<PAGE>
ANNUAL REPORT
December 31, 1996
[LOGO]
WORCESTER, MASSACHUSETTS
<PAGE>
TO OUR CONTRACT OWNERS
AND PARTICIPANTS:
The stock market surged forward in the final quarter of 1996. The U.S. stock
market, as measured by the S&P 500, posted a positive return of 23.1% for the
full year of 1996. Growth stocks, in particular, surged with the Russell 1000
Growth Index appreciating 23.1% for the year. The accumulation unit values of
the Qualified Fund and Non-Qualified Fund increased 22.3% and 20.1%,
respectively.
The portfolio's strong quarterly performance can be attributed largely to
its Technology, Healthcare and Financial Service sectors. Strength in technology
was sparked by strong earnings gains at semiconductor and software companies.
Stock selection in Healthcare, where the portfolio is underweighted to the
Russell 1000 Growth Index, had a positive impact on fourth quarter performance.
The portfolio's relative overweighting in drug companies reflected our
confidence in strong underlying business momentum as higher unit growth rates
result from the penetration of managed care. The portfolio's HMO holdings
rebounded in the fourth quarter after a generally weak performance for much of
1966. Financial Services holdings, which remain overweighted to the Index,
performed well in the lower interest rate environment. Strong performance from
many of the portfolio's significant holdings also contributed to good absolute
quarterly returns.
Looking forward, it is hard to imagine the 1997 market return matching the
1995 and 1996 pattern. Those last two years were driven by a slow growth, low
inflation environment with above average corporate profit growth -- a very
positive environment for stocks. In 1997, we feel the crucial issue will be the
sustainability of corporate profit growth. We believe that stock selection will
become more and more important. Our approach to selecting stocks for inclusion
in your portfolio continues to focus on bottom-up, company-driven research. We
will continue to identify companies within attractive sectors of the economy
that are positioned to become leaders in their markets and therefore offer
excellent long-term growth potential. Through close examination of company
fundamentals, we will seek to provide strong relative performance in the current
challenging environment.
Sincerely,
Charles E. Soule
Chairman, Board of Managers
The Paul Revere Variable
Annuity
Contract Accumulation Fund
President, The Paul Revere
Variable
Annuity Insurance Company
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------
SERIES Q SERIES N
(QUALIFIED) (NON-QUALIFIED)
----------- ---------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated companies at market value
(Cost: Series Q $13,796,376, Series N $3,738,252)
(see Statement of Investments)....................................................... $17,610,584 $ 4,763,593
Cash................................................................................... 532,088 148,183
Dividends and interest receivable...................................................... 28,314 7,312
Receivable from securities sold........................................................ 56,721 7,563
Receivable from The Paul Revere Variable Annuity Insurance Company..................... -- 23,252
----------- ---------------
Total assets...................................................................... 18,227,707 4,949,903
----------- ---------------
LIABILITIES
Surrenders payable..................................................................... 6,566 --
Payable for securities purchased....................................................... 11,612 5,806
Payable to The Paul Revere Variable Annuity Insurance Company.......................... 112,172 --
Other.................................................................................. 27,245 4,291
----------- ---------------
Total liabilities................................................................ 157,595 10,097
----------- ---------------
TOTAL NET ASSETS....................................................................... $18,070,112 $ 4,939,806
----------- ---------------
----------- ---------------
CONTRACT OWNERS' EQUITY
Deferred contracts terminable by owner................................................. $14,863,418 $ 3,400,213
Currently payable contracts............................................................ 3,206,694 1,539,593
----------- ---------------
Total net assets................................................................. $18,070,112 $ 4,939,806
----------- ---------------
----------- ---------------
ACCUMULATION UNITS OUTSTANDING......................................................... 2,093,030 565,935
----------- ---------------
----------- ---------------
NET ASSET VALUE PER ACCUMULATION UNIT.................................................. $ 8.633 $ 8.729
----------- ---------------
----------- ---------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
