FRANKLIN HOLDING CORP, N-30D, 1997-04-15

FRANKLIN HOLDING CORP
N-30D, 1997-04-15

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<PAGE>
THE FRANKLIN HOLDING CORPORATION
(DELAWARE)

ANNUAL REPORT TO THE STOCKHOLDERS

<PAGE>
THE FRANKLIN HOLDING CORPORATION
(DELAWARE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

LETTER FROM THE CHAIRMAN

Dear Fellow Stockholder:

We are pleased to report that for the year ended December 31, 1995,
Franklin's net assets increased by $23,443 or $0.03 per share after taxes and
the payment of a special dividend of $1.00 per share.

At year end, our wholly-owned subsidiary, Excelsior Communications Corp.,
sold its radio properties for $8.5 million. Excelsior's total costs for its
radio investments, initiated in September 1992, were $4.6 million, resulting in
a pre-tax gain of $3.9 million.

In 1996, we will continue to seek investment opportunities which will yield
above average returns for Franklin's stockholders.

On behalf of the Corporation's Board and Management, I look forward to
reporting on our progress to you.

Respectfully,

Stephen L. Brown
Chairman

April 10, 1996

STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>

INVESTMENT INCOME
Income from controlled affiliates (Note 6)................ $ 750,000 $ 364,133
Interest on short term investments and money market
accounts............................................... 138,559 90,272
Interest on marketable investment securities.............. 263 243,313
Interest on loans and debt securities..................... 59,614 6,624
Other..................................................... -- 4,726
----------- ----------
948,436 709,068
----------- ----------

EXPENSES
Salaries and employee benefits (Note 8)................... 879,302 961,600
Professional fees......................................... 231,325 108,766
Investment banking fee.................................... 60,715 --
Rent (Note 5)............................................. 135,008 136,237
Insurance................................................. 51,193 50,256
Directors' fees........................................... 127,090 114,911
Taxes other than income taxes............................. 53,308 59,917
Advertising and promotion................................. 6,500 5,436
Depreciation and amortization............................. 35,030 34,587
Professional fees related to Stearns & Foster litigation
(Note 5)............................................... 327,437 380,083
Recovery from insurance company of professional fees
related to Stearns & Foster litigation (Note 5)........ (397,657) --
Expenses related to Shareholders' litigation & proxy
contest (Note 5)....................................... 420,038 --
General and administrative................................ 219,736 296,944
Miscellaneous............................................. 8,875 --
----------- ----------
2,157,900 2,148,737
----------- ----------

Net investment loss from operations......................... (1,209,464) (1,439,669)

Net realized gain on portfolio of investments............... 1,242,937 1,800,301

Provision for current state and local income
taxes applicable to net realized taxable gains (Note 3)... (243,908) (2,000)

Benefit for deferred Federal and state income taxes (Note
3)........................................................ 274,364 333,146

Decrease in unrealized appreciation of investments.......... (40,486) (391,270)
----------- ----------

Net increase in net assets from operations.................. $ 23,443 $ 300,508
----------- ----------
----------- ----------

Net increase in net assets per common share................. $ 0.03 $ 0.35
----------- ----------
----------- ----------

Weighted average number of common shares outstanding........ 844,172 867,773
----------- ----------
----------- ----------
</TABLE>

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

BALANCE SHEETS
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<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
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<S> <C> <C>

ASSETS
Marketable investment securities, at market value (cost:
December 31, 1995--$1,893,251; December 31,
1994--$398,382) (Note 2).................................. $ 1,850,501 $ 425,217
Investments, at directors' valuation (cost: December
31,1995--$6,067,679; December 31, 1994--$4,828,144) (Note
2)
Excelsior Communications Corporation (Notes 6 and 7)... 8,005,393 8,361,440
Other investments...................................... 1,943,357 318,675
----------- -----------
9,948,750 8,680,115
----------- -----------
Cash and cash equivalents................................... 200,413 4,434,367
Accrued interest and accounts receivable.................... 399,574 278,523
Other assets................................................ 259,318 337,232
----------- -----------
TOTAL ASSETS................................................ $12,658,556 $14,155,454
----------- -----------
----------- -----------
- -----------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Accounts payable and accrued liabilities.................... $ 200,073 $ 435,849
Accrued income taxes payable (Notes 2 and 3)................ 237,718 --
Deferred taxes (Notes 2 and 3).............................. 100,636 375,000
----------- -----------
TOTAL LIABILITIES........................................... 538,427 810,849
----------- -----------
Commitments and contingencies (Note 5)

