<PAGE>
SEPARATE ACCOUNT B
Annual Report
December 31, 1998
PROVIDENT NATIONAL ASSURANCE COMPANY
A Subsidiary of
Provident Companies, Inc.
<PAGE>
MANAGEMENT
BOARD OF MANAGERS OF SEPARATE ACCOUNT B
Henry E. Blaine, Chairman
H. Grant Law, Jr.
David G. Fussell
Susan N. Roth, Secretary
to the Board of Managers
PRINCIPAL OFFICERS OF
PROVIDENT NATIONAL ASSURANCE COMPANY
J. Harold Chandler, Chairman, President and Chief Executive Officer
Thomas R. Watjen, Vice Chairman and Chief Financial Officer
Robert O. Best, Executive Vice President and Chief Information Officer
F. Dean Copeland, Executive Vice President and General Counsel
Thomas B. Heys, Jr., Executive Vice President, Institutional Sales
Peter C. Madeja, Executive Vice President
Jeffrey F. Olingy, Executive Vice President, Sales Support
Robert C. Greving, Senior Vice President and Chief Actuary
Ralph A. Rogers, Senior Vice President and Treasurer
Susan N. Roth, Vice President and Secretary
Vicki W. Corbett, Vice President and Controller
This report and the financial statements attached are submitted solely for the
general information of contract owners of Separate Account B and are not
authorized for other use.
<PAGE>
MESSAGE TO PARTICIPANTS IN
PROVIDENT NATIONAL'S
VARIABLE ANNUITY CONTRACTS
This semiannual report of Separate Account B contains the financial
statements and portfolio information of Separate Account B for the six months
ended December 31, 1998. Comparative figures which relate to Separate Account
B's activities during the second half of 1998 are provided below.
The accumulation unit value for Separate Account B increased 33.4% for the
year 1998, from 11.384926 at year-end 1997 to 15.192155 on December 31, 1998.
During this same period, the S&P 500 index rose by a yield adjusted 28.6%.
Reflecting transfers to the fixed-dollar account, as well as withdrawals and
retirements, the number of accumulation units outstanding on December 31, 1998,
was 1,043,607, down from 1,310,831 twelve months earlier. As a result of
withdrawals, net purchase payments received, and changes in the accumulation
unit value, total contract owners' equity on December 31, 1998, was 18,293,024
compared to 16,453,121 on December 31, 1997.
Performance for 1998 was extremely strong for your fund and for large
stocks in general. The S&P 500 index returned 28.6%, which is the first time in
history the index has grown over 20% annually for four straight years. The
four-year return is a phenomenal 190%, also a record. Performance was fueled by
a surprisingly strong economy, coupled with low inflation and declining interest
rates. Technology, communication services, and health care were the strongest
sectors while energy and basic materials were the weakest. Small stocks
performed poorly. For example the Russell 2000 index (comprised of the smallest
2000 of the largest 3000 companies) was actually down 2.2% for the year, a huge
discrepancy from the large-company-dominated S&P 500 index.
As we head into the final year of the millennium, stock market valuations
are at record highs and interest rates are low. Any negative surprises for the
economy are apt to result in significant market declines. However, the baseline
economic outlook is good with low sustainable gross domestic product growth, low
inflation, an accommodative Federal Reserve, and a strong fiscal position for
the U.S. government that may result in tax cuts or other fiscal stimulus. Fund
performance for 1999 is unlikely to keep up with the pace of the past four
years, but barring unforeseen surprises, the last year of the 1900's could be a
good year.
Thank you for your continued support.
