.

The General fund tranferred to the Cafeteria Enterprise as a contribution, The General fund tranferred to the Self-Insurance Fund as a contribution.

The Special Reserve-Non Capital transferred to the Special Reserve-Capital for land sale payment.

Transfer from Nonmajor

Governmental $ 6,181,257

10,534,492

$ 16,715,749

The Special Reserve-Capital transferred to the General Fund for routine repair and maintenance payment.

The Capital Facilities fund tranferred lo the Deferred Maintenance fund as a contribution.

Total

Total $ 6, 181,257

13,634,492 290,067

1,000,000 $ 21,105,816

$ 3, l 00,000 290,067

1,000,000

9,804,492

6,181,257

730,000 $ 21,105,816

Interfund transfers are used to (l) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) use unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations.

37

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

NOTE6 ACCOUNTSPAYABLE

Accounts payable at June 30, 2005, consisted of the following:

Vendor payables State apportionment Salaries and benefits

Total

General $ 2,769,363

988,901 14,605,276

$ 18,363,540

NOTE 7 DEFERRED REVENUE

Building $2,554,898

937 $ 2,555,835

Deferred revenue at June 30, 2005, consists of the following:

Nonmajor Governmental $ 2,262,447

267,261 $ 2,529, 708

Total $ 7,586,708

988,901 14,873,474

$23,449,083

Nonmajor General Governmental

Federal financial assistance $ 2,662,268 $ 52,467

State categorical aid 1,538, 166 52,388

Other local 947,964 235,796

Total $ 5,148,398 $ 340,651

NOTE 8- LONG-TERM LIABILITIES

Long-Term Debt Summary

The changes in the District's long-term obligations during the year consisted of the following:

Balance Balance

July 1, 2004 Additions Deductions June 30, 2005

General obligation bonds $ 240,030,099 $152,047,248 $ 5,060,000 $ 387,017,347

Capital Leases l ,062,9 l l 65,087 293,704 834,294

Retiree Incentive 4,212,037 l, 174,045 3,037,992

Accumulated vacation - net l ,986, 189 36,615 l ,949,574

S 247,291,236 $152,112,335 $ 6,564,364 $ 392,839,207

38

$

$

Proprietary S 224,346

$ 224,346

Total 2,714,735 1,590,554 1,183,760 5,489,049

Due in One Year

$ 7,295,000 295,803

1, 174,045 l ,949,574

$ l 0,714,422

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Bonded Debt

The outstanding general obligation bonded debt is as follows:

Maturity Interest Original lssue Title Date Rate Issue

Current Interest Bond

19918 2011 3.8%-6.8% s 10,000,000

1999 Refunding 2010 3.7%-4.8% 20,900,000

2002B 2027 2.5%-5.5% 30,000,000

2003 Refunding 2022 3.0%-4.6% 36,795,000

1999C 2024 3.lo/o-5.01Yo 24,500,000

2003 Refunding 2025 2.0~{i-5.3rl/o 97,160,000

2002 Series C 2029 4.0(Yo-5.0°/o 50,000,000

2002 Series D 2030 3.5'11)-s.0110 70,000.000

Sub-Total 339,355,000

Capaal Appreciation

1991 Series F 2011 4.9% 2,999,956

l 999 Series A 2025 5.3o/o-6.5(Yo 25,499,993

2002 Series E 2030 4.2%-5.1% 29,999,529

Sub-Total 58,499,478

Total General Obligation Bonds $ 397 ,854,4 78

Debt Service Requirements to Maturity

The bonds mature through 2030 as follows:

Fiscal Year 2006 2007 2008 2009 2010

2011-2015 20 I 6-2020 2021-2025 2026-2030

subtotal

Accretion to date Total

39

Bonds

Outstanding

July 1, 2004

$ 4,935,000

16,445,000

30,000,000

36,095,000

24,500,000

92,800,000

204,775,000

3,598,695

31,656,404

35,255,099

$ 210,030,099

PrinciEal $ 7,295,000

7,890,000 10,980,000 9,755,000

11,514,566 67,157,252 85,394,104

112,876,926 65,351.630

378,214,478

8,802,869 $387,017,347

Bonds

Accreted/ Outstanding

Issued Redeemed June 30, 2005

$ $ 215,000 $ 4, 720,000

730,000 15,715,000

295,000 29,705,000

1,330,000 34, 765,000

230,000 24,270,000

2,260,000 90,540,000

50,000,000 50,000,000

70,000,000 70,000,000

120,000,000 5,060,000 319,715,000

177,548 3,776,243

1,870, 171 33,526,575

29,999,529

32,047,248 67,302,347

$ 152,047,248 $ 5,060,000 $387,017,347

Interest to Maturity Total

$ 13,071,585 $ 20,366,585 14,432,164 22,322,164 14,140,557 25,120,557 13,751,121 23,506,121 15,605,815 27,120,381 77,377,823 144,535,075 83,091,421 l 68,485,525 82,337,760 195,214,686 51,436,656 116,788,287

$ 365,244,902 $ 743A59,380

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Accumulated Unpaid Employee Vacation

The long-tenn portion of accumulated unpaid employee vacation for the District at June 30, 2005, amounted to $1,949,574.

Capital Leases

The District's liability on lease agreements with options to purchase are summarized below:

Balance, July 1, 2004

Additions

Payments Balance, June 30, 2005

The capital leases have minimum lease payments as follows:

Year Ending June 30,

2006

2007 2008

2009

2010 Total

Less: Amount Representing Interest Present Value of Minimum Lease Payments

40

Capital

Leases $ 1,062,911

65,087 293,704

$ 834,294

Lease

Payment

$ 370,229 342,478

253,277

47,229

1, 147 1,014,360

180,066

$ 834,294

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

NOTE 9 - FUND BALANCES

Fund balances are composed of the following elements:

General Buildin!! Reserved

Revolving cash $ 2,500 $ Stores inventory 191,383 Restricted programs 3,774,526

Total Reserved 3,968,409 Unreserved

Undesignated (l,119,577) 164,075,917 Total Unreserved (1,119,577) 164,075,917

Total $ 2,848,832 $ 164,075,917

NOTE 10- RISK MANAGEMENT

Property and Liability

Nonmajor Fiduciary Governmental Total Funds

$ $ 2,500 $ 191,383

3,774,526 3,968,409

55,053,699 218,010,039 107,082 55,053,699 218,010,039 107,082

$ 55,053,699 $ 221,978,448 $ 107,082

The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees and natural disasters. During fiscal year ending June 30, 2005, the District contracted with Northern California Regional Liability Excess Fund for property and liability insurance coverage. Settled claims have not exceeded this commercial coverage in any of the past three years. There has not been a significant reduction in coverage from the prior year.

\Vorkers' Compensation

For fiscal year 2005, the District participated in the Santa Clara County Schools Insurance Group, an insurance purchasing pool. The intent of the Santa Clara County Schools Insurance Group is to achieve the benefit of a reduced premium for the District by virtue of its grouping and representation with other participants in the Santa Clara County Schools Insurance Group. The workers' compensation experience of the participating districts is calculated as one experience and a common premium rate is applied to all districts in the Santa Clara County Schools Insurance Group. Each participant pays its workers• compensation premium based on its individual rate. A participant will then either receive money from or be required to contribute to the "equity-pooling fund." This "equity pooling" arrangement insures that each participant shares equally in the overall performance of the Santa Clara County Schools Insurance Group. Participation in the Santa Clara County Schools Insurance Group is limited to districts that can meet the Santa Clara County Schools Insurance Group selection criteria.

41

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Coverage provided by Santa Clara County Schools Insurance Group and Northern California Regional Liability Excess Fund for property and liability and workers' compensation is as follows:

Insurance Program I Company Name Type of Coverage Limits

Workers' Compensation Program Santa Clara County Schools Insurance Group Workers' Compensation $ 200,000,000

Property and Liabilitv Program Northern California Regional Liability Excess Fund Property and Liability $ I 0,000,000

Claims Liabilities

The District records an estimated liability for indemnity torts and other claims against the District. Claims liabilities are based on estimates of the ultimate cost of reported claims (including future claim adjustment expenses) and an estimate for claims incurred, but not reported based on historical experience.

