CAPITAL MARKETS ASSURANCE CORPORATION

                              FINANCIAL STATEMENTS

                        DECEMBER 31, 1996, 1995 and 1994

                   (With Independent Auditors' Report Thereon)

<PAGE>

                          Independent Auditors' Report

The Board of Directors
Capital Markets Assurance Corporation:

We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year 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 financial position of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.



                                                           KPMG Peat Marwick LLP


New York, New York
January 29, 1997
<PAGE>

                      Capital Markets Assurance Corporation
                                 Balance Sheets
                  (Dollars in thousands, except per share data)

                                     ASSETS

                                                        December 31  December 31
                                                            1996        1995
--------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $294,861 at
December 31, 1996 and $210,651 at December 31, 1995)      $297,893     215,706
Short-term investments (at amortized cost which
approximates fair value)                                    16,810      68,646
--------------------------------------------------------------------------------
   Total investments                                       314,703     284,352
--------------------------------------------------------------------------------
Cash                                                           371         344
Accrued investment income                                    3,807       3,136
Deferred acquisition costs                                  45,380      35,162
Premiums receivable                                          5,141       3,540
Prepaid reinsurance                                         18,489      13,171
Other assets                                                 6,424       3,428
--------------------------------------------------------------------------------
   Total assets                                           $394,315     343,133
================================================================================
                      LIABILITIES AND STOCKHOLDER'S EQUITY

Liabilities:
Unearned premiums                                         $ 68,262      45,767
Reserve for losses and loss adjustment expenses             10,985       6,548
Ceded reinsurance                                            1,738       2,469
Accounts payable and other accrued expenses                  8,019      10,844
Current income taxes                                           679         136
Deferred income taxes                                       15,139      11,303
--------------------------------------------------------------------------------
   Total liabilities                                       104,822      77,067
--------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding at
December 31, 1996 and 1995                                  15,000      15,000
Additional paid-in capital                                 208,475     205,808
Unrealized appreciation on investments, net of tax           1,970       3,286
Retained earnings                                           64,048      41,972
--------------------------------------------------------------------------------
   Total stockholder's equity                              289,493     266,066
--------------------------------------------------------------------------------
   Total liabilities and stockholder's equity             $394,315     343,133
================================================================================

                 See accompanying notes to financial statements.

<PAGE>

                      Capital Markets Assurance Corporation
                              Statements of Income
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                           Year Ended         Year Ended           Year Ended
                                    December 31, 1996   December 31,1995    December 31, 1994
---------------------------------------------------------------------------------------------
<S>                                          <C>                  <C>                  <C>   
Revenues:
Direct premiums written                      $ 71,752             56,541               43,598
Assumed premiums written                        1,086                935                1,064
Ceded premiums written                        (15,104)           (15,992)             (11,069)
---------------------------------------------------------------------------------------------
   Net premiums written                        57,734             41,484               33,593
Increase in unearned premiums                 (17,177)           (12,242)             (10,490)
---------------------------------------------------------------------------------------------
   Net premiums earned                         40,557             29,242               23,103
Net investment income                          16,992             11,953               10,072
Net realized capital gains                        236              1,301                   92
Other income                                      146              2,273                  120
---------------------------------------------------------------------------------------------
   Total revenues                              57,931             44,769               33,387
---------------------------------------------------------------------------------------------
                                                                                   
Expenses:                                                                          
Losses and loss adjustment expenses             4,815              3,141                1,429
Underwriting and operating expenses            14,613             13,808               11,833
Policy acquisition costs                        7,824              7,203                4,529
---------------------------------------------------------------------------------------------
   Total expenses                              27,252             24,152               17,791
---------------------------------------------------------------------------------------------
   Income before income taxes                  30,679             20,617               15,596
---------------------------------------------------------------------------------------------
                                                                                   
Income Taxes:                                                                      
Current income tax                              5,235              2,113                  865
Deferred income tax                             3,368              3,102                2,843
---------------------------------------------------------------------------------------------
   Total income taxes                           8,603              5,215                3,708
---------------------------------------------------------------------------------------------
                                                                                   
   Net Income                                $ 22,076             15,402               11,888
=============================================================================================
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

                      Capital Markets Assurance Corporation
                       Statements of Stockholder's Equity
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                           Year Ended          Year Ended          Year Ended
                                     December 31,1996   December 31, 1995   December 31, 1994
---------------------------------------------------------------------------------------------
<S>                                         <C>                    <C>                 <C>   
Common stock:
Balance at beginning of year                $  15,000              15,000              15,000
---------------------------------------------------------------------------------------------
   Balance at end of year                      15,000              15,000              15,000
---------------------------------------------------------------------------------------------
                                                                                  
Additional paid-in capital:                                                       
Balance at beginning of year                  205,808             146,808             146,808
Capital contribution                            2,667              59,000                --
---------------------------------------------------------------------------------------------
   Balance at end of year                     208,475             205,808             146,808
---------------------------------------------------------------------------------------------
                                                                                  