SERIES N
SERIES Q (QUALIFIED) (NON-QUALIFIED)
------------------------ ----------------------
INCREASE/DECREASE IN NET ASSETS 1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income................................ $ 52,342 $ 129,286 $ 1,718 $ 4,785
Net realized gain on investments (unaffiliated
companies)........................................ 8,351,181 4,293,754 718,025 465,264
Net increase (decrease) in unrealized appreciation of
investments (unaffiliated companies).............. (4,309,054) 5,138,033 118,379 581,843
----------- ----------- ---------- ----------
Increase in net assets from operations............ 4,094,469 9,561,073 838,122 1,051,892
Contract receipts:
Gross purchase payments received..................... 106,019 653,977 8,707 7,770
Deductions from purchase payments.................... 3,892 3,969 542 483
----------- ----------- ---------- ----------
Net purchase payments received.................... 102,127 650,008 8,165 7,287
Payments to contract owners:
Annuity payments to contract owners.................. 304,504 260,591 170,686 142,452
Terminations and withdrawals to contract owners...... 24,628,563 1,128,000 58,037 43,041
----------- ----------- ---------- ----------
Total payments to contract owners................. 24,933,067 1,388,591 228,723 185,493
----------- ----------- ---------- ----------
Net contract receipts (payments) to/from contract
owners............................................ (24,830,940) (738,583) (220,558) (178,206)
Other additions......................................... 31,550 128,917 60,821 71,953
----------- ----------- ---------- ----------
Total increase (decrease) in net assets........... (20,704,921) 8,951,407 678,385 945,639
NET ASSETS
Beginning of year....................................... 38,775,033 29,823,626 4,261,421 3,315,782
----------- ----------- ---------- ----------
End of year............................................. $18,070,112 $38,775,033 $4,939,806 $4,261,421
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
----------------------------
SERIES Q SERIES N
(QUALIFIED) (NON-QUALIFIED)
----------- ---------------
<S> <C> <C>
INVESTMENT INCOME
Income (unaffiliated companies):
Dividends............................................................................ $ 336,996 $ 67,817
Interest............................................................................. 62,320 10,620
----------- ---------------
Total income...................................................................... 399,316 78,437
Expenses:
Mortality and expense risk fees...................................................... 222,849 46,066
Investment management and advisory service fees...................................... 111,425 23,033
Professional services................................................................ 12,700 7,620
----------- ---------------
Total expenses.................................................................... 346,974 76,719
----------- ---------------
Net investment income................................................................... 52,342 1,718
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments sold
(unaffiliated companies)............................................................. 8,351,181 718,025
Net increase (decrease) in unrealized appreciation of investments
(unaffiliated companies)............................................................. (4,309,054) 118,379
----------- ---------------
Net realized and unrealized gain on investments......................................... 4,042,127 836,404
----------- ---------------
Increase in net assets from operations.................................................. $4,094,469 $ 838,122
----------- ---------------
----------- ---------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------------------- ---------------------------------------------
% OF % OF
SECURITIES OF NUMBER MARKET NET NUMBER MARKET NET
UNAFFILIATED COMPANIES OF SHARES COST (A) VALUE ASSETS OF SHARES COST (A) VALUE ASSETS
----------- ----------- ----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCKS
AEROSPACE
AlliedSignal Inc.......... 2,800 $ 98,189 $ 187,600 700 $ 24,632 $ 46,900
Boeing Co................. 800 73,448 85,200 500 49,467 53,250
----------- ----------- ---------- ----------
171,637 272,800 1.5% 74,099 100,150 2.0%
----------- ----------- ---------- ----------
APPAREL & TEXTILES
(b) Fila Holdings ADS........ 900 95,169 52,200 200 21,149 11,600
NIKE Inc. Class B......... 900 51,241 54,000 200 11,389 12,000
----------- ----------- ---------- ----------
146,410 106,200 0.6% 32,538 23,600 0.5%
----------- ----------- ---------- ----------
AUTOMOTIVE
Goodrich B F Co........... 4,500 181,957 182,250 1.0% 1,100 44,478 44,550 0.9%
----------- ----------- ---------- ----------
BANKS AND CREDIT COMPANIES
Bank of Boston Corp....... 3,880 178,367 249,290 880 40,374 56,540