Unpaid Claims Liabilities

The Internal Service fund establishes a liability for both reported and unreported events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represent the changes in approximate aggregate liabilities for the District from July 1, 2003 to June 30, 2005:

Liability Balance, June 30, 2003 Claims and changes in estimates Claims payments

Liability Balance, June 30, 2004 Claims and changes in estimates Claims payments

Liability Balance, June 30, 2005 Deficit in assets available to pay claims at June 30, 2005

NOTE 11 EMPLOYEE RETIREMENT SYSTEMS

Dental & Vision

$ 446,162 4,746,839

(4,702,480) 490,521

3,545,548 (3,545,548)

490,521 $ ( 408,086)

Qualified employees are covered under multiple-employer contributory retirement plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers' Retirement System (STRSJ and classified employees are members of the Public Employees' Retirement System (PERS).

42

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEJ\IIENTS JUNE 30, 2005

STRS

Plan Description

The District contributes to the California State Teachers' Retirement System (STRS); a cost-sharing multiple­employer public employee retirement system defined benefit pension plan administered by STRS. The plan provides retirement and disability benefits and survivor benefits to beneficiaries. Benefit provisions are established by Stale statutes, as legislatively amended, within the State Teachers' Retirement Law. STRS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the STRS annual financial report may be obtained from STRS, 7667 Folsom Blvd., Sacramento, CA 95826.

Funding Policy

Active plan members are required to contribute 8.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by STRS Teachers' Retirement Board. The required employer contribution rate for fiscal year 2004-2005 was 8.25 percent of annual payroll. The contribution requirements of the plan members are established by State statute. The District's contributions to STRS for the fiscal years ending June 30, 2005, 2004, and 2003, were $8,348,573, $8,274,929 and $8,494,158, respectively, and equal 100 percent of the required contributions for each year.

PERS

Plan Description

The District contributes to the School Employer Pool under the California Public Employees' Retirement System (CalPERS); a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees' Retirement Laws. CalPERS issues a separate comprehensive annual financial report that includes financial statements and required supplementary information. Copies of the CalPERS' annual financial repo11 may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, CA 95814.

Funding Policy

Active plan members are required to contribute 7.0 percent of their salary and the District is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the Cal PERS Board of Administration. The required employer contribution rate for fiscal year 2004-2005 was 9.952 percent of annual payroll. The contribution requirements oftbe plan members are established by State statute. The District's contributions to CalPERS for the fiscal years ending June 30, 2005, 2004, and 2003, were $2,774,239, $2,947,922, and $817,200, respectively, and equal 100 percent of the required contributions for each year.

43

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Social Security

As established by Federal law, all public sector employees who are not members of their employer's existing retirement system (STRS or PERS) must be covered by social security or an alternative plan. The District has elected to use the Social Security as its alternative plan. Contributions made by the District and an employee vest immediately. The District contributes 6.2 percent of an employee's gross earnings. An employee is required to contribute 6.2 percent of his or her gross earnings to the pension plan.

On Behalf Payments

The State of California makes contributions to STRS and PERS on behalf of the District. These payments consist of State General Fund contributions to STRS in the amount of $4, 131,862 ( 4.517 percent of salaries subject to STRS). No contributions were made for PERS for the year ended June 30, 2005. Under accounting principles generally accepted in the United States of America, these amounts are to be reported as revenues and expenditures. These amounts have been recorded in the financial statements, but they are not included in the budgeted revenues and expenditures of the District. These amounts have been excluded from the computation of the available reserves percentage.

NOTE l2 - COMMITMENTS AND CONTINGENCIES

Grants

The District received financial assistance from Federal and State agencies in the form of grants. The disbursement of funds received under these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the general fund or other applicable funds. However, in the opinion of management, any such disallowed claims will not have a material adverse effect on the overall financial position of the District at June 30, 2005.

Litigation

The District is involved in various litigation arising from the normal course of business. In the opinion of management and legal counsel, the disposition of all litigation pending is not expected to have a material adverse effect on the overall financial position of the District at June 30, 2005.