Unrealized appreciation (depreciation)                                            
on investments, net of tax:                                                       
Balance at beginning of year                    3,286              (5,499)              3,600
Unrealized appreciation (depreciation)                                            
on investments                                 (1,316)              8,785              (9,099)
---------------------------------------------------------------------------------------------
   Balance at end of year                       1,970               3,286              (5,499)
---------------------------------------------------------------------------------------------
                                                                                  
Retained earnings:                                                                
Balance at beginning of year                   41,972              26,570              14,682
Net income                                     22,076              15,402              11,888
---------------------------------------------------------------------------------------------
   Balance at end of year                      64,048              41,972              26,570
---------------------------------------------------------------------------------------------
                                                                                  
   Total stockholder's equity               $ 289,493             266,066             182,879
=============================================================================================
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

                      Capital Markets Assurance Corporation
                            Statements of Cash Flows
                              (Dollar in thousands)

<TABLE>
<CAPTION>
                                                       Year Ended          Year Ended          Year Ended
                                                December 31, 1996   December 31, 1995   December 31, 1994
---------------------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>                 <C>   
Cash flows from operating activities:
Net income                                              $  22,076              15,402              11,888
---------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net                                                   
cash provided (used) by operating activities:                                                
   Reserve for losses and loss adjustment                                                    
   expenses                                                 4,437               1,357               1,429
   Unearned premiums, net                                  22,496              19,862              15,843
   Deferred acquisition costs                             (10,218)            (10,302)             (9,611)
   Premiums receivable                                     (1,601)               (161)             (2,103)
   Accrued investment income                                 (671)               (390)               (848)
   Income taxes payable                                     3,911               3,621               2,611
   Net realized capital gains                                (236)             (1,301)                (92)
   Accounts payable and other accrued                                                        
   expenses                                                 1,020                 472               3,726
   Prepaid reinsurance                                     (5,318)             (7,620)             (5,352)
   Other, net                                              (3,396)                992                 689
---------------------------------------------------------------------------------------------------------
         Total adjustments                                 10,424               6,530               6,292
---------------------------------------------------------------------------------------------------------
   Net cash provided by operating activities               32,500              21,932              18,180
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:                                                        
   Purchases of investments                              (199,989)           (158,830)            (77,980)
   Proceeds from sales of investments                      57,210              49,354              39,967
   Proceeds from maturities of investments                110,306              28,803              19,665
---------------------------------------------------------------------------------------------------------
   Net cash used in investing activities                  (32,473)            (80,673)            (18,348)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:                                                        
   Capital contribution                                      --                59,000                --
---------------------------------------------------------------------------------------------------------
   Net cash provided by financing activities                 --                59,000                --
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                27                 259                (168)
Cash balance at beginning of year                             344                  85                 253
---------------------------------------------------------------------------------------------------------
   Cash balance at end of year                          $     371                 344                  85
=========================================================================================================
Supplemental disclosure of cash flow                                                         
information:                                                                                 
Income taxes paid                                       $   4,525               1,450               1,063
=========================================================================================================
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements
                           December 31, 1996 and 1995

1)       Background
         Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a
         New York-domiciled monoline stock insurance company which engages only
         in the business of financial guarantee and surety insurance. CapMAC is
         a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC
         is licensed in all 50 states in addition to the District of Columbia,
         the Commonwealth of Puerto Rico and the territory of Guam. CapMAC
         insures structured asset-backed, corporate, municipal and other
         financial obligations in the U.S. and international capital markets.
         CapMAC also provides financial guarantee reinsurance for structured
         asset-backed, corporate, municipal and other financial obligations
         written by other major insurance companies.

         CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
         Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
         ("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
         and "AAA" by Nippon Investors Service, Inc., a Japanese rating agency.
         Such ratings reflect only the views of the respective rating agencies,
         are not recommendations to buy, sell or hold securities and are subject
         to revision or withdrawal at any time by such rating agencies.

2)       Significant Accounting Policies
         Significant accounting policies used in the preparation of the
         accompanying financial statements are as follows:

         a)       Basis of Presentation
                  The accompanying financial statements are prepared on the
                  basis of generally accepted accounting principles ("GAAP").
                  Such accounting principles differ from statutory reporting
                  practices used by insurance companies in reporting to state
                  regulatory authorities.

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amounts of assets and liabilities and the 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. Management believes the most
                  significant estimates relate to deferred acquisition costs,
                  reserve for losses and loss adjustment expenses and
                  disclosures of financial guarantees outstanding. Actual
                  results could differ from those estimates.

         b)       Investments
                  As of December 31, 1996 and 1995, all of the Company's
                  securities have been classified as available-for-sale.
                  Available-for-sale securities are recorded at fair value. Fair
                  value is generally based upon quoted market prices. Unrealized
                  holding gains and losses, net of the related tax effect, on
                  available-for-sale securities are excluded from earnings and
                  are reported as a separate component of stockholder's equity
                  until realized. Transfers of securities between categories are
                  recorded at fair value at the date of transfer. A decline in
                  the fair value of any available-for-sale security below cost
                  that is deemed other than temporary is charged to earnings
                  resulting in the establishment of a new cost basis for the
                  security.


