<PAGE> 1
[OCEAN STATE LOGO]
REPORT OF THE PRESIDENT
OCTOBER 31, 1997
Can the investment environment for bonds get any better? Surprisingly the
answer may be yes. World stock market weakness has rekindled an interest in
bonds for many skittish investors. Municipal bonds, like those bonds which make
up Ocean State Tax Exempt Fund's portfolio, represent a good relative value for
investors, especially those for whom taxes remain a major concern.
During the Fund's 1997 fiscal year the net asset value rose from $10.53 to
$10.69. In addition, the Fund's dividend distribution increased from $0.56 per
share to $0.57 per share. In a period of falling rates the Fund's dividend has
actually increased. Ocean State Tax Exempt Fund is managed with conservative
Rhode Island investors in mind, those who want to avoid paying taxes on their
investment while receiving steady income. The Fund's objective remains to
provide as high a level of current income, exempt from Rhode Island and Federal
income taxes, as is consistent with preservation of capital.
For an investor, professional management is more important than ever. Chief
among the reasons are:
1. The volatile nature of interest rates today have increased market
and credit risks of municipal bonds. Fund management has the ability and
responsibility to react quickly to changing market trends to better
position your investment. Management follows local, national and
international markets and trends in planning and implementing the Fund's
investment strategy. It's a fine balance between stretching for greater
returns and yield versus managing a comfortable level of risk. We make it
our business to research the individual credits that comprise the portfolio
and review their creditworthiness as suitable investments for your Fund.
2. Recent local and national trends towards balanced budgets and
fiscal conservatism have shrunk the number of new municipal bonds being
issued. This fact combined with a continuing slowdown in refinancings of
older municipal market debt has reduced the inventory of available bonds in
the marketplace. In this environment a large investor, like your Fund, has
the ability to use its size to gain access to a greater variety of bonds,
generally at more attractive yields than is available to the average
individual investor.
3. Although consumer price inflation is running at its slowest pace
in a decade, it remains one of the primary threats to fixed income
investors as any increase can erode a bond's income and principal value.
Your Fund's management spends much of its time analyzing and interpreting
inflationary trends in an effort to maximize investor return. We are
currently optimistic that inflation will remain benign for the foreseeable
future reinforced by continued fiscal conservatism and improved
productivity worldwide.
Many shareholders in Ocean State Tax Exempt Fund have been shareholders for
years. We recognize and appreciate your confidence in this Fund and we will work
hard to retain your loyalty.
Very truly yours,
/s/ Alfred B. Van Liew
-----------------------------
Alfred B. Van Liew
President and Chairman of the
Board of Trustees
<PAGE> 2
OCEAN STATE TAX EXEMPT FUND
INVESTMENT PERFORMANCE REVIEW
AS OF OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRIOR
NOVEMBER 1, 1996 FISCAL YEAR NOVEMBER 1, 1992 NOVEMBER 1, 1987
THROUGH ENDED THROUGH THROUGH
OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1997 OCTOBER 31, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
TOTAL RATE OF RETURN(b)
Based on:
Net Asset Value.... 6.97% 4.89% 6.50% 7.24%
Offering Price..... 2.68% 0.71% 5.62% 6.84%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C> <C> <C>
30-DAY CURRENT YIELD
Based on:
Net Asset Value.... 5.03% 5.13%
Offering Price..... 4.83% 4.92%
30-DAY TAX-EQUIVALENT YIELD(a)
Based on:
Net Asset Value.... 8.09% 8.25%
Offering Price..... 7.77% 7.92%
</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 12.51 years as of October 31, 1997.
The average quality rating of the investments, in the following table was
Aa/AA (Moody's and Standard & Poor's bond rating services).
