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8e Page 50 Financial Statements Attached as APPENDIX B are portions of the audited financial statements of the City (the "Financial Statements") for Fiscal Year 2005-06, which include financial statements for the Enterprise, prepared by the City Department of Finance and audited by [Caporicci & Larson of Oakland, California] (the "Auditor"). The Auditor's letter concludes that the Financial Statements present fairly, in all material respects, the financial position of the City as of June 30, 2006, and the results of its operations and the cash flows of its proprietary fund type for the Fiscal Year then ended in conformity with accounting principles generally accepted in the United States of America. The Financial Statements should be read in their entirety. The City has not requested nor did the City obtain permission from the Auditor to inciude the audited financial statements as an appendix to this Official Statement. Accordingly, the Auditor has not performed any post- audit review of the financial condition or operations of the City. In addition, the Auditor has not reviewed this Official Statement. Enterprise Accounting The Enterprise is accounted for as an enterprise fund with a separate set of self- balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures or expenses, as appropriate. The enterprise funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises--where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis are to be financed or recovered primarily through user charges, or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. Revenues are fully accrued to include unbilled services at year end. The City uses the accrual basis of accounting for its "proprietary funds," including the City's water enterprise fund. Revenues are recognized when earned and expenses are recognized when the related liabilities are incurred. All assets and liabilities for these funds are included on the balance sheet with this measurement focus. Fund equity (Le., net total assets) is segregated into restricted and unrestricted. The proprietary funds apply all applicable Governmental Accounting Standard Board ("GASB") pronouncements as well as applicable pronouncements of the Financial Accounting Standard Board, Accounting Principles Board and any Accounting Research Bulletins issued on or before November 30, 1989, unless they conflict with or contradict GASB pronouncements. See "APPENDIX B - CITY OF REDWOOD CITY AUDITED FINANCIAL STATEMENTS" for a more complete summary of the City's accounting policies. Outstanding Enterprise Obligations Other than the 2005 Installment Payments in the original principal amount of $35,790,000 and the 2006 Installment Payments in the original principal amount of 35