STOCKHOLDERS' EQUITY
Common stock, $1 par value: 2,000,000 shares authorized;
1,003,986 shares issued at December 31, 1995 and 1994..... 1,003,986 1,003,986
Paid-in capital............................................. 8,997,877 8,997,877
Unrealized appreciation of investments, net of deferred
income taxes (Notes 2 and 3).............................. 3,737,686 3,503,807
Accumulated undistributed earnings.......................... 14,081 1,051,215

----------- -----------
13,753,630 14,556,885
Deduct: 177,788 shares at December 31, 1995 and 137,388
shares at December 31, 1994 of common stock held in
treasury, at cost (Note 4)................................ (1,633,501) (1,212,280)
----------- -----------
Net assets at market or fair value, equivalent to $14.67 per
share at December 31, 1995 and $15.40 per share at
December 31, 1994......................................... 12,120,129 13,344,605
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $12,658,556 $14,155,454
----------- -----------
----------- -----------
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</TABLE>

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

STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995 1994
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<S> <C> <C>

Cash flows from operating activities:
Net increase in net assets from operations................ $ 23,443 $ 300,508
Adjustments to reconcile net increase in net assets to net
cash used in operating activities:
Depreciation and amortization........................ 35,030 34,587
Decrease in unrealized appreciation of investments... 40,486 391,270
Deferred income tax benefit.......................... (274,364) (333,146)
Net realized gain on portfolio of investments........ (1,242,937) (1,800,301)
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest and
accounts receivable (121,051) 79,243
Decrease (increase) in other assets............... (41,076) 20,912
Increase (decrease) in accounts payable and
accrued liabilities (235,776) 205,640
Increase in accrued income taxes payable.......... 237,718 --
---------- ----------

Total adjustments............................ (1,601,970) (1,401,795)
---------- ----------

Net cash used in operating activities........ (1,578,527) (1,101,287)

Cash flows from investing activities:
Proceeds from sale of investments, net of expenses........ 4,052 781,998
Investment in Excelsior Communications Corporation........ -- (49,375)
Acquisitions of investments............................... (1,266,528) (749,552)
Return of capital from investments........................ 26,993 --
Proceeds from sale of marketable investment securities,
net of expenses........................................ 3,323,571 9,886,580
Purchases of marketable investment securities............. (3,579,556) (6,265,956)
Purchases of fixed assets................................. (2,977) (38,980)
Sales of fixed assets..................................... 86,937 --
---------- ----------

Net cash (used in) provided by investing
activities.................................... (1,407,508) (3,564,715)
---------- ----------

Cash flows from financing activities:

Distribution to stockholders from accumulated
undistributed earnings................................. (826,698) --
Purchase of treasury stock................................ (421,221) (118,025)
---------- ----------

Net cash used in financing activities........ (1,247,919) (118,025)
---------- ----------

Net (decrease) increase in cash and cash equivalents........ (4,233,954) 2,345,403

Cash and cash equivalents at beginning of year.............. 4,434,367 2,088,964
---------- ----------

Cash and cash equivalents at end of year.................... $ 200,413 $4,434,367
---------- ----------
---------- ----------
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</TABLE>

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

STATEMENTS OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 1995 1994
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<S> <C> <C>

Increase (decrease) in net assets from operations:
Net investment loss....................................... $(1,209,464) $(1,439,669)
Net realized gain on portfolio of investments, net of
current income taxes................................... 999,029 1,798,301
Increase (decrease) in unrealized appreciation of
investments, net of deferred income taxes.............. 233,878 (58,124)
----------- -----------
Net increase in net assets from operations........... 23,443 300,508

Distributions to stockholders from accumulated undistributed
earnings.................................................. (826,698) --