Comerica Inc.............. 1,700 45,714 89,038 500 13,794 26,187
Crestar Financial Corp.... 1,700 91,095 126,437 400 21,483 29,750
First Bank System Inc..... 4,300 268,328 293,475 1,100 68,642 75,075
Northern Trust Corp....... 5,400 106,540 195,750 1,500 28,142 54,375
Norwest Corp.............. 7,100 147,751 308,850 1,800 34,845 78,300
----------- ----------- ---------- ----------
837,795 1,262,840 7.0% 207,280 320,227 6.5%
----------- ----------- ---------- ----------
BUSINESS MACHINES
(b) Digital Equipment
Corp..................... 1,700 65,977 61,625 400 15,524 14,500
Hewlett-Packard Co........ 2,900 92,771 145,725 800 28,589 40,200
(b) Sun Microsystems Inc..... 5,900 116,344 151,559 1,600 35,705 41,101
----------- ----------- ---------- ----------
275,092 358,909 2.0% 79,818 95,801 1.9%
----------- ----------- ---------- ----------
BUSINESS SERVICES
Alco Standard Corp........ 4,000 186,665 206,500 1,100 51,387 56,788
(b) Ceridian Corp............ 1,100 45,028 44,550 300 12,280 12,150
(b) Computer Sciences
Corp..................... 4,400 314,807 361,350 1,200 83,845 98,550
Danka Business Systems
ADR...................... 3,100 128,412 109,662 800 33,050 28,300
(b) Loewen Group Inc......... 4,000 126,325 156,500 1,100 35,536 43,037
----------- ----------- ---------- ----------
801,237 878,562 4.9% 216,098 238,825 4.8%
----------- ----------- ---------- ----------
CELLULAR TELEPHONES
Telephone & Data Systems,
Inc...................... 1,300 49,326 47,125 0.3% 300 11,385 10,875 0.2%
----------- ----------- ---------- ----------
CHEMICALS
Air Products & Chemicals,
Inc...................... 700 42,438 48,388 200 12,125 13,825
(b) BetsDearborn Inc......... 1,800 102,980 105,300 400 22,832 23,400
Monsanto Co............... 4,500 132,016 174,937 1,200 35,204 46,650
Praxair Inc............... 3,200 135,792 147,600 800 33,948 36,900
----------- ----------- ---------- ----------
413,226 476,225 2.6% 104,109 120,775 2.5%
----------- ----------- ---------- ----------
COMPUTER SOFTWARE--PC
First Data Corp........... 3,600 116,208 131,400 1,000 30,882 36,500
(b) Microsoft Corp........... 3,900 121,300 322,237 1,000 30,762 82,625
----------- ----------- ---------- ----------
237,508 453,637 2.5% 61,644 119,125 2.4%
----------- ----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------------------- ---------------------------------------------
% OF % OF
NUMBER MARKET NET NUMBER MARKET NET
OF SHARES COST (A) VALUE ASSETS OF SHARES COST (A) VALUE ASSETS
----------- ----------- ----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMPUTER SOFTWARE--SYSTEMS
(b) BMC Software Inc......... 4,300 $ 164,083 $ 177,912 1,200 $ 46,207 $ 49,650
(b) Compaq Computer Corp..... 1,800 135,686 133,875 500 38,219 37,187
Computer Assoc Intl.
Inc...................... 5,900 192,904 293,525 1,500 45,398 74,625
(b) Cooper & Chyan Technology
Inc...................... 6,000 189,555 196,500 1,500 47,359 49,125
(b) Informix Corp............ 800 21,400 16,300 200 5,350 4,075
(b) Oracle Corp.............. 2,600 72,150 108,550 725 14,647 30,269
----------- ----------- ---------- ----------
775,778 926,662 5.1% 197,180 244,931 5.0%
----------- ----------- ---------- ----------
CONSUMER GOODS & SERVICES
Colgate-Palmolive Co...... 2,600 217,081 239,850 700 58,600 64,575
Gillette Co............... 4,400 277,756 342,100 1,200 76,072 93,300
Philip Morris Cos. Inc.... 4,800 467,300 542,400 1,300 127,560 146,900
Procter & Gamble Co....... 3,100 201,880 333,638 800 49,082 86,100
Sherwin-Williams Co....... 3,900 179,618 218,400 1,000 45,992 56,000
(b) Tupperware Corp.......... 900 48,904 48,262 200 10,868 10,725
Tyco Intl. Ltd............ 10,900 286,885 576,338 2,800 72,744 148,050
----------- ----------- ---------- ----------
1,679,424 2,300,988 12.7% 440,918 605,650 12.3%
----------- ----------- ---------- ----------
DEFENSE ELECTRONICS
(b) Loral Space
Communications........... 2,500 46,400 45,937 0.3% 700 12,992 12,863 0.3%
----------- ----------- ---------- ----------
ELECTRICAL EQUIPMENT
General Electric Co....... 6,400 425,574 632,800 1,700 107,209 168,088
Honeywell Inc............. 1,400 67,345 92,050 400 15,464 26,300
----------- ----------- ---------- ----------
492,919 724,850 4.0% 122,673 194,388 3.9%
----------- ----------- ---------- ----------
ELECTRONICS
(b) ASM Lithograpy
Holdings................. 400 19,437 19,925
(b) Atmel Corp............... 2,900 95,337 96,063 800 26,300 26,500
Intel Corp................ 6,200 391,556 811,816 1,600 101,725 209,501
(b) VLSI Technology Inc...... 5,900 108,370 140,863 1,600 29,339 38,200
----------- ----------- ---------- ----------
595,263 1,048,742 5.8% 176,801 294,126 6.0%
----------- ----------- ---------- ----------
ENTERTAINMENT
(b) Viacom Inc. Class B...... 600 24,890 20,925 0.4%
---------- ----------
FINANCIAL INSTITUTIONS
(b) ADVANTA Corp. Class B.... 400 15,846 16,350
Beneficial Corp........... 3,700 175,320 234,488 1,000 45,580 63,375
Federal Home Loan Mtg.
