<PAGE>
BOARD OF MANAGERS
THE ACCUMULATION FUND
DONALD BOGGS, CHAIRMAN
GORDON T. MILLER,VICE CHAIRMAN
AUBREY K. REID, JR.
JOAN SADOWSKY
WILLIAM J. SHORT
THE PAUL REVERE
VARIABLE ANNUITY
INSURANCE COMPANY
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 10100 Rev. 6/96 Printed in U.S.A.
SEMI-ANNUAL REPORT
June 30, 1997
TO OUR CONTRACT OWNERS AND PARTICIPANTS:
U.S. stocks have provided investors with an exciting ride so far this year.
The S&P 500 has posted astounding returns of 20.6% year-to-date and 17.5% for
the second quarter. We are operating in a benign inflationary environment
globally with moderate economic growth. The Russell 1000 Growth Index
outperformed the S&P 500 in the second quarter, posting a return of 18.9%. The
accumulation unit values of the Qualified Fund and Non-Qualified Fund increased
17.3% and 16.5%, respectively.
The portfolio's slight underperformance in the quarter was attributed to
its relative underweighting in the Consumer Staples sector, and to a lesser
extent, slight underweighting in Technology. As has been the case for some
time, we believe that valuations in many of the Staples companies, particularly
food companies, are at historic highs and that more reasonable valuations exist
elsewhere, particularly in Financial Services. Stock selection in Technology
was a strong contributor to absolute portfolio performance in the quarter.
Within the sector, we have shifted emphasis toward software and service stocks.
The portfolio's exposure to networking stocks was increased, reflecting firming
demand and improved valuations, while semiconductor exposure was reduced in the
quarter. The portfolio's Financial Services holdings turned in another quarter
of strong performance, and the portfolio remains overweighted in this sector.
Insurance stocks, in particular, were strong performers given the benign
interest rate environment and reasonable valuations.
Looking forward, our approach to selecting stocks continues to focus on
bottom-up, company-driven research. We will pursue companies within attractive
sectors of the equity markets which are positioned to become leaders in their
industries and therefore offer excellent long-term growth potential. Through
close examination of company fundamentals, we will seek to provide strong
relative performance in this challenging US economic environment.
Sincerely,
/s/ Donald Boggs
------------------------------------------
Donald Boggs
Senior Vice-President
The Paul Revere Variable Annuity Insurance
Company
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
(UNAUDITED)
----------------------------------
SERIES Q SERIES N
(QUALIFIED) (NON-QUALIFIED)
-------------- ------------------
ASSETS
<S> <C> <C>
Investments in securities at market value
(Cost: Series Q $16,208,239; Series N $4,281,270)
(see Statement of Investments) $20,498,048 $5,484,755
Cash 116 170,183
Dividends and interest receivable 23,298 6,338
Receivable for investments sold 556,357 153,015
----------- ----------
Total assets 21,077,819 5,814,291
----------- ----------
LIABILITIES
Surrenders payable 655,570 43,844
Payable for investments purchased 366,155 85,687
Payable to The Paul Revere Variable Annuity Insurance Co. 79,870 23,296
Other 17,944 3,734
----------- ----------
Total liabilities 1,119,539 156,561
----------- ----------
TOTAL NET ASSETS $19,958,280 $5,657,730
----------- ----------
CONTRACT OWNERS' EQUITY
Deferred contracts terminable by owner $16,366,532 $3,906,904
Currently payable contracts 3,591,748 1,750,826
----------- ----------
