<PAGE>
[EMPIRE BUILDER TAX FREE BOND FUND LOGO]
TAX FREE BOND FUND
3435 STELZER ROAD
COLUMBUS, OHIO 43219
1-800-847-5886
April 1, 1997
Dear Shareholder,
At present there is a growing rift among the fixed income community
regarding the future of interest rates. Some are calling on the Fed to raise
short-term interest rates. They cite wage-induced inflation as the consequence
of an embarrassingly strong economy. Others are calling on the Fed to lower
short-term rates. They cite growing defaults on consumer debt and weaker auto
sales as proof that the economy needs lower interest rates.
As investment advisors who have been entrusted with the shareholders'
money, we believe that caution is the only appropriate response to this level of
market uncertainty. The portfolio continues to be heavily weighted in AAA-rated
bonds, and we have reduced the Fund's market risk exposure by investing in
shorter term bonds. As a result, the portfolio should offer continued tax-free
income with a higher resistance to market volatility.
We have also worked diligently to improve the Builder's convenience and
choices. On April 15, 1996, we introduced the first-of-its-kind, no-frills,
higher yielding Premier Class. It was well-received by our shareholders, who
invested nearly $60 million into the new Class. As expected, they have been
rewarded with higher yields (an extra 16 basis points since inception). Of
course, the shares were purchased without sales charges, due to last year's
adoption of a true, no-load structure.
In addition to the new Premier Class, the Empire Builder also changed
administrators during the year. The new administrator, BISYS Fund Services, has
extended the customer service hours and has introduced a better, more
comprehensive monthly statement. Furthermore, they are providing the services
for a lower fee, which is helping us to reduce the fund's expenses.
In our opinion, the Builder is simply a better 'mousetrap', with regard to
conservative management for the uncertain economy, a no-load structure for
cost-conscious investors, and a new Premier Class for investors looking for
higher yields. For these reasons we are looking forward to the opportunities
ahead, and to helping our shareholders meet their investment needs.
Sincerely,
/s/ Seth M. Glickenhaus
Seth M. Glickenhaus
President
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
The following graphs illustrate the total return based on a $10,000
investment in Builder Class shares of the Fund made March 1, 1987, and a $10,000
investment in Premier Class shares of the Fund made at the trading commencement
date of April 15, 1996, held in each through February 28, 1997, as well as the
performance of the Lehman Municipal Bond Index over the same period.
The Lehman Municipal Bond Index includes 25,000 long-term, investment
grade, municipal bonds. In the opinion of the Fund's adviser, this index most
accurately represents the performance of the broad municipal bond market.
However, there are substantial differences between the index and the Fund.
First, the index covers municipal bonds nationwide, whereas the Fund invests
only in New York exempt bonds. Second, the index does not reflect the costs and
expenses of actually obtaining the underlying bonds. Third, the index had a
higher level of market risk than the Fund during the ten years ended December
31, 1996, as measured by Beta according to a recent study conducted by Lipper
Analytical Services. Finally, the index represents an unmanaged portfollio
whereas the Fund is professionally managed.
The graphs assume all dividends and distributions are reinvested at net
asset value. Past performance is not predictive of future performance.
The Fund's Builder Class shares average annual total return for the periods
indicated was as follows:
+4.30% for the one-year period beginning March 1, 1996 and ended February
28, 1997;
+6.82% for the five-year period beginning March 1, 1992 and ended February
28, 1997;
+6.58% for the ten-year period beginning March 1, 1987 and ended February
28, 1997.
[GRAPH]
Builder Chart
Empire Builder Tax Free Lehman Municipal
Bond Fund Builder Class Bond Index*
March 1, 1987 10,000 10,000
Feb. 29, 1988 10,308 10,262
Feb. 28, 1989 10,883 10,899
Feb. 28. 1990 11,644 12,019
Feb. 28, 1991 12,598 13,127
Feb. 29, 1992 13,608 14,438
Feb. 28, 1993 15,626 16,426
Feb. 28, 1994 16,477 17,335
Feb. 28, 1995 16,657 17,667
Feb. 29, 1996 18,147 19,620
Feb. 28, 1997 18,928 20,703
* An unmanaged portfolio.
2
<PAGE>
The Fund's Premier Class shares total return (not annualized) for the
period beginning April 15, 1996 (commencement of operations) and ended February
28, 1997 was 6.03%.