/s/ David Fussell
David Fussell
Chairman, Board of Managers
Provident National Assurance Company
Separate Account B
<PAGE>
Provident National Assurance Company Separate Account B
Audited Financial Statements
December 31, 1998
<TABLE>
<S> <C>
Report of Independent Auditors.................... 1
Statements of Assets and Liabilities.............. 2
Statements of Operations.......................... 3
Statements of Changes in Contract Owners' Equity.. 4
Schedule of Investments........................... 5
Supplementary Information......................... 8
Notes to Financial Statements..................... 10
</TABLE>
<PAGE>
[LOGO OF ERNST & YOUNG] . 300 Krystal Building . Phone: 423-756-2461
One Union Square Fax: 423-267-0304
Chattanooga, Tennessee 37402
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Provident National Assurance Company
Separate Account B
We have audited the accompanying statements of assets and liabilities of
Provident National Assurance Company Separate Account B as of December 31, 1998
and 1997, including the schedule of investments as of December 31, 1998, and the
related statements of operations and changes in variable annuity contract
owners' equity for each of the three years in the period ended December 31,
1998, and the supplementary information for each of the ten years in the period
then ended. These financial statements and supplementary information are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and supplementary information 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 supplementary
information 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
December 31, 1998 and 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and supplementary information referred
to above present fairly, in all material respects, the financial position of
Provident National Assurance Company Separate Account B at December 31, 1998 and
1997, the results of its operations and the changes in variable annuity contract
owners' equity for each of the three years in the period ended December 31,
1998, and the supplementary information for each of the ten years in the period
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 26, 1999
-1-
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
December 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Common stocks--at market value
(cost: 1998--$9,034,126; 1997--$9,939,798) $18,333,394 $16,402,456
Cash 73,237 52,588
Receivable for securities sold -- 50
Accrued dividends and interest 10,513 17,788
Amounts due from Provident National Assurance Company 1,222 224
----------- -----------
TOTAL ASSETS 18,418,366 16,473,106
----------- -----------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Amounts payable for terminations and variable annuity benefits 112,745 2,794
Management fee and other amounts due Provident
National Assurance Company 12,597 17,191
----------- -----------
TOTAL LIABILITIES 125,342 19,985
----------- -----------
Variable annuity contract owners' equity:
Deferred annuity contracts terminable by owners--(accumulation
units outstanding: 1998--1,043,607.368; 1997--1,310,831.075;
unit value: 1998--$15.192155; 1997--$11.384926) 15,854,645 14,923,715
Annuity contracts in pay-out period 2,438,379 1,529,406
----------- -----------
TOTAL CONTRACT OWNERS' EQUITY $18,293,024 $16,453,121
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
STATEMENTS OF OPERATIONS
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends $125,202 $147,564 $193,196
Interest 5,447 3,995 8,347
-------- -------- --------
130,649 151,559 201,543
-------- -------- --------
Expenses--Note C:
Investment advisory services 75,117 72,873 67,237
Mortality and expense assurances 105,163 102,022 94,131
-------- -------- --------
180,280 174,895 161,368
-------- -------- --------
NET INVESTMENT INCOME (LOSS) (49,631) (23,336) 40,175
-------- -------- --------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS--NOTE A
Net realized gain from investment transactions
(excluding short-term securities):
Proceeds from sales 4,795,716 5,559,161 5,882,270
Cost of investments sold 2,751,226 3,512,353 4,404,304
--------- --------- ---------
Net realized gain 2,044,490 2,046,808 1,477,966
--------- --------- ---------
Net unrealized appreciation of investments:
At end of year 9,299,268 6,462,658 4,003,349
At beginning of year 6,462,658 4,003,349 2,809,091
--------- --------- ---------
Increase in net unrealized appreciation
of investments 2,836,610 2,459,309 1,194,258
--------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 4,881,100 4,506,117 2,672,224
