<PAGE> 1
[OCEAN STATE TAX EXEMPT FUND LOGO]
REPORT OF THE PRESIDENT
OCTOBER 31, 1998
We are pleased to report that Ocean State Tax Exempt Fund's (the "Fund")
net asset value rose from $10.69 to $10.71 over the past six months while the
dividend distribution remained unchanged at $0.57 per share. This performance
was achieved against a turbulent backdrop of wildly fluctuating stock prices
that witnessed the Standard & Poor's 500 Stock Index decline 14.5% in value in
August only to rise by the same amount over September and October. Your Fund's
results met its stated investment objective of preservation of capital with high
current income, exempt from both Rhode Island and Federal income taxes.
Many investment themes were in play during the period not the least of
which were continuing controversy over impeachment proceedings, three reductions
of short-term interest rates by the Federal Reserve, and weakening corporate
profit growth. Against this backdrop, consumer price inflation has remained low
and fear that economic weakness abroad would lead to a domestic recession has
failed to materialize. The action by the Federal Reserve to keep our economy
growing by reducing rates boosted the value of outstanding bonds and was one of
the main reasons the Fund's Net Asset Value rose during the period.
Bond yields in the U.S. are at historically low levels. Part of the decline
is due to the drop in inflation rates from the mid-teens in the early 1980's to
the 2 - 2 1/2% level today. Another reason has been the result of a phenomenon
known as a "flight to quality." Over the past several quarters foreign funds
have been flowing into debt instruments in the U.S. because foreign investors
have perceived our country as a safe haven in a world of general economic
unrest. The flow of monies, billions of dollars, tends to concentrate on
investing in Treasury securities because the liquidity is large and the issues
are direct obligations of our government. This investment pressure, added to
increased demand by stock investors frightened by the sharp decline in equity
prices over the summer, drove bond yields so low that a remarkable anomaly
occurred: yields on municipal bonds exceeded those of Treasury notes in some
comparable maturities. Although the situation has returned to normal, the yield
before tax on a 15-year municipal bond is still over 90% of the rate accorded to
a comparable U.S. Treasury bond.
Nationally, 56% of this year's new bonds were sold with insurance, up from
25% a decade ago. In line with this trend, the Fund's management has continued
to improve the credit quality of the portfolio by increasing the holdings of
insured, AAA rated debt instruments to over 64%. Credits in the portfolio are
continually reviewed by management and judged for their suitability to the
portfolio. National and international factors, some of which we mentioned above,
have a far greater effect on your investment than local factors. However, the
diverse mix of Rhode Island holdings in the Fund minimizes the investor's risk
if problems arise with an individual issuer.
Ocean State Tax Exempt Fund is a long-term holding for most investors.
Double tax-free income -- exempt from State and Federal taxes for Rhode Island
residents -- is the main reason investors purchase the Fund. We recognize and
appreciate this long-term commitment. We will strive to maintain your confidence
in Ocean State Tax Exempt Fund, and we look forward to a successful 1999.
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, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRIOR
NOVEMBER 1, 1997 FISCAL YEAR NOVEMBER 1, 1993 NOVEMBER 1, 1988
THROUGH ENDED THROUGH THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1998 OCTOBER 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
TOTAL RATE OF RETURN(b)
Based on:
Net Asset Value.... 5.46% 6.97% 5.14% 5.86%
Offering Price..... 1.20% 2.68% 4.27% 5.51%
<CAPTION>
AS OF AS OF
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C> <C> <C>
30-DAY CURRENT YIELD
Based on:
Net Asset Value.... 4.87% 5.03%
Offering Price..... 4.67% 4.83%
30-DAY TAX-EQUIVALENT YIELD(a)
Based on:
Net Asset Value.... 7.70% 7.96%
Offering Price..... 7.39% 7.64%
</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 11.74 years as of October 31, 1998.
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 10-31-98 10-31-97
------ -------- --------
<S> <C> <C>
Aaa/AAA.............................. 64.74% 62.05%
Aa/AA................................ 20.45% 20.83%
A.................................... 13.06% 14.98%
Baa/BBB.............................. 1.75% 2.14%
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 1998 shareholders subject to a combined Federal and State tax rate of
36.78% (31% Federal, 27% State).