[GRAPH]
Premier Chart
Empire Builder Tax Free Bond Fund Lehman Municipal
Premier Class Bond Index *
April 15, 1996 10,000 10,000
April 30, 1996 10,013 9,972
May 31, 1996 10,025 9,968
June 30, 1996 10,126 10,077
July 31, 1996 10,221 10,168
Aug. 31, 1996 10,199 10,166
Sept. 30, 1996 10,335 10,309
Oct. 31, 1996 10,417 10,425
Nov. 30, 1996 10,578 10,616
Dec. 31, 1996 10,529 10,571
Jan. 31, 1997 10,524 10,591
Feb. 28, 1997 10,602 10,689
Commencement of Operations
* An unmanaged portfolio
3
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS -- FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Credit Principal Value
Ratings* Municipal Securities -- 96.6% Amount (Note 2)
- ---------- ---------------------------------------- ------------- -------------
<S> <C> <C> <C>
NEW YORK CITY -- 3.6%
Aaa/AAA New York City General Obligation (MBIA),
Series C, 6.625%, 8/01/2012........... $ 105,000 $ 113,662
Aaa/AAA New York City Municipal Water Finance
Authority (MBIA),
Series B, 5.50%, 6/15/2019............ 4,325,000 4,206,062
-------------
TOTAL NEW YORK CITY (Identified Cost
$4,295,851)........................... 4,319,724
-------------
NEW YORK STATE AGENCIES -- 76.9%
Empire State Development Corporation
(Urban Development Corporation),
Baa1/BBB University Facilities, 6.00%,
1/01/2008........................... 850,000 892,500
Baa1/BBB University Facilities, 6.00%,
1/01/2009........................... 905,000 945,725
Baa1/BBB University Facilities, 6.00%,
1/01/2010........................... 955,000 992,006
New York State Dormitory Authority
Revenue,
Baa1/BBB City University, Consolidated Revenue,
Series D, 8.20%, 7/01/2012(a)....... 2,500,000 2,665,625
Aaa/AAA City University (MBIA), 6.875%,
7/01/2014(a)........................ 4,825,000 5,361,781
NR/AAA Cooper Union (AMBAC), 5.375%,
7/01/2016............................. 700,000 680,750
NR/AAA Cooper Union (AMBAC), 5.375%,
7/01/2020........................... 860,000 828,825
Aa2/AA Cornell University, Series A, 7.375%,
7/01/2020........................... 750,000 821,250
Baa1/BBB Department of Health, 5.50%,
7/01/2014........................... 3,000,000 2,876,250
NR/AAA Heritage House Nursing Center (FHA),
7.00%, 8/01/2031.................... 485,000 528,650
Aaa/AAA Montefiore Medical Center (AMBAC-FHA),
5.25%, 2/01/2015.................... 3,300,000 3,184,500
Aaa/AAA Mt. Sinai School of Medicine (MBIA),
5.00%, 7/01/2021.................... 2,000,000 1,822,500
Aaa/AAA Mt. Sinai School of Medicine (MBIA),
6.75%, 7/01/2015.................... 2,250,000 2,432,813
Aaa/AAA Rockefeller University (FGIC), Series
A, 6.75%, 7/01/2010................. 525,000 575,531
Aaa/AAA Rockefeller University (FGIC), Series
A, 6.75%, 7/01/2011................. 1,000,000 1,092,500
NR/AAA St. Francis Geriatric (FHA), 7.65%,
8/01/2030........................... 975,000 1,072,500
NR/AAA St. John's Fisher College (Connie
Lee), 6.75%, 7/01/2011.............. 2,670,000 2,893,613
Aaa/AAA St. Joseph's Hospital (MBIA), 5.25%,
7/01/2018........................... 1,000,000 953,750
Aaa/AAA Special Act School District (MBIA),
6.00%, 7/01/2019.................... 3,540,000 3,663,900
Baa1/BBB+ State University, 5.25%, 5/15/2001.... 1,450,000 1,477,188
Baa1/BBB+ State University, 5.50%, 5/15/2026.... 10,175,000 9,615,375
Aaa/AAA WK Nursing Home (MBIA-FHA), 5.95%,
2/01/2016........................... 2,500,000 2,559,375
New York State Environmental Facility
Corp.,
Aaa/AAA Water Pollution Control Pool Loan,
5.90%, 1/15/2018.................... 1,510,000 1,545,863
New York State Housing Finance Agency,
Aaa/AAA Fulton Manor (AMBAC-FHA), 6.10%,
11/15/2025.......................... 2,000,000 2,050,000
Aaa/AAA Health Facilities (AMBAC), Series A,
6.00%, 11/01/2007(a)................ 5,000,000 5,381,250
Aa/NR Multi-Family Housing Secured Mortgage
(SONYMA Insured), 6.45%,
8/15/2014........................... 2,245,000 2,337,606
A1/NR Village of St. John (Section 8
Assisted), 8.25%, 5/01/2009......... 1,675,000 1,691,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS -- FEBRUARY 28, 1997 -- CONTINUED
<TABLE>
<CAPTION>
Credit Principal Value
Ratings* Municipal Securities -- continued Amount (Note 2)
- ---------- ---------------------------------------- ------------- -------------
NEW YORK STATE AGENCIES -- CONTINUED
<S> <C> <C> <C>
New York State Medical Care Facilities
Finance Agency,
Aaa/AAA Hospital & Nursing Home Mortgage, St.
