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1996 Directors Stock Unit Plan - MBIA INC - 3-28-1997

VIEWS: 2 PAGES: 91

									Exhibit 10.70 1996 Directors Stock Unit Plan Section 1. Purpose The Plan is intended to attract, retain and motivate the best qualified directors for the benefit of the Corporation and its shareholders and to provide such directors an economic interest in the Corporation's Common Shares (the "Common Shares") thereby enhancing a long-term mutuality of interest between such directors and the shareholders. Section 2. Definitions When used in this Plan, the following terms shall have the definitions set forth in this Section: "Board" shall mean the Board of Directors of the Corporation. "Change in Control" shall mean (i) the occurrence of any merger, consolidation, sale of assets, liquidation or reorganization (other than a merger, consolidation or combination in which the Corporation is the continuing corporation and which does not result in its outstanding stock being converted into or exchanged for different securities, cash or other property or any combination thereof which has been approved by the Corporation's stockholders holding at least 50% of the voting stock, or (ii) the first purchase of Common Shares pursuant to a tender or exchange offer (other than an offer by the corporation, any of its subsidiaries, or any employee benefit plan maintained by the Corporation or any of its subsidiaries. "Committee" shall mean the Compensation and Organization Committee of the Board. "Common Shares" shall mean shares of the common stock of the Corporation. "Corporation" shall mean MBIA Inc. "Director" shall mean any member of the Board regardless of whether an Eligible Director. "Elialble Director" shall mean a Director who is not an employee of the Corporation or any Subsidiary. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the closing price of a Common Share on the New York Stock Exchange on the date of determination or, if no sale of Common Shares is recorded on such date, then on the next preceding day on which there was such a sale. Grant" shall mean a grant of Units under Section 3. "Subsidiary" shall mean any entity of which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such entity. "Termination" shall mean any termination (whether voluntary or involuntary) of an Eligible Director's service as a Director. "Unit" shall mean a contractual obligation of the Corporation to deliver a Common Share or pay cash based on the Fair Market Value of a Common Share to an Eligible Director or the beneficiary or estate of such Eligible Director as provided herein. -2Section 3. Units

"Common Shares" shall mean shares of the common stock of the Corporation. "Corporation" shall mean MBIA Inc. "Director" shall mean any member of the Board regardless of whether an Eligible Director. "Elialble Director" shall mean a Director who is not an employee of the Corporation or any Subsidiary. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the closing price of a Common Share on the New York Stock Exchange on the date of determination or, if no sale of Common Shares is recorded on such date, then on the next preceding day on which there was such a sale. Grant" shall mean a grant of Units under Section 3. "Subsidiary" shall mean any entity of which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such entity. "Termination" shall mean any termination (whether voluntary or involuntary) of an Eligible Director's service as a Director. "Unit" shall mean a contractual obligation of the Corporation to deliver a Common Share or pay cash based on the Fair Market Value of a Common Share to an Eligible Director or the beneficiary or estate of such Eligible Director as provided herein. -2Section 3. Units (a) Unit Awards. In each December during the term of the Plan, any Eligible Director serving as a Director on such date who has been a Director continuously since the prior October 31 shall be awarded $10,000.000 in Units (the amount of Units to be based on the Fair Market Value of a Common Share on the same determination date as used by the Corporation's Stock Option Grant program). (b) Delivery of Common Shares. Subject to the satisfaction of the vesting requirements set forth in Section 4 and except as provided in (c) and (d) below, all Common Shares that are subject to Units credited to an Eligible Director shall be delivered to such Eligible Director and transferred on the books on the Company as of the effective date of such Director Termination. (c) Payment Upon Death. In the event of the death of an Eligible Director, the Corporation shall pay to the beneficiary designated by the Eligible Director on a form provided by the Corporation, or, in the absence of such designation, to the Eligible Director's estate, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of Termination multiplied by (ii) the Fair Market Value on the date of Termination. (d) Change in Control. Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Corporation shall pay an Eligible Director (or, in the event of the death of an Eligible Director following a Change in Control, the beneficiary or estate determined pursuant to (c) above), not later than 30 days after the Change in Control occurs, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of the Change in Control multiplied by (ii) the Fair Market Value on the date of the Change in Control. (e) Satisfaction of the Corporation's Obligations. Upon the delivery of a Common Share (or the payment of cash with respect to a whole or fractional Common -3-

Section 3. Units (a) Unit Awards. In each December during the term of the Plan, any Eligible Director serving as a Director on such date who has been a Director continuously since the prior October 31 shall be awarded $10,000.000 in Units (the amount of Units to be based on the Fair Market Value of a Common Share on the same determination date as used by the Corporation's Stock Option Grant program). (b) Delivery of Common Shares. Subject to the satisfaction of the vesting requirements set forth in Section 4 and except as provided in (c) and (d) below, all Common Shares that are subject to Units credited to an Eligible Director shall be delivered to such Eligible Director and transferred on the books on the Company as of the effective date of such Director Termination. (c) Payment Upon Death. In the event of the death of an Eligible Director, the Corporation shall pay to the beneficiary designated by the Eligible Director on a form provided by the Corporation, or, in the absence of such designation, to the Eligible Director's estate, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of Termination multiplied by (ii) the Fair Market Value on the date of Termination. (d) Change in Control. Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Corporation shall pay an Eligible Director (or, in the event of the death of an Eligible Director following a Change in Control, the beneficiary or estate determined pursuant to (c) above), not later than 30 days after the Change in Control occurs, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of the Change in Control multiplied by (ii) the Fair Market Value on the date of the Change in Control. (e) Satisfaction of the Corporation's Obligations. Upon the delivery of a Common Share (or the payment of cash with respect to a whole or fractional Common -3-

Share) pursuant to the Plan the corresponding Unit (or fraction thereof ) shall be canceled and be of no further force or effect. (f) Dividend Equivalents. Whenever a dividend other than a dividend payable in the form of the Corporation's Common Shares is declared with respect to the Corporation's Common Shares, the number of Units credited to an Eligible Director shall be increased by the number of Units determined by dividing (i) the product of (A) the number of Units credited to such Eligible Director on the related dividend record date and (B) the amount of any cash dividend declared by the Corporation on a Common share (or, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payor, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payment date. In the case of any dividend declared on the Corporation's Common Shares which is payable in Common Shares, each Eligible Director shall be credited with an additional number of Units equal to the product of (i) the number of Units credited to such Eligible Director on the related dividend record date and (ii) the number of Common Shares (including any fraction thereof) distributable as a dividend on a Common Share. Section 4. Vesting Vesting Schedule. All Units awarded each year pursuant to Section 3 will be vested as of the date of the Grant. Section 5. Adjustment for Corporate Transactions In the event that any capitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares at a price substantially below fair market value, or other similar event affects the Common Shares such that an adjustment is required to

Share) pursuant to the Plan the corresponding Unit (or fraction thereof ) shall be canceled and be of no further force or effect. (f) Dividend Equivalents. Whenever a dividend other than a dividend payable in the form of the Corporation's Common Shares is declared with respect to the Corporation's Common Shares, the number of Units credited to an Eligible Director shall be increased by the number of Units determined by dividing (i) the product of (A) the number of Units credited to such Eligible Director on the related dividend record date and (B) the amount of any cash dividend declared by the Corporation on a Common share (or, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payor, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payment date. In the case of any dividend declared on the Corporation's Common Shares which is payable in Common Shares, each Eligible Director shall be credited with an additional number of Units equal to the product of (i) the number of Units credited to such Eligible Director on the related dividend record date and (ii) the number of Common Shares (including any fraction thereof) distributable as a dividend on a Common Share. Section 4. Vesting Vesting Schedule. All Units awarded each year pursuant to Section 3 will be vested as of the date of the Grant. Section 5. Adjustment for Corporate Transactions In the event that any capitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares at a price substantially below fair market value, or other similar event affects the Common Shares such that an adjustment is required to

preserve, or to prevent enlargement of, the benefits or potential benefits made available under the Plan, then the Board shall adjust the number and kind or shares which thereafter may be awarded under the plan and the number of Units to be granted annually to each Eligible Director under the Plan. Section 6. Administration The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to determine the terms and provisions of the awards made pursuant to the Plan and to make all other determinations necessary or advisable for the administration of the Plan provided, however, that the Plan shall be administered such that the transactions contemplated hereunder will continue to qualify for the exemptive relief available under Rule 16b-3 of the Exchange Act. Section 7. Amendment and Termination The Board may suspend, revise, amend or discontinue the Plan at any time; provided that, no such action may materially and adversely affect any rights of an Eligible Director under any Grant made pursuant to the Plan without such Director's consent. Unless the Board otherwise specifies at the time of such termination, a termination of the Plan will not result in a distribution with respect to the Units then credited to an Eligible Director under the Plan. Section 8. Effective Date of the Plan The Plan shall be effective as of December 4,1996 and shall terminate as of December 31, 2006 unless extended by the Board or terminated at an earlier date pursuant to section 7 above.

SECTION 9. GOVERNING LAW

preserve, or to prevent enlargement of, the benefits or potential benefits made available under the Plan, then the Board shall adjust the number and kind or shares which thereafter may be awarded under the plan and the number of Units to be granted annually to each Eligible Director under the Plan. Section 6. Administration The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to determine the terms and provisions of the awards made pursuant to the Plan and to make all other determinations necessary or advisable for the administration of the Plan provided, however, that the Plan shall be administered such that the transactions contemplated hereunder will continue to qualify for the exemptive relief available under Rule 16b-3 of the Exchange Act. Section 7. Amendment and Termination The Board may suspend, revise, amend or discontinue the Plan at any time; provided that, no such action may materially and adversely affect any rights of an Eligible Director under any Grant made pursuant to the Plan without such Director's consent. Unless the Board otherwise specifies at the time of such termination, a termination of the Plan will not result in a distribution with respect to the Units then credited to an Eligible Director under the Plan. Section 8. Effective Date of the Plan The Plan shall be effective as of December 4,1996 and shall terminate as of December 31, 2006 unless extended by the Board or terminated at an earlier date pursuant to section 7 above.

SECTION 9. GOVERNING LAW The Plan shall be construed in all respects under the laws of the State of New York. SECTION 10. GENERAL PROVISIONS (a) Nontransferable Grants. Grants made under the Plan may not be assigned or transferred, in whole or in part, either directly or by operation of law (except, in the event of an Eligible Director's death, by will or applicable laws of descent and distribution), including, but not by way of limitation, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Eligible Director in the Plan shall be subject to any obligation or liability of such Eligible Director. (b) No Right to Serve as A Director. The Plan shall not impose any obligations on the Corporation to retain any Eligible Director as a Director nor shall it impose any obligation on the part of any Eligible Director to remain as a Director of the Corporation. (c) No Right to Particular Assets. Nothing contained in the Plan and no action taken pursuant to the Plan shall create or be construed to create a trust of any kind or any fiduciary relationship between the Corporation and any Eligible Director, the executor, administrator or other personal representative or designated beneficiary of such Eligible Director, or any other persons. Any reserves that may be established by the Corporation in connection with Units granted under the Plan shall continue to be treated as the assets of the Corporation for Federal income tax purposes and remain subject to the claims of the Corporation's creditors. To the extent that any Eligible Director or the executor, administrator, or other personal representative of such Eligible Director, acquires a right to receive any payment from the Corporation pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Corporation. (d) No Rights as Shareholder. An Eligible Director shall have no rights as a shareholder of the Corporation with respect to any Units granted pursuant to the Plan unless and until Common Shares are delivered pursuant to Section 3 above. (e) Limitations on Liability. Neither the establishment of the Plan nor any modifications thereof nor the creation of

SECTION 9. GOVERNING LAW The Plan shall be construed in all respects under the laws of the State of New York. SECTION 10. GENERAL PROVISIONS (a) Nontransferable Grants. Grants made under the Plan may not be assigned or transferred, in whole or in part, either directly or by operation of law (except, in the event of an Eligible Director's death, by will or applicable laws of descent and distribution), including, but not by way of limitation, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Eligible Director in the Plan shall be subject to any obligation or liability of such Eligible Director. (b) No Right to Serve as A Director. The Plan shall not impose any obligations on the Corporation to retain any Eligible Director as a Director nor shall it impose any obligation on the part of any Eligible Director to remain as a Director of the Corporation. (c) No Right to Particular Assets. Nothing contained in the Plan and no action taken pursuant to the Plan shall create or be construed to create a trust of any kind or any fiduciary relationship between the Corporation and any Eligible Director, the executor, administrator or other personal representative or designated beneficiary of such Eligible Director, or any other persons. Any reserves that may be established by the Corporation in connection with Units granted under the Plan shall continue to be treated as the assets of the Corporation for Federal income tax purposes and remain subject to the claims of the Corporation's creditors. To the extent that any Eligible Director or the executor, administrator, or other personal representative of such Eligible Director, acquires a right to receive any payment from the Corporation pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Corporation. (d) No Rights as Shareholder. An Eligible Director shall have no rights as a shareholder of the Corporation with respect to any Units granted pursuant to the Plan unless and until Common Shares are delivered pursuant to Section 3 above. (e) Limitations on Liability. Neither the establishment of the Plan nor any modifications thereof nor the creation of any account under the Plan nor the payment of any benefits shall be construed as giving to any participant or other person any legal or equitable right against the Corporation (or any person connected therewith) except as provided by law or any Plan provision. In no event shall the Corporation or any person connected therewith be liable to any person for the failure of any participant or other person to be entitled to any particular tax consequences with respect to the Plan or any contribution thereto or any distributions therefrom. (f) Non-Exclusivity. The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable. (g) No Limit on Corporate Action. The existence of the Plan and the Units granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Corporation to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Corporation or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding. (h) Listing of Common Shares and Related Matters. If at any time the Board shall determine in its discretion that the listing, registration or qualification of the Common Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the delivery of -7-

Common Shares under the Plan, no Common Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board.

(d) No Rights as Shareholder. An Eligible Director shall have no rights as a shareholder of the Corporation with respect to any Units granted pursuant to the Plan unless and until Common Shares are delivered pursuant to Section 3 above. (e) Limitations on Liability. Neither the establishment of the Plan nor any modifications thereof nor the creation of any account under the Plan nor the payment of any benefits shall be construed as giving to any participant or other person any legal or equitable right against the Corporation (or any person connected therewith) except as provided by law or any Plan provision. In no event shall the Corporation or any person connected therewith be liable to any person for the failure of any participant or other person to be entitled to any particular tax consequences with respect to the Plan or any contribution thereto or any distributions therefrom. (f) Non-Exclusivity. The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable. (g) No Limit on Corporate Action. The existence of the Plan and the Units granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Corporation to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Corporation or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding. (h) Listing of Common Shares and Related Matters. If at any time the Board shall determine in its discretion that the listing, registration or qualification of the Common Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the delivery of -7-

Common Shares under the Plan, no Common Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board. (i) Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provision had not been included. 0) Incapacity. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person' s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge any liability or obligation of the Board, the Corporation and all other parties with respect thereto. (k) Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. -8-

EXHIBIT 11 MBIA INC. AND SUBSIDIARIES for the Years Ended December 31, 1996, 1995 and 1994 Computation of Earnings Per Share Assuming Full Dilution (In thousands except per share amounts)
1996 1995 1994

Common Shares under the Plan, no Common Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board. (i) Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provision had not been included. 0) Incapacity. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person' s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge any liability or obligation of the Board, the Corporation and all other parties with respect thereto. (k) Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. -8-

EXHIBIT 11 MBIA INC. AND SUBSIDIARIES for the Years Ended December 31, 1996, 1995 and 1994 Computation of Earnings Per Share Assuming Full Dilution (In thousands except per share amounts)
1996 ------------$322,163 ============= 1995 ------------$271,419 ============= 1994 ------------$260,209 =============

Net Income Fully diluted shares: Average number of common shares outstanding Assumed exercise of dilutive stock options

42,928

41,763

41,686

523 ------------43,451 ============= $ 7.41 =============

559 ------------42,322 ============= $ 6.41 =============

402 ------------42,088 ============= $ 6.18 =============

Earnings per share assuming full dilution

EXHIBIT 13 ANNUAL REPORT 1996 MBIA Inc. 113 King Street Armonk New York 10504

EXHIBIT 11 MBIA INC. AND SUBSIDIARIES for the Years Ended December 31, 1996, 1995 and 1994 Computation of Earnings Per Share Assuming Full Dilution (In thousands except per share amounts)
1996 ------------$322,163 ============= 1995 ------------$271,419 ============= 1994 ------------$260,209 =============

Net Income Fully diluted shares: Average number of common shares outstanding Assumed exercise of dilutive stock options

42,928

41,763

41,686

523 ------------43,451 ============= $ 7.41 =============

559 ------------42,322 ============= $ 6.41 =============

402 ------------42,088 ============= $ 6.18 =============

Earnings per share assuming full dilution

EXHIBIT 13 ANNUAL REPORT 1996 MBIA Inc. 113 King Street Armonk New York 10504

FINANCIAL REVIEW TABLE OF CONTENTS
Selected Financial and Statistical Data Management's Discussion and Analysis of Financial Condition and Results of Operations Report on Management's Responsibility Report of Independent Accountants Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Changes 32

34 40 40 41 42

EXHIBIT 13 ANNUAL REPORT 1996 MBIA Inc. 113 King Street Armonk New York 10504

FINANCIAL REVIEW TABLE OF CONTENTS
Selected Financial and Statistical Data Management's Discussion and Analysis of Financial Condition and Results of Operations Report on Management's Responsibility Report of Independent Accountants Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows 32

34 40 40 41 42

43 44

Notes to Consolidated Financial Statements 45 31

SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries(1)
Dollars in millions except per share amounts 1996 1995 1994 1993 1992 1991 1990 19 ========================================================================================================= GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 461 $ 348 $ 361 $ 479 $ 369 $ 269 $ 211 $ 1 Premiums earned 252 215 218 231 163 132 107 Net investment income 248 220 194 179 150 132 115 Net realized gains 12 11 10 10 10 3 --Insurance operating income 412 362 342 339 255 207 181 1 Investment management operating income (loss) 12 7 6 (1) (1) (2) --Income before income taxes 408 345 329 324 244 190 165 1 NET INCOME 322 271 260 259 189 145 127 1 NET INCOME PER COMMON SHARE $ 7.43 $ 6.43 $ 6.18 $ 6.10 $ 4.62 $ 3.74 $ 3.33 $ 2. - -------------------------------------------------------------------------------------------------------