(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, 1998
<TABLE>
<S> <C>
ASSETS
Investments at value (identified cost $39,936,225)
(Note 1A)................................................. $42,704,260
Cash........................................................ 544,680
Interest receivable......................................... 635,222
-----------
Total Assets...................................... $43,884,162
LIABILITIES
Payable for securities purchased............................ $ 511,361
Distribution payable to shareholders........................ 77,051
Accrued management fees..................................... 21,407
Accrued expenses............................................ 25,184
Payable for fund shares redeemed............................ 1,500
-----------
Total Liabilities................................. 636,503
-----------
Net Assets........................................ $43,247,659
===========
Net Assets consist of:
Shares of beneficial interest at par ($.01/share)........... 40,378
Additional paid-in capital (Note 4)......................... 40,384,905
Undistributed net investment income......................... 12,511
Accumulated net realized gain on investment transactions.... 41,830
Net unrealized appreciation of investments.................. 2,768,035
-----------
Total -- Representing Net Assets at Value for 4,037,808
Shares Outstanding........................................ $43,247,659
===========
Computation of Net Asset Value & Offering Price:
Net Assets.................................................. $43,247,659
Divided by number of shares outstanding..................... 4,037,808
Net asset value............................................. $ 10.71
===========
Offering price.............................................. $ 11.16
===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 4
OCEAN STATE TAX EXEMPT FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest income (Note 1B)............................................. $2,536,612
Expenses:
Adviser fees (Note 2).................................. 147,822
Administrator fees (Note 2)............................ 105,587
Transfer agent fees.................................... 36,071
Auditing fees.......................................... 28,400
Trustees fees and expenses............................. 19,000
Custodian fees......................................... 10,486
Legal fees and expenses................................ 19,811
Shareholder reports.................................... 11,762
Distribution expenses (Note 5)......................... 8,237
Insurance expenses..................................... 1,983
Pricing fees........................................... 3,872
Miscellaneous expenses................................. 2,163
Registration fees...................................... 825
--------
396,019
----------
Net Investment Income....................................... $2,140,593
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net Realized Gain on Investments............................ 41,822
Net Change in Unrealized Appreciation of Investments........ 56,057
--------
Net Realized and Unrealized Gain on Investments....................... 97,879
----------
Net Increase in Net Assets Resulting from Operations.................. $2,238,472
==========
</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, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets Resulting from:
Operations:
Net investment income.................................. $ 2,140,593 $ 2,205,786
Net realized gain on investments....................... 41,822 42,174
Change in unrealized appreciation of investments....... 56,057 610,813
----------- -----------
Net increase in net assets resulting from operations... $ 2,238,472 $ 2,858,773
Dividends and distributions to shareholders from:
Net investment income ($.56 per share in 1998 and $.57
per share in 1997)................................... (2,140,593) (2,205,786)
Capital Gain ($.01 per share in 1998).................. (30,119) 0
Net increase (decrease) from fund share transactions
(Note 4)............................................. 1,554,210 (1,483,616)
----------- -----------
Total increase (decrease) in net assets........... 1,621,970 (830,629)
NET ASSETS:
Beginning of year...................................... 41,625,689 42,456,318
----------- -----------
End of year(1)......................................... $43,247,659 $41,625,689
=========== ===========
- ---------------
(1) Including undistributed net investment income........... $ 12,511 $ 14,397
=========== ===========
</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
10/31/98 10/31/97 10/31/96 10/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of Year.......................... $10.69 $10.53 $10.59 $10.10