PORTFOLIO QUALITY ANALYSIS
<TABLE>
<CAPTION>
% OF TOTAL PORTFOLIO
-------------------------
AS OF AS OF
RATING 10-31-97 10-31-96
------ -------- --------
<S> <C> <C>
Aaa/AAA.............................. 62.05% 57.74%
Aa/AA................................ 20.83% 19.33%
A.................................... 14.98% 17.12%
Baa/BBB.............................. 2.14% 5.81%
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 1997 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> 3
OCEAN STATE TAX EXEMPT FUND
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost $38,342,496) (Note 1A).................. $41,054,474
Cash.......................................................................... 80,369
Interest receivable........................................................... 605,752
Receivable for fund shares sold............................................... 24,000
-----------
Total Assets........................................................ $41,764,595
LIABILITIES
Distribution payable to shareholders.......................................... $ 91,122
Accrued management fees....................................................... 20,633
Accrued expenses.............................................................. 27,151
-----------
Total Liabilities................................................... $ 138,906
-----------
Net Assets.......................................................... $41,625,689
===========
Net Assets consist of:
Shares of beneficial interest at par ($.01/share)............................. $ 38,928
Additional paid-in capital (Note 4)........................................... 38,830,259
Undistributed net investment income........................................... 14,397
Accumulated net realized gain on investment transactions...................... 30,127
Net unrealized appreciation of investments.................................... 2,711,978
-----------
Total -- Representing Net Assets at Value for 3,892,789 Shares Outstanding.... $41,625,689
===========
Computation of Net Asset Value & Offering Price:
Net Assets.................................................................... $41,625,689
Divided by number of shares outstanding....................................... 3,892,789
Net asset value............................................................... $ 10.69
===========
Offering price................................................................ $ 11.14
===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 4
OCEAN STATE TAX EXEMPT FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest income (Note 1B).................................................... $2,620,310
Expenses:
Adviser Fees (Note 2)......................................... $146,775
Administrator fees (Note 2)................................... 104,839
Transfer agent fees........................................... 45,000
Auditing fees................................................. 28,179
Trustees fees and expenses.................................... 20,750
Custodian fees................................................ 19,755
Legal fees and expenses....................................... 16,006
Shareholder reports........................................... 11,868
Distribution expenses (Note 5)................................ 7,741
Insurance..................................................... 4,500
Pricing fees.................................................. 3,959
Miscellaneous expenses........................................ 3,902
Registration fees............................................. 1,250
--------
$414,524
----------
Net Investment Income.............................................. $2,205,786
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net Realized Gain on Investments................................... $ 42,174
Net Change in Unrealized Appreciation of Investments............... 610,813
--------
Net Gain on Investments...................................................... 652,987
----------
Net Increase in Net Assets Resulting from Operations......................... $2,858,773
==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
OCEAN STATE TAX EXEMPT FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets Resulting from:
Operations:
Net investment income.................................. $ 2,205,786 $ 2,305,062
Net realized gain on investments....................... 42,174 16,530
Change in unrealized appreciation (depreciation) of net
investments.......................................... 610,813 (307,544)
------------ ------------
Net increase in net assets resulting from operations... 2,858,773 2,014,048
Dividends and distributions to shareholders from:
Net investment income ($.57 per share in 1997 and $.56
per share in 1996)................................... (2,205,786) (2,305,645)
Net decrease from fund share transactions (Note 4)..... (1,483,616) (340,314)
------------ ------------
Total decrease in net assets...................... (830,629) (631,911)
NET ASSETS:
Beginning of year...................................... 42,456,318 43,088,229
------------ ------------
End of year(1)......................................... $ 41,625,689 $ 42,456,318
============ ============
- ---------------
(1) Including undistributed net investment income........... $ 14,397 $ 0
============ ============
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
OCEAN STATE TAX EXEMPT FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
The following data includes selected data and other performance information
derived from the financial statements.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
10/31/97 10/31/96 10/31/95 10/31/94
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of Year............................... $10.53 $10.59 $10.10 $10.95
Net investment income............................................ .57 .56 .58 .59
Net realized and unrealized gain (loss) on securities............ .16 (.06) .49 (.84)
------ ------ ------ ------
Total from Investment Operations................................. .73 .50 1.07 (.25)
------ ------ ------ ------
Less Distributions:
Dividends from net investment income............................. (.57) (.56) (.58) (.59)
Distribution from net realized gains............................. (.00) (.00) (.00) (.01)
------ ------ ------ ------
Total Distributions.............................................. (.57) (.56) (.58) (.60)
------ ------ ------ ------
Net Asset Value, End of Year..................................... $10.69 $10.53 $10.59 $10.10
====== ====== ====== ======
Total investment return at Net Asset Value(b).................... 6.97% 4.89% 10.89% (2.04)%
Ratios and Supplemental Data:
Net Assets, End of Year (000's omitted).......................... $41,626 $42,456 $43,088 $41,346
Ratio of expenses to average net assets.......................... .99% .98% .98% .88%
Ratio of net investment income to average net assets............. 5.25% 5.31% 5.58% 5.55%
Portfolio turnover............................................... 2.27% 13.30% 11.77% 8.48%
Adviser/Administrator waived fees per share...................... .00 .00 .00 .01
Fund expenses without waiver per share........................... .11 .10 .10 .10
Net investment income without waiver per share................... .57 .56 .58 .58
Ratio of expenses to average net assets without waiver........... .99% .98% .98% .93%
Ratio of net investment income to average net assets without
waiver......................................................... 5.25% 5.31% 5.58% 5.50%
</TABLE>
(a) 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.