Capital stock transactions:
Purchase of treasury stock................................ (421,221) (118,025)
----------- -----------

Total increase (decrease) in net assets.............. (1,224,476) 182,483
----------- -----------

Net assets at beginning of year............................. 13,344,605 13,162,122
----------- -----------

Net assets at end of year................................... $12,120,129 $13,344,605
----------- -----------
----------- -----------
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</TABLE>

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

FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
FOR THE
NINE
MONTHS
---------FOR THE YEAR ENDED--------- ENDED FOR THE YEAR ENDED
DEC. 31, DEC. 31, DEC. 31, DEC. 31, MARCH 31, MARCH 31,
1995 1994 1993 1992 1992 1991
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<S> <C> <C> <C> <C> <C> <C>

PER SHARE OPERATING
PERFORMANCE(1):
Net asset value, beginning of
period...................... $ 15.40 $ 14.96 $ 15.17 $ 14.98 $ 13.01 $ 13.50
---------- ---------- ---------- -------- --------- ---------
Net investment loss......... (1.43) (1.66) (1.01) (0.79) (0.79) (0.75)
Net gain on portfolio of
investments (realized and
unrealized).............. 1.46 2.01 0.71 1.73 2.29 0.20
---------- ---------- ---------- -------- --------- ---------
Total from investment
operations.................. 0.03 0.35 (0.30) 0.94 1.50 (0.55)
---------- ---------- ---------- -------- --------- ---------
Less dividends and
distributions:
Distributions from
accumulated undistributed
earnings................. (1.00) 0 0 (0.80) 0 0
---------- ---------- ---------- -------- --------- ---------
Total dividends and
distributions............... (1.00) 0 0 (0.80) 0 0
---------- ---------- ---------- -------- --------- ---------
Treasury stock transactions... 0.24 0.09 0.09 0.05 0.47 0.06
---------- ---------- ---------- -------- --------- ---------
Net asset value, end of
period...................... $ 14.67 $ 15.40 $ 14.96 $ 15.17 $ 14.98 $ 13.01
---------- ---------- ---------- -------- --------- ---------
---------- ---------- ---------- -------- --------- ---------
Market value per share, end of
period...................... $ 10.13 $ 8.13 $ 8.88 $ 8.88 $ 9.13 $ 8.13
---------- ---------- ---------- -------- --------- ---------
---------- ---------- ---------- -------- --------- ---------

TOTAL INVESTMENT RETURN(2):

Based on market value per
share (%)................... 35.45 (8.45) 0.00 6.30 12.31 0.00

RATIOS TO AVERAGE NET
ASSETS(2):
Expenses (%).................. 16.59 16.04 13.50 13.61 12.53 15.73
Net investment loss (%)....... (11.17) (10.76) (7.00) (7.59) (5.61) (5.66)

RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(000 omitted)............... $ 12,120 $ 13,345 $ 13,162 $13,524 $13,458 $12,919
Portfolio turnover rate (%)... 32 63 79 78 110 75
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</TABLE>

(1) Calculated based on weighted average number of shares outstanding during the
period.
(2) The ratios for the period ended December 31, 1992 have been annualized.
Total investment return has not been annualized.

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

PORTFOLIO OF INVESTMENTS

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MARKETABLE INVESTMENT SECURITIES
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<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT ($) VALUE
DECEMBER 31, 1995 OR # SHARES COST (NOTE 2)
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<S> <C> <C> <C>

Common Stock--M.A.I.D. (ADRs) *......... 125,000 $1,855,250 $1,812,500
Certificate of Deposit--4.40%, due May
4, 1996............................... $ 38,001 38,001 38,001
---------- ----------
Total Marketable Investment
Securities........................ $1,893,251 $1,850,501
---------- ----------
---------- ----------
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</TABLE>

INVESTMENTS, AT DIRECTORS' VALUATION
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<TABLE>
<CAPTION>
DIRECTORS'
PRESENT VALUATION
DECEMBER 31, 1995 INVESTMENT EQUITY COST (NOTE 2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTROLLED AFFILIATES
Excelsior Communications 100.0% $4,386,048 $8,005,393
Corporation ...............
(Wholly-owned subsidiary
investing
in broadcast industry)
OTHER INVESTMENTS
Sola Enterprises, Inc. ...... First and second None 327,418 327,418
(Restaurant, motel and mortgage notes;
marina operator) 10.0 % interest rate
Avery Communications, Inc..... Secured note; None 350,000 350,000
(Telecommunications) 12% interest rate