Net investment income....................................... .56 .57 .56 .58
Net realized and unrealized gain (loss) on securities....... .03 .16 (.06) .49
------ ------ ------ ------
Total from Investment Operations............................ .59 .73 .50 1.07
------ ------ ------ ------
Less Distributions:
Dividends from net investment income........................ (.56) (.57) (.56) (.58)
Distribution from net realized gains........................ (.01) (.00) (.00) (.00)
------ ------ ------ ------
Total Distributions......................................... (.57) (.57) (.56) (.58)
------ ------ ------ ------
Net Asset Value, End of Year................................ $10.71 $10.69 $10.53 $10.59
====== ====== ====== ======
Total investment return at Net Asset Value(b)............... 5.46% 6.97% 4.89% 10.89%
Ratios and Supplemental Data:
Net Assets, End of Year (000's omitted)..................... $43,248 $41,626 $42,456 $43,088
Ratio of expenses to average net assets..................... .94% .99% .98% .98%
Ratio of net investment income to average net assets........ 5.07% 5.25% 5.31% 5.58%
Portfolio turnover.......................................... 10.30% 2.27% 13.30% 11.77%
Adviser/Administrator waived fees per share................. .00 .00 .00 .00
Fund expenses without waiver per share...................... .10 .11 .10 .10
Net investment income without waiver per share.............. .56 .57 .56 .58
Ratio of expenses to average net assets without waiver...... .94% .99% .98% .98%
Ratio of net investment income to average net assets
without waiver............................................ 5.07% 5.25% 5.31% 5.58%
</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
10/31/94 10/31/93 10/31/92 10/31/91 10/31/90(a) 10/31/89
- -------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$10.95 $10.32 $10.14 $ 9.73 $ 9.80 $ 9.74
.59 .56 .63 .64 .67 .62
(.84) .63 .18 .41 (.09) .07
------ ------ ------ ------ ------ ------
(.25) 1.19 .81 1.05 .58 .69
------ ------ ------ ------ ------ ------
(.59) (.56) (.63) (.64) (.65) (.63)
(.01) (.00) (.00) (.00) (.00) (.00)
------ ------ ------ ------ ------ ------
(.60) (.56) (.63) (.64) (.65) (.63)
------ ------ ------ ------ ------ ------
$10.10 $10.95 $10.32 $10.14 $ 9.73 $ 9.80
====== ====== ====== ====== ====== ======
(2.04)% 12.35% 8.00% 10.96% 5.89% 7.10%
$41,346 $45,043 $36,854 $29,750 $20,675 $12,159
.88% .81% .85% .92% 1.27% 1.36%
5.55% 5.70% 6.13% 6.40% 6.45% 6.34%
8.48% 13.27% 36.29% 21.57% 10.16% 37.90%
.01 .01 .01 .03 .02 .03
.10 .09 .10 .12 .12 .16
.58 .55 .62 .61 .65 .59
.93% .81% .95% 1.17% 1.51% 1.69%
5.50% 5.58% 6.02% 6.15% 6.21% 6.02%
</TABLE>
7
<PAGE> 8
OCEAN STATE TAX EXEMPT FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
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, 1998 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, 1998, 98.16% 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, 1998, 60.94% 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 23.28% 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 period ended October 31, 1998,
the Fund paid $30,119 from long-term capital gains. 99.76% of the income
dividends paid by the Fund are exempt from Federal and Rhode Island income
taxes.
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, 1998 was $2,000.
Legal fees and expenses of $19,811 were paid to a firm of which the Fund's
Secretary is a partner.
During the period November 1, 1997 through October 31, 1998 the Distributor
received $4,442 in commissions as a result of Fund share sales.
NOTE 3 INVESTMENT TRANSACTIONS
During the period ended October 31, 1998 purchases and sales of investment
securities other than short-term investments aggregated $5,932,008 and
$4,358,635, 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, 1998, gross unrealized appreciation on
investment securities was $2,782,032 and gross unrealized depreciation on
investment securities was $13,997.
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..................................... 4,033,431 $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 decrease............................................ (140,642) (1,483,619)
--------- -----------
Balance at 10/31/97..................................... 3,892,789 $38,918,118
========= ===========
Shares sold............................................. 524,456 $ 5,603,144
Shares issued in reinvestment of dividends.............. 108,162 1,157,248
Shares redeemed......................................... (487,599) (5,206,182)
--------- -----------
Net increase............................................ 145,019 1,554,210
--------- -----------
Balance at 10/31/98..................................... 4,037,808 $40,472,328
========= ===========
</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 $8,237 under the Plan during fiscal
1998.