                                       1
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

                  Short-term investments are those investments having a maturity
                  of less than one year at purchase date. Short-term investments
                  are carried at amortized cost which approximates fair value.

                  Premiums and discounts are amortized or accreted over the life
                  of the related security as an adjustment to yield using the
                  effective interest method. Dividend and interest income are
                  recognized when earned. Realized gains and losses are included
                  in earnings and are derived using the FIFO (first-in,
                  first-out) method for determining the cost of securities sold.

         c)       Premium Revenue Recognition
                  Premiums which are payable monthly to CapMAC are reflected in
                  income when due, net of amounts payable to reinsurers.
                  Premiums which are payable quarterly, semi-annually or
                  annually are reflected in income, net of amounts payable to
                  reinsurers, on an equal monthly basis over the corresponding
                  policy term. Premiums that are collected as a single premium
                  at the inception of the policy and have a term longer than one
                  year are earned, net of amounts payable to reinsurers, by
                  allocating premium to each bond maturity based on the
                  principal amount and earning it straight-line over the term of
                  each bond maturity. For the years ended December 31, 1996 and
                  1995, 91% of net premiums earned were attributable to premiums
                  payable in installments and 9% were attributable to premiums
                  collected on an up-front basis.

         d)       Deferred Acquisition Costs
                  Certain costs incurred by CapMAC, which vary with and are
                  primarily related to the production of new business, are
                  deferred. These costs include direct and indirect expenses
                  related to underwriting, marketing and policy issuance, rating
                  agency fees and premium taxes, net of reinsurance ceding
                  commissions. The deferred acquisition costs are amortized over
                  the period in proportion to the related premium earnings. The
                  actual amount of premium earnings may differ from projections
                  due to various factors such as renewal or early termination of
                  insurance contracts or different run-off patterns of exposure
                  resulting in a corresponding change in the amortization
                  pattern of the deferred acquisition costs.

         e)       Reserve for Losses and Loss Adjustment Expenses
                  The reserve for losses and loss adjustment expenses consists
                  of a supplemental loss reserve ("SLR") and a case basis loss
                  reserve. The SLR is established for expected levels of losses
                  resulting from credit failures on currently insured issues and
                  reflects the estimated portion of earned premiums required to
                  cover those losses.

                  A case basis loss reserve is established for insured
                  obligations when, in the judgment of management, a default in
                  the timely payment of debt service is imminent. For defaults
                  considered temporary, a case basis loss reserve is established
                  in an amount equal to the present value of the anticipated
                  defaulted debt service payments over the expected period of
                  default. If the default is judged not to be temporary, the
                  present value of all remaining defaulted debt service payments
                  is recorded as a case basis loss reserve. Anticipated salvage
                  recoveries are considered in establishing case basis loss
                  reserves when such amounts are reasonably estimable. Case
                  basis loss reserves may be allocated from any SLR outstanding
                  at the time the case basis reserves are established.


                                       2
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

                  Management believes that the current level of reserves is
                  adequate to cover the ultimate net cost of claims and the
                  related expenses with respect to financial guarantees issued
                  by CapMAC. The establishment of the appropriate level of loss
                  reserves is an inherently uncertain process involving
                  estimates and subjective judgments by management, and
                  therefore there can be no assurance that ultimate losses in
                  CapMAC's insured portfolio will not exceed the current
                  estimate of loss reserves.

         f)       Depreciation
                  Leasehold improvements, furniture, fixtures and electronic
                  data processing equipment are being amortized or depreciated
                  over the lease term or useful life, whichever is shorter,
                  using the straight-line method.

         g)       Income Taxes
                  Deferred income taxes are provided with respect to temporary
                  differences between the financial statement and tax basis of
                  assets and liabilities using enacted tax rates in effect for
                  the year in which the differences are expected to reverse. The
                  effect on deferred tax assets and liabilities of a change in
                  tax rates is recognized in the period that includes the
                  enactment date.


                                       3
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

   3)    Insured Portfolio
         At December 31, 1996 and 1995, the principal amount of financial
         obligations insured by CapMAC was $24.5 billion and $16.9 billion,
         respectively, and net of reinsurance (net principal outstanding), was
         $19.7 billion and $12.6 billion, respectively, with a weighted average
         life of 6.4 years and 6.0 years, respectively. CapMAC's insured
         portfolio was broadly diversified by geographic distribution and type
         of insured obligations, with no single insured obligation in excess of
         statutory single risk limits, after giving effect to any reinsurance
         and collateral, which are a function of CapMAC's statutory qualified
         capital (the sum of statutory capital and surplus and mandatory
         contingency reserve). At December 31, 1996 and 1995, the statutory
         qualified capital was approximately $260 million and $240 million,
         respectively.