Avery Communications, Inc..... Warrants None -- 88,667
(Telecommunications)
FMA High Yield Income Limited Limited partnership 1.1% 675,000 708,153
Partnership ............... interest
(Schroder Wertheim high
yield bond
limited partnership)
CIC Standby Ventures, L.P..... Limited partnership 1.8% 73,007 324,478
(Computer handwriting interest
systems)
Hefty Profits Limited--Pacific Limited partnership 10.0% 97,185 97,185
Healthcare ................ interest
(Home healthcare services in
Asia Pacific Region)
BP Restaurants, LP .......... Limited partnership 2.4% 159,021 47,456
(Chain of restaurants in interest
Southwest)
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1,681,631 1,943,357
---------- ----------
Total Investments, at $6,067,679 $9,948,750
Directors' Valuation...
---------- ----------
---------- ----------
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</TABLE>

(*) Non-income producing security.

See accompanying notes.

1. ORGANIZATION

The Franklin Holding Corporation (Delaware) ('Franklin Holding' or the
'Corporation') is a Delaware corporation registered as a closed-end investment
company under the Investment Company Act of 1940 (the 'Act').

Franklin Holding's investment objective, as previously approved by the
Corporation's stockholders, is to acquire majority or greater stakes in (i) one
or more operating businesses with the ultimate purpose that the Corporation
would cease to be an investment company and would deregister under the Act, and
with the ultimate result that the Corporation's total assets would consist of
securities of one or more majority or wholly owned subsidiaries, and (ii) cash
and cash equivalents, Government securities and other assets which are not
investment securities within the meaning of the Act.

In November 1994, Franklin Holding filed an application with the Securities and
Exchange Commission (the 'SEC') requesting an order declaring that it has ceased
to be an investment company under the Act. In February 1995, the Corporation
filed a first amended and restated application. On December 31, 1995, Franklin
Holding, through its wholly-owned subsidiary, Excelsior Communications
Corporation ('Excelsior') sold its radio properties to Cox Broadcasting, Inc.
(See Note 7). As a result of the sale, the facts set forth on the Corporation's
application, which provide the grounds on which the Corporation based such
application, have materially changed. It is management's intention to continue
to seek investment opportunities consistent with the investment guidelines
previously approved by the stockholders which will allow the Corporation to
amend the application so that the SEC can consider whether an order to
deregister can be issued.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Franklin Holding is an investment company under the Act and, accordingly, does
not consolidate non-investment company subsidiaries.

USE OF ESTIMATES

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 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.

STATEMENTS OF CASH FLOWS

For purposes of the statements of cash flows, Franklin Holding considers only
highly liquid investments with maturities of 90 days or less at the date of
their acquisition to be cash equivalents.

The Corporation paid no interest during the years ended December 31, 1995 and
1994, and paid $6,190 and $0 for income taxes during the years ended December
31, 1995 and 1994, respectively.

VALUATION OF INVESTMENTS

Investments are recorded on a trade date basis. Security investments which are
publicly traded are stated at the last reported sales price on the day of
valuation, or if no sale was reported on that date, then the securities are
stated at the last quoted bid price. The Board may determine, if appropriate, to
discount the value where there is an impediment to the marketability of the
securities held.

Investments for which there is no ready market are initially valued at cost and,
thereafter, at fair value based upon the financial condition and operating
results of the issuer and other pertinent factors as determined by the Board of
Directors. The financial condition and operating results have been derived
utilizing both audited and unaudited data. Certain assumptions inherent in the
valuation process may not materialize and unanticipated events and circumstances
may occur subsequent to the date of the valuation. Therefore, the actual amounts
eventually realized from each investment may vary from the valuations shown and
the differences may be material. Franklin Holding reports the unrealized gain or
loss resulting from such valuation in the Statements of Operations.