(b) Total investment return does not reflect sales load.
See Notes to Financial Statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/93 10/31/92 10/31/91 10/31/90(a) 10/31/89 10/31/88
- -------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
$10.32 $10.14 $ 9.73 $ 9.80 $ 9.74 $ 9.13
.56 .63 .64 .67 .62 .66
.63 .18 .41 (.09) .07 .62
------ ------ ------ ------ ------ ------
1.19 .81 1.05 .58 .69 1.28
------ ------ ------ ------ ------ ------
(.56) (.63) (.64) (.65) (.63) (.66)
(.00) (.00) (.00) (.00) (.00) (.01)
------ ------ ------ ------ ------ ------
(.56) (.63) (.64) (.65) (.63) (.67)
------ ------ ------ ------ ------ ------
$10.95 $10.32 $10.14 $ 9.73 $ 9.80 $ 9.74
====== ====== ====== ====== ====== ======
12.35% 8.00% 10.96% 5.89% 7.10% 14.30%
$45,043 $36,854 $29,750 $20,675 $12,159 $9,745
.81% .85% .92% 1.27% 1.36% 1.10%
5.70% 6.13% 6.40% 6.45% 6.34% 6.84%
13.27% 36.29% 21.57% 10.16% 37.90% 45.58%
.01 .01 .03 .02 .03 .08
.09 .10 .12 .12 .16 .19
.55 .62 .61 .65 .59 .58
.81% .95% 1.17% 1.51% 1.69% 1.88%
5.58% 6.02% 6.15% 6.21% 6.02% 6.06%
</TABLE>
7
<PAGE> 8
OCEAN STATE TAX EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
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, 1997 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, 1997, 94.75% 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, 1997, 54.98% 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 25.47% of the
portfolio.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(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 subchapter M 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. Dividends paid by the Fund from
net interest on tax-exempt municipal bonds are not includable by shareholders as
gross income for
8
<PAGE> 9
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 tax-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, 1997, 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, 1997 was $2,000.
Legal fees and expenses of $16,006 were paid to a firm of which the Fund's
Secretary is a partner.
During the period November 1, 1996 through October 31, 1997 the Distributor
received $3,318 in commissions as a result of Fund share sales.
NOTE 3 INVESTMENT TRANSACTIONS
During the period ended October 31, 1997 purchases and sales of investment
securities other than short-term investments aggregated $942,006 and $2,911,690,
respectively. The aggregate cost of investments for Federal income tax purposes
is substantially the same as the aggregate cost for financial statement
purposes. At October 31, 1997, gross unrealized appreciation on investment
securities was $2,726,101 and gross unrealized depreciation on investment
securities was $14,124.