Vincent Hospital (AMBAC-FHA), Series
A, 6.20%, 2/15/2021................. $ 2,500,000 $ 2,584,375
Aaa/AAA Long Term Health Care (CGIC), 6.50%,
11/01/2015.......................... 2,400,000 2,556,000
Baa1/BBB+ Mental Health Services Facilities,
Series A, 7.625%, 2/15/2008......... 705,000 738,438
Aaa/AAA Mental Health Services Facilities
(FSA), Series E, 6.25%,
2/15/2009........................... 1,420,000 1,554,900
Baa1/BBB+ Mental Health Services Facilities,
Series B, 7.875%,
8/15/2020........................... 755,000 833,331
Aaa/AAA N.Y. Hospital (AMBAC-FHA), Series A,
6.50%, 8/15/2029.................... 1,500,000 1,620,000
Aaa/AAA N.Y. Hospital (AMBAC-FHA), Series A,
6.90%, 8/15/2034(a)................. 3,350,000 3,701,750
Aaa/AAA North Shore University Hospital
(MBIA), 5.125%, 11/01/2012.......... 1,000,000 958,750
Aaa/AAA Presbyterian Hospital (MBIA-FHA),
5.50%, 8/15/2024...................... 1,300,000 1,261,000
Aaa/AAA St. Mary's Hospital (AMBAC), Series A,
6.20%, 11/01/2014................... 2,100,000 2,220,750
New York State Thruway Authority,
Aaa/AAA (FGIC), Series C, 6.00%, 1/01/2025.... 1,000,000 1,028,750
Aaa/AAA Service Contracts (AMBAC), 5.30%,
4/01/2004............................. 5,825,000 6,079,844
New York State Urban Development
Corporation,
Baa1/BBB Youth Facilities, 5.75%, 4/01/2008.... 1,000,000 1,021,250
A1/A- Triborough Bridge and Tunnel Authority,
Special Obligation, Series B, 7.10%,
1/01/2010(a).......................... 3,725,000 4,027,656
-------------
TOTAL NEW YORK STATE AGENCIES
(Identified Cost $87,365,680)......... 91,130,170
-------------
OTHER NEW YORK STATE BONDS -- 12.2%
Baa1/NR Albany County Housing Authority, 6.25%,
10/01/2012............................ 1,000,000 1,030,000
Aaa/AAA Buffalo Municipal Water Authority, Water
System Revenue (FGIC), 5.75%,
7/01/2013............................. 500,000 506,875
Aaa/AAA Buffalo Municipal Water Authority, Water
System Revenue (FGIC), 5.75%,
7/01/2019............................. 500,000 505,000
Aaa/AAA Buffalo Schools Series B (AMBAC), 5.00%,
2/01/2008............................. 645,000 634,519
Aaa/AAA Buffalo Schools Series B (AMBAC), 5.10%,
2/01/2009............................. 1,100,000 1,080,750
Aaa/AAA Buffalo Schools Series B (AMBAC), 5.20%,
2/01/2010............................. 350,000 343,437
Aaa/AAA Buffalo Schools Series B (AMBAC), 5.25%,
2/01/2011............................. 530,000 519,400
Aaa/AAA Dutchess County Resource Recovery Agency
Revenue Solid Waste (FGIC), Series A,
7.50%, 1/01/2009...................... 1,500,000 1,629,375
Evans Public IMPT General Obligation
Bank Qualified,
Aaa/AAA (AMBAC), 6.80%, 4/15/2012............. 225,000 259,875
Aaa/AAA (AMBAC), 6.80%, 4/15/2013............. 225,000 259,875
Aa3/NR Hempstead Industrial Development Agency
Resource Recovery Revenue, American
Ref-Fuel Company, 7.40%, 12/01/2010... 700,000 715,673
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS -- FEBRUARY 28, 1997 -- CONTINUED
<TABLE>
<CAPTION>
Credit Principal Value
Ratings* Municipal Securities -- continued Amount (Note 2)
- ---------- ---------------------------------------- ------------- -------------
OTHER NEW YORK STATE BONDS -- CONTINUED
<S> <C> <C> <C>
Aaa/AAA Hempstead Industrial Development Agency
Resource Recovery Revenue, American
Ref-Fuel Company (MBIA), 5.00%,
12/01/2009............................ $ 3,500,000 $ 3,416,875
NR/AAA Lillian Cooper Housing Development
Corporation Mortgage Revenue Section 8
(FNMA & FHA), 7.00%, 1/01/2022........ 1,100,000 1,166,000
Aaa/AAA Mt. Sinai Union Free School District
(AMBAC), 6.20%, 2/15/2012............. 1,065,000 1,162,181
North Hempstead General Obligation
Refunding,
Aaa/AAA (FGIC), Series B, 6.375%, 4/01/2009... 570,000 636,263
Aaa/AAA (FGIC), Series B, 6.40%, 4/01/2010.... 560,000 624,400
-------------
TOTAL OTHER NEW YORK STATE BONDS
(Identified Cost $13,909,415)......... 14,490,498
-------------
OTHER MUNICIPAL BONDS -- 0.9%
Aaa/AAA Guam Government Limited Obligation
Highway Revenue (CGIC), Series A,
6.25%, 5/01/2007 (Identified Cost
$990,370)............................. 1,000,000 1,081,250
-------------
SHORT TERM INVESTMENTS -- VARIABLE
RATE -- 3.0%
Dreyfus New York Municipal Cash
Management Fund
(Identified Cost $3,500,000).......... 3,500,000 3,500,000
-------------
TOTAL INVESTMENTS -- 96.6% (Identified
Cost $110,061,316)+................... 114,521,642
OTHER ASSETS LESS LIABILITIES -- 3.4%... 3,967,554
-------------
NET ASSETS -- 100.0%.................... $ 118,489,196
-------------
-------------
</TABLE>
- ------------------
+ The cost for Federal income taxes is the same.
