N-CSR 1 ocean_ncsr.txt BODY OF N-CSR N-CSR 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-4788 VLC TRUST (Exact name of registrant as specified in charter) ONE REGENCY PLAZA, PROVIDENCE, RHODE ISLAND 02903 (Address of principal executive offices) MARGARET D. FARRELL, ESQ. SECRETARY HINCKLEY, ALLEN & SNYDER LLP 1500 FLEET CENTER PROVIDENCE, RHODE ISLAND 02903 (Name and address of agent for service) Registrant's telephone number, including area code: (401) 421-1411 Date of fiscal year end: October 31 Date of reporting period: October 31, 2006 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ------------------------------------------------------------------------------- TABLE OF CONTENTS OCTOBER 31, 2006 ITEM 1 The following is a copy of the report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1) OCEAN STATE TAX EXEMPT FUND [LOGO] REPORT OF THE PRESIDENT October 31, 2006 Interest rates. Are they going up, down or staying where they are? It appears that the economy is still digesting the Federal Reserve Board's 17 rate increases since June, 2004. Though there is a general sense in the market that we are not going to see higher rates the odds that rates will be lowered in the 1st quarter are growing dim. Stronger than expected employment and services growth numbers may have delayed any imminent downward rate move. Market pundits have been surprised at the relative strength of bonds. Instead of a normal (upward sloping) yield curve the current curve is flat, where short-term yields are almost the same as long-term yields. Why is there so little difference in yields across the maturity spectrum? When we look at the current yield curve it represents not just today's environment but it also incorporates expectations of the future investment environment in terms of yields, inflation and both boom and recessionary fears among many other factors. The theory that longer-term rates are determined by investor expectations of future short-term rates is commonly known as the "expectations theory". Add in a dearth of longer-term investment alternatives, foreign investment in our markets and maturity extension of portfolios in pursuit of higher yields - the result is lower long-term yields. What does this environment mean for Ocean State Tax Exempt Fund (the "Fund") shareholders? The Ocean State fund takes a long-term approach to investing regardless of the market environment. The Fund aims to strike a balance between risk and return. Management is committed to meeting its objective to provide a high level of current net income, exempt from Rhode Island and Federal income taxes*, as is consistent with preservation of capital. Happy holidays! Sincerely yours, /s/ Alfred B. Van Liew /s/ John H. St. Sauveur Alfred B. Van Liew John H. St. Sauveur President Chairman of the Board of Trustees * For certain investors, some dividends may be subject to Federal and State taxes. NOT A PART OF THE ANNUAL REPORT OCEAN STATE TAX EXEMPT FUND INVESTMENT PERFORMANCE REVIEW as of October 31, 2006
Prior November 1, 2005 Fiscal Year November 1, 2001 November 1, 1996 through Ended through through October 31, 2006 October 31, 2005 October 31, 2006 October 31, 2006 ---------------- ---------------- ---------------- ---------------- Total Rate of Return (b) Based on: Net Asset Value ....................... 3.56% 0.565% 3.14% 4.11% Offering Price ........................ (0.55)% (3.50)% 2.29% 3.68% As of As of October 31, 2006 October 31, 2005 ---------------- ---------------- 30-day Current Yield Based on: Net Asset Value ....................... 3.30% 3.04% Offering Price ........................ 3.17% 2.92% 30-day Tax-Equivalent Yield (a) Based on: Net Asset Value ....................... 5.64% 5.20% Offering Price ........................ 5.42% 4.99%
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 12.2 years as of October 31, 2006. The average quality rating of the investments, in the following table was Aaa/AAA (Moody's and Standard & Poor's bond rating services). Portfolio Quality Analysis % of Total Portfolio ------------------------ as of as of Rating 10/31/06 10/31/05 ------ -------- -------- Aaa/AAA ............................................ 66.50% 68.14% Aa/AA .............................................. 25.94% 24.55% A .................................................. 2.01% 3.52% Baa/BBB ............................................ 5.55% 3.79% Not Rated .......................................... 0% 0% The Fund will continue its policy of seeking the highest tax advantaged yields available, consistent with maintaining quality and diversification objectives. (a) For 2005, shareholders were subject to a maximum Federal tax rate of 35% and a Rhode Island tax rate of 9.90% of Federal taxable income. All interest income is exempt from local, state and Federal taxes for Rhode island residents. Capital gains taxes will apply to any distributed capital gains. (b) Past performance is no guarantee of future results. Total return does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The offering price reflects a maximum sales charge of 4.00%. 2 Management's Discussion of Investment Performance October 31, 2006 marked the end of the Fund's nineteenth fiscal year. During the prior 12 months, the Fund's net asset value (NAV) declined from $10.16 to $10.15. The Fund's dividend distribution stayed steady at $0.36 per share during the year while the Fund's total return on net asset value was 3.56%.* During the year the Fund's management shortened the Fund's average maturity from 13 to 12 years while the Aaa/AAA component of the portfolio was reduced to 67%. Due to the relatively flat yield curve environment the Fund's management refrained from extending the maturity of the Fund's portfolio. Management continues to emphasize call protection in the lingering low long- term interest rate environment. Insured general obligation bonds still represent the largest sector weighting of the bond's portfolio followed by insured revenue bonds.