44

EAST SIDE UNION HIGH SCHOOL DISTRICT

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005

Construction Commitments

As of June 30, 2005, the District had the following commitments with respect to the unfinished capital projects:

CAPITAL PROJECT Adult Education Andrew Hill Education Center Foothill Independence James Lick Mount Pleasant Oak Grove Pegasus Piedmont Hills Santa Teresa Silver Creek Overfelt Yerba Buena

NOTE 13 - RELATED PARTY TRANSACTIONS

Remaining Construction Commitment $ 352,500

2.207,975 3,134,[63

44,390 2,084,4 lO 6,486,617 2,590,579 8,379,254

5,595 1,247,172 3,339,744 1,920,870 2,149,300 6.473,469

$ 40,416,038

Expected Date of

Completion Dec-06 Dec-07 Jun-09 Jun-06 Dec-06 Jun-06 Dec-07 Dec-06 Jun-06 .Jun-06 Jun-06 Jun-06 Sep-07 Jun-06

In 2003, the District entered into an employment agreement with an officer of the district, which included an advance for personal housing. The note bears interest at 2 percent and interest is payable monthly with a maturity at fifteen, twenty, twenty-five or thirty years chosen at the option of the officer. The balance was fully paid before fiscal year end.

NOTE 14- RESTATEMENT OF BEGINNING FUND BALANCE GOVERNMENT-WIDE

GASB 34 was implemented in the prior years, requiring the District to record the long-term debt on the Government-Wide Statement of Net Assets. The District did not record a portion of the long term liability resulting from the issuance of the hands in fiscal year 2002-2003. As a result, the opening balance was overstated by $30,000,000. A prior period adjustment has been made in the current year to correctly state the beginning balance on the Statement of Net Assets. The adjustment does not affect the Governmental Funds statements or the District's available reserves.

45

REQUIRED SUPPLEMENTARY INFORMATION

EAST SIDE UNION HIGH SCHOOL DISTRICT

GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED JUNE 30, 2005

Budgeted Amounts

(GAAP Basis)

Original Final

REVENUES

Revenue lin1lt sources $ 139,737,880 $ 141,275,011

Federal sources 13,613,456 13,555,381

Other state sources 30,717,732 30,761,396

Other local sources 10,924,491 10,199,787

Total Revenues 194,993,559 195,791,575

EXPENDITURES

Instn1ction 107,335,228 109,155,368

Instruction related activities;

Supervision of instruction 10,881,773 10,835,522

Instructional library, media, and teclu1ology 2,631,626 2,351,076

School site administration 12,929,899 14,164,258

Pupil services:

Home-to-school transportation 2,731,791 3,131,791

Food services 53,524 38,570

All other pupil services 15,050,966 14,739,175

General administration:

Data processing 3,281,979 3,003,641

All other general administration 8,435,616 7,292,995

Plant services 17,500,029 20,230,321

Facility acquisition and construction 875

Ancillary servlces 1,689,780 1,757,670

Community services 412,700 406,122

Other outgo 11,033,998 11,750,879

Debt service

Interest

Total Expenditures 193,968,909 198,858,263

Excess (Deficiency) of RevenuesOver Expenditures 1,024,650 (3,066,688)

Other Financing Sources (lfses):

Transfers in 1,475,000 7,749,840

Other sources

Transfers out (J,759,361) (6,319,922)

Net Financing Sources (Uses) (284,361) 1,429,918

NET CHANGE IN FUND BALANCES 740,289 (1,636,770)

Fund Balance - Beginning 1,156,403 I, 156,403

Fund Balance - Ending $ 1,896,692 $ (480,367)

Actual

(GAAP Basis)

$ 141,326,073

12,663,371

34,948,694

13,281,566

202,219,704

112,631,709

10,730.225

2,310,549

13,684,393

3,101,773

31,273

14,678,612

2,864,582

9,044,115

19.000, 139

139,854

1,984,562

389,923

11,497,939

293,704

202,383,552

(163,848)

6,181,257

65,087

(4,390,067)

1,856,277

1,692,429

1,156,403

$ 2,848,832

[ ! J On behalf payments of 54, 13 l ,862 are indu<led in both other state sources revenue and instruction expenditures

The accompanying notes are an integral part of these financial statements.