GAINS ON PORTFOLIO OF INVESTMENTS

Amounts reported as realized gains are measured by the difference between the
proceeds of sale or exchange and the cost basis of the investment without regard
to unrealized gains reported in the prior periods. Gains are considered realized
when sales of investments are consummated.

INCOME TAXES

Franklin Holding does not qualify as a Regulated Investment Company for income
tax purposes. Therefore, the Corporation is taxed as a regular corporation.

Franklin Holding adopted Statement of Financial Accounting Standards No. 109,
'Accounting for Income Taxes' ('SFAS 109') effective April 1, 1991. The
significant components of deferred tax assets and liabilities are principally
related to the Corporation's net operating loss carryforward and its unrealized
appreciation of investments.

DEPRECIATION AND AMORTIZATION

Depreciation is recorded using the straight-line method at rates based upon
estimated useful lives of five years for the respective assets. Franklin Holding
amortizes its leasehold improvements over its useful life or the remaining life
of the lease, whichever is shorter.

<PAGE>

NET INCREASE IN NET ASSETS PER COMMON SHARE

Net increase in net assets per common share is based upon the weighted average
number of shares of common stock outstanding. Franklin Holding has no common
stock equivalents.

3. INCOME TAXES

At December 31, 1995, Franklin Holding had a net operating loss carryforward for
Federal income tax purposes of approximately $138,000 which will begin to expire
in 2002. At a 34% Federal income tax rate the benefit from this loss would be
approximately $47,000.

For the years ended December 31, 1995 and 1994, Franklin Holding's tax benefit
(provision) was based on the following:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------

<S> <C> <C>
1995 1994
----------- -----------
Net investment loss...................... $(1,209,464) $(1,439,669)
Net realized gain........................ 1,242,937 1,800,301
Decrease in unrealized appreciation...... (40,486) (391,270)
----------- -----------
Pre-tax book (loss).................... $ (7,013) $ (30,638)
----------- -----------
----------- -----------

1995 1994
----------- -----------
<S> <C> <C>
Tax at 34% on $(7,013) and
$(30,638), respectively................ $ 2,384 $ 10,417
State and local, net of Federal
benefit................................ (243,908) (2,000)
Adjustment to state and local deferred
taxes.................................. 271,980 316,502
Other, net............................... -- 6,227
----------- -----------
$ 30,456 $ 331,146
----------- -----------
----------- -----------
</TABLE>

The adjustments to state and local deferred taxes of $271,980 and 316,502 for
the years ended December 31, 1995 and 1994, respectively, are attributable to

income that was realized at tax rates lower than had been assumed when the
related deferred taxes were provided, as well as certain gains recognized for
tax purposes that are unrealized on the books of the Corporation.

The components of the tax benefit (provision) are as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------

1995 1994
--------- ---------
<S> <C> <C>

Net deferred Federal tax benefit
(provision)............................... $ (80,339) $ 13,000
Current state and local tax benefit
(provision)............................... (243,908) 56,146
Deferred state and local tax benefit........ 354,703 262,000
--------- ---------
Benefit for income taxes.................. $ 30,456 $ 331,146
--------- ---------
--------- ---------
</TABLE>
- ------------------------------------------------------------------

Deferred income tax benefit (provision) reflects the impact of 'temporary
differences' between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws.

At December 31, 1995 and 1994, deferred tax attributes consist of:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------
<S> <C> <C>
ASSET (LIABILITY)
---------------------
1995 1994
--------- ---------
Deferred Federal benefit from net operating
and capital loss carryforward............. $ 46,885 $ 823,000
Deferred Federal provision on unrealized
appreciation of investments............... (114,224) (679,000)
Deferred state provision on unrealized
appreciation of investments............... (33,297) (388,000)
Other, net.................................. -- (69,000)
Valuation allowance......................... -- (62,000)
--------- ---------
Deferred Taxes............................ $(100,636) $(375,000)
--------- ---------
--------- ---------
</TABLE>
- ------------------------------------------------------------------

4. TREASURY STOCK

The Board of Directors has authorized Franklin Holding to repurchase up to an
aggregate of 250,000 shares of its common stock in open market purchases on the
American Stock Exchange when such purchases are deemed to be in the best
interest of the Corporation and its stockholders. To date, Franklin Holding has
repurchased 187,788 shares of its common stock of which 177,788 shares remain in
treasury at December 31, 1995.