                                               Net Principal Outstanding
                                       December 31, 1996       December 31, 1995
                                       -----------------       -----------------
Type of Obligations Insured              Amount        %         Amount        %
($ in millions)                       
--------------------------------------------------------------------------------
Consumer receivables                   $ 10,362     52.8       $  6,959     55.1
Trade and other corporate             
obligations                               8,479     43.1          4,912     38.9
Municipal/government obligations            814      4.1            757      6.0
--------------------------------------------------------------------------------
   Total                               $ 19,655    100.0       $ 12,628    100.0
================================================================================
                                   
         At December 31, 1996 and 1995, the principal and interest amount of
         financial obligations insured by CapMAC was $29.8 billion and $20.3
         billion, respectively, and net of reinsurance (net principal and
         interest outstanding) was $23.3 billion and $15.1 billion,
         respectively. At December 31, 1996, approximately 93% of CapMAC's
         insured portfolio was comprised of structured asset-backed
         transactions. Under these structures, a pool of assets covering at
         least 100% of the principal amount guaranteed under its insurance
         contract is sold or pledged to a special purpose bankruptcy remote
         entity. CapMAC's primary risk from such insurance contracts is the
         impairment of cash flows due to delinquency or loss on the underlying
         assets. CapMAC, therefore, evaluates all the factors affecting past and
         future asset performance by studying historical data on losses,
         delinquencies and recoveries of the underlying assets. Each transaction
         is reviewed to ensure that an appropriate legal structure is used to
         protect against the bankruptcy risk of the originator of the assets.
         Along with the legal structure, an additional level of first loss
         protection is also created to protect against losses due to credit or
         dilution. This first level of loss protection is usually available from
         reserve funds, excess cash flows, overcollateralization, or recourse to
         a third party. The level of first loss protection depends upon the
         historical losses and dilution of the underlying assets, but is
         typically several times the normal historical loss experience for the
         underlying type of assets.

         During 1995, the Company sold without recourse its interest in
         potential cash flows from transactions included in its insured
         portfolio and recognized $2,200,000 of income which has been included
         in other income in the accompanying financial statements.

         The following entities each accounted for, through referrals and
         otherwise, 10% or more of total revenues for each of the periods
         presented:


                       Year Ended             Year Ended              Year Ended
                December 31, 1996      December 31, 1995       December 31, 1994
             --------------------   --------------------    --------------------
                             % of                   % of                    % of
                         Revenues               Revenues                Revenues
             --------------------   --------------------    --------------------
Citicorp                     14.5                   15.2                    16.3
                                                               
                                                            
                                       4
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

4)       Investments
         The amortized cost, gross unrealized gains, gross unrealized losses and
         estimated fair value for available-for-sale securities by major
         security type at December 31, 1996 and 1995 were as follows ($ in
         thousands):

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------
                                                          Gross        Gross   Estimated
                                         Amortized   Unrealized   Unrealized        Fair
Securities Available-for-sale                 Cost        Gains       Losses       Value
----------------------------------------------------------------------------------------
<S>                                       <C>                <C>      <C>          <C>  
U.S. Treasury obligations                 $  4,059           10            -       4,069
Mortgage-backed securities of             
U.S. government instrumentalities         
and agencies                               109,436          265        1,160     108,541
Obligations of states, municipalities     
and political subdivisions                 177,811        4,602          555     181,858
Corporate and asset-backed                
securities                                  20,365           23          153      20,235
----------------------------------------------------------------------------------------
   Total                                  $311,671        4,900        1,868     314,703
========================================================================================
                                         

December 31, 1995
----------------------------------------------------------------------------------------
                                                          Gross        Gross   Estimated
                                          Amortized  Unrealized   Unrealized        Fair
Securities Available-for-sale                  Cost       Gains       Losses       Value
----------------------------------------------------------------------------------------
U.S. Treasury obligations                  $  4,153          55            -       4,208
Mortgage-backed securities of              
U.S. government instrumentalities          
and agencies                                100,628         313           79     100,862
Obligations of states, municipalities      
and political subdivisions                  166,010       4,809           82     170,737
Corporate and asset-backed                 
securities                                    8,506          45            6       8,545
----------------------------------------------------------------------------------------
   Total                                   $279,297       5,222          167     284,352
========================================================================================
</TABLE>


                                       5
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

         The amortized cost and estimated fair value of investments in debt
         securities at December 31, 1996 by contractual maturity are shown below
         ($ in thousands):

December 31, 1996
--------------------------------------------------------------------------------
                                                    Amortized          Estimated
Securities Available-for-sale                            Cost         Fair Value
--------------------------------------------------------------------------------
Due in one year or less                           $    11,627             11,644
Due after one year through five years                  31,821             32,815
Due after five years through ten years                 76,450             78,200
Due after ten years                                    82,337             83,503
--------------------------------------------------------------------------------
     Sub-total                                        202,235            206,162
Mortgage-backed securities                            109,436            108,541
--------------------------------------------------------------------------------
         Total                                    $   311,671            314,703
================================================================================
                                             
         Actual maturities may differ from contractual maturities because
         borrowers may call or prepay obligations with or without call or
         prepayment penalties.