(a) Securities pledged as collateral for futures transactions or when issued
securities.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS -- FEBRUARY 28, 1997 -- CONTINUED
*Credit Ratings given by Moody's Investors Service Inc. and Standard & Poor's
Corporation (unaudited).
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
<S> <C> <C>
Aaa AAA Instrument judged to be of the highest quality and carrying the smallest
amount of investment risk.
Aa AA Instrument judged to be of high quality by all standards.
A A Instrument judged to be adequate by all standards.
Baa BBB Instrument judged to be of moderate quality by all standards.
NR NR Not Rated. In the opinion of the Investment Adviser, instrument judged to
be of comparable investment quality to rated securities which may be
purchased by the Fund.
</TABLE>
For items possessing the strongest investment attributes of their category,
Moody's gives that letter rating followed by a number. The Standard & Poor's
ratings may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
ABBREVIATIONS USED IN THIS STATEMENT:
<TABLE>
<S> <C>
AMBAC Insured as to principal and interest by the American Municipal Bond Assurance Corporation.
CGIC Insured as to principal and interest by the Capital Guarantee Insurance Corporation.
Connie Lee Insured as to principal and interest by Connie Lee Insurance Company.
FGIC Insured as to principal and interest by the Financial Guarantee Insurance Corporation.
FHA Insured by the Federal Housing Administration.
FNMA Insured by the Federal National Mortgage Association.
FSA Insured as to principal and interest by Financial Security Assurance.
MBIA Insured as to principal and interest by the Municipal Bond Insurance Association.
SONYMA Insured as to principal and interest by the State of New York Mortgage Association.
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C> <C>
Investments in securities, at value (identified cost
$110,061,316) (Note 2)........................................ $114,521,642
Cash............................................................ 6,261,965
Interest receivable............................................. 1,436,007
Receivable for Fund shares sold................................. 200
Prepaid insurance and other assets.............................. 34,140
------------
Total Assets.................................................. 122,253,954
LIABILITIES:
Payable for investments purchased................... $3,441,480
Income distribution payable......................... 42,981
Fund accounting and shareholder servicing fees
payable (Note 4).................................. 55,968
Advisory fee payable (Note 4)....................... 35,481
Payable for Fund shares redeemed.................... 30,138
Administrative services fee payable (Note 4)........ 17,353
Other payables and accrued expenses................. 141,357
----------
Total Liabilities............................................. 3,764,758
------------
NET ASSETS........................................................ $118,489,196
------------
------------
NET ASSETS:
Net assets consist of:
Capital paid in............................................... $114,040,935
Accumulated net realized loss on investments including futures
contracts.................................................... (12,065)
Net unrealized appreciation on investments including futures
contracts.................................................... 4,460,326
------------
NET ASSETS........................................................ $118,489,196
------------
------------
SHARES OF BENEFICIAL INTEREST:
Builder Class:
Shares of beneficial interest outstanding........... 3,334,766
----------
----------
Net asset value, offering and redemption price per
share
($59,132,949 divided by 3,334,766 shares)......... $ 17.73
----------
----------
Premier Class:
Shares of beneficial interest outstanding........... 3,348,222
----------
----------
Net asset value, offering and redemption price per
share
($59,356,247 divided by 3,348,222 shares)......... $ 17.73
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C> <C>
INCOME:
Interest......................................................... $6,868,673
EXPENSES:
Advisory fees (Note 4).............................. $ 458,454
Administrative services fees (Note 4)............... 228,434
Shareholder servicing and dividend disbursing agent
fees (Builder Class) (Note 4)..................... 171,227
Shareholder servicing and dividend disbursing agent
fees (Premier Class) (Note 4)..................... 28,677
Legal............................................... 68,000
Custody............................................. 52,081
Printing............................................ 48,634
Audit............................................... 43,350
Fund accounting fees and expenses (Note 4).......... 42,592
Trustees' fees and expenses......................... 24,226
Insurance........................................... 13,198
Registration........................................ 11,665
Miscellaneous....................................... 23,608
-----------
Total expenses.................................... 1,214,146
Custody fee credit.................................. (52,081)
-----------
Total net expenses............................................. 1,162,065
----------
INVESTMENT INCOME-NET.............................................. 5,706,608
Realized and unrealized gain / (loss) on investments
(Notes 2 and 3):
Net realized gain on investments on basis of
identified cost................................... 720,080
Net realized loss on futures contracts on basis of