** Fund management remains focused on the Fund's investment objective to provide as high a level of current income, exempt from Federal and Rhode Island tax, as is consistent with the preservation of principal. * A portion of the Fund's income may be subject to federal income and/or state income tax. The total return on net asset value does not include the 4.00% maximum sales charge. ** Private insurance does not decrease the risk of loss of principal associated with this investment. 3 The following graph compares the performance of the Fund to the performance of the Lehman Brothers Municipal Bond Index. The graph assumes a $10,000 hypothetical investment at November 1, 1996 through October 31, 2006 with all distributions reinvested in shares. The Fund information with respect to Class A Shares reflects the maximum sales charge of 4% and all Fund expenses. The Index graph line does not reflect any expenses or sales charges. The performance table and graph of the Fund do not reflect the deduction of taxes that a shareholder would pay on Fund capital gains distributions or the redemption of shares. All performance data represents past performance and should not be considered indicative of future performance. PERFORMANCE COMPARISON OCEAN STATE TAX-EXEMPT FUND VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX [GRAPHIC OMITTED]
---------------------------------------------------------------------------------------------------------------------------------- OCT-31-96 OCT-31-97 OCT-31-98 OCT-31-99 OCT-31-00 OCT-31-01 OCT-31-02 OCT-31-03 OCT-31-04 OCT-31-05 OCT-31-06 ---------------------------------------------------------------------------------------------------------------------------------- Ocean State Tax- Exempt Fund ....... 9,599 10,268 10,828 10,757 11,426 12,298 12,816 13,277 13,748 13,825 14,318 ---------------------------------------------------------------------------------------------------------------------------------- Lehman Municipal Bond Index ........ 10,000 10,850 11,721 11,512 12,492 13,806 14,616 15,363 16,288 16,704 17,666 ----------------------------------------------------------------------------------------------------------------------------------
The following table shows the Fund's average annual total returns over the past 1, 5 and 10 fiscal years. The information reflects the maximum sales charge of 4%.
Fiscal Year Periods Ending October 31, 2006 Past One Year Past 5 Years Past 10 Years -------------------------- ------------- ------------ ------------- Ocean State Tax-Exempt Fund ...................... -0.55% 2.29% 3.68%
4 Fund Expenses Borne by Shareholders During the Period from May 31, 2006 through October 31, 2006. As a shareholder of the fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on certain purchase payments, and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, May 1, 2006 through October 31, 2006. Actual Expenses The first line in the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line in the table provides information about hypothetical account values and hypothetical expenses based on the fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Expenses Table Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Annualized Beginning Ending Paid During Expense Account Value Account Value* Period** Ratio 5/1/06 10/31/06 5/1/05-10/31/06 ---------- ------------- -------------- --------------- Actual ........................... 1.40% $1,000.00 $1,024.40 $7.14 Hypothetical ..................... 1.40% $1,000.00 $1,025.00 $7.15 * Ending account value reflects the ending account value assuming the actual return per year before expenses (Actual) and a hypothetical 5% return per year before expenses (Hypothetical). ** Expenses paid is equal to the annualized expense ratio for the most recent 6 month period, as shown above, multiplied by the average account value over the period multiplied by the number of days in the period divided by the number of days in the year. Expenses paid do not include any applicable sales charges (loads) or redemption fees. If these transaction costs had been included, your costs would have been higher.
5 OCEAN STATE TAX EXEMPT FUND STATEMENT OF ASSETS AND LIABILITIES as of October 31, 2006 ASSETS Investments at value (identified cost $24,963,392) (Note 1A) .............................. $25,804,722 Cash ...................................................................................... 165,895 Interest receivable ....................................................................... 319,414 Receivable for Capital Stock Sold ......................................................... 25,000 ----------- Total Assets ........................................................................ $26,315,031 LIABILITIES Distribution payable to shareholders ...................................................... $ 35,587 Accrued management fees ................................................................... 12,837 Accrued expenses .......................................................................... 28,899 Payable for Capital Stock Redeemed ........................................................ 42,981 ----------- Total Liabilities ................................................................... $ 120,304 ----------- Net Assets .......................................................................... $26,194,727 =========== Net Assets consist of: Shares of beneficial interest at par ($.01/share) ......................................... $ 25,813 Additional paid-in capital ................................................................ 25,379,950 Accumulated net realized gain on investment transactions .................................. 19,748 Distributions in excess of net investment income .......................................... (72,114) Net unrealized appreciation of investments ................................................ 841,330 ----------- Total -- Representing Net Assets at Value for 2,581,330 Shares Outstanding ................ $26,194,727 =========== Computation of Net Asset Value & Offering Price: Net Assets ................................................................................ $26,194,727 Divided by number of shares outstanding ................................................... 2,581,330 Net asset value ........................................................................... $ 10.15 =========== Offering price ............................................................................ $ 10.57 ===========