Total net assets $19,958,280 $5,657,730
----------- ----------
ACCUMULATION UNITS OUTSTANDING 1,970,993 556,281
=========== ==========
NET ASSET VALUE PER ACCUMULATION UNIT $10.126 $10.171
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED 6/30/97
(UNAUDITED) YEAR ENDED 12/31/96
------------------------------ -------------------------------
SERIES Q SERIES N SERIES Q SERIES N
(QUALIFIED) (NON-QUALIFIED) (QUALIFIED) (NON-QUALIFIED)
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
Operations:
Net investment income (loss) $ 30,926 $ (2,095) $ 52,342 $ 1,718
Net realized gain on
investments 2,516,929 630,365 8,351,181 718,025
Net increase (decrease) in
unrealized appreciation of
investments 475,508 178,143 (4,309,054) 118,379
----------- ---------- ------------ ----------
Increase in net assets
from operations 3,023,363 806,413 4,094,469 838,122
Contract receipts:
Gross purchase payments
received 24,092 4,710 106,019 8,707
Deductions from purchase
payments 1,023 312 3,892 542
----------- ---------- ------------ ----------
Net purchase payments
received 23,069 4,398 102,127 8,165
Payments to contract owners:
Annuity payments to contract
owners: 181,732 94,323 304,504 170,686
Terminations and withdrawals
to contract owners 967,728 30,388 24,628,563 58,037
----------- ---------- ------------ ----------
Total payments to contract
owners 1,149,460 124,711 24,933,067 228,723
----------- ---------- ------------ ----------
Net contract payments to
contract owners (1,126,391) (120,313) (24,830,940) (220,558)
Other additions (deductions) (8,804) 31,824 31,550 60,821
----------- ---------- ------------ ----------
Total increase (decrease)
in net assets 1,888,168 717,924 (20,704,921) 678,385
NET ASSETS
Beginning of year 18,070,112 4,939,806 38,775,033 4,261,421
----------- ---------- ------------ ----------
End of period $19,958,280 $5,657,730 $ 18,070,112 $4,939,806
=========== ========== ============ ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED 6/30/97
(UNAUDITED)
----------------------------------
SERIES Q SERIES N
(QUALIFIED) (NON-QUALIFIED)
-------------- ------------------
<S> <C> <C>
INVESTMENT INCOME (LOSS)
Income:
Dividends $ 110,340 $ 29,589
Interest 68,337 11,310
---------- --------
Total income 178,677 40,899
Expenses:
Mortality and expense risk fees 94,334 26,163
Investment management and advisory service fees 47,167 13,081
Professional services 6,250 3,750
---------- --------
Total expenses 147,751 42,994
---------- --------
Net investment income (loss) 30,926 (2,095)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments sold 2,516,929 630,365
Net increase in unrealized appreciation of investments 475,508 178,143
---------- --------
Net realized and unrealized gain on investments 2,992,437 808,508
---------- --------
Increase in net assets from operations $3,023,363 $806,413
========== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------ -----------------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST (a) VALUE ASSETS SHARES COST (a) VALUE ASSETS
------ -------- --------- ------ ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCKS
AEROSPACE
AlliedSignal Inc. 1,500 63,270 126,000 400 17,618 33,600
Boeing Co. 2,000 93,129 106,250 500 25,393 26,563
------- --------- ------- -------
156,399 232,250 1.2% 43,011 60,163 1.1%
------- --------- ------- -------
AUTOMOTIVE
Goodrich B F Co. 1,200 49,195 52,050 300 12,265 13,012
(b)Hertz Corporation 2,300 75,742 82,800 600 19,759 21,600
------- --------- ------- -------
124,937 134,850 0.7% 32,024 34,612 0.6%
