<PAGE> 1
1933 Act Registration No. 33-7788
1940 Act Registration No. 811-4788
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [____]
Pre-Effective Amendment No. _____ [____]
Post-Effective Amendment No. 12 [ X ]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [____]
Amendment No. 14 [ X ]
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VLC TRUST
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(Exact Name of Registrant as Specified in Charter)
One Regency Plaza
Providence, Rhode Island 02903
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(Address of Principal Executive Offices)
(401) 421-1411
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(Registrant's Telephone Number)
Margaret D. Farrell, Esquire
Hinckley, Allen & Snyder
1500 Fleet Center
Providence, Rhode Island 02903
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ X ] immediately upon filing pursuant to Rule 485(b)
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[ ] on March 1, 1997 pursuant to Rule 485(b)
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[_____] 60 days after filing pursuant to Rule 485(a)
[_____] on (date) pursuant to Rule 485(a)
The Registrant hereby declares, pursuant to Section (a)(1) of Rule 24f-2 under
the Investment Company Act of 1940, that the Registrant has registered an
indefinite number of its shares under the Securities Act of 1933 pursuant to
that Section and that the Rule 24f-2 Notice for the Registrant's fiscal year
ended October 31, 1996 was filed on December 23, 1996.
<PAGE> 2
<TABLE>
VLC TRUST
Cross Reference Sheet
(Pursuant to Rule 495)
Showing location in Prospectus and Statement of Additional Information
<CAPTION>
Part A INFORMATION REQUIRED IN A PROSPECTUS Caption
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<S> <C> <C>
Item 1. Cover Page. . . . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . . . . . . . . . . . Summary
Item 3. Condensed Financial Information . . . . . . . . Financial
Highlights
Item 4. General Description of Registrant . . . . . . . Introduction;
General
Information;
Investment of the
Fund's Assets;
Investment
Restrictions
Item 5. Management of the Fund. . . . . . . . . . . . . Management
Arrangements
Item 5A. Management Discussion of Fund Performance...... Discussion of Fund
Performance
Item 6. Capital Stock and other Securities. . . . . . . General
Information;
Dividends and Tax
Information
Item 7. Purchase of Securities Being Offered. . . . . . How to Invest in
the Fund; Net Asset
Value
Item 8. Redemption or Repurchase. . . . . . . . . . . . How to Redeem Your
Investment
Item 9. Pending Legal Proceedings . . . . . . . . . . . Not Applicable
Part B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page. . . . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . . . . . Not Applicable
Item 13. Investment Objectives and Policies. . . . . . . Investment of the
Fund's Assets;
Municipal Bonds;
Investment
Restrictions
Item 14. Management of the Fund. . . . . . . . . . . . . Trustees and
Officers
Item 15. Control Persons and Principal Holders of
Securities. . . . . . . . . . . . . . . . . . . General
Information*
Item 16. Investment Advisory and Other Services. . . . . Additional
Information as to
Management
Arrangements
Item 17. Brokerage Allocation and Other Practices. . . . Investment of the
Fund's Assets
Item 18. Capital Stock and Other Securities. . . . . . . General Information
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered . . . . . . . . . . . . . . . . . Computation of Net
Asset Value;
Automatic
Withdrawal Plan
Item 20. Tax Status. . . . . . . . . . . . . . . . . . . Dividends and Tax
Information*;
Investment of the
Fund's Assets
Item 21. Underwriters. . . . . . . . . . . . . . . . . . How to Invest in
the Fund*;
Distribution
Arrangements
Item 22. Calculation of Performance Data . . . . . . . . Yield Information
Item 23. Financial Statements are incorporated into and provided as
attachment to the Statement of Additional Information
<FN>
___________________
* Included under referenced caption in the Prospectus
</TABLE>
<PAGE> 3
LOGO
OCEAN STATE TAX-EXEMPT FUND
ONE REGENCY PLAZA
PROVIDENCE, RHODE ISLAND 02903
1-800-300-1116
401-421-1411
PROSPECTUS
MARCH 1, 1997
The objective of Ocean State Tax-Exempt Fund (the "Fund") of VLC Trust (the
"Trust") is to seek to provide as high a level of current income, exempt from
Rhode Island and Federal income taxes, as is consistent with preservation of
capital. The Fund invests primarily in Rhode Island Obligations, i.e.,
obligations (including those of non-Rhode Island issuers) which, in the opinion
of bond counsel, pay interest exempt from Rhode Island State and Federal income
taxes. Thus the name of the Fund does not mean that it will invest solely or
even primarily in the obligations of Rhode Island Issuers, but rather that the
interest received by the Fund will be free from Rhode Island State and Federal
income taxes. Under normal market conditions, the Fund will invest at least 80%
of its net assets in Rhode Island Obligations.
This Prospectus concisely states information about the Fund that a
prospective investor should know before investing. A Statement of Additional
Information dated March 1, 1997 about the Fund and the Trust (the "Additional
Statement") has been filed with the Securities and Exchange Commission and is
available without charge upon written request to Provident Financial Processing
Corporation, the Trust's transfer agent, at the address given below, or by
calling the telephone number given below. The Additional Statement contains
information about the Fund and its management not included in this Prospectus.
The Additional Statement is incorporated by reference in its entirety in this
Prospectus. Only when this Prospectus and the Additional Statement are both read
are all facts about the Fund available to the investor.
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FOR PURCHASE, REDEMPTION OR ACCOUNT INQUIRIES CONTACT
THE FUND'S TRANSFER AGENT: PFPC, INC.
P.O. BOX 8871, WILMINGTON, DELAWARE 19899-8871
TOLL FREE 1-800-992-2207
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FOR GENERAL INQUIRIES AND YIELD INFORMATION, CALL 1-800-300-1116 OR 401-421-1411
- --------------------------------------------------------------------------------
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE
----------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
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SUMMARY
THE FUND
The Fund is the sole investment portfolio of the Trust, an open-end,
nondiversified investment company organized in August 1986 as a Massachusetts
business trust. The Fund's Investment objective is to provide as high a level of
current income which is exempt from both Rhode Island and Federal income taxes
as is consistent with preservation of capital. In pursuit of its objective, the
Fund will, under normal market conditions, invest at least 80% of its assets in
Rhode Island Obligations. See "Investment of the Fund's Assets". There is no
assurance that the Fund can achieve its objective.
MANAGEMENT
Van Liew Capital Inc. serves as the Fund's Adviser and Administrator. The
fees payable to the Advisor for its advisory and administrative services are at
a total rate of .60% of the Fund's average daily net assets adjusted downward
with the increase in the Fund's size. See "Management Arrangements".
PURCHASE AND REDEMPTION OF SHARES
Shares of beneficial interest of the Fund are sold through sales
representatives of Van Liew Securities Inc., the Fund's Distributor, at the net
asset value per share next determined on a daily basis plus a sales charge in
the maximum amount of 4% of the offering price (4.17% of the amount invested).
The sales charge is reduced on purchases in excess of $25,000. The minimum
initial investment is $1,000. See "How To Invest In The Fund".
Shares may be redeemed on any business day at their net asset value next
determined. The Fund has the right to redeem shares and close accounts with a
balance of less than $500. See "How To Redeem Your Investment".
RISK FACTORS
The Fund will concentrate in Rhode Island Obligations and is classified as
a "nondiversified" investment company and, therefore, may not have as much
diversification among securities, and thus diversification of risk, as if it
were a "diversified" investment company. The Fund may buy and sell Municipal
Bond Index Futures which may involve investment risks different from those of
Rhode Island Obligations. From time to time proposals have been introduced
before Congress to restrict or eliminate the Federal income tax exemption for
interest on municipal obligations. Such proposals, if enacted, might materially
adversely affect the availability of municipal obligations for investment by the
Fund and the value of the Fund's portfolio. See "Introduction" and "Investment
Of The Fund's Assets". The Adviser has had limited experience in managing
investment companies. See "Management Arrangements".
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2
<PAGE> 5
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EXPENSE SUMMARY
The purpose of the following information is to assist an investor in
understanding the costs and expenses that an investor in the Fund will bear
directly or indirectly. The information is based on expenses incurred for the
fiscal year ended October 31, 1996.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........... 4.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees*................................ 0.60%
12b-1 Expenses.................................. 0.01%
Other Expenses*................................. 0.37%
Total Fund Operating Expenses*.................. 0.98%
</TABLE>
Example of Expenses
An investor would pay the following expenses on a $1,000 investment in the
Fund assuming a 5% annual return and redemption at the end of each time
period**:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
- ----- ------ ------ -------
<S> <C> <C> <C>
$ 50 $ 70 $ 93 $ 160
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The example is included to provide a means for the investor to
compare expense levels of funds with different fee structures over varying
investment periods. To facilitate such comparison, all funds are required to
utilize a 5% annual return assumption. The example set forth above should not be
considered a representation of past or future expenses. Actual expenses may be
greater or lesser than those shown. Similarly, the annual rate of return is not
an estimate or guarantee of future investment performance.
- ---------------
* Includes advisory and administration fees totalling $259,202.
** There are no charges imposed upon redemption.
- --------------------------------------------------------------------------------
3
<PAGE> 6
FINANCIAL HIGHLIGHTS
The following table represents selected data for a single Fund share
outstanding throughout the period shown which, with respect to the fiscal years
ended October 31, 1996, October 31, 1995, October 31, 1994, October 31, 1993,
October 31, 1992, October 31, 1991, October 31, 1990, and October 31, 1989, has
been examined by Ernst & Young LLP, independent auditors, whose opinion thereon
appears in the Fund's Annual Report. For the fiscal periods ended October 31,
1987 and October 31, 1988, the financial information has been examined by the
previous independent auditors to the Fund. This information should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report, which financial statements and notes are incorporated
by reference into the Additional Statement. The Fund's Annual Report accompanies
the Additional Statement.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR 12/08/86
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
10/31/96 10/31/95 10/31/94 10/31/93 10/31/92 10/31/91 10/31/90 10/31/89 10/31/88 10/31/87
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of Year... $10.59 $10.10 $10.95 $10.32 $10.14 $9.73 $9.80 $9.74 $9.13 $10.18
Net Investment
income.............. .56 .58 .59 .56 .63 .64 .67 .62 .66 .62
Net realized and
unrealized gain
(loss) on
securities.......... (.06) .49 (.84) .63 .18 .41 (.09) .07 .62 (1.05)
------ ------ ------ ------ ------ ----- ----- ----- ----- ------
Total from Investment
Operations.......... .50 1.07 (.25) 1.19 .81 1.05 .58 .69 1.28 (.43)
------ ------ ------ ------ ------ ----- ----- ----- ----- ------
Less Distributions:
Dividends from net
investment income... (.56) (.58) (.59) (.56) (.63) (.64) (.65) (.63) (.66) (.62)
Distribution from net
realized gains...... (.00) (.00) (.01) (.00) (.00) (.00) (.00) (.00) (.01) (.00)
------ ------ ------ ------ ------ ----- ----- ----- ----- ------
Total Distributions... (.56) (.58) (.60) (.56) (.63) (.64) (.65) (.63) (.67) (.62)
------ ------ ------ ------ ------ ----- ----- ----- ----- ------
Net Asset Value End of
Year................ $10.53 $10.59 $10.10 $10.95 $10.32 $10.14 $9.73 $9.80 $9.74 $9.13
====== ====== ====== ====== ====== ===== ===== ===== ===== ======
Total investment
return at Net Asset
Value(b)............ 4.89% 10.89% (2.04)% 12.35% 8.00% 10.96% 5.89% 7.10% 14.30% (4.99)%(a)
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End of
Year (000's
omitted)............ $42,456 $43,088 $41,346 $45,043 $36,854 $29,750 $20,675 $12,159 $9,745 $6,149
Ratio of Expenses to
average net
assets(b)........... .98% .98% .88% .81% .85% .92% 1.27% 1.36% 1.10% 1.15%(a)
Ratio of net
investment income to
average net
assets(b)........... 5.31% 5.58% 5.55% 5.70% 6.13% 6.40% 6.45% 6.34% 6.84% 6.95%(a)
Portfolio
turnover(b)......... 13.30% 11.77% 8.48% 13.27% 36.29% 21.57% 10.16% 37.90% 45.58% 96.39%(a)
Adviser/Administrator
waived fees......... .00 .00 .01 .01 .01 .03 .02 .03 .08 .06
Fund expenses without
waiver.............. .10 .10 .10 .09 .10 .12 .12 .16 .19 .16
Net Investment Income
without waiver...... .56 .58 .58 .55 .62 .61 .65 .59 .58 .56
Ratio of Expenses to
average net assets
without waiver(b)... .98% .98% .93% .81% .95% 1.17% 1.51% 1.69% 1.88% 1.86%(a)
Ratio of net
investment income to
average net assets
without waiver(b)... 5.31% 5.58% 5.50% 5.58% 6.02% 6.15% 6.21% 6.02% 6.06% 6.24%(a)
</TABLE>
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(a) Annualized for 1987.
(b) Commencing in fiscal year 1990, data included the combined operations of the
Fund and the Rhode Island Tax-Free Bond Fund (the "RI Fund") for the period
from the date of the acquisition of the assets of the RI Fund by the Fund
(November 1, 1989). The data shown above for the periods prior thereto are
the historical results of the Fund.
(c) Total investment return does not reflect sales load.
4
<PAGE> 7
DISCUSSION OF FUND PERFORMANCE
In accordance with the reporting requirements of the Securities and
Exchange Commission, the following data is supplied for the ten-year period
ended October 31, 1996, with all distributions reinvested in shares. The average
annualized total returns for one year, five years and since inception on
December 8, 1986 were 0.71%, 6.50% and 8.42%, respectively and reflect payment
of the maximum sales charge of 4%. All performance data shown represents past
performance and should not be considered indicative of future performance.
The graph below compares the performance of the Fund to the performance of
the Lehman Brothers Municipal Bond Index (the "Index"). The Index is comprised
of approximately 20,000 actual bonds. The bonds are all investment-grade,
fixed-rate, long-term maturities and are selected from issues larger than $50
million dated since January 1984.
The graph assumes a $10,000 hypothetical investment at inception through
October 31, 1996 with all distributions invested in shares. The Fund graph line
illustrates the maximum sales charge of 4% and all fund expenses. The Index
graph line does not reflect any expenses or sales charges.
PERFORMANCE COMPARISON
OCEAN STATE TAX EXEMPT FUND VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD OCEAN STATE TAX EXEMPT LEHMAN MUNICIPAL BOND
(FISCAL YEAR COVERED) FUND INDEX
<S> <C> <C>
08-DEC-86 9603.77 10000.00
31-OCT-87 9164.18 9723.97
31-OCT-88 10501.32 11140.44
31-OCT-89 11290.36 12043.46
31-OCT-90 11970.91 12937.28
31-OCT-91 13303.98 14511.44
31-OCT-92 14398.75 15729.87
31-OCT-93 16177.41 17943.07
31-OCT-94 15780.23 17162.78
31-OCT-95 17498.71 19710.41
31-OCT-96 18354.49 20835.36
</TABLE>
5
<PAGE> 8
October 31, 1996, was the end of the Fund's tenth fiscal year. During the
prior 12 months, the Fund's net asset value declined from $10.59 to $10.53 per
share for a loss of 0.57% on principal value. Net assets dropped from $43.1
million to $42.5 million while dividends per share declined from $0.58 to $0.56.
The Fund's 1996 fiscal year witnessed a low inflation, moderate economic
growth environment that has continued into 1997. The Federal Reserve has not
acted to change interest rates since January, 1996. The Adviser remains
committed to providing as high a level of current income as is consistent with
preservation of principal in this relatively stable interest rate environment.
At fiscal year end, October 31, 1996, the Fund has an average maturity of 13.70
years. However, the Fund's portfolio owns a significant amount of high coupon,
pre-refunded debt instruments which are subject to smaller price swings than
longer maturities. The effect of these "cushion" bonds has been a reduction in
the effective maturity of the Fund's portfolio, thus, reducing volatility. In
addition, the Adviser has steadily increased the holdings of AAA rated
instruments in the Fund's portfolio to over 57% of the portfolio at fiscal year
end, October 31, 1996.
INTRODUCTION
The Fund is an open-end investment company which is designed to be a
suitable investment for individuals, corporations, institutions and fiduciaries
who seek as high a current income exempt from Federal and Rhode Island income
taxes as is consistent with preservation of capital.
Cash of investors may be invested in shares of the Fund as an alternative
to direct investment in Rhode Island Obligations. The Fund offers the
opportunity to keep cash reserves fully invested in a vehicle that provides
investors with a professionally managed portfolio of Rhode Island Obligations
which may, but not necessarily will, be more diversified among Rhode Island
Obligations, higher yielding or more stable and more liquid than they might be
able to obtain on an individual basis. Through an investment in the Fund,
investors are also relieved of the inconvenience of making direct investments,
including the selection, purchasing, handling and safekeeping of Rhode Island
Obligations.
Rhode Island Obligations are a type of municipal obligation. Municipal
obligations are issued by or on behalf of states, territories and possessions of
the United States and their political subdivisions, agencies, and
instrumentalities to obtain funds for various public purposes. Municipal notes
are generally used to provide for short-term capital needs and generally have
maturities of one year or less while municipal bonds have extended maturities.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes. Municipal obligations are
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as airports, highways, bridges,
schools, hospitals, housing, mass transportation, streets and water and sewer
works. Other public purposes for which municipal obligations may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to lend to other public
institutions and facilities.
6
<PAGE> 9
The two principal classifications of Municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special tax or other specific revenue source such as the user of
the facility being financed. Industrial development bonds are in most cases
revenue bonds and are not payable from the unrestricted revenues of the
municipal issuer, but from the revenues derived from payments of the private
user. Therefore, these bonds may present greater investment risks than
securities issued by government subdivisions. The Fund's ability to meet its
objectives depends on the ability of the various issuers to meet their scheduled
payments of principal and interest, and the pledge, if any, of real and personal
property so financed as security for such payment. Under the Internal Revenue
Code (the "Code") the interest on certain such bonds is taxable while the
interest on certain other such bonds is exempt from Federal income taxes. The
Fund will invest in such bonds only if the interest is so tax free to the Fund.
Proposals have been introduced periodically before Congress to restrict or
eliminate the Federal income tax exemption for interest on municipal bonds.
Similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of municipal bonds for investment by the Fund and the
value of the Fund's portfolio would be affected. In that event the Fund would
reevaluate its investment policies and restrictions and consider recommending to
its shareholders changes in both.
INVESTMENT OF THE FUND'S ASSETS
In seeking its objective of providing as high a level of current income
which is exempt from both Rhode Island and Federal Income taxes as is consistent
with the preservation of capital, the Fund will invest primarily in Rhode Island
Obligations (as defined below). There is no assurance that the Fund will achieve
this objective. However, this objective is a fundamental policy of the Fund
which may not be changed without the approval of the holders of a majority (as
defined in the Investment Company Act of 1940) of the Fund's outstanding shares.
Subject to the limitations set forth below, the Fund may also invest in Taxable
Short-Term Obligations (see below), in Municipal Bond Index Futures (see below)
for protective (hedging) purposes and in Non-Rhode Island Obligations (see
below) for temporary defensive purposes. As used in this Prospectus and the
Additional Statement, the term "Rhode Island Obligations" means obligations,
including those of non-Rhode Island issuers of any maturity which pay interest
exempt, in the opinion of bond counsel, from Rhode Island State and Federal
income taxes. (The non-Rhode Island issuers the interest on which is so exempt
under present law, in the opinion of counsel, are Guam, Puerto Rico and the
Virgin Islands.) The Rhode Island Obligations which the Fund will purchase must,
at the time of purchase, either (i) be rated within the four highest grades
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P"); or (ii) if unrated, be judged by the Fund's Investment
adviser to be of comparable quality to municipal obligations so rated. Municipal
Obligations rated in the fourth highest grade are considered by such rating
agencies to be of medium quality and have speculative characteristics and thus
may present investment risks not
7
<PAGE> 10
present in more highly rated obligations. For example, the prices of such bonds
tend to be more sensitive to economic changes and other circumstances than
higher-rated investments which are affected primarily by interest rate changes
since adverse economic conditions are more likely to adversely affect the
issuer's capacity to meet its payment obligations. It is the policy of the Fund
to dispose of an Obligation held by the Fund if its rating drops below the
fourth highest grade, unless the Adviser determines that the decline in rating
is temporary and immediate disposition of the bond would not be in the best
interests of the Fund. See Appendix A to the Additional Statement for further
information as to these ratings.
The Fund may purchase industrial development bonds only if they meet the
definition of Rhode Island Obligations, i.e., the interest on them is exempt
from Rhode Island State and Federal income taxes. However, since the interest on
newly issued private activity bonds is an item of "tax preference" subject to
the Federal alternative minimum tax for individuals and corporations, such bonds
("AMT Obligations") shall not be included in the term "Rhode Island Obligations"
for purposes of calculating the percentage of the Fund's net assets so invested.
See "Tax Information".
The Fund may invest in Rhode Island Obligations with demand features,
including variable rate demand notes which meet the quality standards set forth
above. Although there may be no active secondary market with respect to a
particular variable rate demand note purchased by the Fund, the Fund may, upon
notice specified in the note, demand payment in full of the principal of and
accrued interest on the note at any time and may resell the note at any time to
a third party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of the variable rate demand note in the event
the issuer of the note defaulted on its payment obligation, and the Fund could,
for this or other reasons, suffer a loss to the extent of the default.
The "Taxable Short-Term Obligations" which the Fund may purchase are
obligations maturing in one year or less from the date of purchase by the Fund
and which are either (i) obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities ("U.S.
Government Obligations"); see the Additional Statement for further information;
(ii) commercial paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
(see Appendix A to the Additional Statement); or (iii) bank obligations, such as
certificates of deposit, bankers acceptances and fixed time deposits, issued by
a domestic bank subject to regulation by the U.S. Government having total assets
of at least $1.5 billion. For instance, the Fund might choose to invest in
Taxable Short-Term Obligations pending investment in Rhode Island Obligations of
the proceeds of the sale of shares or the sale of Rhode Island Obligations,
pending settlement of purchases of Rhode Island Obligations or if it is
attempting to maintain liquidity to meet anticipated redemptions. Under normal
market conditions the Fund will invest at least 80% of its net assets in Rhode
Island Obligations and may not purchase Taxable Short-Term Obligations if
thereafter more than 20% of its total assets would consist of Taxable Short-Term
Obligations, AMT Obligations and cash. However, the Fund may temporarily invest
more than 20% of its total assets in Taxable Short-Term Obligations, AMT
Obligations, and municipal obligations which pay interest which is exempt from
Federal, but not Rhode Island, income tax ("Non-Rhode Island Obligations") as a
"defensive" measure during times of adverse market conditions affecting the
market for Rhode Island Obligations, i.e., unavailability of suitable Rhode
Island Obligations or in anticipation of a decline or possible decline in the
8
<PAGE> 11
value of Rhode Island Obligations. The Fund may also enter into repurchase
agreements as to Taxable Short-Term Obligations; see "Repurchase Agreements"
below.
The Fund is classified as a "non-diversified" investment company under the
Investment Company Act of 1940 (the "1940 Act"). The Fund also intends to
qualify as a "regulated investment company" under the Internal Revenue Code (the
"Code"). One of the tests for such qualification under the Code is, in general,
that at the end of each fiscal quarter of the Fund, at least 50% of its assets
must consist of (i) cash; and (ii) securities which, as to any one issuer, do
not exceed 5% of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment company, it would have
to meet a similar test as to 75% of its assets. The Fund may therefore not have
as much diversification among securities, and thus diversification of risk, as
if it had made this election under the 1940 Act. In addition, because the Fund
is non-diversified its share price may be subject to greater fluctuations as a
result of changes in the financial condition or the market's assessment of an
individual issuer.
MUNICIPAL BOND INDEX FUTURES
For the purpose of protecting (hedging) the value of the Fund's assets, the
Fund may buy and sell futures contracts relating to indices on municipal bonds
("Municipal Bond Index Futures" or "Futures"). Futures transactions may attempt
to serve as a hedge against changes in the market price of the Fund's Rhode
Island Obligations caused by interest rate fluctuations. As a matter of
fundamental policy the Fund will not buy or sell a Municipal Bond Index Future
if thereafter more than 10% of its net assets would be in initial or variation
margin on such Futures. The primary risks associated with the use of Municipal
Bond Index Futures are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and the prices of
Futures purchased or sold by the Fund; (ii) incorrect forecasts by the Adviser
concerning interest rates which may result in the hedge being ineffective; and
(iii) possible lack of a liquid secondary market for a Future; the resulting
inability to close a futures position could adversely affect the Fund's hedging
ability. For a hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security being hedged. The risk
of imperfect correlation of these price changes is increased as the composition
of the Fund's portfolio is divergent from the debt securities underlying the
index. To date the Adviser has had no experience in the use of Futures.
The "sale" of a Future means the acquisition by the Fund of an obligation
to deliver an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of the last trading day of the
Future and the price at which the Future is originally struck (which the Fund
anticipates will be lower because of a subsequent rise in interest rates and a
corresponding decline in the index value). This is referred to as having a
"short" Futures position. The "purchase" of a Future means the acquisition by
the Fund of an obligation to take delivery of such an amount of cash. In this
case, the Fund anticipates that the closing index value will be higher than the
price at which the Future is originally struck. This is referred to as having a
"long" Futures position. No physical delivery of the bonds making up the index
is made as to either a long or a short Futures position.