identified cost (Note 2).......................... (732,415)
Net decrease in unrealized appreciation on
investments including futures contracts........... (656,980)
-----------
Net loss on investments........................................ (669,315)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $5,037,293
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Year
Ended Ended
2/28/97 2/29/96
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Investment income--net.......................... $ 5,706,608 $ 5,593,736
Net realized gain on investments................ 720,080 3,309,546
Net realized loss on futures contracts.......... (732,415) (435,150)
Net increase / (decrease) in unrealized
appreciation (depreciation) on investments
including futures contracts................... (656,980) 1,273,183
------------ ------------
Net increase in net assets resulting from
operations.................................... 5,037,293 9,741,315
------------ ------------
Distributions to shareholders from:
Net investment income--Builder Class............ (3,318,420) (5,593,736)
Net investment income--Premier Class............ (2,388,188) --
Net realized gain on investments--Builder
Class......................................... (535,066) --
Net realized gain on investments--Premier
Class......................................... (304,958) --
------------ ------------
Total distributions............................. (6,546,632) (5,593,736)
------------ ------------
SHARE TRANSACTIONS:
Proceeds from sale of 535,999 shares--Builder
Class......................................... 9,479,126 16,324,081
Proceeds from sale of 3,525,184 shares--Premier
Class......................................... 61,910,250 --
Proceeds from reinvestment of income and capital
gain distributions of 190,410 shares--Builder
Class......................................... 3,354,882 4,983,473
Proceeds from reinvestment of income and capital
gain distributions of 137,550 shares--Premier
Class......................................... 2,422,316 --
Cost of 3,954,973 shares redeemed--Builder
Class......................................... (69,479,003) (15,615,064)
Cost of 314,512 shares redeemed--Premier
Class......................................... (5,549,298) --
------------ ------------
Net increase in net assets from capital share
transactions.................................. 2,138,273 5,692,490
------------ ------------
Net increase in net assets...................... 628,934 9,840,069
NET ASSETS:
Beginning of year............................... 117,860,262 108,020,193
------------ ------------
End of year..................................... $118,489,196 $117,860,262
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION AND SHARES OF THE FUND:
The Fund was established as a Massachusetts business trust by an Agreement
and Declaration of Trust dated September 30, 1983. The Fund is registered under
the Investment Company Act of 1940 as an open-end, non-diversified investment
company. The Fund has an unlimited authorized number of shares (no par value).
The Fund seeks as high a level of current income exempt from Federal income
tax and New York State and City personal income taxes as the Fund's investment
adviser believes is consistent with the preservation of capital. The Fund
invests primarily in a portfolio of New York tax-exempt bonds.
As of April 15, 1996, the Fund has offered two classes of shares, the
Builder Class and the Premier Class. Builder Class shares offer a higher level
of shareholder services and features. Premier Class shares offer fewer services
and features, and require a higher minimum investment, but benefit from a lower
level of expenses. Consequently, Premier Class shares produce a higher
investment yield than Builder Class shares.
Each class of shares outstanding bears the same dividend, liquidation and
other rights and conditions, except that the Builder Class shares and the
Premier Class shares bear separate shareholder servicing expenses. Each class of
shares has exclusive voting rights with respect to matters affecting only that
class.
2. SIGNIFICANT ACCOUNTING POLICIES:
SECURITY VALUATION
Tax-exempt securities for which transaction prices are not readily
available (which constitute the majority of the Fund's portfolio securities) are
valued at their fair value as determined by an independent pricing service
approved by the Fund's Board of Trustees as the Fund believes that reliable
transaction prices are generally not readily available for purposes of valuing
tax-exempt securities on a daily basis. The pricing service uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The methods used by the pricing service and the
quality of valuations so established are reviewed by Officers of the Fund and
the Fund's Investment Adviser, under the general supervision of the Trustees of
the Fund.
Securities for which quotations are readily available are stated at market.
Short-term debt securities having remaining maturities of sixty (60) days or
less are stated at amortized cost, which approximates market.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date. Interest income
is accrued as earned. Realized gains and losses from security transactions and
unrealized appreciation and depreciation of investments are determined on the
basis of identified cost.
TAXES
The Fund qualifies and intends to continue to qualify as a 'regulated
investment company' under Subchapter M of the Internal Revenue Code of 1986, as
amended, and to distribute all or substantially all of its tax-exempt and
taxable income to its shareholders. Therefore, no Federal income tax provision
is required.