9
<PAGE> 10
OCEAN STATE TAX EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 SHARES OF BENEFICIAL INTEREST
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 and in dollars were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Balance at 10/31/96..................................... 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 decrease............................................ (34,422) (340,313)
--------- -----------
Balance at 10/31/96..................................... 4,033,431 $40,401,737
========= ===========
Shares sold............................................. 240,416 $ 2,549,515
Shares issued in reinvestment of dividends.............. 102,029 1,081,012
Shares redeemed......................................... (483,087) (5,114,146)
--------- -----------
Net decreases........................................... (140,642) (1,483,619)
--------- -----------
Balance at 10/31/97..................................... 3,892,789 $38,918,118
========= ===========
</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 $7,741 under the Plan
during fiscal 1997.
10
<PAGE> 11
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS
AS OF OCTOBER 31, 1997
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- ----------- -------------------- -----------
<S> <C> <C>
MUNICIPAL SECURITIES (98.63%)(a)
RHODE ISLAND GENERAL OBLIGATION AND REVENUE (44.69%)(a)
$ 100,000 Bristol General Obligation 7.00%, 12/1/08......... Baa1/NR $ 109,147
120,000 Bristol General Obligation MBIA Insured 6.00%,
12/15/10........................................ Aaa/AAA 128,270
250,000 Bristol General Obligation MBIA Insured 5.05%,
8/15/06......................................... Aaa/AAA 256,577
300,000 Burrillville General Obligation MBIA Insured
5.75%, 10/15/17................................. Aaa/AAA 309,020
200,000 Burrillville General Obligation FGIC Insured
5.70%, 5/1/11................................... Aaa/AAA 212,530
75,000 Central Falls General Obligation 7.90%, 7/1/02.... Baa3/NR 77,443
130,000 Coventry General Obligation FGIC Insured 7.25%,
11/1/10......................................... Aaa/AAA 142,380
460,000 Cranston General Obligation MBIA Insured 5.00%,
6/15/02......................................... Aaa/AAA 474,984
200,000 Cumberland General Obligation 6.80%, 7/15/08...... A-1/NR 207,782
165,000 Cumberland General Obligation MBIA Insured 5.70%,
10/1/11......................................... Aaa/AAA 171,615
175,000 Cumberland General Obligation MBIA Insured 5.70%,
10/1/12......................................... Aaa/AAA 181,797
300,000 East Providence General Obligation MBIA Insured
5.70%, 5/15/10.................................. Aaa/AAA 319,171
750,000 Foster/Glocester General Obligation AMBAC Insured
6.90%, 9/1/11................................... Aaa/AAA 812,965
135,000 Jamestown General Obligation CGIC Insured 7.00%,
3/15/07......................................... Aaa/AAA 136,587
250,000 Kent County Water Auth. MBIA Insured 6.35%,
7/15/14......................................... Aaa/AAA 274,121
100,000 Lincoln General Obligation MBIA Insured 7.55%,
7/15/08......................................... Aaa/AAA 105,281
355,000 Lincoln General Obligation MBIA Insured 5.50%,
8/15/10......................................... Aaa/AAA 371,013
300,000 Lincoln General Obligation FGIC Insured 5.60%,
8/1/12.......................................... Aaa/AAA 311,276
110,000 Little Compton General Obligation 7.00%, 1/15/09.. A-1/NR 117,718
100,000 Little Compton General Obligation 6.90%, 1/15/08.. A-1/NR 106,766
120,000 Middletown General Obligation 7.00%, 2/15/08...... A-1/A 124,324
100,000 Narragansett General Obligation MBIA Insured
5.30%, 9/15/09.................................. Aaa/AAA 103,633
200,000 Narragansett General Obligation Pre-refunded U.S.
Treasury AMBAC Insured 7.10%, 6/15/10........... Aaa/NR 213,532
210,000 Newport General Obligation MBIA Insured 6.50%,
8/15/06......................................... Aaa/AAA 231,314
</TABLE>
11
<PAGE> 12
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- ----------- -------------------- -----------
<S> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND GENERAL OBLIGATION AND REVENUE--(CONTINUED)
$ 100,000 Newport General Obligation Pre-refunded U.S.
Treasury 6.80%, 4/15/09......................... A-1/NR $ 110,150
100,000 Newport General Obligation Pre-refunded U.S.