         Proceeds from sales of investment securities were approximately $57.2
         million, $49.3 million and $39.9 million in 1996, 1995 and 1994,
         respectively. Gross realized capital gains of $772,000, $1,320,000 and
         $714,000, and gross realized capital losses of $536,000, $19,000 and
         $622,000 were realized on those sales for the years ended December 31,
         1996, 1995 and 1994, respectively.

         Investments include bonds having a fair value of approximately
         $3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
         1995, respectively, with state regulators as required by law.

         Investment income is comprised of interest and dividends, net of
         related expenses, and is applicable to the following sources:

                               Year Ended         Year Ended         Year Ended
$ in thousands          December 31, 1996  December 31, 1995  December 31, 1994
-------------------------------------------------------------------------------
Bonds                            $ 15,726             11,105              9,193
Short-term investments              1,534              1,245                484
Mutual funds                            -               (162)               579
Investment expenses                  (268)              (235)              (184)
-------------------------------------------------------------------------------
  Total                          $ 16,992             11,953             10,072
===============================================================================


                                       6
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

         The change in unrealized appreciation (depreciation) on
         available-for-sale securities is included as a separate component of
         stockholder's equity as shown below:

                                           Year  Ended               Year Ended
$ in thousands                       December 31, 1996        December 31, 1995
-------------------------------------------------------------------------------
Balance at beginning of year                $    3,286                   (5,499)
Change in unrealized 
  (depreciation) appreciation                   (2,024)                  13,386
Income tax effect                                  708                   (4,601)
--------------------------------------------------------------------------------
Net change                                      (1,316)                   8,785
-------------------------------------------------------------------------------
   Balance at end of year                   $    1,970                    3,286
===============================================================================

         No single issuer, except for investments in U.S. Treasury and U.S.
         government agency securities, exceeds 2% of stockholder's equity as of
         December 31, 1996 and 1995, respectively.

5)       Deferred Acquisition Costs
         The following table reflects acquisition costs deferred by CapMAC and
         amortized in proportion to the related premium earnings:

<TABLE>
<CAPTION>
                                    Year Ended         Year Ended        Year  Ended
$ in thousands               December 31, 1996  December 31, 1995  December 31, 1994
------------------------------------------------------------------------------------
<S>                                    <C>                 <C>                <C>   
Balance at beginning of year           $35,162             24,860             15,249
Additions                               18,042             17,505             14,140
Amortization (policy                   
acquisition costs)                      (7,824)            (7,203)            (4,529)
------------------------------------------------------------------------------------
  Balance at end of year               $45,380             35,162             24,860
====================================================================================
</TABLE>

6)       Employee Benefits
         CapMAC has a service agreement with CapMAC Financial Services, Inc.
         ("CFS"). Under the service agreement, CFS has agreed to provide various
         services, including underwriting, reinsurance, marketing, data
         processing and other services to CapMAC in connection with the
         operation of CapMAC's insurance business. CapMAC pays CFS a fee for
         providing such services, but not in excess of CFS's cost for such
         services. CFS incurred, on behalf of CapMAC, total compensation
         expenses, excluding bonuses, of $13,374,000, $13,484,000 and
         $11,081,000 in 1996, 1995 and 1994, respectively.

         The Company, through CFS, maintains an incentive compensation plan for
         its employees. The plan is an annual discretionary bonus award. For the
         years ended December 31, 1996, 1995 and 1994, the Company had provided
         approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for
         the plan. CFS also provides health and welfare benefits to
         substantially all of its employees. The Company incurred $551,943,
         $598,530, and $562,508 of expense for the years ended December 31,
         1996, 1995 and 1994, respectively, for such plan. The Company also has
         a defined contribution retirement plan which allows participants to
         make voluntary contributions by salary reduction pursuant to section
         401 (k) of the Internal Revenue Code. The Company provides for the
         administrative cost for the 401 (k) plan.


                                       7
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

         On June 25, 1992, certain officers of CapMAC were granted 182,633
         restricted stock units ("RSU") at $13.33 a share in respect of certain
         deferred compensation. On December 7, 1995, the RSU's were converted to
         cash in the amount of approximately $3.7 million, and such officers
         agreed to defer receipt of such cash amount in exchange for receiving
         the same number of new shares of restricted stock of Holdings as the
         number of RSU's such officers previously held. During 1995 and 1994,
         the expense was $1.3 million and $0.1 million, respectively. During
         1996, Holdings assumed the liability of $3.7 million less the related
         deferred tax asset of $1.1 million as capital contribution. The cash
         amount is held by Holdings and invested in accordance with certain
         guidelines. Such amount, including the investment earnings thereon,
         will be paid to each officer upon the occurrence of certain events but
         no later than December 2000.