NOTE 6 YEAR 2000 PROBLEM (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely
affected if the computer systems used by the Fund's service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem". The Fund's
Adviser and Administrator is taking measures that it believes are reasonably
designed to address the Year 2000 Problem with respect to computer systems that
it uses and to obtain reasonable assurances that comparable steps are being
taken by each of the Fund's other service providers. At this time, however,
there can no assurance that these steps will be sufficient to avoid any adverse
impact on the Fund as a result of the Year 2000 Problem.
10
<PAGE> 11
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS
AS OF OCTOBER 31, 1998
<TABLE>
<CAPTION>
RATINGS
PRINCIPAL MOODY'S/ VALUE
AMOUNT STANDARD & POOR'S(b) (NOTE 1)
- --------- -------------------- --------
<S> <C> <C>
MUNICIPAL SECURITIES (98.74%)(a)
RHODE ISLAND GENERAL OBLIGATION AND REVENUE (51.99%)(a)
$ 100,000 Bristol General Obligation 7.00%, 12/1/08......... Baa1/NR $ 108,000
120,000 Bristol General Obligation MBIA Insured 6.00%,
12/15/10........................................ Aaa/AAA 129,300
250,000 Bristol General Obligation MBIA Insured 5.05%,
8/15/06......................................... Aaa/AAA 262,500
300,000 Burrillville General Obligation MBIA Insured
5.75%, 10/15/17................................. Aaa/AAA 318,000
200,000 Burrillville General Obligation FGIC Insured
5.70%, 5/1/11................................... Aaa/AAA 218,250
75,000 Central Falls General Obligation 7.90%, 7/1/02.... Baa3/NR 76,969
130,000 Coventry General Obligation FGIC Insured 7.25%,
11/1/10......................................... Aaa/AAA 140,887
460,000 Cranston General Obligation MBIA Insured 5.00%,
6/15/02......................................... Aaa/AAA 480,125
50,000 Cumberland General Obligation 5.25%, 9/1/04....... A-3/NR 53,750
165,000 Cumberland General Obligation MBIA Insured 5.70%,
10/1/11......................................... Aaa/AAA 174,694
175,000 Cumberland General Obligation MBIA Insured 5.70%,
10/1/12......................................... Aaa/AAA 185,500
300,000 East Providence General Obligation MBIA Insured
5.70%, 5/15/10.................................. Aaa/AAA 327,375
750,000 Foster/Glocester General Obligation AMBAC Insured
6.90%, 9/1/11................................... Aaa/AAA 809,062
135,000 Jamestown General Obligation CGIC Insured 7.00%,
3/15/07......................................... Aaa/AAA 136,632
250,000 Kent County Water Auth. MBIA Insured 6.35%,
7/15/14......................................... Aaa/AAA 280,625
355,000 Lincoln General Obligation MBIA Insured 5.50%,
8/15/10......................................... Aaa/AAA 376,300
300,000 Lincoln General Obligation FGIC Insured 5.60%,
8/1/12.......................................... Aaa/AAA 325,125
110,000 Little Compton General Obligation 7.00%,
1/15/09......................................... A-1/NR 116,050
100,000 Little Compton General Obligation 6.90%,
1/15/08......................................... A-1/NR 105,250
100,000 Narragansett General Obligation MBIA Insured
5.30%, 9/15/09.................................. Aaa/AAA 105,375
200,000 Narragansett General Obligation Pre-refunded U.S.
Treasury AMBAC Insured 7.10%, 6/15/10........... Aaa/NR 208,806
210,000 Newport General Obligation MBIA Insured 6.50%,
8/15/06......................................... Aaa/AAA 228,375
100,000 Newport General Obligation Pre-refunded U.S.
Treasury 6.80%, 4/15/09......................... A-1/NR 109,125
100,000 Newport General Obligation Pre-refunded U.S.