46

Favorable (Unfavorable)

Variance

Final

to Actual

$ 51,062

(892,010)

4,187,298

3,081,779

6,428, 129

(3,476,341)

105,297

40,527

479,865

30,018

7,297

60,563

139,059

(1,751,320)

1,230,182

(138,979)

(226,892)

16,199

252,940

(293,704)

(3,525,289)

2,902,840

( 1,568,583)

65,087

1,929,855

426,359

3,329,199

$ 3,329, 199

SUPPLEMENTARY INFORMATION

EAST SIDE UNION HIGH SCHOOL DISTRICT

SCHEDULE OF EXPENDITURES OF FEDERAL A \VARDS FOR THE YEAR ENDED JUNE 30, 2005

Federal Federal Grantor/Pass-Through CFDA

Grantor/Prooram or Cluster Title Number U.S. DEPARTMENT OF EDUCATION

Passed through California Department of Education (COE): No Child Left Behind Act:

Title I, Part A, Basic Grants Low-Income and Neglected 1'1 84.010

Title I, Part A, Program Improvement Corrective Action 111 84.010

Tille I, Part A, Program Improvement District Intervention 1'1 84.010 Tille I, Part C, Migrant Education 84.011

Title II, Part A, Teacher Quality 1'1 84.367

Title II, Part D, Enhancing Education Through Technology 84.318 Title ![[, Bilingual Education: Discretionary Grants 84.290 Title Ill, Limited English Proficiency 84.365 Title [V, 21st Century; After Sehl Learning Center 84.287

Tille IV, Part A, Drug-Free Schools 84.186 Title IV, Physical Fitness Grant 84.215 Tille IV, Smaller Learn. Communities 84.215L Title IV, Teach American History 84.215X Tille V, Part A, Innovative Education Strategies 84.298A Title VII, Indian Education 84.060

Individuals with Disabilities Act: Basic Local Assistance Entitlement, Part B, Section 611 84.027 Local Staff Development Grant, Part B, Section 61 l 84.027A Workability II, Transition Partnership 84. 158

Carl Perkins Act: Vocational & Applied Technology Grant, Secondary 84.048 Vocational & Applied Technology Grant, Postsecondary 84.048

Adult Education Act:

Adult Education: Adult Basic Education 1'1 84.002

Adult Secondary Education 1'1 84.002A Subtotal

See accompanying note to supplementary information.

47

Pass-Through Entity

Identifying Federal Number Expenditures

04329 $ 4,481,125

04579 185,550

04581 660 03174 223, 176

04341 856,171

04335 125,125

00008 316,964

00084 374,019

[2] 120,029 04347 151,060

[2] 168,481

[2] 147,895 [2] 80,011

04354 68,901 00011 26,398

03379 3,848,618 03613 9,039 00006 251,662

03577 555,227 03578 26,451

04508 568, 170

03978 27,464 12,612,196

EAST SIDE UNION HIGH SCHOOL DISTRICT

SCHEDULE OF EXPENDITURES OF FEDERAL AW ARDS (CONTINUED) FOR THE YEAR ENDED JUNE 30, 2005

U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Passed through California Department of Education (COE):

Child Development Act: Child Development: Quality Improvement Activities

Head Start Medi-Cal Billing Option

Refugee Children Supplemental Assistance Program

Subtotal U.S. DEPARTMENT OF AGRICULTURE

Passed through California Department of Education (COE):

Basic Breakfast

Needy Breakfast National School Lunch

Subtotal

U.S. DEPARTMENT OF DEFENSE

Junior Reserve Officer Training Corp; ROTC l3l[IJ

Total

[ l] Tested as a major prograrn

(2] Pass-Through Entity Identifying Number not available

See accompanying note to supplementary infonnation.