FINANCIAL REVIEW TABLE OF CONTENTS
Selected Financial and Statistical Data Management's Discussion and Analysis of Financial Condition and Results of Operations Report on Management's Responsibility Report of Independent Accountants Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows 32

34 40 40 41 42

43 44

Notes to Consolidated Financial Statements 45 31

SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries(1)
Dollars in millions except per share amounts 1996 1995 1994 1993 1992 1991 1990 19 ========================================================================================================= GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 461 $ 348 $ 361 $ 479 $ 369 $ 269 $ 211 $ 1 Premiums earned 252 215 218 231 163 132 107 Net investment income 248 220 194 179 150 132 115 Net realized gains 12 11 10 10 10 3 --Insurance operating income 412 362 342 339 255 207 181 1 Investment management operating income (loss) 12 7 6 (1) (1) (2) --Income before income taxes 408 345 329 324 244 190 165 1 NET INCOME 322 271 260 259 189 145 127 1 NET INCOME PER COMMON SHARE $ 7.43 $ 6.43 $ 6.18 $ 6.10 $ 4.62 $ 3.74 $ 3.33 $ 2. - -------------------------------------------------------------------------------------------------------

GAAP SUMMARY BALANCE SHEET DATA: Investments $ 7,648 $ 6,607 $ 4,867 $ 3,544 $ 2,529 $ 1,961 $ 1,724 $ 1,5 Total assets 8,562 7,267 5,456 4,106 3,049 2,438 2,159 1,9 Deferred premium revenue 1,786 1,616 1,512 1,403 1,196 1,019 902 8 Loss reserves 59 43 40 34 26 21 5 Municipal investment and repurchase agreements 3,259 2,642 1,526 493 ------Long-term debt 374 374 299 299 299 199 200 1 Shareholders' equity 2,480 2,234 1,705 1,596 1,382 1,063 932 7 Book value per share 57.28 53.19 40.96 38.18 33.00 27.58 24.35 21. Dividends declared per common share 1.45 1.31 1.14 .94 .76 .62 .48 . - ------------------------------------------------------------------------------------------------------STATUTORY DATA: Net income $ 317 $ 278 $ 225 $ 258 $ 190 $ 149 $ 127 $

SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries(1)
Dollars in millions except per share amounts 1996 1995 1994 1993 1992 1991 1990 19 ========================================================================================================= GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 461 $ 348 $ 361 $ 479 $ 369 $ 269 $ 211 $ 1 Premiums earned 252 215 218 231 163 132 107 Net investment income 248 220 194 179 150 132 115 Net realized gains 12 11 10 10 10 3 --Insurance operating income 412 362 342 339 255 207 181 1 Investment management operating income (loss) 12 7 6 (1) (1) (2) --Income before income taxes 408 345 329 324 244 190 165 1 NET INCOME 322 271 260 259 189 145 127 1 NET INCOME PER COMMON SHARE $ 7.43 $ 6.43 $ 6.18 $ 6.10 $ 4.62 $ 3.74 $ 3.33 $ 2. - -------------------------------------------------------------------------------------------------------

GAAP SUMMARY BALANCE SHEET DATA: Investments $ 7,648 $ 6,607 $ 4,867 $ 3,544 $ 2,529 $ 1,961 $ 1,724 $ 1,5 Total assets 8,562 7,267 5,456 4,106 3,049 2,438 2,159 1,9 Deferred premium revenue 1,786 1,616 1,512 1,403 1,196 1,019 902 8 Loss reserves 59 43 40 34 26 21 5 Municipal investment and repurchase agreements 3,259 2,642 1,526 493 ------Long-term debt 374 374 299 299 299 199 200 1 Shareholders' equity 2,480 2,234 1,705 1,596 1,382 1,063 932 7 Book value per share 57.28 53.19 40.96 38.18 33.00 27.58 24.35 21. Dividends declared per common share 1.45 1.31 1.14 .94 .76 .62 .48 . - ------------------------------------------------------------------------------------------------------STATUTORY DATA: Net income $ 317 $ 278 $ 225 $ 258 $ 190 $ 149 $ 127 $ Capital and surplus 1,467 1,274 1,110 978 896 647 579 4 Contingency reserve 893 744 621 539 404 316 261 2 - ------------------------------------------------------------------------------------------------------Qualified statutory capital 2,360 2,018 1,731 1,517 1,300 963 840 7 Unearned premium reserve 1,918 1,733 1,620 1,474 1,242 1,044 926 8 Loss reserves 10 7 22 8 14 12 --- ------------------------------------------------------------------------------------------------------Total policyholders' reserves 4,288 3,758 3,373 2,999 2,556 2,019 1,766 1,5 Present value of installment premiums 288 235 177 186 173 151 134 Standby line of credit 725 650 600 575 500 500 500 3 - ------------------------------------------------------------------------------------------------------TOTAL CLAIMS-PAYING RESOURCES 5,301 4,643 4,150 3,760 3,229 2,670 2,400 1,9 - ------------------------------------------------------------------------------------------------------FINANCIAL RATIOS: GAAP Loss ratio 6.1% 4.9% 3.7% 3.4% 3.4% 13.0% 4.7% 0 Underwriting expense ratio 28.3 29.3 28.8 27.4 32.0 30.1 33.7 38 Combined ratio 34.4 34.2 32.5 30.8 35.4 43.1 38.4 38 Statutory Loss ratio 2.0 0.4 9.8 (3.5) 2.4 12.7 0.0 0 Underwriting expense ratio 17.6 20.6 22.9 17.6 18.3 20.4 23.4 31 Combined ratio 19.6 21.0 32.7 14.1 20.7 33.1 23.4 31 NET DEBT SERVICE OUTSTANDING $411,106 $344,037 $304,502 $266,784 $223,056 $184,604 $157,707 $137,2 NET PAR AMOUNT OUTSTANDING $233,244 $188,636 $164,318 $141,387 $112,483 $ 90,043 $ 75,979 $ 65,2 ========================================================================================================= (1) Balance sheet amounts as of December 31, 1996 - 1989 and income statement amounts for the years ended December 31, 1996 - 1990 include the accounts of MBIA Insurance Corp. of Illinois (formerly BIG Insurance Company) (See Note 1 to consolidated financial statements).

Note 1 to consolidated financial statements).

32

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries INTRODUCTION MBIA Inc. (our company or MBIA) is the world's premier financial guarantee company and a leading provider of investment management products and services. Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we provide financial guarantees to municipalities and other bond issuers. Our primary business is insuring municipal bonds issued by governmental units to finance essential public purposes. We also guarantee structured asset-backed and mortgage-backed transactions, selected corporate bonds, including investor-owned utility debt, and obligations of high-quality financial institutions. We provide these products in both the new issue and secondary markets - internationally as well as domestically. MBIA also provides investment management products and services to the public sector. These include cash management, municipal investment agreements, discretionary asset management and administrative services. In addition, through an equity investment we provide services to the municipal sector through the purchase and sale of tax liens. RESULTS OF OPERATIONS Summary The following chart presents highlights of our consolidated financial results for 1996, 1995 and 1994:
Percent Change -------------1996 1995 vs. vs. 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Net income (in millions) $ 322 $ 271 $ 260 19% 4% Per share data: Net income Operating earnings Core earnings Book value Adjusted book value

$ 7.43 $ 7.22 $ 6.62 $57.28 $82.94

$ 6.43 $ 6.35 $ 5.87 $53.19 $76.56

$ 6.18 $ 6.01 $ 5.26 $40.96 $62.35

16% 14% 13% 8% 8%

4% 6% 12% 30% 23%

We believe that core earnings, which exclude the effects of refundings and calls of our insured issues, realized capital gains and losses, accounting changes and other non-recurring items, provides the most indicative measure of our underlying profit trend. Core earnings per share of $6.62 for 1996 grew by 13% over 1995, following a 12% increase in 1995. The consistent increases in core earnings were due primarily to growth in premiums earned and net investment income generated by our insurance operations, as well as the increasing contributions of operating earnings from our investment management services businesses. Our net income grew 19% in 1996 and 4% in 1995. In 1996, on a per share basis, net income increased 16% due to the dilutive effect of the 1996 public offering of additional shares of our company. The difference between the growth rate of core earnings and net income is related to the net income effects of refunded issues and realized capital gains and losses. Operating earnings per share, which excludes the impact of realized capital gains and losses, increased 14% in 1996 and 6% in 1995. 33

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries INTRODUCTION MBIA Inc. (our company or MBIA) is the world's premier financial guarantee company and a leading provider of investment management products and services. Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we provide financial guarantees to municipalities and other bond issuers. Our primary business is insuring municipal bonds issued by governmental units to finance essential public purposes. We also guarantee structured asset-backed and mortgage-backed transactions, selected corporate bonds, including investor-owned utility debt, and obligations of high-quality financial institutions. We provide these products in both the new issue and secondary markets - internationally as well as domestically. MBIA also provides investment management products and services to the public sector. These include cash management, municipal investment agreements, discretionary asset management and administrative services. In addition, through an equity investment we provide services to the municipal sector through the purchase and sale of tax liens. RESULTS OF OPERATIONS Summary The following chart presents highlights of our consolidated financial results for 1996, 1995 and 1994:
Percent Change -------------1996 1995 vs. vs. 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Net income (in millions) $ 322 $ 271 $ 260 19% 4% Per share data: Net income Operating earnings Core earnings Book value Adjusted book value

$ 7.43 $ 7.22 $ 6.62 $57.28 $82.94

$ 6.43 $ 6.35 $ 5.87 $53.19 $76.56

$ 6.18 $ 6.01 $ 5.26 $40.96 $62.35

16% 14% 13% 8% 8%

4% 6% 12% 30% 23%

We believe that core earnings, which exclude the effects of refundings and calls of our insured issues, realized capital gains and losses, accounting changes and other non-recurring items, provides the most indicative measure of our underlying profit trend. Core earnings per share of $6.62 for 1996 grew by 13% over 1995, following a 12% increase in 1995. The consistent increases in core earnings were due primarily to growth in premiums earned and net investment income generated by our insurance operations, as well as the increasing contributions of operating earnings from our investment management services businesses. Our net income grew 19% in 1996 and 4% in 1995. In 1996, on a per share basis, net income increased 16% due to the dilutive effect of the 1996 public offering of additional shares of our company. The difference between the growth rate of core earnings and net income is related to the net income effects of refunded issues and realized capital gains and losses. Operating earnings per share, which excludes the impact of realized capital gains and losses, increased 14% in 1996 and 6% in 1995. 33

Our book value at year-end 1996 was $57.28 per share, up from $53.19 at year-end 1995 and $40.96 at yearend 1994. As with core earnings, we believe that a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of our net deferred premium revenue net of deferred acquisition costs plus the present value of unrecorded future installment

Our book value at year-end 1996 was $57.28 per share, up from $53.19 at year-end 1995 and $40.96 at yearend 1994. As with core earnings, we believe that a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of our net deferred premium revenue net of deferred acquisition costs plus the present value of unrecorded future installment premiums. The following table presents the components of our adjusted book value per share:
Percent Change -------------1996 1995 vs. vs. 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Book value $57.28 $53.19 $40.96 8% 30% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 21.34 19.73 18.63 8% 6% Present value of future installment premiums* 4.32 3.64 2.76 19% 32% - --------------------------------------------------------------------Adjusted book value $82.94 $76.56 $62.35 8% 23% - ---------------------------------------------------------------------

*The discount rate used to present value future installment premiums was 9% in 1996 and 1995 and 13% in 1994. Our adjusted book value per share was $82.94 at year-end 1996, an 8% increase from year-end 1995. The increase was due to our strong operating results, significant growth in new business written and the 1996 offering of common stock, offset partially by the impact of higher interest rates on the fair value of our fixed-income investment portfolios. In 1995, our adjusted book value grew by 23% due to strong 34

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries operating results and the added benefit of an increase in the fair value of our fixed-income portfolios resulting from a decline in interest rates at December 31, 1995 compared with December 31, 1994. Financial Guarantee Insurance Business was strong in 1996 with total gross premiums written (GPW) increasing significantly to $460.7 million from $348.5 million in 1995. GPW, as reported on our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment-based insurance policies originated in the period. To provide additional information regarding year-to-year changes in new business premium production, we discuss our adjusted gross premiums (AGP), which include our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. MBIA's premium production in terms of GPW and AGP for the last three years is presented in the following table:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Premiums written: GPW $460.7 $348.5 $360.8 32% (3)% AGP $543.8 $372.1 $362.0 46% 3 %

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries operating results and the added benefit of an increase in the fair value of our fixed-income portfolios resulting from a decline in interest rates at December 31, 1995 compared with December 31, 1994. Financial Guarantee Insurance Business was strong in 1996 with total gross premiums written (GPW) increasing significantly to $460.7 million from $348.5 million in 1995. GPW, as reported on our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment-based insurance policies originated in the period. To provide additional information regarding year-to-year changes in new business premium production, we discuss our adjusted gross premiums (AGP), which include our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. MBIA's premium production in terms of GPW and AGP for the last three years is presented in the following table:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Premiums written: GPW $460.7 $348.5 $360.8 32% (3)% AGP $543.8 $372.1 $362.0 46% 3 %

The higher year-to-year growth rates of AGP compared with GPW reflect the growing proportion of installmentbased policies written by MBIA. We estimate the present value of our total future installment premium stream on outstanding policies to be $288.0 million at year-end 1996, compared with $235.4 million at year-end 1995 and $176.9 million at year-end 1994. MUNICIPAL MARKET In 1996, we maintained our market leadership in the growing new issue municipal market. In addition, through our substantial financial and capital resources, we were able to provide insurance for several large transactions, thereby increasing our par and premium writings. In 1995, with the decline in the new issue municipal market, our par writings were flat. Our premium writings decreased, however, since they are based on total debt service written which declines with lower interest rates. Domestic new issue municipal market information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table:
Percent Change -------------1996 1995 vs. vs. Domestic Municipal 1996 1995 1994 1995 1994 - -------------------------------------------------------------------Total new issue market:* Par value (in billions) $161.9 $142.1 $154.7 14% (8)% Insured penetration 52% 47% 40% MBIA market share 40% 42% 40% MBIA insured: Par value (in billions) $ 39.2 $ 32.6 $ 32.5 20% -Premiums (in millions) GPW $364.1 $296.9 $324.4 23% (8)% AGP $357.8 $291.6 $318.4 23% (8)% - --------------------------------------------------------------------

*Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue.

STRUCTURED FINANCE MARKET The par value of issues in the asset-backed securities market (excluding private placements and mortgage-backed securities, for which market data are unavailable) increased 40% in 1996 and 43% in 1995. In 1996 and 1995, we achieved substantial gains in both our domestic new issue and secondary market structured finance business (includes asset-/mortgage-backed). Details regarding the assetbacked market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below:
Percent Change -------------1996 1995 Domestic vs. vs. Structured Finance 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Total asset-backed market:* Par value (in billions) $151.1 $108.0 $75.5 40% 43% MBIA insured: Par value (in billions) $ 20.4 $ 9.0 $ 5.7 127% 57% Premiums (in millions) GPW $ 52.3 $ 22.9 $15.8 128% 46% AGP $116.0 $ 46.8 $24.3 148% 93% - ----------------------------------------------------------------------

* Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC Indemnity Corporation (another leading Triple-A rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by 1996 growth rates of 65%, 18% and 69% for international par value, GPW and AGP, respectively. In 1995, international GPW increased by 10% and AGP increased by 24%, despite a decline in par value insured due to the effect of one large transaction in 1994. Our company's municipal and structured 35

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries finance international business volume in the new issue and secondary markets for the last three years is illustrated below:
Percent Change -------------1996 1995 vs. vs. International 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Par value (in billions) $ 3.8 $ 2.3 $ 2.6 65% (11)% Premiums: (in millions) GPW $25.2 $21.3 $19.4 18% 10 % AGP $40.6 $24.1 $19.3 69% 24 %

CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premium (ceded premium) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to certain single risk limitations and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $54.9 million, $45.1 million and $49.3 million in

STRUCTURED FINANCE MARKET The par value of issues in the asset-backed securities market (excluding private placements and mortgage-backed securities, for which market data are unavailable) increased 40% in 1996 and 43% in 1995. In 1996 and 1995, we achieved substantial gains in both our domestic new issue and secondary market structured finance business (includes asset-/mortgage-backed). Details regarding the assetbacked market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below:
Percent Change -------------1996 1995 Domestic vs. vs. Structured Finance 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Total asset-backed market:* Par value (in billions) $151.1 $108.0 $75.5 40% 43% MBIA insured: Par value (in billions) $ 20.4 $ 9.0 $ 5.7 127% 57% Premiums (in millions) GPW $ 52.3 $ 22.9 $15.8 128% 46% AGP $116.0 $ 46.8 $24.3 148% 93% - ----------------------------------------------------------------------

* Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC Indemnity Corporation (another leading Triple-A rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by 1996 growth rates of 65%, 18% and 69% for international par value, GPW and AGP, respectively. In 1995, international GPW increased by 10% and AGP increased by 24%, despite a decline in par value insured due to the effect of one large transaction in 1994. Our company's municipal and structured 35

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries finance international business volume in the new issue and secondary markets for the last three years is illustrated below:
Percent Change -------------1996 1995 vs. vs. International 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Par value (in billions) $ 3.8 $ 2.3 $ 2.6 65% (11)% Premiums: (in millions) GPW $25.2 $21.3 $19.4 18% 10 % AGP $40.6 $24.1 $19.3 69% 24 %

CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premium (ceded premium) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to certain single risk limitations and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $54.9 million, $45.1 million and $49.3 million in 1996, 1995 and 1994, respectively. Cessions as a function of GPW declined from 14% in 1994 to 12% in

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries finance international business volume in the new issue and secondary markets for the last three years is illustrated below:
Percent Change -------------1996 1995 vs. vs. International 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Par value (in billions) $ 3.8 $ 2.3 $ 2.6 65% (11)% Premiums: (in millions) GPW $25.2 $21.3 $19.4 18% 10 % AGP $40.6 $24.1 $19.3 69% 24 %

CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premium (ceded premium) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to certain single risk limitations and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $54.9 million, $45.1 million and $49.3 million in 1996, 1995 and 1994, respectively. Cessions as a function of GPW declined from 14% in 1994 to 12% in 1996. Our basic reinsurance treaty calls for a minimum cession rate of 10%. Variances above this rate generally reflect the higher utilization of treaty or facultative reinsurance required to comply with regulatory constraints or our own single risk limits. Most of our reinsurers are rated Double-A or higher by Standard & Poor's Corporation or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we believe that we will recover the reinsured portion of any losses which may occur. REVENUES Our insurance revenues are primarily comprised of premiums earned and investment income. Premiums are recognized over the life of the bonds we insure. The slow premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. PREMIUMS EARNED For approximately 80% of our insurance writings, we receive premiums upfront and earn them pro rata over the period of risk of the bond issue. Accordingly, the portion of net premiums earned on each policy in any given year represents a relatively small percentage of the total net upfront premium received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. For 20% of our new business writings - primarily our structured finance business - - we collect installment premiums. Installment premiums are credited to the deferred premium revenue account when they are received, and are recognized as revenue over each installment period - generally one year or less.