Corp..................... 1,800 127,579 198,675 500 32,841 55,188
Federal Natl Mtg.
Assoc.................... 2,400 92,844 90,300 600 23,211 22,575
FINOVA Group Inc.......... 2,100 77,301 134,925 500 18,405 32,125
United Cos Financial
Corp..................... 700 23,804 18,638
----------- ----------- ---------- ----------
473,044 658,388 3.6% 159,687 208,251 4.2%
----------- ----------- ---------- ----------
FOOD & BEVERAGE PRODUCTS
Earthgrains Co............ 500 19,216 26,125 100 3,631 5,225
(b) Interstate Bakeries
Corp..................... 1,100 47,504 54,038 300 12,955 14,737
McCormick & Co............ 7,300 177,025 172,010 1,900 45,325 44,770
PepsiCo Inc............... 7,500 194,334 219,375 2,000 50,858 58,500
Ralston-Purina Group...... 1,300 93,456 95,388 300 21,567 22,013
Tyson Foods Inc. Class
A........................ 2,100 64,312 71,925 600 18,375 20,550
----------- ----------- ---------- ----------
595,847 638,861 3.5% 152,711 165,795 3.4%
----------- ----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------------------- ---------------------------------------------
% OF % OF
NUMBER MARKET NET NUMBER MARKET NET
OF SHARES COST (A) VALUE ASSETS OF SHARES COST (A) VALUE ASSETS
----------- ----------- ----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREST & PAPER PRODUCTS
Kimberly-Clark Corp....... 1,520 $ 99,666 $ 144,780 0.8% 380 $ 24,917 $ 36,195 0.7%
----------- ----------- ---------- ----------
INSURANCE
Chubb Corp................ 4,300 231,282 231,125 1,200 64,457 64,500
CIGNA Corp................ 1,600 180,195 218,600 400 45,049 54,650
Conseco Inc............... 600 37,573 38,250
ITT Hartford Group Inc.... 2,900 184,537 195,750 800 50,907 54,000
Travelers Group Inc....... 5,500 106,548 249,562 1,400 25,044 63,525
----------- ----------- ---------- ----------
702,562 895,037 5.0% 223,030 274,925 5.6%
----------- ----------- ---------- ----------
MACHINERY
IDEX Corp................. 2,900 102,306 115,638 0.6% 700 24,720 27,912 0.6%
----------- ----------- ---------- ----------
MEDICAL & HEALTH PRODUCTS
Bristol-Myers Squibb
Co....................... 1,700 187,136 185,300 400 43,926 43,600
(b) Elan Corp. ADS........... 3,300 87,102 109,725 900 23,779 29,925
Lilly (Eli) Co............ 3,700 230,704 270,100 1,000 62,098 73,000
Merck & Co. Inc........... 3,500 264,957 278,688 1,000 75,702 79,625
Pfizer Inc................ 2,600 109,178 215,800 600 25,561 49,800
Rhone-Poulenc Rorer
Inc...................... 2,400 151,065 187,500 600 37,739 46,875
Schering-Plough Corp...... 3,600 155,957 233,100 900 39,444 58,275
SmithKline Beecham ADS.... 2,100 125,076 142,800 600 35,736 40,800
----------- ----------- ---------- ----------
1,311,175 1,623,013 9.0% 343,985 421,900 8.5%
----------- ----------- ---------- ----------
MEDICAL & HEALTH TECH.