Treasury 6.80%, 4/15/10......................... A-1/NR 109,125
</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 New Shoreham General Obligation MBIA Insured
7.00%, 1/15/10.................................. Aaa/AAA $ 102,760
75,000 North Kingstown General Obligation 6.70%,
12/15/05........................................ A-1/NR 86,250
80,000 North Kingstown General Obligation 6.80%,
12/15/06........................................ A-1/NR 93,600
80,000 North Kingstown General Obligation 6.30%,
7/15/07......................................... A-1/NR 85,500
120,000 North Providence General Obligation MBIA Insured
6.00%, 10/01/09................................. Aaa/AAA 130,500
100,000 Pawtucket General Obligation MBIA Insured 6.75%,
9/15/08......................................... Aaa/AAA 109,250
500,000 Pawtucket General Obligation CGIC Insured 6.00%,
3/15/15......................................... Aaa/AAA 548,125
500,000 Pawtucket General Obligation CGIC Insured 6.00%,
3/15/11......................................... Aaa/AAA 548,750
500,000 Pawtucket General Obligation CGIC Insured 6.00%,
3/15/13......................................... Aaa/AAA 551,875
500,000 Pawtucket General Obligation CGIC Insured, 6.00%,
3/15/12......................................... Aaa/AAA 554,375
200,000 Providence Public Bldg. Auth. FSA Insured 5.10%,
12/15/08........................................ Aaa/AAA 213,500
200,000 Providence Public Bldg. Auth. Pre-refunded U.S.
Treasury 7.30%, 12/1/08......................... Baa2/NR 224,250
300,000 Providence Public Bldg. Auth. Pre-refunded U.S.
Treasury 7.30%, 12/1/09......................... Baa2/NR 336,375
500,000 Providence Public Bldg. Auth. CGIC Insured 7.25%,
12/15/10........................................ Aaa/AAA 542,500
150,000 Providence Public Bldg. Auth. MBIA Insured 5.50%
12/15/13........................................ Aaa/AAA 161,250
185,000 Providence Public Bldg. Auth. FSA Insured 5.00%,
12/15/18........................................ Aaa/AAA 183,612
750,000 Providence General Obligation MBIA Insured 6.75%,
1/15/11......................................... Aaa/AAA 793,125
100,000 South Kingston General Obligation AMBAC Insured
5.00%, 11/15/08................................. Aaa/AAA 104,500
700,000 Warwick General Obligation MBIA Insured 6.60%,
11/15/06........................................ Aaa/AAA 777,875
155,000 Warwick General Obligation FGIC Insured 7.20%,
11/15/08........................................ Aaa/AAA 164,562
250,000 Warwick General Obligation FGIC Insured 4.85%,
3/1/12.......................................... Aaa/AAA 254,687
225,000 Westerly General Obligation Pre-refunded U.S.
Treasury 7.00%, 1/15/06......................... A-1/NR 232,306
</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)
$ 100,000 Westerly General Obligation Pre-refunded U.S.
Treasury 7.00%, 1/15/09......................... A-1/NR $ 103,247
35,000 Westerly Dunn's Corner Fire District Unlimited Tax
Assessment 7.80%, 6/1/03........................ A-1/NR 39,112
35,000 Westerly Dunn's Corner Fire District Unlimited Tax
Assessment 7.85%, 6/1/04........................ A-1/NR 39,769
800,000 Rhode Island Clean Water MBIA Insured 6.50%,
10/1/06......................................... Aaa/AAA 883,000
150,000 Rhode Island Clean Water MBIA Insured 5.30%,
10/1/07......................................... Aaa/AAA 162,000
600,000 Rhode Island Correctional Facility MBIA Insured
7.00%, 8/1/09................................... Aaa/AAA 629,172
650,000 Rhode Island Depositors Economic Protection Corp.
MBIA Insured 6.55%, 8/1/10...................... Aaa/AAA 781,625
215,000 Rhode Island Depositors Economic Protection Corp.
CAPMAC Guaranteed 6.375%, 8/1/22................ Aaa/AAA 258,806
250,000 Rhode Island Depositors Economic Protection Corp.