--------- --------- ---------
INCREASE IN CONTRACT OWNERS' EQUITY $4,831,469 $4,482,781 $2,712,399
FROM INVESTMENT ACTIVITIES ========== ========== ==========
Ratio of expenses to total investment income 137.99% 115.40% 80.07%
========== ========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
STATEMENTS OF CHANGES IN VARIABLE ANNUITY CONTRACT OWNERS' EQUITY
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $16,453,121 $13,917,113 $13,151,831
----------- ----------- -----------
From investment activities:
Net investment income (loss) (49,631) (23,336) 40,175
Net realized gain on investments 2,044,490 2,046,808 1,477,966
Increase in net unrealized appreciation of investments 2,836,610 2,459,309 1,194,258
--------- --------- ---------
Increase in contract owners' equity from
investment activities 4,831,469 4,482,781 2,712,399
--------- --------- ---------
From variable annuity contract transactions:
Net contract purchase payments (Units purchased):
1998-- 1,326.260;
1997--16,110.275;
1996-- 4,869.798; 17,001 174,149 35,994
Terminations and death benefits (Units terminated):
1998-- 219,758.026;
1997-- 206,229.494;
1996-- 243,557.308; (2,718,161) (1,974,221) (1,866,405)
Variable annuity benefits paid (Number of units):
1998-- 22,625.469;
1997-- 14,527.206;
1996-- 15,310.532; (290,406) (146,701) (116,706)
---------- --------- ---------
Decrease in contract owners' equity from variable
annuity contract transactions (2,991,566) (1,946,773) (1,947,117)
----------- ---------- ----------
Net increase in contract owner's equity 1,839,903 2,536,008 765,282
----------- ---------- ----------
Balance at end of year $18,293,024 $16,453,121 $13,917,113
=========== =========== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
SCHEDULE OF INVESTMENTS
Provident National Assurance Company Separate Account B
December 31, 1998
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------- ----------
<S> <C> <C>
COMMON STOCKS
CAPITAL GOODS (12.3%)
Corning, Inc. 2,800 $ 126,000
Emerson Electric Company 4,500 272,250
General Electric Company 7,800 796,088
Thermo Ecotek Corporation 1,800 19,013
Thermo Electron Corporation 2,500 42,344
Textron, Inc. 5,000 379,688
Tyco International Ltd. 2,000 150,875
Waste Management, Inc. 6,400 298,400
USA Filter Corporation 7,600 173,850
----------
2,258,508
CONSUMER GOODS (6.0%)
Coca-Cola Company 3,000 200,625
Lear Corporation 3,200 123,200
Newell Company 4,000 165,000
PepsiCo, Inc. 8,000 327,500
Proctor & Gamble Company 3,000 273,938
----------
1,090,263
CONSUMER SERVICES (18.0%)
America Online, Inc. 800 128,000
Cendant Corporation 5,604 106,826
Comcast Corporation Class A 12,500 733,594
Gannett Company, Inc. 6,000 387,000
InaCom Corporation 2,300 34,213
Lowe's Companies, Inc 800 40,950
McDonald's Corporation 3,600 275,850
Office Depot, Inc. 4,600 169,913
Safeway, Inc. 10,400 633,750
Wal-Mart Stores, Inc. 4,000 325,750
Walt Disney Company 9,600 288,000
Viacom, Inc. Class B 2,200 162,800
----------
3,286,646
ENERGY (1.4%)
Atlantic Richfield Company 800 52,200
Royal Dutch Petroleum Company 2,900 138,838
Weatherford International Inc. 3,600 69,750
----------
260,788
</TABLE>
See notes to financial statements.
-5-
<PAGE>
SCHEDULE OF INVESTMENTS - Continued
Provident National Assurance Company Separate Account B
December 31, 1998
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------- ----------
<S> <C> <C>
COMMON STOCKS - Continued
FINANCIAL (9.2%)
American Express Company 4,000 $ 409,000
Chase Manhattan Corporation 9,600 653,400
BankAmerica Corporation 4,000 240,500
First Union Corporation 3,645 221,662
Washington Mutual, Inc. 4,200 160,388
----------
1,684,950
HEALTH CARE (13.3%)
Bristol-Myers Squibb Company 3,500 468,344
Eli Lilly & Company 2,700 239,963
HealthSouth Corporation 21,600 333,450
Johnson & Johnson 6,732 564,647
Medtronic Inc. 5,000 371,250
Merck & Company, Inc. 1,900 280,606
Tenet Healthcare Corporation 6,800 178,500
----------
2,436,760
TECHNOLOGY-HARDWARE (11.9%)
Cisco Systems, Inc. 3,600 334,125
Compaq Computer Corporation 6,000 251,625
Hewlett Packard Company 3,000 204,938
Lucent Technologies, Inc. 6,088 669,680
SCI Systems, Inc. 10,000 577,500
3Com Corporation 3,250 145,641
----------
2,183,509
TECHNOLOGY-SOFTWARE (10.5%)
Computer Associates International 10,500 447,563
First Data Corporation 3,300 104,569
Microsoft Corporation 7,000 970,813
National Data Corporation 1,500 73,031
Oracle Corporation 7,500 323,438
----------
1,919,414
</TABLE>
See noted to financial statements.