7)       Employee Stock Ownership Plan
         Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide
         its employees the opportunity to obtain beneficial interests in the
         stock of Holdings through a trust (the "ESOP Trust"). Compensation
         expense related to the ESOP and allocated to CapMAC was approximately
         $2,764,000, $2,087,000 and $2,086,000 for the years ended December 31,
         1996, 1995 and 1994, respectively.


                                       8
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

8)       Reserve for Losses and Loss Adjustment Expenses
         The reserve for losses and loss adjustment expenses consists of a case
         basis loss reserve and the SLR.

         In 1995, CapMAC incurred its first claim on a financial guarantee
         policy. Based on its current estimate, the Company expects the
         aggregate amount of claims and related expenses not to exceed $2.7
         million, although no assurance can be given that such claims and
         related expenses will not exceed that amount. Such loss amount was
         covered through a recovery under a quota share reinsurance agreement of
         $0.2 million and a reduction in the SLR of $2.5 million. The portion of
         such claims and expenses not covered under the quota share agreement is
         being funded through payments to CapMAC from the Lureco Trust Account
         (see note 12).

         The following is a summary of the activity in the case basis loss
         reserve account and the components of the reserve for losses and loss
         adjustment expenses ($ in thousands):

                                                        1996      1995      1994
--------------------------------------------------------------------------------
Case basis loss reserve:                            
                                                    
Net balance at January 1                             $   620         -         -
--------------------------------------------------------------------------------
                                                    
Incurred related to:                                
   Current year                                            -     2,473         -
   Prior years                                             -         -         -
--------------------------------------------------------------------------------
Total incurred                                             -     2,473         -
--------------------------------------------------------------------------------
                                                    
Paid related to:                                    
   Current year                                            -     1,853         -
   Prior years                                           309         -         -
--------------------------------------------------------------------------------
Total paid                                               309     1,853         -
--------------------------------------------------------------------------------
Net balance at December 31                               311       620         -
Reinsurance recoverable                                    -        69         -
--------------------------------------------------------------------------------
Gross balance at December 31                             311       689         -
--------------------------------------------------------------------------------
Supplemental loss reserve                           
Balance at January 1                                   5,859     5,191     3,762
--------------------------------------------------------------------------------
   Additions to supplemental loss reserve              4,815     3,141     1,429
   Allocated to case basis reserve                         -    (2,473)        -
--------------------------------------------------------------------------------
Balance at December 31                                10,674     5,859     5,191
--------------------------------------------------------------------------------
Total reserve for losses and loss adjustment        
expenses                                             $10,985     6,548     5,191
================================================================================


                                       9
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

9)       Income Taxes
         Pursuant to a tax sharing agreement with Holdings, the Company is
         included in Holdings' consolidated U.S. Federal income tax return. The
         Company's annual Federal income tax liability is determined by
         computing its pro rata share of the consolidated group Federal income
         tax liability.

         Total income tax expense differed from the amount computed by applying
         the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
         1994:

<TABLE>
<CAPTION>
                                                Year Ended            Year Ended          Year  Ended
                                         December 31, 1996     December 31, 1995    December 31, 1994
$ in thousands                            Amount         %      Amount         %    Amount          %
-----------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>       <C>         <C>     <C>          <C> 
Expected tax expense computed
at the statutory rate                  $  10,738      35.0      $7,216      35.0    $5,303       34.0
Increase (decrease) in tax
resulting from:
   Tax-exempt interest                    (2,916)     (9.5)     (2,335)    (11.3)   (1,646)     (10.6)
   Other, net                                781       2.5         334       1.6        51        0.4
-----------------------------------------------------------------------------------------------------
       Total income tax expense        $   8,603      28.0      $5,215      25.3    $3,708       23.8
=====================================================================================================
</TABLE>

         The tax effects of temporary differences that give rise to significant
         portions of the deferred Federal income tax liability are as follows:

$ in thousands                             December 31, 1996   December 31, 1995
--------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation                             $      200               1,901
Losses and loss adjustment expenses                    1,527               1,002
Unearned premiums                                        866                 852
Other, net                                                96                  98
--------------------------------------------------------------------------------
  Total gross deferred tax assets                      2,689               3,853
--------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs                            15,883              12,307
Unrealized capital gains on investments                1,061               1,769
Other, net                                               884               1,080
--------------------------------------------------------------------------------
   Total gross deferred tax liabilities               17,828              15,156
--------------------------------------------------------------------------------
   Net deferred tax liability                     $   15,139              11,303
================================================================================

         A valuation allowance is provided when it is more likely than not that
         some portion of the deferred tax assets will not be realized.
         Management believes that the deferred tax assets will be fully realized
         in the future.