9
<PAGE> 12
WHEN-ISSUED AND DELAYED DELIVERY PURCHASES
The Fund may buy Rhode Island Obligations on a when-issued or delayed
delivery basis when it has the intention of acquiring them; the Rhode Island
Obligations so purchased are subject to market fluctuation and no interest
accrues to the Fund until delivery and payment take place; their value at the
delivery date may be less than the purchase price. For example, delivery and
payment may take place a month or more after the date of the transaction. The
Fund may not enter into when-issued commitments exceeding in the aggregate 15%
of the market value of the Fund's total assets, less liabilities other than the
obligations created by when-issued commitments. If the Fund chooses to dispose
of the right to acquire a when-issued Obligation prior to its acquisition, it
could, as with the disposition of any other portfolio holding, incur a gain or
loss due to market fluctuation; any such gain would be taxable short-term gain.
See the Additional Statement for further information.
REPURCHASE AGREEMENTS
The Fund may purchase securities (limited to Taxable Short-Term
Obligations) subject to repurchase agreements. Income from repurchase agreements
is taxable and therefore is not included in the "exempt-interest" dividends
which the Fund will pay; see "Dividend and Tax Information". Repurchase
agreements may be entered into only with commercial banks or broker dealers. A
repurchase agreement occurs when, at the time the Fund purchases a security, the
Fund also resells it to the vendor and must deliver the security (or securities
substituted for it) to the vendor on an agreed-upon date in the future. (The
securities so resold or substituted are referred to herein as the "Resold
Securities".) The Resold Securities will be held by the Fund's Custodian bank.
The resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the Fund's money is invested in the Resold Securities. The majority of these
transactions run from day to day, and the delivery pursuant to the resale
typically will occur within one to five days of the purchase. The Fund's risk is
limited to the ability of the vendor to pay the agreed-upon sum upon the
delivery date; in the event of bankruptcy or other default by the vendor, there
may be possible delays and expenses in liquidating the Resold Securities,
decline in their value and loss of interest. Repurchase agreements can be
considered as loans "collateralized" by the Resold Securities (such agreements
being defined as "loans" in the Investment Company Act of 1940). The return on
such "collateral" may be more or less than that from the repurchase agreement.
The Resold Securities under any repurchase agreement will be marked to market
every business day so that the value of the "collateral" is at least equal to
the value of the loan, including the accrued interest earned thereon, plus
sufficient additional market value as is considered necessary to provide a
margin of safety. Additionally, the Adviser will regularly review the financial
strength of all vendors of repurchase agreements to the Fund, in accordance with
procedures established by the Board of Trustees.
LIMITATION TO 10% AS TO CERTAIN INVESTMENTS
Due to their possible limited liquidity, the Fund may not make certain
investments if thereafter more than 10% of its net assets would consist of such
investments. The investments included in this 10% limit are (i) repurchase
agreements maturing in more than seven days; (ii) fixed time deposits subject to
withdrawal penalties other than overnight deposits; (iii) restricted securities,
i.e.,
10
<PAGE> 13
securities which cannot freely be sold for legal reasons (which the Fund does
not expect to own); and (iv) securities for which market quotations are not
readily available. However, this 10% limit does not include any obligations
having minimal credit risks in the opinion of the Adviser and which are payable
at principal amount plus accrued interest on demand or within seven days after
demand.
FACTORS WHICH MAY AFFECT THE VALUE OF THE FUND'S INVESTMENT AND THEIR YIELDS
The value of the Rhode Island Obligations, Non-Rhode Island Obligations and
Short-Term Taxable Obligations (collectively, "Obligations") in which the Fund
invests will fluctuate depending in large part on changes in prevailing interest
rates. If the prevailing interest rates go up after the Fund buys Obligations,
the value of the Obligations may go down; if these rates go down, the value of
the Obligations may go up. Changes in value and yield based on changes in
prevailing interest rates may have different effects on short-term Obligations
than on long-term Obligations. Long-term Obligations (which often have higher
yields) may fluctuate in value more than short-term ones. The Fund is not aware
of any economic or legal factors special to Rhode Island or the other
jurisdictions issuing Rhode Island Obligations creating any risks not applicable
to other municipal obligations of the same quality as the Rhode Island
Obligations in which the Fund may invest.
ECONOMIC FACTORS AFFECTING RHODE ISLAND AND PUERTO RICO
The following is a summary of economic factors which may affect the ability
of the issuers of Municipal Bonds to repay general obligation and revenue bonds.
Such information is derived from sources that are generally available to
investors and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.
The State of Rhode Island (the "State") draws substantially all of its
revenue from non-property related taxes and excises, principal among them being
the personal income tax and general retail sales and use tax. Additional revenue
is obtained from federal assistance payments and grants-in-aid and from earnings
and receipts from certain State-operated programs and facilities such as the
State higher education system. The State experienced an excess of resources and
other financing sources over expenditures during the 1985 through 1989 fiscal
years resulting in a free surplus balance for future appropriations at the end
of each of the fiscal years 1985 through 1989. During fiscal years 1990 through
1992, a revenue short-fall occurred due to a regional downturn of the economy.
To deal with this shortfall, the State utilized its free surpluses and most of
its State Budget Reserve and Cash Stabilization Account, reduced and deferred
certain aid payments and other commitments, and used other extraordinary one
time measures. In addition, commencing in fiscal year 1992, the State imposed a
limit on expenditures such that appropriations do not result in general fund
expenditures exceeding 99.5% of General Fund revenues in fiscal year 1993, 98.5%
in fiscal year 1994 and 98% thereafter. The remaining balance is to be deposited
into a budget reserve account, capped at 3% of General Fund revenues.
For fiscal year 1996, total resources to fund the budget of approximately
$1,758.9 million resulted in a surplus of approximately $26.5 million. Under
Rhode Island law, unexpended or unencumbered balances of general revenue
appropriations constitute free surplus for future appropriations by the General
Assembly. The free surplus of approximately $26.5 million in the
11
<PAGE> 14
General Fund at the end of fiscal year 1996 is up from the fiscal year 1995 free
surplus of approximately $6.1 million. Under the fiscal year 1997 budget of
approximately $1,734 million, there is no free surplus expected at the end of
fiscal 1997.
In January 1991, the collapse of the Rhode Island Share and Deposit
Indemnity Corporation precipitated the closure of 45 financial institutions with
a total deposit liability of approximately $1.7 billion. In response, the State
created the Rhode Island Depositors Economic Protection Corporation ("DEPCO") to
assist in the resolution of the banking crisis. By the middle of 1992,
substantially all of the frozen deposits had been repaid or otherwise made
available to depositors through the reopening, sale or liquidation of the closed
institutions. To facilitate the sale of certain institutions and the payout of
frozen deposits, DEPCO has issued various general and special obligation bonds.
As of December 31, 1996, it has outstanding approximately $312.7 million of
special obligation bonds. Receipts from .6% of the State's sales and use tax
rate are dedicated to a special revenue fund to be used for repayment of the
special obligation bonds.
The State's budget difficulties, together with the banking crisis and the
issuance of the DEPCO debt, contributed to a lowering of the State's credit
rating in 1992 to "A-1" by Moody's Investors Service, Inc. and "AA-" from
Standard & Poor's Corporation. There were no changes in the rating in 1996.
Below the level of State government, Rhode Island is divided into 39 cities
and towns which exercise the functions of local general government. Every city
or town has only the power to levy, assess and collect taxes, or borrow money,
as specifically authorized by the General Assembly. In addition, State statutes
require every city and town to adopt a balanced budget for each fiscal year.
Local governments rely principally upon general real and tangible personal
property taxes and automobile excise taxes for provision of revenue. Under Rhode
Island law, the power of the cities and towns to pay their general obligation
bonds and notes is unlimited and each city or town is required to levy ad
valorem taxes upon all the taxable property for the payment of such bonds and
notes and the interest thereon, without limitation as to rate or amount.
The 1987 session of the General Assembly enacted legislation which
consolidated all prior revenue sharing components into one general revenue
sharing program and incorporated a distribution formula based upon relative
population, tax effort and personal income of each city and town. In addition,
the State continues to provide municipal aid programs which give wage
supplements as an incentive to municipal police and firemen earning specialized
education credits, and distributes the proceeds of a statewide tax imposed on
the tangible personal property of telephone, telegraph, cable, express and
telecommunications companies. The 1991 General Assembly passed legislation which
dedicates, beginning in fiscal year 1994, an amount equal to one percent of
second prior year total state tax revenues to general state aid. In the
Governor's revised fiscal year 1997 budget, $13.2 million is provided for this
purpose.
In addition, Rhode Island cities and towns receive aid from the State to
fund a portion of the costs of major public expenditures, and also participate
in a general revenue sharing program. Aid to cities and towns has risen from
approximately $389.7 million in fiscal year 1991 to $503.5 million in the
Governor's revised fiscal year 1997 budget.
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<PAGE> 15
The largest category of State aid to cities and towns involves assistance
programs for school operations and school buildings. In addition to
reimbursement of operations costs, state school construction aid is also
provided at levels ranging from 30% to 88% of the construction cost of new
facilities. The fiscal year 1996 enacted budget suspended the education aid
formulae, supplanted the poverty weight fund (established in the fiscal year
1995 budget) with an equity fund, and calculated education aid using the same
reference year as the 1995 aid calculation. Each community receives no less than
the amount budgeted in fiscal year 1995 ($423.3 million), with an additional
$18.5 million allocated as follows: $2.3 million for conventional public housing
aid, $2.2 million for vocational aid, $1.7 million for regional bonus, $12.1
million in a non-restricted equity fund, $0.9 million for school construction
aid, $0.7 for aid to Central Falls School District, and a reduction of $1.4
million in the State share of teacher retirement.
The fiscal year 1997 revised budget for education aid totals $462.4
million. This includes $411.5 million in aid to all school districts, including
Central Falls, $17.1 million for Capital Construction Aid and $33.7 million for
the State share of teacher retirement. This represents an $11.7 million increase
in State support relative to the final fiscal year 1996 budget. The increase in
funding is primarily due to an increase in teacher retirement obligations of
$1.0 million, and $10.7 million for additional school aid. Of the $10.7 million,
$10.4 million is distributed to the school districts, including Central Falls,
based on the number of students eligible for free or reduced lunch, reflecting
$217 for each eligible student.
The Commonwealth of Puerto Rico (the "Commonwealth") draws its revenue from
income taxes, excise taxes, property taxes, licenses, Federal taxes returned to
the Commonwealth, Federal grants, and a tollgate tax on dividends and profit
shares repatriated to United States corporations subject to Section 936 of the
Internal Revenue Code. As of January 1997, general obligation bonds issued by
the Commonwealth would qualify to receive a "Baa 1" rating from Moody's
Investor's Service, Inc. Bonds rated "Baa 1" are considered to be of medium
quality and have speculative characteristics, but are believed by Moody's to
possess the strongest investment attributes in the "Baa" class. As of January
1997, general obligation bonds issued by the Commonwealth would qualify for an
"A" rating from Standard and Poor's Corporation.
Despite substantial long-term progress in raising its living standards, the
Commonwealth's problems of poverty and unemployment persist. Income levels on
the island are lower than even the poorest of the fifty states, and unemployment
rates consistently exceed those on the mainland. The unemployment rate for both
1995 and 1996 fiscal years was 13.8%. The Commonwealth has a high debt load, due
in part to the scope of the development tasks it had undertaken. Debt policy has
sought to keep the rate of growth of debt at that of gross domestic product.
Over fiscal years 1992 to 1996, public sector debt increased 27.5% while gross
product rose 27.5%. The rate of public sector debt over the subject period was
principally the result of debt service refinancings. Operating deficits have
occurred in the general fund in two of the past four fiscal years. Financial
trends during these years reflect the influence of both economic slowdown and a
high level of public sector employment. As financial operations have come under
pressure from the economic slowdown, the Commonwealth has attempted to maintain
budgetary balance, but with regular reliance on nonrecurring measures. The
general fund budget for fiscal 1997 provides appropriations of $5,621 million,
an
13
<PAGE> 16
increase of $428 million over the fiscal 1996 amount. Spending is balanced by an
equal amount of resources, but again these include several nonrecurring items.
Preliminary fiscal year 1997 general fund total revenues are approximately
$5,499 million, an increase of $251.4 million (4.8%) over fiscal year 1996.
Total projected expenditures for fiscal year 1997 decreased by $1.8 million when
compared to fiscal year 1996, with an ending general fund cash balance for
fiscal year 1997 estimated to be $9.0 million.
PORTFOLIO TURNOVER
A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities for a year and dividing
it by the monthly average of such securities during the year, excluding certain
debt securities. Since the turnover rate of the Fund will be affected by a
number of factors (see below), the Fund is unable to predict what rate the Fund
will have in any particular period or periods, although such rate is not
expected to exceed 100%. However, the rate could be substantially higher or
lower in any particular period. The factors which may affect the rate include
(i) assuming or moving away from a temporary defensive position; (ii) the
possible necessary sales of Obligations to meet redemptions; and (iii) the
possibility of purchasing or selling Obligations without regard to the length of
time the Obligations have been held to attempt to take advantage of short-term
differentials in bond yields with the objective of seeking exempt-interest
income while conserving capital. Short-term trading increases portfolio turnover
and transaction costs and may generate taxable capital gains. See "Tax
Information" for a discussion of the income tax consequences arising from
short-term trading. For the fiscal year ended October 31, 1996, the portfolio
turnover rate of the Fund was 13%.
INVESTMENT RESTRICTIONS
The Fund has a number of rules about what it may and may not do. These
rules may not be changed unless the holders of a "majority", as defined in the
Investment Company Act of 1940 (the "1940 Act"), of the Fund's outstanding
shares vote to change them. Some of the more important of these rules are set
forth below; the rest are listed in the Additional Statement.
1. THE FUND INVESTS ONLY IN CERTAIN LIMITED SECURITIES.
The Fund may not buy any securities other than the Obligations listed under
"Investment of the Fund's Assets"; provided the Fund may also purchase and sell
Municipal Bond Index Futures within the 10% limit discussed under "Municipal
Bond Index Futures." Under normal market conditions, the Fund will invest at
least 80% of its assets in Rhode Island Obligations.
2. THE FUND HAS INDUSTRY INVESTMENT REQUIREMENTS.
The Fund may not buy the Obligations of issuers in any one industry (see
below for discussion) if more than 25% of its total assets would then be of
issuers of that industry; Rhode Island Obligations and U.S. Government
Obligations are not included in this limit. In applying this restriction, the
Fund will consider that a nongovernmental user of facilities financed by
industrial development bonds is an issuer in an industry.
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<PAGE> 17
See "Dividend And Tax Information" below for certain diversification
requirements under the Internal Revenue Code which the Fund intends to meet and
as to possible risk factors due to meeting only these diversification
requirements.
3. THE FUND CAN MAKE LOANS ONLY BY LENDING SECURITIES OR ENTERING INTO
REPURCHASE AGREEMENTS.
The Fund can buy those Obligations which it is permitted to buy (see
"Investment of the Fund's Assets"); this is investing, not making a loan. The
Fund can, to increase its income, lend its portfolio securities up to 10% of the
value of its total assets on a collateralized basis to broker-dealers, banks and
certain financial institutions, (see the Additional Statement) and enter into
repurchase agreements (see "Repurchase Agreements" above). The Fund may be
considered as the beneficial owner of the loaned securities in that any gain or
loss in their market price during the loan inures to the Fund and its
shareholders; thus, when the loan is terminated, the value of the securities may
be more or less than their value at the beginning of the loan. Income from
securities loans is taxable and therefore it is not included in the
"exempt-interest" dividends which the Fund may pay.
4. THE FUND CAN ONLY BORROW IN LIMITED AMOUNTS FOR SPECIAL PURPOSES.
The Fund can borrow from banks for temporary or emergency purposes but only
up to 10% of its total assets. It can mortgage or pledge its assets only in
connection with such borrowing and only up to the lesser of the amounts borrowed
or 5% of the value of its total assets. The Fund will not borrow to purchase
Obligations or to increase its income but only to meet redemptions so that it
will not have to sell Obligations to pay for redemptions. Interest on borrowings
would reduce the Fund's income. The Fund will not purchase any Obligations while
it has any outstanding borrowings which exceed 5% of the value of its total
assets.
The Fund will not invest more than 25% of its total assets in (i) Rhode
Island Obligations the interest on which is paid from revenues of similar type
projects or (ii) in industrial development bonds unless this Prospectus and/or
the Additional Statement are supplemented to reflect the change and to give
additional information and current shareholders are also notified of the change.
NET ASSET VALUE PER SHARE
The Fund's Net Asset Value and offering price per share are determined at
4:30 p.m., Eastern time on each day the New York Stock Exchange is open. The Net
Asset Value per share is determined by dividing the value of the net assets of
the Fund (i.e. the value of the assets less liabilities) by the total number of
shares outstanding. The Fund's business days will be the same as those of the
New York Stock Exchange. The value of the Fund's assets is, subject to the
direction and control of the Fund's Board of Trustees, in general based on fair
value, except that Obligations maturing in 60 days or less are generally valued
at amortized cost; see the Additional Statement for further information.
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<PAGE> 18
HOW TO INVEST IN THE FUND
The Fund's shares may be purchased through Van Liew Securities Inc. (the
"Distributor") or through any dealer (a "selected dealer") which has a sales
agreement with the Distributor. There are two ways to make an initial
investment; either (i) complete the Application included in this Prospectus and
mail it with check payable to Ocean State Tax-Exempt Fund to PFPC, Inc. (the
"Agent") at the address on the Application; or (ii) order the shares through
your dealer, if it is a selected dealer, and include a completed Application.
Investors may not purchase shares of the Fund with a check issued by a third
party and endorsed over to the Fund. Checks for investment must be made payable
to "Ocean State Tax-Exempt Fund."
The minimum initial investment is $1,000 except as otherwise stated in this
Prospectus or the Additional Statement. Subsequent investments may be in any
amount (except for investors having an Automatic Withdrawal Plan) and may be
made through a selected dealer or by forwarding payments to the Agent, with the
name(s) of all account owner(s), the account number and the name of the Fund.
Please send the pre-printed stub attached to the Fund's confirmations.
Shares are sold at their offering price. The offering price will be the
next determined (see below) net asset value per share plus a sales charge. The
offering price applies to all purchase orders received by the Transfer Agent
from selected dealers that day, except that orders received by it after 4:00
p.m. Eastern time will receive that day's offering price only if such orders
were received by selected dealers from customers prior to such time and
transmitted to the Distributor prior to its close of business that day (normally
5:00 p.m. Eastern time). Dealers are required to transmit orders promptly.
Investments by mail are made at the offering price next determined after receipt
of the purchase order by the Agent. Purchase orders received on other than a
business day will be executed on the next succeeding business day. The sale of
shares will be suspended during any period when the determination of net assets
value is suspended and may be suspended by the Distributor when the Distributor
judges it in the Fund's best interest to do so.
Certain commercial banks are making shares of the Fund available to their
customers on an agency basis. A portion of the sales charge paid by these
customers is retained by or remitted to the banks in the amounts indicated below
as an agency commission. Under the Glass-Steagall Act, banks are prohibited from
underwriting Fund shares; however, the Glass-Steagall Act does permit certain
agency transactions and the banking regulators have not indicated that these
particular agency transactions are not permitted under such Act.
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<PAGE> 19
The following table shows the amount of the sales charges to a "single
purchaser" (defined below):
<TABLE>
<CAPTION>
Sales Charge As Dealer's
Sales Charge As Approximate Allowance or
Percentage of Public Percentage of Agency
Amount of Purchase Offering Price Amount Invested Commission
- ------------------------------------ -------------------- --------------- ------------
<S> <C> <C> <C>
Less than $25,000................... 4.00% 4.17% 3.00%
$25,000 but less than $50,000....... 3.75 3.90 3.00
$50,000 but less than $100,000...... 3.50 3.63 2.75
$100,000 but less than $250,000..... 3.25 3.36 2.75
$250,000 but less than $500,000..... 3.00 3.09 2.50
$500,000 but less than $1,000,000... 2.50 2.56 2.25
$1,000,000 but less than
$2,500,000........................ 0.75 0.76 0.50
$2,500,000 and over................. 0.25 0.25 0.20
</TABLE>
Upon notice to all selected dealers the Distributor may reallow up to the
full applicable sales charge as shown in the above schedule during periods
specified in such notice. During periods when all or substantially all of the
entire sales charge is reallowed, such dealers may be deemed to be underwriters
as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases by a "single
purchaser", i.e.: (a) an individual; (b) an individual, his or her spouse and
their children under the age of 21 purchasing shares for his or her own
accounts; (c) a trustee or other fiduciary purchasing shares for a single trust
estate or a single fiduciary account; (d) a pension, profit-sharing or other
employee benefit plan qualified or non-qualified under Section 401 of the Code;
and (e) tax-exempt organizations enumerated in Section 501(c)(3) or (13) of the
Code.
REDUCED SALES CHARGES
Right of Accumulation: "Single purchasers" may also benefit from a
reduction of the sales charge in accordance with the above schedule if the
cumulative value (at cost or current net asset value, whichever is higher) of
shares purchased with a sales charge, together with shares previously purchased
with such a charge, amounts to $25,000 or more.
Letters of Intent: The foregoing schedule of reduced sales charges will
also be available to "single purchasers" who enter into a written Letter of
Intent (included in the Application) providing for the purchase, within a
thirteen-month period, of shares of the Fund through the Distributor or through
a single selected dealer. Shares of the Fund sold with a sales charge at time of
purchase which were previously purchased during a 90-day period prior to the
date of receipt by the Distributor of the Letter of Intent and still owned by
the shareholder may also be included in determining the applicable reduction.
For further details, including escrow provisions. See the Letter of Intent
provisions of the Application.
Net Asset Value Swap: Shares of the Fund may be purchased at Net Asset
Value by investors who are selling shares held for more than six months in any
other mutual fund in order to purchase shares of the Fund on a dollar for dollar
basis. Each swap must involve shares having an aggregate value of at least
$5,000 redeemed within the previous 60 days. An investor wishing to make a swap
17
<PAGE> 20
may do so by submitting the Application contained in this Prospectus to the
Distributor, along with a check or money order in the proper amount of the
investment, a photocopy of the redemption request and redemption check from the
fund from which shares were sold to make the investment and evidence that such
shares have been held for more than six months.
Purchases at Net Asset Value: The Fund's Trustees and the directors,
officers and certain employees and representatives of the Adviser, Distributor
and Selected Dealers, certain plans for their benefit, and investment advisory
clients of the Adviser may buy the Fund's shares at Net Asset Value without a
sales charge. In addition, trust departments of banks, trust companies and other
financial institutions may buy the Fund's shares at Net Asset Value without a
sales charge if the total amount of the purchase equals or exceeds $250,000, or
such purchases are made pursuant to a written Letter of Intent providing for the
purchase of shares with a cumulative value (at cost or current net asset value,
whichever is higher) of $250,000 or more, within a thirteen-month period, of
shares through the Distributor. A form of Letter of Intent for such purpose may
be obtained from the Distributor. See the Additional Statement for further
information.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan permits investors to purchase shares of the
Fund (minimum initial investment of $250 and minimum subsequent investments of
$100 per transaction) at regular intervals selected by the investor. Provided
the investor's bank or other financial institution allows automatic withdrawals,
Fund shares may be purchased by transferring monies from the account designated
by the investor. At the investor's option, the account designated will be
debited in the specified amount, and Fund shares will be purchased once a month,
on the twentieth day. Shares purchased under the Systematic Investment Plan are
subject to the applicable sales charge, in accordance with the right of
accumulation described above under "Reduced Sales Charges." Only an account
maintained at a domestic financial institution which is an Automated Clearing
House member may be so designated. Investors desiring to participate in the
Systematic Investment Plan should call the Transfer Agent at 1-800-992-2207 to
obtain the appropriate forms. The Systematic Investment Plan does not assure a
profit and does not protect against loss in declining markets. Since the
Systematic Investment Plan involves the continuous investment in the Fund
regardless of fluctuating price levels of the Fund's shares, investors should
consider their financial ability to continue to purchase through periods of low
price levels. The Fund may modify or terminate the Systematic Investment Plan at
any time or charge a service fee. No such fee currently is contemplated.
CONFIRMATION AND SHARE CERTIFICATES
All purchases of shares will be confirmed and credited to the shareholder
in an account maintained for the shareholder at the Agent in full and fractional
shares of the Fund (rounded to the nearest 1/1000 of a share). Share
certificates will not be issued unless requested in writing from the Agent by
the investor. No certificates will be issued for fractional shares or to
shareholders who have elected predesignated bank account method of redemption.
(See "How to Redeem Your Investment" below.)
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<PAGE> 21
The Fund and the Distributor reserve the right to reject any order for the
purchase of shares. In addition, the offering of shares may be suspended at any
time and resumed at any time thereafter.