SERVICES
(b) Columbia/HCA Healthcare
Corp..................... 4,000 153,337 163,000 1,100 42,138 44,825
(b) HEALTHSOUTH Corp......... 4,900 176,744 189,262 1,300 46,928 50,212
Medtronic Inc............. 1,900 102,233 129,200 500 27,739 34,000
(b) Pacificare Health Systems
Inc. Class B............. 2,100 126,953 179,025 550 33,726 46,888
(b) St. Jude Medical Inc..... 5,750 227,328 243,656 1,500 58,509 63,562
(b) United Healthcare
Corp..................... 6,300 245,145 283,500 1,600 61,363 72,000
----------- ----------- ---------- ----------
1,031,740 1,187,643 6.6% 270,403 311,487 6.3%
----------- ----------- ---------- ----------
OILS
Mobil Corp................ 1,700 172,833 207,825 1.2% 400 40,667 48,900 1.0%
----------- ----------- ---------- ----------
PHOTOGRAPHIC PRODUCTS
Eastman Kodak Co.......... 4,000 246,783 321,000 1.8% 1,000 55,750 80,250 1.6%
----------- ----------- ---------- ----------
PRINTING & PUBLISHING
Gannett Co................ 2,700 186,177 202,162 600 41,376 44,925
McGraw-Hill Cos Inc....... 500 17,934 23,062
Reuters Holdings ADR...... 2,500 101,445 191,250 600 24,579 45,900
----------- ----------- ---------- ----------
287,622 393,412 2.2% 83,889 113,887 2.3%
----------- ----------- ---------- ----------
RAILROAD
Burlington Northern Santa
Fe Corp.................. 1,300 113,503 112,288 0.6% 300 26,193 25,912 0.5%
----------- ----------- ---------- ----------
RESTAURANTS & LODGING
(b) HFS Inc.................. 700 52,280 41,825 0.2% 200 14,937 11,950 0.2%
----------- ----------- ---------- ----------
SPECIAL PRODUCTS & SERVICES
(b) Imation Corp............. 150 25,976 4,219 0.0%
----------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------------------- ---------------------------------------------
% OF % OF
NUMBER MARKET NET NUMBER MARKET NET
OF SHARES COST (A) VALUE ASSETS OF SHARES COST (A) VALUE ASSETS
----------- ----------- ----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STORES
(b) Dollar General Corp...... 1,600 $ 46,696 $ 51,200 400 $ 11,674 $ 12,800
Lowe's Cos. Inc........... 1,800 58,779 64,125 500 16,327 17,813
(b) Rite Aid Corp............ 6,000 208,517 238,500 1,750 61,693 69,562
(b) Staples Inc.............. 6,900 129,981 124,635 1,800 33,929 32,513
Talbots Inc............... 2,700 95,786 77,625 600 21,270 17,250
----------- ----------- ---------- ----------
539,759 556,085 3.1% 144,893 149,938 3.0%
----------- ----------- ---------- ----------
SUPERMARKETS
(b) Safeway Inc.............. 5,600 222,236 239,400 1,500 59,527 64,125
(b) Vons Cos Inc............. 3,000 89,338 179,625 800 23,740 47,900
----------- ----------- ---------- ----------
311,574 419,025 2.3% 83,267 112,025 2.3%
----------- ----------- ---------- ----------
TELECOMMUNICATIONS
(b) 3Com Corp................ 1,100 55,687 80,712 300 15,187 22,013
(b) Cabletron Systems Inc.... 1,400 46,917 46,550 600 21,624 19,950
(b) Cisco Systems Inc........ 4,100 240,037 260,862 1,300 78,363 82,713
(b) U. S. Robotics. Corp..... 100 5,317 7,200
----------- ----------- ---------- ----------
347,958 395,324 2.2% 115,174 124,676 2.5%
----------- ----------- ---------- ----------
UTILITIES--ELECTRIC
FPL Group Inc............. 5,100 235,949 234,600 1.3% 1,300 60,144 59,800 1.2%
----------- ----------- ---------- ----------
UTILITIES--GAS
Consolidated Nat Gas
Co....................... 1,700 91,462 93,925 400 21,511 22,100
PanEnergy Corp............ 4,900 165,566 220,500 1,300 44,169 58,500
----------- ----------- ---------- ----------
257,028 314,425 1.7% 65,680 80,600 1.6%
----------- ----------- ---------- ----------
UTILITIES--TELEPHONE
MCI Communications
Corp..................... 3,300 69,637 107,870 0.6% 900 19,845 29,419 0.6%
----------- ----------- --------- ---------- ---------- ---------
Total common stocks....... 13,681,214 17,456,985 96.6% 3,716,795 4,730,633 95.7%
----------- ----------- --------- ---------- ---------- ---------
PREFERRED STOCKS
CHEMICALS
AirTouch Communications
Inc.