-6-
<PAGE>
SCHEDULE OF INVESTMENTS - Continued
Provident National Assurance Company Separate Account B
December 31, 1998
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------- ------------
<S> <C> <C>
COMMON STOCKS - Continued
TECHNOLOGY-OTHER (4.0%)
Intel Corporation 5,700 $ 675,806
Motorola, Inc. 1,000 61,063
-----------
736,869
TELECOMMUNICATIONS (13.6%)
Airtouch Communications, Inc. 11,000 793,375
AT&T Corporation 4,430 333,358
MCI Worldcom, Inc. 14,800 1,061,900
Sprint Corporation FON Group 3,000 252,374
Sprint Corporation PCS Group 1,500 34,680
-----------
2,475,687
-----------
TOTAL COMMON STOCKS (100.2%) 18,333,394
-----------
TOTAL INVESTMENTS (100.2%) 18,333,394
CASH AND RECEIVABLES LESS LIABILITIES (-0.2%) (40,370)
-----------
TOTAL VARIABLE ANNUITY CONTRACT
OWNERS' EQUITY (100.0%) $18,293,024
===========
</TABLE>
See notes to financial statements.
-7-
<PAGE>
SUPPLEMENTARY INFORMATION
Provident National Assurance Company Separate Account B
Selected data for an accumulation unit outstanding throughout each year
excluding sales loads:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income $ 0.10 $ .10 $ .11 $ .13 $ .15
Expenses 0.14 .12 .09 .07 .07
---------- ---------- ---------- ---------- ----------
Net investment income (loss) (0.04) (.02) .02 .06 .08
Net realized and unrealized gain (loss)
on investments 3.85 2.96 1.51 1.44 (.32)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in contract
owners' equity 3.81 2.94 1.53 1.50 (.24)
Net contract owners' equity:
Beginning of year 11.38 8.44 6.91 5.41 5.65
---------- ---------- ---------- ---------- ----------
End of year $ 15.19 $ 11.38 $ 8.44 $ 6.91 $ 5.41
========== ========== ========== ========== ==========
Ratio of expenses to average contract
owners' equity 1.07% 1.16% 1.20% 1.21% 1.21%
Ratio of net investment income (loss) to
average contract owners' equity (0.30%) (0.16%) 0.30% 0.89% 1.72%
Portfolio turnover 11% 25% 28% 101% 70%
Number of accumulation units
outstanding at end of year 1,043,607 1,310,831 1,538,926 1,767,394 2,097,793
</TABLE>
See notes to financial statements.
-8-
<PAGE>
SUPPLEMENTARY INFORMATION - Continued
Provident National Assurance Company Separate Account B
Selected data for an accumulation unit outstanding throughout each year
excluding sales loads:
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income $ 0.14 $ .12 $ .13 $ .13 $ .12
Expenses 0.06 .06 .05 .04 .04
---------- ---------- ---------- ---------- ----------
Net investment income (loss) 0.08 .06 .08 .09 .08
Net realized and unrealized gain (loss)
on investments .54 (.07) 1.22 (.16) .64
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in contract
owners' equity .62 (.01) 1.30 (.07) .72
Net contract owners' equity:
Beginning of year 5.03 5.04 3.74 3.81 3.09
---------- ---------- ---------- ---------- ----------
End of year $ 5.65 $ 5.03 $ 5.04 $ 3.74 $ 3.81
========== ========== ========== ========== ==========
Ratio of expenses to average contract
owners' equity 1.22% 1.21% 1.21% 1.22% 1.21%
Ratio of net investment income (loss) to
average contract owners' equity 1.39 1.36% 1.91% 2.34% 2.36%
Portfolio turnover 57% 35% 42% 58% 104%
Number of accumulation units
outstanding at end of year 2,242,809 2,655,895 2,854,559 3,031,469 3,667,660
</TABLE>
See notes to financial statements.
-9-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Provident National Assurance Company Separate Account B
NOTE A--INVESTMENTS AND ACCOUNTING POLICIES
Separate Account B is a segregated investment account of Provident National
Assurance Company (a wholly-owned subsidiary of Provident Companies, Inc.) and
is registered under the Investment Company Act of 1940, as amended, as an open-
end diversified management investment company.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in those statements and accompanying notes. Actual
results may differ from such estimates.
Common stocks and bonds are valued at published market quotations which
represent the closing sales price for securities traded on a national stock
exchange or the mean between the quoted bid and asked prices for those traded
over-the-counter. Short-term investments are valued at cost plus accrued
interest.
Realized and unrealized gains and losses are credited to or charged to variable
annuity contract owners' equity. The identified cost basis has been used in
determining realized gains and losses on sales of investments. There were gross
unrealized gains of $9,728,100 and gross unrealized losses of $428,832 at
December 31, 1998. Security transactions are recorded on the day after the
securities are purchased or sold. Dividends are taken into income on an accrual
basis as of the ex-dividend date.