DISTRIBUTOR AND DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan under Rule 12b-1 (the "Rule")
under the 1940 Act. The Rule provides in substance that an investment company
may not engage directly or indirectly in financing any activity which is
primarily intended to result in the sale of its shares except pursuant to a
written plan adopted under the Rule. There are no payments to the Distributor by
the Fund pursuant to the Distribution Plan. The purpose of the Distribution Plan
is to protect against any claim against or involving the Fund that some of the
expenses (for example, the cost of printing all prospectuses, statements of
additional information and reports and notices to shareholders, even those which
are not sent to existing shareholders, registration and "blue sky" fees) which
might be considered to be sales related which the Fund pays or may pay come
within the purview of the Rule. During the fiscal year ended October 31, 1996,
the only expense paid by the Fund under the Plan was for the printing of
prospectuses and reports to shareholders which were sent to nonshareholders. See
the Additional Statement for further information regarding the Distribution
Plan.
The Distributor is a registered broker-dealer formed in 1990. The
Distributor is an affiliate of the Adviser. Under the Distribution Agreement,
the Distributor is responsible for the payment of certain expenses; in brief,
these expenses relate to the preparation, printing and distribution costs
relating to sales literature and advertising material. The Fund will not
reimburse the Distributor for such expenses.
HOW TO REDEEM YOUR INVESTMENT
An investor may redeem all or any part of his shares at the next determined
Net Asset Value after acceptance of his redemption request at PFPC, Inc. (the
"Agent") by the various methods described below. Except for shares recently
purchased by check as discussed below, there is no minimum period for any
investment in the Fund. There are no redemption fees or withdrawal penalties. A
completed purchase Application must have been received by the Agent before
redemption requests can be honored. A redemption may result in a taxable
transaction to the investor.
EXPEDITED REDEMPTION METHODS (NON-CERTIFICATE SHARES)
As to shares not represented by certificates (see above) a shareholder has
the flexibility of two alternative expedited redemption methods:
1. BY MAIL. If payment is to be made to a predesignated bank account,
redemptions may be made by a letter of instruction sent to: PFPC, Inc.,
Attention: Ocean State Tax-Exempt Fund, P.O. Box 8871, Wilmington,
Delaware 19899-8871, indicating account number, amount to be redeemed,
and any payment directions, signed by the registered holder(s).
Signature guarantees are not required. Cash proceeds from the redemption
of shares will be mailed (or wired, wherever possible, upon request, if
in an amount of $1,000 or more)
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to the bank account specified in the Expedited Redemption section of the
investor's Application.
2. BY TELEPHONE. The Agent will accept instructions to redeem shares
and make payments to a predesignated bank account by telephone request
from anyone. Cash proceeds in any amount from the redemption of shares
will be mailed (or wired, wherever possible, upon request, if in an
amount of $1,000 or more) to the bank account specified in the Expedited
Redemption section of the investor's Application. The name of the
registered shareholder and his account must be supplied.
To redeem an investment by this method, telephone:
Toll Free 1-800-992-2207
A shareholder wishing to use the above procedure should so elect on the
Expedited Redemption section of his Application and provide the required
information concerning his commercial bank account number. The bank account must
be in the exclusive name(s) of the shareholder as registered with the Fund. A
shareholder may change the bank account designated by him at any time by
completing and returning a form available from the Fund. For protection of the
investor's assets, this form requires signature guarantees and possible
additional documentation.
REGULAR REDEMPTION METHOD (CERTIFICATE AND NON-CERTIFICATE SHARES)
1. CERTIFICATE SHARES. Certificates representing shares to be redeemed
and payment instructions should be sent to: PFPC, Inc., Attention: Ocean
State Tax-Exempt Fund, P.O. Box 8871, Wilmington, Delaware 19899-8871
with a stock assignment form signed by the registered shareholder(s)
exactly as the account is registered; (for shareholder protection,
certificates and signed redemption documentation should be sent
separately if mailed). For the redemption request to be in "proper
form", the signature or signatures must be the same as in the
registration of the account. In a joint account, the signatures of both
shareholders are necessary. Additional documentation may be required
where shares are held by a corporation, a partnership, trustee or
executor, or if redemption is requested by other than the shareholder of
record. Signatures must be guaranteed by an "eligible guarantor
institution" which complies with the written standards and procedures
established by PFPC, Inc. "Eligible guarantor institutions", as defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, include
banks, savings associations, credit unions, brokers, dealers, securities
exchanges and associations and clearing agencies. Questions regarding
signature guarantee requirements should be directed to the Distributor.
2. NON-CERTIFICATE SHARES. A shareholder owning non-certificate shares
registered on the books of the Fund and who has not elected Expedited
Redemption to a predesignated bank account, must use the Regular
Redemption Method of redemption. Under this redemption method the
shareholder should send a letter of instruction to: PFPC, Inc.,
Attention: Ocean State Tax-Exempt Fund, P.O. Box 8871, Wilmington,
Delaware 19899-8871 containing:
- Account Number
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<PAGE> 23
- Dollar amount or number of shares to be redeemed or a statement
that all shares held in the account are to be redeemed
- Payment instructions (normally redemption proceeds will be mailed
to the shareholder's address as registered with the Fund)
- Signature(s) of the registered shareholder(s)
- Signature(s) guaranteed by an eligible guarantor institution.
REDEMPTION PAYMENTS
Redemption payments will ordinarily be mailed to the shareholder at his
address of record. Redemption proceeds will also be wired, upon shareholder
request, to a bank, wherever possible, if in the amount of $1,000 or more. The
Fund may impose a charge, not exceeding $5.00 per wire redemption, after written
notice to investors who have elected this redemption procedure. The Fund has no
present intention of making this charge. The recipient bank may also impose a
charge in connection with a wire redemption.
The Fund will normally make payment for all shares redeemed on the next
business day following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set forth below,
in no event will payment be made more than seven days after acceptance of such a
redemption request. However, the right of redemption may be suspended or the
date of payment postponed (i) during periods when the New York Stock Exchange is
closed for other than weekends and holidays or when trading on such Exchange is
restricted as determined by the Securities and Exchange Commission by rule or
regulation; (ii) during periods in which an emergency, as determined by the
Securities and Exchange Commission, exists which causes disposal of, or
evaluation of the Net Asset Value of, the portfolio securities to be
unreasonable or impracticable; or (iii) for such other periods as the Securities
and Exchange Commission may permit. Redemption by any method of shares which
were recently purchased by check (irrespective of whether the check is a regular
check or a certified, cashier's or official bank check) may be delayed up to 15
days or until the check clears or a determination has been made that the
purchase check will be honored. Such determination may also be made by telephone
or written assurance to the Agent from the bank on which the purchase check was
drawn, which must be arranged by the shareholder requesting redemption and must
be satisfactory to the Agent and the Fund. Possible delays in remittance of
redemption proceeds can be eliminated by using wire payments or Federal Reserve
drafts to pay for purchases.
Within 30 days of a redemption of shares on which a sales charge was paid,
an investor may reinvest all or part of the redemption proceeds in shares of the
Fund at the net asset value next computed after the Agent's receipt of the
reinvestment order. The privilege may be exercised only once by a shareholder
with respect to the Fund. If the shareholder has realized a gain on the
redemption and reinvestment in the Fund, the transaction is taxable, and
reinvestment will not alter any capital gains tax payable. If there has been a
loss on the redemption, some of the loss may be tax deductible, depending on the
amount reinvested.
If the Trustees determine that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the
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<PAGE> 24
redemption price in whole or in part by the distribution in kind of securities
from the portfolio of the Fund, in lieu of cash, in conformity with applicable
rules of the Securities and Exchange Commission. See the Additional Statement
for details.
The Fund has the right to compel the redemption of shares held in any
account if the aggregate Net Asset Value of such shares is less than $500. If
the Board elects to do this, shareholders who are affected will receive prior
written notice and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.
AUTOMATIC WITHDRAWAL PLAN
Any shareholder who owns or purchases shares of the Fund having a Net Asset
Value of at least $5,000 may establish an Automatic Withdrawal Plan under which
he will receive a monthly or quarterly check in a stated amount, not less than
$50. All dividends and distributions must be reinvested. Redemption of shares to
make payments under the Plan will give rise to a gain or loss for tax purposes.
See the Automatic Withdrawal Plan provisions of the Application included in this
Prospectus and the Additional Statement under "Automatic Withdrawal Plan" and
"Dividend and Tax Information" below.
Purchase of additional shares concurrently with withdrawals are undesirable
because of sales charges when purchases are made. Accordingly, a Planholder may
not maintain a Withdrawal Plan while simultaneously making regular purchases.
While an occasional lump sum investment may be made, such investment should
normally be an amount equivalent to three times the annual withdrawal or $5,000,
whichever is less.
MANAGEMENT ARRANGEMENTS
THE BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction and
control of its Board of Trustees. The Additional Statement lists the Fund's
Trustees and officers and provides further information about them.
ADVISORY AGREEMENT
Van Liew Capital Inc. (the "Adviser") supervises the investment program of
the Fund and the composition of its portfolio. The Adviser is a registered
investment adviser incorporated in Rhode Island in 1984 and acts as an
investment adviser for individuals, charitable institutions, financial
institutions and pension plans primarily in the New England area. As of October
31, 1996, the Adviser had approximately $310 million under management. The
Adviser does not serve as an adviser to any other registered investment
companies. The Adviser is controlled by Alfred B. Van Liew, a Trustee and
President of the Fund. See the Additional Statement for more information
regarding Mr. Van Liew.
Joseph J. Healy and Samuel H. Hallowell, Jr. serve as co-managers of the
Fund's portfolio, and share responsibility for managing the Fund's portfolio in
accordance with the Fund's investment objectives and policies.
Mr. Healy, who was elected as a Vice President of the Fund in 1996, joined
the Adviser in 1992. Prior thereto, he was a Senior International Mutual Fund
Accountant with The Boston Company
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<PAGE> 25
Advisors, Inc. Mr. Healy is responsible for the management, marketing and
administration of the Fund and functions as the primary trader for the Adviser
of fixed income and equity securities while overseeing the firm's trading
compliance practices as Executive Representative to the NASD. Mr. Healy has a BS
from Boston College in Finance and Marketing and holds NASD Series 7, 24, 63 and
65 licenses.
Samuel H. Hallowell, Jr. has been a Vice President of the Fund since it's
inception in December 1986 and the Adviser since June 1992. He is a founding
Partner of the Adviser and Vice President of Van Liew Trust Company, and manages
over $179 million of investments for individuals and institutions. With over 20
years experience in the investment business Mr. Hallowell previously served as a
Senior Portfolio Manager and Vice President at Rhode Island Hospital Trust
National Bank.
The services of the Adviser are rendered under an Investment Advisory
Agreement which provides, subject to the control of the Board of Trustees, for
investment, supervisory and certain corporate administrative services. The
Investment Advisory Agreement states that the Adviser shall, at its expense,
provide to the Fund all office space and facilities, equipment and clerical
personnel necessary for the carrying out of its duties under the Advisory
Agreement and the keeping of the accounting records of the Fund, including the
computation of the Net Asset Value per share and the dividends.
Under the Advisory Agreement, the Adviser pays all compensation of those of
the Fund's officers and employees and of those Trustees who are affiliated with
the Adviser. Under the Advisory Agreement, the Fund bears the cost of the
preparation, setting in type and printing of its prospectuses and reports to
shareholders (whether or not sent to existing shareholders) and the costs of
distributing those copies of such prospectuses and reports as are sent to
shareholders. Under the Advisory Agreement, all other expenses not expressly
assumed by the Adviser under the Advisory Agreement are paid by the Fund. The
Advisory Agreement lists examples of such expenses; the major categories of such
expenses relate to legal and audit expenses, custodian and transfer agent, or
shareholder servicing agency expenses, stock issuance and redemption costs,
certain printing costs, registration costs of the Fund and its shares under
Federal and State securities laws, interest, taxes and brokerage commissions,
and non-recurring expenses, including litigation.
Under the Advisory Agreement, the Adviser also provides all administrative
services to the Fund other than those relating to its investment portfolio and
the maintenance of its accounting books and records. Such administration
services include but are not limited to (i) providing office space and equipment
in connection with the maintenance of the headquarters of the Fund; (ii)
maintenance of books and records (other than accounting books and records); and
(iii) overseeing the relationship between the Fund and its custodian and
transfer agent. See the Additional Statement for a further description of
administrative functions listed in the Advisory Agreement as part of such
duties.
Under the Advisory Agreement, the Fund pays a fee at the annual rate of .60
of 1% for the first $200 million of average annual net assets and .50 of 1% of
such average annual net assets above $200 million. Fees are computed and accrued
daily and paid monthly.
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<PAGE> 26
The Adviser agrees that in the event the operating expenses of the Fund
exceed the expense limitations applicable to the Fund imposed by the securities
laws or regulations of any state in which the Fund's shares are qualified for
sale, the above fees shall be reduced, but not below zero, by an amount equal to
such excess expenses. The payment of fees at the end of any month will be
reduced or postponed so that at no month end will there be any accrued but
unpaid liability under an expense limitation. Currently, no expense limitation
is applicable to the Fund. Additionally, the Adviser has indicated to the Fund
that it may, but is not obligated to, waive all or a portion of these fees. The
Adviser waived $23,636 of the total $261,545 in fees due under the Advisory
Agreement for the fiscal year ended October 31, 1994. Accordingly, the actual
fees received by the Adviser for such period were $237,909. The waiver of such
fees had the effect of increasing the Fund's yield for this period. The Adviser
will not seek reimbursement for such fees to the extent waived.
The Advisory Agreement was approved by a majority (as defined in the
Investment Company Act of 1940) of the Fund's shareholders on May 5, 1988 and
became effective on that date. Prior to such shareholder approval, investment
management and administrative services were provided by the Adviser under two
separate agreements. The combined fees payable and the services rendered under
the prior agreements were identical to those provided under the existing
Advisory Agreement.
DIVIDEND AND TAX INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare dividends from net investment income daily. Net
income for dividend purposes includes interest income accrued by the Fund since
the previous dividend declaration, including accretion of any original issue or
market discount, less expenses paid or accrued including any amortization of any
original issue or market premium. Dividends are declared as to any shares
outstanding beginning at the close of business (i) in the case of investments by
mail, on the day after the day on which the shares are issued (see "How To
Invest in The Fund"); or (ii) in the case of dealer orders, on the day after the
day on which actual dealer payment for such shares is timely received by the
Agent, irrespective of the earlier issuance of the shares (see the same
caption). Timely receipt of actual dealer payment by the Agent means either (i)
receipt by the Agent prior to 12:00 Noon Eastern time on a business day of
checks, drafts or other orders for the payment of U.S. dollars as well as wire
payments to the Custodian but does not include a receivable from a selected
dealer to make payment for shares ordered by it; or (ii) a guarantee from the
selected dealer that such payment will be received by the Agent on such business
day. Any loss resulting from this payment policy must be satisfied immediately
by a party other than the Fund. Dividends so declared will be paid within a week
after the end of each month. Redeemed shares continue to earn dividends through
and including the day which is the earlier of (i) the day before the day on
which the redemption proceeds are mailed or wired by the Custodian or paid by
the Custodian to a selected dealer; or (ii) the day which is the fifth day on
which the New York Stock Exchange is open after the day on which the Net Asset
Value of the redeemed shares has been determined (see "How To Redeem Your
Investment").
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<PAGE> 27
Net investment income includes amounts of income from the Rhode Island
Obligations in the Fund's portfolio which is allocated as "exempt-interest
dividends" (see below) and is therefore free from Federal income tax. This
allocation will be made by the use of one designated percentage applied
uniformly to all income dividends made during the Fund's tax year. Such
designation will normally be made in the first month after the end of each of
the Fund's fiscal years as to income dividends paid in the prior year. The
percentage of income designated as tax-exempt for any particular dividend may be
substantially different from the percentage of the Fund's income that was
tax-exempt during the period covered by the dividend. Distributions ("capital
gains distributions") from net realized capital gains, if any, will be paid on
an annual basis. If net capital losses are realized in any year, they are
charged against principal and not against net investment income which is
distributed regardless of gains or losses. Under the Interest and Dividend Tax
Compliance Act of 1983, the Fund may be required to impose backup withholding at
a rate of 31% upon payment of redemptions to shareholders, and from taxable
dividends and short and long-term gains distributions (if any), if shareholders
do not comply with provisions of the law relating to the furnishing of taxpayer
identification numbers and reporting of dividends.
Unless a shareholder requests otherwise by letter addressed to PFPC, Inc.
or by filing an appropriate application prior to a given ex-dividend date,
dividends and distributions will be automatically reinvested in full and
fractional shares of the Fund at net asset value on the record date for the
dividend or distribution or other date fixed by the Board of Trustees. An
election by a shareholder to receive cash will continue in effect until written
notification of a change is received by the Agent. Shareholders whose dividends
are being reinvested will receive a monthly summary of their accounts indicating
the reinvestment of dividends. There is no fixed dividend rate. None of the
Fund's dividends will qualify for the 70% dividend received deduction for
corporations.
TAX INFORMATION
If the Fund qualifies as a "regulated investment company" under the
Internal Revenue Code (the "Code"), it will not be liable for Federal income
taxes on amounts paid by it as dividends and distributions. The Fund has so
qualified and expects to continue to do so. However, the Code contains a number
of complex tests relating to such qualification and it is possible that the Fund
might not meet one or more of these tests in any particular year. If it does not
so qualify, it would be treated for tax purposes as an ordinary corporation,
would receive no tax deduction for payments made to shareholders and would be
unable to pay "exempt-interest dividends" as discussed below.
One of the tests for such qualifications is, in general, that at the end of
each fiscal quarter of the Fund, at least 50% of the value of its assets must
consist of (i) cash; (ii) U.S. Government Obligations; and (iii) securities of
any one issuer which do not exceed 5% of the value of the Fund's assets. See the
Additional Statement for further information as to the tests for such
qualification and for tax information on Futures.
In addition, the Code imposes a nondeductible excise tax on the Fund equal
to 4% of the excess, if any, of the required distribution over the amount
actually distributed for a calendar year. The Fund intends to make the required
distributions and thereby to avoid any such excise tax.
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<PAGE> 28
For dividends and distribution purposes, realized gains and losses would
include those gains and losses on Futures which are required to be reported for
Federal income tax purposes. Gains from the closing out of Futures are not free
from Federal income tax and thus cannot be included in the "exempt-interest
dividends" (see below) the Fund pays. Instead, any such gains will be taxable to
shareholders for Federal income tax purposes when the Fund distributes them.
In addition, the Fund intends to qualify during each fiscal year under the
Code to pay "exempt interest dividends" to its shareholders. Exempt-interest
dividends which are derived from net income earned by the Fund on Rhode Island
Obligations will be excludable from gross income of the shareholders for Federal
income tax purposes and, therefore, tax-free. A shareholder receiving a dividend
from net interest income earned by the Fund from one or more of (i) Taxable
Short-Term Obligations; (ii) income from repurchase agreements and securities
loans; and (iii) an excess of net short-term capital gain over net long-term
capital loss, treats the dividend as a receipt of ordinary income in the
computation of his gross income regardless of whether it is reinvested in Fund
shares. In addition, gain on the disposition of a tax-exempt obligation or any
other market discount bond that is acquired after April 30, 1993 for a price
that is less than the principal amount of the bond generally will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount.
Long-term gains distributions, if any, are taxable to shareholders as
long-term capital gains irrespective of the length of time a shareholder has
held his stock and regardless of whether the distributions are reinvested in
Fund shares. Long-term gains distributions are not eligible for the dividend
received deduction for corporations. Even if the Fund has a net realized capital
gains in any taxable year, the amount of any distribution may be reduced or
eliminated by an applicable capital loss carryover.
Information as to the tax status of the Fund's dividends and distributions
will be mailed to shareholders annually.
Under the Code, tax-exempt interest on private activity bonds issued after
August 7, 1986, other than qualified 501(c)(3) bonds, constitutes a tax
preference subject to the Federal individual and corporate alternative minimum
tax. To the extent the Fund invests in these bonds, individual and corporate
shareholders, depending on their status, might be subject to the alternative
minimum tax on the part of the Fund's distributions derived from the bonds.
Interest income on Municipal Obligations is included in corporate "earnings and
profits" for purposes of computing the Federal alternative minimum tax
applicable to corporations. In addition, certain corporate shareholders may be
subject to a Federal "environmental" tax on the Fund's dividends for taxable
years beginning after December 31, 1986.
Interest on loans to purchase shares of the Fund may not be deducted for
Federal tax purposes. Under rules used by the Internal Revenue Service for
determining when borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund may be considered
to have been made with borrowed funds even though the borrowed funds are not
directly traceable to the purchase of shares. Furthermore, in view of Section
147(a) of the Code, persons who are "substantial users" (or persons related
thereto) of facilities
26
<PAGE> 29
financed by industrial development bonds should consult their own tax advisers
before purchasing shares, since the income from those obligations may not be tax
exempt for substantial users.
Under the Tax Reform Act of 1986, instead of separate volume limits for
most private activity bonds and for qualified mortgage bonds, a single annual
volume cap, effective for bonds issued after August 15, 1986, covers exempt
facility bonds, small issue bonds, qualified redevelopment bonds, student loan
bonds, qualified mortgage bonds and private loan bonds. Bonds not covered by a
volume cap include qualified 501(c)(3) bonds, exempt facility bonds for
governmentally owned airports and docks and moors, and exempt facility bonds for
solid waste disposal facilities, if all property financed with the bonds is
governmentally owned.
The new unified annual volume cap for each state after 1987, is equal to
the greater of $50 per resident of the state or $150 million. The $150 million
limit will apply to Obligations of Rhode Island issuers. Consequently, relative
to states with greater populations which will be subject to the dollar per
resident limitation, Rhode Island will have greater ability to finance various
projects on a tax exempt basis because it will be able to issue more bonds per
resident, since it is subject to the higher cap. In recent years the demand for
Rhode Island Obligations has exceeded supply, which tends to increase bond
prices and reduce yields. The Fund, as one of the largest purchasers of Rhode
Island Obligations, may not be as adversely affected by these market forces as
other investors.
TAX EFFECTS OF REDEMPTIONS
If you redeem your shares, you will have a short- or long-term (depending
on how long you have held your shares) gain or loss (depending on whether you
receive more or less on the redemption than your tax basis, usually cost).
However, if the shares redeemed (or sold or exchanged) were held for not more
than six months (commencing on an original purchase or an exchange), any
short-term capital loss is disallowed to the extent of any exempt-interest
dividend on these shares. However, the Treasury may, by regulation, prescribe a
shorter holding period than six months in the case of a regulated investment
company which distributes at least 90% of its net tax-exempt interest.
If you have a gain on a redemption, some of it may represent interest on
Rhode Island Obligations earned but not yet paid out. If you wait to redeem
until shortly after you are entitled to receive the next dividend, all or most
of the dividend will be tax exempt, while the gain would have been taxable.
RHODE ISLAND TAX INFORMATION
The Fund, and dividends and distributions made by the Fund to Rhode Island
residents, will generally be treated for Rhode Island income tax purposes in the
same manner as they are treated under the Code for Federal income tax purposes.
Under Rhode Island law, however, interest derived from obligations of States
(and their political subdivisions) other than Rhode Island will not be exempt
from Rhode Island income taxation. (Interest derived from obligations of the
following is exempt from Rhode Island income taxation: Guam, Puerto Rico, and
the Virgin Islands).
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<PAGE> 30
Persons or entities who are not Rhode Island residents should not be
subject to Rhode Island income taxation on dividends and distributions made by
the Fund but may be subject to other State and local taxes.
YIELD INFORMATION
Yield information on shares of the Fund may appear from time to time in
advertisements and in communications to shareholders and others. The yield
quoted may be provided in a number of ways. The "current yield" is, in general,
the net average annualized yield for a 30-day period calculated at simple
interest rates. This is computed by annualizing the Fund's net investment income
per share for a recent 30-day (or one month) period divided by the maximum
public offering price per share (including sales charge) on the last day of the
period. The "tax equivalent yield" is, in general, the current yield divided by
a factor equal to one minus stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after-tax basis
a specified tax-exempt yield. Any yield quotation will be accompanied by total
return quotations for specified periods. See the Additional Statement for
further information as to the methods of calculating these yields and returns.
GENERAL INFORMATION
DESCRIPTION OF THE FUND AND ITS SHARES
The Fund is the sole investment portfolio of the Trust, an open-end,
non-diversified investment company organized in August 1986, as a Massachusetts
business trust. (See the second paragraph under "Tax Information" above for
further information about the Fund's status as "non-diversified".) The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in the Fund. Each share represents an equal proportionate interest in
the Fund with each other share. Upon liquidation of the Fund shareholders are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders. All shares are presently of the same class;
however, if they deem it advisable and in the best interests of shareholders,
the Board of Trustees of the Trust may create additional classes of shares which
may differ from each other only as to dividends (subject to rules and
regulations of the Securities and Exchange Commission or by exemptive order) or
the Board of Trustees may, at its own discretion, create additional series of
shares each of which may have separate assets and liabilities (in which case any
such series would be designated as a separate "series" or "fund"). See the
Additional Statement for further information as to possible additional series.