6.00% Class B 2,684 69,123 73,139 587 13,067 15,995
4.25% Class C 1,788 46,039 80,460 377 8,390 16,965
----------- ----------- ---------- ----------
Total preferred
stocks................. 115,162 153,599 0.9% 21,457 32,960 0.7%
----------- ----------- --------- ---------- ---------- ---------
Total stocks........... 13,796,376 17,610,584 97.5% 3,738,252 4,763,593 96.4%
----------- ----------- --------- ---------- ---------- ---------
Total investments in
securities of
unaffiliated
companies.......... $13,796,376 17,610,584 97.5% $3,738,252 4,763,593 96.4%
----------- ----------- --------- ---------- ---------- ---------
----------- ----------
CASH AND RECEIVABLES LESS
LIABILITIES 459,528 2.5% 176,213 3.6%
----------- --------- ---------- ---------
Total net assets....... $18,070,112 100.0% $4,939,806 100.0%
----------- --------- ---------- ---------
---------
----------- ---------- ---------
</TABLE>
(a) Effective cost for federal income tax purposes.
(b) Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION
The Paul Revere Variable Annuity Contract Accumulation Fund ("The Fund") is a
separate account of The Paul Revere Variable Annuity Insurance Company ("Paul
Revere Variable"), and is registered under the Investment Company Act of 1940
as an open-end diversified investment company. Paul Revere Variable is a
wholly-owned subsidiary of The Paul Revere Life Insurance Company ("Paul
Revere Life") which in turn is wholly-owned by The Paul Revere Corporation
which is 83% owned by Textron Inc. The Fund is the investment vehicle for
Paul Revere Variable's tax deferred group annuity contracts.
2. ACCOUNTING POLICIES
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 and preferred stocks are stated at market values which are based on the
last sales prices at December 31, 1996 as reported on national security
exchanges or the closing bid prices for unlisted securities as reported by
investment dealers. Short-term notes are stated at amortized cost which
approximates market value. Unrealized investment gains and losses are included
in contract owners' equity. Realized gains and losses on investments sold are
determined on the basis of specific identification of investments. Security
transactions are accounted for on the date the securities are purchased or
sold. Dividend income is recorded on the ex-dividend dates. Interest income is
accrued on a daily basis.
The Fund does not distribute net investment income and net realized capital
gains through dividends to contract owners. The allocation of net investment
income and net realized capital gains occurs automatically in the daily
determination of unit net asset values. They are, therefore, included in the
value of the contracts in force and in payments to contract owners.
Contract owners' equity is comprised of two components. Contracts terminable
by owner represents amounts attributable to contracts which have not yet
annuitized. Currently payable contracts include amounts equivalent to the
annuity reserves relating to contracts with current annuities. Annuity
reserves are computed for currently payable contracts according to the 1900
Progressive Annuity Mortality Table. The assumed interest rate is either 3.5%
or 5% according to the option elected by the annuitant at the time of
conversion. Paul Revere Variable bears all the mortality risk associated with
these contracts.
3. INVESTMENT ADVISOR
Paul Revere Variable acts as investment advisor to the Fund and provides
mortality and expense guarantees to holders of variable annuity contracts.
For these services, Paul Revere Variable receives mortality and expense risk
fees and investment management and advisory service fees as shown on the
statement of operations which, on an annual basis, will not exceed 2% of the
average daily net asset value of the Fund.
Paul Revere Variable also acts as principal underwriter and performs all sales
and administrative functions relating to the variable annuity contracts and
the Fund. Fees for such services are deducted from the contract purchase
payments as shown in the statements of changes in net assets.