------- --------- ------- -------
BANKS AND CREDIT COMPANIES
Bank of Boston Corp. 1,980 119,956 143,302 580 26,705 41,977
CCB Financial Corp. 300 22,016 21,938 100 7,339 7,313
Comerica Inc. 2,500 94,844 170,000 700 26,127 47,600
Crestar Financial Corp. 3,400 91,095 132,175 800 21,483 31,100
First Bank System Inc. 4,300 268,328 367,113 1,100 68,642 93,913
Northern Trust Corp. 4,800 95,180 232,200 1,600 38,205 77,400
Norwest Corp. 2,400 72,510 135,000 600 15,494 33,750
------- --------- ------- -------
763,929 1,201,728 6.0% 203,995 333,053 5.9%
------- --------- ------- -------
BUSINESS MACHINES
Hewlett-Packard Co. 2,400 103,830 134,400 700 32,709 39,200
(b)Sun Microsystems Inc. 2,400 82,800 89,400 700 24,150 26,075
------- --------- ------- -------
186,630 223,800 1.1% 56,859 65,275 1.1%
------- --------- ------- -------
BUSINESS SERVICES
(b)Ceridian Corp. 1,100 45,027 46,475 300 12,281 12,675
(b)Computer Sciences Corp. 1,900 126,184 137,037 500 32,981 36,063
Danka Business Systems ADR 4,700 190,813 192,113 1,300 52,550 53,137
Electronic Data Systems Corp. 2,100 81,239 86,625 600 23,211 24,750
IKON Office Solutions Inc. 4,900 166,397 122,196 1,500 50,555 37,407
------- --------- ------- -------
609,660 584,446 2.9% 171,578 164,032 2.9%
------- --------- ------- -------
CHEMICALS
Air Products & Chemicals, Inc. 2,200 145,829 178,750 600 39,657 48,750
Hercules, Inc. 1,600 75,496 76,600 400 18,874 19,150
Praxair Inc. 2,500 110,760 140,000 600 26,396 33,600
------- --------- ------- -------
332,085 395,350 2.0% 84,927 101,500 1.9%
------- --------- ------- -------
COMPUTER SOFTWARE-PC
First Data Corp. 4,900 166,184 215,600 1,400 46,769 61,600
(b)Microsoft Corp. 2,900 323,825 366,487 800 89,800 101,100
------- --------- ------- -------
490,009 582,087 2.9% 136,569 162,700 2.9%
------- --------- ------- -------
COMPUTER SOFTWARE-SYSTEMS
(b)BMC Software, Inc. 2,700 120,667 149,512
(b)Cadence Design Systems, Inc. 1,785 66,505 59,798 510 19,001 17,085
(b)Compaq Computer Corp. 1,000 83,534 99,500 300 25,677 29,850
Computer Assoc. Intl. Inc. 4,700 191,406 262,025 1,300 53,243 72,475
(b)Compuware Corporation 4,300 152,804 205,325 1,200 42,963 57,300
(b)Dell Computer Corp. 800 91,100 94,000 200 22,775 23,500
HBO & Company 1,100 67,625 75,762 400 24,240 27,550
(b)Oracle Corp. 3,600 114,987 181,350 1,025 27,459 51,633
------- --------- ------- -------
888,628 1,127,272 5.7% 215,358 279,393 4.9%
------- --------- ------- -------
CONSUMER GOODS & SERVICES
(b)800-JR Cigar, Inc. 100 1,700 2,075 100 1,700 2,075
(b)ADT Ltd. 10,800 295,366 359,100 2,900 79,385 96,425
Browning-Ferris
Industries,Inc. 3,900 118,906 129,675 1,100 33,538 36,575
Coca-Cola Company 4,100 290,834 278,800 1,100 78,029 74,800
Colgate-Palmolive Co. 5,400 239,755 352,350 1,400 61,474 91,350
Corning Inc. 3,000 144,032 166,875 800 38,424 44,500
</TABLE>
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
---------------------------------------- ------------------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST (a) VALUE ASSETS SHARES COST (a) VALUE ASSETS
------- ---------- --------- ------ ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSUMER GOODS & SERVICES
(CONTINUED)
(b)CUC International, Inc. 4,300 101,845 110,995 1,200 28,422 30,976
Gillette Co. 2,700 195,425 255,825 700 50,012 66,325
Philip Morris Cos. Inc. 13,500 499,113 597,375 3,700 137,618 163,725
Procter & Gamble Co. 1,900 157,578 268,375 500 39,839 70,625
Tyco Intl. Ltd. 13,600 455,631 946,900 3,500 116,493 243,687
Wal-Mart Stores, Inc. 3,200 101,392 108,400 900 28,517 30,487