On November 1, 1989, the Fund acquired all of the assets of the Rhode
Island Tax-Free Bond Fund (the "R.I. Fund") in exchange for shares of the Fund
pursuant to the terms of an Agreement and Plan of Reorganization. Under the
terms of the reorganization, each shareholder of the R.I. Fund became a
shareholder of the Fund, receiving shares of the Fund with a value equal to the
value of the shareholder's interest in the R.I. Fund. Approximately 212,150
shares of the Fund were issued in connection with the reorganization.
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<PAGE> 31
LIABILITY AND INDEMNIFICATION OF SHAREHOLDERS AND TRUSTEES
Under Massachusetts law, shareholders of such a Trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. The Declaration of Trust does, however, contain an express disclaimer of
shareholder liability of acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification out of the Trust's property of any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to the relatively
remote circumstances in which the Trust itself would be unable to meet its
obligations. In the event the Trust had two or more funds or series, and if any
such fund or series were to be unable to meet the Trust's obligations
attributable to it (which, as is the case with the Fund, is relatively remote)
other fund or series would be subject to such obligations, with corresponding
increase in the risk of the shareholder liability mentioned in the prior
sentence.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
Trustees and on other matters submitted to the vote of shareholders. The holders
of shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable, except as set forth above. The Fund may be terminated upon the
vote of the holders of a majority of the outstanding shares of the Fund or by
the Trustees by written notice to the shareholders. If not so terminated, the
Fund will continue indefinitely.
Under the 1940 Act, shareholders of record of no fewer than two-thirds of
the outstanding shares of the trust may remove a Trustee through a declaration
in writing or by vote cast in person or by proxy at a meeting called for that
purpose. The Trustees are required promptly to call a meeting of shareholders
for the purposes of voting upon the question of removal of any Trustee when
requested in writing to do so by the shareholders of record of not less than 10%
of the Trust's outstanding shares.
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<PAGE> 32
<TABLE>
<CAPTION>
<S> <C>
OCEAN STATE TAX EXEMPT FUND ("THE FUND")
C/O PFPC, INC. ("THE AGENT")
P.O. BOX 8950
a. APPLICATION PLEASE PRINT CLEARLY WILMINGTON, DELAWARE 19899
- ---------------------------------------------------------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION:
- ---------------------------------------------------------------------------------------------------------------------------------
COMPLETE ONLY THE APPLICABLE SECTIONS WHICH WILL TELL US HOW YOUR ACCOUNT SHOULD
BE REGISTERED.
</TABLE>
<TABLE>
<S> <C>
[] Individual ----------------------------------------------------------------------
(First Name) (Middle Initial) (Last
Joint Name)
[] Registrant ----------------------------------------------------------------------
(if any)2 (First Name) (Middle Initial) (Last
Name)
1Only one Social Security Number is needed for tax reporting.
2The account registration will be joint tenants with right of survivorship and not tenants in common
unless tenants in common or community property registrations are requested.
Name of Adult Custodian (Only 1 permitted):
[] Gifts to ---------------------------------------------------------------------------
Minors (First Name) (Middle Initial) (Last
Name)
Name of Minor (Only 1 permitted):
--------------------------------------------------------------------------------
(First Name) (Middle Initial (Last
Name)
Uniform Gifts to Minors Act
---------------------------------------------------------------------------------------------------------
(Name of State) Minor's Soc. Sec. No.
Corporation
Partnerships
[] Trusts & ---------------------------------------------------------------------------------------------------------
Others (Name of Corporation or Partnership. If a Trust, include the name(s) of Trustees in which account will be
registered and the name and date of the Trust Instrument. Account for a Pension or Profit Sharing Plan or
Trust may be registered in the name of the Plan or Trust itself.)
PLEASE INDICATE TYPE OF ORGANIZATION:
[] Corporation [] Partnership [] Trust [] Other -----------------------------
----------------------------- (Taxpayer I.D. No.)
2. ADDRESS
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
(Street Address)
--------------------------------------------------------------------------------------- ---------------- -------------------
(City) (State) (Zip) Area Code Daytime Tel.
Citizen or resident of: [ ] U.S. [ ] Other
------------ Check here [ ] If you are a non-U.S. Citizen or resident and not subject
(specify) to back-up withholding (See certification in 8 below.)
3. AMOUNT OF INVESTMENT:
- ---------------------------------------------------------------------------------------------------------------------------------
------------------------
MINIMUM INITIAL INVESTMENT $1,000
AMOUNT OF INVESTMENT $ Enclose check payable to: Ocean State Tax Exempt Fund
------------------------
[ ]Please check here if establishing an Automatic Withdrawal Plan (minimum investment $5,000) and complete Section 7 of this
Application.
4. DIVIDEND AND DISTRIBUTION INSTRUCTIONS: (Dividends and Capital Gains will be reinvested unless indicated otherwise)
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends are to be: [ ] Reinvested [ ] Paid in cash Capital Gains Distributions are to be: [ ] Reinvested [ ] Paid in cash
5. RIGHT OF ACCUMULATION/LETTER OF INTENT:
- -----------------------------------------------------------------------------------------------------------------------------------
IF YOU ARE ALREADY A FUND SHAREHOLDER, YOU MAY BE ENTITLED TO A REDUCED SALES CHARGE UNDER RIGHT OF ACCUMULATION OR LETTER OF
INTENT. TO QUALIFY, YOU MUST COMPLETE THIS SECTION. List all your accounts, including those in your spouse's name, joint accounts
with your spouse, and accounts held for your minor children. If you need more space, please attach a separate sheet. This account
qualifies for reduced sales charge under:
[ ] RIGHT OF ACCUMULATION: My existing LETTER OF INTENT: [] Submitted with this application
(complete Section b)
Fund account numbers are:
[] Previously submitted for accounts
listed below:
- -------------------------------------- ------------------------------------------------------
</TABLE>
<PAGE> 33
6. SYSTEMATIC INVESTMENT PLAN:
- --------------------------------------------------------------------------------
The Systematic Investment Plan, makes possible regularly scheduled purchases of
Fund shares to allow dollar-cost averaging. The Fund's Transfer Agent can
arrange for an amount of money selected by you ($100 minimum) to be deducted
from your checking account and used to purchase shares of the Fund. A $1,000
minimum initial investment is required. This may not be used in conjunction with
the Automatic Withdrawal Plan.
Please debit $
- --------------- from my checking account (named in Section c) on or about the
20th of the month.
$100 Minimum
Depending on the Application receipt date, the Plan may take 10 to 20 days to be
in effect.
[ ] Monthly [ ] Every alternate month
[ ] Quarterly [ ] Other
-------------------------------------------------------
- --------------------------- Start Month.
If you are applying for the Systematic Investment Plan, please attach a deposit
slip or voided check. If you are applying for the Systematic Investment Plan,
you must also complete Section c of this Application.
7. AUTOMATIC WITHDRAWAL PLAN:
- --------------------------------------------------------------------------------
Please establish an Automatic Withdrawal Plan for this account, subject to the
terms of such Plan as set forth below. To realize the amount stated below, the
Agent is authorized to redeem sufficient shares from this account at the then
Net Asset Value, in accordance with the terms below:
Dollar Amount of each withdrawal $
-------------beginning
(Minimum:$50)
Payments to be made: [ ] Monthly or [ ] Quarterly.
- -------------
(Month)(Year)
Checks should be made payable to (if check is payable to a bank for your
commercial bank account, indicate bank name, address and your account number):
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------- ---------------------------------------
(First Name) (Middle Initial) (Last Name) (Bank Name and Address)
- ----------------------------------------------------------------------- ---------------------------------------
(Street)
- ----------------------------------------------------------------------- ---------------------------------------
(City) (State) (Zip)
---------------------------------------
(Bank Account Number)
</TABLE>
8. TELEPHONE REDEMPTION:
- --------------------------------------------------------------------------------
When shares are redeemed by telephone or wire, please wire redemption proceeds
of $1,000 or more in federal funds to my (our) commercial bank account which
must be in the same name as this Fund account is registered. (Please attach a
deposit slip or voided check.)
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------- ------------------------------ ----------------------------
Name of Bank Bank a/c no. Bank ABA no.
- ------------------------------------------------------- -------------------------------------------------------------
Street
9. SIGNATURE(S):
- --------------------------------------------------------------------------------
The undersigned warrants that he/she has full authority and is of legal age to
purchase shares of the Fund and has received and read a current Prospectus of
the Fund and agrees to its terms. The undersigned authorizes the Fund and its
agents to act upon the instructions for the features that have been selected
above. The Agent will not be liable for acting upon instructions it believes are
genuine. Under penalties of perjury, the undersigned whose Social Security (Tax
I.D.) Number is shown above certifies (i) that Number is my correct taxpayer
identification number and (ii) currently I am not under IRS notification that I
am subject to backup withholding (line out (ii) if under notification). If no
such Number is shown, the undersigned further certifies, under penalties of
perjury, that either (a) no such Number has been issued, and a Number has been
or will soon be applied for; if a Number is not provided to you within sixty
days, the undersigned understands that all payments (including liquidations) are
subject to 31% withholding under federal tax law, until a Number is provided; or
(b) that the undersigned is not a citizen or resident of the U.S.; and either
does not expect to be in the U.S. for 183 days during each calendar year and
does not conduct a business in the U.S. which would receive any gain from the
Fund, or is exempt under an income tax treaty.
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------ ------------------------------------------ ------------------------
Individual(or Custodian) Joint Registrant, if any Date
- ------------------------------------------ ------------------------------------------ ------------------------
Corporate Officer, Partner, Trustee, etc. Title Date
</TABLE>
<PAGE> 34
10. INVESTMENT DEALER: (IMPORTANT--TO BE COMPLETED BY DEALER):
- --------------------------------------------------------------------------------
- -------------------------------------------------------
Dealer Name
- -------------------------------------------------------
Address
( )
- -------------------------------------------------------
Area Code Telephone
- -------------------------------------------------------
Branch #/Rep. #/Name
- -------------------------------------------------------
Dealer No./Branch Office--City & State
IMPORTANT INFORMATION ABOUT TAXPAYER IDENTIFICATION NUMBERS:
- --------------------------------------------------------------------------------
Because of important changes made to the Internal Revenue Code in 1983, we must
be certain that we have a record of your correct Social Security Number or other
Taxpayer Identification Number. If you have not certified that you have provided
us with the correct number, your account will be subject to special Federal
income tax withholding (called "backup withholding"); the law will then require
us to withhold 31% of each taxable dividend or capital gain distribution paid to
you in cash or reinvested in your account and will require us to withhold 31% of
any liquidation or the amount you exchange to establish a new account. The
amount withheld is paid to the Internal Revenue Service toward the amount of
Federal income taxes you owe. The Fund will not return to you an amount withheld
due to your failure to provide a correct certified number. In addition, you may
be subject to a $50 I.R.S. penalty. Therefore please include your correct Social
Security Number or Taxpayer Identification Number. The appropriate taxpayer
identification number must be inserted on the application in the space provided.
The following sets forth examples of what identification number to list:
<TABLE>
<S> <C>
Type of Account Registration Taxpayer Number to be Used
- ------------------------------------------------------------------------------------------------------------------
Individual Account Social Security Number of Applicant
Joint Account Social Security Number of Person Reporting Tax
Custodian Account for a Minor Social Security Number of Minor
Corporation, Partnership, Trust Estate, Pension Trust, Broker, Taxpayer Identification Number
etc.
Nonresident Alien None Required
</TABLE>
<PAGE> 35
B. LETTER OF INTENT SEE TERMS BELOW
- --------------------------------------------------------------------------------
------------------------------
DATE
Gentlemen:
I intend to invest in shares of the Fund during the 13-month period from the
date of my first purchase pursuant to this Letter (which purchase cannot be more
than 90 days prior to this Letter), an aggregate amount (excluding any
reinvestments of dividends or distributions) of at least $25,000 which, together
with my present holdings of Fund shares (at public offering price on date of
this Letter), will equal or exceed the minimum amount checked below:
<TABLE>
<CAPTION>
<S> <C> <C> <C< <C> <C>
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
</TABLE>
Subject to conditions specified below, each purchase will be made at the
public offering price applicable to a single transaction of the dollar amount
checked above.
I am making no commitment to purchase shares, but if my purchases within
thirteen months from the date of my first purchase do not aggregate $25,000, or,
if such purchases added to my present holdings do not aggregate the minimum
amount specified above, I will pay the increased amount of sales charge
prescribed in terms of escrow below. It is understood that 3% of the minimum
dollar amount checked above will be held in escrow in the form of shares
(computed to the nearest full share). These shares will be held subject to the
terms of escrow.
The commission to the dealer, if any, named herein shall be at the rate
applicable to the minimum amount of my specified intended purchases checked
above. If my actual purchases do not reach this minimum amount, the commissions
previously paid to the dealer will be adjusted to the rate applicable to my
total actual purchases. If my total purchases exceed the dollar amount of my
intended purchases and pass the next commission break-point, I shall receive the
lower sales charge, provided that the dealer returns to the Distributor the
excess of commissions previously allowed or paid to him over that which would be
applicable to the amount of my total purchases.
In determining from time to time the total amount of purchases made
hereunder, shares disposed of by the undersigned prior to the termination of
this Letter will be deducted.
My dealer shall refer to this Letter of Intent in placing any future
purchase orders for me while this Letter is in effect.
Terms Accepted
<TABLE>
<S> <C> <C>
- ------------------------------------ ------------------------------------ ------------------------------------
(Dealer) Print name(s) of Investor(s) Print name(s) of Investor(s)
By
------------------------------------ ------------------------------------ ------------------------------------
(Authorized Signature) Address Address
Date
------------------------------------ ------------------------------------ ------------------------------------
City City
Accepted:
------------------------------------ ------------------------------------
State and Zip State and Zip
By
------------------------------------ ------------------------------------ ------------------------------------
Distributor Signature(s) of Investor(s) Signature(s) of Investor(s)
---------------------------
NUMBER OF SHARES TO BE HELD IN
ESCROW UNDER THIS LETTER OF INTENT
---------------------------
------------------------------------
Expiration Date of Letter
</TABLE>
TERMS OF ESCROW FOR LETTER OF INTENT
- --------------------------------------------------------------------------------
In submitting a Letter of Intent, the investor agrees to be bound by the terms
and conditions applicable to Letters of Intent appearing below.
1. Out of the initial purchase (or subsequent purchase if necessary), 3% of
the dollar amount specified in the Letter of Intent ("Letter") shall be held in
escrow in shares of the Fund by the Agent. All dividends and any capital
distributions on the escrowed shares will be credited to the investor's account.
2. If the total minimum investment specified under the Letter of Intent is
completed with a thirteen-month period, the escrowed shares will be promptly
released to the investor. However, shares disposed of prior to completion of the
purchase requirement under the Letter of Intent will be deducted from the amount
required to complete the investment commitment.
3. If the total purchases pursuant to the Letter of Intent are less than
the amount specified in the Letter as the intended aggregate purchases, the
investor must remit to the Distributor an amount equal to the difference between
the dollar amount of sales charges actually paid and the amount of sales charges
which would have been paid if the total amount purchased had been made at a
single time. If such difference in sales charges is not paid within twenty days
after receipt of a request from the Distributor or the dealer, the Distributor
will, within sixty days after the expiration of the Letter, redeem the number of
escrowed shares necessary to realize such difference in sales charges. Full
shares and any cash proceeds for a fractional share remaining after such
redemption will be released to the investor. The escrow of shares will not be
released until any additional sales charge due has been paid as stated in this
section.
4. By signing the Letter, the investor irrevocably constitutes and appoints
the Agent or the Distributor his attorney to surrender for redemption any or all
escrowed shares on the books of the Fund.
<PAGE> 36
C. SYSTEMATIC INVESTMENT PLAN PROVISIONS/DEPOSITOR'S
AUTHORIZATION TO HONOR DEBITS
- --------------------------------------------------------------------------------
IF YOU SELECTED SYSTEMATIC INVESTMENT YOU MUST ALSO COMPLETE THIS SECTION
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by PFPC, Inc.,
the Agent, and to pay such sums in accordance therewith, provided my/our account
has sufficient funds to cover such drafts or debits. I/We further agree that
your treatment of such orders will be the same as if I/we personally signed or
initiated the drafts or debits.
The undersigned acknowledges that in connection with a Systematic Investment, if
his/her account at the Financial Institution has insufficient funds, the Fund
and its agents may cancel the purchase transaction and are authorized to
liquidate other shares or fractions thereof held in his/her Fund account to make
up any deficiency resulting from any decline in the net asset value of shares so
purchased and any dividends paid on those shares. The undersigned authorizes the
Fund and its agents to correct any transfer error by a debit or credit to
his/her Financial Institution account and/or Fund account and to charge the
account for any related charges.
I/We understand that this authority will remain in effect until you received
my/our written instructions to cancel this service. I/We also agree that if any
such drafts or debits are dishonored, for any reason, you shall have no
liabilities.
Financial Institution Account Number
<TABLE>
<S> <C>
Name and Address Name of Financial Institution
where my/our account -----------------------------------------------------
is maintained Street Address
Name(s) and Signature(s) --------------------------------------------------------------------
of Depositor(s) as they
appear where account City --------------------------------------------------- State --------- Zip
is registered
---------------------------------------------------------------
(Please Print)
X
--------------------------------------------------------------- ------------------
(Signature) (Date)
---------------------------------------------------------------
(Please Print)
X
--------------------------------------------------------------- ------------------
(Signature) (Date)
</TABLE>
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, the Agent agrees:
1. Electronic Funds Transfer debit and credit items transmitted pursuant to the
above authorization shall be subject to the provisions of the Operating Rules
of the National Automated Clearing House Association.
2. To indemnify and hold you harmless from any loss you may suffer in connection
with the execution and issuance of any electronic debit in the normal course
of business initiated by the Agent (except any loss due to your payment of
any amount drawn against insufficient or uncollected funds), provided that
you promptly notify us in writing of any claim against you with respect to
the same, and further provided that you will not settle or pay or agree to
settle or pay any such claim without the written permission of the
Distributor.
3. To indemnify you for any loss including your reasonable costs and expenses in
the event that you dishonor, with or without cause, any such electronic
debit.
<PAGE> 37
D. AUTOMATIC WITHDRAWAL PLAN PROVISIONS
- --------------------------------------------------------------------------------
By requesting an Automatic Withdrawal Plan, the applicant agrees to the terms
and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan") as
agent for the person (the "Planholder") who executed the Plan authorization.
2. Certificates will not be issued for shares of the Fund purchased for
and held under the Plan, but the Agent will credit all such shares to the
Planholder on the records of the Fund. Any certificates now held by the
Planholder may be surrendered unendorsed to the Agent with the application so
that the shares represented by the certificates may be held under the Plan.
3. Dividends and distributions will be reinvested in shares of the Fund at
Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will be
made at the Net Asset Value per share in effect at the close of business on the
last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address to
which checks are to be mailed may be changed, at any time, by the Planholder on
written notification to the Agent. The Planholder should allow at least two
week's time in mailing such notification before the requested change can be put
into effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the ten current
prospectus of the Fund) to redeem all, or any part of, the shares held under the
Plan. In such case the Agent will redeem the number of shares requested at the
Net Asset Value per share in effect in accordance with the Fund's usual
redemption procedures and will mail a check for the proceeds of such redemption
to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that effect
from the Fund. The Agent will also terminate the Plan upon receipt of evidence
satisfactory to it of the death or legal incapacity of the Planholder. Upon
termination of the Plan by the Agent or the Fund, shares remaining unredeemed
will be held in an uncertificated account in the name of the Planholder, and the
account will continue as a dividend-reinvestment, uncertificated account unless
and until proper instructions are received from the Planholder, his executor or
guardian, or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Fund, the Planholder will be deemed to have appointed any successor transfer
agent to act as his agent in administering the Plan.
10. Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made. Accordingly, a
Planholder may not maintain this Plan while simultaneously making regular
purchases. While an occasional lump sum investment may be made, such investment
should normally be an amount equivalent to three times the annual withdrawal or
$5,000, whichever is less.
<PAGE> 38
NOTES
<PAGE> 39
INVESTMENT ADVISER
Van Liew Capital Inc.
One Regency Plaza, Suite One
Providence, Rhode Island 02903
DISTRIBUTOR
Van Liew Securities Inc.
One Regency Plaza, Suite One
Providence, Rhode Island 02903
CUSTODIAN
P.N.C. Bank, N.A.
Airport Business Center
200 Stevens Drive, Suite 440
Lester, Pennsylvania 19113
TRANSFER AGENT
PFPC, Inc.
P.O. Box 8871
Wilmington, Delaware 19899-8871
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
COUNSEL
Hinckley, Allen & Snyder
1500 Fleet Center
Providence, Rhode Island 02903
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary..................................... 2
Financial Highlights........................ 4
Discussion of Fund Performance.............. 5
Introduction................................ 6
Investment Of The Fund Assets............... 7
Investment Restrictions..................... 14
Net Asset Value Per Share................... 15
How To Invest In The Fund................... 16
How To Redeem Your Investment............... 19
Automatic Withdrawal Plan................... 21
Management Arrangements..................... 21
Dividend And Tax Information................ 24
General Information......................... 28
Application And Letter of Intent
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE
PROSPECTUS IN CONNECTION WITH ANY
OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH
INFORMATION MUST NOT BE RELIED ON AS
HAVING BEEN AUTHORIZED BY THE FUND.
THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE FUND IN ANY
JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
[OCEAN STATE TAX EXEMPT FUND LOGO]
A tax-free
income vehicle
PROSPECTUS
<PAGE> 40
STATEMENT OF ADDITIONAL INFORMATION
OCEAN STATE TAX-EXEMPT FUND
ONE REGENCY PLAZA
PROVIDENCE, RHODE ISLAND 02903
401-421-1411
1-800-300-1116
MARCH 1, 1997
This Statement of Additional Information ("Additional Statement") is
not a Prospectus. This Additional Statement should be read in conjunction
with the Prospectus (the "Prospectus") dated March 1, 1997 of Ocean State
Tax-Exempt Fund (the "Fund"), which may be obtained by written request to
the Fund's transfer agent, PFPC, Inc. by writing to the transfer agent at:
P.O. Box 8950, Wilmington, Delaware 19899, or by calling it at the
following number:
Toll free 1-800-992-2207
or by written request to Van Liew Securities Inc., the Fund's Distributor,
One Regency Plaza, Providence, Rhode Island 02903.
TABLE OF CONTENTS
Investment of the Fund's Assets. . . . . . . . . . . . . . . . . . . . . 2
Municipal Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Yield Information .. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . 10
Distribution Arrangements. . . . . . . . . . . . . . . . . . . . . . . . 11
Limitation of Redemptions in Kind. . . . . . . . . . . . . . . . . . . . 13
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 13
Additional Information as to Management Arrangements . . . . . . . . . . 17
Computation of Net Asset Value . . . . . . . . . . . . . . . . . . . . 18
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . . . . . 20
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE> 41
INVESTMENT OF THE FUND'S ASSETS
The investment objective and policies of the Fund are described in the
Prospectus, which refers to the matters described below. See the Prospectus for
the definitions of "Rhode Island Obligations", "Non-Rhode Island Obligations"
and "Taxable Short-Term Obligations" (collectively "Obligations").
INFORMATION ON U.S. GOVERNMENT SECURITIES
U.S. Government Securities (i.e., obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities) include securities issued
by the U.S. Government, which in turn include Treasury Bills (which mature
within one year of the date they are issued) and Treasury Notes and Bonds (which
are issued with longer maturities). All Treasury securities are backed by the
full faith and credit of the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Bank for Cooperatives, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, the Tennessee Valley Authority, District of
Columbia Armory Board, the Inter-American Development Bank, the Asian-American
Development Bank, and the International Bank for Reconstruction and Development.
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the Federal National Mortgage
Association, are supported only by the credit of the instrumentality and not by
the Treasury. If the securities are not backed by the full faith and credit of
the United States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to assert a
claim against the United States in the event that the agency or instrumentality
does not meet its commitment. The Fund will invest in securities of agencies
and instrumentalities only if Van Liew Capital Inc. (the "Adviser") is satisfied
that the credit risk involved is minimal.
RATINGS
The ratings assigned by Moody's Investors Service, Inc. (Moody's") or
Standard & Poor's Corporation ("S&P") represent their respective opinions of the
quality of the municipal bonds and notes and Short-Term Taxable Obligations
which they undertake to rate. It should be emphasized, however, that ratings
are general and not absolute standards of quality. Consequently, obligations
with the same maturity, stated interest rate and rating may have different
yields, while obligations of the same maturity and stated interest rate with
2
<PAGE> 42
different ratings may have the same yield. See Appendix A to this Additional
Statement for further information about the ratings of Moody's and S&P as to the
various rated Rhode Island Obligations, Non-Rhode Island Obligations and Short-
Term Taxable Obligations which the Fund may purchase.
WHEN-ISSUED AND DELAYED DELIVERY OBLIGATIONS
The Fund may purchase Obligations on a when-issued or delayed delivery basis.