Treasury 6.80%, 4/15/10......................... A-1/NR 110,150
80,000 New Shoreham General Obligation MBIA Insured
7.60%, 1/1/07................................... Aaa/AAA 81,460
100,000 New Shoreham General Obligation MBIA Insured
7.00%, 1/15/10.................................. Aaa/AAA 107,393
75,000 North Kingstown General Obligation 6.70%,
12/15/05........................................ A-1/NR 84,774
80,000 North Kingstown General Obligation 6.80%,
12/15/06........................................ A-1/NR 91,628
80,000 North Kingstown General Obligation 6.30%,
7/15/07......................................... A-1/NR 85,614
120,000 North Providence General Obligation MBIA Insured
6.00%, 10/01/09................................. Aaa/AAA 128,571
100,000 Pawtucket General Obligation MBIA Insured 6.75%,
9/15/08......................................... Aaa/AAA 110,526
500,000 Pawtucket General Obligation CGIC Insured 6.00%,
3/15/15......................................... Aaa/AAA 530,698
500,000 Pawtucket General Obligation CGIC Insured, 6.00%,
3/15/11......................................... Aaa/AAA 536,338
500,000 Pawtucket General Obligation CGIC Insured 6.00%,
3/15/13......................................... Aaa/AAA 533,205
500,000 Pawtucket General Obligation CGIC Insured, 6.00%,
3/15/12......................................... Aaa/AAA 536,338
200,000 Providence Public Bldg. Auth. FSA Insured 5.10%,
12/15/08........................................ Aaa/AAA 206,264
200,000 Providence Public Bldg. Auth. 7.30%, 12/1/08...... Baa2/NR 226,565
300,000 Providence Public Bldg. Auth. 7.30%, 12/1/09...... Baa2/NR 339,848
500,000 Providence Public Bldg. Auth. CGIC Insured 7.25%,
12/15/10........................................ Aaa/AAA 552,628
150,000 Providence Public Building Auth. MBIA Insured
5.50% 12/15/13.................................. Aaa/AAA 153,758
750,000 Providence General Obligation MBIA Insured 6.75%,
1/15/11......................................... Aaa/AAA 806,386
275,000 Smithfield General Obligation MBIA Insured 6.80%,
4/15/06......................................... Aaa/AAA 284,002
100,000 South Kingston General Obligation AMBAC Insured
5.00%, 11/15/08................................. Aaa/AAA 102,380
700,000 Warwick General Obligation MBIA Insured 6.60%,
11/15/06........................................ Aaa/AAA 772,802
155,000 Warwick General Obligation FGIC Insured 7.20%,
11/15/08........................................ Aaa/AAA 167,624
225,000 Westerly General Obligation 7.00%, 1/15/06........ A-1/NR 237,405
100,000 Westerly General Obligation 7.00%, 1/15/09........ A-1/NR 105,513
</TABLE>
12
<PAGE> 13
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- ----------- -------------------- -----------
<S> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND GENERAL OBLIGATION AND REVENUE--(CONTINUED)
$ 35,000 Westerly Dunn's Corner Fire District Unlimited Tax
Assessment 7.80%, 6/1/03........................ A-1/NR $ 38,903
35,000 Westerly Dunn's Corner Fire District Unlimited Tax
Assessment 7.85%, 6/1/04........................ A-1/NR 39,430
800,000 Rhode Island Clean Water MBIA Insured 6.50%,
10/1/06......................................... Aaa/AAA 884,205
150,000 Rhode Island Clean Water MBIA Insured 5.30%,
10/1/07......................................... Aaa/AAA 158,458
600,000 Rhode Island Correctional Facility MBIA Insured
7.00%, 8/1/09................................... Aaa/AAA 642,101
650,000 Rhode Island Depositors Economic Protection Corp.
MBIA Insured 6.55%, 8/1/10...................... Aaa/AAA 753,441
215,000 Rhode Island Depositors Economic Protection Corp.
CAPMAC Guaranteed 6.375%, 8/1/22................ Aaa/AAA 245,982
250,000 Rhode Island Depositors Economic Protection Corp.