Escrowed to Maturity 5.75%, 8/1/21.............. NR/A- 279,375
500,000 Rhode Island Economic Development Corp. Airport
Revenue FSA Insured 5.25%, 7/1/12............... Aaa/AAA 525,625
395,000 Rhode Island Economic Development Corp. Airport
Revenue FSA Insured 5.25%, 7/1/13............... Aaa/AAA 413,762
545,000 Rhode Island Economic Development Corp. Airport
Revenue FSA Insured 5.25%, 7/1/14............... Aaa/AAA 566,119
250,000 Rhode Island Economic Development Corp. Airport
Revenue FSA Insured 5.00%, 7/1/18............... Aaa/AAA 247,500
100,000 RI COPS MBIA Insured 5.375%, 10/1/16.............. Aaa/AAA 104,875
300,000 Rhode Island Lease Participation Certificate
Shepard Bldg. AMBAC Insured 5.125%, 6/1/12...... Aaa/AAA 311,250
500,000 Rhode Island Lease Participation Certificate
Shepard Bldg. AMBAC Insured 5.00%, 6/1/17....... Aaa/AAA 503,125
750,000 Rhode Island Turnpike Authority 5.35%, 12/1/17.... NR/A 761,250
645,000 Rhode Island Public Building Auth. Pre-refunded
U.S. Treasury 7.60%, 2/1/09..................... A/A 664,756
125,000 Rhode Island Public Building Auth. AMBAC Insured
5.20%, 2/1/06................................... Aaa/AAA 132,031
150,000 Rhode Island Public Building Auth. AMBAC Insured
5.25%, 2/1/10................................... Aaa/AAA 156,562
150,000 Rhode Island Port Auth. AMBAC Insured 6.50%,
6/1/08.......................................... Aaa/AAA 171,375
500,000 Rhode Island Refunding Bond Authority AMBAC
Insured 5.25%, 2/1/10........................... Aaa/AAA 533,125
250,000 Rhode Island Student Loan Auth. Gtd. Std. Lns.
6.20%, 12/1/09.................................. Aaa/NR 258,437
</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)
- --------- -------------------- --------
<S> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND GENERAL OBLIGATION AND REVENUE--(CONTINUED)
$ 250,000 Rhode Island General Obligation FGIC Insured
7.00%, 7/15/04.................................. Aaa/AAA $ 289,375
5,000 Rhode Island General Obligation 7.50%, 6/15/05.... A-1/AA- 5,069
300,000 Rhode Island General Obligation FGIC Insured
5.125%, 7/15/14................................. Aaa/AAA 307,500
500,000 Rhode Island General Obligation MBIA Insured
5.75%, 8/1/15................................... Aaa/AAA 535,000
250,000 Rhode Island Cons. Cap. Dev. FGIC Insured 5.00%,
9/1/16.......................................... Aaa/AAA 251,250
250,000 Rhode Island Cons. Cap. Dev. FGIC Insured 5.00%,
9/1/15.......................................... Aaa/AAA 252,500
125,000 Rhode Island Water Resources Fruit Hill Reservoir
MBIA Insured 7.05%, 9/15/07..................... Aaa/AAA 131,715
-----------
TOTAL RHODE ISLAND GENERAL OBLIGATION AND
REVENUE......................................... $22,483,034
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION (29.25%)(a)
$ 150,000 Board of Governors CGIC Insured 6.125%, 9/15/10... Aaa/AAA $ 165,375
195,000 Board of Governors CGIC Insured 6.15%, 9/15/11.... Aaa/AAA 214,987
120,000 Brown University 6.75%, 9/1/16.................... Aa-1/AA+ 125,924
220,000 Brown University 5.40%, 9/1/18.................... Aa-1/AA+ 223,300
375,000 Brown University 6.00%, 9/1/10.................... Aa-1/AA+ 387,979
100,000 Brown University 4.75%, 9/1/12.................... Aa-1/AA+ 100,375
200,000 Brown University 5.90%, 9/1/14.................... Aa-1/AA+ 216,750
400,000 Brown University 5.00%, 9/1/19.................... Aa-1/AA+ 401,500
400,000 Bryant College MBIA Insured 6.50%, 6/1/05......... Aaa/AAA 439,000
100,000 Bryant College MBIA Insured 5.95%, 6/1/07......... Aaa/AAA 107,500
100,000 Bryant College MBIA Insured 6.20%, 6/1/13......... Aaa/AAA 107,625
100,000 Higher Education Auth. CGIC Insured 7.375%,
9/15/09......................................... Aaa/AAA 105,647
150,000 Providence College Pre-refunded U.S. Treasury
7.45%, 11/1/03.................................. Aaa/NR 159,386
125,000 Providence College Pre-refunded U.S. Treasury
7.50%, 11/1/04.................................. Aaa/NR 132,883
120,000 Providence College Pre-refunded U.S. Treasury
7.75%, 11/1/09.................................. Aaa/NR 127,858
550,000 Roger Williams College Connie Lee Insured 6.50%,
11/15/08........................................ NR/AAA 608,437
550,000 Roger Williams College Connie Lee Insured 6.625%,
11/15/11........................................ NR/AAA 611,187
1,290,000 South County Hospital Pre-refunded U.S. Treasury
7.25%, 11/1/11.................................. NR/AAA 1,431,900
345,000 Roger Williams Realty Corp. Collateral U.S.