The purchase price and the interest rate payable on the Obligations are fixed on
the transaction date. At the time the Fund makes the commitment to purchase
Obligations on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value each day of such Obligations in
determining its net asset value. The Fund will make commitments for such
when-issued transactions only when it has the intention of actually acquiring
the Obligations. To facilitate such acquisitions, the Fund will maintain with
the Custodian a separate account with portfolio Obligations in an amount at
least equal to such commitments. On delivery dates for such transactions, the
Fund will meet its commitments by selling the Obligations held in the separate
account and/or from cash flow.
MUNICIPAL BOND INDEX FUTURES
The Fund is permitted to use Municipal Bond Index Futures ("Municipal Bond
Index Futures" or "Futures") as a possible means to protect the asset value of
the Fund during changing interest rate markets, although in fact the Fund may
never do so. A Future is a contract to deliver or accept delivery of a cash
settlement based on the movement of a security index. The following discussion
is intended to explain briefly the workings of Futures.
Unlike when the Fund purchases or sells an Obligation, no price is paid or
received by the Fund upon the purchase or sale of a Future. Initially, however,
when such transactions are entered into, the Fund will be required to deposit
with the futures commission merchant ("broker") an amount of cash or Obligations
equal to a varying specified percentage of the contract amount. This amount is
known as initial margin. Subsequent payments, called variation margin, to and
from the broker, will be made on a daily basis as the price of the underlying
index fluctuates making the Future more or less valuable, a process known as
mark to market. Insolvency of the broker may make it more difficult to recover
initial or variation margin. Changes in variation margin are recorded by the
Fund as unrealized gains or losses. Margin deposits do not involve borrowing by
the Fund and may not be used to support any other transactions. At any time
prior to expiration of the Future, the Fund may elect to close the position by
taking an opposite position which will operate to terminate the Fund's position
in the Future. A final determination of variation margin is then made.
Additional cash is required to be paid by or released to the Fund and it
realizes a gain or a loss. Although Futures by their terms call for the actual
delivery or acceptance of cash, in most cases the contractual obligation is
fulfilled without having to make or take delivery. All transactions in the
futures markets are subject to commissions payable by the Fund and are made
3
<PAGE> 43
offset or fulfilled through a clearing house associated with the exchange on
which the contracts are traded. Although the Fund intends to buy and sell
Futures only on an exchange where there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for
any particular Future at any particular time. In such event, or in the event
of an equipment failure at a clearing house, it may not be possible to close a
futures position.
One risk in employing Futures to attempt to protect against the price
volatility of the Fund's Rhode Island Obligations is that the Adviser could be
incorrect in its expectations as to the extent of various interest rate
movements or the time span within which the movements take place. For example,
if the Fund sold a Future in anticipation of an increase in interest rates, and
then interest rates went down instead, the Fund would lose money on the sale.
Another risk as to Futures arises because of the imperfect correlation
between movement in the price of the Future and movements in the prices of the
Rhode Island Obligations which are the subject of the hedge. The risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the municipal bonds included in the applicable index. The price of
the Future may move more than or less than the price of the Rhode Island
Obligations being hedged. If the price of the Future moves less than the price
of the Rhode Island Obligations which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the Rhode Island Obligations
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at all. If the price of the Rhode
Island Obligations being hedged has moved in a favorable direction, this
advantage will be partially offset by the Future. If the price of the Future
moved more than the price of the Rhode Island Obligations, the Fund will
experience either a loss or gain on the Future which will not be completely
offset by movements in the price of the Rhode Island Obligations which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of the Rhode Island Obligations being hedged and movements in the
price of the Futures, the Fund may buy or sell Futures in a greater dollar
amount than the dollar amount of the Rhode Island Obligations being hedged if
the historical volatility of the prices of the Rhode Island Obligations being
hedged is less than the historical volatility of the debt securities which are
included in the index. It is also possible that, where the Fund has sold
Futures to hedge its portfolio against decline in the market, the market may
advance and the value of the Rhode Island Obligations held in the Fund's
portfolio may decline. If this occurred the Fund would lose money on the Future
and also experience a decline in value of its portfolio securities.
Where Futures are purchased to hedge against a possible increase in the price
of Rhode Island Obligations before the Fund is able to invest in them in an
orderly fashion, it is possible that the market may decline instead; if the Fund
then concludes not to invest in them at that time because of concern as to
possible further market decline or for other reasons, the Fund will realize a
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<PAGE> 44
loss on the Futures that is not offset by a reduction in the price of the Rhode
Island Obligations which it had anticipated purchasing.
There are daily price fluctuation limits established by contract markets
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached on a contract, no
trades may be entered into at prices beyond the limit, thus preventing the
liquidation of open futures positions.
REGULATORY ASPECTS OF MUNICIPAL BOND INDEX FUTURES
The Fund will, due to requirements under the Investment Company Act of 1940
(the "1940 Act"), deposit in a segregated account with its custodian bank Rhode
Island Obligations maturing in one year or less or cash, in an amount equal to
the fluctuating market value of long Futures it has purchased, less any margin
deposited on long positions.
The Fund must operate within certain restrictions as to its long and short
positions in Futures under a rule (the "CFTC Rule") adopted by the Commodity
Futures Trading Commission ("CFTC") under the Commodity Exchange Act (the "CEA")
to be eligible for the exclusion provided by the CFTC Rule as a "commodity pool
operator" (as defined under the CEA), and must represent to the CFTC that the
Fund will operate within such restrictions. Under these restrictions the Fund
will not, as to any positions, whether long, short or a combination thereof,
enter into Futures for which the aggregate initial margins exceed 5% of the fair
market value of its assets. Under the restrictions, the Fund also must, as to
its short positions, use Futures solely for bona-fide hedging purposes within
the meaning and intent of the applicable provisions under the CEA. As to the
Fund's long positions which are used as part of its portfolio strategy and are
incidental to its activities in the underlying cash market, the "underlying
commodity value" (see below) of its Futures must not exceed the sum of (i) cash
set aside in an identifiable manner, or short-term U.S. debt obligations or
other U.S. dollar-denominated high quality short-term money market instruments
so set aside, plus any funds deposited as margin; (ii) cash proceeds from
existing investments due in 30 days and (iii) accrued profits held at the
futures commission merchant. (There is described above the segregated account
which the Fund must maintain with its custodian bank as to its Futures'
activities due to requirements other than those of the CFTC Rule; the Fund will,
as to long positions, be required to abide by the more restrictive of this other
requirement or the above requirements of the CFTC Rule.) The "underlying
commodity value" of a Future is computed by multiplying the size of the Future
by the daily settlement price of the Future.
TAX INFORMATION ON FUTURES
The Prospectus states that the Fund intends to qualify as a "regulated
investment company" under the Internal Revenue Code (the "Code") and discusses
one of the tests for such qualification.
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<PAGE> 45
Other tests for such qualification are that (i) at least 90% of the Fund's
gross income must be derived from interest and gains from the sale or other
disposition of securities and (ii) that less than 30% of the Fund's gross income
must be derived from gains realized on the sale of certain securities (stock,
securities, options, futures, forward contracts, foreign currencies or options,
futures or forward contracts on foreign currencies) held for less than three
months. For purpose of applying the 30% test, any increase in the value on a
position that is part of a designated hedge is offset by any decrease in value
(whether or not realized) on any other position that is part of such hedge.
In connection with the 90% test, while the Code does not explicitly state
that gains realized by the Fund in connection with transactions in Futures are
gains from the sale of securities within the meaning of the Code, the Fund
intends to treat such gains as so qualifying.
In connection with the 30% test, the Code requires, as further discussed
below, that certain Futures be "marked to market" at the end of each fiscal
year. In calculating gains from the sale of securities held for less than three
months, the Fund will exclude any "gains" resulting from marking to market at
the end of a fiscal year.
For Code purposes, the Futures held by the Fund which remain open at fiscal
year end which are not part of a "mixed straddle" are marked-to-market; that is,
treated as having been sold at market value. The resultant net gain or loss
will be included in Federal taxable income. Further, for Federal income tax
purposes, a realized or unrealized gain or loss with respect to Futures is
normally treated as a long-term capital gain or loss, to the extent of 60% of
such gain or loss, and as a short-term capital gain or loss, to the extent of
40% of such gain or loss.
If a Future is part of a "mixed straddle", as defined by the Code, the Fund
may take an election whereby the mark-to-market and 60/40 rules will be
inapplicable.
Code Section 1092 may also affect the taxation of Futures. Section 1092
defines a "straddle" as offsetting positions with respect to personal property.
Futures fall under the definition of personal property. Section 1092 generally
provides that any loss from the disposition of a position in a straddle can be
deducted only to the extent that the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle. Section 1092 also provides that "wash
sale" rules are applicable to transactions where a position is sold at a loss
and a new offsetting position is acquired within a prescribed period, and that
"short sale" rules are applicable to straddles. The Adviser will consider the
effect of Section 1092 and related regulations in managing the Fund's portfolio.
LOAN OF PORTFOLIO SECURITIES
The Fund may, to increase its income, lend its Obligations on a short or long
term basis to broker-dealers, banks or certain other financial institutions
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<PAGE> 46
(see below) if (i) the loan is collateralized in accordance with applicable
regulatory requirements (the "Guidelines") and if, (ii) after any loan, the
value of the Obligations loaned does not exceed 10% of the value of its total
assets. The financial institutions other than broker-dealers or banks to which
the Fund can lend its Obligations are limited to "accredited investors", as that
term is defined in Section 2(15) of the Securities Act of 1933. (In general,
such institutions are insurance companies, investment companies and certain
employee benefit plans.) Under the present Guidelines (which are subject to
change) the loan collateral must, on each business day, at least equal the value
of the loaned obligations and must consist of cash, bank letters of credit or
U.S. Government Securities. To be acceptable as collateral, a letter of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing banks would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral.
The Fund receives amounts equal to the interest or other distributions on
loaned obligations and also receives one or more of the negotiated loan fees,
interest on obligations used as collateral or interest on the securities
purchased with such collateral, either of which type interest may be shared with
the borrower. The Fund may also pay reasonable finder's, custodian and
administrative fees but only to persons not affiliated with the Fund. The terms
of the Fund's loans will meet certain tests under the Internal Revenue Code and
permit the Fund to terminate the loan and thus reacquire loaned securities on
five days' notice.
PORTFOLIO TRANSACTIONS
As most purchases of Obligations made by the Fund are principal transactions
at net prices, the Fund incurs little or no brokerage costs. The Fund deals
directly with the selling or purchasing principal or market maker without
incurring charges for the services of a broker on its behalf unless it is
determined that better price or execution may be obtained by utilizing the
services of a broker. Purchases of Obligations from underwriters include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers include a spread between the bid and asked price. The Fund seeks
to obtain prompt execution of orders at the most favorable net price. All
principal transactions are with unaffiliated parties. Transactions are directed
to dealers based upon best execution and availability of securities. The Fund
is authorized to direct brokerage to dealers for their execution and research
services, on which no dollar value can be placed. There is no formula for such
allocation. The research information received may or may not be useful to the
Fund and/or other accounts of the Adviser; information received by these other
accounts may or may not be useful to the Fund. The research information
obtained may help the Fund and the Adviser in a number of ways. The information
may be in written form or through direct contact with individuals and includes
information on particular companies and industries, as well as market, economic
or institutional activity areas.
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<PAGE> 47
The Fund may participate, if and when practicable, in bidding for the
purchase of municipal bonds directly from an issuer for the Fund's portfolio in
order to take advantage of the lower purchase price available to members of a
bidding group. The Fund will engage in this practice, however, only when the
Adviser, in its sole discretion, believes such practice to be otherwise in the
Fund's interest.
MUNICIPAL BONDS
The two principal classifications of municipal bonds are "general obligation"
bonds and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and unlimited taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable only from the
revenues derived from a particular facility or class of facilities or projects
or, in a few cases, from the proceeds of a special excise or other tax, but are
not supported by the issuer's power to levy general taxes. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. The
yields of municipal bonds depend on, among other things, general money market
conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issue.
Since the Fund may invest in industrial development bonds, the Fund may not
be an appropriate investment for entities which are "substantial users" of
facilities financed by industrial development bonds or for investors who are
"related persons". Generally, an individual will not be a "related person"
under the Code unless such investor or his immediate family (spouse, brothers,
sisters and lineal descendants) own directly or indirectly in the aggregate more
than 50 percent in the value of the equity of a corporation or partnership which
is a "substantial user" of a facility financed from proceeds of "industrial
development bonds". A "substantial user" of such facilities is defined
generally as a "non-exempt person who regularly uses a part of (a) facility"
financed from the proceeds of industrial development bonds.
As set forth in the Prospectus, the Tax Reform Act of 1986 establishes new
unified volume caps for most "private purpose" municipal bonds (such as
industrial development bonds and obligations to finance low-interest mortgages
on owner-occupied housing and student loans). The unified volume cap is not
expected to adversely affect the availability of Rhode Island Obligations for
investment by the Fund. However, it is possible that proposals will be
introduced before Congress to further restrict or eliminate the Federal income
tax exemption for interest on municipal obligations. Any such proposals, if
enacted, could adversely affect the availability of municipal bonds for
investment by the Fund and the value of the Fund's portfolio might be affected.
In that event, the Fund might reevaluate its investment policies and
restrictions and consider recommending to its shareholders changes in both.
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<PAGE> 48
YIELD INFORMATION
From time to time the Fund may include its yield in advertisements or in
information furnished to present or prospective shareholders. The Fund's
"current yield" is the net average annualized return without compounding accrued
interest income. This is computed by annualizing the Fund's net investment
income per share for a recent 30-day (or one month) period divided by the
maximum public offering price (including sales charge) on the last day of the
period. The yield figure is calculated using certain uniform accounting
principles by which discount and premium of debt obligations are amortized into
income using the current market value of the obligations. Yield is rounded to 2
decimal places for advertisements and informational purposes. The Fund may also
furnish yield information based on the net asset value per share in addition to
the maximum public offering price.
The Fund's "tax-equivalent yield" is computed by dividing that portion of the
Fund's current yield which is tax-exempt by a factor equal to 1 minus a stated
income tax rate and adding the product to that portion, if any, of the Fund's
current yield that is not tax-exempt. The "tax-equivalent yield" reflects the
yield a taxable investment would have to achieve in order to equal on an after
tax basis a specified tax-exempt yield.
The Fund's current yield for the 30-day period ended October 31, 1996 was
4.92%, based on the maximum public offering price (including sales charge) of
$10.97 on October 31, 1996. For shareholders with a combined federal and state
tax rate of 37.84%, this represents a tax-equivalent yield of 7.92%. The 30-day
yield for such period based on the net asset value of $10.53 on October 31, 1996
was 5.13% (8.25% tax equivalent).
The Fund's yield varies from time to time depending upon market conditions,
the composition of its portfolio and operating expenses. These factors and
possible differences in the methods used in calculating yield and other
performance data should be considered when comparing the Fund's yield to yields
published for other investment companies and other investment vehicles. Yield
should also be considered relative to changes in the value of the Fund's shares
and to the risks associated with the Fund's investment objectives and policies.
At any time in the future, yields may be higher or lower than past yields and
there can be no assurance that any past yield will continue.
Any advertised yield quotation will be accompanied by average annual total
returns quotations for a one-year period and the entire period of the Fund's
operations. Average annual total return is calculated by determining the
average annual compounded rates of return over the specified periods that would
equate a hypothetical initial $1,000 investment at the beginning of the period
to the redeemable value at the end of the period. For purposes of the
calculation, the maximum sales load is deducted from the hypothetical $1,000
investment and all dividends and distributions by the Fund during the period are
assumed reinvested in shares at the net asset value per share on the
reinvestment dates during the period. The average annual total return of the
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<PAGE> 49
Fund based on the maximum public offering price was 0.71% for the fiscal year
ended October 31, 1996, 6.50% for the five year period ended October 31, 1996
and 8.42% for the period from December 8, 1986 (commencement of operations)
through October 31, 1996. Both yield and total return are based on historical
earnings and may fluctuate. Past performance should not be considered an
indication of future performance.
INVESTMENT RESTRICTIONS
The Fund has a number of policies concerning what it may and may not do.
Those policies not set forth in the Prospectus are set forth below and may not
be changed unless the holders of a "majority" (as defined in the Investment
Company Act of 1940) of the Fund's outstanding shares vote to change them. Under
the Act, the vote of the holders of a "majority" of the Fund's outstanding
shares means the vote of the holders of the lesser of (a) 67% or more of the
Fund's shares present at a meeting or represented by proxy if the holders of 50%
or more of its shares are so present or represented; or (b) more than 50% of the
Fund's outstanding shares.
1. The Fund invests only in certain limited securities.
Since the Fund may not buy any securities other than those listed under
"Investment of the Fund's Assets" in the Prospectus, the Fund may not buy any
voting securities, any commodities or commodity contracts other than Municipal
Bond Index Futures, any mineral related programs or leases, any shares of other
investment companies or any warrants, puts, calls or combinations thereof.
The Fund may not purchase or hold the securities of any issuer if,
to its knowledge, Trustees, directors or officers of the Fund or its Adviser
individually owning beneficially more than 1/2 of 1% of the securities of that
issuer together own in the aggregate more than 5% of such securities.
The Fund may not buy real estate nor any non-liquid interests in real estate
investment trusts; however, it may buy any securities which it may otherwise buy
even though the issuer invests in real estate or has interests in real estate.
2. The Fund does not buy for control.
The Fund may not invest for the purpose of exercising control or management
of other companies.
3. The Fund does not sell securities it doesn't own or borrow from brokers to
buy securities.
Thus, it may not sell short or buy on margin; however, the Fund may make
margin deposits in connection with the purchase or sale of Municipal Bond Index
Futures.
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<PAGE> 50
4. The Fund is not an underwriter.
The Fund may not engage in the underwriting of securities, that is, the
selling of securities or others. Also, it may not invest in restricted
securities. Restricted securities are securities which cannot freely be sold
for legal reasons.
5. The Fund may not issue senior securities.
The Fund may not issue senior securities or any shares of beneficial interest
having priority over any other class as to distribution of assets or payment of
dividends, provided that the Fund may issue additional classes and series of
shares to the extent permitted by the Investment Company Act of 1940.
DISTRIBUTION ARRANGEMENTS
DISTRIBUTOR
Van Liew Securities Inc., an affiliate of the Adviser, has served as the
Fund's Distributor since May 31, 1990, pursuant to a Distribution Agreement
approved by the Board of Trustees on May 22, 1990. Van Liew Securities Inc.
received $107 in underwriting fees and $6,269 in commissions as a result of
sales of Fund shares for the fiscal year ended October 31, 1994, $37 in
underwriting fees and $5,389 in commissions as a result of sales of Fund shares
for the fiscal year ended October 31, 1995 and $6,522 in commissions as a
result of sales of Fund shares for the fiscal year ended October 31, 1996.
The Distribution Agreement shall continue in effect from year to year but
only so long as its continuance is approved at least annually in the same manner
as the Distribution Plan described below. The Distribution Agreement will
terminate automatically in the event of its assignment (as defined in the
Investment Company Act of 1940) and may be terminated by either the Fund or the
Distributor on 60 days' written notice without further recourse.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940 (the "1940 Act"). The Rule
provides in substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended to result in
the sale of its shares except pursuant to a plan adopted under the Rule. The
Plan authorizes the Fund to pay for printing all prospectuses, statements of
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<PAGE> 51
additional information and reports and notices to shareholders, even those
which are not sent to existing shareholders, which expenses may be related
to the sale of the Fund's shares and, accordingly come within the purview of
the Rule. During the fiscal year ended October 31, 1996, the Fund paid $7,104
for such printing costs. The Plan is also designed to protect against any
claim against or involving the Fund that some of the other expenses related to
the sale of the Fund's shares which the Fund pays or may pay come within the
purview of the Rule. If and to the extent that any payment as specifically
listed in the Plan is considered to be primarily intended to result in or as
indirect financing of any activity which is primarily intended to result in the
sale of Fund shares, these payments are authorized under the Plan.
The Plan states that if and to the extent that any of the payments listed
below are considered to be "primarily intended to result in the sale of" shares
issued by the Fund within the meaning of the Rule, such payments are authorized
under the Plan: (i) the costs of the preparation and printing of all reports and
notices to shareholders and the costs of mailing such reports and notices to
existing shareholders, irrespective of whether such reports or notices contain
or are accompanied by material intended to result in the sale of shares of the
Fund or other funds or other investments; (ii) the costs of the preparation and
printing of all prospectuses and statements of additional information and the
costs of mailing all prospectuses and statements of additional information to
existing shareholders; (iii) the costs of preparation, printing and mailing of
any proxy statements and proxies, irrespective of whether any such proxy
statement includes any item relating to, or directed toward, the sale of the
Fund's shares; (iv) all legal and accounting fees relating to the preparation of
any such reports, prospectuses, statements of additional information, proxies
and proxy statements; (v) all fees and expenses relating to the qualification of
the Fund and/or its shares under the securities or "Blue-Sky" laws of any
jurisdiction; (vi) all fees under the Securities Act of 1933 and 1940 Act,
including fees in connection with any application for exemption relating to or
directed toward the sale of the Fund's shares; (vii) all fees and assessments of
the Investment Company Institute or any successor organization, irrespective of
whether some of its activities are designed to provide sales assistance; (viii)
all costs of the preparation and mailing of confirmations of shares sold or
redeemed or share certificates, and reports of share balances; and (ix) all
costs of responding to telephone or mail inquiries of investors.
The Plan states that while it is in effect, the selection and nomination of
those Trustees of the Fund who are not "interested persons" of the Fund shall be
committed to the discretion of such disinterested Trustees but that nothing in
the Plan shall prevent the involvement of others in such selection and
nomination if the final decision on any such selection and nomination is
approved by a majority of such disinterested Trustees.
The Plan requires the Fund's Adviser at least quarterly to report in writing
to the Fund's Trustees for their review on all costs of each item specified in
the second preceding paragraph (making estimates of such costs where necessary
or desirable) during the preceding calendar or fiscal quarter.
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The Plan has been approved: (i) by a vote of the Trustees of the Fund and of
those Trustees (the "Qualified Trustees") who are not "interested persons" as
defined in the Investment Company Act of 1940 of the Fund and have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan, cast in person at a meeting called for the purpose of
voting on the Plan; and (ii) by a vote of holders of at least a "majority" (as
so defined) of the outstanding voting securities of the Fund at a meeting held
on May 5, 1988. Unless terminated as hereinafter provided, the Plan shall
continue in effect from year to year only so long as such continuance is
specifically approved at least annually by the Fund's Trustees and its Qualified
Trustees by a vote cast in person at a meeting called for the purpose of voting
on such continuance. The Plan may be terminated at any time by vote of a
majority of the Qualified Trustees or by the vote of the holders of a "majority"
(as defined above) of the outstanding voting securities of the Fund. The Plan
may not be amended to increase materially the amount of payments to be made
without shareholder approval as set forth in (ii) above, and all amendments must
be approved in the manner set forth in (i) above.
In voting on the implementation of the Plan, the Board of Trustees concluded,
in the exercise of reasonable business judgment and in light of their fiduciary
duties under state and federal law, that there is a reasonable likelihood that
the Plan will benefit the Fund and its shareholders and must reach a similar
conclusion when voting on any continuance of the Plan. The anticipated benefits
of the Plan include the possibility of increasing the Fund's assets to a level
that would permit the Fund to invest in larger denominations of some instruments
that offer a higher effective yield than small denomination investments in the
same instruments and cost advantages resulting from economies of scale.
LIMITATIONS OF REDEMPTIONS IN KIND
The Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 pursuant to which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1 percent of the net asset value
of the Fund during any 90 day period for any one shareholder. Should
redemptions by any shareholder exceed such limitation, the Fund will have the
option of redeeming the excess in cash or in kind. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash. The method of valuing securities used to make redemptions in
kind will be the same as the method of valuing portfolio securities described
under "Net Asset Value Per Share" in the Prospectus, and such valuation will be
made as of the same time the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their affiliations, if any, with the
Administrator, and their principal occupations during at least the past five
years are set forth below. Trustees who are "interested persons" of the Fund
as
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<PAGE> 53
that term is defined in the Investment Company Act of 1940 are designated with
an (*) asterisk. As of January 31, 1997, the Trustees and officers of the Fund
owned 38,407 shares or approximately 0.96% of the outstanding shares of the
Fund.
ALFRED B. VAN LIEW*, PRESIDENT AND TRUSTEE
One Regency Plaza, Suite One, Providence, Rhode Island 02903
Managing Partner of the Adviser, since 1984; Director of the Distributor
since May 1990; Chairman & Chief Executive Officer of Van Liew Trust Company, a
Rhode Island chartered trust company, since 1984; Executive Vice President in
charge of the trust & investment management businesses of Rhode Island Hospital
Trust National Bank (1981-1984); President & Chief Executive Officer of Hospital
Trust of Florida (1982-1984); Chairman & Chief Executive Officer of HT Advisers,
Inc. (1980-1984) and Director of HT Investors, Inc. (1981-1984), registered
investment counselling firms affiliated with RIHT Financial Corp.; Trustee of RI
School of Design (1974-1992); Board member, Rhode Island Water Resources Board
and Rhode Island Water Resources Board Corp. (1991- 1994); Trustee of The
Heritage Trust of Rhode Island since 1971; Adviser to the National Trust for
Historic Preservation since 1983; Trustee of St. Andrew's School since 1984;
Trustee of the Museum of Yachting since 1988; and Trustee of the Seamen's
Institute, Newport, Rhode Island since 1994.