See Notes to Financial Statements. 6 OCEAN STATE TAX EXEMPT FUND STATEMENT OF OPERATIONS For the year ended October 31, 2006 Investment Income Interest income (Note 1B) .................................................. $1,283,298 Expenses: Adviser fees (Note 2) ......................................... $ 94,205 Administrator fees (Note 2) ................................... 67,289 Transfer agent fees ........................................... 88,807 Auditing fees ................................................. 40,429 Legal fees and expenses ....................................... 27,913 Trustees fees and expenses .................................... 25,000 Custody ....................................................... 22,979 Distribution expenses (Note 5) ................................ 17,382 Shareholder reports ........................................... 8,250 Miscellaneous expenses ........................................ 3,238 Pricing fees .................................................. 3,000 Registration fees ............................................. 1,975 Insurance ..................................................... 1,377 -------- $401,844 ---------- Net Investment Income ................................................ $ 881,454 Realized and Unrealized Gain/(Loss) on Investments Net Realized Loss on Investments ................................ $ (2,865) Net Change in Unrealized Appreciation of Investments ............ 63,643 -------- Net Realized and Unrealized Gain on Investments ............................ 60,778 ---------- Net Increase in Net Assets Resulting from Operations ....................... $ 942,232 ==========
See Notes to Financial Statements. 7 OCEAN STATE TAX EXEMPT FUND STATEMENTS OF CHANGES IN NET ASSETS
Fiscal Year Fiscal Year Ended Ended October 31, 2006 October 31, 2005 ---------------- ---------------- Increase (Decrease) in Net Assets Resulting from: Operations: Net investment income ...................................... $ 881,454 $ 972,986 Net realized gain/(loss) on investments .................... (2,865) 121,718 Change in unrealized appreciation/(depreciation) of investments ............................................ 63,643 (931,565) ----------- ----------- Net increase in net assets resulting from operations ....... $ 942,232 $ 163,139 Dividends and distributions to shareholders from: Net investment income ($.33 per share in 2006 and $.34 per share in 2005) ................................... (881,453) (965,687) Net realized gains ($.03 per share in 2006 and $.02 per share in 2005) ................................... (92,289) (62,898) ----------- ----------- Total distributions to shareholders .................... (973,742) (1,028,585) Net (decrease) from fund share transactions (Note 4) ....... (1,942,463) (2,551,021) ----------- ----------- Total (decrease) in net assets ......................... (1,973,973) (3,416,467) NET ASSETS: Beginning of year .......................................... 28,168,700 31,585,167 ----------- ----------- End of year ................................................ $26,194,727 $28,168,700 =========== =========== Distribution in excess of net investment income .............. (72,114) (72,457)
See Notes to Financial Statements. 8 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.
Fiscal Fiscal Fiscal Fiscal Fiscal Year Year Year Year Year Ended Ended Ended Ended Ended 10/31/06 10/31/05 10/31/04 10/31/03 10/31/02 -------- -------- -------- -------- -------- Per Share Operating Performance: Net Asset Value, Beginning of Year ..................... $ 10.16 $ 10.46 $ 10.48 $ 10.54 $ 10.55 Net investment income .................................. .33 .34 .35 .42 .45 Net realized and unrealized gain (loss) on investments . (.02) (.28) .01 (.03) (.01) ------- ------- ------- ------- ------- Total from Investment Operations ....................... .35 .06 .36 .39 .44 ------- ------- ------- ------- ------- Less Distributions: Dividends from net investment income ................... (.33) (.34) (.35) (.42) (.45) Distribution from net realized gains ................... (.03) (.02) (.03) (.03) (.00) ------- ------- ------- ------- ------- Total Distributions .................................... (.36) (.36) (.38) (.45) (.45) ------- ------- ------- ------- ------- Net Asset Value, End of Year ........................... $ 10.15 $ 10.16 $ 10.46 $ 10.48 $ 10.54 ======= ======= ======= ======= ======= Total investment return at Net Asset Value (a) ......... 3.56% 0.56% 3.55% 3.60% 4.21% Ratios and Supplemental Data: Net Assets, End of Year (000's omitted) ............... $26,195 $28,169 $31,585 $33,115 $36,089 Ratio of expenses to average net assets ................ 1.49% 1.39% 1.24% 1.06% 1.04% Ratio of net investment income to average net assets ............................................ 3.28% 3.27% 3.40% 3.82% 4.25% Portfolio turnover ..................................... 1% 13% 15% 19% 17% Fund expenses per share ................................ .15 .14 .13 .12 .11 Net investment income per share ........................ .33 .34 .35 .42 .45 (a) Total investment return does not reflect sales load.