5. COMMITMENTS AND CONTINGENCIES

Franklin Holding is obligated under an operating lease which provides for annual
minimum rental payments as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------
<S> <C>
December 31,
1996.................................................. $ 139,000
1997.................................................. 139,000
1998.................................................. 139,000
1999.................................................. 149,000
2000.................................................. 149,000
2001 and thereafter................................... 449,000
----------
$1,164,000
----------
----------
</TABLE>
- -----------------------------------------------------------------

Rent expense for the years ended December 31, 1995 and 1994 was $135,008 and
$136,237, respectively.

In March 1994, Stearns and Foster Bedding Company ('Stearns & Foster') commenced
a private cost recovery and contribution action against Franklin Holding and a
number of other defendants in the United States District Court for the District
of New Jersey (Newark). Stearns & Foster is the current owner of a site located
in South Brunswick, New Jersey (the 'Site'), which is the subject of an
investigation and cleanup under the Industrial Site Recovery Act ('ISRA').
Stearns & Foster has alleged that a number of parties, including Franklin
Holding, are liable for contamination at the Site. Franklin Holding's alleged
liability is the result of an investment in a manufacturing company then located
on the Site made approximately twenty years ago by The Franklin Corporation,
which by operation of a merger became a former wholly owned subsidiary of
Franklin Holding. To date, Stearns & Foster has incurred approximately $2
million in investigation and remediation costs for which Stearns & Foster seeks
recovery from the defendants in the aforementioned action. The State of New
Jersey has not approved any specific cleanup plan

9
<PAGE>

for the Site and therefore presently it is not possible to provide an estimate
as to the ultimate cleanup costs. Franklin Holding has asserted a number of
legal and factual defenses, which if successful, would exculpate the Corporation
from liability. Additionally, Franklin Holding has asserted contribution claims
against the other defendants. Based on information that is currently available,
management has no basis to expect that this matter will have a material adverse
effect on its financial position.

In a separate action, Franklin Holding instituted a declaratory judgement in New
Jersey Superior Court against certain insurers that in the opinion of its
counsel, may be obligated under New Jersey law to defend and indemnify Franklin
Holding against costs incurred, and against any liabilities that may be
incurred, in connection with the aforementioned environmental litigation. In
December 1995, an insurer agreed to assume, in substantial part, Franklin
Holding's ongoing costs for its New Jersey legal counsel and expert consultants.
In addition, in 1995, Franklin Holding was reimbursed $397,657 by the insurer
for certain defense costs it had previously expended. Franklin Holding's claim
for indemnification is still pending.

In March 1995, a complaint was filed in the United States District Court for the
Southern District of New York by a former director of Franklin Holding (who, in
1990, was not renominated for election to the Board of Directors) against the
Corporation, its chairman, certain of its directors and an affiliated company.
The action was purportedly brought both on behalf of a class of minority
shareholders of Franklin Holding and derivatively on behalf of the Corporation.
The action, in substance, alleged that the Corporation's Board did not comply
with the 'interested persons' provisions of the Investment Company Act of 1940;
that there had not been full disclosure about various matters, including with
respect to the Corporation's application to deregister as an investment company
and about the business relationships between defendants in proxy statements from
1989 through 1994; and that management's and directors' compensation and
benefits were excessive in relation to the financial performance of the
Corporation. The complaint asserted claims under the Act and SEC Rules
promulgated thereunder and under common law. In May 1995, an amended complaint
was filed containing in substance, the same claims as the original complaint,
but purporting to assert additional derivative and class action claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended
complaint alleged that Franklin Holding and its Board failed to disclose facts
in various documents, including the Corporation's 1994 Annual Report and 1993
and 1994 Proxy Statements, with respect to, among other things, Franklin
Holding's investment through Excelsior in various radio stations and the current
status of the Corporation's operations.