Escrowed to Maturity 5.75%, 8/1/21.............. Baa1/A- 268,169
100,000 RI COPS MBIA Insured 5.375%, 10/1/16.............. Aaa/AAA 100,250
300,000 Rhode Island Lease Participation Certificate
Shepard Building AMBAC Insured 5.125%, 6/1/12... Aaa/AAA 299,246
325,000 Rhode Island Turnpike Authority 5.35%, 12/1/17.... A/A 323,776
645,000 Rhode Island Public Building Auth.
Pre-refunded U.S. Treasury 7.60%, 2/1/09........ A/A 686,218
125,000 Rhode Island Public Building Auth. AMBAC Insured
5.20%, 2/1/06................................... Aaa/AAA 129,698
150,000 Rhode Island Public Building Auth. AMBAC Insured
5.25%, 2/1/10................................... Aaa/AAA 152,819
150,000 Rhode Island Port Auth. AMBAC Insured 6.50%,
6/1/08.......................................... Aaa/AAA 168,044
250,000 Rhode Island Student Loan Auth. 6.20%, 12/1/09.... Aaa/NR 258,144
250,000 Rhode Island General Obligation FGIC Insured
7.00%, 7/15/04.................................. Aaa/AAA 287,279
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 523,806
125,000 Rhode Island Water Resources Fruit Hill Reservoir
MBIA Insured 7.05%, 9/15/07..................... Aaa/AAA 134,241
-----------
TOTAL RHODE ISLAND GENERAL OBLIGATION AND
REVENUE......................................... $18,600,576
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION (30.23%)(a)
$ 150,000 Board of Governors CGIC Insured 6.125%, 9/15/10... Aaa/AAA $ 164,661
195,000 Board of Governors CGIC Insured 6.15%, 9/15/11.... Aaa/AAA 214,303
120,000 Brown University 6.75%, 9/1/16.................... Aa-1/AA 127,067
220,000 Brown University 5.40%, 9/1/18.................... Aa-1/AA 221,377
375,000 Brown University 6.00%, 9/1/10.................... Aa-1/AA 391,915
</TABLE>
13
<PAGE> 14
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- ----------- -------------------- -----------
<C> <S> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION--(CONTINUED)
$ 200,000 Brown University 5.90%, 9/1/14.................... Aa-1/AA $ 211,277
400,000 Bryant College MBIA Insured 6.50%, 6/1/05......... Aaa/AAA 440,098
100,000 Bryant College MBIA Insured 5.95%, 6/1/07......... Aaa/AAA 107,142
100,000 Bryant College MBIA Insured 6.20%, 6/1/13......... Aaa/AAA 106,390
100,000 Higher Education Auth. CGIC Insured 7.375%,
9/15/09......................................... Aaa/AAA 108,019
150,000 Providence College Pre-refunded U.S. Treasury
7.45%, 11/1/03.................................. Aaa/NR 162,781
125,000 Providence College Pre-refunded U.S. Treasury
7.50%, 11/1/04.................................. Aaa/NR 135,807
120,000 Providence College Pre-refunded U.S. Treasury
7.75%, 11/1/09.................................. Aaa/NR 130,977
550,000 Roger Williams College Connie Lee Insured 6.50%,
11/15/08........................................ NR/AAA 601,688
550,000 Roger Williams College Connie Lee Insured 6.625%,
11/15/11........................................ NR/AAA 602,377
320,000 Roger Williams College LOC-Fleet National Pre-
refunded U.S. Treasury 7.75%, 10/1/18........... A-1/NR 338,043
1,290,000 South County Hospital Pre-refunded U.S. Treasury
7.25%, 11/1/11.................................. NR/AAA 1,448,412
345,000 Roger Williams Realty Corp. Collateral U.S.