Waste Management Inc. 3,100 104,811 99,587 800 27,047 25,700
--------- --------- ------- -------
2,706,388 3,676,332 18.4% 720,498 977,250 17.3%
--------- --------- ------- -------
ELECTRICAL EQUIPMENT
General Electric Co. 12,700 565,509 825,500 3,500 144,009 227,500
Honeywell, Inc. 1,700 89,554 128,987 500 22,867 37,937
(b)Kulicke & Soffa Industries, Inc. 5,200 137,375 169,000 1,500 39,887 48,750
--------- --------- ------- -------
792,438 1,123,487 5.6% 206,763 314,187 5.5%
--------- --------- ------- -------
ELECTRONICS
(b)Applied Materials, Inc. 1,200 74,400 85,050 400 24,825 28,350
(b)Atmel Corp. 2,100 63,250 58,800 600 18,450 16,800
(b)Imation Corp. 150 25,976 3,937 - -
Intel Corp. 1,300 142,013 184,437 400 42,000 56,750
(b)Novellus Systems, Inc. 900 70,997 77,850 200 15,842 17,300
(b)Teradyne, Inc. 2,800 91,189 110,600 800 26,244 31,600
(b)Xilinx, Inc. 1,100 46,727 54,038 400 17,492 19,650
--------- --------- ------- -------
514,552 574,712 2.9% 144,853 170,450 3.0%
--------- --------- ------- -------
ENERGY
(b)BJ Services Company 2,500 120,049 134,063 600 28,779 32,175
Halliburton Company 900 73,507 71,325 200 16,335 15,850
(b)Santa Fe International Corp. - - 100 2,850 3,400
Union Pacific Resources Group,
Inc. 3,000 81,801 74,625 900 24,575 22,387
--------- --------- ------- -------
275,357 280,013 1.4% 72,539 73,812 1.3%
--------- --------- ------- -------
ENTERTAINMENT
(b) Viacom, Inc. Class B 700 27,770 21,000 0.4%
------- -------
FINANCIAL INSTITUTIONS
(b)ADVANTA Corp. Class B 400 15,846 14,300
American Express Co. 2,100 151,851 156,450 600 43,386 44,700
Federal Home Loan Mtg. Corp. 4,300 84,511 150,500 1,200 22,380 42,000
Federal Natl Mtg Assoc. 5,700 236,912 248,663 1,600 66,993 69,800
FINOVA Group Inc. 1,600 69,312 122,400 500 21,877 38,250
Household International, Inc. 400 33,558 47,000 100 8,390 11,750
--------- --------- ------- -------
576,144 725,013 3.6% 178,872 220,800 3.9%
--------- --------- ------- -------
FOOD & BEVERAGE PRODUCTS
Archer-Daniels-Midland Co. 2,700 61,394 63,450 800 18,191 18,800
Hershey Foods Corp. 1,200 51,222 66,450 300 12,806 16,613
McCormick & Co. 3,900 94,575 98,475 1,400 34,025 35,350
PepsiCo Inc. 3,300 123,124 124,163 900 33,579 33,862
Ralston-Purina Group 1,600 118,740 131,600 400 29,995 32,900
Wrigley (WM) Jr. Co. 3,200 196,975 214,400 900 55,180 60,300
--------- --------- ------- -------
646,030 698,538 3.5% 183,776 197,825 3.5%
--------- --------- ------- -------
INSURANCE
Aetna Inc. 500 50,280 51,188 100 10,056 10,238
Chubb Corp. 5,000 273,341 334,375 1,400 76,567 93,625
Cigna Corp. 2,000 246,157 355,000 500 61,539 88,750
Conseco Inc. 3,300 130,928 122,100 1,000 33,442 37,000
The Hartford Financial Services
Group Inc. 2,900 184,537 239,975 800 50,907 66,200
Lincoln National Corp. 2,600 164,755 167,375 700 44,363 45,062
Travelers Group Inc. 3,400 97,630 214,625 900 24,715 56,813
--------- --------- ------- -------
1,147,628 1,484,638 7.4% 301,589 397,688 7.0%
--------- --------- ------- -------
</TABLE>
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------------ ----------------------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST (a) VALUE ASSETS SHARES COST (a) VALUE ASSETS
------- --------- ---------- ------ ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MEDICAL & HEALTH PRODUCTS
American Home Products Corp. 2,700 198,665 206,550 700 51,452 53,550
(b)AmeriSource Health Corp. 3,100 147,260 154,613 900 42,875 44,888
Bristol-Myers Squibb Co. 6,700 394,023 542,700 1,900 112,667 153,900