MILTON C. BICKFORD, JR., TRUSTEE
147 Beavertail Road, Jamestown, Rhode Island 02835
Private investor since 1989; CEO, National Bickford Foremost, Inc. (national
color printing firm) 1980-1989; CEO, National Bickford Graphics, Inc. 1972-1980;
CEO, Bickford Engraving & Electrotype Company 1959-1972; President Rotary Club
of Providence 1970-1971; Vice President Rhode Island Philharmonic Orchestra
1972-1976; Vice President Greater Providence Chamber of Commerce 1976-1979;
Trustee Museum of Yachting 1990-1995; currently Vice Chairman AAA Auto Club of
Southcentral New England.
MICHAEL E. HOGUE, TRUSTEE
32 Keene Street, Providence, Rhode Island 02906
President, VIAcorp. since June 1994; Managing Director, Chairman and Chief
Executive Officer of PW Group, Inc. (insurance) and Chairman and Chief Executive
Officer of the Providence Washington Insurance Group from 1986 to 1993; Chairman
and Managing Director of Philadelphia Insurance Research Group from 1975 to 1986
and Assistant Professor of Insurance at the Wharton School, University of
Pennsylvania, from 1973 to 1977.
ALICE M. MACINTOSH, TRUSTEE
861 Stratford Lane, Warwick, Rhode Island 02886
Marketing consultant; from 1986 to 1991, Chief Supervisory Clerk of the
State's Superior Court; previously a Marketing Consultant and Vice-President of
Marketing at Hospital Trust National Bank. Mrs. Macintosh is an honorary
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<PAGE> 54
director of Narragansett Electric Company, a director of Bay Loan & Investment
Company (a subsidiary of FPL Group, Inc., a subsidiary of Florida Power and
Light) and The Convention Authority of the City of Providence and is also past
Chairman of the Board of AAA Auto Club of South Central New England, and past
President of the Rhode Island Bankers Association, the Business and Professional
Women of Rhode Island and past Regional Vice President of the National
Association of Bank Women (NABW) and co-founder of the Rhode Island Chapter.
RICHARD A. PLOTKIN, TRUSTEE
130 Bellevue Avenue, Newport, Rhode Island 02840
Managing Partner, Rooney, Plotkin & Willey, LLP (certified public
accountants) since 1973; Member, American Institute of Certified Public
Accountants and Rhode Island Society of Certified Public Accountants; Chairman,
United Way of Southeastern New England; Member, Audit Committee of Bank of
Newport; Director, Advantage Travel, Ltd; Director and Treasurer SEA Oats of
Boca Grande Condominium Association.
JOHN ST. SAUVEUR, TRUSTEE
219 Great Road, North Smithfield, Rhode Island 02896
President and CEO, West Bank Realty; Senior Vice President (governmental and
consumer relations) of Valley Resources, Inc., (a natural gas distributor) and
its subsidiary companies from 1956 to 1994. He is a Director of the Community
College of Rhode Island Foundation; Chairman of the Board of the Rhode Island
Citizen Energy Conservation Corporation, doing business as Rhode Island Saving
Energy (RISE), a statewide organization funded by Rhode Island electric and gas
utility companies; Chairman of the Board of Directors of the Woonsocket
Industrial Development Corporation; Director of the Main Street 2000 Corporation
(a Woonsocket non-profit corporation formed for the development and
revitalization of the city's Main Street business district), the Northern Rhode
Island Private Industry Council and the Northern Rhode Island Chamber of
Commerce; Commissioner of the Rhode Island Solid Waste Corporation, Secretary of
the Greater Woonsocket Industrial Development Foundation and Vice Chairman of
the North Smithfield Industrial Development Commission; a vice president and
director of the Rhode Island Chamber of Commerce Federation and member of the
Rhode Island State Job Training Coordinating Council; also Trustee, Landmark
Health System and Landmark Health Foundation.
THOMAS R. WESCHLER, TRUSTEE
391 Indian Avenue, Portsmouth, Rhode Island 02871
Vice Admiral, U.S. Navy, Retired (l975) after 35 years active service, ending
as Director, Logistics, Joint Chiefs of Staff. Past Chairman, Operations
Department, U.S. Naval War College, 1976-1981; Elective Professor, 1981-1988;
Trustee, American Sail Training Association; Incorporator, Sea Education
Association; Incorporator, Newport Health Care Corporation; Member, URI Marine
Programs Advisory Council.
15
<PAGE> 55
SAMUEL H. HALLOWELL, JR., VICE PRESIDENT
One Regency Plaza, Suite One, Providence, Rhode Island 02903
Partner of the Adviser and Vice President of Van Liew Trust Company since
1984; formerly Vice President and Senior Portfolio Manager at Rhode Island
Hospital Trust National Bank, specializing in the management of large personal
portfolios, and a member of the Strategy Committee from 1981 to 1984; previously
with Bay Bank Harvard Trust with responsibilities that included portfolio
management, investment consulting, trading, and investment research, and a
member of its Trust Investment and Administrative Committee; prior thereto, he
was associated with the brokerage firm of Moseley, Hallgarten, Estabrook &
Weeden, Inc.
JOSEPH J. HEALY, VICE PRESIDENT
One Regency Plaza, Suite One, Providence, Rhode Island 02903
Investment Officer, Fund Controller and primary trader of the Adviser since
1992 and General Securities Principal of the Distributor since 1993; previously
a Senior Mutual Fund Accountant with The Boston Company Advisers, Inc.
(September 1989 to August 1992).
KEVIN M. OATES, TREASURER
One Regency Plaza, Suite One, Providence, Rhode Island 02903
Partner of the Adviser since 1996 and Vice President-Administration and
Controller of the Adviser and Vice President of Van Liew Trust Company and the
Distributor, affiliated companies of the Adviser since 1991; Director of
Business Administration (August 1988 to April 1991) and Manager (August 1985 to
October 1987) at Finkel, DiSanto, Fine & Co. (certified public accountants);
previously a Senior Tax Consultant with Ernst & Whinney.
MARGARET D. FARRELL, SECRETARY
1500 Fleet Center, Providence, Rhode Island, 02903
Partner, Hinckley, Allen & Snyder, general legal counsel to the Fund, since
November 1981; Director and Secretary of Bank Rhode Island; Director of Care
New England Health System; Director and Vice Chairman of Women and Infants
Corporation; Trustee of Women & Infants Hospital of Rhode Island; Trustee of
Butler Hospital; Trustee of Hospital Association of Rhode Island; and Secretary
of Astro-Med, Inc. (manufacturer of graphic recording and printing systems).
The Fund does not pay fees to Trustees affiliated with the Adviser or to any
of its officers. The Fund pays Trustees who are not interested persons of the
Fund an annual retainer of $2,000 plus $250 per meeting attended. For the
fiscal year ended October 31, 1996, such fees totalled $19,750.
16
<PAGE> 56
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
ADDITIONAL INFORMATION AS TO THE ADVISORY AGREEMENT
Under the Advisory Agreement, subject to the control of the Fund's Board of
Trustees, the Adviser provides all administrative services to the Fund other
than those relating to its investment portfolio and the maintenance of its
accounting books and records; as part of such duties, the Adviser (i) provides
office space, facilities and equipment for the performance of the following
functions and as is necessary in connection with the maintenance of the
headquarters of the Fund; (ii) maintains the Fund's books and records (other
than accounting books and records); oversees its insurance relationships and
prepares for it (or assists counsel and auditors in the preparation of) all
required tax returns, proxy statements and reports to its shareholders and
Trustees and reports to and other filings with the Securities and Exchange
Commission and any other governmental agency; (iii) arranges for the preparation
of, on the Fund's behalf and at the Fund's expense, such applications and
reports as may be necessary to register or maintain the Fund's registration
and/or the registration of its shares under the securities or "blue sky" laws of
such jurisdictions as may be determined from time to time by the Adviser; (iv)
responds to all inquiries or other communications of shareholders and broker-
dealers, if any, or, if any such inquiry or other communication is more properly
to be responded to by the Fund's transfer agent, oversees such transfer agent's
response thereto; and (vi) oversees all relationships between the Fund and its
custodian and transfer agent, including the negotiation of agreements in
relation thereto and the supervision of the performance of such agreements and
oversees all administrative matters which are necessary or desirable in
connection with the sale or redemption of the Fund's shares. Since the Fund
pays its own legal and audit expenses, to the extent that the Fund's counsel and
accountants prepare or assist in the preparation of prospectuses, proxy
statements and reports to shareholders, the costs of such preparation or
assistance are paid by the Fund.
The Advisory Agreement may be terminated by the Adviser at any time without
penalty upon giving the Fund sixty days' written notice, and may be terminated
by the Fund at any time without penalty upon giving the Adviser sixty days'
written notice, provided that such termination by the Fund shall be directed or
approved by the vote of a majority of all its Trustees in office at the time or
by the vote of the holders of a majority (as defined in the Investment Company
Act of 1940) of its voting securities at the time outstanding entitled to vote;
it automatically terminates in the event of its assignment (as so defined).
However, in the Advisory Agreement, the Adviser agrees that it will not exercise
its termination rights for at least two years from the effective date of the
Advisory Agreement except in the event of a material breach by the Fund or the
Board of Trustees of the Fund of its or their obligations thereunder or a
material violation by the Fund or the Board of Trustees of the Fund of its or
their duties or obligations with respect to the Fund or under the 1940 Act or
the Securities Act of 1933.
17
<PAGE> 57
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations thereunder,
the Adviser is not liable for any loss sustained by the adoption of any
investment policy or the purchase, sale or retention of any security and permits
the Adviser to act as investment adviser for any other person, firm or
corporation. The Fund agrees to indemnify the Adviser to the full extent
permitted under the Fund's Declaration of Trust.
The Advisory Agreement states that it is agreed that the Adviser shall have
no responsibility or liability for the accuracy or completeness of the Fund's
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 except for the information supplied by the Adviser for
inclusion therein.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Fund's shares is determined at 4:30 p.m., Eastern
time on each day the New York Stock Exchange is open by dividing the value of
the Fund's net assets by the total number of its shares then outstanding.
Securities having a remaining maturity of less than sixty days when purchased
and securities originally purchased with maturities in excess of sixty days but
which currently have maturities of sixty days or less are valued at cost
adjusted for amortization of premiums and accretion of discounts. All other
portfolio securities are valued at the mean between bid and asked quotations
which, for Rhode Island Obligations, may be obtained from a reputable pricing
service or from one or more broker/dealers dealing in Rhode Island Obligations
either of which may, in turn, obtain quotations from broker/dealers or banks
which deal in specific issues. However, since Rhode Island Obligations are
ordinarily purchased and sold on a "yield" basis by banks or dealers which act
for their own account and do not ordinarily make continuous offerings,
quotations obtained from such sources may be subject to greater fluctuations
than is warranted by prevailing market conditions. Accordingly, some or all of
the Rhode Island Obligations in the Fund's portfolio may be priced, with the
approval of the Fund's Board of Trustees, by differential comparisons to the
market in other municipal bonds under methods which include consideration of the
current market value of tax-free debt instruments having varying characteristics
of quality, yield and maturity. Any securities or assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision and responsibility of the Fund's Board of Trustees. In the case of
Rhode Island Obligations, such procedures may include "matrix" comparisons to
the prices for other tax-free debt instruments on the basis of the comparability
of their quality, yield, maturity and other special factors, if any, involved.
With the approval of the Fund's Board of Trustees, the Adviser may at its own
expense employ a pricing service, bank or broker/dealer experienced in such
matters to perform any of the above described functions.
As indicated above, the Net Asset Value per share of the Fund's shares will
be determined on each day that the New York Stock Exchange is open. That
18
<PAGE> 58
Exchange annually announces the days on which it will not be open. The most
recent announcement indicates that it will not be open on the following days:
New Year's Day, President's Day, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However, that
Exchange may close on days not included in that announcement.
The Fund's Trustees and officers and the directors, officers and certain
employees and representatives of the Adviser, the Distributor and Selected
Dealers, and certain plans for their benefit, may buy the Fund's shares at Net
Asset Value without a sales charge. These purchasers must meet certain tests
under the Investment Company Act of 1940 and must give written assurance that
the purchase is for investment and that the shares will not be resold except
through redemption. There may be tax consequences arising from such purchases.
Purchasers should consult their own tax counsel.
REASONS FOR DIFFERENCES IN PUBLIC OFFERING PRICE
As described herein and in the Prospectus, there are a number of instances in
which the Fund's shares are sold or issued on a basis other than the maximum
public offering price, that is, the Net Asset Value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges for larger
purchases, whether made at one time or over a period of time as under a Letter
of Intent or right of accumulation. (See the table of sales charges in the
Prospectus.) The reasons for these quantity discounts are, in general, that (i)
they are traditional and have long been permitted in the industry and are
therefore necessary to meet competition as to sales of shares of other funds
having such discounts; (ii) certain quantity discounts are required by rules of
the National Association of Securities Dealers, Inc. (as are elimination of
sales charges on the reinvestment of dividends and distributions); and (iii)
they are designed to avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses. Quantity discounts
are made available to certain related persons ("single purchasers") for reasons
of family unity and to provide a benefit to tax-exempt plans and organizations.
The reasons for the other instances in which there are reduced or eliminated
sales charges are as follows. Sales without sales charge are permitted to
Trustees, officers and certain others due to reduced or eliminated selling
expenses and in order to aid in the development of sound employee relationships,
encourage responsibility and promote an identification with the aims and
policies of the Fund. Limited reinvestments of redemptions at no sales charge
are permitted to attempt to protect against mistaken or incompletely informed
redemption decisions. Shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and since, in some
cases, such issuance is exempted in the 1940 Act from the otherwise applicable
restrictions as to what sales charge must be imposed. In no case in which there
is a reduced or eliminated sales charge are the interests of existing
shareholders adversely affected since, in each case, the Fund receives the Net
Asset Value per share of all shares sold or issued.
19
<PAGE> 59
AUTOMATIC WITHDRAWAL PLAN
Any shareholder who owns or purchases shares of the Fund having a net asset
value of at least $5,000 may establish an Automatic Withdrawal Plan under which
he will receive a monthly or quarterly check in a stated amount, not less than
$50. Stock certificates will not be issued for shares held under an Automatic
Withdrawal Plan. All dividends and distributions must be reinvested. Shares
will be redeemed on the last business day of the month or quarter as may be
necessary to meet withdrawal payments. Redemption of shares for withdrawal
purposes may reduce or even liquidate the account. Monthly or quarterly
payments paid to shareholders may not be considered as a yield or income on
investment.
GENERAL INFORMATION
CAPITAL STOCK
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held). The Fund's management is not
aware of any person who beneficially owned 5% or more of the Fund's outstanding
shares as of the date of this Additional Statement.
POSSIBLE ADDITIONAL SERIES
On December 15, 1987, the Trustees of the Trust voted to change the name of
the Trust from "Ocean State Tax-Exempt Fund" to "VLC Trust" and to designate the
outstanding shares of the Trust as shares of the Ocean State Tax- Exempt Fund
portfolio. If additional funds or series (as discussed in the Prospectus) were
created by the Board of Trustees, shares of each such fund or series would be
entitled to vote as a class only to the extent permitted by the Investment
Company Act of 1940 (see below) or as permitted by the Board of Trustees.
Income and operating expenses would be allocated fairly among two or more funds
or series by the Board of Trustees.
Under Rule 18f-2 under the Investment Company Act of 1940, as to any
investment company which has two or more series outstanding as to any matter
required to be submitted to shareholder vote, such matter is not deemed to have
been effectively acted upon unless approved by the holders of a "majority" (as
defined in that Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
CUSTODIAN AND INDEPENDENT AUDITORS
The Fund's Custodian, PNC Bank, N.A., is responsible for holding the Fund's
assets. The financial statements of the Fund and the financial highlights
incorporated herein by reference have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon and incorporated
herein by reference.
20
<PAGE> 60
FINANCIAL STATEMENTS
The following financial statements of the Fund, together with the report of
Ernst & Young LLP, independent auditors, are included in the Annual Report to
Shareholders which accompanies this Additional Statement and are incorporated
herein by reference:
1. Statement of Assets and Liabilities as of October 31, 1996
2. Statement of Operations for the fiscal year ended October 31, 1996
3. Statement of Changes in Net Assets for each of the two fiscal years in
the period ended October 31, 1996
4. Financial Highlights for each of the periods indicated therein.
5. Notes to Financial Statements
6. Schedule of Portfolio Investments as of October 31, 1996
20
<PAGE> 61
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
MUNICIPAL BOND RATINGS
STANDARD & POOR'S. A Standard & Poor's municipal obligation rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors such
as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
o Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
o Nature of and provisions of the obligation;
o Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
STANDARD & POOR'S RATING SERVICE. A brief description of the applicable
Standard & Poor's rating symbols and their meaning follows:
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
22
<PAGE> 62
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MOODY'S INVESTORS SERVICE. A brief description of the applicable Moody's
Investors Service rating symbols and their meaning follows:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
23
<PAGE> 63
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1
and B1.
MOODY'S SHORT TERM LOAN RATINGS - There are four rating categories
for short-term obligations, all of which define an investment grade situation.
These are designated Moody's Investment Grade as MIG 1 through MIG 4. In the
case of variable rate demand obligations (VRDOs), two ratings are assigned; one
representing an evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other representing an evaluation of the
degree of risk associated with the demand feature. The short-term rating
assigned to the demand feature of VRDOs is designated as VMIG. When no rating
is applied to the long or short-term aspect of a VRDO, it will be designated NR.
Issues or the features associated with MIG or VMIG ratings are identified by
date of issue, date of maturity or maturities or rating expiration date and
description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issues specific structural or
credit features.
MIG1/VMIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG2/VMIG2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
24
<PAGE> 64
[OCEAN STATE LOGO]
REPORT OF THE PRESIDENT
OCTOBER 31, 1996
We are proud to announce that October 31, 1996 marked the Fund's tenth
fiscal year. The Fund started in December of 1986 with $100,000 in assets which
has grown to $42.5 million today. It also is the oldest publicly traded Rhode
Island municipal bond fund. If one had invested $10,000 in the Fund at inception
and reinvested the monthly dividend that investment would be worth over $17,000
today*. During the past twelve months, the Fund's net asset value declined from
$10.59 to $10.53 for a loss of 0.57% on principal value.
In 1996 the bond market took a back seat to the rise in the stock market.
However, one must temper these results since historic returns of the stock
market have been subject to greater volatility than the bond market. If the
current environment of moderate growth and low inflation persists, and the
economy slows enough to significantly effect corporate earnings, then bond funds
may attract renewed interest.
Keep in mind that the focus and goal of your investment in the Fund is to
provide as high a level of current income as is consistent with preservation of
capital. For Rhode Island residents the Fund distributes monthly dividend income
free from state and federal taxes. We're proud of the Fund's return in a highly
competitive environment. Management remains committed to improving the quality
of the portfolio and maintaining the level of dividend income.
The sheltering of one's income from taxes is becoming increasingly
important. Worries over revision of our tax structure and a negative impact on
your municipal investments do not appear to be a threat as Washington's interest
in flat tax proposals and the like have waned. In addition, the focus on
managing the nation's deficit and recognition of this problem on the part of
both major political parties is a positive sign.
Our investment environment has changed tremendously since the Fund began
trading publicly. 1987 witnessed the worst decline in the stock market since the
market crash of 1929. In 1987 the 30 year treasury was yielding 7.48% compared
to today's 6.64% at our fund year end. In this changing environment the Fund has
met the challenge to provide a stabile long term investment vehicle. Though past
performance cannot predict future results, we look forward to the Fund's next
decade with optimism.
Very truly yours,
[VAN LIEW Signature]
ALFRED B. VAN LIEW
President and Chairman of the
Board of Trustees
* Reflecting a 4% maximum sales charge
<PAGE> 65
OCEAN STATE TAX EXEMPT FUND
<TABLE>
INVESTMENT PERFORMANCE REVIEW
AS OF OCTOBER 31, 1996
(UNAUDITED)
<CAPTION>
PRIOR SINCE INCEPTION
NOVEMBER 1, 1995 FISCAL YEAR NOVEMBER 1, 1991 DECEMBER 8, 1986
THROUGH ENDED THROUGH THROUGH
OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1996 OCTOBER 31, 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
TOTAL RATE OF RETURN(B)
Based on:
Net Asset Value...... 4.89% 10.89% 7.59% 9.19%
Offering Price....... .71% 6.46% 6.50% 8.42%
<CAPTION>
AS OF AS OF
OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ----------------
<S> <C> <C>
30-DAY CURRENT YIELD
Based on:
Net Asset Value...... 5.13% 5.26%
Offering Price... 4.92% 5.05%
30-DAY TAX-EQUIVALENT
YIELD(A)
Based on:
Net Asset Value...... 8.25% 8.46%
Offering Price....... 7.92% 8.12%
</TABLE>
The Ocean State Tax Exempt Fund has placed a high priority on capital
preservation while at the same time striving for competitive after-tax
investment returns. The Fund has maintained the weighted average maturity of the
portfolio at 13.70 years as of October 31, 1996.
The average quality rating of the investments, in the following table was
Aa/AA (Moody's and Standard & Poor's bond rating services).
<TABLE>
PORTFOLIO QUALITY ANALYSIS
<CAPTION>
% OF TOTAL PORTFOLIO
------------------------------
AS OF AS OF
RATING 10-31-96 10-31-95
------ -------- --------
<S> <C> <C>
Aaa/AAA....................... 57.74% 56.06%
Aa/AA......................... 19.33% 16.90%
A............................. 17.12% 19.19%
Baa/BBB....................... 5.81% 7.85%
Not Rated..................... 0% 0%
</TABLE>
The Fund will continue its policy of seeking the highest tax advantaged
yields available, consistent with maintaining quality and diversification
objectives.
(a) For 1996 shareholders are subject to a maximum combined federal and state
tax rate of 37.84%.
(b) Past performance is no guarantee of future results.
2
<PAGE> 66
OCEAN STATE TAX EXEMPT FUND
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 1996
<CAPTION>
ASSETS
<S> <C>
Investments at value (identified cost $40,269,930) (Note 1A).................. $42,371,095
Cash.......................................................................... 59,555
Interest receivable........................................................... 626,956
Receivable for fund shares sold............................................... 30,106
Prepaid Expenses.............................................................. 12,250
-----------
Total Assets........................................................ $43,099,962
LIABILITIES
Distribution payable to shareholders.......................................... $ 92,951
Payable for securities purchased.............................................. 502,563
Accrued management fees....................................................... 21,879
Payable for fund shares redeemed.............................................. 15,139
Accrued expenses.............................................................. 11,112
-----------
Total Liabilities................................................... $ 643,644
-----------
Net Assets.......................................................... $42,456,318
===========
Net Assets consist of:
Shares of beneficial interest at par ($.01/share)............................. $ 40,334
Additional paid-in capital (Note 4)........................................... 40,326,866
Accumulated net realized loss on investment transactions...................... (12,047)
Net unrealized appreciation of investments.................................... 2,101,165
-----------
Total -- Representing Net Assets at Value for 4,033,431 Shares Outstanding.... $42,456,318
===========
Computation of Net Asset Value & Offering Price:
Net Assets.................................................................... $42,456,318
Divided by number of shares outstanding....................................... 4,033,431
Net asset value............................................................... $ 10.53
===========
Offering price................................................................ $ 10.97
===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 67
OCEAN STATE TAX EXEMPT FUND
<TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest income (Note 1B).......................................... $2,727,725
Expenses:
Adviser Fees (Note 2)............................. $151,201
Administrator fees (Note 2)....................... 108,001
Legal fees and expenses........................... 12,753
Trustees fees and expenses........................ 19,750
Transfer agent fees............................... 50,115
Custodian fees.................................... 20,963
Insurance......................................... 4,970
Auditing.......................................... 27,500
Pricing........................................... 4,468
Shareholder reports............................... 9,255
Distribution Expenses (Note 5).................... 7,104
Miscellaneous expenses............................ 5,308
Registration fees................................. 1,275
--------
$422,663
----------
Net Investment Income.................................... 2,305,062
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net Realized Gain on Investments....................... 16,530
Net Change in Unrealized Appreciation of Investments... (307,544)
--------
Net loss on investments............................................ (291,014)
----------
Net Increase in Net Assets Resulting from Operations............... $2,014,048
==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 68
OCEAN STATE TAX EXEMPT FUND
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets Resulting from:
Operations:
Net investment income.................................. $ 2,305,062 $ 2,341,523
Net realized gain on investments....................... 16,530 97,223
Change in unrealized appreciation of net investments... (307,544) 1,903,481
----------- -----------
Net increase in net assets resulting from operation.... 2,014,048 4,342,227
Dividends and distributions to shareholders from:
Net investment income ($.56 per share in 1996 and
$.58 per share in 1995).............................. (2,305,645) (2,354,085)
Net Increase from fund share transactions (Note 4)..... (340,314) (246,199)
----------- -----------
Total increase (decrease) in net assets........... (631,911) 1,741,943
NET ASSETS:
Beginning of year...................................... 43,088,229 41,346,286
----------- -----------
End of year (including $4,799 of dividends in excess
of net investment income in 1995).................... $42,456,318 $43,088,229
=========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 69
OCEAN STATE TAX EXEMPT FUND
<TABLE>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following data includes selected data and other performance information derived from the financial statements.