When an MBIA-insured bond issue is refunded or retired early the related deferred premium revenue is earned immediately, except for any portion which may be applied as a credit towards insuring the refunding bond issue. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below:
Percent Change --------------

When an MBIA-insured bond issue is refunded or retired early the related deferred premium revenue is earned immediately, except for any portion which may be applied as a credit towards insuring the refunding bond issue. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Premiums earned: Scheduled $207.3 $181.1 $165.3 14% 10 % Refunded 44.4 34.0 53.0 31% (36)% - --------------------------------------------------------------------Total $251.7 $215.1 $218.3 17% (1)%

The year-to-year increase in premiums earned from scheduled amortization reflects the additive effect of new business written, including the expanding installment premium activity from the structured finance and international sectors. INVESTMENT INCOME Our insurance related investment income increased to $247.6 million in 1996 and $219.9 million in 1995 from $193.9 million in 1994, growing 13% each year. These increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance related net realized capital gains were $11.7 million in 1996, $11.3 million in 1995 and $10.3 million in 1994. These realized gains were generated as a result of ongoing management of the investment portfolio. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, are allocated within the total loss reserve as case-specific reserves. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. 36

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the last three years as well as our loss provision for the last three years:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Reserves: Case-specific $20.2 $14.5 $21.9 40% (34)% Unallocated 39.1 28.0 18.2 39% 54 % - ---------------------------------------------------------------------

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the last three years as well as our loss provision for the last three years:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Reserves: Case-specific $20.2 $14.5 $21.9 40% (34)% Unallocated 39.1 28.0 18.2 39% 54 % - --------------------------------------------------------------------Total $59.3 $42.5 $40.1 40% 6 % Provision $15.3 $10.6 $ 8.1 44% 31 %

Over the three-year period from 1994 through 1996, our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. The unallocated reserve has more than doubled since year-end 1994 from $18.2 million to $39.1 million at year-end 1996. OPERATING EXPENSES Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total operating expenses, as well as related expense measures, are shown below:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Policy acquisition costs, net $24.7 $21.3 $21.9 16% (3)% Operating 46.6 41.8 41.0 12% 2 % - --------------------------------------------------------------------Total insurance operating expenses $71.3 $63.1 $62.9 13% --Expense ratio: GAAP Statutory

28.3% 17.6%

29.3% 20.6%

28.8% 22.9%

For 1996, policy acquisition costs net of deferrals increased 16% to $24.7 million following a 3% decrease in 1995, in tandem with our year-to-year fluctuations in premiums earned. The ratio of policy acquisition costs net of deferrals to earned premiums has remained constant at 10% for all three years. In 1996, operating expenses increased 12% subsequent to a relatively small increase in 1995, due to expanded marketing and surveillance initiatives and one significant structured finance transaction for which a related contingent commission was recorded as an operating expense. Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's 1996 expense ratios have improved over both 1995 and 1994.

Investment Management Services Over the last six years, our investment management businesses have expanded services to the public sector and added new revenue sources. Average assets under management for these businesses have increased from $3.2 billion in 1994 to $6.2 billion in 1996. These assets include our municipal investment agreements, pooled public funds and third-party accounts. With the growth in investments under management, these businesses generated increases in operating income in 1996 and 1995. We realized $2.6 million of net realized capital gains in 1996 following net realized losses of $6.1 million and $0.7 million for 1995 and 1994, respectively. Pretax financial results for 1996, 1995 and 1994 are summarized below:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Revenues $26.7 $19.9 $16.2 34% 23 % Expenses (14.6) (12.9) (10.6) 13% 21 % - --------------------------------------------------------------------Pretax operating income $12.1 $ 7.0 $ 5.6 72% 26 % Net realized gains (losses)

$ 2.6

$(6.1)

$(0.7)

142%

(739)%

The following provides a summary of each of our primary investment management businesses: MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue to our company at little added cost. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered investment advisers. 37

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The MBIA-MISC organization has a network of investment professionals in twenty states and the Commonwealth of Puerto Rico, providing efficient delivery of its products and services. Since its inception in 1990, MBIA-MISC has successfully grown this distribution network and its revenue base and has plans to expand into additional states, as well as products and markets. At year-end 1996, MBIA-MISC had $4.2 billion of client assets under management compared with $2.5 billion and $1.7 billion at year-end 1995 and 1994, respectively. MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides guaranteed investment agreements for bond proceeds of states and municipalities. At year-end 1996, principal and accrued interest outstanding on investment agreements was $3.3 billion compared with $2.6 billion and $1.5 billion at year-end 1995 and 1994, respectively. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.3 billion, $2.6 billion and $1.7 billion at December 31, 1996, 1995 and 1994, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC, from time to time, uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1996, our exposure to derivative financial instruments was not significant. MBIA CAPITAL MANAGEMENT CORP. (CMC) provides investment management services for IMC's

Investment Management Services Over the last six years, our investment management businesses have expanded services to the public sector and added new revenue sources. Average assets under management for these businesses have increased from $3.2 billion in 1994 to $6.2 billion in 1996. These assets include our municipal investment agreements, pooled public funds and third-party accounts. With the growth in investments under management, these businesses generated increases in operating income in 1996 and 1995. We realized $2.6 million of net realized capital gains in 1996 following net realized losses of $6.1 million and $0.7 million for 1995 and 1994, respectively. Pretax financial results for 1996, 1995 and 1994 are summarized below:
Percent Change -------------1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------Revenues $26.7 $19.9 $16.2 34% 23 % Expenses (14.6) (12.9) (10.6) 13% 21 % - --------------------------------------------------------------------Pretax operating income $12.1 $ 7.0 $ 5.6 72% 26 % Net realized gains (losses)

$ 2.6

$(6.1)

$(0.7)

142%

(739)%

The following provides a summary of each of our primary investment management businesses: MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue to our company at little added cost. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered investment advisers. 37

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The MBIA-MISC organization has a network of investment professionals in twenty states and the Commonwealth of Puerto Rico, providing efficient delivery of its products and services. Since its inception in 1990, MBIA-MISC has successfully grown this distribution network and its revenue base and has plans to expand into additional states, as well as products and markets. At year-end 1996, MBIA-MISC had $4.2 billion of client assets under management compared with $2.5 billion and $1.7 billion at year-end 1995 and 1994, respectively. MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides guaranteed investment agreements for bond proceeds of states and municipalities. At year-end 1996, principal and accrued interest outstanding on investment agreements was $3.3 billion compared with $2.6 billion and $1.5 billion at year-end 1995 and 1994, respectively. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.3 billion, $2.6 billion and $1.7 billion at December 31, 1996, 1995 and 1994, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC, from time to time, uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1996, our exposure to derivative financial instruments was not significant. MBIA CAPITAL MANAGEMENT CORP. (CMC) provides investment management services for IMC's

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The MBIA-MISC organization has a network of investment professionals in twenty states and the Commonwealth of Puerto Rico, providing efficient delivery of its products and services. Since its inception in 1990, MBIA-MISC has successfully grown this distribution network and its revenue base and has plans to expand into additional states, as well as products and markets. At year-end 1996, MBIA-MISC had $4.2 billion of client assets under management compared with $2.5 billion and $1.7 billion at year-end 1995 and 1994, respectively. MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides guaranteed investment agreements for bond proceeds of states and municipalities. At year-end 1996, principal and accrued interest outstanding on investment agreements was $3.3 billion compared with $2.6 billion and $1.5 billion at year-end 1995 and 1994, respectively. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.3 billion, $2.6 billion and $1.7 billion at December 31, 1996, 1995 and 1994, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC, from time to time, uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1996, our exposure to derivative financial instruments was not significant. MBIA CAPITAL MANAGEMENT CORP. (CMC) provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios, as well as third-party accounts. CMC assumed full management for MBIA's insurance related fixedincome investment portfolio in 1996, which was previously managed externally. Public Sector Services STRATEGIC SERVICES, INC. (SSI) was established in 1996 to provide tax administration and related services to state and local governments. In May 1996, SSI acquired an equity interest in Capital Asset Holdings (Capital Asset), a purchaser and servicer of delinquent tax certificates. It also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. At year-end 1996, Capital Asset had a tax lien portfolio of $485 million. In January 1997, SSI acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public sector entities. Interest Expense In 1996, 1995 and 1994, respectively, we incurred $33.5 million, $28.4 million and $27.2 million of interest expense. The increase in interest expense in 1996 was due to the $75 million addition to MBIA's long-term debt in December 1995. In 1995, the increase was a result of short-term bank borrowings under existing lines of credit. Taxes Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. Our effective tax rate has remained unchanged at 21% over the three-year period.

CAPITAL RESOURCES We carefully manage our capital resources to optimize our cost of capital, while maintaining appropriate claimspaying resources to sustain our Triple-A claims-paying ratings. At year-end 1996, our total capital was $2.5 billion with total long-term borrowings at $374 million. We use debt financing to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and ratios we use to measure it:
1996 1995 1994

CAPITAL RESOURCES We carefully manage our capital resources to optimize our cost of capital, while maintaining appropriate claimspaying resources to sustain our Triple-A claims-paying ratings. At year-end 1996, our total capital was $2.5 billion with total long-term borrowings at $374 million. We use debt financing to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and ratios we use to measure it:
1996 1995 1994 - -----------------------------------------------------------------Long-term debt (in millions) $374 $374 $299 Long-term debt to total capital 13% 14% 15% Ratio of earnings to fixed charges 13.2x 13.1x 13.1x

In addition, our insurance company has a $725 million irrevocable standby line of credit with a group of major worldwide banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term which expires on September 30, 2003 and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. From time to time we access the capital markets to support the growth of our businesses. At year-end 1995, we issued $75 million of debt securities, and in February 1996, we completed a public offering of 3.9 million shares of common stock, of which 770,000 shares were newly issued, for total net proceeds to MBIA of $55 million. In October 1996, to provide us with flexibility to access the capital markets when market and business conditions are favorable, we filed a registration statement with the SEC to allow us to offer and sell a combination of up to $250 million of debt securities, common stock and/or preferred stock. 38

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries As of year-end 1996, total claims-paying resources for our insurance company stood at $5.3 billion, a 14% increase over 1995. LIQUIDITY Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company which generates substantial cash flow from premium writings and investment income. In 1996, operating cash flow from our insurance company was $521 million, a 28% increase from $408 million in 1995. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1996 our insurance company paid dividends of $29 million and at year-end 1996 had additional dividend capacity of $118 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1996, cash equivalents and shortterm investments totaled $183 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $300 million with a group of worldwide banks. At year-end 1996, $29.1 million was outstanding under these facilities to fund interim cash requirements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries As of year-end 1996, total claims-paying resources for our insurance company stood at $5.3 billion, a 14% increase over 1995. LIQUIDITY Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company which generates substantial cash flow from premium writings and investment income. In 1996, operating cash flow from our insurance company was $521 million, a 28% increase from $408 million in 1995. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1996 our insurance company paid dividends of $29 million and at year-end 1996 had additional dividend capacity of $118 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1996, cash equivalents and shortterm investments totaled $183 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $300 million with a group of worldwide banks. At year-end 1996, $29.1 million was outstanding under these facilities to fund interim cash requirements. Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable highquality fixed-income securities and short-term investments. At year-end 1996, the fair value of our consolidated investment portfolio increased 16% to $7.6 billion, as shown below:
Percent Change -------------In millions 1996 1995 1996 vs. 1995 - -----------------------------------------------------------------Insurance operations: Amortized cost $4,207 $3,641 16 % Unrealized gain 148 224 (34)% - -----------------------------------------------------------------Fair value $4,355 $3,865 13 % - -----------------------------------------------------------------Municipal investment agreements: Amortized cost $3,263 $2,646 23 % Unrealized gain 30 96 (69)% - -----------------------------------------------------------------Fair value $3,293 $2,742 20 % - -----------------------------------------------------------------Total portfolio at fair value $7,648 $6,607 16 %

The growth of our insurance related investments in 1996 was the result of positive cash flows and proceeds from our financing activities, partially offset by the decrease in unrealized gains caused by higher interest rates at yearend. The fair value of investments related to our municipal investment agreement business grew 20% to $3.3 billion from $2.7 billion at year-end 1995, primarily as a result of the continued strong growth of this business.

The growth of our insurance related investments in 1996 was the result of positive cash flows and proceeds from our financing activities, partially offset by the decrease in unrealized gains caused by higher interest rates at yearend. The fair value of investments related to our municipal investment agreement business grew 20% to $3.3 billion from $2.7 billion at year-end 1995, primarily as a result of the continued strong growth of this business. Our investment portfolios are considered to be available-for-sale and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception in 1986, and since we generally intend to hold most of our investments to maturity as part of our risk-management strategy, we expect to realize a value substantially equal to amortized cost. 39

REPORT ON MANAGEMENT'S RESPONSIBILITY REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Coopers & Lybrand L.L.P., independent accountants, is retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.
/s/ David H. Elliott - -----------------------David H. Elliott Chairman and Chief Executive Officer

/s/ Julliette S. Tehrani - -----------------------Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer

REPORT ON MANAGEMENT'S RESPONSIBILITY REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Coopers & Lybrand L.L.P., independent accountants, is retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.
/s/ David H. Elliott - -----------------------David H. Elliott Chairman and Chief Executive Officer

/s/ Julliette S. Tehrani - -----------------------Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: We have audited the accompanying consolidated balance sheets of MBIA Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: We have audited the accompanying consolidated balance sheets of MBIA Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L. L. P. - ------------------------------

New York, New York February 3, 1997

40

CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 --------------------------------------Dollars in thousands except per share amounts 1996 1995 1994 ======================================================================================== REVENUES Insurance: Gross premiums written $460,675 $348,487 $360,836 Ceded premiums (54,852) (45,050) (49,281) - ---------------------------------------------------------------------------------------Net premiums written 405,823 303,437 311,555 Increase in deferred premium revenue (154,111) (88,365) (93,226) - ---------------------------------------------------------------------------------------Premiums earned (net of ceded premiums of $38,893, $30,655 and $33,340) 251,712 215,072 218,329 Net investment income 247,561 219,858 193,853 Net realized gains 11,740 11,312 10,335 Investment management services: Income 26,663 19,884 16,178 Net realized gains (losses) 2,572 (6,092) (726) Other 5,289 2,188 1,567 - ---------------------------------------------------------------------------------------Total revenues 545,537 462,222 439,536 - ---------------------------------------------------------------------------------------EXPENSES Insurance: Losses and loss adjustment 15,334 10,639 8,093 Policy acquisition costs, net 24,660 21,283 21,845 Operating 46,654 41,805 41,026 Investment management services 14,583 12,857 10,611

CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 --------------------------------------Dollars in thousands except per share amounts 1996 1995 1994 ======================================================================================== REVENUES Insurance: Gross premiums written $460,675 $348,487 $360,836 Ceded premiums (54,852) (45,050) (49,281) - ---------------------------------------------------------------------------------------Net premiums written 405,823 303,437 311,555 Increase in deferred premium revenue (154,111) (88,365) (93,226) - ---------------------------------------------------------------------------------------Premiums earned (net of ceded premiums of $38,893, $30,655 and $33,340) 251,712 215,072 218,329 Net investment income 247,561 219,858 193,853 Net realized gains 11,740 11,312 10,335 Investment management services: Income 26,663 19,884 16,178 Net realized gains (losses) 2,572 (6,092) (726) Other 5,289 2,188 1,567 - ---------------------------------------------------------------------------------------Total revenues 545,537 462,222 439,536 - ---------------------------------------------------------------------------------------EXPENSES Insurance: Losses and loss adjustment 15,334 10,639 8,093 Policy acquisition costs, net 24,660 21,283 21,845 Operating 46,654 41,805 41,026 Investment management services 14,583 12,857 10,611 Interest 33,462 28,439 27,159 Other 2,714 2,169 1,380 - ---------------------------------------------------------------------------------------Total expenses 137,407 117,192 110,114 - ---------------------------------------------------------------------------------------Income before income taxes 408,130 345,030 329,422 Provision for income taxes 85,967 73,611 69,213 - ---------------------------------------------------------------------------------------NET INCOME $322,163 $271,419 $260,209 - ---------------------------------------------------------------------------------------NET INCOME PER COMMON SHARE $ 7.43 $ 6.43 $ 6.18 - ---------------------------------------------------------------------------------------WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 43,348,048 42,240,011 42,085,943 ========================================================================================

The accompanying notes are an integral part of the consolidated financial statements. 41

CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1996 December 31, 1995 ============================================================================================== ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) $4,149,700 $3,652,621 Short-term investments, at amortized cost (which approximates fair value) 176,088 198,035 Other investments 29,101 14,064 - ---------------------------------------------------------------------------------------------4,354,889 3,864,720 Municipal investment agreement portfolio

CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1996 December 31, 1995 ============================================================================================== ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) $4,149,700 $3,652,621 Short-term investments, at amortized cost (which approximates fair value) 176,088 198,035 Other investments 29,101 14,064 - ---------------------------------------------------------------------------------------------4,354,889 3,864,720 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,263,211 and $2,645,828) 3,293,298 2,742,626 - ---------------------------------------------------------------------------------------------TOTAL INVESTMENTS 7,648,187 6,607,346 Cash and cash equivalents 7,356 23,258 Securities borrowed or purchased under agreements to resell 217,000 --Accrued investment income 104,725 87,016 Deferred acquisition costs 147,750 140,348 Prepaid reinsurance premiums 216,846 200,887 Goodwill (less accumulated amortization of $43,050 and $41,298) 105,138 106,569 Property and equipment, at cost (less accumulated depreciation of $21,642 and $17,625) 50,923 46,030 Receivable for investments sold 980 6,100 Other assets 63,110 49,896 - ---------------------------------------------------------------------------------------------TOTAL ASSETS $8,562,015 $7,267,450 - ---------------------------------------------------------------------------------------------LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $1,785,875 $1,616,315 Loss and loss adjustment expense reserves 59,314 42,505 Municipal investment agreements 2,290,609 2,026,709 Municipal repurchase agreements 968,671 615,776 Long-term debt 374,010 373,900 Short-term debt 29,100 18,000 Securities loaned or sold under agreements to repurchase 217,000 --Deferred income taxes 206,492 246,736 Payable for investments purchased 52,029 10,695 Other liabilities 99,218 82,548 - ---------------------------------------------------------------------------------------------TOTAL LIABILITIES 6,082,318 5,033,184 - ---------------------------------------------------------------------------------------------COMMITMENTS AND CONTINGENCIES Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares--10,000,000; issued and outstanding--none ----Common stock, par value $1 per share; authorized shares--200,000,000; issued shares -- 43,294,243 and 42,077,387 43,294 42,077 Additional paid-in capital 803,078 725,153 Retained earnings 1,518,994 1,261,051 Cumulative translation adjustment (1,042) 2,849 Unrealized appreciation of investments, net of deferred income tax provision of $62,706 and $112,252 116,424 207,648 Unearned compensation - restricted stock (1,051) (426) Treasury stock, at cost; 73,676 shares in 1995 --(4,086) - ---------------------------------------------------------------------------------------------TOTAL SHAREHOLDERS' EQUITY 2,479,697 2,234,266 - ----------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,562,015 $7,267,450 ==============================================================================================

The accompanying notes are an integral part of the consolidated financial statements. 42

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 1996, 1995 and 1994 - ------------------------------------------------------------------------------------------------------Unrealized U Common Stock Additional Cumulative Appreciation Compen In thousands except --------------Paid-in Retained Translation (Depreciation) Res per share amounts Shares Amount Capital Earnings Adjustment of Investments ========================================================================================================= BALANCE, JANUARY 1, 1994 42,074 $42,074 $719,281 $ 844,916 $(1,218) $ 7,080 - ------------------------------------------------------------------------------------------------------Treasury shares acquired ------------Exercise of stock options 3 3 469 (526) ----Net income ------260,209 ----Change in foreign currency translation --------1,721 --Change in unrealized depreciation of investments net of change in deferred income taxes of $50,105 ----------(93,640) Dividends (declared per common share $1.14, paid per common share $1.09) ------(47,507) ----- ------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1994 42,077 42,077 719,750 1,057,092 503 (86,560) - ------------------------------------------------------------------------------------------------------Unearned compensation restricted stock ------116 ----Exercise of stock options ----5,403 (12,806) ----Net income ------271,419 ----Change in foreign currency translation --------2,346 --Change in unrealized appreciation of investments net of change in deferred income taxes of $(158,544) ----------294,208 Dividends (declared per common share $1.31, paid per common share $1.275) ------(54,770) ----- ------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1995 42,077 42,077 725,153 1,261,051 2,849 207,648 - ------------------------------------------------------------------------------------------------------Net proceeds from issuance of shares 770 770 54,463 ------Unearned compensation restricted stock ------------Exercise of stock options 447 447 23,462 (1,757) ----Net income ------322,163 ----Change in foreign currency translation --------(3,891) --Change in unrealized appreciation of investments net of change in deferred income taxes of $49,546 ----------(91,224) Dividends (declared per common share $1.45, paid per common share $1.415) ------(62,463) ----- ------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1996 43,294 $43,294 $803,078 $1,518,994 $(1,042) $116,424 =========================================================================================================

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 1996, 1995 and 1994 - ------------------------------------------------------------------------------------------------------Unrealized U Common Stock Additional Cumulative Appreciation Compen In thousands except --------------Paid-in Retained Translation (Depreciation) Res per share amounts Shares Amount Capital Earnings Adjustment of Investments ========================================================================================================= BALANCE, JANUARY 1, 1994 42,074 $42,074 $719,281 $ 844,916 $(1,218) $ 7,080 - ------------------------------------------------------------------------------------------------------Treasury shares acquired ------------Exercise of stock options 3 3 469 (526) ----Net income ------260,209 ----Change in foreign currency translation --------1,721 --Change in unrealized depreciation of investments net of change in deferred income taxes of $50,105 ----------(93,640) Dividends (declared per common share $1.14, paid per common share $1.09) ------(47,507) ----- ------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1994 42,077 42,077 719,750 1,057,092 503 (86,560) - ------------------------------------------------------------------------------------------------------Unearned compensation restricted stock ------116 ----Exercise of stock options ----5,403 (12,806) ----Net income ------271,419 ----Change in foreign currency translation --------2,346 --Change in unrealized appreciation of investments net of change in deferred income taxes of $(158,544) ----------294,208 Dividends (declared per common share $1.31, paid per common share $1.275) ------(54,770) ----- ------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1995 42,077 42,077 725,153 1,261,051 2,849 207,648 - ------------------------------------------------------------------------------------------------------Net proceeds from issuance of shares 770 770 54,463 ------Unearned compensation restricted stock ------------Exercise of stock options 447 447 23,462 (1,757) ----Net income ------322,163 ----Change in foreign currency translation --------(3,891) --Change in unrealized appreciation of investments net of change in deferred income taxes of $49,546 ----------(91,224) Dividends (declared per common share $1.45, paid per common share $1.415) ------(62,463) ----- ------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1996 43,294 $43,294 $803,078 $1,518,994 $(1,042) $116,424 =========================================================================================================

The accompanying notes are an integral part of the consolidated financial statements. 43

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 ----------------------------------------Dollars in thousands 1996 1995 ========================================================================================================= CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 322,163 $ 271,419 $ Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (17,709) (18,530) Increase in deferred acquisition costs (7,402) (7,300) Increase in prepaid reinsurance premiums (15,959) (14,395) Increase in deferred premium revenue 170,070 102,760 Increase in loss and loss adjustment expense reserves 16,809 2,357 Depreciation 4,341 3,984 Amortization of goodwill 5,064 5,183 Amortization of bond discount, net (21,030) (18,468) Net realized gains on sale of investments (14,312) (5,222) Deferred income taxes 9,308 11,349 Other, net (4,931) 17,946 - ------------------------------------------------------------------------------------------------------Total adjustments to net income 124,249 79,664 - ------------------------------------------------------------------------------------------------------Net cash provided by operating activities 446,412 351,083 - ------------------------------------------------------------------------------------------------------CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (1,519,213) (1,149,253) ( Sale of fixed-maturity securities, net of receivable for investments sold 873,823 719,523 Redemption of fixed-maturity securities, net of receivable for investments redeemed 158,087 83,448 (Purchase) sale of short-term investments (1,523) (32,281) Purchase of other investments (14,644) (1,065) Sale of other investments 862 6,926 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,861,126) (2,210,571) ( Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,264,033 1,115,239 Capital expenditures, net of disposals (9,245) (4,923) - ------------------------------------------------------------------------------------------------------Net cash used by investing activities (1,108,946) (1,472,957) ( - -------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 55,233 --Net proceeds from issuance of long-term debt --74,344 Net proceeds from issuance of short-term debt 11,100 --Dividends paid (60,501) (53,179) Purchase of treasury stock ----Proceeds from issuance of municipal investment and repurchase agreements 2,242,872 2,351,206 Payments for drawdowns of municipal investment and repurchase agreements (1,628,310) (1,251,517) Exercise of stock options 26,238 16,338 - ------------------------------------------------------------------------------------------------------Net cash provided by financing activities 646,632 1,137,192 - ------------------------------------------------------------------------------------------------------Net (decrease) increase in cash and cash equivalents (15,902) 15,318 Cash and cash equivalents - beginning of year 23,258 7,940 - ------------------------------------------------------------------------------------------------------Cash and cash equivalents - end of year $ 7,356 $ 23,258 $ - ------------------------------------------------------------------------------------------------------SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 66,101 $ 52,410 $ Interest paid: Municipal investment and repurchase agreements $ 113,750 $ 104,301 $ Long-term debt 31,722 26,575 Short-term debt 1,309 1,228 =========================================================================================================

CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 55,233 --Net proceeds from issuance of long-term debt --74,344 Net proceeds from issuance of short-term debt 11,100 --Dividends paid (60,501) (53,179) Purchase of treasury stock ----Proceeds from issuance of municipal investment and repurchase agreements 2,242,872 2,351,206 Payments for drawdowns of municipal investment and repurchase agreements (1,628,310) (1,251,517) Exercise of stock options 26,238 16,338 - ------------------------------------------------------------------------------------------------------Net cash provided by financing activities 646,632 1,137,192 - ------------------------------------------------------------------------------------------------------Net (decrease) increase in cash and cash equivalents (15,902) 15,318 Cash and cash equivalents - beginning of year 23,258 7,940 - ------------------------------------------------------------------------------------------------------Cash and cash equivalents - end of year $ 7,356 $ 23,258 $ - ------------------------------------------------------------------------------------------------------SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 66,101 $ 52,410 $ Interest paid: Municipal investment and repurchase agreements $ 113,750 $ 104,301 $ Long-term debt 31,722 26,575 Short-term debt 1,309 1,228 =========================================================================================================

The accompanying notes are an integral part of the consolidated financial statements. 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 1. BUSINESS AND ORGANIZATION MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Service Corporation (MBIA-MISC) was formed as a subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC, which commenced operations in August 1993, provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp. which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 1. BUSINESS AND ORGANIZATION MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Service Corporation (MBIA-MISC) was formed as a subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC, which commenced operations in August 1993, provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp. which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company, its municipal cash management service businesses and public pension funds. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc. (SSI), which acquired an interest in Capital Asset Holdings (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows:

CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS The company's entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the

CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS The company's entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixedmaturity securities, other than those held in the municipal investment agreement portfolio, with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services income. Municipal investment agreement portfolio accrued interest income, receivables for investments sold and payables for investments purchased are included in the respective consolidated accounts. Other investments include the company's interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. The company records dividends from these investments as a component of investment income. In addition, the company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. At December 31, 1996, other investments also include the company's investment in Capital Asset which is accounted for on the equity method. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services income. Municipal investment agreement portfolio accrued interest income, receivables for investments sold and payables for investments purchased are included in the respective consolidated accounts. Other investments include the company's interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. The company records dividends from these investments as a component of investment income. In addition, the company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. At December 31, 1996, other investments also include the company's investment in Capital Asset which is accounted for on the equity method. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where the company insures the refunding issue, is earned at that time, since there is no longer risk to the company. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years.

PROPERTY AND EQUIPMENT Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES

PROPERTY AND EQUIPMENT Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses (LAE) are established in an amount equal to the company's estimate of the identified and unidentified losses, including costs of settlement, on the obligations it has insured. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of expected payments, including loss and LAE associated with these issues, net of expected recoveries, is allocated within the total loss reserve as case-specific reserves. Management of the company periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims, but the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet at the time such agreements are executed. The liabilities for municipal investment and repurchase agreements are carried at the face value of the agreement plus accrued interest, whereas the related assets are recorded at fair value. 46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Investment management services income includes investment income on the assets underlying the municipal investment agreement portfolio, net of interest expense at rates specified in the agreements, computed daily based upon the outstanding balances. DERIVATIVES The company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The company uses derivative financial instruments for hedging purposes as part of its overall risk management strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services income is comprised of the net investment income and operating revenues of MBIA-MISC, IMC and CMC. The operating expenses of MBIA-MISC, IMC and CMC are reported in investment management services expenses. INCOME TAXES Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Investment management services income includes investment income on the assets underlying the municipal investment agreement portfolio, net of interest expense at rates specified in the agreements, computed daily based upon the outstanding balances. DERIVATIVES The company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The company uses derivative financial instruments for hedging purposes as part of its overall risk management strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services income is comprised of the net investment income and operating revenues of MBIA-MISC, IMC and CMC. The operating expenses of MBIA-MISC, IMC and CMC are reported in investment management services expenses. INCOME TAXES Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. The company records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time the company may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholders' equity. NET INCOME PER COMMON SHARE Net income per common share is computed based on the weighted average number of shares, including common stock equivalents, outstanding during each period.

3. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: . premiums are earned only when the related risk has expired rather than over the period of the risk; . acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; . a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default.

3. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: . premiums are earned only when the related risk has expired rather than over the period of the risk; . acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; . a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on the company's reasonable estimate of the identified and unidentified losses and LAE on the insured obligations it has written; . federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; . fixed-maturity securities are reported at amortized cost rather than fair value; . tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and . certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. 47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 ---------------------------------------In thousands 1996 1995 1994 - ---------------------------------------------------------------------------Company's GAAP shareholders' equity $2,479,697 $2,234,266 $1,704,716 Contributions to MBIA Corp. 361,494 341,202 273,273 Premium revenue recognition (368,762) (328,450) (296,524) Deferral of acquisition costs (147,750) (140,348) (133,048) Unrealized (gains) losses (179,129) (319,900) 132,852 Contingency reserve (892,793) (743,510) (620,988) Loss and loss adjustment expense reserves 39,065 28,024 18,181 Deferred income taxes 206,234 239,304 69,371 Tax and loss bonds 103,008 70,771 50,471 Goodwill (100,718) (105,614) (110,543) Other (33,324) (1,607) 22,277 - ---------------------------------------------------------------------------Statutory capital and surplus $1,467,022 $1,274,138 $1,110,038 - ---------------------------------------------------------------------------Consolidated net income of MBIA Corp., determined in accordance with statutory accounting practices for the years ended December 31, 1996, 1995 and 1994 was $316.6 million, $278.3 million and $224.9 million, respectively. 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - ---------------------------------------------------Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996, 1995 and 1994, respectively, related to refunded and called bonds. 5. INVESTMENTS - -----------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 ---------------------------------------In thousands 1996 1995 1994 - ---------------------------------------------------------------------------Company's GAAP shareholders' equity $2,479,697 $2,234,266 $1,704,716 Contributions to MBIA Corp. 361,494 341,202 273,273 Premium revenue recognition (368,762) (328,450) (296,524) Deferral of acquisition costs (147,750) (140,348) (133,048) Unrealized (gains) losses (179,129) (319,900) 132,852 Contingency reserve (892,793) (743,510) (620,988) Loss and loss adjustment expense reserves 39,065 28,024 18,181 Deferred income taxes 206,234 239,304 69,371 Tax and loss bonds 103,008 70,771 50,471 Goodwill (100,718) (105,614) (110,543) Other (33,324) (1,607) 22,277 - ---------------------------------------------------------------------------Statutory capital and surplus $1,467,022 $1,274,138 $1,110,038 - ---------------------------------------------------------------------------Consolidated net income of MBIA Corp., determined in accordance with statutory accounting practices for the years ended December 31, 1996, 1995 and 1994 was $316.6 million, $278.3 million and $224.9 million, respectively. 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - ---------------------------------------------------Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996, 1995 and 1994, respectively, related to refunded and called bonds. 5. INVESTMENTS - ----------------The company's investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. The company's investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of the company, as of December 31, 1996 and 1995: Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -----------------------------------------------------------------------------December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 533,666 $ 13,657 $ (997) $ 546,326 Corporate and other obligations 2,718,585 34,559 (16,824) 2,736,320 Mortgage-backed 1,263,511 20,201 (5,460) 1,278,252 Tax-exempt bonds State and municipal obligations 2,925,099 137,389 (4,300) 3,058,188 - -----------------------------------------------------------------------------Total $7,440,861 $205,806 $(27,581) $7,619,086 - ------------------------------------------------------------------------------

Amortized

Gross Unrealized

Gross Unrealized

Fair

Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -----------------------------------------------------------------------------December 31, 1995 Taxable bonds United States Treasury and Government Agency $ 334,289 $ 30,594 $ (1) $ 364,882 Corporate and other obligations 2,029,269 74,620 (1,603) 2,102,286 Mortgage-backed 1,271,559 46,180 (1,843) 1,315,896 Tax-exempt bonds State and municipal obligations 2,637,732 175,081 (2,595) 2,810,218 - -----------------------------------------------------------------------------Total $6,272,849 $326,475 $(6,042) $6,593,282 - ------------------------------------------------------------------------------

Fixed-maturity investments carried at fair value of $7.8 million and $8.2 million as of December 31, 1996 and 1995, respectively, were on deposit with various regulatory authorities to comply with insurance laws. A portion of the obligations under municipal investment and repurchase agreements require the company to pledge securities as collateral. As of December 31, 1996 and 1995, the fair value of securities pledged as collateral with respect to these obligations approximated $1.5 billion and $1.2 billion, respectively. The table below sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1996. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. 48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
In thousands Amortized Cost Fair Value - ---------------------------------------------------------------Maturity Within 1 year $ 601,050 $ 601,033 Beyond 1 year but within 5 years 1,555,293 1,586,868 Beyond 5 years but within 10 years 1,458,526 1,507,290 Beyond 10 years but within 15 years 901,449 943,746 Beyond 15 years but within 20 years 1,022,485 1,051,583 Beyond 20 years 638,547 650,314 - ---------------------------------------------------------------6,177,350 6,340,834 Mortgage-backed 1,263,511 1,278,252 - ---------------------------------------------------------------Total fixed-maturities and short-term investments $7,440,861 $7,619,086 - ----------------------------------------------------------------

6. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 -------------------------------In thousands 1996 1995 1994 - -------------------------------------------------------------Fixed-maturities $245,109 $216,653 $194,163 Short-term investments 5,244 5,834 2,332 Other investments 62 217 167 - -------------------------------------------------------------Gross investment income 250,415 222,704 196,662

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
In thousands Amortized Cost Fair Value - ---------------------------------------------------------------Maturity Within 1 year $ 601,050 $ 601,033 Beyond 1 year but within 5 years 1,555,293 1,586,868 Beyond 5 years but within 10 years 1,458,526 1,507,290 Beyond 10 years but within 15 years 901,449 943,746 Beyond 15 years but within 20 years 1,022,485 1,051,583 Beyond 20 years 638,547 650,314 - ---------------------------------------------------------------6,177,350 6,340,834 Mortgage-backed 1,263,511 1,278,252 - ---------------------------------------------------------------Total fixed-maturities and short-term investments $7,440,861 $7,619,086 - ----------------------------------------------------------------

6. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 -------------------------------In thousands 1996 1995 1994 - -------------------------------------------------------------Fixed-maturities $245,109 $216,653 $194,163 Short-term investments 5,244 5,834 2,332 Other investments 62 217 167 - -------------------------------------------------------------Gross investment income 250,415 222,704 196,662 Investment expenses 2,854 2,846 2,809 - -------------------------------------------------------------Net investment income 247,561 219,858 193,853 Net realized gains (losses): Fixed-maturities Gains 16,760 9,941 9,635 Losses (5,353) (2,537) (8,851) - -------------------------------------------------------------Net 11,407 7,404 784 - -------------------------------------------------------------Other investments Gains 333 3,917 9,551 Losses --(9) --- -------------------------------------------------------------Net 333 3,908 9,551 - -------------------------------------------------------------Total net realized gains 11,740 11,312 10,335 - -------------------------------------------------------------Total investment income $259,301 $231,170 $204,188 - --------------------------------------------------------------

Total investment income excludes investment income and realized gains and losses from MBIA-MISC, IMC and CMC, which are reported in investment management services revenues.