Treasury, 7.50%, 8/1/29......................... NR/AA- 361,859
500,000 Salve Regina College Connie Lee Insured 6.25%,
3/15/13......................................... NR/AAA 533,205
400,000 Salve Regina College LOC-Fleet Bank Pre-refunded
U.S. Treasury 7.70%, 1/1/20..................... A2/NR 437,090
300,000 Salve Regina College Pre-refunded U.S. Treasury
Connie Lee Insured 6.30%, 3/15/20............... NR/AAA 315,788
525,000 Johnson & Wales College Connie Lee Insured 5.75%,
4/1/12.......................................... NR/AAA 544,076
500,000 St. Antoine Residence LOC-Allied Irish 6.75%,
11/15/18........................................ Aa-3/NR 539,470
150,000 Landmark Medical Center Escrowed to Maturity
7.625%, 7/1/99.................................. NR/AAA 156,390
500,000 Landmark Medical Center Pre-refunded U.S. Treasury
8.375%, 7/1/09.................................. NR/AAA 545,109
575,000 Kent County Hospital MBIA Insured 7.00%, 7/1/10... Aaa/AAA 636,243
200,000 Memorial Hospital MBIA Insured 6.50%, 7/1/04...... Aaa/AAA 220,801
140,000 Miriam Hospital Pre-refunded U.S. Treasury 7.00%,
4/1/06.......................................... NR/A 148,596
400,000 Miriam Hospital Pre-refunded U.S. Treasury 6.35%,
4/1/08.......................................... NR/A 444,609
900,000 Miriam Hospital Pre-refunded U.S. Treasury 7.25%,
4/1/11.......................................... NR/A 958,641
300,000 Rhode Island Hospital FGIC Insured 6.70%,
8/15/04......................................... Aaa/AAA 331,577
</TABLE>
14
<PAGE> 15
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- ----------- -------------------- -----------
<C> <S> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION--(CONTINUED)
$ 600,000 Women & Infants Hospital CGIC Insured 6.55%,
9/1/13.......................................... Aaa/AAA $ 653,379
100,000 United Methodist Elder Care LOC-Fleet Bank 7.50%,
11/1/14......................................... A/A 112,280
125,000 New England Tech Inst. Connie Lee Insured 6.00%,
3/1/15.......................................... NR/AAA 130,952
-----------
TOTAL RHODE ISLAND HEALTH & EDUCATION BUILDING
CORPORATION..................................... $12,582,399
RHODE ISLAND HOUSING & MORTGAGE FINANCE CORPORATION (18.70%)(a)
$ 5,000 9.30%, 7/1/04, FGIC Insured....................... Aaa/AAA $ 5,029
40,000 7.625%, 10/1/04................................... Aa-2/AA+ 41,704
95,000 8.25%, 10/1/07.................................... A-1/A+ 97,142
195,000 8.10%, 10/1/07.................................... A-1/A+ 199,397
200,000 5.65%, 10/1/07.................................... NR/A 207,016
300,000 8.00%, 10/1/08.................................... Aa/AA+ 312,251
500,000 7.80%, 10/1/10, Series A.......................... Aa-2/AA+ 533,831
300,000 7.60%, 10/1/20.................................... NR/A 316,915
95,000 7.80%, 10/1/11.................................... Aa-2/AA+ 99,047
385,000 7.50%, 10/1/11.................................... Aa-2/AA+ 412,497
205,000 7.80%, 10/1/11.................................... Aa-2/AA+ 215,017
200,000 5.70%, 4/1/15..................................... Aa-2/AA+ 203,508
35,000 7.75%, 10/1/16.................................... A-1/A+ 35,789
500,000 5.75%, 4/1/17..................................... Aa-2/AA+ 517,541
200,000 6.25%, 4/1/17..................................... Aa-2/AA+ 200,729
110,000 7.95%, 10/1/20.................................... NR/A 115,375
105,000 7.25%, 10/1/21.................................... Aa-2/AA+ 111,973
365,000 7.875%, 10/1/21, MBIA Insured..................... Aaa/AAA 379,177
640,000 7.875%, 10/1/22................................... Aa-2/AA+ 671,274
50,000 7.75%, 4/1/22..................................... Aa-2/AA+ 52,757
345,000 7.55%, 10/1/22.................................... Aa-2/AA+ 370,073
300,000 6.50%, 10/1/22.................................... Aa-2/AA+ 318,795
1,250,000 6.70%, 10/1/15.................................... Aa-2/AA+ 1,348,676
500,000 6.15%, 4/1/17..................................... Aa-2/AA+ 522,553