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR 12/8/86
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
10/31/96 10/31/95 10/31/94 10/31/93 10/31/92 10/31/91 10/31/90 10/31/89 10/31/88 10/31/87
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance
Net Asset Value,
Beginning of Year... $ 10.59 $ 10.10 $ 10.95 $ 10.32 $ 10.14 $ 9.73 $ 9.80 $ 9.74 $ 9.13 $10.18
Net Investment
income.............. .56 .58 .59 .56 .63 .64 .67 .62 .66 .62
Net realized and
unrealized gain
(loss) on
securities.......... (.06) .49 (.84) .63 .18 .41 (.09) .07 .62 (1.05)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total from Investment
Operations.......... .50 1.07 (.25) 1.19 .81 1.05 .58 .69 1.28 (.43)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Less Distributions:
Dividends from net
investment income... (.56) (.58) (.59) (.56) (.63) (.64) (.65) (.63) (.66) (.62)
Distribution from net
realized gains...... (.00) (.00) (.01) (.00) (.00) (.00) (.00) (.00) (.01) (.00)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total
Distributions....... (.56) (.58) (.60) (.56) (.63) (.64) (.65) (.63) (.67) (.62)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Net Asset Value End
of Year............. $ 10.53 $ 10.59 $ 10.10 $10.95 $ 10.32 $ 10.14 $ 9.73 $ 9.80 $ 9.74 $ 9.13
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
Total investment
return at Net Asset
Value............... 4.89% 10.89% (2.04)% 12.35% 8.00% 10.96% 5.89% 7.10% 14.30% (4.99)%(b)
Ratios and
Supplemental Data
Net Assets, End of
Year (000's
omitted)............ $42,456 $43,088 $41,346 $45,043 $36,854 $29,750 $20,675 $12,159 $9,745 $6,149
Ratio of Expenses to
average net
assets.............. .98% .98% .88% .81% .85% .92% 1.27% 1.36% 1.10% 1.15%(b)
Ratio of net
investment income to
average net
assets.............. 5.31% 5.58% 5.55% 5.70% 6.13% 6.40% 6.45% 6.34% 6.84% 6.95%(b)
Portfolio turnover... 13.30% 11.77% 8.48% 13.27% 36.29% 21.57% 10.16% 37.90% 45.58% 96.39%(b)
Adviser/Administrator
waived fees......... .00 .00 .01 .01 .01 .03 .02 .03 .08 .06
Fund expenses without
waiver.............. .10 .10 .10 .09 .10 .12 .12 .16 .19 .16
Net Investment Income
without waiver...... .56 .58 .58 .55 .62 .61 .65 .59 .58 .56
Ratio of Expenses to
average net assets
without waiver...... .98% .98% .93% .81% .95% 1.17% 1.51% 1.69% 1.88% 1.86%(b)
Ratio of net
investment income to
average net assets
without waiver...... 5.31% 5.58% 5.50% 5.58% 6.02% 6.15% 6.21% 6.02% 6.06% 6.24%(b)
- ---------------
<FN>
(a) Annualized for 1987.
(b) Commencing in fiscal year 1990, data included the combined operations of
the Fund and the Rhode Island Tax-Free Bond Fund (the "RI Fund") for the
period from the date of the acquisition of the assets of the RI Fund by the
Fund (November 1, 1989). The data shown above for the periods prior thereto
are the historical results of the Fund.
(c) Total investment return does not reflect sales load.
</TABLE>
See Notes to Financial Statements
6
<PAGE> 70
OCEAN STATE TAX EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
VLC Trust (the Trust) is a Massachusetts business trust organized on August
1, 1986 and registered under the Investment Company Act of 1940, as amended, as
a non-diversified, open-end management investment company. There is authorized
an unlimited number of shares with a par value of one cent per share.
Declaration of the Trust permits the Trustees to create additional portfolios
(funds). As of October 31, 1996 there is only one fund, Ocean State Tax Exempt
Fund (the Fund). The objective of the Fund is to seek to provide as high level
of current income, exempt from Rhode Island and Federal income taxes, as is
consistent with preservation of capital. The Fund invests primarily in
obligations which pay interest exempt from Rhode Island and Federal income
taxes. The Fund commenced operations on December 8, 1986.
At October 31, 1996, 94.23% of the Fund's net assets are invested in Rhode
Island municipal securities. Economic changes effecting the state in certain of
its public bodies and municipalities may affect the ability of the issuer to pay
the required principal and interest payments of the municipal securities. In
order to reduce risk associated with such factors on October 31, 1996, 54.62% of
the portfolio of investments have credit enhancements backing them which the
Fund relies on, such as: letters of credit, insurance, or guarantees. MBIA
provides the largest total enhancements for the Fund, representing 24.23% of the
portfolio.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
(A) SECURITY VALUATION: Debt securities are valued on the basis of
valuations furnished by a pricing service since such valuations are believed to
reflect the fair value of such securities. Valuations used by the Fund may be
determined without exclusive reliance on quoted prices and take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue and other local
market conditions. Securities having an original maturity of less than sixty
days are valued at cost adjusted for amortization of premiums and accretion of
discounts. Other securities are appraised in good faith at fair value using
methods determined by the Trustees and applied on a consistent basis. The
Trustees monitor the valuation of the Fund's municipal bonds through receipt of
periodic reports from the Adviser.
(B) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis. The
specific identification method is used for determining net realized gains and
losses for both financial statement and Federal income tax purposes.
(C) FEDERAL INCOME TAXES: The Fund's policy is to comply with the
provisions of the Internal Revenue Code available to regulated investment
companies and distribute to shareholders all of its net income, including any
net realized gain on investments. Accordingly, no provision for Federal income
tax or excise tax is necessary. At October 31, 1996 the Fund had approximately
$12,000 in capital loss carryforwards for federal tax purposes available to
offset future capital gains. These capital loss carryforwards expire on October
31, 2002. Dividends received by the Fund from net interest on tax-exempt
municipal bonds are not includable by shareholders as gross income for
7
<PAGE> 71
OCEAN STATE TAX EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Federal income tax purposes, because the Fund intends to meet certain
requirements of the Internal Revenue Code applicable to regulated investment
companies which will enable the Fund to pay exempt-interest dividends. The
portion of such interest, if any, earned on private activity bonds issued after
August 7, 1986 may be considered a tax preference item to shareholders.
(D) DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income
are declared daily and distributed monthly. Capital gains distributions, if any,
are declared and distributed annually. For the year ended October 31, 1996, the
Fund paid no distributions from capital.
NOTE 2 ADVISORY AND ADMINISTRATIVE SERVICES AND OTHER AFFILIATED TRANSACTIONS
Van Liew Capital Inc. is the Adviser and the Administrator to the Fund. The
Fund will pay Van Liew Capital Inc. at the following annual rates for the
adviser and administrator services, respectively:
.35 and .25 of 1% of the first $200 million of average daily net assets.
.30 and .20 of 1% of average daily net assets over $200 million.
The Fund does not pay fees to Trustees affiliated with the Adviser or to
any of its officers. The Fund pays Trustees who are not interested persons of
the Fund an annual retainer plus $250 per meeting attended. The annual retainer
at October 31, 1996 was $2,000.
Legal fees and expenses of $12,753 were paid to a firm of which the Fund's
Secretary is a partner.
During the period November 1, 1995 through October 31, 1996 the Distributor
received $6,522 in commissions as a result of Fund share sales.
NOTE 3 INVESTMENT TRANSACTIONS
During the period ending October 31, 1996 purchases and sales of investment
securities other than short-term investments aggregated $5,659,577 and
$5,697,240, respectively.
The aggregate cost of investments for Federal income tax purposes is
substantially the same as aggregate cost for financial statement purposes. At
October 31, 1996, gross unrealized appreciation on investment securities was
$2,142,705 and gross unrealized depreciation on investment securities was
$41,540.
8
<PAGE> 72
OCEAN STATE TAX EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 SHARES OF BENEFICIAL INTEREST
<TABLE>
The authorized capital of the Fund consists of unlimited number of shares
of beneficial interest with par value of one cent per share. Transactions in
shares of beneficial interest were as follows:
<CAPTION>
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Balance 10/31/94........................................ 4,093,109 $40,988,249
Shares sold............................................. 259,900 2,697,652
Shares issued in reinvestment of dividends.............. 108,243 1,119,237
Shares redeemed......................................... (393,399) (4,063,088)
--------- -----------
Net decrease............................................ (25,256) (246,199)
--------- -----------
Balance 10/31/95........................................ 4,067,853 $40,742,050
========= ===========
Shares sold............................................. 382,864 $ 4,057,522
Shares issued in reinvestment of dividends.............. 106,236 1,120,409
Shares redeemed......................................... (523,522) (5,518,244)
--------- -----------
Net decreases........................................... (34,422) (340,313)
--------- -----------
Balance 10/31/96........................................ 4,033,431 $40,401,737
========= ===========
</TABLE>
NOTE 5 DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the Plan) pursuant to Rule 12b-1
(the "Rule") of the Investment Company Act of 1940 (the Act). The Rule provides
in substance that the Fund may not engage directly or indirectly in financing
any activity which is primarily intended to result in the sale of its shares
except pursuant to a plan adopted under the Rule. Under the Plan, the Fund is
authorized to pay for the printing of all prospectuses, statements of additional
information and reports and notices to shareholders, even those which are not
sent to existing shareholders. The Fund paid $7,104 under the plan during fiscal
1996.
NOTE 6 RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended October 31, 1996, the Fund has reclassified the net
investment income in excess of dividends of $18,368 to additional
paid-in-capital. This represents the cumulative amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of October
31, 1996. This reclassification, which has no impact on the net asset value of
the Fund, is primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
9
<PAGE> 73
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS
AS OF OCTOBER 31, 1995
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S (NOTE 1)
- ---------- ----------------- -----------
<S> <C> <C> <C>
MUNICIPAL SECURITIES (99.80%)
RHODE ISLAND GENERAL OBLIGATION AND REVENUE BONDS (44.04%)
$ 100,000 Bristol General Obligation 7.00%, 12/1/08............ Baa1/NR $ 108,750
120,000 Bristol General Obligation MBIA Insured 6.00%,
12/15/10........................................... Aaa/AAA 126,000
250,000 Bristol General Obligation MBIA Insured 5.05%,
8/15/06............................................ Aaa/AAA 249,375
300,000 Burrillville General Obligation MBIA Insured 5.75%,
10/15/17........................................... Aaa/AAA 301,125
200,000 Burrillville General Obligation FGIC Insured 5.70%,
5/1/11............................................. Aaa/AAA 205,500
75,000 Central Falls General Obligation 7.90%, 7/1/02....... Baa/NR 76,687
130,000 Coventry General Obligation FGIC Insured 7.25%,
11/1/10............................................ Aaa/AAA 142,187
460,000 Cranston General Obligation MBIA Insured 5.00%,
6/15/02............................................ Aaa/AAA 468,050
200,000 Cumberland General Obligation 6.80%, 7/15/08......... A-1/NR 210,000
165,000 Cumberland General Obligation MBIA Insured 5.70%,
10/1/11............................................ Aaa/AAA 166,856
175,000 Cumberland General Obligation MBIA Insured 5.70%,
10/1/12............................................ Aaa/AAA 176,969
300,000 East Providence General Obligation MBIA Insured
5.70%, 5/15/10..................................... Aaa/AAA 308,625
1,250,000 Foster/Glocester General Obligation AMBAC Insured
6.90%, 9/1/11...................................... Aaa/AAA 1,351,563
135,000 Jamestown General Obligation CGIC Insured 7.00%,
3/15/07............................................ Aaa/AAA 138,544
250,000 Kent County Water Auth. MBIA Insured 6.35%, 7/15/14.. Aaa/AAA 267,187
100,000 Lincoln General Obligation MBIA Insured 7.55%,
7/15/08............................................ Aaa/AAA 108,000
355,000 Lincoln General Obligation MBIA Insured 5.50%,
8/15/10............................................ Aaa/AAA 359,881
300,000 Lincoln General Obligation FGIC Insured 5.60%,
8/1/12............................................. Aaa/AAA 301,500
110,000 Little Compton General Obligation 7.00%,1/15/09...... A-1/NR 117,975
100,000 Little Compton General Obligation 6.90%,1/15/08...... A-1/NR 106,750
120,000 Middletown General Obligation 7.00%, 2/15/08......... A-1/A 127,200
100,000 Narragansett General Obligation MBIA Insured 5.30%,
9/15/09............................................ Aaa/AAA 99,750
200,000 Narragansett General Obligation Pre-refunded U.S.
Treasury AMBAC Insured 7.10%, 6/15/10.............. Aaa/NR 217,000
</TABLE>
10
<PAGE> 74
OCEAN STATE TAX EXEMPT FUND
<TABLE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S (NOTE 1)
- ---------- ----------------- --------
<S> <C> <C> <C>
MUNICIPAL SECURITIES--CONTINUED
RHODE ISLAND GENERAL OBLIGATION AND REVENUE BONDS--CONTINUED
$ 210,000 Newport General Obligation MBIA Insured 6.50%,
8/15/06............................................ Aaa/AAA $229,950
100,000 Newport General Obligation 6.80%, 4/15/09............ A-1/NR 110,375
100,000 Newport General Obligation Pre-refunded U.S. Treasury
6.80%, 4/15/10..................................... A-1/NR 110,375
80,000 New Shoreham General Obligation MBIA Insured 7.60%,
1/1/07............................................. Aaa/AAA 81,973
100,000 New Shoreham General Obligation MBIA Insured 7.00%,
1/15/10............................................ Aaa/AAA 107,625
75,000 North Kingstown General Obligation 6.70%, 12/15/05... A/NR 82,594
80,000 North Kingstown General Obligation 6.80%, 12/15/06... A/NR 89,700
80,000 North Kingstown General Obligation 6.30%, 7/15/07.... A/NR 84,500
120,000 North Providence General Obligation MBIA Insured
6.00%, 10/01/09.................................... Aaa/AAA 125,250
100,000 Pawtucket General Obligation MBIA Insured 6.75%,
9/15/08............................................ Aaa/AAA 109,625
500,000 Pawtucket General Obligation CGIC Insured 6.0%,
3/15/15............................................ Aaa/AAA 515,625
500,000 Pawtucket General Obligation CGIC Insured Insured,
6.0%, 3/15/11...................................... Aaa/AAA 520,625
500,000 Pawtucket General Obligation CGIC Insured 6.0%,
3/15/13............................................ Aaa/AAA 515,625
500,000 Pawtucket General Obligation CGIC Insured, 6.0%,
3/15/12............................................ Aaa/AAA 518,125
300,000 Providence Public Bldg. Auth. FSA Insured 5.10%,
12/15/08........................................... Aaa/AAA 292,500
200,000 Providence Public Bldg. Auth. 7.30%, 12/1/08......... Baa1/NR 226,750
300,000 Providence Public Bldg. Auth. 7.30%, 12/1/09......... Baa1/NR 340,125
500,000 Providence Public Bldg. Auth. CGIC Insured 7.25%,
12/15/10........................................... Aaa/AAA 549,375
750,000 Providence General Obligation MBIA Insured 6.75%,
1/15/11............................................ Aaa/AAA 801,563
200,000 Smithfield General Obligation MBIA Insured 6.50%,
4/15/02............................................ Aaa/AAA 209,500
275,000 Smithfield General Obligation MBIA Insured 6.80%,
4/15/06............................................ Aaa/AAA 287,375
100,000 South Kingston General Obligation AMBAC Insured
5.00%, 11/15/08.................................... Aaa/AAA 98,250
</TABLE>
11
<PAGE> 75
OCEAN STATE TAX EXEMPT FUND
<TABLE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S (NOTE 1)
- ---------- ----------------- -----------
<S> <C> <C> <C>
MUNICIPAL SECURITIES--CONTINUED
RHODE ISLAND GENERAL OBLIGATION AND REVENUE BONDS--CONTINUED
$ 700,000 Warwick General Obligation MBIA Insured 6.60%,
11/15/06........................................... Aaa/AAA $ 761,250
155,000 Warwick General Obligation FGIC Insured 7.20%,
11/15/08........................................... Aaa/AAA 168,175
225,000 Westerly General Obligation 7.00%, 1/15/06........... A-1/NR 239,344
100,000 Westerly General Obligation 7.00%, 1/15/09........... A-1/NR 106,250
35,000 Westerly Dunn's Corner Fire District Unlimited Tax
Assessment 7.80%, 6/1/03........................... A-1/NR 38,587
35,000 Westerly Dunn's Corner Fire District Unlimited Tax
Assessment 7.85%, 6/1/04........................... A-1/NR 38,937
800,000 Rhode Island Clean Water MBIA Insured 6.50%,
10/1/06............................................ Aaa/AAA 870,000
150,000 Rhode Island Clean Water MBIA Insured 5.30%,
10/1/07............................................ Aaa/AAA 153,375
600,000 Rhode Island Correctional Facility MBIA Insured
7.00%, 8/1/09...................................... Aaa/AAA 637,500
650,000 Rhode Island Depositors Economic Protection Corp.
MBIA Insured 6.55%, 8/1/10......................... Aaa/AAA 721,500
165,000... Rhode Island Depositors Economic Protection Corp.
CAPMAC Guaranteed 6.375%, 8/1/22................... Aaa/AAA 179,644
500,000... Rhode Island Depositors Economic Protection Corp.
Escrowed to Maturity 5.75%, 8/1/21................. NR/A- 506,875
200,000 Rhode Island Public Building Auth. 8.20%, 2/1/08..... A/A 213,500
645,000 Rhode Island Public Building Auth. 7.60%, 2/1/09..... A/A 700,631
125,000 Rhode Island Public Building Auth. AMBAC Insured
5.20%, 2/1/06...................................... Aaa/AAA 125,625
150,000 Rhode Island Public Building Auth. AMBAC Insured
5.25%, 2/1/10...................................... Aaa/AAA 146,813
150,000 Rhode Island Port Authority AMBAC Insured 6.5%,
6/1/08............................................. Aaa/AAA 163,688
250,000 Rhode Island Student Loan Auth. 6.20%, 12/1/09....... Aaa/NR 251,875
250,000 Rhode Island General Obligation FGIC Insured 7.00%,
7/15/04............................................ Aaa/AAA 284,375
5,000 Rhode Island General Obligation 7.50%, 6/15/05....... A-1/AA- 5,100
500,000 Rhode Island General Obligation MBIA Insured 5.75%,
8/1/15............................................. Aaa/AAA 505,625
125,000 Rhode Island Water Resources Fruit Hill Reservoir
MBIA Insured 7.05%, 9/15/07........................ Aaa/AAA 134,688
-----------
$18,696,236
</TABLE>
12
<PAGE> 76
OCEAN STATE TAX EXEMPT FUND
<TABLE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S (NOTE 1)
- ---------- ----------------- -----------
<S> <C> <C> <C>
MUNICIPAL SECURITIES--CONTINUED
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION (30.35%)
$ 150,000 Board of Governors CGIC Insured 6.125%, 9/15/10...... Aaa/AAA $ 163,500
195,000 Board of Governors CGIC Insured 6.15%, 9/15/11....... Aaa/AAA 212,794
120,000 Brown University 6.75%, 9/1/16....................... Aa-1/AA 125,550
200,000 Brown University 5.40%, 9/1/18....................... Aa-1/AA 195,250
375,000 Brown University 6.00%, 9/1/10....................... Aa-1/AA 389,062
200,000 Brown University 5.90%, 9/1/14....................... Aa-1/AA 205,000
400,000 Bryant College MBIA Insured 6.50%, 6/1/05............ Aaa/AAA 433,500
100,000 Bryant College MBIA Insured 5.95%, 6/1/07............ Aaa/AAA 104,250
100,000 Bryant College MBIA Insured 6.20%, 6/1/13............ Aaa/AAA 103,750
100,000 Higher Education Authority CGIC Insured 7.375%,
9/15/09............................................ Aaa/AAA 110,000
150,000 Providence College 7.45%, 11/1/03.................... Aaa/NR 165,563
125,000 Providence College 7.50%, 11/1/04.................... Aaa/NR 138,125
120,000 Providence College 7.75%, 11/1/09.................... Aaa/NR 133,500
550,000 Roger Williams College Connie Lee Insured 6.50%,
11/15/08........................................... NR/AAA 583,688
550,000 Roger Williams College Connie Lee Insured 6.625%,
11/15/11........................................... NR/AAA 584,375
320,000 Roger Williams College LOC-Fleet National 7.75%,
10/1/18............................................ A-1/NR 346,800
1,290,000 South County Hospital 7.25%, 11/1/11................. NR/BBB+ 1,352,888
345,000 Roger Williams Realty Corp. Collateral U.S. Treasury,
7.50%, 8/1/29...................................... NR/AA- 361,819
500,000 Salve Regina College Connie Lee Insured 6.25%,
3/15/13............................................ NR/AAA 518,750
400,000 Salve Regina College LOC Fleet National Bank 7.70%,
1/1/20............................................. NR/A 444,000
300,000 Salve Regina College Pre-refunded U.S. Treasury
Connie Lee Insured 6.30%, 3/15/20.................. NR/AAA 310,125
1,025,000 Johnson & Wales College Connie Lee Insured 5.75%,
4/1/12............................................. NR/AAA 1,030,125
500,000 St. Antoine Residence LOC Allied Irish 6.75%,
11/15/18........................................... A-1/NR 528,125
220,000 Landmark Medical Center 7.625%, 7/1/99............... NR/BBB+ 232,100
500,000 Landmark Medical Center 8.375%, 7/1/09............... NR/AAA 558,750
575,000 Kent County Hospital MBIA Insured 7.00%, 7/1/10...... Aaa/AAA 623,156
200,000 Memorial Hospital MBIA Insured 6.50%, 7/1/04......... Aaa/AAA 217,500
140,000 Miriam Hospital 7.00%, 4/1/06........................ NR/A 147,000
400,000 Miriam Hospital 6.35%, 4/1/08........................ NR/A 416,000
</TABLE>
13
<PAGE> 77
OCEAN STATE TAX EXEMPT FUND
<TABLE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S (NOTE 1)
- ---------- ----------------- -----------
<S> <C> <C> <C>
MUNICIPAL SECURITIES--CONTINUED
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION--CONTINUED
$ 900,000 Miriam Hospital 7.25%, 4/1/11........................ NR/A $ 939,375
300,000 Rhode Island Hospital FGIC Insured 6.70%, 8/15/04.... Aaa/AAA 325,875
600,000 Women & Infants Hospital CGIC Insured 6.55%, 9/1/13.. Aaa/AAA 647,250
100,000 United Methodist Elder Care 7.50%, 11/1/14........... NR/A 109,375
125,000 New England Tech Inst. Connie Lee Insured 6.00%,
3/1/15............................................. NR/AAA 127,031
-----------
$12,883,951
RHODE ISLAND HOUSING & MORTGAGE FINANCE CORPORATION (18.76%)
$ 5,000 9.30%, 7/1/04 FGIC Insured........................... Aaa/AAA $ 5,012
45,000 7.625%, 10/1/04...................................... AA/A+ 46,575
100,000 8.25%, 10/1/07....................................... A-1/A+ 103,044
200,000 8.10%, 10/1/07....................................... A-1/A+ 205,830
200,000 5.65%, 10/1/07....................................... NR/A 200,250
300,000 8.00%, 10/1/08....................................... Aa/AA+ 311,250
500,000 7.80%, 10/1/10, Series A............................. Aa/AA+ 524,375
50,000 7.50%, 7/1/10........................................ A-1/A+ 50,375
300,000 7.60%, 10/1/20....................................... NR/A 313,875
160,000 8.30%, 10/1/11....................................... Aa/A+ 168,000
100,000 7.80%, 10/1/11....................................... Aa/A+ 103,500
395,000 7.50%, 10/1/11....................................... Aa/AA+ 419,194
210,000 7.80%, 10/1/11....................................... Aa/AA+ 219,975
200,000 5.70%, 4/1/15........................................ Aa/AA+ 199,000
35,000 7.75%, 10/1/16....................................... A-1/A+ 35,700
500,000 5.75%, 4/1/17........................................ Aa/AA+ 498,125
200,000 6.25%, 4/1/17........................................ Aa/AA+ 202,750
110,000 7.95%, 10/1/20....................................... NR/A 115,087
140,000 7.25%, 10/1/21....................................... Aa/Aa+ 147,350
375,000 7.875%, 10/1/21, MBIA Insured........................ Aaa/AAA 384,844
640,000 7.875%, 10/1/22...................................... Aa/AA+ 669,600
50,000 7.75%, 4/1/22........................................ Aa/AA+ 52,437
345,000 7.55%, 10/1/22....................................... Aa/AA+ 366,994
300,000 6.50%, 10/1/22....................................... Aa/AA+ 310,125
1,250,000 6.70%, 10/1/15....................................... Aa/AA+ 1,304,687
500,000 6.15%, 4/1/17........................................ Aa/AA+ 500,625
85,000 5.875%, 4/1/25....................................... Aa/AA+ 85,000
300,000 6.50%, 4/1/27........................................ Aa/AA+ 310,125
</TABLE>
14
<PAGE> 78
OCEAN STATE TAX EXEMPT FUND
<TABLE>
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S (NOTE 1)
- ---------- ----------------- -----------
<S> <C> <C> <C>
MUNICIPAL SECURITIES--CONTINUED
RHODE ISLAND HOUSING & MORTGAGE FINANCE CORPORATION--CONTINUED
$ 105,000 6.85%, 4/1/27........................................ Aa/AA+ $ 109,987
-----------
$ 7,963,691
RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION (1.09%)
$ 80,000 Inge Corporation SBA GTD 9.125%, 10/1/00............. Aaa/NR $ 81,714
250,000 Mobil Oil 6.00%, 11/1/14............................. Aa-2/AA 257,500
60,000 Blazing Graphics LOC-Fleet National 8.20%, 5/1/13.... Baa/NR 61,662
60,000 Blazing Graphics LOC-Fleet National 8.25%, 5/1/14.... Baa/NR 61,662
-----------
$ 462,538
-----------
TOTAL RHODE ISLAND BONDS (94.23%).................... $40,006,416
-----------
PUERTO RICO BONDS (5.57%)
$ 30,000 Puerto Rico Commonwealth MBIA Insured 7.125%,
7/1/02............................................. Aaa/AAA $ 31,303
500,000 Puerto Rico Commonwealth 7.75%, 7/1/06............... NR/AAA 540,000
200,000 Puerto Rico Commonwealth 7.75%, 7/1/13............... NR/AAA 216,000
300,000 Puerto Rico Electric Power Auth. 8.00%, 7/1/08....... NR/AAA 324,750
100,000 Puerto Rico Highway 8.00%, 7/1/03.................... NR/AAA 108,250
200,000 Puerto Rico Highway 8.00%, 7/1/05.................... NR/AAA 216,500
225,000 Puerto Rico Highway 7.70%, 7/1/03.................... Baa1/AAA 254,531
285,000 Puerto Rico HFA LOC-Fugi Dev. Bk 7.50%, 10/1/15...... NR/AA 299,606
110,000 Puerto Rico Public Bldg. Auth. 7.875%, 7/1/07........ Aaa/AAA 115,309
200,000 Puerto Rico Public Improvement 8.00%, 7/1/07......... Baa1/A 216,500
40,000 Puerto Rico Public Building Auth. 7.875%, 7/1/07..... Aaa/AAA 41,930
-----------
TOTAL PUERTO RICO BONDS (5.57%)...................... $ 2,364,679
-----------
TOTAL INVESTMENTS (Cost $40,269,930)
(94.85%)(a)........................................ $42,371,095
===========
</TABLE>
(a) Percentages indicated are based on net assets of $42,456,318 at October 31,
1996 (total investments plus cash and receivables less liabilities) which
corresponds to a net asset value per share of $10.53.