Net unrealized gains consist of:
As of December 31 --------------------In thousands 1996 1995 - ------------------------------------------------Fixed-maturities:

Net unrealized gains consist of:
As of December 31 --------------------In thousands 1996 1995 - ------------------------------------------------Fixed-maturities: Gains $205,806 $326,475 Losses (27,581) (6,042) - ------------------------------------------------Net 178,225 320,433 Other investments: Gains 934 287 Losses (29) (820) - ------------------------------------------------Net 905 (533) - ------------------------------------------------Total 179,130 319,900 Deferred income taxes 62,706 112,252 - ------------------------------------------------Unrealized gains, net $116,424 $207,648 - -------------------------------------------------

The deferred income taxes relate primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity. The change in net unrealized gains (losses) consists of:
Years ended December 31 -------------------------------In thousands 1996 1995 1994 - -----------------------------------------------------------------Fixed-maturities $(142,208) $454,805 $(351,040) Other investments 1,438 (2,053) (9,373) - -----------------------------------------------------------------Total (140,770) 452,752 (360,413) Deferred income taxes (49,546) 158,544 (50,105) - -----------------------------------------------------------------Unrealized gains (losses), net $ (91,224) $294,208 $(310,308) - -----------------------------------------------------------------7. INCOME TAXES - ----------------

The company files a consolidated tax return that includes all of its U.S. subsidiaries. The provision for income taxes is composed of:
Years ended December 31 ------------------------------In thousands 1996 1995 1994 - -----------------------------------------------------------------Current $76,659 $62,262 $50,146 Deferred 9,308 11,349 19,067 - -----------------------------------------------------------------Total $85,967 $73,611 $69,213 - ------------------------------------------------------------------

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, the company's effective income tax rate differs from the statutory rate on ordinary income. The reasons for the company's lower effective tax rates are as follows:
Years ended December 31 ----------------------------1996 1995 1994 - -------------------------------------------------------------------Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (12.6) (13.4) (12.9) Amortization of goodwill 0.4 0.5 0.5 Other (1.7) (0.8) (1.6) - -------------------------------------------------------------------Provision for income taxes 21.1% 21.3% 21.0% - --------------------------------------------------------------------

The company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below:
In thousands 1996 1995 - ---------------------------------------------------------------Deferred tax assets Tax and loss bonds $102,222 $ 71,183 Alternative minimum tax credit carryforward 58,067 36,871 Loss and loss adjustment expense reserves 13,673 9,808 Other 13,347 4,459 - ---------------------------------------------------------------Total gross deferred tax assets 187,309 122,321 - ---------------------------------------------------------------Deferred tax liabilities Contingency reserve 180,957 127,361 Deferred premium revenue 74,082 65,155 Deferred acquisition costs 51,713 51,455 Unrealized gains 62,706 112,252 Contingent commissions 1,052 4,672 Other 23,291 8,162 - ---------------------------------------------------------------Total gross deferred tax liabilities 393,801 369,057 - ---------------------------------------------------------------Net deferred tax liability $206,492 $246,736 - ----------------------------------------------------------------

8. DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department.

8. DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends that can be paid in any 12-month period, MBIA Corp. had $118 million available for the payment of dividends to the company as of December 31, 1996. In 1996, 1995 and 1994, MBIA Corp. declared and paid dividends of $29 million, $83 million and $38 million, respectively, to the company. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1996. 9. LONG-TERM DEBT AND LINES OF CREDIT Long-term debt consists of:
As of December 31 --------------------In thousands 1996 1995 - ------------------------------------------------9.000% Notes due 2001 $100,000 $100,000 9.375% Notes due 2011 100,000 100,000 8.200% Debentures due 2022 100,000 100,000 7.000% Debentures due 2025 75,000 75,000 - ------------------------------------------------375,000 375,000 Less unamortized discount 990 1,100 - ------------------------------------------------Total $374,010 $373,900 - -------------------------------------------------

The company's long-term debt is subject to certain covenants, none of which significantly restrict the company's operating activities or dividend-paying ability. MBIA Corp. has a standby line of credit commitment in the amount of $725 million with a group of major banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1996 in excess of the greater of $500 million or 6.25% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on September 30, 2003, and contains an annual renewal provision subject to approval by the bank group. The company and MBIA Corp. maintain bank liquidity facilities aggregating $300 million. At December 31, 1996, $29.1 million was outstanding under these facilities. 50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. 10. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. 10. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Obligations under municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet based upon proceeds received at the time such agreements are executed plus unpaid accrued interest from that date. Upon the occurrence of certain contractually agreed upon events, some of these funds may be withdrawn at various times prior to maturity at the option of the investor. As of December 31, 1996, the interest rates on these agreements ranged from 3.6% to 9.6%. Principal payments due under these investment agreements in each of the next five years ending December 31, and thereafter, based upon expected withdrawal dates, were as follows: In thousands Principal Amount Expected withdrawal date
1997 $1,218,581 1998 740,415 1999 300,745 2000 101,727 2001 14,444 Thereafter 845,210 - ---------------------------------------------Total $3,221,122 - ----------------------------------------------

IMC also provides agreements obligating it to purchase designated securities in a bond reserve fund at par value upon the occurrence of certain contractually agreed upon events. The opportunities and risks in these agreements are analogous to those of municipal investment agreements and municipal repurchase agreements. The total par value of securities subject to these agreements was $43 million at December 31, 1996. 11. NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp.

As of December 31, 1996, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-42 years. The distribution of net insurance in force by geographic location and type of bond, excluding $3.3 billion and $2.7 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1996 and 1995, respectively, is set forth in the following tables:
As of December 31 - ------------------------------------------------------------------------------------------------------$ in billions 1996 1995 - -------------------------------------------------------------------------------------------------------

As of December 31, 1996, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-42 years. The distribution of net insurance in force by geographic location and type of bond, excluding $3.3 billion and $2.7 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1996 and 1995, respectively, is set forth in the following tables:
As of December 31 - ------------------------------------------------------------------------------------------------------$ in billions 1996 1995 - ------------------------------------------------------------------------------------------------------Number % of Net Number Net Insurance of Issues Insurance Net Insurance of Issues I Geographic Location In Force Outstanding In Force In Force Outstanding - --------------------------------------------------------------------------------------------------Domestic California $ 60.7 3,378 14.8% $ 51.2 3,122 New York 30.4 4,819 7.4 27.4 4,679 Florida 29.6 1,632 7.2 26.9 1,684 Texas 21.9 2,052 5.3 20.4 2,031 Pennsylvania 21.2 2,216 5.1 19.7 2,143 New Jersey 18.8 1,863 4.6 16.4 1,730 Illinois 18.5 1,145 4.5 15.0 1,090 Ohio 11.1 1,032 2.7 9.1 1,017 Massachusetts 10.9 1,100 2.6 9.3 1,070 Michigan 9.5 1,021 2.3 7.9 1,012 - --------------------------------------------------------------------------------------------------Subtotal 232.6 20,258 56.5 203.3 19,578 Other States 170.1 11,502 41.4 135.6 11,147 - --------------------------------------------------------------------------------------------------Total domestic 402.7 31,760 97.9 338.9 30,725 International 8.4 169 2.1 5.1 53 - --------------------------------------------------------------------------------------------------Total $411.1 31,929 100.0% $344.0 30,778 - ---------------------------------------------------------------------------------------------------

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
As of December 31 - ------------------------------------------------------------------------------------------------------$ in billions 1996 1995 - --------------------------------------------------------------------------------------------------Number % of Net Number Net Insurance of Issues Insurance Net Insurance of Issues I Type of Bond In Force Outstanding In Force In Force Outstanding - --------------------------------------------------------------------------------------------------Domestic Municipal: General obligation $110.5 11,763 26.9% $ 91.6 11,445 Utilities 67.9 4,799 16.5 60.3 4,931 Health care 54.0 2,386 13.1 51.9 2,458 Transportation 30.3 1,520 7.4 25.5 1,562 Special revenue 28.9 1,543 7.0 24.4 1,445 Industrial development and pollution control revenue 18.1 931 4.4 17.2 924 Higher education 17.8 1,309 4.3 15.2 2,671 Housing 17.7 2,455 4.3 15.8 1,261 Other 3.8 169 0.9 7.3 134 - --------------------------------------------------------------------------------------------------Total municipal 349.0 26,875 84.8 309.2 26,831 Structured finance* 38.6 349 9.4 20.2 256 Other 15.1 4,536 3.7 9.5 3,638 - --------------------------------------------------------------------------------------------------Total domestic 402.7 31,760 97.9 338.9 30,725 - --------------------------------------------------------------------------------------------------International Infrastructure 3.6 121 0.9 1.6 34 Structured finance* 2.1 22 0.5 1.6 8 Other 2.7 26 0.7 1.9 11 - ---------------------------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
As of December 31 - ------------------------------------------------------------------------------------------------------$ in billions 1996 1995 - --------------------------------------------------------------------------------------------------Number % of Net Number Net Insurance of Issues Insurance Net Insurance of Issues I Type of Bond In Force Outstanding In Force In Force Outstanding - --------------------------------------------------------------------------------------------------Domestic Municipal: General obligation $110.5 11,763 26.9% $ 91.6 11,445 Utilities 67.9 4,799 16.5 60.3 4,931 Health care 54.0 2,386 13.1 51.9 2,458 Transportation 30.3 1,520 7.4 25.5 1,562 Special revenue 28.9 1,543 7.0 24.4 1,445 Industrial development and pollution control revenue 18.1 931 4.4 17.2 924 Higher education 17.8 1,309 4.3 15.2 2,671 Housing 17.7 2,455 4.3 15.8 1,261 Other 3.8 169 0.9 7.3 134 - --------------------------------------------------------------------------------------------------Total municipal 349.0 26,875 84.8 309.2 26,831 Structured finance* 38.6 349 9.4 20.2 256 Other 15.1 4,536 3.7 9.5 3,638 - --------------------------------------------------------------------------------------------------Total domestic 402.7 31,760 97.9 338.9 30,725 - --------------------------------------------------------------------------------------------------International Infrastructure 3.6 121 0.9 1.6 34 Structured finance* 2.1 22 0.5 1.6 8 Other 2.7 26 0.7 1.9 11 - --------------------------------------------------------------------------------------------------Total international 8.4 169 2.1 5.1 53 - --------------------------------------------------------------------------------------------------Total $411.1 31,929 100.0% $344.0 30,778 - ---------------------------------------------------------------------------------------------------

* Asset-/mortage-backed

12. REINSURANCE MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $57.6 billion and $50.1 billion, at December 31, 1996 and 1995, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 - -------------------------------------------------------------------In billions 1996 1995 - ---------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - ---------------------------------------------------------------Domestic California $ 9.4 16.2% $ 8.8 17.5% New York 6.2 10.7 5.7 11.4 New Jersey 3.3 5.7 3.1 6.1 Texas 2.9 5.1 2.8 5.6 Pennsylvania 2.9 5.1 2.7 5.4 Illinois 2.6 4.5 2.2 4.5 Florida 2.4 4.1 2.3 4.6

12. REINSURANCE MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $57.6 billion and $50.1 billion, at December 31, 1996 and 1995, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 - -------------------------------------------------------------------In billions 1996 1995 - ---------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - ---------------------------------------------------------------Domestic California $ 9.4 16.2% $ 8.8 17.5% New York 6.2 10.7 5.7 11.4 New Jersey 3.3 5.7 3.1 6.1 Texas 2.9 5.1 2.8 5.6 Pennsylvania 2.9 5.1 2.7 5.4 Illinois 2.6 4.5 2.2 4.5 Florida 2.4 4.1 2.3 4.6 Washington 1.9 3.2 1.4 2.7 District of Columbia 1.5 2.7 1.5 3.0 Massachusetts 1.4 2.5 1.1 2.1 Ohio 1.3 2.3 1.0 2.0 Puerto Rico 1.2 2.1 1.3 2.6 - ---------------------------------------------------------------Subtotal 37.0 64.2 33.9 67.5 Other states 16.9 29.4 14.4 28.8 - ---------------------------------------------------------------Total domestic 53.9 93.6 48.3 96.3 International 3.7 6.4 1.8 3.7 - ---------------------------------------------------------------Total $57.6 100.0% $50.1 100.0% - ----------------------------------------------------------------

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
As of December 31 - --------------------------------------------------------------------------In billions 1996 1995 - ----------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ----------------------------------------------------------------------Domestic Municipal: General obligation $14.4 24.9% $11.7 23.3% Utilities 10.2 17.7 9.0 18.0 Transportation 6.4 11.1 5.5 11.0 Health care 6.3 11.0 6.6 13.1 Special revenue 3.4 5.9 3.2 6.4 Industrial development and pollution control revenue 3.2 5.6 3.0 6.0 Housing 1.6 2.7 1.4 2.8 Higher education 1.5 2.6 1.2 2.4 Other 1.0 1.7 2.4 4.8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
As of December 31 - --------------------------------------------------------------------------In billions 1996 1995 - ----------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ----------------------------------------------------------------------Domestic Municipal: General obligation $14.4 24.9% $11.7 23.3% Utilities 10.2 17.7 9.0 18.0 Transportation 6.4 11.1 5.5 11.0 Health care 6.3 11.0 6.6 13.1 Special revenue 3.4 5.9 3.2 6.4 Industrial development and pollution control revenue 3.2 5.6 3.0 6.0 Housing 1.6 2.7 1.4 2.8 Higher education 1.5 2.6 1.2 2.4 Other 1.0 1.7 2.4 4.8 - ----------------------------------------------------------------------Total municipal 48.0 83.2 44.0 87.8 Structured finance* 4.5 7.9 3.6 7.2 Other 1.4 2.5 0.7 1.3 - ----------------------------------------------------------------------Total domestic 53.9 93.6 48.3 96.3 - ----------------------------------------------------------------------International Infrastructure 1.6 2.7 0.7 1.4 Structured finance* 1.1 1.9 0.2 0.5 Other 1.0 1.8 0.9 1.8 - ----------------------------------------------------------------------Total international 3.7 6.4 1.8 3.7 - ----------------------------------------------------------------------Total $57.6 100.0% $50.1 100.0% - -----------------------------------------------------------------------

* Asset-/mortgage-backed 13. PENSION AND PROFIT SHARING PLANS The company has a pension plan covering substantially all employees. The pension plan is a defined contribution plan and the company contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1996, 1995 and 1994 was $3.9 million, $3.6 million and $3.3 million, respectively. The company also has a profit sharing/401(k) plan that allows eligible employees to contribute up to 10% of eligible compensation. The company matches employee contributions up to the first 5% of total compensation. Company contributions to the profit sharing plan aggregated $1.7 million, $1.5 million and $1.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. The 401(k) plan company match amounts are invested in common stock of the company. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. Of the above amounts for the pension and profit sharing plans, $3.0 million, $2.7 million and $2.6 million for the years ended December 31, 1996, 1995 and 1994, respectively, are included in policy acquisition costs. 14. LONG-TERM INCENTIVE PLANS On March 2, 1987, the company adopted a plan for key employees of the company and its subsidiaries to enable those employees to acquire shares of common stock of the company or to benefit from appreciation in the price of the common stock of the company. Options granted will either be Incentive Stock Options (ISOs), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (NQSOs). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the company's common