Average share method was used to calculate financial highlights. See Notes to Financial Statements. 9 OCEAN STATE TAX EXEMPT FUND NOTES TO FINANCIAL STATEMENTS October 31, 2006 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. The Declaration of Trust permits the Trustees to create additional portfolios (funds). As of October 31, 2006 there is only one fund, Ocean State Tax Exempt Fund (the Fund). The objective of the Fund 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 obligations which pay interest exempt from Rhode Island and Federal income taxes. The Fund commenced operations on December 8, 1986. At October 31, 2006, 93.15% of the Fund's net assets are invested in Rhode Island municipal securities. Economic changes affecting 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, 2006, 76.21% 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 21.42% of the portfolio. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 at least weekly on the basis of valuations furnished by a pricing service since such valuations are believed to reflect the fair value of such securities, and adjusted as needed by management based on appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, broker quotes and other local market conditions. Valuations developed through pricing techniques may vary from the actual amounts realized upon sale of the securities. 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 10 OCEAN STATE TAX EXEMPT FUND NOTES TO FINANCIAL STATEMENTS -- (Continued) October 31, 2006 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 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. The tax character of distributions as reported on the Statements of Changes in Net Assets for the years ended October 31, 2006 and 2005 were as follows: 2006 2005 Tax-Exempt Income .................. $878,381 $965,687 Long-Term Capital Gains ............ 92,289 62,898 Taxable Ordinary Income ............ 3,072 0 The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States. The book/tax differences are either considered temporary or permanent in nature. Temporary differences are generally due to differing book and tax treatments of market discounts. Permanent differences are generally due to the treatment of market discount upon disposition. Permanent book and tax basis differences may result in reclassifications to undistributed (distributions in excess of) net investment income, accumulated net realized gain (loss) and paid-in capital. As of October 31, 2006 the components of distributable earnings on a tax basis were as follows: Unrealized Appreciation ........................ $862,378 Undistributed Tax-Exempt Income ................ -- Capital Loss Carryforward ...................... (1,300) Capital loss carryforward expires on 10/31/14. 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. 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 pays 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. 11 OCEAN STATE TAX EXEMPT FUND NOTES TO FINANCIAL STATEMENTS -- (Continued) October 31, 2006 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, 2006 was $2,000. The Chairman of the Board of Trustees annual retainer is $4,000. The Chairman of the Audit Committee's annual retainer is $2,500. Legal fees and expenses of $27,913 were paid to a firm of which the Fund's Secretary is a partner. Van Liew Securities, Inc. a subsidiary of the Adviser, is the Distributor of the Fund (the "Distributor"). During the period November 1, 2005 through October 31, 2006, the Distributor received $1,109 in commissions as a result of Fund share sales. NOTE 3 Investment Transactions During the period ended October 31, 2006 purchases and sales of investment securities, other than short-term investments, aggregated $200,000 and $2,334,878, respectively. The aggregate cost of investments for Federal income tax purposes was $24,942,344. At October 31, 2006, gross unrealized appreciation on investment securities was $852,723 and gross unrealized depreciation on investment securities was $11,393. NOTE 4 Shares of benefifical 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:
Shares Amount ------ ------ Balance at 10/31/04 ............................ 3,020,782 $29,882,952 Shares sold .................................... 140,947 1,456,842 Shares issued in reinvestment of dividends ..... 49,576 511,851 Shares redeemed ................................ (437,652) (4,519,714) --------- ----------- Net decrease ................................... (247,129) (2,551,021) --------- ----------- Balance at 10/31/05 ............................ 2,773,653 $27,331,931 ========= =========== Shares sold .................................... 51,974 525,457 Shares issued in reinvestment of dividends ..... 47,149 476,296 Shares redeemed ................................ (291,446) (2,994,216) --------- ----------- Net decrease ................................... (192,323) (1,942,463) --------- ----------- Balance at 10/31/06 ............................ 2,581,330 $25,389,468 ========= ===========
12 OCEAN STATE TAX EXEMPT FUND NOTES TO FINANCIAL STATEMENTS -- (Continued) October 31, 2006 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 $17,382 under the Plan during fiscal 2006. NOTE 6 New Accounting Pronouncements On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions will "more-likely-than-not" be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely- than-not threshold would be recorded as a tax benefit or expense in the reporting period. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. At this time, management is evaluating the implications of FIN 48 and any impact in the financial statements has not been determined. In September 2006, FASB Statement No. 157, Fair Value Measurements (the "Statement") was issued, and is effective for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements. Management is evaluating the application of the Statement to the Fund, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Statement on the Fund's financial statements. 13 OCEAN STATE TAX EXEMPT FUND PORTFOLIO OF INVESTMENTS as of October 31, 2006