(b)Elan Corp. ADS 2,800 74,072 126,700 800 21,173 36,200
Lilly (Eli) Co. 2,600 176,278 284,385 700 46,485 76,563
McKesson Corp. 900 65,525 69,750 300 21,860 23,250
Merck & Co. Inc. 1,400 110,544 143,325 400 31,801 40,950
Pfizer Inc. 2,800 151,784 334,600 700 35,414 83,650
Schering Plough Corp. 9,000 231,359 430,875 2,200 56,200 105,325
Smithkline Beecham PLC ADR 1,500 108,840 137,437 500 29,780 45,812
---------- ---------- --------- ---------
1,658,350 2,430,935 12.2% 449,707 664,088 11.7%
---------- ---------- --------- ---------
MEDICAL & HEALTH TECH.
SERVICES
(b)Boston Scientific Corp. 3,800 227,962 233,700 1.100 64,945 67,650
(b)HEALTHSOUTH Corp. 8,200 153,817 204,492 2,200 41,196 54,864
Medtronic Inc. 2,400 135,560 198,000 600 34,404 49,500
(b)St. Jude Medical Inc. 4,750 177,954 185,250 1,400 52,228 54,600
(b)Tenet Healthcare Corp. 2,200 60,845 64,900 600 16,658 17,700
(b)United Healthcare Corp. 4,800 224,342 249,600 1,300 59,145 67,600
(b)Vencor, Inc. 1,700 64,742 71,825 500 19,091 21,125
---------- ---------- --------- ---------
1,045,222 1,207,767 6.1% 287,667 333,039 5.9%
---------- ---------- --------- ---------
PRINTING & PUBLISHING
Gannett Co. 2,700 186,177 266,625 700 50,454 69,125
McGraw-Hill Cos, Inc. - - 600 23,162 35,325
---------- ---------- --------- ---------
186,177 266,625 1.3% 73,616 104,450 1.8%
---------- ---------- --------- ---------
RAILROAD
Burlington Northern Santa Fe
Corp. 1,600 137,437 143,800 400 34,171 35,950
Canadian National Railway Co. 600 24,936 26,250 200 8,312 8,750
---------- ---------- --------- ---------
162,373 170,050 0.9% 42,483 44,700 0.8%
---------- ---------- --------- ---------
RESTAURANTS & LODGING
(b) HFS Inc. 900 51,373 52,200 0.3% 300 16,832 17,400 0.3%
---------- ---------- --------- ---------
STORES
American Stores Co. 1,200 52,741 59,250 300 13,170 14,813
CVS Corp. 4,200 189,044 215,250 1,200 54,078 61,500
(b)Dollar General Corp. 2,900 77,106 109,113 800 22,564 30,100
Lowe's Cos. Inc. 2,300 77,732 85,387 600 20,118 22,275
(b)Rite Aid Corp. 12,250 477,546 610,969 3,350 132,381 167,081
(b)Staples Inc. 3,500 67,777 81,375 1,000 19,342 23,250
---------- ---------- --------- ---------
941,946 1,161,344 5.8% 261,653 319,019 5.6%
---------- ---------- --------- ---------
SUPERMARKETS
(b) Safeway Inc. 1,475 45,358 68,034 0.3% 440 14,023 20,295 0.4%
---------- ---------- --------- ---------
TELECOMMUNICATIONS
(b)3Com Corp. 1,300 53,213 58,500 600 23,725 27,000
(b)Ascend Communications, Inc. 1,800 73,928 70,875 500 20,493 19,687
(b)Bay Networks Inc. 3,500 88,682 92,312 1,000 25,320 26,375
(b)Cisco Systems Inc. 3,700 230,681 248,363 1,000 62,094 67,125
Lucent Technologies, Inc. 2,400 139,340 173,100 700 41,299 50,488
MCI Communications Corp. 4,100 100,038 156,825 1,100 27,446 42,075
Sprint Corporation 4,200 204,010 219,450 1,100 53,411 57,475
Telephone & Data Systems,Inc. 1,600 60,547 60,800 300 11,385 11,400
(b)Worldcom, Inc. 5,100 149,656 163,200 1,400 40,963 44,800
---------- ---------- --------- ---------
1,100,095 1,243,425 6.2% 306,136 346,425 6.1%
---------- ---------- --------- ---------
UTILITIES-GAS
Consolidated Nat Gas Co. 1,700 91,462 91,588 0.5% 500 26,714 26,938 0.5%
---------- ---------- --------- --------- --------- -------
Total common stocks 359,490 15,493,170 19,736,484 98.9% 100,505 4,259,812 5,450,094 96.3%
---------- ---------- --------- --------- --------- -------
</TABLE>
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
JUNE 30, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