11
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
In addition, by distributing during each calendar year substantially all of
its net investment income, capital gains and certain other amounts, if any, the
Fund will not be subject to a Federal excise tax.
FUTURES CONTRACTS
Upon entering into a futures contract, the Fund is required to deposit cash
or pledge securities in an amount equal to a certain percentage of the purchase
price indicated in the futures contract (initial margin). Subsequent payments,
which are dependent on the daily fluctuations in the value of the underlying
security, are made or received by the Fund each day (daily variation margin) and
are recorded as unrealized gains or losses until the contracts are closed.
DISTRIBUTIONS AND DIVIDENDS
Distributions to shareholders from net investment income are declared daily
and paid monthly. The Fund also distributes to shareholders substantially all
net capital gains realized from portfolio transactions.
The characterization of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes due to differences in the
recognition of income and expense items for financial statement and federal
income tax purposes.
USE OF ESTIMATES
Estimates and assumptions are required to be made regarding assets,
liabilities, and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ from these amounts.
DETERMINATION OF NET ASSET VALUE AND ALLOCATION OF EXPENSES
In calculating net asset value per share of each class, investment income
and expenses, other than class-specific expenses, are allocated daily to each
class of shares based on the value of outstanding settled shares.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES:
Purchases and sales of investment securities, excluding short-term
investments, during the year ended February 28, 1997, amounted to $190,508,789
and $188,991,640, respectively.
At February 28, 1997, aggregate gross unrealized appreciation for
securities in which there is an excess of value over tax cost amounted to
$4,624,442 and the aggregate gross unrealized depreciation for all securities in
which there is an excess of tax cost over value amounted to $164,116.
4. ADVISORY FEES AND OTHER RELATED PARTY TRANSACTIONS:
The Fund retains Glickenhaus & Co. (the 'Adviser') to act as investment
adviser pursuant to an Investment Advisory Agreement. As compensation for its
advisory services, the Adviser receives a fee, computed daily and paid monthly,
at the annual rates of 0.40% of the first $100,000,000 of average daily net
assets and 0.3333% of any excess over $100,000,000. For the year ended February
28, 1997, the advisory fee earned by the Adviser was $458,454.
Glickenhaus has agreed to a reduction of advisory fees to the extent that
the Fund's expenses, including the advisory fees, exceed (a) 1.50% of the Fund's
average annual net assets or (b) any
12
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
expense limitation on investment company expenses imposed by any statute or
regulatory authority of any jurisdiction in which shares of the Fund are
qualified for offer or sale. For the year ended February 28, 1997, there was no
reduction of advisory fees pursuant to this agreement.
Furman Selz LLC ('Furman Selz'), acted as Administrator and Fund Accounting
Agent for the Fund from March 1, 1996 to December 31, 1996. Furman Selz also
acted as Transfer Agent for the Fund from March 1, 1996 to November 15, 1996.
Furman Selz is primarily an institutional brokerage firm with membership on the
New York, American, Boston, Midwest, Pacific and Philadelphia Stock Exchanges.
Furman Selz also served as sponsor, administrator and distributor of other
mutual funds. On June 28, 1996 Furman Selz and BISYS Group, Inc. ('BISYS')
announced a definitive agreement which provided for Furman Selz to transfer its
mutual fund business to BISYS during the last quarter of 1996. BISYS,
headquartered in Little Falls, New Jersey, supports more than 5,000 financial
institutions and corporate clients through two strategic business units. BISYS
Information Services Group provides image and data processing outsourcing and
pricing analysis to more than 600 banks nationwide. BISYS Investment Services
Group designs, administers and distributes over 30 families of proprietary
mutual funds consisting of more than 365 portfolios, and provides 401(k)
marketing support, administration and recordkeeping services in partnership with
banking institutions and investment management companies. At a meeting held on
September 10, 1996, the Fund's Trustees reviewed and approved a new
Administration Agreement with BISYS Fund Services Limited Partnership d/b/a
BISYS Fund Services ('BISYS Fund Services') and a new Transfer Agency Agreement
and Fund Accounting Agreement with BISYS Fund Services, Inc. Both BISYS
companies have their principal place of business at 3435 Stelzer Road, Columbus,
Ohio 43219. The new Administration and Fund Accounting Agreements took effect at
January 1, 1997, while the new Transfer Agency Agreement was effective November
16, 1996.
Pursuant to the Administration Agreements, Furman Selz and BISYS Fund
Services provided various administrative services and personnel necessary for
the operations of the Fund. For providing such services and personnel, Furman
Selz received a fee from the Fund, computed daily and paid monthly, at the
annual rates of 0.20% of the first $100,000,000 of average daily net assets and
0.1666% of any excess over $100,000,000. From March 1, 1996 to December 31,
1996, Furman Selz earned $191,917 under its Administration Agreement with the
Fund. BISYS receives a fee from the Fund, computed daily and paid monthly at the
annual rates of 0.20% of the first $100,000,000 of average daily net assets and
0.14% of any excess over $100,000,000. From January 1, 1997 to February 28,
1997, BISYS earned $36,517 under its Administration Agreement with the Fund.