48

93.575 03942

93.600 00016

93.778 00013

93.576 03981

l 0.556 04198

12,000 [2]

121 158,400

60,819

98,990 318,330

30,425

595,789

1,515,688 2,141,902

513,451 15,585,879

EAST SIDE UNION HIGH SCHOOL DISTRICT

SCHEDULE OF A VERA GE DAILY ATTENDANCE FOR THE YEAR ENDED JUNE 30, 2005

SECONDARY

Regular classes

Continuation education

Home and hospital

Special education

Total Secondary REGIONAL OCCUPATIONAL PROGRAM

COMMUNITY DAY SCHOOLS

CLASSES FOR ADULTS

Concurrently enrolled

Not concurrently enrolled

Total Classes for Adults Grand Total

SUMMER SCHOOL High school

Total Hours

Sec accompanying note to supplementary information.

49

Amended

Second Period Annual Report Report

21,368 21,204

605 590 31 34

1,184 1, 173 23,188 23,001

983 1,038 64 69

187 253 2,047 2,658

2,911

27,019

Hours of

Attendance

1,276,348 1,276,348

EAST SIDE UNION HIGH SCHOOL DISTRICT

SCHEDULE OF INSTRUCTIONAL TIME FOR THE YEAR ENDED JUNE 30, 2005

1982-83 1986-87 2004-05

Actual Minutes Actual Grade Level Minutes Requirement Minutes

Grades 9 - 12 61,893 64,800 64,934

See accompanying note to supplementary information.

50

Number of Days Traditional Multi track

Calendar Calendar Status

180 NIA In Compliance

EAST SIDE UNION HIGH SCHOOL DISTRJCT

RECONCILIATION OF ANNUAL FINANCIAL AND BUDGET REPORT WITH AUDITED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2005

Summarized below are the fund balance reconciliations between the Unaudited Actual Financial Report, and the audited financial statements.

Adult General Education Selflnsurance

FUND BALANCE Balance, June 30, 2005, Unaudited Actuals $ 3,387,617 $ 183,571 $ 102,817

Increase (Decrease) in: Account receivable (678,397) 152,390 Due from other funds

(Increase) in: Account payable 139,612 (185,252)

Balance, June 30, 2005, Audited Financial Statement $ 2,848,832 $ 335,961 $ (82,435)

See accompanying note to supplementary information.

51

EAST SIDE UNION HIGH SCHOOL DISTRICT

SCHEDULE OF FINANCIAL TRENDS AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2005

(Budget)

2006 1 2005

GENERAL FUND Revenues $ 207,896,708 $ 202,219,704

Other sources 6,383,582 6,246,344 Total Revenues and Other Sources 214,280,290 208,466,048

Expenditures 205,873,534 202,383,552 Other uses and transfers out 7,410,964 4,390,067

Total Expenditures and Other Uses 213,284,498 206,773,619

INCREASE (DECREASE) IN FUND BALANCE $ 995,792 $ 1,692,429

ENDING FUND BALANCE $ 3,844,624 $ 2,848,832

AVAILABLE RESERVES 2 $ 5, 173,558 $ 3,600,736

AVAILABLE RESERVES AS A

PERCENTAGE OF TOTAL OUTGO 4

2.43% 1,78%

LONG-TERM DEBT $ 382,124,785 $ 392,839,208

AVERAGE DAILY

ATTENDANCE AT P-2 1 23,115 23,252

2004 2003

$ 189,642,83 l $ l 91,973,003 2,041,442 5,548,508

191,684,273 197,521,51 l ] 97, 724,356 195,802,541

l,505,125 l,002,457

199,229,481 196,804,998

$ (7,545,208) $ 716.513

$ l,156,403 $ 8,701,6] l

$ 2,488,955 $ 8,404,081

1.25%. 4,27%

$217,291,236 $ 244,597 ,843

22,679 22,567

The General Fund balance has decreased by $5,852,779 over the past two years. The fiscal year 2005-2006 budget projects an increase of $995, 792. For a district this size, the State recommends available reserves of at least 3 percent of total General Fund expenditures, transfers out, and other uses (total outgo).

The District has incurred operating deficit in one of the past three years and anticipates incurring an operating surplus during the 2005-2006 fiscal year. Total long-tem1 debt has increased by $148,241,365 over the past two years.

Average daily attendance has increased by 685 over the past two years. A decline of 137 ADA is anticipated during fiscal year 2005-2006.