In June 1995, the Corporation and the other defendants moved to dismiss the
amended complaint for failure to make the required demand upon the Board of
Directors (as to purported derivative claims), for lack of standing to assert
the purported derivative claims, for failure to state a claim upon which the
requested relief can be granted and for failure to plead the claims for fraud
with the required specificity. Plaintiff filed a second amended complaint in
August 1995 containing in substance the same claims as the amended complaint,
but including additional factual allegations. The second amended complaint seeks
unspecified monetary relief from the individual defendants and equitable and
declaratory relief with respect to Franklin Holding, including setting aside the

election of directors held at the Corporation's annual meeting in August 1994
and 1995 and Board action since August 1994, declaring the chairman's employment
contract void, an accounting by defendants, and an injunction directing the
liquidation of Franklin Holding and the appointment of a special fiscal agent,
receiver or conservator to oversee same. The plaintiff and the defendants
submitted supplemental briefings concerning the issue of whether the second
amended complaint should be dismissed.

In January 1996, the Court issued an opinion partially granting and partially
denying defendants' motion to dismiss. The Court dismissed plaintiff's
derivative claims for failure to make the required demand and abstained from
entertaining plaintiff's claim that the Corporation be dissolved and that a
special fiscal agent, receiver or conservator be appointed. The Court denied
defendants' motion to dismiss with respect to the remainder of plaintiff's
claims.

Management believes the plaintiff's claims are without merit and intends to
continue vigorously defending the action. During the year ended December
31,1995, the Corporation expended $420,038 defending this action as well as a
related proxy contest.

6. TRANSACTIONS WITH CONTROLLED AFFILIATES

Franklin Communications Partners, L.P. ('FCP'), a limited partnership of which
Excelsior had a 48.5 percent ownership share, was formed in September 1992. From
its inception, FCP acquired seven radio stations. Pursuant to an agreement of
its limited partners, FCP was dissolved by its general partner, WESHAM
Broadcasting Corporation ('WESHAM'), on August 2, 1994. Prior to its
dissolution, FCP sold six of its stations. Effective July 1, 1994, as part of
the dissolution plan, Excelsior received substantially all the assets of FCP
used primarily in the operation of radio station WRKA-FM in Louisville,
Kentucky, in satisfaction of substantially all of its rights to the proceeds of
the sale of the other radio stations and the dissolution of FCP. As
consideration for receiving the distribution, Excelsior also contributed
$1,763,000 to FCP. As part of the plan, the partners of FCP agreed to value the
assets associated with WRKA-FM at $6.25 million, exclusive of the radio
station's net receivables. The plan also specified that Excelsior was

<PAGE>

deemed to have received cash to the extent that the aggregate amount of WRKA's
accounts receivable distributed to Excelsior exceeded the aggregate amount of
the accounts payable and accrued expenses assumed by Excelsior, a net amount of
approximately $416,000. WESHAM was also dissolved and included in the amount
distributed as part of this plan.

For the years ended December 31, 1995 and 1994, Franklin Holding's income from
Excelsior consists of a management fee of $750,000 and $341,000, respectively,
and interest income, net of related expenses, of $0 and $23,133, respectively.

During 1994 and 1993, Franklin Holding purchased artwork totaling approximately
$87,000 from an affiliated company. The purchase price was based upon the

affiliated company's original cost and an independent appraisal. The artwork has
been used by the Corporation at its offices at 767 Fifth Avenue since 1986 and
continues to be used at Franklin Holding's offices at 450 Park Avenue. The
artwork was repurchased by the affiliated company in June, 1995, at the cost to
Franklin Holding, approximately $87,000.

7. EXCELSIOR COMMUNICATIONS CORPORATION TRANSACTIONS

On August 30, 1995, Excelsior purchased the assets of radio station WAJE-FM for
$1.035 million, including cash of $342,750 and a note payable to the seller of
$692,250. The station, a start-up operation whose primary coverage area includes
the City of Louisville, Kentucky, is licensed in New Albany, Indiana.

On December 31, 1995, Excelsior sold the broadcast assets of its two Louisville
radio stations, WRKA-FM and WAJE-FM, to Cox Broadcasting, Inc. for a total price
of $8.5 million in cash. Excelsior retained the cash and accounts receivable of
the station in excess of its accounts payable and accrued liabilities, a total
of approximately $565,000. Excelsior utilized a portion of the funds received
from this sale to fully satisfy its obligations under the note payable due on
the purchase of WAJE-FM.