Furman Selz and BISYS also provided the Fund with certain accounting and
related services. For their services under the Fund Accounting Agreements,
Furman Selz received from the Fund a monthly fee of $2,500 plus 1/75th of 1% of
any excess over $100,000,000 of the Fund's average daily net assets for the
month. From March 1, 1996 to December 31, 1996, Furman Selz received fees and
expense reimbursement of $35,792 under its Fund Accounting Agreement with the
Fund. BISYS receives from the Fund a monthly fee of $2,500. From January 1, 1997
to February 28, 1997, BISYS received fees and expense reimbursement of $6,800
under its Fund Accounting Agreement with the Fund.
Pursuant to the Transfer Agency Agreements, Furman Selz and BISYS acted as
transfer agents for the Fund and assisted the Fund with certain transfer and
dividend disbursing agent functions. For these transfer agent services, Furman
Selz and BISYS received a fee of $8 per account per year plus
13
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
out-of-pocket expenses. From March 1, 1996 to November 15, 1996, Furman Selz was
entitled to, and received, transfer agency fees and expense reimbursements of
$142,689 for the Builder Class and $23,897 for the Premier Class. From November
16, 1996 to February 28, 1997, BISYS was entitled to, and received, transfer
agency fees and expense reimbursements of $28,538 for the Builder Class and
$4,780 for the Premier Class.
5. OFF-BALANCE-SHEET RISK AND DERIVATIVES:
The Fund's use of futures contracts involves, to varying degrees, elements
of market risk in excess of the amount recognized in the statement of assets and
liabilities. Futures contracts are one type of derivative financial instrument
and are used by the Fund to hedge against changes in the values of New York tax
exempt bonds that the Fund owns or expects to purchase. Although futures
contracts are not used by the Fund for the purpose of leveraging or speculating,
they can result in additional risks if used improperly. The objective in buying
or selling a derivative instrument is to increase or decrease a Fund's exposure
to changing security prices and interest rates. If the Adviser misjudges market
conditions or employs a strategy that does not correlate well with the Fund's
other investments, use of these derivatives could result in a loss, regardless
of the Adviser's original intent to reduce risk.
The Fund sold short futures contracts aggregating $89,531,469 and closed
futures contracts aggregating $90,254,184, resulting in a loss of $722,715,
during the year ended February 28, 1997. The Fund also bought long futures
contracts aggregating $2,846,875 and closed futures contracts aggregating
$2,837,175, resulting in a loss of $9,700, during the year ended February 28,
1997. At February 28, 1997, there were no open contracts.
6. FEDERAL INCOME TAX--CAPITAL LOSS CARRYFORWARD:
At February 28, 1997, the Fund had capital loss carryforwards of $12,335,
expiring 2005, which is available to offset future capital gains, if any.
FEDERAL TAX STATUS OF DIVIDENDS (UNAUDITED)
This information is presented to you to meet regulatory requirements and
requires no current action on your part. Certain portions of this information
were previously reported to you on Form 1099 at the close of calendar year 1996.
Ordinary income dividends paid to you in cash or reinvested in your account
during the fiscal year ended February 28, 1997 were 100% derived from New York
State and Federal exempt obligations.
14
<PAGE>
THE EMPIRE BUILDER TAX FREE BOND FUND
FINANCIAL HIGHLIGHTS
AMOUNTS EXPRESSED AS DOLLARS ARE FOR A
SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Period Ended Year Ended
------------------- ---------------------------------------------
2/28/97 2/29/96 2/28/95 2/28/94 2/28/93
------------------- -------- -------- -------- -------
Builder Premier Builder Builder Builder Builder
Class Class* Class Class Class Class
------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 17.96 $ 17.57 $ 17.31 $ 18.24 $ 18.41 $ 17.17
------- -------- -------- -------- -------- -------
Income from Investment Operations:
Net investment income............... 0.84 0.75 0.87 0.87 0.90 0.94
Net gain (loss) on securities (both
realized and unrealized).......... (0.10) 0.29 0.65 (0.71) 0.09 1.43
------- -------- -------- -------- -------- -------
Total from Investment Operations.... 0.74 1.04 1.52 0.16 0.99 2.37
------- -------- -------- -------- -------- -------
Less Distributions:
Dividends from net investment
income............................ (0.84) (0.75) (0.87) (0.87) (0.90) (0.94)
Distributions from net realized
capital gains..................... (0.13) (0.13) -- -- (0.26) (0.19)
Distributions in excess of net
realized capital gains............ -- -- -- (0.22) -- --
------- -------- -------- -------- -------- -------
Total Distributions................. (0.97) (0.88) (0.87) (1.09) (1.16) (1.13)
------- -------- -------- -------- -------- -------
Net Asset Value, End of Period.......... $ 17.73 $ 17.73 $ 17.96 $ 17.31 $ 18.24 $ 18.41
------- -------- -------- -------- -------- -------
------- -------- -------- -------- -------- -------
Total Return (not including sales
load)................................. 4.30% 6.03%(1) 8.95% 1.09% 5.44% 14.32%
Ratios/Supplemental Data:
Net Assets, End of Period (in
thousands)........................ $59,133 $ 59,356 $117,860 $108,020 $108,305 $96,568
Ratio of Expenses to Average Net
Assets** ......................... 1.07% 0.97%(2) 1.01% 0.93% 0.98% 1.03%
Ratio of Net Investment Income to
Average Net Assets................ 4.81% 4.88%(2) 4.91% 5.04% 4.85% 5.31%
Portfolio Turnover Rate............. 181% 181% 150% 143% 164% 122%
</TABLE>
- ------------------
* Premier Class commenced operations on April 15, 1996.