14. LONG-TERM INCENTIVE PLANS On March 2, 1987, the company adopted a plan for key employees of the company and its subsidiaries to enable those employees to acquire shares of common stock of the company or to benefit from appreciation in the price of the common stock of the company. Options granted will either be Incentive Stock Options (ISOs), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (NQSOs). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the company's common stock as determined on the date granted. Options will be exercisable as specified at the time of grant and expire ten years from the date of grant (or shorter if specified or following termination of employment). The Board of Directors of the company has authorized a maximum of 4,753,011 shares of the company's common stock to be granted as options. As of December 31, 1996, 3,449,587 options had been granted net of expirations and cancellations, leaving the total number available for future grants at 1,303,424. Options granted through 1990 are exercisable in equal annual installments on each of the first three anniversaries of the grant at 100% of the market price at the date of grant. The options granted from 1991 through 1994 are exercisable in five equal annual installments commencing one year after the date of grant. On all options granted from 1991 through 1994, accelerated vesting and exercisability of those options is possible if the company's return on equity for the year is at least equal to the threshold return on equity specified in the annual financial plan and if earnings per share are at least 2.5% greater than plan earnings per share. In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term Incentive Program." The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of the company's stock. Awards under the long-term program will be divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor) to be paid in cash or shares of company stock. Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. The awards under the long-term program typically will be granted from the Vice President level up to and including the Chairman and Chief Executive Officer. The ABV portion of the long-term incentive program may be awarded every other year. The December 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12%. The amount to be 53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 1999 in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every other year with concomitant payments occurring after the three-year cycle. During 1996 and 1995, $2.9 million and $0.2 million, respectively, were recorded as a charge related to the December 1995 ABV award. Of these amounts, $1.6 million and $0.1 million were included in policy acquisition costs for the same respective periods. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair value (closing price) of the stock on the date of the grant. Each option vests over five years and has a ten-year term. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1996, 156,370 options were awarded. In December 1995, the company adopted a restricted stock program whereby key executive officers were granted restricted shares of the company's stock. Shares are awarded in the name of the employee, who has all rights of a shareholder, subject to certain restrictions or forfeitures. This stock award may only be sold three years from the date of grant, at which time the award fully vests.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 1999 in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every other year with concomitant payments occurring after the three-year cycle. During 1996 and 1995, $2.9 million and $0.2 million, respectively, were recorded as a charge related to the December 1995 ABV award. Of these amounts, $1.6 million and $0.1 million were included in policy acquisition costs for the same respective periods. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair value (closing price) of the stock on the date of the grant. Each option vests over five years and has a ten-year term. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1996, 156,370 options were awarded. In December 1995, the company adopted a restricted stock program whereby key executive officers were granted restricted shares of the company's stock. Shares are awarded in the name of the employee, who has all rights of a shareholder, subject to certain restrictions or forfeitures. This stock award may only be sold three years from the date of grant, at which time the award fully vests. In 1996 and 1995, respectively, a total of 7,753 and 5,640 restricted shares of the company's stock were granted. The fair value of the shares awarded in 1996 and 1995 determined on the grant date, was $0.8 million and $0.4 million, respectively, and has been recorded as "Unearned compensation - restricted stock" and is shown as a separate component of shareholders' equity. Unearned compensation is amortized to expense over the three-year vesting period. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required the company to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may continue to account for their employee stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. Had compensation cost for the company's stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1996 are not likely to be representative of the effects on reported net income and earnings per share for future years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively; exercise prices $101.875 and $77.125; dividend yields of 1.492% and 1.937%; expected volatility of .2110 and .2787; riskfree interest rates of 5.96% and 5.97%; and expected option terms of 5.52 years for both grants. A summary of the company's Plan as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below:
1996 ---------------------------Weighted Number Average

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively; exercise prices $101.875 and $77.125; dividend yields of 1.492% and 1.937%; expected volatility of .2110 and .2787; riskfree interest rates of 5.96% and 5.97%; and expected option terms of 5.52 years for both grants. A summary of the company's Plan as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below:
1996 ---------------------------Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------Outstanding at beginning of year 1,772,480 $ 44.850 Granted 156,370 101.875 Exercised 520,532 82.205 Expired or canceled 22,560 59.210 - --------------------------------------------------------------------Outstanding at year-end 1,385,758 $ 55.390 - --------------------------------------------------------------------Exercisable at year-end 795,428 $ 43.410 - --------------------------------------------------------------------Weighted-average fair value per share of options granted during the year

$28.17

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
1995 --------------------------Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------Outstanding at beginning of year 2,091,087 $40.600 Granted 97,300 77.125 Exercised 382,447 68.957 Expired or canceled 33,460 58.671 - --------------------------------------------------------------------Outstanding at year-end 1,772,480 $44.850 - --------------------------------------------------------------------Exercisable at year-end 1,177,100 $37.160 - --------------------------------------------------------------------Weighted-average fair value per share of options granted during the year

$23.59

1994 --------------------------Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------Outstanding at beginning of year 1,591,487 $35.640 Granted 552,700 54.500 Exercised 47,080 57.902 Expired or canceled 6,020 60.937 - --------------------------------------------------------------------Outstanding at year-end 2,091,087 $40.600 - --------------------------------------------------------------------Exercisable at year-end 1,376,847 $32.240 - ---------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
1995 --------------------------Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------Outstanding at beginning of year 2,091,087 $40.600 Granted 97,300 77.125 Exercised 382,447 68.957 Expired or canceled 33,460 58.671 - --------------------------------------------------------------------Outstanding at year-end 1,772,480 $44.850 - --------------------------------------------------------------------Exercisable at year-end 1,177,100 $37.160 - --------------------------------------------------------------------Weighted-average fair value per share of options granted during the year

$23.59

1994 --------------------------Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------Outstanding at beginning of year 1,591,487 $35.640 Granted 552,700 54.500 Exercised 47,080 57.902 Expired or canceled 6,020 60.937 - --------------------------------------------------------------------Outstanding at year-end 2,091,087 $40.600 - --------------------------------------------------------------------Exercisable at year-end 1,376,847 $32.240 - --------------------------------------------------------------------Weighted-average fair value per share of options granted during the year

$16.67

The following table summarizes information about the Plan's stock options at December 31, 1996:
Weighted-Average Range of Number Outstanding Remaining Contractual Weighted-Average Number Exercisable We Exercise Prices at 12/31/96 Life in Years Exercise Price at 12/31/96 - ------------------------------------------------------------------------------------------------------$16.50 to $41.125 403,018 3.16 $29.680 403,018 $50.00 to $60.125 576,250 7.15 53.530 272,650 $69.00 to $101.875 406,490 8.26 83.510 119,760 - ------------------------------------------------------------------------------------------------------Total 1,385,758 6.32 $55.390 795,428 - -------------------------------------------------------------------------------------------------------

15. SHAREHOLDERS' RIGHTS PLAN In December 1991, the Board of Directors of the company declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of the company's common stock. Each Right entitles its holder to purchase from the company one one-hundredth of a share of the company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the company (the Shares Acquisition Date) that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the company's common stock and (ii) ten business days (or later as may be

The following table summarizes information about the Plan's stock options at December 31, 1996:
Weighted-Average Range of Number Outstanding Remaining Contractual Weighted-Average Number Exercisable We Exercise Prices at 12/31/96 Life in Years Exercise Price at 12/31/96 - ------------------------------------------------------------------------------------------------------$16.50 to $41.125 403,018 3.16 $29.680 403,018 $50.00 to $60.125 576,250 7.15 53.530 272,650 $69.00 to $101.875 406,490 8.26 83.510 119,760 - ------------------------------------------------------------------------------------------------------Total 1,385,758 6.32 $55.390 795,428 - -------------------------------------------------------------------------------------------------------

15. SHAREHOLDERS' RIGHTS PLAN In December 1991, the Board of Directors of the company declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of the company's common stock. Each Right entitles its holder to purchase from the company one one-hundredth of a share of the company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the company (the Shares Acquisition Date) that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the company's common stock and (ii) ten business days (or later as may be determined by the Board of Directors) after the announcement or commencement of a tender offer or exchange offer which, if successful, would result in the bidder owning 10% or more of the outstanding shares of the company's common stock. However, no person shall be deemed to have acquired or obtained the right to acquire the beneficial ownership of 10% or more of the outstanding shares of the company's common stock, if the Board of Directors determines that such acquisition is inadvertent, and such person promptly divests itself of a sufficient number of shares to be below the 10% ownership threshold. If the acquiring person or group acquires beneficial ownership of 10% or more of the company's common stock (except pursuant to a tender or exchange offer for all outstanding common stock of the company, determined by the company's independent directors to be at a fair price and in the best interests of the company and its shareholders), each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the company having a fair value of $320. Similarly, if after an acquiring person or group so acquires 10% or more of the company's common stock, the company is acquired in a merger or other business combination and is not the surviving entity, or its common stock is changed or exchanged in whole or in part, or 50% or more of the company's assets, cash flow or earning power is sold, each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the acquiring company having a fair value of $320. The Board of Directors may redeem the Rights in whole at $.01 per Right at any time prior to ten business days following the Shares Acquisition Date. Further, at any time after a person or group acquires 10% or more, but less than 50%, of the company's common stock, the Board of Directors of the company may exchange the Rights (other than those held by the acquirer) in whole or in part, at an exchange ratio of one share of common stock per Right. The Board of Directors may also amend the Rights at any time prior to the Shares Acquisition Date. The Rights will expire on December 12, 2001, unless earlier redeemed or exchanged. 55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 16. RELATED PARTY TRANSACTIONS Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association, one of which is a former principal shareholder, which had their Standard & Poor's Corporation claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent instead of to the former Association member as was previously required. The aggregate outstanding exposure on these surety bonds as of December 31, 1996 is $340 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 16. RELATED PARTY TRANSACTIONS Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association, one of which is a former principal shareholder, which had their Standard & Poor's Corporation claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent instead of to the former Association member as was previously required. The aggregate outstanding exposure on these surety bonds as of December 31, 1996 is $340 million. In 1995, the company sold 78,000 shares of Credit Local de France, a major shareholder. Realized gains from the sale amounted to $3.5 million. The company had investment management and advisory agreements with an affiliate of a former principal shareholder, which provided for payment of fees on assets under management. Total related expenses for the years ended December 31, 1995 and 1994 amounted to $2.5 million and $2.6 million, respectively. These agreements were terminated on January 1, 1996 at which time CMC assumed full management of MBIA Corp.'s consolidated investment portfolios. The company has various insurance coverages provided by a former principal shareholder, the cost of which totaled $2.1 million, $1.9 million and $1.9 million, respectively, for the years ended December 31, 1996, 1995 and 1994. SSI provides financing to Capital Asset under various borrowing arrangements. The net balance outstanding under these agreements at December 31, 1996 was $15.7 million, including accrued interest and is included in other assets on the company's consolidated balance sheet. Net interest earned under these agreements during 1996 was $2.1 million. 17. PUBLIC OFFERINGS OF COMMON STOCK In February 1996, the company completed a public offering of 3,890,000 shares of the company's common stock. Of the shares offered, 3,120,000 were sold by an existing shareholder and 770,000 were new shares offered by the company. The company realized $55 million in new capital from the offering. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by the company using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Fixed-maturity securities The fair value of fixed-maturity securities is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Short-term investments Short-term investments are carried at amortized cost which approximates fair value. Other investments Other investments include the company's interest in a limited partnership and a mutual fund that invests principally in marketable equity securities. The fair value of these investments is based on quoted market prices. On December 31, 1996, other investments also include the company's investment in Capital Asset that is accounted for on the equity method. Municipal investment agreement portfolio The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market prices, if available, of its fixed-maturities plus the amortized

Municipal investment agreement portfolio The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market prices, if available, of its fixed-maturities plus the amortized cost of its short-term investments, which because of their short duration, is a reasonable estimate of fair value. If a quoted market price is not available for a fixed-maturity security, fair value is estimated using quoted market prices for similar securities. Cash and cash equivalents, receivable for investments sold, short-term debt, and payable for investments purchased The carrying amounts of these items are a reasonable estimate of their fair value. Securities borrowed or purchased under agreements to resell The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. Prepaid reinsurance premiums The fair value of the company's prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. Deferred premium revenue The fair value of the company's deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. Loss and loss adjustment expense reserves The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. Long-term debt The fair value is estimated based on the quoted market prices for the same or similar securities. 56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Municipal investment agreements and municipal repurchase agreements The fair values of municipal investment agreements and municipal repurchase agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the agreements being valued. Securities loaned or sold under agreements to repurchase The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. Installment premiums The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1996 ------------------------Carrying Estimated In thousands Amount Fair Value - -------------------------------------------------------------------------------------ASSETS: Fixed-maturity securities $4,149,700 $4,149,700 Short-term investments 176,088 176,088 Other investments 29,101 29,101 Municipal investment agreement portfolio 3,293,298 3,293,298 Cash and cash equivalents 7,356 7,356 Securities borrowed or purchased under agreements to resell 217,000 219,718 Prepaid reinsurance premiums 216,846 189,631 As of Decembe --------------Carrying Amount F ------------$3,652,621 198,035 14,064 2,742,626 23,258 --200,887 $

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Municipal investment agreements and municipal repurchase agreements The fair values of municipal investment agreements and municipal repurchase agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the agreements being valued. Securities loaned or sold under agreements to repurchase The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. Installment premiums The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1996 ------------------------Carrying Estimated In thousands Amount Fair Value - -------------------------------------------------------------------------------------ASSETS: Fixed-maturity securities $4,149,700 $4,149,700 Short-term investments 176,088 176,088 Other investments 29,101 29,101 Municipal investment agreement portfolio 3,293,298 3,293,298 Cash and cash equivalents 7,356 7,356 Securities borrowed or purchased under agreements to resell 217,000 219,718 Prepaid reinsurance premiums 216,846 189,631 Receivable for investments sold 980 980 LIABILITIES: Deferred premium revenue Loss and loss adjustment expense reserves Municipal investment agreements Municipal repurchase agreements Long-term debt Short-term debt Securities loaned or sold under agreements to repurchase Payable for investments purchased OFF-BALANCE SHEET INSTRUMENTS: Installment premiums As of Decembe --------------Carrying Amount F ------------$3,652,621 198,035 14,064 2,742,626 23,258 --200,887 6,100 $

1,785,875 59,314 2,290,609 968,671 374,010 29,100 217,000 52,029

1,545,976 59,314 2,297,272 982,410 402,976 29,100 221,575 52,029

1,616,315 42,505 2,026,709 615,776 373,900 18,000 --10,695

---

287,969

---

19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly income statement information follows:
In thousands except per share amounts 1996 First Second Third Fourth - ------------------------------------------------------------------------------------------------------Gross premiums written $120,599 $134,001 $ 79,910 $126,165 $46 Net premiums written 105,884 122,087 70,874 106,978 40 Premiums earned 60,352 62,066 64,538 64,756 25 Investment income and realized gains and losses 62,758 65,334 67,636 66,145 26 All other revenues 7,087 7,625 7,850 9,390 3 Income before income taxes 98,574 100,830 105,258 103,468 40 Net income $ 77,625 $ 79,737 $ 83,321 $ 81,480 $32 - ------------------------------------------------------------------------------------------------------Net income per common share $ 1.81 $ 1.84 $ 1.92 $ 1.87 $ - ------------------------------------------------------------------------------------------------------1995 First Second Third Fourth - ------------------------------------------------------------------------------------------------------Gross premiums written $ 70,834 $106,343 $ 92,022 $ 79,288 $34 Net premiums written 63,754 94,294 78,945 66,444 30 Premiums earned 51,074 53,888 55,609 54,501 21 Investment income and realized gains and losses 54,594 55,482 57,536 57,466 22 All other revenues 5,112 4,563 5,585 6,812 2 Income before income taxes 83,522 85,766 89,008 86,734 34 Net income $ 66,006 $ 67,307 $ 69,834 $ 68,272 $27

19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly income statement information follows:
In thousands except per share amounts 1996 First Second Third Fourth - ------------------------------------------------------------------------------------------------------Gross premiums written $120,599 $134,001 $ 79,910 $126,165 $46 Net premiums written 105,884 122,087 70,874 106,978 40 Premiums earned 60,352 62,066 64,538 64,756 25 Investment income and realized gains and losses 62,758 65,334 67,636 66,145 26 All other revenues 7,087 7,625 7,850 9,390 3 Income before income taxes 98,574 100,830 105,258 103,468 40 Net income $ 77,625 $ 79,737 $ 83,321 $ 81,480 $32 - ------------------------------------------------------------------------------------------------------Net income per common share $ 1.81 $ 1.84 $ 1.92 $ 1.87 $ - ------------------------------------------------------------------------------------------------------1995 First Second Third Fourth - ------------------------------------------------------------------------------------------------------Gross premiums written $ 70,834 $106,343 $ 92,022 $ 79,288 $34 Net premiums written 63,754 94,294 78,945 66,444 30 Premiums earned 51,074 53,888 55,609 54,501 21 Investment income and realized gains and losses 54,594 55,482 57,536 57,466 22 All other revenues 5,112 4,563 5,585 6,812 2 Income before income taxes 83,522 85,766 89,008 86,734 34 Net income $ 66,006 $ 67,307 $ 69,834 $ 68,272 $27 - ------------------------------------------------------------------------------------------------------Net income per common share $ 1.57 $ 1.60 $ 1.65 $ 1.61 $ - -------------------------------------------------------------------------------------------------------

Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. 57

EXHIBIT 21 SUBSIDIARIES OF MBIA INC.
NAME OF SUBSIDIARY - -----------------MBIA Insurance Corporation MBIA Issuers Service Corporation MBIA Municipal Investors Service Corporation MBIA Investment Management Corp. MBIA Capital Management Corp. MBIA Capital Corp. Strategic Services, Inc. MBIA-AMBAC International Marketing Services, Pty. Limited MBIA Assurance S.A. MBIA Insurance Corp. of Illinois American Money Management Associates, Inc. Municipal Tax Collection Bureau STATE OF INCORPORATION ---------------------New York New York Delaware Delaware Delaware Delaware Delaware Australia

France Illinois Colorado Pennsylvania

EXHIBIT 21 SUBSIDIARIES OF MBIA INC.
NAME OF SUBSIDIARY - -----------------MBIA Insurance Corporation MBIA Issuers Service Corporation MBIA Municipal Investors Service Corporation MBIA Investment Management Corp. MBIA Capital Management Corp. MBIA Capital Corp. Strategic Services, Inc. MBIA-AMBAC International Marketing Services, Pty. Limited MBIA Assurance S.A. MBIA Insurance Corp. of Illinois American Money Management Associates, Inc. Municipal Tax Collection Bureau STATE OF INCORPORATION ---------------------New York New York Delaware Delaware Delaware Delaware Delaware Australia

France Illinois Colorado Pennsylvania

EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. on Forms S-3 (No. 333-15003) and S-8 (Nos. 33- 22441 and 33-46062) of: (1) our report dated February 3, 1997, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which report is incorporated by reference in this 1996 Annual Report on Form 10-K; and (2) our report dated February 3, 1997 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this 1996 Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Experts" included in the Prospectuses.
/s/ COOPERS & LYBRAND L. L. P.