Treasury, 7.50%, 8/1/29......................... NR/AA- 356,916
</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)
- --------- -------------------- --------
<S> <C> <C>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND HEALTH & EDUCATION BUILDING CORPORATION--(CONTINUED)
$ 500,000 Salve Regina College Connie Lee Insured 6.25%,
3/15/13......................................... NR/AAA $ 546,875
400,000 Salve Regina College LOC-Fleet Bank Pre-refunded
U.S. Treasury 7.70%, 1/1/20..................... A-2/NR 427,000
300,000 Salve Regina College Pre-refunded U.S. Treasury
Connie Lee Insured 6.30%, 3/15/20............... NR/AAA 327,006
525,000 Johnson & Wales College Connie Lee Insured 5.75%,
4/1/12.......................................... NR/AAA 564,375
500,000 St. Antoine Residence LOC-Allied Irish 6.75%,
11/15/18........................................ Aa-3/NR 543,750
80,000 Landmark Medical Center Escrowed to Maturity
7.625%, 7/1/99.................................. NR/AAA 81,295
500,000 Landmark Medical Center Pre-refunded U.S. Treasury
8.375%, 7/1/09.................................. NR/AAA 527,160
575,000 Kent County Hospital MBIA Insured 7.00%, 7/1/10... Aaa/AAA 627,469
200,000 Memorial Hospital MBIA Insured 6.50%, 7/1/04...... Aaa/AAA 221,000
140,000 Miriam Hospital Pre-refunded U.S. Treasury 7.00%,
4/1/06.......................................... NR/A 144,985
400,000 Miriam Hospital Pre-refunded U.S. Treasury 6.35%,
4/1/08.......................................... NR/A 446,000
900,000 Miriam Hospital Pre-refunded U.S. Treasury 7.25%,
4/1/11.......................................... NR/A 932,949
300,000 Rhode Island Hospital FGIC Insured 6.70%,
8/15/04......................................... Aaa/AAA 328,125
600,000 Women & Infants Hospital CGIC Insured 6.55%,
9/1/13.......................................... Aaa/AAA 660,000
100,000 United Methodist Elder Care LOC-Fleet Bank 7.50%,
11/1/14......................................... A/A 113,000
125,000 New England Tech Inst. Connie Lee Insured 6.00%,
3/1/15.......................................... NR/AAA 135,156
-----------
TOTAL RHODE ISLAND HEALTH & EDUCATION BUILDING
CORPORATION..................................... $12,650,674
RHODE ISLAND HOUSING & MORTGAGE FINANCE CORPORATION (16.21%)(a)
$ 5,000 9.30%, 7/1/04, FGIC Insured....................... Aaa/AAA $ 5,002
40,000 7.625%, 10/1/04................................... Aa-2/AA 41,210
200,000 5.65%, 10/1/07.................................... NR/A 209,250
300,000 8.00%, 10/1/08.................................... Aa-2/AA+ 306,000
500,000 7.80%, 10/1/10, Series A.......................... Aa-2/AA+ 526,250
300,000 7.60%, 10/1/20.................................... NR/A 313,500
90,000 7.80%, 10/1/11.................................... Aa-2/AA+ 92,738
375,000 7.50%, 10/1/11.................................... Aa-2/AA+ 397,031
200,000 7.80%, 10/1/11.................................... Aa-2/AA+ 206,624
200,000 5.70%, 4/1/15..................................... Aa-2/AA+ 207,000
500,000 5.75%, 4/1/17..................................... Aa-2/AA+ 522,500
</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>
MUNICIPAL SECURITIES--(CONTINUED)