** Effective fiscal year ended February 29, 1996, the ratio does not include a
reduction of expenses for custodian fee credits on cash balances maintained
with the custodian. Including such custodian fee credits, the expense ratio
for fiscal year ended February 29, 1996 would be 0.96% for the Builder Class.
For the fiscal year ended February 28, 1997, the ratio would be 1.03% for the
Builder Class and 0.93% for the Premier Class, respectively.
(1) Not Annualized.
(2) Annualized
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees
The Empire Builder Tax Free Bond Fund
We have audited the accompanying statement of assets and liabilities of The
Empire Builder Tax Free Bond Fund, including the portfolio of investments, as of
February 28, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund'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 confirmation of securities owned as of
February 28, 1997, by correspondence with the custodian and 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
Empire Builder Tax Free Bond Fund as of February 28, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
April 17, 1997
16
<PAGE>
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<PAGE>
[This page intentionally left blank]
<PAGE>
THE MANAGEMENT
TRUSTEES AND OFFICERS
TRUSTEES
SETH M. GLICKENHAUS,* CHAIRMAN OF THE BOARD
OF TRUSTEES
Senior Partner of Glickenhaus & Co.
EDWARD A. FALKENBERG, Trustee
Vice President and Controller,
Joseph E. Seagram & Sons, Inc. and
Controller, Seagram Company Ltd.
EDWARD A. KUCZMARSKI, Trustee
Certified Public Accountant and Partner,
Hays & Company
ELIZABETH B. NEWELL, Trustee
Trustee, International Preschools
JOHN P. STEINES, Trustee
Professor of Law, New York University
School of Law
OFFICERS
SETH M. GLICKENHAUS
President of the Fund; Senior Partner of
Glickenhaus & Co.
MICHAEL J. LYNCH
Senior Vice President of the Fund; Director,
Unit Trust Department, Glickenhaus & Co.
FRANK M. DEUTCHKI
Vice President of the Fund; Registration and Compliance Officer, Fund
Administration,
BISYS Fund Services
GEORGETTE L. HORTON
Vice President of the Fund; Director,
BISYS Fund Services
MICHAEL SAKALA
Treasurer of the Fund; Vice President and Treasurer, BISYS Fund Services
ALAINA V. METZ
Assistant Secretary of the Fund; Chief Administrative Officer, BISYS Fund
Services
BRUCE TREFF
Assistant Secretary of the Fund; Counsel, Administrative and Regulatory
Services,
BISYS Fund Services
* Trustee who is an 'interested person' of the Fund as that term is defined in
the Investment Company Act of 1940.
THIS IS INSIDE BACK COVER
<PAGE>
[EMPIRE BUILDER TAX FREE BOND FUND LOGO]
TAX FREE BOND FUND
ANNUAL REPORT
FEBRUARY 28, 1997
Investment Adviser and Distributor
GLICKENHAUS & CO.
6 East 43rd Street
New York, New York 10017
Administrator
BISYS FUND SERVICES LIMITED PARTNERSHIP
D/B/A BISYS FUND SERVICES
3435 Stelzer Road
Columbus, Ohio 43219
Transfer and Shareholder Servicing Agent
BISYS FUND SERVICES, INC.
3435 Stelzer Road
Columbus, Ohio 43219
Custodian
INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, Missouri 64105
Legal Counsel
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
Independent Accountants
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
Customer Service
3435 Stelzer Road
Columbus, Ohio 43219
1-800-847-5886
[EMPIRE BUILDER TAX FREE BOND FUND LOGO]
3435 Stelzer Road
Columbus, Ohio 43219
1-800-847-5886
`
This report is submitted for the information of the shareholders of the Empire
Builder Tax Free Bond Fund. It is not authorized for distribution to prospective
investors in the Fund unless preceded or accompanied by an effective prospectus,
obtainable from an investment dealer, which includes information regarding the
Fund's objectives and policies, record, management, sales commission and other
data.