New York, New York March 27, 1997

EXHIBIT 24 POWER OF ATTORNEY

EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. on Forms S-3 (No. 333-15003) and S-8 (Nos. 33- 22441 and 33-46062) of: (1) our report dated February 3, 1997, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which report is incorporated by reference in this 1996 Annual Report on Form 10-K; and (2) our report dated February 3, 1997 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this 1996 Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Experts" included in the Prospectuses.
/s/ COOPERS & LYBRAND L. L. P.

New York, New York March 27, 1997

EXHIBIT 24 POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of David H. Elliott, Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1996, and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand this 20th day of March, 1997.
/s/ Joseph W. Brown, Jr. - -------------------------------Joseph W. Brown, Jr. /s/ Freda S. Johnson ---------------------------Freda S. Johnson

/s/ David C. Clapp - -------------------------------David C. Clapp

/s/ Daniel P. Kearney ---------------------------Daniel P. Kearney

/s/ Gary C. Dunton - -------------------------------Gary C. Dunton

/s/ James A. Lebenthal ---------------------------James A. Lebenthal

/s/ Claire L. Gaudiani - -------------------------------Claire L. Gaudiani

/s/ Pierre-Henri Richard ---------------------------Pierre-Henri Richard

/s/ John A. Rolls

EXHIBIT 24 POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of David H. Elliott, Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1996, and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand this 20th day of March, 1997.
/s/ Joseph W. Brown, Jr. - -------------------------------Joseph W. Brown, Jr. /s/ Freda S. Johnson ---------------------------Freda S. Johnson

/s/ David C. Clapp - -------------------------------David C. Clapp

/s/ Daniel P. Kearney ---------------------------Daniel P. Kearney

/s/ Gary C. Dunton - -------------------------------Gary C. Dunton

/s/ James A. Lebenthal ---------------------------James A. Lebenthal

/s/ Claire L. Gaudiani - -------------------------------Claire L. Gaudiani

/s/ Pierre-Henri Richard ---------------------------Pierre-Henri Richard

- -------------------------------William H. Gray, III

/s/ John A. Rolls ---------------------------John A. Rolls

ARTICLE 7 MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END DEBT HELD FOR SALE DEBT CARRYING VALUE DEBT MARKET VALUE EQUITIES MORTGAGE REAL ESTATE TOTAL INVEST CASH RECOVER REINSURE DEFERRED ACQUISITION TOTAL ASSETS POLICY LOSSES UNEARNED PREMIUMS POLICY OTHER POLICY HOLDER FUNDS

YEAR DEC 31 1996 JAN 01 1996 DEC 31 1996 4,149,700 0 0 0 0 0 7,648,187 7,356 0 147,750 8,562,015 59,314 1,785,875 0 0

ARTICLE 7 MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END DEBT HELD FOR SALE DEBT CARRYING VALUE DEBT MARKET VALUE EQUITIES MORTGAGE REAL ESTATE TOTAL INVEST CASH RECOVER REINSURE DEFERRED ACQUISITION TOTAL ASSETS POLICY LOSSES UNEARNED PREMIUMS POLICY OTHER POLICY HOLDER FUNDS NOTES PAYABLE PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY PREMIUMS INVESTMENT INCOME INVESTMENT GAINS OTHER INCOME BENEFITS UNDERWRITING AMORTIZATION UNDERWRITING OTHER INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED RESERVE OPEN PROVISION CURRENT PROVISION PRIOR PAYMENTS CURRENT PAYMENTS PRIOR RESERVE CLOSE CUMULATIVE DEFICIENCY

YEAR DEC 31 1996 JAN 01 1996 DEC 31 1996 4,149,700 0 0 0 0 0 7,648,187 7,356 0 147,750 8,562,015 59,314 1,785,875 0 0 403,110 43,294 0 0 2,436,403 8,562,015 251,712 247,561 11,740 34,524 15,334 24,660 46,654 408,130 85,967 322,163 0 0 0 322,163 7.43 7.41 0 0 0 0 0 0 0

EXHIBIT 99 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF

EXHIBIT 99 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF MBIA INSURANCE CORPORATION: We have audited the accompanying consolidated balance sheets of MBIA Insurance Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/S/ COOPERS & LYBRAND L. L. P.

New York, New York February 3, 1997.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 1996 ----------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) Short-term investments, at amortized cost (which approximates fair value) Other investments TOTAL INVESTMENTS Cash and cash equivalents Securities purchased under agreements to resell December 31, 1995 -----------------

$4,149,700 169,889 14,851 ---------4,334,440 3,288 108,900

$3,652,621 198,035 14,064 ---------3,864,720 2,135 ---

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF MBIA INSURANCE CORPORATION: We have audited the accompanying consolidated balance sheets of MBIA Insurance Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/S/ COOPERS & LYBRAND L. L. P.

New York, New York February 3, 1997.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 1996 ----------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) Short-term investments, at amortized cost (which approximates fair value) Other investments TOTAL INVESTMENTS Cash and cash equivalents Securities purchased under agreements to resell Accrued investment income Deferred acquisition costs Prepaid reinsurance premiums Goodwill (less accumulated amortization of $42,262 and $37,366) Property and equipment, at cost (less accumulated depreciation of $14,782 and $12,137) Receivable for investments sold Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase December 31, 1995 -----------------

$4,149,700 169,889 14,851 ---------4,334,440 3,288 108,900 65,194 147,750 216,846 100,718 47,176 975 40,871 ---------$5,066,158 ==========

$3,652,621 198,035 14,064 ---------3,864,720 2,135 --60,247 140,348 200,887 105,614 41,169 5,729 42,145 ---------$4,462,994 ==========

$1,785,875 59,314 108,900

$1,616,315 42,505 ---

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 1996 ----------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) Short-term investments, at amortized cost (which approximates fair value) Other investments TOTAL INVESTMENTS Cash and cash equivalents Securities purchased under agreements to resell Accrued investment income Deferred acquisition costs Prepaid reinsurance premiums Goodwill (less accumulated amortization of $42,262 and $37,366) Property and equipment, at cost (less accumulated depreciation of $14,782 and $12,137) Receivable for investments sold Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase Deferred income taxes Payable for investments purchased Other liabilities TOTAL LIABILITIES Shareholder's Equity: Common stock, par value $150 per share; authorized, issued and outstanding - 100,000 shares Additional paid-in capital Retained earnings Cumulative translation adjustment Unrealized appreciation of investments, net of deferred income tax provision of $52,175 and $78,372 TOTAL SHAREHOLDER'S EQUITY TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY December 31, 1995 -----------------

$4,149,700 169,889 14,851 ---------4,334,440 3,288 108,900 65,194 147,750 216,846 100,718 47,176 975 40,871 ---------$5,066,158 ==========

$3,652,621 198,035 14,064 ---------3,864,720 2,135 --60,247 140,348 200,887 105,614 41,169 5,729 42,145 ---------$4,462,994 ==========

$1,785,875 59,314 108,900 195,704 48,811 63,683 ---------2,262,287 ----------

$1,616,315 42,505 --212,925 10,695 54,682 ---------1,937,122 ----------

15,000 1,041,876 1,651,315 (1,188)

15,000 1,021,584 1,341,855 2,704

96,868 ---------2,803,871 ---------$5,066,158 ==========

144,729 ---------2,525,872 ---------$4,462,994 ==========

The accompanying notes are an integral part of the consolidated financial statements. -2-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ---------------------------------------------------1996 1995 1994 ---------------------------------------

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ---------------------------------------------------1996 1995 1994 --------------------------------------Revenues: Gross premiums written Ceded premiums Net premiums written Increase in deferred premium revenue Premiums earned (net of ceded premiums of $38,893, $30,655 and $33,340) Net investment income Net realized gains Other Total revenues Expenses: Losses and loss adjustment Policy acquisition costs, net Operating Total expenses Income before income taxes Provision for income taxes Net income $462,444 (54,852) ------------407,592 (154,111) ------------$349,812 (45,050) -------------304,762 (88,365) -------------$361,523 (49,281) -------------312,242 (93,226) --------------

253,481 247,286 11,740 3,163 ------------515,670 ------------15,334 24,660 46,654 ------------86,648 ------------429,022 90,562 ------------$338,460 =============

216,397 219,834 7,777 2,168 -------------446,176 -------------10,639 21,283 41,812 -------------73,734 -------------372,442 81,748 -------------$290,694 ==============

219,016 193,966 10,335 1,539 -------------424,856 -------------8,093 21,845 41,044 -------------70,982 -------------353,874 77,125 -------------$276,749 ==============

The accompanying notes are an integral part of the consolidated financial statements. -3-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1996, 1995 and 1994

(In thousands except per share amounts)
Common Stock ------------------Shares Amount -------------100,000 $15,000 --------Additional Paid-in Capital ---------$ 943,794 ----Cumulative Translation Adjustment ----------$(1,203) --1,630 A (D of ---

Balance, January 1, 1994 Net income Change in foreign currency translation Change in unrealized depreciation of investments net of change in deferred income taxes of $27,940 Dividends declared (per common share $380.00) Tax reduction related to tax sharing agreement with MBIA Inc. Balance, December 31, 1994

Retained Earnings ---------$ 895,312 276,749 ---

------------100,000 -------

------------15,000 -------

----9,861 ---------953,655 ----------

--(38,000) -----------1,134,061 ----------

----------------427 -----------

-----

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1996, 1995 and 1994

(In thousands except per share amounts)
Common Stock ------------------Shares Amount -------------100,000 $15,000 --------Additional Paid-in Capital ---------$ 943,794 ----Cumulative Translation Adjustment ----------$(1,203) --1,630 A (D of ---

Balance, January 1, 1994 Net income Change in foreign currency translation Change in unrealized depreciation of investments net of change in deferred income taxes of $27,940 Dividends declared (per common share $380.00) Tax reduction related to tax sharing agreement with MBIA Inc. Balance, December 31, 1994 Net income Change in foreign currency translation Change in unrealized appreciation of investments net of change in deferred income taxes of $(103,707) Dividends declared (per common share $829.00) Capital contribution from MBIA Inc. Tax reduction related to tax sharing agreement with MBIA Inc. Balance, December 31, 1995 Net income Change in foreign currency translation Change in unrealized appreciation of investments net of change in deferred income taxes of $26,197 Dividends declared (per common share $290.00) Tax reduction related to tax sharing agreement with MBIA Inc. Balance, December 31, 1996

Retained Earnings ---------$ 895,312 276,749 ---

------------100,000 -----------

------------15,000 -----------

----9,861 ---------953,655 --------------

--(38,000) -----------1,134,061 ---------290,694 ---

----------------427 ------------2,277

-----

--------------100,000 -----------

--------------15,000 -----------

----52,800 15,129 ---------1,021,584 --------------

--(82,900) -------------1,341,855 ---------338,460 ---

------------------2,704 ------------(3,892)

-----

------------100,000 =======

------------$15,000 =======

----20,292 ---------$1,041,876 ==========

--(29,000) -----------$1,651,315 ==========

----------------$(1,188) ===========

--===

The accompanying notes are an integral part of the consolidated financial statements. -4-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 -------------------------------------1996 1995 1994 -------------------------Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income $ 338,460 $290,694 $ 276,749

(4,947)

(4,900)

(3,833)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 -------------------------------------1996 1995 1994 -------------------------Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income Increase in deferred acquisition costs Increase in prepaid reinsurance premiums Increase in deferred premium revenue Increase in loss and loss adjustment expense reserves Depreciation Amortization of goodwill Amortization of bond (discount) premium, net Net realized gains on sale of investments Deferred income taxes Other, net Total adjustments to net income $ 338,460 $290,694 $ 276,749

(4,947) (7,402) (15,959) 170,070 16,809 2,952 4,896 (7,526) (11,740) 8,982 26,687 ---------182,822 ---------521,282 ----------

(4,900) (7,300) (14,395) 104,104 2,357 2,676 4,929 (2,426) (7,778) 11,391 29,080 --------117,738 --------408,432 ---------

(3,833) (12,564) (15,941) 109,167 6,413 1,607 4,961 621 (10,335) 19,082 (8,469) ---------90,709 ---------367,458 ----------

Net cash provided by operating activities

Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased Sale of fixed-maturity securities, net of receivable for investments sold Redemption of fixed-maturity securities, net of receivable for investments redeemed Sale (purchase) of short-term investments, net Sale (purchase) of other investments, net Capital expenditures, net of disposals

(1,519,213) 873,823 158,087 4,676 468 (8,970) ---------(491,129) ----------

(897,128) 473,352 83,448 (32,281) (692) (4,228) -------(377,529) --------

(1,060,033) 515,548 128,274 3,547 87,456 (3,665) ---------(328,873) ----------

Net cash used by investing activities

Cash flows from financing activities: Capital contribution from MBIA Inc. Dividends paid

--(29,000) ---------(29,000) ---------1,153 2,135 ---------$ 3,288 ==========

52,800 (82,900) -------(30,100) -------803 1,332 -------$ 2,135 ========

--(38,000) ---------(38,000) ---------585 747 ---------$ 1,332 ==========

Net cash used by financing activities

Net increase in cash and cash equivalents Cash and cash equivalents - beginning of year

Cash and cash equivalents - end of year

Supplemental cash flow disclosures: Income taxes paid

$

63,018

$ 50,790

$

53,569

The accompanying notes are an integral part of the consolidated financial statements. -5-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). In January 1990, MBIA Illinois ceded its portfolio of net insured obligations to MBIA Corp. in exchange for cash and investments equal to its unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the common stock of BIG to MBIA Corp. resulting in additional paid-in capital of $200 million. The insured portfolio acquired from BIG Ins. consists of municipal obligations with risk characteristics similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois. Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 resulting in additional paidin capital of $6 million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC, which commenced operations in August 1993, provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities. -6-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp. which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for MBIA Inc., its municipal cash management service businesses and public pension funds. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to CMC; the management of the balance of this portfolio was transferred in January 1996. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of MBIA Corp. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS MBIA Corp.'s entire investment portfolio is considered available-for-sale and is reported in the financial

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp. which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for MBIA Inc., its municipal cash management service businesses and public pension funds. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to CMC; the management of the balance of this portfolio was transferred in January 1996. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of MBIA Corp. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS MBIA Corp.'s entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholder's equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixedmaturity securities with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. -7-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell. MBIA Corp. minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with MBIA Corp. when deemed necessary. POLICY ACQUISITION COSTS

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell. MBIA Corp. minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with MBIA Corp. when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the -8-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where MBIA Corp. insures the refunding issue, is earned at that time, since there is no longer risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 2 to 31 years. Maintenance and repairs are charged to expenses as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where MBIA Corp. insures the refunding issue, is earned at that time, since there is no longer risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 2 to 31 years. Maintenance and repairs are charged to expenses as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses (LAE) are established in an amount equal to MBIA Corp.'s estimate of the identified and unidentified losses, including costs of settlement, on the obligations it has insured. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of expected payments, including loss and LAE associated with these issues, net of expected recoveries, is allocated within the total loss reserve as case-specific reserves. Management of MBIA Corp. periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims, but the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. INCOME TAXES MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax -9-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time MBIA Corp. may present the tax and loss bonds for redemption to satisfy the additional tax liability.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time MBIA Corp. may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholder's equity. 3. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; -10-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) o a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established, at present value, for specific insured issues which are identified as currently or likely to be in default. Under GAAP, reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unidentified losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries:

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) o a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established, at present value, for specific insured issues which are identified as currently or likely to be in default. Under GAAP, reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unidentified losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 ----------------------------------------In thousands 1996 1995 1994 - --------------------------------------------------------------------------GAAP shareholder's equity $2,803,871 $2,525,872 $2,055,503 Premium revenue recognition (368,762) (328,450) (296,524) Deferral of acquisition costs (147,750) (140,348) (133,048) Unrealized (gains) losses (148,138) (223,635) 71,932 Contingency reserve (892,793) (743,510) (620,988) Loss and loss adjustment expense reserves 39,065 28,024 18,181 Deferred income taxes 195,704 205,425 90,328 Tax and loss bonds 103,008 70,771 50,471 Goodwill (100,718) (105,614) (110,543) Other (16,465) (14,397) (15,274) - --------------------------------------------------------------------------Statutory capital and surplus $1,467,022 $1,274,138 $1,110,038 - ---------------------------------------------------------------------------

Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 1996, 1995 and 1994 was $316.6 million, $278.3 million and $224.9 million, respectively. -11-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996, 1995 and 1994, respectively, related to refunded and called bonds. 5. INVESTMENTS MBIA Corp.'s investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996, 1995 and 1994, respectively, related to refunded and called bonds. 5. INVESTMENTS MBIA Corp.'s investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of highquality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of MBIA Corp. as of December 31, 1996 and 1995.
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ----------------------------------------------------------------------------December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 6,585 $ 171 $ (10) $ 6,746 Corporate and other obligations 767,472 13,978 (7,272) 774,178 Mortgage-backed 472,295 12,185 (4,003) 480,477 Tax-exempt bonds State and municipal obligations 2,925,099 137,389 (4,300) 3,058,188 - ----------------------------------------------------------------------------Total $4,171,451 $163,723 $(15,585) $4,319,589 - -----------------------------------------------------------------------------

-12-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------December 31, 1995 Taxable bonds United States Treasury and Government Agency $ 6,742 $ 354 $ --$ 7,096 Corporate and other obligations 592,604 30,536 (212) 622,928 Mortgage-backed 389,943 21,403 (932) 410,414 Tax-exempt bonds State and municipal obligations 2,637,732 175,081 (2,595) 2,810,218 - -------------------------------------------------------------------------Total $3,627,021 $227,374 $(3,739) $3,850,656 - --------------------------------------------------------------------------