A summary of the cost of investments purchased and proceeds from investments
sold for the three years in the period ended December 31, 1998 is shown below.
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cost of investments purchased $11,431,634 $12,440,923 $ 9,751,620
Less: Short-term securities 9,586,080 8,714,428 6,012,666
----------- ----------- -----------
$ 1,845,554 $ 3,726,495 $ 3,738,954
=========== =========== ===========
Proceeds from investments sold $14,383,400 $14,470,491 $11,698,035
Less: Short-term securities 9,587,684 8,911,330 5,815,765
----------- ----------- -----------
$ 4,795,716 $ 5,559,161 $ 5,882,270
=========== =========== ===========
</TABLE>
The aggregate cost of investments for federal income tax purposes is the same as
that presented in the Statements of Assets and Liabilities.
-10-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Provident National Assurance Company Separate Account B
NOTE B--FEDERAL INCOME TAXES
Operations of Separate Account B will form a part of the income tax return of
Provident National Assurance Company, which is taxed as a "life insurance
company" under the Internal Revenue Code.
Under current law, no federal income taxes are payable with respect to Separate
Account B.
NOTE C--EXPENSES
Deductions are made by Provident National Assurance Company at the end of each
valuation period for investment advisory services and for mortality and expense
assurances, which on an annual basis are approximately .50% and .70%,
respectively, of the net assets of Separate Account B.
NOTE D--COMMITMENTS
On May 15, 1998 Provident completed an Asset Transfer and Acquisition Agreement
under which American General Corporation assumed Provident's individual and tax-
sheltered annuity business including all individual annuities. In accordance
with the agreement, American General Corporation, through its subsidiaries
Variable Annuity Life Insurance Company and American General Annuity assumed the
administration, but not the ownership, of Provident's two registered separate
accounts, Separate Account B and The Paul Revere Variable Annuity Contract
Accumulation Fund. The administration services provided to the Fund by American
General Corporation include processing of unit transactions and daily unit
valuation calculations subsequent to December 1, 1998 as well as accounting and
other services. These services were previously performed by Provident. Fees
for such services are deducted from Separate Account B as shown in the
Statements of Operations.
-11-
<PAGE>
ACCUMULATION UNIT VALUE TABLE
(Unaudited)
Provident National Assurance Company Separate Account B
<TABLE>
<CAPTION>
End of Month Accumulation Unit Value End of Month Accumulation Unit Value
- --------------- ----------------------- ------------ -----------------------
<S> <C> <C> <C>
December 1968 1.036279 March 1994 5.386379
December 1969 1.080379 June 5.274454
December 1970 1.030039 September 5.475394
December 1971 1.178612 December 5.410722
December 1972 1.403795 March 1995 5.656995
December 1973 1.126624 June 6.194660
December 1974 .863269 September 6.505252
December 1975 1.022844 December 6.908158
December 1976 1.156853 March 1996 7.309625
December 1977 1.064425 June 7.593667
December 1978 1.094150 September 7.851947
December 1979 1.219189 December 8.435567
December 1980 1.555258 March 1997 8.468896
December 1981 1.473246 June 10.238554
December 1982 1.812441 September 11.146167
December 1983 2.132092 December 11.384926
December 1984 2.029912 January 1998 11.579188
December 1985 2.480050 February 12.469525
December 1986 2.743444 March 12.975484
December 1987 2.734169 April 13.175727
December 1988 3.087892 May 12.691816
December 1989 3.812606 June 13.465013
December 1990 3.736441 July 13.375934
December 1991 5.036212 August 11.083512
March, 1992 4.735470 September 11.758633
June 4.585274 October 12.780012
September 4.694884 November 13.777563
December 5.028547 December 15.192155
March 1993 5.208499
June 5.190340
September 5.441446
December 5.646864
</TABLE>
Initial contributions to Separate Account B were received on February 1, 1968,
prior to which time the unit value was set at 1.000000.
The above indicates the accumulation unit value on the last valuation day of
each year from December 1968 through December 1991, on the last valuation day
of each quarter from March 1992 through December 1997, and on the last valuation
day of each month of 1998. The results shown should not be considered as a
representation of the results which may be realized in the future.
-12-