                                       10
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

   10)   Insurance Regulatory Restrictions
         CapMAC is subject to insurance regulatory requirements of the State of
         New York and other states in which it is licensed to conduct business.
         Generally, New York insurance laws require that dividends be paid from
         earned surplus and restrict the amount of dividends in any year that
         may be paid without obtaining approval for such dividends from the
         Superintendent of Insurance to the lower of (i) net investment income
         as defined or (ii) 10% of statutory surplus as of December 31 of the
         preceding year. No dividends were paid by CapMAC to Holdings during the
         years ended December 31, 1996, 1995 and 1994. No dividends could be
         paid during these periods because CapMAC had negative earned surplus.
         Statutory surplus at December 31, 1996 and 1995 was approximately
         $193,726,000 and $195,018,000, respectively. Statutory surplus differs
         from stockholder's equity determined under GAAP principally due to the
         mandatory contingency reserve required for statutory accounting
         purposes and differences in accounting for investments, deferred
         acquisition costs, SLR and deferred taxes provided under GAAP.
         Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
         years ended December 31, 1996, 1995 and 1994, respectively. Statutory
         net income differs from net income determined under GAAP principally
         due to deferred acquisition costs, SLR and deferred income taxes.

11)      Commitments and Contingencies
         The Company's lease agreement for the space occupied in New York
         expires on November 20, 2008. CapMAC has a lease agreement for its
         London office, which expires on October 1, 2002. As of December 31,
         1996, future minimum payments under the lease agreements are as
         follows:

         $ in thousands                                                Payment
         ---------------------------------------------------------------------
         1997                                                         $  2,647
         1998                                                            2,715
         1999                                                            3,077
         2000                                                            3,152
         2001 and thereafter                                            28,660
         ---------------------------------------------------------------------
            Total                                                     $ 40,251
         =====================================================================
                                                                            
         Rent expense, commercial rent taxes and electricity for the years ended
         December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
         $2,243,000, respectively.

         CapMAC has available a $150,000,000 standby corporate liquidity
         facility (the "Liquidity Facility") scheduled to terminate in September
         1999. The Liquidity Facility is provided by a consortium of banks,
         headed by Bank of Montreal, as agent, which is rated "A-1+" and "P- 1"
         by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
         will be able, subject to satisfying certain conditions, to borrow funds
         from time to time in order to enable it to fund any claim payments or
         payments made in settlement or mitigation of claim payments under its
         insurance contracts. There have been no draws under the Liquidity
         Facility.

         CapMAC has agreed to make an investment of 50 million French Francs
         (approximately $10 million U.S. dollars) in CapMAC Assurance, S.A., an
         insurance subsidiary to be established in Paris, France. This
         investment is anticipated to be made in 1997.


                                       11
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

12)      Reinsurance
         In the ordinary course of business, CapMAC cedes exposure under various
         treaty and facultative reinsurance contracts, both on a pro rata and
         excess of loss basis, primarily designed to minimize losses from large
         risks and protect the capital and surplus of CapMAC.

         The effect of reinsurance on premiums written and earned was as
         follows:

<TABLE>
<CAPTION>
                                      Years Ended December 31
                         1996                   1995                  1994
                  -------------------   -------------------   --------------------
$ in thousands     Written     Earned   Written      Earned   Written       Earned
----------------------------------------------------------------------------------
<S>               <C>          <C>       <C>         <C>       <C>          <C>   
Direct            $ 71,752     48,835    56,541      36,853    43,598       28,561
Assumed              1,086      1,508       935         761     1,064          258
Ceded              (15,104)    (9,786)  (15,992)     (8,372)  (11,069)      (5,716)
----------------------------------------------------------------------------------
Net premiums      $ 57,734     40,557    41,484      29,242    33,593       23,103
==================================================================================
</TABLE>
                            
         The reinsurance of risk does not relieve the ceding insurer of its
         original liability to its policyholders. A contingent liability exists
         with respect to the aforementioned reinsurance arrangements, which may
         become a liability of CapMAC in the event the reinsurers are unable to
         meet obligations assumed by them under the reinsurance contracts. At
         December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
         $69,000, respectively, and had ceded unearned premiums of $18,489,000
         and $13,171,000, respectively.

         In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
         Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
         European-based reinsurer. The agreement is renewable annually at the
         Company's option, subject to satisfying certain conditions. The
         agreement reinsured and indemnified the Company for any loss incurred
         by CapMAC during the agreement period up to the limits of the
         agreement. The Lureco Treaty provides that the annual reinsurance
         premium payable by CapMAC to Lureco, after deduction of the reinsurer's
         fee payable to Lureco, be deposited in a trust account (the "Lureco
         Trust Account") to be applied by CapMAC, at its option, to offset
         losses and loss expenses incurred by CapMAC in connection with incurred
         claims. Amounts on deposit in the Lureco Trust Account which have not
         been applied against claims are contractually due to CapMAC at the
         termination of the treaty.