Fixed-maturity investments carried at fair value of $7.8 million and $8.2 million as of December 31, 1996 and

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------December 31, 1995 Taxable bonds United States Treasury and Government Agency $ 6,742 $ 354 $ --$ 7,096 Corporate and other obligations 592,604 30,536 (212) 622,928 Mortgage-backed 389,943 21,403 (932) 410,414 Tax-exempt bonds State and municipal obligations 2,637,732 175,081 (2,595) 2,810,218 - -------------------------------------------------------------------------Total $3,627,021 $227,374 $(3,739) $3,850,656 - --------------------------------------------------------------------------

Fixed-maturity investments carried at fair value of $7.8 million and $8.2 million as of December 31, 1996 and 1995, respectively, were on deposit with various regulatory authorities to comply with insurance laws. The table below sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1996. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Fair In thousands Cost Value - -------------------------------------------------------------------Maturity Within 1 year $ 158,786 $ 158,768 Beyond 1 year but within 5 years 535,176 561,478 Beyond 5 years but within 10 years 1,218,877 1,263,126 Beyond 10 years but within 15 years 828,646 867,813 Beyond 15 years but within 20 years 807,952 836,153 Beyond 20 years 149,719 151,774 - -------------------------------------------------------------------3,699,156 3,839,112 Mortgage-backed 472,295 480,477 - -------------------------------------------------------------------Total fixed-maturities and short-term investments $4,171,451 $4,319,589 - --------------------------------------------------------------------

-13-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 -----------------------------------In thousands 1996 1995 1994 - ---------------------------------------------------------------------Fixed-maturities $245,109 $216,653 $193,729 Short-term investments 4,961 6,008 3,003 Other investments 61 17 12

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 -----------------------------------In thousands 1996 1995 1994 - ---------------------------------------------------------------------Fixed-maturities $245,109 $216,653 $193,729 Short-term investments 4,961 6,008 3,003 Other investments 61 17 12 - ---------------------------------------------------------------------Gross investment income 250,131 222,678 196,744 Investment expenses 2,845 2,844 2,778 - ---------------------------------------------------------------------Net investment income 247,286 219,834 193,966 Net realized gains (losses): Fixed-maturities: Gains 16,760 9,941 9,635 Losses (5,353) (2,537) (8,851) - ---------------------------------------------------------------------Net 11,407 7,404 784 - ---------------------------------------------------------------------Other investments: Gains 333 382 9,551 Losses --(9) --- ---------------------------------------------------------------------Net 333 373 9,551 - ---------------------------------------------------------------------Total realized gains 11,740 7,777 10,335 - ---------------------------------------------------------------------Total investment income $259,026 $227,611 $204,301 - ----------------------------------------------------------------------

Net unrealized gains consist of:
As of December 31 -------------------In thousands 1996 1995 --------------------------------------------------Fixed-maturities: Gains $163,723 $227,374 Losses (15,585) (3,739) --------------------------------------------------Net 148,138 223,635 Other investments: Gains 934 287 Losses (29) (821) --------------------------------------------------Net 905 (534) --------------------------------------------------Total 149,043 223,101 Deferred income taxes 52,175 78,372 --------------------------------------------------Unrealized gains, net $ 96,868 $144,729 ---------------------------------------------------

The deferred taxes relate primarily to unrealized gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in shareholder's equity. -14-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The change in net unrealized gains (losses) consists of:
Years ended December 31 -----------------------------------In thousands 1996 1995 1994 - ---------------------------------------------------------------------Fixed-maturities $(75,497) $295,567 $(289,327) Other investments 1,439 508 (8,488) - ---------------------------------------------------------------------Total (74,058) 296,075 (297,815) Deferred income taxes (26,197) 103,706 (27,940) - ---------------------------------------------------------------------Unrealized gains (losses), net $(47,861) $192,369 $(269,875) - ----------------------------------------------------------------------

7. INCOME TAXES The provision for income taxes is composed of:
Years ended December 31 -------------------------------In thousands 1996 1995 1994 - -----------------------------------------------------------------Current $81,580 $70,357 $58,043 Deferred 8,982 11,391 19,082 - -----------------------------------------------------------------Total $90,562 $81,748 $77,125 - ------------------------------------------------------------------

The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, MBIA Corp.'s effective income tax rate differs from the statutory rate on ordinary income. The reasons for MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31 ---------------------------------1996 1995 1994 - -------------------------------------------------------------------------Income taxes computed on pre-tax financial income at statutory rates 35.0 % 35.0 % 35.0 % Increase (reduction) in taxes resulting from: Tax-exempt interest (12.0) (12.5) (12.0) Amortization of goodwill 0.4 0.5 0.5 Other (2.3) (1.1) (1.7) - -------------------------------------------------------------------------Provision for income taxes 21.1 % 21.9 % 21.8 % - --------------------------------------------------------------------------

MBIA Corp. recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the -15-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below:
In thousands 1996 1995 - -----------------------------------------------------------------Deferred tax assets Tax and loss bonds $102,222 $ 71,183 Alternative minimum tax credit carryforward 58,068 39,072 Loss and loss adjustment expense reserves 13,673 9,809 Other 3,305 954 - -----------------------------------------------------------------Total gross deferred tax assets 177,268 121,018 - -----------------------------------------------------------------Deferred tax liabilities Contingency reserve 186,173 131,174 Deferred premium revenue 76,526 64,709 Deferred acquisition costs 51,713 49,122 Unrealized gains 52,175 78,372 Contingent commissions 491 7,158 Other 5,894 3,408 - -----------------------------------------------------------------Total gross deferred tax liabilities 372,972 333,943 - -----------------------------------------------------------------Net deferred tax liability $195,704 $212,925 - ------------------------------------------------------------------

8. DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements, or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Corp. had $118 million available for the payment of dividends as of December 31, 1996. In 1996, 1995 and 1994, MBIA Corp. declared and paid dividends of $29 million, $83 million and $38 million, respectively, to MBIA Inc. Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the -16-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Illinois had $10 million available for the payment of dividends as of December 31, 1996. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Illinois had $10 million available for the payment of dividends as of December 31, 1996. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1996. 9. LINES OF CREDIT MBIA Corp. has a standby line of credit commitment in the amount of $725 million with a group of major banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1996 in excess of the greater of $500 million or 6.25% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on September 30, 2003 and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating $300 million. At December 31, 1996, MBIA Inc. had $29.1 million outstanding under these facilities. 10. NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. -17-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. As of December 31, 1996, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-42 years. The distribution of net insurance in force by geographic location and type of bond, including $3.3 billion and $2.7 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1996 and 1995, respectively, is set forth in the following tables: As of December 31 $ in billions 1996 1995 Net Number % of Net Net Number % of Net Geographic Insurance of Issues Insurance Insurance of Issues Insurance

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. As of December 31, 1996, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-42 years. The distribution of net insurance in force by geographic location and type of bond, including $3.3 billion and $2.7 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1996 and 1995, respectively, is set forth in the following tables: As of December 31 $ in billions 1996 1995 Net Number % of Net Net Number % of Net Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force - --------------------------------------------- -------------------------------Domestic California $ 60.7 3,378 14.6% $ 51.2 3,122 14.8% New York 33.7 5,057 8.1 30.1 4,846 8.7 Florida 29.6 1,632 7.1 26.9 1,684 7.7 Texas 21.9 2,052 5.3 20.4 2,031 5.9 Pennsylvania 21.2 2,216 5.1 19.7 2,143 5.7 New Jersey 18.8 1,863 4.6 16.4 1,730 4.7 Illinois 18.5 1,145 4.5 15.0 1,090 4.3 Ohio 11.1 1,032 2.7 9.1 1,017 2.6 Massachusetts 10.9 1,100 2.6 9.3 1,070 2.7 Michigan 9.5 1,021 2.3 7.9 1,012 2.3 - ----------------------------------------------------------------------Subtotal 235.9 20,496 56.9 206.0 19,745 59.4 Other states 170.1 11,502 41.1 135.6 11,147 39.1 - -----------------------------------------------------------------------

Total domestic 406.0 31,998 98.0 341.6 30,892 98.5 International 8.4 169 2.0 5.1 53 1.5 Total $414.4 32,167 100.0% $346.7 30,945 100.0% -18-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31 $ in billions 1996 1995 Net Number % of Net Net Number % of Net Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force - --------------------------------------------Domestic Municipal: General obligation $110.5 11,763 26.7% Utilities 67.9 4,799 16.4 In Force Outstanding In Force --------------------------------

$ 91.6 60.3

11,445 4,931

26.4% 17.4

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31 $ in billions 1996 1995 Net Number % of Net Net Number % of Net Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force - --------------------------------------------Domestic Municipal: General obligation $110.5 11,763 26.7% Utilities 67.9 4,799 16.4 Health care 54.0 2,386 13.0 Transportation 30.3 1,520 7.3 Special revenue 28.9 1,543 7.0 Industrial development and pollution control revenue 18.1 931 4.4 Higher education 17.8 1,309 4.3 Housing 17.7 2,455 4.3 Other 3.8 169 0.9 - --------------------------------------------Total municipal 349.0 26,875 84.3 - --------------------------------------------Structured finance* 38.6 349 9.3 Other 18.4 4,774 4.4 - --------------------------------------------Total domestic 406.0 31,998 98.0 - --------------------------------------------International Infrastructure 3.6 121 0.9 Structured finance* 2.1 22 0.5 Other 2.7 26 0.6 - --------------------------------------------Total In Force Outstanding In Force --------------------------------

$ 91.6 60.3 51.9 25.5 24.4

11,445 4,931 2,458 1,562 1,445

26.4% 17.4 15.0 7.4 7.0

17.2

924

5.0

15.2 1,261 4.4 15.8 2,671 4.5 7.3 134 2.1 -----------------------------309.2 26,831 89.2 -----------------------------20.2 256 5.8 12.2 3,805 3.5 -----------------------------341.6 30,892 98.5 -----------------------------1.6 34 0.5

1.6 8 0.5 1.9 11 0.5 ------------------------------

international 8.4 169 2.0 5.1 53 1.5 Total $414.4 32,167 100.0% $346.7 30,945 100.0% * Asset-/mortgage-backed 11. REINSURANCE MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $57.6 billion and $50.1 billion, at -19-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 ------------------------------------------------In billions 1996 1995 - ------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - ------------------------------------------------------------------Domestic California $ 9.4 16.2% $ 8.8 17.5% New York 6.2 10.7 5.7 11.4 New Jersey 3.3 5.7 3.1 6.1 Texas 2.9 5.1 2.8 5.6 Pennsylvania 2.9 5.1 2.7 5.4 Illinois 2.6 4.5 2.2 4.5 Florida 2.4 4.1 2.3 4.6 Washington 1.9 3.2 1.4 2.7 District of Columbia 1.5 2.7 1.5 3.0 Massachusetts 1.4 2.5 1.1 2.1 Ohio 1.3 2.3 1.0 2.0 Puerto Rico 1.2 2.1 1.3 2.6 - ------------------------------------------------------------------Subtotal 37.0 64.2 33.9 67.5 Other states 16.9 29.4 14.4 28.8 - ------------------------------------------------------------------Total domestic 53.9 93.6 48.3 96.3 International 3.7 6.4 1.8 3.7 - ------------------------------------------------------------------Total $57.6 100.0% $50.1 100.0% - -------------------------------------------------------------------

-20-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ------------------------------------------------In billions 1996 1995 - ------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ------------------------------------------------------------------Domestic Municipal: General obligation $14.4 24.9% $11.7 23.3% Utilities 10.2 17.7 9.0 18.0 Transportation 6.4 11.1 5.5 11.0 Health care 6.3 11.0 6.6 13.1 Special revenue 3.4 5.9 3.2 6.4 Industrial development and pollution control revenue 3.2 5.6 3.0 6.0 Housing 1.6 2.7 1.4 2.8 Higher education 1.5 2.6 1.2 2.4 Other 1.0 1.7 2.4 4.8 - ---------------------------------------------------------------

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ------------------------------------------------In billions 1996 1995 - ------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ------------------------------------------------------------------Domestic Municipal: General obligation $14.4 24.9% $11.7 23.3% Utilities 10.2 17.7 9.0 18.0 Transportation 6.4 11.1 5.5 11.0 Health care 6.3 11.0 6.6 13.1 Special revenue 3.4 5.9 3.2 6.4 Industrial development and pollution control revenue 3.2 5.6 3.0 6.0 Housing 1.6 2.7 1.4 2.8 Higher education 1.5 2.6 1.2 2.4 Other 1.0 1.7 2.4 4.8 - --------------------------------------------------------------Total municipal 48.0 83.2 44.0 87.8 Structured finance* 4.5 7.9 3.6 7.2 Other 1.4 2.5 0.7 1.3 - --------------------------------------------------------------Total domestic 53.9 93.6 48.3 96.3 - --------------------------------------------------------------International Infrastructure 1.6 2.7 0.7 1.4 Structured finance* 1.1 1.9 0.2 0.5 Other 1.0 1.8 0.9 1.8 - --------------------------------------------------------------Total international 3.7 6.4 1.8 3.7 - --------------------------------------------------------------Total $57.6 100.0% $50.1 100.0% - ---------------------------------------------------------------

* Asset-/mortgage-backed 12. EMPLOYEE BENEFITS MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all employees. The pension plan is a defined contribution plan and MBIA Corp. contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1996, 1995 and 1994 was $3.4 million, $3.2 million and $3.0 million, respectively. MBIA Corp. also has a profit sharing/401(k) plan which allows eligible employees to contribute up to 10% of eligible compensation. MBIA Corp. matches employee contributions up to the first 5% of total compensation. MBIA Corp. contributions to the profit sharing plan -21-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) aggregated $1.5 million, $1.4 million and $1.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. Of the above amounts for the pension and profit sharing plans, $3.0 million, $2.7 million and $2.6 million for the years ended December 31, 1996, 1995 and 1994, respectively, are included in policy

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) aggregated $1.5 million, $1.4 million and $1.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. Of the above amounts for the pension and profit sharing plans, $3.0 million, $2.7 million and $2.6 million for the years ended December 31, 1996, 1995 and 1994, respectively, are included in policy acquisition costs. MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to benefit from appreciation in the price of the common stock of MBIA Inc. MBIA Corp. also participates in MBIA Inc.'s restricted stock program, adopted in December 1995, whereby key executive officers of MBIA Corp. are granted restricted shares of MBIA Inc. common stock. During 1996 and 1995, the amounts amortized were $164,000 and $9,000, respectively, of which $102,000 and $5,000 are included in policy acquisition costs. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stockbased compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no impact on MBIA Corp.'s financial position or results of operations. Had compensation cost for the MBIA Inc. stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on MBIA Corp.'s net income would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1996 are not likely to be representative of the effects on reported net income for future years. 13. RELATED PARTY TRANSACTIONS Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association, one of which is a former principal shareholder of MBIA Inc., which had their Standard & Poor's Corporation claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent instead of to the former Association member as was previously required. The aggregate amount payable by MBIA Corp. on these surety bonds is limited to $340 million. These surety bonds remain outstanding as of December 31, 1996. MBIA Corp. had investment management and advisory agreements with an affiliate of a former principal shareholder of MBIA Inc., which provided for payment of fees on assets under management. Total related expenses for the years ended December 31, 1995 and 1994 amounted to $2.5 million and $2.6 million, respectively. These agreements were terminated on January 1, 1996 at which time CMC assumed full management of MBIA Corp.'s consolidated investment portfolios. Total fees paid to CMC on assets under management for the years -22-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ended December 31, 1996 and 1995 amounted to $2.8 million and $0.1 million, respectively.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ended December 31, 1996 and 1995 amounted to $2.8 million and $0.1 million, respectively. MBIA Corp. has various insurance coverages provided by a former principal shareholder of MBIA Inc., the cost of which totaled $2.1 million, $1.9 million and $1.9 million, respectively, for the years ended December 31, 1996, 1995 and 1994. Included in other assets at December 31, 1996 and 1995 is $2.0 million and $1.1 million of net receivables from MBIA Inc. and other subsidiaries. As of December 31, 1996, MBIA Corp. held securities subject to agreements to resell of $108.9 million, and transferred securities subject to agreements to repurchase of $108.9 million with IMC and MBIA Inc. These agreements have a term of less than one year. The interest expense paid and income received relating to these agreements for the year ended December 31, 1996 was $2.3 million and $2.4 million, respectively. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by MBIA Corp. using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount MBIA Corp. could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based upon quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund that invests principally in marketable -23-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) equity securities. The fair value of these investments is based on quoted market prices. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) equity securities. The fair value of these investments is based on quoted market prices. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%. -24-

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 1996 As of December 31, 1995 Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value ASSETS:
Fixed-maturity securities Short-term investments Other investments Cash and cash equivalents Securities purchased under agreements to resell Prepaid reinsurance premiums Receivable for investments sold LIABILITIES: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase Payable for investments purchased $4,149,700 169,889 14,851 3,288 108,900 216,846 975 $4,149,700 169,889 14,851 3,288 124,471 189,631 975 $3,652,621 198,035 14,064 2,135 --200,887 5,729 $3,652,621 198,035 14,064 2,135 --174,444 5,729

1,785,875 59,314 108,900 48,811

1,545,976 59,314 115,838 48,811

1,616,315 42,505 --10,695

1,395,159 42,505 --10,695

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 1996 As of December 31, 1995 Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value ASSETS:
Fixed-maturity securities Short-term investments Other investments Cash and cash equivalents Securities purchased under agreements to resell Prepaid reinsurance premiums Receivable for investments sold LIABILITIES: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase Payable for investments purchased $4,149,700 169,889 14,851 3,288 108,900 216,846 975 $4,149,700 169,889 14,851 3,288 124,471 189,631 975 $3,652,621 198,035 14,064 2,135 --200,887 5,729 $3,652,621 198,035 14,064 2,135 --174,444 5,729

1,785,875 59,314 108,900 48,811

1,545,976 59,314 115,838 48,811

1,616,315 42,505 --10,695

1,395,159 42,505 --10,695

OFF-BALANCE-SHEET INSTRUMENTS: Installment premiums

---

287,969

---

235,371

-25-


								
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