Ratings Principal Moody's/ Value Amount Standard & Poor's (b) (Note 1) --------- --------------------- -------- MUNICIPAL SECURITIES (98.51%) (a) Rhode Island General Obligation and Revenue (63.79%) (a) $ 500,000 Barrington School District 5.00%, 10/1/14 .......................... Aa-2/NR $ 529,325 200,000 Burrillville General Obligation FGIC Insured 5.70%, 5/1/11 ......... Aaa/AAA 204,490 250,000 Cranston General Obligation FSA Insured 5.00%, 2/15/24 ............. Aaa/AAA 264,835 250,000 Cranston General Obligation FSA Insured 5.00%, 2/15/22 ............. Aaa/AAA 265,808 225,000 Middletown General Obligation 4.00%, 7/15/12 ....................... Aa-3/NR 228,778 80,000 North Kingstown General Obligation 6.80%, 12/15/06 ................. Aa-3/NR 80,293 200,000 North Kingstown General Obligation FGIC Insured 5.70%, 10/1/18 .................................................... Aaa/NR 213,476 250,000 North Providence General Obligation FSA Insured 4.00%, 10/15/17 ................................................... Aaa/AAA 252,873 500,000 Providence General Obligation FSA Insured 5.00%, 7/15/14 ........... Aaa/AAA 544,580 150,000 Providence Public Bldg. Auth. MBIA Insured 5.50%, 12/15/13 ......... Aaa/AAA 153,310 500,000 Providence Public Bldg. Auth. AMBAC Insured 5.125%, 12/15/14 ....... Aaa/AAA 532,290 685,000 Providence Public Bldg. Auth. FSA Insured 5.00%, 12/15/18 .......... Aaa/AAA 712,194 250,000 Providence Public Bldg. Auth. AMBAC Insured 5.25%, 12/15/15 ........ Aaa/AAA 266,140 500,000 Providence Redevelopment Auth. AMBAC Insured, 5.30%, 4/1/12 ........ Aaa/NR 530,970 200,000 Providence Redevelopment Radian Insured 4.25%, 9/1/13 .............. NR/AA 203,670 8,000 Warwick General Obligation MBIA Insured 6.60%, 11/15/06 ............ Aaa/AAA 8,008 250,000 Warwick General Obligation FSA Insured 4.00%, 7/15/11 .............. Aaa/AAA 254,603 250,000 Warwick General Obligation FSA Insured 4.125%, 7/15/13 ............. Aaa/AAA 255,920 500,000 West Warwick General Obligation 5.00%, 10/15/25 .................... A-3/NR 518,360 225,000 Rhode Island Clean Water MBIA Insured 5.00%, 10/1/18 ............... Aaa/AAA 236,054 500,000 Rhode Island Clean Water MBIA Insured 5.00%, 10/1/19 ............... Aaa/AAA 539,585 500,000 Rhode Island Clean Water MBIA Insured 4.40%, 10/1/25 ............... Aaa/AAA 509,215 650,000 Rhode Island Depositors Economic Protection Corp. MBIA Insured Escrowed to Maturity 6.55%, 8/1/10 ................................ Aaa/AAA 698,129 215,000 Rhode Island Depositors Economic Protection Corp. CAPMAC Guaranteed Escrowed to Maturity 6.375%, 8/1/22 ............................... Aaa/AAA 276,855 250,000 Rhode Island Depositors Economic Protection Corp. Escrowed to Maturity 5.75%, 8/1/21 ............................................ Aaa/NR 298,670 500,000 Rhode Island Economic Department of Transportation AMBAC Insured 3.75%, 6/15/13 .................................................... Aaa/AAA 503,485 500,000 Rhode Island Economic Development Corp. Airport Revenue FSA Insured 5.25%, 7/1/12 ..................................................... Aaa/AAA 518,120 395,000 Rhode Island Economic Development Corp. Airport Revenue FSA Insured 5.25%, 7/1/13 ..................................................... Aaa/AAA 409,184 545,000 Rhode Island Economic Development Corp. Airport Revenue FSA Insured 5.25%, 7/1/14 ..................................................... Aaa/AAA 564,484 450,000 Rhode Island Economic Development Corp. Airport Revenue FSA Insured 5.00%, 7/1/18 ..................................................... Aaa/AAA 463,478 14 OCEAN STATE TAX EXEMPT FUND PORTFOLIO OF INVESTMENTS -- (Continued) Ratings Principal Moody's/ Value Amount Standard & Poor's (b) (Note 1) --------- --------------------- -------- MUNICIPAL SECURITIES (a) -- (continued) Rhode Island General Obligation and Revenue (continued) $ 900,000 Rhode Island Economic Development Corp. Providence Place Radian Insured 6.125%, 7/1/20 ............................................ NR/AA $ 992,142 100,000 RI COPS MBIA Insured 5.375%, 10/1/16 ............................... Aaa/AAA 102,532 250,000 RI COPS Kent County Courthouse MBIA Insured 5.00%, 10/1/22 ......... Aaa/AAA 265,930 300,000 Rhode Island Lease Participation Certificate Shepard Bldg. AMBAC Insured 5.125%, 6/1/12 ............................................ Aaa/AAA 305,661 500,000 Rhode Island Refunding Bond Authority AMBAC Insured 5.25%, 2/1/10 ..................................................... Aaa/AAA 515,200 500,000 Rhode Island General Obligation MBIA Insured 5.00%, 9/1/18 ......... Aaa/AAA 531,520 300,000 Rhode Island General Obligation FGIC Insured 5.125%, 7/15/14 ....... Aaa/AAA 310,035 1,000,000 Rhode Island General Obligation FGIC Insured 5.50%, 9/1/16 ......... Aaa/AAA 1,061,860 250,000 Rhode Island Cons. Cap. Dev. FGIC Insured 5.00%, 9/1/16 ............ Aaa/AAA 258,917 250,000 Rhode Island Cons. Cap. Dev. FGIC Insured 5.00%, 9/1/15 ............ Aaa/AAA 258,917 1,000,000 Tobacco Settlement Financing Corp. 6.25%, 6/1/42 ................... Baa-3/BBB 1,068,420 ----------- Total Rhode Island General Obligation and Revenue ................... $16,708,316 ----------- Rhode Island Health & Education Building Corporation (23.26%)(a) $ 100,000 University of Rhode Island AMBAC Insured 5.20%, 9/15/15 ............ Aaa/AAA $ 106,856 300,000 University of Rhode Island AMBAC Insured 5.20%, 9/15/16 ............ Aaa/AAA 320,568 100,000 Bryant College AMBAC Insured 4.60%, 6/1/12 ......................... Aaa/AAA 105,113 780,000 Brown University 5.25%, 9/1/16 ..................................... Aa-1/AA+ 832,962 400,000 Brown University 5.00%, 9/1/19 ..................................... Aa-1/AA+ 408,788 500,000 Brown University 5.00%, 9/1/23 ..................................... Aa-1/AA+ 511,065 250,000 Salve Regina College Radian Insured 5.25%, 3/15/18 ................. NR/AA 265,473 750,000 Johnson & Wales College MBIA Insured 5.00%, 4/1/29 ................. Aaa/AAA 774,045 500,000 Johnson & Wales College XL Capital 5.25%, 4/1/14 ................... Aaa/AAA 544,450 250,000 Rhode Island School of Design MBIA Insured 4.40%, 6/1/15 ........... Aaa/AAA 259,832 585,000 Rhode Island School of Design MBIA Insured 4.60%, 6/1/17 ........... Aaa/AAA 611,653 500,000 St. Antoine Residence LOC-Allied Irish Bank 6.125%, 11/15/18 ....... Aa-3/NR 526,430 300,000 Lifespan MBIA Insured 5.75%, 5/15/23 ............................... Aaa/AAA 309,451 500,000 Times 2 Academy LOC-Citizens Bank 5.00%, 12/15/24 .................. Aa2/NR 517,160 ----------- Total Rhode Island Health & Education Building Corporation ......... $ 6,093,846 ----------- Rhode Island Housing & Mortgage Finance Corporation (6.10%)(a) $ 200,000 3.95%, 10/1/15 ..................................................... Aa-2/AA+ $ 201,100 400,000 5.00%, 10/1/16 ..................................................... Aa-2/AA+ 412,876 10,000 6.50%, 10/1/22 ..................................................... Aa-2/AA+ 10,038 950,000 4.30%, 10/1/17 ..................................................... Aa-2/AA+ 968,183 5,000 6.50%, 4/1/27 ...................................................... Aa-2/AA+ 5,040 ----------- Total Rhode Island Housing & Mortgage Finance Corporation .......... $ 1,597,237 ----------- TOTAL RHODE ISLAND BONDS (93.15%) (a) .............................. $24,399,399 ----------- 15 OCEAN STATE TAX EXEMPT FUND PORTFOLIO OF INVESTMENTS -- (Continued) Ratings Principal Moody's/ Value Amount Standard & Poor's (b) (Note 1) --------- --------------------- -------- MUNICIPAL SECURITIES (a) -- (continued) Puerto Rico Bonds (5.36%) (a) $ 350,000 Puerto Rico Commonwealth 5.00%, 7/1/29 ............................. Baa3/B $ 363,972 500,000 Puerto Rico Electric Power Authority MBIA Insured 5.125%, 7/1/29 .................................................... Aaa/AAA 527,195 500,000 Puerto Rico Municipal Finance Auth. FSA Insured 5.50%, 7/1/17 ..................................................... Aaa/AAA 514,156 ----------- TOTAL PUERTO RICO BONDS (5.36%) (a) ................................ $ 1,405,323 ----------- TOTAL INVESTMENTS (Cost $24,963,392)(95.30%) (a) ................... $25,804,722 ----------- OTHER ASSETS AND LIABILITIES (1.49%) ............................... $ 390,005 ----------- TOTAL NET ASSETS (100%) ............................................ $26,194,727 =========== (a) Percentages indicated are based on net assets of $26,194,727 at October 31, 2006 (total investments plus cash and receivables less liabilities) which corresponds to a net asset value per share of $10.15. (b) 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 and are unaudited. The ratings indicated are the most current available and are unaudited. 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. 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) (c) Abbreviations used: AMBAC -- American Municipal Bond Assurance Corp. FGIC -- Financial Guaranty Insurance Co. FSA -- Financial Security Assurance Inc. MBIA -- Municipal Bond Investors Assurance Corp. LOC -- Letter of Credit CAPMAC -- Capital Markets Assurance Corp. Radian -- Radian Insurance Co.
See Notes to Financial Statements. 16 REPORT OF ERNST & YOUNG LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Trustees of VLC Trust and Shareholders of Ocean State Tax Exempt Fund We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Ocean State Tax Exempt Fund (the "Fund") (the only portfolio of the VLC Trust), as of October 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006 by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Ocean State Tax Exempt Fund of VLC Trust, at October 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts December 8, 2006 17 TAX INFORMATION (Unaudited) For the year ended October 31, 2006 the amount of long-term capital gains distributions designated by the Fund was $92,289. The amount of tax exempt interest dividends distributed by the Fund was $878,381. The amount of ordinary income dividends distributed by the Fund was $3,072. 18 Trustees and Officers The Trustees of the Fund are responsible for the management and direction of the business and affairs of the Fund. The Trustees and officers of the Fund, their affiliations, if any, with the Adviser, and their principal occupations during at least the past five years are set forth below. Trustees who are "interested persons" of the Fund as that term is defined in the 1940 Act are designated with an (*) asterisk. Age of the Trustee is in parentheses (). The VLC Trust consists of one investment portfolio. The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q is available on the Commissions website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Statement of Additional Information includes additional information about Trustees and is available along with Form N-Q, without charge and upon request, by calling 401-421-1411. Trustees Background