         The premium deposit amounts in the Lureco Trust Account have been
         reflected as assets by CapMAC during the term of the agreement.
         Premiums in excess of the deposit amounts have been recorded as ceded
         premiums in the statements of income. For the 1996 policy year, the
         agreement provides $7 million of loss coverage in excess of the premium
         deposit amount of $5 million retained in the Lureco Trust Account.
         Additional coverage is provided for losses incurred in excess of 200%
         of the net premiums earned up to $4 million for any one agreement year.
         In September 1995, a claim of approximately $2.5 million on an
         insurance policy was applied against the Lureco Trust Account.


                                       12
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

         In addition to its capital (including statutory contingency reserves),
         CapMAC has other reinsurance available to pay claims under its
         insurance contracts. Effective November 30, 1995, CapMAC entered into a
         Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
         Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
         Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
         required to pay any losses in excess of $100 million in the aggregate
         incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
         the insurance policies in effect on December 1, 1995 and written during
         the one-year period thereafter, up to an aggregate limit payable under
         the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
         Agreement has a term of seven years and is subject to early termination
         by CapMAC in certain circumstances. Effective January 1, 1997 the
         stop-loss reinsurance coverage increased to $75 million in excess of
         incurred losses of $150 million increasing annually based on increases
         in CapMAC's statutory qualified capital. The new stop-loss reinsurance
         is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and Munchener
         Ruckversicherungs-Gesellschaft ("Munich Re").

         On November 30, 1995, CapMAC canceled the quota share reinsurance
         agreement with Winterthur Swiss Insurance Company ("Winterthur")
         pursuant to which Winterthur had the right to reinsure on a quota share
         basis 10% of each policy written by CapMAC. As a result, CapMAC
         reassumed approximately $1.4 billion of principal insured by Winterthur
         on January 1, 1996. In connection with the commutation, Winterthur
         returned $2.0 million of unearned premiums, net of ceding commission
         and Federal excise tax.

13)      Disclosures About Fair Value of Financial Instruments
         The following table presents the carrying amounts and estimated fair
         values of the Company's financial instruments at December 31, 1996 and
         1995. The fair value amounts were determined by the Company using
         independent market information when available, and appropriate
         valuation methodologies when market information was not available. Such
         valuation methodologies require significant judgment and are not
         necessarily indicative of the amount the Company could recognize in a
         current market exchange.

<TABLE>
<CAPTION>
                                               December 31, 1996       December 31, 1995
                                           Carrying    Estimated    Carrying   Estimated
$ in thousands                               Amount   Fair Value      Amount  Fair Value
----------------------------------------------------------------------------------------
<S>                                        <C>           <C>         <C>         <C>    
Financial Assets:
Available-for-sale securities              $314,703      314,703     284,352     284,352
----------------------------------------------------------------------------------------
Off-Balance-Sheet Instruments:                        
Financial guarantees outstanding           $   --        219,989        --       147,840
   Less: ceding commission                     --         65,997        --        44,352
----------------------------------------------------------------------------------------
Net financial guarantees outstanding       $   --        153,992                 103,488
========================================================================================
</TABLE>


                                       13
<PAGE>

                      Capital Markets Assurance Corporation
                          Notes to Financial Statements

         The following methods and assumptions were used to estimate the fair
         value of each class of financial instruments summarized above:

         Available-for-sale Securities
         The fair values of fixed maturities are based upon quoted market
         prices. The fair value of short-term investments approximates amortized
         cost.

         Financial Guarantees Outstanding
         The fair value of financial guarantees outstanding consists of (1) the
         current unearned premium reserve, net of prepaid reinsurance and (2)
         the fair value of installment revenue which is derived by calculating
         the present value of the estimated future cash inflow to CapMAC of
         policies in force having installment premiums, net of amounts payable
         to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
         The amount calculated is assumed to be equivalent to the consideration
         that would be paid by CapMAC under market conditions prevailing at the
         reporting dates to transfer CapMAC's financial guarantee business to a
         third party under reinsurance and other agreements. Ceding commission
         represents the expected amount that would be paid to CapMAC to
         compensate CapMAC for originating and servicing the insurance
         contracts. In constructing estimated future cash inflows, management
         makes assumptions regarding prepayments for amortizing asset-backed
         securities which are consistent with relevant historical experience.
         For revolving programs, assumptions are made regarding program
         utilization based on discussions with program users. The amount of
         future installment revenue actually realized by the Company could be
         reduced in the future due to factors such as early termination of
         insurance contracts, accelerated prepayments of underlying obligations
         or lower than anticipated utilization of insured structured programs,
         such as commercial paper conduits. Although increases in future
         installment revenue earnings due to renewals of existing insurance
         contracts historically have been greater than reductions in future
         installment revenue due to factors such as those described above, there
         can be no assurance that future circumstances might not cause a
         material net reduction in the future installment revenue.

14)      Capitalization
         In 1995, $59.0 million of the proceeds received by Holdings from the
         sale of shares in connection with an initial public offering and
         private placements were contributed to CapMAC.