------------------------------------------- ----------------------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST (a) VALUE ASSETS SHARES COST (a) VALUE ASSETS
------ -------- ------- ------ ------ -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED STOCKS
TELECOMMUNICATIONS
Airtouch Communications Inc.
6.00% Class B 2,684 69,123 75,740 587 13,067 16,565
4.25% Class C 1,788 46,039 85,824 377 8,391 18,096
---------- ---------- --------- ---------
Total preferred stocks 4,472 115,162 161,564 0.8% 964 21,458 34,661 0.6%
---------- ---------- ----- --------- --------- -----
Total stocks 363,962 15,608,332 19,898,048 99.7% 101,469 4,281,270 5,484,755 96.9%
---------- ---------- ----- --------- --------- -----
SHORT-TERM INVESTMENTS
Federal Natl. Mtg. Assoc.
5.6% due July 1, 1997 599,907 600,000 3.0%
---------- ---------- -----
Total investments 16,208,239 20,498,048 102.7% 4,281,270 5,484,755 96.9%
========== ---------- ----- ========= --------- -----
CASH AND RECEIVABLES LESS LIABILITIES
(539,768) -2.7% 172,975 3.1%
---------- ----- --------- -----
Total net assets 19,958,280 100.0% 5,657,730 100.0%
========== ===== ========= =====
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
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 wholly-owned by Provident Companies, 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 June 30, 1997, 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. Deferred 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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 Provident
Companies, 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>
June 30, 1997 $11,994,299 $12,699,281 $3,228,708 $3,316,050
December 31, 1996 $17,913,759 $40,511,084 $4,024,116 $4,120,878
</TABLE>
At June 30, 1997, net unrealized appreciation of investments in Series Q,
amounting to $4,289,809, consisted of unrealized gains of $4,405,780 and
unrealized losses of $115,971; net unrealized appreciation of investment in
Series N, amounting to $1,203,485, consisted of unrealized gains of
$1,236,597 and unrealized losses of $33,112.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
7. ACCUMULATION UNITS
The change in the number of accumulation units outstanding were as follows:
<TABLE>
<CAPTION>
SERIES Q SERIES N SERIES Q SERIES N
(QUALIFIED) (NON-QUALIFIED) (QUALIFIED) (NON-QUALIFIED)
--------------- ---------------------- -------------- ------------------
SIX MONTHS ENDED 6/30/97
(UNAUDITED) YEAR ENDED 12/31/96
--------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Units outstanding at
beginning of year 2,093,030 565,935 5,490,718 586,396
Units credited to contracts:
Net purchase payments 2,484 475 13,534 1,056
Units withdrawn from
contracts:
Annuity payments 19,553 10,071 39,287 21,645
Terminations and
withdrawals 103,949 3,199 3,375,395 7,179
--------- ------- ---------- -------
Net units withdrawn 123,502 13,270 3,414,682 28,824
--------- ------- ---------- -------
Contract units withdrawn in
excess of units credited (121,018) (12,795) (3,401,148) (27,768)
Other additions (deductions) (1,019) 3,141 3,460 7,307
--------- ------- ---------- -------
Net decrease in units (122,037) (9,654) (3,397,688) (20,461)
--------- ------- -------
Units outstanding at end of
period 1,970,993 556,281 2,093,030 565,935
========= ======= ========== =======
</TABLE>
The majority of the terminations and withdrawals from Series Q during 1997
related to withdrawals by participants in the Paul Revere Agency and Home
Office Pension Plans which were deposited into an unrelated funding
vehicle.