Name, Address and Age Position(s) Held with Fund Principal Occupation(s) During Past Five Years --------------------- -------------------------- ---------------------------------------------- Alfred B. Van Liew (71) President (since 1987) and Managing Partner of the Adviser since 1984; One Regency Plaza Trustee (since 1986) Director of the Distributor since May 1990; Suite One Chairman and Chief Executive Officer of Van Providence, Rhode Island 02903 Liew Trust Company, a Rhode Island chartered trust company; Trustee of Preserve 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 Seamen's Institute, Newport, Rhode Island since 1994. John St. Sauveur (72) Chairman (since 2006) and Director of the Adviser until 2005; President 219 Great Road Trustee (since 1992) and CEO, WestBank Realty Corporation; North Smithfield, Director, Community College of Rhode Island Rhode Island 02896 Foundation; Chairman, Woonsocket Industrial Development Corporation; Chairman, Greater Woonsocket Industrial Development Foundation; Vice-Chairman, North Smithfield Industrial Development Commission; a Vice President and Director, Rhode Island Chamber of Commerce Federation; Member, Rhode Island State Job Training Coordination Council; Finance Chairman, Landmark Health System; Trustee, Landmark Medical Center; Commissioner of the Rhode Island Resource Recovery Corporation (1992-present); Chairman, The Rehabilitation Hospital of Rhode Island; Director and Corporate Secretary, Gooding Realty Corporation. 19 Name, Address and Age Position(s) Held with Fund Principal Occupation(s) During Past Five Years --------------------- -------------------------- ---------------------------------------------- Mary Ann Altrui (64) Trustee (since 2001) Executive Director of St. Antoine Residence 10 Rhodes Avenue and Villa at St. Antoine (1988-present); North Smithfield, Director of Diocesan Elder Care Services Rhode Island 02896 (1997-present); oversight responsibility for St. Clare Home (a 44-bed nursing facility in Newport, RI); founding member with St. Elizabeth Community, Scandinavian Home, and Steere House of "CareLink" (a management service organization incorporated in 1977); member of American College of Health Care Administrators; Board member of Visiting Nursing Services of Greater Rhode Island; advisory committee member for the Diocese of Providence, the State of Rhode Island and the Nonprofit Association of Facilities and Services for the Aging. Milton C. Bickford, Jr. (75) Trustee (since 1987) Private investor since 1989; Director 147 Beavertail Road (Chairman 1999-2002) of AAA Southern New Jamestown, Rhode Island 02835 England; Director, AAA Southern New England Bank (1999-2005); Trustee, National Traffic Safety Foundation (1999-2000). Meredith A. Curren (46) Trustee (since 2001) Chief Executive Officer, Pease & Curren, Inc. 75 Pennsylvania Avenue (refiners of precious metals) since 1990; Warwick, Rhode Island 02888 Director, Bancorp Rhode Island, Inc. and Bank Rhode Island; Board Member, Providence Jewelers Club; Board Member, Providence Chamber of Commerce; Partner, SVP RI, Social Venture Partners of RI.; Board Member, Research Engineering & Manufacturing, Inc. Michael E. Hogue (64) Trustee (since 1989) Managing Partner, eTime (insurance services) 116 Chestnut Street (February 2002-present); President, VIAcorp Providence, Rhode Island 02903 (financial services) (June 1994-present); Assistant Professor of Insurance at the Wharton School, University of Pennsylvania; Trustee Emeritus, Trinity Repertory Company (1997-present); President, Jewelry District Association (1999-present). 20 Name, Address and Age Position(s) Held with Fund Principal Occupation(s) During Past Five Years --------------------- -------------------------- ---------------------------------------------- Arthur H. Lathrop (51) Trustee (since 2001) In practice as a Certified Public Accountant 3 Orleans Court (sole proprietor) in Westerly, RI (1991- Westerly, Rhode Island 02891 present); Director and Audit Committee member, Newport Federal Savings Bank and Newport Bancorp, Inc. (2005-present); Trustee, Westerly Savings Bank (1993 2005); Trustee and Treasurer, River Bend Cemetery Company (1990-present); Incorporator, Community Health Company of Westerly, Inc. (1989-Present); Incorporator, Memorial & Library Association of Westerly (2004- present) Lawrence B. Sadwin (62) Trustee (since 2001) President/CEO, Landmark Healthcare Foundation 18 Oyster Point (since October 2005); President, Lifestyle Warren, Rhode Island 02885 Security, LLC (since August 2002), Division Marketing Leader for General Electric (2000- 2002); Chief Operating Officer (1999-2000), Regional Manager (1998-1999), Recruiter (1997-1998) and Long Term Care Specialist (1997) for Travelers/NET Plus, Inc.; Consultant (1994-1997), MGS Holding Corporation; Member-At-Large, National Board of Directors, American Heart Association; Member, National Leadership Council, Research America; Chairman, Landmark Medical Center; Member and counsel to public representatives, National Institution of Health; Chairman, American Heart Association (2001-2002). Samuel H. Hallowell, Jr. (58) Vice President Partner of the Adviser and Vice President, One Regency Plaza (since 1989) Van Liew Trust Company (1984-present); Suite One Secretary and past Secretary, Audubon Society Providence, Rhode Island 02903 of Rhode Island. Joseph J. Healy (39) Vice President Investment Officer, Fund Controller and One Regency Plaza (since 1996) primary trader of the Adviser (1992-2000); Suite One President and General Securities Principal of Providence, Rhode Island 02903 the Distributor (1993-present). Kevin M. Oates (46) Vice President, Treasurer Partner of the Adviser (1996-present); Chief One Regency Plaza and Chief Compliance Operating Officer of the Adviser and Van Liew Suite One Officer (since 1991) Trust Company (April 2000-present), Vice Providence, Rhode Island 02903 President and Treasurer of the Distributor (1991-present); Vice President-Administration of the Adviser (1991-2000). 21 Name, Address and Age Position(s) Held with Fund Principal Occupation(s) During Past Five Years --------------------- -------------------------- ---------------------------------------------- Margaret D. Farrell (56) Secretary (since 1986) Partner, Hinckley, Allen & Snyder LLP, 1500 Fleet Center general legal counsel to the Fund (1981- Providence, Rhode Island, 02903 present); Secretary, Bancorp Rhode Island, Inc. and Bank Rhode Island; Director, Care New England Health System; Director, Women & Infants Corporation; Trustee, Women and Infants Hospital of Rhode Island; Secretary, Astro-Med, Inc. (manufacturer of graphic recording and printing systems).