4. INVESTMENT SUB-ADVISOR
Under an investment sub-advisory agreement with MFS Institutional Advisors,
Inc. ("MFSI"), MFSI provides investment management services to Paul Revere
Variable for a fee which, on an annual basis, will equal 0.35% of the average
daily net assets of each series of the Fund. This fee is borne by Paul Revere
Variable only and does not represent an additional charge to the Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES
The Fund's operations are included with those of Paul Revere Variable, which
is taxed as a life insurance company under the Internal Revenue Code and is
included in a consolidated federal tax return filed by Textron Inc. In the
opinion of Paul Revere Variable management, current law provides that
investment income and capital gains from assets maintained in the Fund for
the exclusive benefit of the contract owners are generally not subject to
federal income tax. However, to the extent that Paul Revere Variable incurs
federal income taxes based on the income from the Fund's assets, the Fund
will be charged. No charges for federal income taxes have been made since the
inception of the Fund.
6. SECURITY TRANSACTIONS
The aggregate cost of securities purchased and proceeds of securities sold,
other than securities with maturities of one year or less, were as follows:
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
---------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
1996................................................... $ 17,913,759 $ 40,511,084 $ 4,024,116 $ 4,120,878
1995................................................... $ 21,413,264 $ 22,487,069 $ 2,385,219 $ 2,546,433
</TABLE>
At December 31, 1996, net unrealized appreciation of investments in Series Q,
amounting to $3,814,208, consisted of unrealized gains of $3,959,176 and
unrealized losses of $144,968; net unrealized appreciation of investments in
Series N, amounting to $1,025,341, consisted of unrealized gains of $1,061,288
and unrealized losses of $35,947.
7. ACCUMULATION UNITS
The change in the number of accumulation units outstanding during each of the
two years ended December 31, 1996 and 1995, respectively, were as follows:
<TABLE>
<CAPTION>
SERIES N
SERIES Q (QUALIFIED) (NON-QUALIFIED)
----------------------- --------------------
1996 1995 1996 1995
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Units outstanding at beginning of year.................... 5,490,718 5,597,405 586,396 604,004
Units credited to contracts:
Net purchase payments................................ 13,534 114,907 1,056 1,152
Units withdrawn from contracts:
Annuity payments..................................... 39,287 42,202 21,645 22,386
Terminations and withdrawals......................... 3,375,395 190,226 7,179 6,906
----------- ---------- --------- ---------
Net units withdrawn.................................. 3,414,682 232,428 28,824 29,292
----------- ---------- --------- ---------
Contract units credited in excess of units withdrawn.... (3,401,148) (117,521) (27,768) (28,140)
Other additions.......................................... 3,460 10,834 7,307 10,532
----------- ---------- --------- ---------
Net decrease in units................................... (3,397,688) (106,687) (20,461) (17,608)
----------- ---------- --------- ---------
Units outstanding at end of year.......................... 2,093,030 5,490,718 565,935 586,396
----------- ---------- --------- ---------
----------- ---------- --------- ---------
</TABLE>
The majority of the terminations and withdrawals from Series Q during 1996
related to withdrawals by participants in the Paul Revere Agency and Home
Office Pension Plans which were deposited into an unrelated funding vehicle.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. MERGER AGREEMENT
On April 29, 1996, The Paul Revere Corporation ("Company") and Provident
Companies, Inc. ("Provident") announced they had signed a definitive merger
agreement. On November 6, 1996, the Company and Provident announced that they
had amended and restated the merger agreement to, among other things, extend
the date as of which the parties would be entitled to terminate the agreement
and to adjust the exchange ratio to be used in determining the number of
shares of Provident common stock that Textron, which owns approximately 83%
of the Company's outstanding common shares, will receive in the transaction.
The transaction, valued at approximately $1.2 billion, has been approved by
Boards of Directors of both companies. The transaction remains subject to the
approval of the Commonwealth of Massachusetts Division of Insurance and the
satisfaction of certain customary closing conditions.