! Budget 2006 is mcluded for analytical purposes only and has not been subjected to an audit

2 A va!lable reserves consist of al! undesignated funJ balances and all funds designated for economic uncert::unty contained within the General Fund and Special Reserve Fund (other than capital outlay).

3 Excludes Adult Education and ROP ADA

4 On-behalf payments of $4, I 3 1.862 have been excluded from the calculation of availabk: reserve~ percentage for fiscal year ending June 30, 2005

See accompanying note to supplementary infom1ation.

52

EAST SIDE UNION HIGH SCHOOL DISTRICT

SCHEDULE OF CHARTER SCHOOLS FOR THE YEAR ENDED JUNE 30, 2005

Name of Charter School California Youth Outreach Academy/Vocational Escuela Popular Accelerated Family Learning Escuela Popular/Center for Training & Careers Family Learning Latino College Preparatory Academy MACSA Academia Calmecac San Jose Conservation Corps Charter

See accompanying note to supplementary infom1alion.

53

Included in Audit Report

No No No No No No

[THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX B

FORM OF CONTINUING DISCLOSURE CERTIFICATE

APPENDIX B

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the 11Disclosure Certificate") is executed and delivered by the EAST SIDE UNION HIGH SCHOOL DISTRICT (the "District") in connection with the issuance by the Board of Supervisors of Santa Clara County (the "Board") in the name of the District of $14,000,000 East Side Union High School District (Santa Clara County, California) 2006 Tax and Revenue Anticipation Notes (the 11Notes 11

). The Notes are being issued pursuant to a resolution adopted by the Board of Trustees of the District on August 24, 2006, and a resolution adopted by the Board on September 26, 2006 (collectively, the "Resolution"). The District covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the District for the benefit of the holders and beneficial owners of the Notes and in order to assist the Participating Underwriters in complying with S.E.C. Rule 15c2-12(b )(5).

Section 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

11 Dissemination Agent" shall mean the District, or any successor Dissemination Agent designated in writing by the District and which has filed with the District a written acceptance of such designation.

"Listed Events" shall mean any of the events listed in Section 3(a) of this Disclosure Certificate.

11 National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule.

II Participating Underwriter" shall mean any of the original underwriters of the Notes required to comply with the Rule in connection with offering of the Notes.

"Rule" shall mean Rule 15c2-12(b )(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State Repository" shall mean any public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate, there is no State Repository.

Section 3. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 3, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Notes, if material:

(i) Principal and interest payment delinquencies. (ii) Non-payment related defaults. (iii) Unscheduled draws on debt service reserves reflecting financial difficulties. (iv) Unscheduled draws on credit enhancements reflecting financial difficulties. (v) Substitution of credit or liquidity providers, or their failure to perform. (vi) Adverse tax opinions or events affecting the tax-exempt status of the security. (vii) Modifications to rights of security holders. (viii) Contingent or unscheduled bond calls. (ix) Defeasances. (x) Release, substitution, or sale of property securing repayment of the securities. (xi) Rating changes.

Appendix B Page I

(b) Whenever the District obtains knowledge of the occurrence of a Listed Event, the District shall as soon as possible determine if such event would be material under applicable Federal securities law.

(c) If the District determines that knowledge of the occurrence of a Listed Event would be material under applicable Federal securities law, the District shall promptly file a notice of such occurrence with each National Repository or with the Municipal Securities Rulemaking Board and with each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(viii) and (ix) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Notes pursuant to the Resolution.

Section 4. Termination of Reporting Obligation. The District's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Notes. If such termination occurs prior to the final maturity of the Notes, the District shall give notice of such termination in the same manner as for a Listed Event under Section 3(c).

Section 5. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be the District.

Section 6. Amendment; Waiver. Notwithstanding any other prov1s10n of this Disclosure Certificate, the District may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Section 3(a) it 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 an obligated person with respect to the Notes, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Notes, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) the proposed amendment or waiver either (i) is approved by holders of the Notes, or (ii) does not, in the opinion of the Trustee or nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Notes.

Section 7. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the District chooses to include any information in any notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the District shall have no obligation under this Disclosure Certificate to update such information or include it in any future notice of occurrence of a Listed Event.