8. MERGER AGREEMENT
On March 27, 1997, Provident Companies, Inc. acquired The Paul Revere
Corporation at a price of approximately $1.2 billion.
<PAGE>
SELECTED PER UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31
1997 --------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
----------- ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER UNIT DATA (a)
SERIES Q (QUALIFIED)
Investment income $ 0.088 $0.153 $0.119 $ 0.081 $ 0.054 $ 0.068
Expenses 0.073 0.133 0.096 0.073 0.079 0.076
------- ------ ------ ------- ------- -------
Net investment income (loss) 0.015 0.020 0.023 0.008 (0.025) (0.008)
Net realized and unrealized
gains (losses) from securities 1.478 1.551 1.711 (0.020) 0.291 0.159
------- ------ ------ ------- ------- -------
Net increase (decrease) in net
asset value 1.493 1.571 1.734 (0.012) 0.266 0.151
Accumulation unit net asset
value:
Beginning of year 8.633 7.062 5.328 5.340 5.074 4.923
------- ------ ------ ------- ------- -------
End of period $10.126 $8.633 $7.062 $ 5.328 $ 5.340 $ 5.074
======= ====== ====== ======= ======= =======
SERIES N (NON-QUALIFIED)
Investment income $ 0.073 $0.137 $0.117 $ 0.099 $ 0.055 $ 0.071
Expenses 0.077 0.134 0.109 0.102 0.092 0.094
------- ------ ------ ------- ------- -------
Net investment income (loss) (0.004) 0.003 0.008 (0.003) (0.037) (0.023)
Net realized and unrealized
gains (losses) from securities 1.446 1.459 1.769 (0.023) 0.318 0.194
------- ------ ------ ------- ------- -------
Net increase (decrease) in net
asset value 1.442 1.462 1.777 (0.026) 0.281 0.171
Accumulation unit net asset
value:
Beginning of year 8.729 7.267 5.490 5.516 5.235 5.064
------- ------ ------ ------- ------- -------
End of period $10.171 $8.729 $7.267 $ 5.490 $ 5.516 $ 5.235
======= ====== ====== ======= ======= =======
(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.
RATIOS
SERIES Q (QUALIFIED)
Operating expenses to average
accumulation fund balance 0.78% 1.57% 1.55% 1.55% 1.56% 1.56%
Net investment income (loss) to
average accumulation fund
balance 0.16% 0.24% 0.38% 0.17% (0.50%) (0.17%)
Portfolio turnover rate 64% 78% 64% 64% 59% 61%
Accumulation units outstanding
at the end of the period (in
thousands) 1,971 2,093 5,491 5,597 5,700 5,753
SERIES N (NON-QUALIFIED)
Operating expenses to average
accumulation fund balance 0.82% 1.69% 1.71% 1.73% 1.73% 1.74%
Net investment income (loss) to
average accumulation fund
balance (0.04%) 0.04% 0.13% (0.05%) (0.69%) (0.42%)
Portfolio turnover rate 65% 94% 67% 62% 62% 66%
Accumulation units outstanding
at the end of the period (in
thousands) 556 566 586 604 640 662
</TABLE>