RHODE ISLAND HOUSING & MORTGAGE FINANCE CORPORATION--(CONTINUED)
$ 200,000 6.25%, 4/1/17..................................... Aa-2/AA+ $ 211,750
110,000 7.95%, 10/1/20.................................... NR/A 113,727
80,000 7.25%, 10/1/21.................................... Aa-2/AA+ 84,600
260,000 7.875%, 10/1/21, MBIA Insured..................... Aaa/AAA 267,426
440,000 7.875%, 10/1/22................................... Aa-2/AA+ 454,472
45,000 7.75%,4/1/22...................................... Aa-2/AA+ 46,856
345,000 7.55%, 10/1/22.................................... Aa-2/AA+ 365,700
300,000 6.50%, 10/1/22.................................... Aa-2/AA+ 318,375
1,250,000 6.70%, 10/1/15.................................... Aa-2/AA+ 1,348,437
500,000 6.15%, 4/1/17..................................... Aa-2/AA+ 528,125
55,000 5.875%, 4/1/25.................................... Aa-2/AA+ 56,856
300,000 6.50%, 4/1/27..................................... Aa-2/AA+ 318,000
65,000 6.85%, 4/1/27..................................... Aa-2/AA+ 70,200
-----------
TOTAL RHODE ISLAND HOUSING & MORTGAGE FINANCE
CORPORATION..................................... $ 7,011,629
RHODE ISLAND INDUSTRIAL FACILITIES CORPORATION (0.73%)(a)
$ 45,000 Inge Corporation SBA GTD 9.125%, 10/1/00.......... Aaa/NR $ 45,173
250,000 Mobil Oil 6.00%, 11/1/14.......................... Aa-2/AA 269,062
-----------
TOTAL RHODE ISLAND INDUSTRIAL FACILITIES
CORPORATION..................................... $ 314,235
-----------
TOTAL RHODE ISLAND BONDS (98.18%)(a).............. $42,459,572
PUERTO RICO BONDS (0.57%)(A)
$ 225,000 Puerto Rico Highway Pre-refunded U.S. Treasury
7.70%, 7/1/03................................... Baa1/AAA $ 244,688
-----------
TOTAL PUERTO RICO BONDS (0.57%)(a)................ $ 244,688
-----------
TOTAL INVESTMENTS (Cost $39,936,225)(92.34%)(a)... $42,704,260
===========
</TABLE>
(a) Percentages indicated are based on net assets of $43,247,659 at October 31,
1998 (total investments plus cash and receivables less liabilities) which
corresponds to a net asset value per share of $10.71.
(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.
16
<PAGE> 17
OCEAN STATE TAX EXEMPT FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
(d) Abbreviations used:
AMBAC -- American Municipal Bond Assurance Corp.
CGIC -- Capital Guaranty Insurance Co.
FGIC -- Financial Guaranty Insurance Co.
FSA -- Financial Security Assurance Inc.
MBIA -- Municipal Bond Investors Assurance Corp.
LOC -- Letter of Credit
SBA -- Small Business Administration
CAPMAC -- Capital Markets Assurance Corp.
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, 1998, 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 ten years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998, 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 at October 31, 1998, 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
ten years in the period then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 10, 1998
<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
[OCEAN STATE TAX EXEMPT FUND LOGO]
(THE PORTFOLIO OF VLC TRUST)
ANNUAL REPORT
OCTOBER 31, 1998
INTEREST INCOME EXEMPT
FROM FEDERAL AND RHODE
ISLAND INCOME TAXES
FROM QUALITY MUNICIPAL
BONDS.