Section 8. Default. In the event of a failure of the District to comply with any prov1s10n of this Disclosure Certificate any holder or beneficial owner of the Notes may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Resolution, and the sole remedy under this Disclosure Certificate in the event of any failure of the District to comply with this Disclosure Certificate shall be an action to compel performance.

Section 9. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the

Appendix B Page2

District agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Notes.

Section 10. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the District, the Dissemination Agent, the Participating Underwriters and holders and beneficial owners from time to time of the Notes, and shall create no rights in any other person or entity.

Date: [Closing Date] EAST SIDE UNION HIGH SCHOOL DISTRICT

By ________________ _ Name~~~~~~~~~~~~~~~~~ Title ________________ _

Appendix B Page3

APPENDIX C

FORM OF OPINION OF BOND COUNSEL

APPENDIX C

FORM OF FINAL OPINION OF BOND COUNSEL

[Letterhead of Quint & Thinunig LLP]

Board of Trustees East Side Union High School District 830 North Capitol Avenue San Jose, California 95133-1398

[Closing Date]

OPINION: $14,000,000 East Side Union High School District (Santa Clara County, California) 2006 Tax and Revenue Anticipation Notes

Members of the Board of Trustees:

We have acted as bond counsel to the East Side Union High School District (the "District") in connection with the issuance by the Board of Supervisors of Santa Clara County (the "Board") of $14,000,000 principal amount of East Side Union High School District (Santa Clara County, California) 2006 Tax and Revenue Anticipation Notes, dated October 25, 2006 (the "Notes"). pursuant to Article 7.6 (commencing with section 53850), Chapter 4, Part 1, Division 2, Title 5 of the California Government Code, a resolution adopted by the Board of Trustees of the District on August 24, 2006 (the "District Resolution"). and a resolution adopted by the Board on September 26, 2006 (the "Board Resolution" and, collectively, the 11Resolutions 11

). We have examined the law and such certified proceedings and other papers as we deemed necessary to render this opinion.

As to questions of fact material to our opinion, we have relied upon representations of the Board contained in the Board Resolution and of the District in the District Resolution and in the certified proceedings and certifications of public officials and others furnished to us, without undertaking to verify such facts by independent investigation.

Based upon our examination, we are of the opinion, as of the date hereof, that:

1. The District is duly created and validly existing as a school district with the power to perform its obligations under the District Resolution, to cause the Board to issue the Notes in its name and to perform its obligations under the Board Resolution and the Notes.

2. The District Resolution has been duly adopted by the District. The Board Resolution has been duly adopted by the Board and creates a valid first lien on the funds pledged under the Board Resolution for the security of the Notes.

3. The Notes have been duly authorized, issued and delivered by the Board and are valid and binding general obligations of the District enforceable in accordance with their terms.

4. The interest on the Notes is excluded 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; it should be noted, however, that, for the purpose of computing the alternative minimum tax imposed on corporations (as defined for federal income tax purposes), such interest is taken into account in determining certain income and earnings. The Notes are II qualified tax-exempt obligations" within the meaning of section 265(b)(3) of the Internal Revenue Code of 1986

Appendix C Page I

(the "Code"), and, in the case of certain financial institutions (within the meaning of section 265(b)(5) of the Code), a deduction is allowed for eighty percent (80%) of that portion of such financial institutions' interest expense allocable to interest payable on the Notes. The opinions set forth in the preceding sentences are subject to the condition that the District comply with all requirements of the Code that must be satisfied subsequent to the issuance of the Notes in order that interest thereon be, or continue to be, excluded from gross income for federal income tax purposes. The District has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the inclusion of interest on the Notes in gross income for federal income tax purposes to be retroactive to the date of issuance of the Notes. We express no opinion regarding other federal tax consequences arising with respect to the Notes.

5. The interest on the Notes is exempt from personal income taxation imposed by the State of California.

The rights of the owners of the Notes and the enforceability thereof may be subject to bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights heretofore or hereafter enacted and their enforcement may be subject to the exercise of judicial discretion in accordance with general principles of equity.

Respectfully submitted,

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