(b) The ratings indicated are the most current available. When bonds are rated
differently by Moody's and S&P, the higher rating has been reported. The
rating NR means it is not rated by Moody's or S&P.
(c) These municipal securities meet the four highest ratings assigned by Moody's
Investors Service, Inc. or Standard & Poor's Corp. or where not rated, are
determined by the Fund to be of comparable quality within the guidelines
approved by directors. Certain securities have credit
15
<PAGE> 79
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
enhancement features backing them. Without these enhancement features the
securities may or may not meet the quality standards of other securities
purchased by the Fund. (See Note 1)
(d) Abbreviations used:
AMBAC -- American Municipal Bond Assurance Corp.
CGIC -- Capital Guaranty Insurance Co.
FGIC -- Financial Guaranty Insurance Co.
MBIA -- Municipal Bond Investors Assurance
LOC -- Letter of Credit
BIG -- Bond Investors Guaranty (subsidiary of MBIA)
SBA -- Small Business Administration
CAPMAC -- Capital Markets Assurance Corp.
See Notes to Financial Statements.
16
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Trustees
of Ocean State Tax Exempt Fund
We have audited the accompanying statement of assets and liabilities of
Ocean State Tax Exempt Fund (a portfolio of VLC Trust), including the schedule
of investments, as of October 31, 1996, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended and the financial highlights for each of the
eight 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. The financial highlights of Ocean State Tax Exempt Fund for
the two fiscal periods ended October 31, 1988 and October 31, 1987 were audited
by other auditors whose report dated January 6, 1989 expressed an unqualified
opinion on those financial highlights.
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
October 31, 1996, 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 the financial highlights
referred to above present fairly, in all material respects, the financial
position of Ocean State Tax Exempt Fund (a portfolio of VLC Trust) at October
31, 1996, 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 financial
highlights for each of the eight years in the period then ended in conformity
with generally accepted accounting principles.
[Ernst & Young LLP Signature]
Boston, Massachusetts
December 3, 1996
17
<PAGE> 81
INVESTMENT ADVISER &
ADMINISTRATOR
Van Liew Capital Inc. [OCEAN STATE LOGO]
One Regency Plaza, Suite One
Providence, Rhode Island 02903
DISTRIBUTOR
Van Liew Securities, Inc.
One Regency Plaza, Suite One
Providence, Rhode Island 02903
CUSTODIAN
PNC Institutional Custody Services
Airport Business Center ANNUAL REPORT
200 Stevens Drive, Suite 440 OCTOBER 31, 1996
Lester, Pennsylvania 19113
TRANSFER AGENT
PFPC, Inc.
P.O. Box 8950
Wilmington, Delaware 19899
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
COUNSEL
Hinckley, Allen & Snyder
1500 Fleet Center
Providence, Rhode Island 02903
TRUSTEES
Alfred B. Van Liew, Chairman
Milton C. Bickford, Jr.
Michael E. Hogue
Alice M. Macintosh
Richard A. Plotkin
John H. St. Sauveur
Thomas R. Weschler,
Vice Admiral, US Navy, Retired
OFFICERS INTEREST INCOME EXEMPT
Alfred B. Van Liew, President FROM FEDERAL AND RHODE
Samuel H. Hallowell, Vice President ISLAND INCOME TAXES
Joseph J. Healy, Vice President FROM QUALITY MUNICIPAL
Kevin M. Oates, Treasurer BONDS.
Margaret D. Farrell, Secretary
<PAGE> 82
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
- ------- ---------------------------------
(a) Financial Statements.
Included in Part A:
Financial Highlights
Included in Part B (incorporated by reference to the Annual Report
provided as an attachment to the Statement of Additional Information):
(a) Report of Independent Auditors
(b) Statement of Assets and Liabilities dated October 31, 1996
(c) Statement of Operations for the fiscal year ended October
31, 1996
(d) Statement of Changes in Net Assets for each of the two fiscal
years in the period ended October 31, 1996
(e) Financial Highlights for each of the periods indicated therein
(f) Portfolio of Investments as of October 31, 1996
Included in Part C:
None
(b) Exhibits.
(1) Copy of Declaration of Trust of the Registrant is incorporated
herein by reference to Exhibit (1) of Registrant's Registration
Statement filed on August 5, 1986.
(a) Copy of First Amendment to Declaration of Trust dated
December 28, 1987 is incorporated by reference to Exhibit (1)
(a) of Post-Effective Amendment No. 2 filed on December 31,
1987.
(b) Copy of Second Amendment to Declaration of Trust dated May 5,
1988 is incorporated by reference to Exhibit (1)(b) of
Post-Effective Amendment No. 4 filed on February 28, 1989.
C-1
<PAGE> 83
(2) Copy of By-laws of the Registrant is incorporated herein by
reference to Exhibit (2) of Registrant's Registration Statement
filed on August 5, 1986.
(3) Not Applicable.
(4) Specimen copy of share certificate for shares of beneficial
interest of the Registrant is incorporated herein by reference to
Exhibit (4) of Pre-Effective Amendment No. 2 filed on November 19,
1986.
(5) Investment Advisory Agreement between the Registrant and Van Liew
Capital Inc. incorporated by reference to Exhibit 5(c) of
Registrant's Registration Statement filed on December 31, 1987.
(6) (a) Form of Sales Agreement incorporated herein by reference to
Exhibit 6(b) of Registrant's Registration Statement filed on
August 5, 1986.
(b) Form of Bank Correspondent Agreement incorporated herein by
reference to Exhibit 6(c) of Post-Effective Amendment No. 3 to
Registrant's Registration Statement filed on December 30,
1988.
(c) Distribution Agreement between Registrant and Van Liew
Securities Inc. dated as of May 31, 1990 incorporated by
reference to Exhibit 6(d) of Amendment No. 6 to Registrant's
Registration Statement filed on February 28, 1991.
(7) Not Applicable.
(8) Custodian Agreement between the Registrant and Provident National
Bank incorporated herein by reference to Exhibit (8) of
Pre-Effective Amendment No. 2 filed on November 19, 1986.
(9) Transfer Agency Agreement between the Registrant and Provident
Financial Processing Corporation incorporated herein by reference
to Exhibit (9) of Pre-Effective Amendment No. 2 filed on November
19, 1986.
C-2
<PAGE> 84
*(10) Opinion of Counsel as to legality of shares and Consent of
Counsel.
*(11) Consent of Ernst & Young LLP, Independent Auditors.
(12) Not Applicable.
(13) Agreement relating to initial capitalization of the Registrant
incorporated herein by reference to Exhibit (13) of Pre-Effective
Amendment No. 2 filed on November 19, 1986.
(14) Not Applicable.
(15) Distribution Plan incorporated herein by reference to Exhibit
(15) to Registrant's Registration Statement filed on August 5,
1986.
*(16) Schedule for Computation of Performance Quotations.
*(25) Power of Attorney.
*(27) Financial Data Schedule
Item 25. Persons Controlled by or Under Common Control with Registrant.
- ------- -------------------------------------------------------------
None.
Item 26. Number of Holders of Securities.
- ------- -------------------------------
The following information is as of January 31, 1997:
Title of Class Record Holders
-------------- --------------
Shares of Beneficial Interest 995
Item 27. Indemnification.
- ------- ---------------
Indemnification is incorporated herein by reference to Item 27 of
Registrant's Pre-Effective Amendment No. 2 filed on November 19, 1987.
Item 28. Business and other Connections of Investment Adviser.
- ------- ----------------------------------------------------
Van Liew Capital Inc. is the investment adviser and administrator of
the Registrant. For information as to the business, profession,
vocation or employment of a substantial nature of Van Liew Capital
Inc., its officers and directors, reference is made to the Form ADV
filed under the Investment Advisers Act of 1940 by it.
____________________
* Filed herewith
C-3
<PAGE> 85
Item 29. Principal Underwriters.
- ------- ----------------------
(a) Van Liew Securities Inc., the Distributor for the Registrant's
securities, currently does not act as a principal underwriter,
depositor or investment adviser to any other investment companies.
<TABLE>
(b) The table below sets forth certain information as to the Distributor's
partners and officers:
<CAPTION>
Positions and Positions and
Name and Principal Offices with Offices with
Business Address Distributor Registrant
- ------------------ ------------- -------------
<S> <C> <C>
Alfred B. Van Liew Director Trustee
One Regency Plaza, Suite One and President
Providence, Rhode Island 02903
Kevin M. Oates President and Treasurer
One Regency Plaza, Suite One Treasurer
Providence, Rhode Island 02903
Joseph J. Healy Principal Vice-President
One Regency Plaza, Suite One
Providence, Rhode Island 02903
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Books.
- ------- ------------------------------
(1) PNC Bank, N.A. (records relating to its functions as custodian).
(2) PFPC, Inc. (records relating to its functions as transfer agent
and shareholder servicing agent).
(3) Van Liew Capital Inc. (records relating to its functions as
investment adviser and administrator and Registrant's
Declaration of Trust, Bylaws and Minute Books).
Item 31. Management Services.
- ------- -------------------
Other than as set forth under the captions "Management Arrangements"
in the Prospectus and "Additional Information as to Management
Arrangements" in the Additional Statement constituting Part A and Part
B, respectively, of this Registration Statement, Registrant is not a
party to any management-related service contract.
C-4
<PAGE> 86
Item 32. Undertakings.
- ------- ------------
Registrant undertakes to submit the selection of Ernst & Young, LLP as
its auditors for ratification by Registrant's shareholders at the
first annual or special meeting of shareholders held after the
effective date of this Registration Statement.
C-5
<PAGE> 87
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant had duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Providence, and State of Rhode Island, on the
27th day of February, 1997, and in connection therewith, hereby certifies
pursuant to Rule 485(e) under the Securities Act of 1933 that this Amendment
meets all of the requirements for effectiveness pursuant to Rule 485(b)
thereunder.
VLC TRUST (Registrant)
ON BEHALF OF
OCEAN STATE TAX-EXEMPT FUND
By: /s/ Samuel H. Hallowell, Jr.
----------------------------
Samuel H. Hallowell, Jr.,
Vice President
WITNESS our hands on the date set forth below.
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<CAPTION>
<S> <C> <C>
*ALFRED B. VAN LIEW Trustee and President
- -------------------- Principal Executive
Officer February 27, 1997
Treasurer (Chief
Financial and Accounting
/s/ Kevin M. Oates Officer February 27, 1997
- --------------------
(Kevin M. Oates)
*MILTON C. BICKFORD, JR. Trustee
*MICHAEL E. HOGUE Trustee
*ALICE M. MACINTOSH Trustee
*RICHARD A. PLOTKIN Trustee
*JOHN H. ST. SAUVEUR Trustee
THOMAS R. WESCHLER Trustee
/s/ Samuel H. Hallowell *Attorney-in-fact February 27, 1997
- ----------------------- as to the above
(Samuel H. Hallowell, Jr.)
</TABLE>
C-6
<PAGE> 88
<TABLE>
VLC Trust
Exhibit Index
<CAPTION>
Exhibit No. Document Page
- ----------- -------- ----
No.
- ---
<S> <C>
10 Opinion of Counsel as to Legality
of Shares and Consent of Counsel
11 Consent of Ernst & Young LLP,
Independent Auditors
16 Schedule for Computation of
Performance Calculations
25 Power of Attorney
27 Financial Data Schedule
</TABLE>
C-7
<PAGE> 1
EXHIBIT 10
----------
February 28, 1997
The Board of Trustees
Ocean State Tax-Exempt Fund
(the portfolio of VLC Trust)
One Regency Plaza, Suite One
Providence, Rhode Island 02903
Gentlemen:
We have acted as counsel to Ocean State Tax-Exempt Fund (the "Fund"),
the portfolio of VLC Trust, a Massachusetts business trust (the "Trust"), in
connection with the organization of the Trust and Fund. Acting in such
capacity, we are furnishing this opinion to be filed as Exhibit 10 to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A of
the Trust (the "Registration Statement") which was originally filed with the
Securities and Exchange Commission (the "SEC") on August 5, 1986, Registration
No. 33-7788.
We have examined and are familiar with originals or copies, certified
or otherwise identified to our satisfaction, of the Agreement and Declaration
of Trust of the Trust made August 1, 1986, as amended on December 28, 1987 and
May 5, 1988 (the "Declaration of Trust"), the Bylaws of the Trust (the
"Bylaws"), and such other records of the Trust and the Fund as we have deemed
necessary in connection with rendering this opinion.
Based on the foregoing, we are of the opinion that:
1. The Trust is a Massachusetts business trust validly organized and
legally existing under the laws of Massachusetts and is authorized to issue an
unlimited number of shares of beneficial interest, par value $.01 per share
(the "Shares").
2. The Trust's Registration Statement under the Securities Act of 1933
as amended, and the Investment Company Act of 1940 as amended covering an
indefinite number of Shares of the Fund has become effective, and upon the
qualification of the Shares of the Fund for sale in the states where such
Shares are to be sold, the Shares of the Fund will, upon sale and issuance
thereof in the manner contemplated by the Registration Statement as amended, be
validly issued, fully paid and non-assessable.
<PAGE> 2
The Board of Trustees
Ocean State Tax-Exempt Fund
February 28, 1997
Page Two
Under Massachusetts law, shareholders of a business trust may, in
certain circumstances, be held personally liable as partners for the
obligations of the trust. However, in the case of the Trust, the Declaration
of Trust contains an express disclaimer of shareholder liability for acts or
obligations of each portfolio (the "Portfolio") of the Trust and requires that
notice of such disclaimer be given in each instrument entered into or executed
by the Trust. The Declaration of Trust also provides for indemnification out
of a Portfolio's property for any shareholder of such Portfolio held personally
liable for any of the Portfolio's obligations. Thus, the economic risk
resulting from a shareholder being personally liable as a partner for
obligations of a Portfolio is limited to the circumstances in which the
Portfolio itself would be unable to meet its obligations.
We have not reviewed the securities laws of any state or territory in
connection with the proposed offering of Shares, and we express no opinion as
to the legality of any offer or sale of Shares under any such state or
territorial securities laws.
This opinion is intended only for your use in connection with the
offering of Shares, and may not be relied upon by any other person.
We consent to the filing of this opinion as Exhibit 10 to
Post-Effective Amendment No. 12 to the Registration Statement and to the
reference to our firm under the caption "Counsel" in the Prospectus which is
part of the Registration Statement.
Very truly yours,
/s/ HINCKLEY, ALLEN & SNYDER
<PAGE> 1
EXHIBIT 11
----------
Consent of Ernst & Young LLP Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" in the prospectus and "Custodian and Independent Auditors" and
"Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in Post-Effective Amendment No. 12 to Registration
Statement No. 33-7788 on Form N-1A of our report dated December 3, 1996 on the
financial statements and financial highlights included in the October 31, 1996
Annual Report to Shareholders of Ocean State Tax Exempt Fund (the portfolio of
VLC Trust).
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 28, 1997
<PAGE> 1
Exhibit 16
PERFORMANCE CALCULATIONS AT FYE 1996
RATES AND YIELDS BASED ON NET ASSET VALUE:
- -----------------------------------------
1-DAY RATE: (NET INVESTMENT INCOME)/(RECORD SHARES*NAV)
1 DAY RATE = .000141124
1-DAY YIELD: ((NET INVESTMENT INCOME)/(RECORD SHARES*NAV))*365
1 DAY YIELD = 5.15%
7-DAY RATE: (NET INVESTMENT INCOME SUMMED FOR PREVIOUS 7 DAYS)/(RECORD
SHARES*NAV)
7 DAY RATE = .000986623
7-DAY YIELD: ((NET INVESTMENT INCOME SUMMED FOR PREVIOUS 7 DAYS)/(RECORD
SHARES*NAV))*365)/7
7 DAY YIELD = 5.14%
30-DAY RATE: (NET INVESTMENT INCOME SUMMED FOR PREVIOUS 30 DAYS)/(RECORD
SHARES*NAV)
30 DAY RATE = .004214704
30-DAY YIELD: (((NET INVESTMENT INCOME SUMMED FOR PREVIOUS 30 DAYS)/
(RECORD SHARES*NAV))*365)/30
30 DAY YIELD = 5.13%
RATES AND YIELDS BASED ON OFFERING PRICE:
- ----------------------------------------
1-DAY RATE: (NET INVESTMENT INCOME)/(RECORD SHARES*OFFER)
1 DAY RATE = .000135463
1-DAY YIELD: ((NET INVESTMENT INCOME)/(RECORD SHARES*OFFER))*365
1 DAY YIELD = 4.94%
7-DAY RATE: (NET INVESTMENT INCOME SUMMED FOR PREVIOUS 7 DAYS)/(RECORD
SHARES*OFFER)
7 DAY RATE = .000946942
7-DAY YIELD: (((NET INVESTMENT INCOME SUMMED FOR PREVIOUS 7 DAYS)/(RECORD
SHARES*OFFER))*365)/7
7 DAY YIELD = 4.94%
30-DAY RATE: (NET INVESTMENT INCOME SUMMED FOR PREVIOUS 30 DAYS)/(RECORD
SHARES*OFFER)
30 DAY RATE = .004045426
30-DAY YIELD: (((NET INVESTMENT INCOME SUMMED FOR PREVIOUS 30 DAYS)/
(RECORD SHARES*OFFER))*365)/30
30 DAY YIELD = 4.92%
<PAGE> 2
30-DAY SEC YIELD: 2*(((((((((SEC ADJ INCOME*PAR*1000/12)/30)-SUM OF PREVIOUS
30 DAYS)/AVG DIV SHARES FOR PREVIOUS 30 DAYS*OFFER))+1)
[TAKEN TO THE 6TH POWER])-1)
30 DAY SEC YIELD = 4.61%
30 DAY TAX EQUIVALENT YIELD
- ---------------------------
BASED ON NAV
------------
(30 DAY YIELD ON NAV)/(1-.3784) = 8.25%
BASED ON OFFER
--------------
(30 DAY YIELD ON OFFER)/(1-.3784) = 7.92%
THE 37.84% RATE US BASED UPON THE COMBINED FEDERAL AND
STATE TAX RATE
TOTAL RATE OF RETURN
- --------------------
BASED ON NAV
------------
(((NET CHANGE IN NAV DURING PERIOD + DIVIDENDS AND CAP GAINS
DURING PERIOD)/(NAV AT BEGINNING OF PERIOD))/((NUMBER OF
MONTHS IN PERIOD)*12)
1-YEAR TOTAL RATE OF RETURN = 4.89%
5-YEAR TOTAL RATE OF RETURN = 7.59%
SINCE INCEPTION TOTAL RATE OF RETURN = 9.19%
BASED ON OFFER
---------------
((NET CHANGE IN OFFER DURING PERIOD + DIVIDENDS AND CAP GAINS
DURING PERIOD)/(OFFER AT BEGINNING OF PERIOD))/((NUMBER OF
MONTHS IN PERIOD)*12)
1-YEAR TOTAL RATE OF RETURN = 0.71%
5-YEAR TOTAL RATE OF RETURN = 6.50%
SINCE INCEPTION TOTAL RATE OF RETURN = 8.42%
<PAGE> 1
EXHIBIT 25
VLC TRUST
POWER OF ATTORNEY
We, the undersigned officers and trustees of the VLC Trust (the "Trust"),
hereby severally constitute and appoint Alfred B. Van Liew, Samuel H. Hallowell,
Jr. and Kevin M. Oates, and each of them singly, our true and lawful attorneys,
with full power to them and each of them, to sign for us, and in our hands and
in the capacities indicated below, any and all Post-Effective Amendments to the
Trust's Registration Statement on Form N-1A and to file the same, with all
exhibits thereto, and other documents therewith, with the Securities and
Exchange Commission, granting unto said attorneys, and each of them, acting
alone, full authority and power to do and perform each and every act and thing
requisite or necessary to be done in the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys or any of them lawfully do or cause to be done by virtue
thereof.
IN WITNESS WHEREOF, the undersigned have set their hands on the date
written.
Trustee and President
(Principal Executive
/s/Alfred B. Van Liew Officer) February 26, 1997
- -------------------------------
(Alfred B. Van Liew)
Treasurer (Chief
Financial and Accounting
/s/Kevin M. Oates Officer) February 26, 1997
- -------------------------------
(Kevin M. Oates)
/s/Milton C. Bickford Trustee February 26, 1997
- -------------------------------
(Milton C. Bickford)
/s/Michael E. Hogue Trustee February 26, 1997
- -------------------------------
(Michael E. Hogue)
/s/Alice M. Macintosh Trustee February 26, 1997
- -------------------------------
(Alice M. Macintosh)
/s/Richard A. Plotkin Trustee February 26, 1997
- -------------------------------
(Richard A. Plotkin)
/s/John H. St. Sauveur Trustee February 26, 1997
- -------------------------------
(John H. St.Sauveur)
/s/Thomas R Weschler Trustee February 26, 1997
- -------------------------------
(Thomas R. Weschler)
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> OCEAN STATE TAX-EXEMPT FUND
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-1-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 40,269,930
<INVESTMENTS-AT-VALUE> 42,371,095
<RECEIVABLES> 657,062
<ASSETS-OTHER> 71,805
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 43,099,962
<PAYABLE-FOR-SECURITIES> 502,563
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 141,081
<TOTAL-LIABILITIES> 643,644
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,367,200
<SHARES-COMMON-STOCK> 4,033,431
<SHARES-COMMON-PRIOR> 4,067,853
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,047)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,101,165
<NET-ASSETS> 42,456,318
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,727,725
<OTHER-INCOME> 0
<EXPENSES-NET> 422,663
<NET-INVESTMENT-INCOME> 2,305,062
<REALIZED-GAINS-CURRENT> 16,530
<APPREC-INCREASE-CURRENT> (307,544)
<NET-CHANGE-FROM-OPS> 2,014,048
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,305,645
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 382,864
<NUMBER-OF-SHARES-REDEEMED> 523,522
<SHARES-REINVESTED> 106,236
<NET-CHANGE-IN-ASSETS> (631,911)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 4,799
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 151,201
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 422,663
<AVERAGE-NET-ASSETS> 42,998,180
<PER-SHARE-NAV-BEGIN> 10.59
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> (.06)
<PER-SHARE-DIVIDEND> .56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 0.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