Privacy Policy The Van Liew Companies and Ocean State Tax Exempt Fund have always been committed to ensuring your financial privacy. We do not sell personal information to anyone. We recognize and respect the privacy of our customers. This notice is being sent to comply with the privacy regulations of the Securities and Exchange Commission. Each of the above financial institutions has in effect the following policy with respect to nonpublic personal information about its customers. o Only such information received from you, through application forms or otherwise, and information about your transactions will be collected. o None of such information about you (or former customers) will be disclosed to anyone, except as permitted by law (which includes disclosure to employees necessary to service your account). We do not disclose nonpublic personal information about you to non-affiliated third parties. o Policies and procedures (including physical, electronic and procedural safeguards) are in place that are designed to protect the confidentiality of such information. 22 Investment Adviser & Administrator Van Liew Capital Inc. One Regency Plaza, Suite One [LOGO] OCEAN STATE Providence, Rhode Island 02903 TAX EXEMPT FUND (The Portfolio of VLC Trust) Distributor Van Liew Securities, Inc. One Regency Plaza, Suite One Providence, Rhode Island 02903 Custodian PFPC Trust Company Airport Business Center 200 Stevens Drive, Suite 440 Lester, Pennsylvania 19113 Transfer Agent Ocean State Tax Exempt Fund c/o PFPC, Inc. Annual Report P.O. Box 9839 October 31, 2006 Providence, Rhode Island 02903 Independent Registered Public Accounting Firm Ernst & Young LLP 200 Clarendon Street Boston, MA 02116-5072 Counsel Hinckley, Allen & Snyder LLP 1500 Fleet Center Providence, Rhode Island 02903 Trustees John H. St. Sauveur, Chairman Alfred B. Van Liew Mary Ann Altrui Milton C. Bickford, Jr. Meredith A. Curren Interest income exempt Michael E. Hogue from Federal and Rhode Arthur H. Lathrop Island income taxes Lawrence B. Sadwin from quality municipal bonds. Officers Alfred B. Van Liew, President Samuel H. Hallowell, Vice President Joseph J. Healy, Vice President Kevin M. Oates, Chief Compliance Officer and Treasurer Margaret D. Farrell, Secretary ITEM 2. CODE OF ETHICS. (a) The registrant has adopted a code of ethics applicable to its President (as the registrant's principal executive officer), the Treasurer (as the registrant's principal financial and accounting officer) and any other person or persons performing the functions of these offices or the functions of a controller. The registrant undertakes to provide a copy of such code of ethics to any person upon request, without charge, by calling 1-800-330-1116. (b) During the period covered by this report, no amendments were adopted to the registrant's code of ethics applicable to its President, Treasurer or other persons performing the functions of those offices or the functions of a controller. (c) During the period covered by this report, no implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a) above were granted. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The registrant's board has designated Arthur H. Lathrop, an independent trustee, as its audit committee financial expert. Mr. Lathrop is a practicing certified public accountant and sole proprietor in Westerly, Rhode Island. Previously, Mr. Lathrop served as Tax Manager of Sansiveri, Ryan, Sullivan & Co. of Providence and Westerly, Rhode Island. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) - (d) The following table sets forth the aggregate fees billed for the past two fiscal years by the independent auditor Ernst & Young LLP, for professional services rendered for: (i) the audit of the Fund's annual financial statements included in the Fund's annual report to shareholders; and (ii) tax compliance, tax advice and tax return preparation. No fees were paid for audit related or other services. Fiscal Year Ended Audit Audit Related Tax All Other ----------------- ----- ------------- --- --------- October 31, 2005 $35,500 $0 $4,300 $0 October 31, 2006 $35,500 $0 $5,000 $0 (e) (1) The Fund's Audit Committee Charter requires the pre-approval of all audit and non-audit services provided to the Fund by the Fund's independent auditors. The Fund's Audit Committee Charter also requires pre-approval of all audit and non-audit services provided to the Adviser and service affiliates to the extent that these services are directly related to the operations or financial reporting of the Fund. (e) (2) All of the amounts for Audit Fees and Tax Fees in the table above are for services pre-approved by the Fund's Audit Committee. (f) Not applicable. (g) The following table sets forth the aggregate non-audit services for the past two fiscal years provided to the Fund, the Fund's Adviser and entities that control, are controlled by or under common control with the Adviser that provide ongoing services to the Fund, which include conducting an annual internal control report pursuant to Statement on Auditing Standards No. 70 ("Service Affiliates"): All Fees for Non-Audit Total Amount of Services Provided to the Foregoing Column Fund, the Adviser and Pre-Approved by Service Affiliates the Audit Committee ------------------------ ------------------- October 31, 2005 $0 $0 October 31, 2006 $0 $0 (h) Not applicable. No non-audit services were provided to the Fund, the Adviser or any Service Affiliates during the past two fiscal years. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. Registrant is not a listed issuer as defined in Rule 10A-3 of the Securities Exchange Act of 1934. ITEM 6. SCHEDULE OF INVESTMENTS. Please see Schedule of Investments contained in the Report to Shareholders included under Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. Registrant is an open-end management investment company. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. Registrant is an open-end management investment company. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. Registrant is an open-end management investment company. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures conducted within 90 days of the filing date of this report, the President and Treasurer have concluded that those controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act of 1940) provide reasonable assurance that material information required to be disclosed by the registrant in this Form N-CSR has been recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation described above, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 12. EXHIBITS. (a) Any Code of Ethics, or amendment thereto, that is subject to the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit. See Item 2. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940. (i) EX-99.(a) CERT - Certification of President pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (filed herewith). (ii) EX-99.(b) CERT - Certification of Vice President and Treasurer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (filed herewith). (iii) EX-99.906(a) CERT - Certification of President pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (filed herewith). (iv) EX-99.906(b) CERT - Certification of Vice President and Treasurer pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (filed herewith). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) VLC Trust ON BEHALF OF OCEAN STATE TAX EMEMPT FUND Date: January 4, 2007 By: /s/ Alfred B. Van Liew ------------------------------------ Alfred B. Van Liew President Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: January 4, 2007 By: /s/ Alfred B. Van Liew ------------------------------------ Alfred B. Van Liew President Date: January 4, 2007 By: /s/ Kevin M. Oates ------------------------------------ Kevin M. Oates Vice President & Treasurer