8. EMPLOYEE STOCK SAVINGS PLAN

Franklin Holding has a contributory retirement plan (the 'Plan') covering all
employees. Contributions to the Plan are invested in Franklin Holding's common
stock and/or a selected group of mutual funds. Contributions for the years ended
December 31, 1995 and 1994 were $25,070 and $27,951, respectively, and are
included in salaries and employee benefits in the accompanying Statements of
Operations.

9. PURCHASES AND SALES OF INVESTMENT SECURITIES

The cost of purchases and proceeds from sales of investment securities,
excluding short term investments, aggregated $4,837,273 and $3,350,826,
respectively, for the year ended December 31, 1995 and $7,383,359 and
$15,580,857, respectively, for the year ended December 31, 1994.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE FRANKLIN HOLDING CORPORATION (DELAWARE):

We have audited the accompanying balance sheets of The Franklin Holding
Corporation (Delaware) (a Delaware corporation) as of December 31, 1995 and
1994, including the portfolio of investments as of December 31, 1995, and the
related statements of operations, cash flows and changes in net assets for each
of the two years in the period then ended, and the financial highlights for each
of the three years in the period then ended, for the period ended December 31,
1992 and for each of the two years in the period ended March 31, 1992. These
financial statements and financial highlights are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and financial highlights 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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the physical inspection of securities on
hand at December 31, 1995 and 1994, and the confirmation of marketable
investment securities owned as of December 31, 1995 and 1994, by correspondence
with brokers. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Franklin Holding Corporation (Delaware) as of December 31, 1995 and 1994, the
results of its operations, cash flows and changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
three years in the period then ended, for the period ended December 31, 1992 and
for each of the two years in the period ended March 31, 1992 in conformity with
generally accepted accounting principles.

As discussed in Note 2 to the financial statements, investment securities not
readily marketable amounting to $9,948,750 (82% of net assets) as of December
31, 1995 and $8,680,115 (65% of net assets) as of December 31, 1994, have been
valued at fair value as determined by the Board of Directors. We have reviewed
the procedures used by the Board of Directors in valuing such investments and
have inspected underlying documentation, and in the circumstances, we believe
the procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, the Board of Directors'
estimate of values may differ significantly from the values that would have been
used had a ready market existed for the securities and the differences could be

material.

New York, New York
February 14, 1996

BOARD OF DIRECTORS
- ------------------

STEPHEN L. BROWN*
Chairman and Chief Executive Officer, The Franklin Holding Corporation
(Delaware)

MILES L. BERGER
Vice Chairman of the Board, Heitman Financial Ltd.

CARL D. GLICKMAN*
Private Investor and Corporate Director

JOHN GREENBAUM
Chief Financial Officer, Treasurer, The Franklin Holding Corporation (Delaware)

IRVING LEVINE
Chairman, Copley Fund, Inc.

JONATHAN A. MARSHALL*
Senior Partner, Pennie & Edmonds

JEFFREY J. STEINER
Chairman, President and Chief Executive Officer, The Fairchild Corporation

*Member of Executive Committee
Carl D. Glickman, Chairman

REGISTRAR & TRANSFER AGENT
- --------------------------

Chemical Shareholder Services
450 West 33rd Street
15th Floor
New York, NY 10001
(212) 946-8484

OFFICERS
- --------
STEPHEN L. BROWN
Chairman and Chief Executive Officer

SPENCER L. BROWN
Senior Vice President and Secretary

JOHN GREENBAUM
Chief Financial Officer, Treasurer

STEPHEN J. MAYER
Vice President and Controller

AUDITORS
- --------
Arthur Andersen LLP
1345 Avenue of the Americas
New York, NY 10105

SECURITIES TRADED
- -----------------
American Stock Exchange
Symbol: FKL

<PAGE>

THE FRANKLIN HOLDING CORPORATION
(DELAWARE)

450 Park Avenue, New York, NY 10022
(212) 486-2323 FAX (212) 755-5451