75,000 5.875%, 4/1/25.................................... Aa-2/AA+ 77,067
300,000 6.50%, 4/1/27..................................... Aa-2/AA+ 318,043
95,000 6.85%, 4/1/27..................................... Aa-2/AA+ 102,737
-----------
TOTAL RHODE ISLAND HOUSING & MORTGAGE FINANCE
CORPORATION..................................... $ 7,785,913
RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION (1.13%)(a)
$ 80,000 Inge Corporation SBA GTD 9.125%, 10/1/00.......... Aaa/NR $ 82,080
250,000 Mobil Oil 6.00%, 11/1/14.......................... Aa-2/AA 265,036
</TABLE>
15
<PAGE> 16
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- ----------- -------------------- -----------
<S> <C> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION--(CONTINUED)
$ 60,000 Rhode Island State Indl Dev Rev LOC-Fleet Bank
8.20%, 5/1/13................................... Baa/NR $ 61,656
60,000 Rhode Island State Indl Dev Rev LOC-Fleet Bank
8.25%, 5/1/14................................... Baa/NR 61,656
-----------
TOTAL RHODE ISLAND INDUSTRIAL FACILITIES
CORPORATION..................................... $ 470,428
-----------
TOTAL RHODE ISLAND BONDS (94.75%)(a).............. $39,439,316
PUERTO RICO BONDS (3.88%) (a)
$ 500,000 Puerto Rico Commonwealth Pre-refunded U.S.
Treasury 7.75%, 7/1/06.......................... NR/AAA $ 524,418
200,000 Puerto Rico Commonwealth Pre-refunded U.S.
Treasury 7.75%, 7/1/13.......................... NR/AAA 210,096
300,000 Puerto Rico Electric Power Auth. Pre-refunded U.S.
Treasury 8.00%, 7/1/08.......................... NR/AAA 315,135
100,000 Puerto Rico Highway Pre-refunded U.S. Treasury
8.00%, 7/1/03................................... NR/AAA 105,045
200,000 Puerto Rico Highway Pre-refunded U.S. Treasury
8.00%, 7/1/05................................... NR/AAA 210,090
225,000 Puerto Rico Highway Pre-refunded U.S. Treasury
7.70%, 7/1/03................................... Baa1/AAA 250,374
-----------
TOTAL PUERTO RICO BONDS (3.88%)(a)................ $ 1,615,158
-----------
TOTAL INVESTMENTS (Cost $38,342,496)(92.11%)(a)... $41,054,474
===========
</TABLE>
(a) Percentages indicated are based on net assets of $41,625,689 at October 31,
1997 (total investments plus cash and receivables less liabilities) which
corresponds to a net asset value per share of $10.69.
(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 the directors. Certain securities have credit 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)
16
<PAGE> 17
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
(d) Abbreviations used:
<TABLE>
<C> <S>
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.
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 18
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 (the Fund) (a portfolio of VLC Trust), including the
portfolio of investments, as of October 31, 1997, 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 nine 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 fiscal period ended October 31, 1988 was 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 and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997, by correspondence with the custodian.
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 at October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and financial highlights for each of the
nine years in the period then ended in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Boston, Massachusetts
December 9, 1997
<PAGE> 19
INVESTMENT ADVISER &
ADMINISTRATOR
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
PNC Institutional Custody Services
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 02116-5072
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
Alfred B. Van Liew, President
Samuel H. Hallowell, Vice President
Joseph J. Healy, Vice President
Kevin M. Oates, Treasurer
Margaret D. Farrell, Secretary
[LOGO] OCEAN STATE TAX EXEMPT FUND
(THE PORTFOLIO OF VLC TRUST)
ANNUAL REPORT
OCTOBER 31, 1997
INTEREST INCOME EXEMPT
FROM FEDERAL AND RHODE
ISLAND INCOME TAXES
FROM QUALITY MUNICIPAL
BONDS.