<PAGE>
SELECTED PER UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA (A)
SERIES Q (QUALIFIED)
- ------------------
Investment income..................................................... $ 0.153 $ 0.119 $ 0.081 $ 0.054 $ 0.068
Expenses.............................................................. 0.133 0.096 0.073 0.079 0.076
--------- --------- --------- --------- ---------
Net investment income (loss).......................................... 0.020 0.023 0.008 (0.025) (0.008)
Net realized and unrealized gains (losses) from securities............ 1.551 1.711 (0.020) 0.291 0.159
--------- --------- --------- --------- ---------
Net increase (decrease) in net asset value............................ 1.571 1.734 (0.012) 0.266 0.151
Accumulation unit net asset value:
Beginning of year................................................... 7.062 5.328 5.340 5.074 4.923
--------- --------- --------- --------- ---------
End of year......................................................... $ 8.633 $ 7.062 $ 5.328 $ 5.340 $ 5.074
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SERIES N (NON-QUALIFIED)
- -----------------------
Investment income..................................................... $ 0.137 $ 0.117 $ 0.099 $ 0.055 $ 0.071
Expenses.............................................................. $ 0.134 $ 0.109 0.102 0.092 0.094
--------- --------- --------- --------- ---------
Net investment income................................................. 0.003 0.008 (0.003) (0.037) (0.023)
Net realized and unrealized gains (losses) from securities............ 1.459 1.769 (0.023) 0.318 0.194
--------- --------- --------- --------- ---------
Net increase (decrease) in net asset value............................ 1.462 1.777 (0.026) 0.281 0.171
Accumulation unit net asset value:
Beginning of year................................................... 7.267 5.490 5.516 5.235 5.064
--------- --------- --------- --------- ---------
End of year......................................................... $ 8.729 $ 7.267 $ 5.490 $ 5.516 $ 5.235
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(a) The per unit amounts represent the proportionate distribution of actual
investment results as related to the change in unit net asset values for the
year.
<TABLE>
<CAPTION>
RATIOS
<S> <C> <C> <C> <C> <C>
SERIES Q (QUALIFIED)
- -------------------
Operating expenses to average accumulation fund balance................ 1.57% 1.55% 1.55% 1.56% 1.56%
Net investment income to average accumulation fund balance............. 0.24% 0.38% 0.17% (0.50%) (0.17%)
Portfolio turnover rate................................................ 78% 64% 64% 59% 61%
Accumulation units outstanding at the end of the year
(in thousands)....................................................... 2,093 5,491 5,597 5,700 5,753
SERIES N (NON-QUALIFIED)
- -----------------------
Operating expenses to average accumulation fund balance................ 1.69% 1.71% 1.73% 1.73% 1.74%
Net investment income to average accumulation fund balance............. 0.04% 0.13% (0.05%) (0.69%) (0.42%)
Portfolio turnover rate................................................ 94% 67% 62% 62% 66%
Accumulation units outstanding at the end of the year
(in thousands)....................................................... 566 586 604 640 662
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Owners of Variable Annuity Contracts of The Paul Revere Variable Annuity
Insurance Company and the Board of Managers of The Paul Revere Variable Annuity
Contract Accumulation Fund of The Paul Revere Variable Annuity Insurance
Company:
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of The Paul Revere Variable Annuity Contract
Accumulation Fund (comprising the Qualified and Non-Qualified Portfolios) as of
December 31, 1996, the related statement of operations for the year then ended
and the statement of changes in net assets for each of the two years in the
period then ended, and the selected per unit data and ratios for each of the
five years in the period then ended. These financial statements and per unit
data and ratios are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and per
unit data and ratios 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 per unit data
and ratios 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 at December
31, 1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per unit data and ratios
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting The Paul Revere
Variable Annuity Contract Accumulation Fund at December 31, 1996, the results of
their operations for the year then ended, the changes in their net assets for
each of the two years in the period then ended, and the selected per unit data
and ratios for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 14, 1997
<PAGE>
BOARD OF MANAGERS
THE ACCUMULATION FUND
CHARLES E. SOULE
CHAIRMAN
GORDON T. MILLER
VICE CHAIRMAN
AUBREY K. REID, JR.
JOAN SADOWSKY
WILLIAM J. SHORT
[LOGO]
WORCESTER, MASSACHUSETTS 01608
This report and the financial statements attached are
submitted for the general information of contract
owners and are not authorized for distribution to
prospective investors unless preceded or accompanied
by an effective prospectus. Nothing herein contained
is to be considered an offer of sale of The Paul
Revere Variable Annuity Insurance Company contracts.
Such offering is made only by prospectus, which
includes details as to offering price and other
material information.
Form 9949 Rev. 1/97 Printed in U.S.A.
