<PAGE>
FILE NO. 2-24380
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20550
FORM N-3 REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
/ / Pre Effective Amendment No.: __
/X/ Post Effective Amendment No.: 52
/X/ and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
/X/ Amendment No.: 52
/X/ THE PAUL REVERE VARIABLE ANNUITY CONTRACT ACCUMULATION FUND
(Exact Name of Registrant as Specified in Charter)
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
(Name of Insurance Company)
18 Chestnut Street, Worcester, Massachusetts 01608
(ADDRESS OF INSURANCE COMPANY'S PRINCIPAL EXECUTIVE OFFICES)
Insurance Company's Telephone Number (including area code): (508)
799-4441
Susan N. Roth
Provident Companies, Inc.
1 Fountain Square
Suite 756
Chattanooga, Tennessee 37402
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Approximate Date of Proposed Public Offering: May 1, 1998
<PAGE>
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to Paragraph (b) of Rule 485
/X/ on May 1, 1998, pursuant to Paragraph (b) of Rule 485
/ / 60 days after filing, pursuant to Paragraph (a)(i) of Rule 485
/ / on , pursuant to Paragraph (a) of Rule 485
THE PAUL REVERE VARIABLE ANNUITY
CONTRACT ACCUMULATION FUND
Cross Reference Sheet Showing Location in Preliminary Prospectus for Individual
"Level Charge" and Group Variable Administration Variable Annuity Contracts of
Items Called for by Registration Statement on Form N-8B-1.
<TABLE>
<CAPTION>
PAGE NO. ITEM NO. HEADING IN PROSPECTUS (PART A)
<S> <C> <C>
1 Cover Page
8 2 Definitions
8 3 Summary
11 4 Per Unit Income and Capital Changes (a)
13 5 Description of Insurance Company and the
Accumulation Fund
16 6 Management
18 7 Deductions and Expenses
21 8 Description of Contracts
26 9 Payments to Annuitants
28 10 Payments at Death
13 11 Purchases Payment Provisions
30 12 Redemption
36 13 Federal Tax Status
39 14 Legal Proceedings
STATEMENT OF ADDITIONAL
INFORMATION (PART B)
Cover Page
1 17 Table of Contents
3 18 General Information and History of Insurance
Company and the Accumulation Fund
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
4 19 Investment Objectives and Policies
6 20 Management
11 21 Investment Advisory Services
15 22 Brokerage Allocation
17 24 Underwriters
18 23 Purchase and Pricing of Contracts
19 26 Annuity Payments
21 27 Financial Statements
OTHER INFORMATION (PART C)
28(a) Financial Statements and Exhibits
1 28(b) List of Exhibits
2 29 Directors and Officers of the Insurance Company
2 30 Persons Controlled by or under Common Control with
Registrant
2 31 Number of Contractowners
2 32 Indemnification
2 33 Business and Other Connections of Investment Advisers
2 34 Principal Underwriters
3 35 Location of Accounts and Records
3 36 Management Services
3 37 Undertakings
</TABLE>
3
<PAGE>
The
Paul Revere
VARIABLE ANNUITY
CONTRACT ACCUMULATION FUND
PROSPECTUS
. "Level Charge" Variable Annuity
Contracts
. Individual Variable Annuity
Contracts
. Group
Variable
Annuity
Contracts
May 1, 1998 (R)
WORCESTER, MASSACHUSETTS
508-799-4441
____________________________________________________
(R)
WORCESTER, MA 01608
Form 5373-96
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Definitions 8
Summary 8
Selected Per Unit Data and Ratios 11
Description of the Company and 13
the Accumulation Fund
A. Investment Policies and Restrictions 14
Management 16
Deductions and Expenses 18
A. Sales and Administrative Functions and Expenses 18
B. Investment Advisory Fees 19
C. Expense and Mortality and Expense Risk Assumptions 20
D. Brokerage Expenses and Portfolio Turnover 20
Description of Contracts 21
A. Types of Contracts 21
B. Purchase Payment Provisions 23
C. Accumulation Units 24
D. Net Asset Value 24
E. Annuity Unit 25
F. Payments to Annuitants 26
G. Payments at Death 28
H. Early or Deferred Commencement Dates 30
I. Redemption 30
J. Voting Rights 30
K. Miscellaneous Provisions 31
Prior Contracts 33
A. Flexible Payment Contracts Issued Prior to June 1, 1977 33
B. Group Contracts Issued Prior to June 1, 1977 34
C. Group Deposit Administration Variable Annuity Contracts 34
Fixed Accumulation 36
Federal Tax Status 36
Changes in Operation of the Separate Account 39
Legal Proceedings 39
Statement of Additional Information
Table of Contents
</TABLE>
5
<PAGE>
P R O S P E C T U S
THE PAUL REVERE VARIABLE ANNUITY CONTRACT ACCUMULATION FUND
VARIABLE ANNUITY CONTRACTS
SOLD BY
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
WORCESTER, MASSACHUSETTS 01608
508-799-4441
This Prospectus describes the following Variable Annuity Contracts
("Contracts") offered by The Paul Revere Variable Annuity Insurance Company
("Company"). They are:
1. Flexible Purchase Payment Variable Annuity Contract ("Flexible");
2. Single Payment Variable Annuity Contract ("Single");
3. Individual "Level Charge" Variable Annuity Contract ("Level"); and
4. Group Variable Annuity Contract ("Group").
The purchase payments received pursuant to these contracts are
invested in The Paul Revere Variable Annuity Contract Accumulation Fund
("Accumulation Fund"), a separate account of the Insurance Company. The
Accumulation Fund consists of two Series. Series Q is applicable to contracts
which were afforded special tax treatment under the Internal Revenue Code
("IRC") and are commonly referred to as "qualified contracts". Series N is
applicable to all other contracts. Funds may be accumulated and annuity payments
made on a variable basis, a fixed basis or a combination variable and fixed
basis except with respect to the Group Contract which does not provide for fixed
accumulation.
The primary investment objective of both Series of the Accumulation
Fund is growth of capital. The assets of the Accumulation Fund will usually be
invested in common stock believed to have potential for growth but may, from
time to time, be invested in other securities. When deemed necessary for
defensive purposes, the Accumulation Fund may substantially increase that
portion of its assets invested in fixed income obligations and held in cash. As
the contracts are subject to the risks associated with common stock investment
and changing economic conditions, there can be no assurance that the investment
objective will be attained.
6
<PAGE>
This Prospectus sets forth information about the Contracts and
Accumulation Fund that a prospective investor ought to know before investing. A
Statement of Additional Information about the Company, the Accumulation Fund and
the Contracts has been filed with the Securities and Exchange Commission and is
available, without charge, upon written or oral request received by the Company
at its Home Office located at 18 Chestnut Street, Worcester, Massachusetts
01608. Please refer to page 17 to examine the Table of Contents of the Statement
of Additional Information.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this Prospectus carefully and retain it for future
reference.
The date of this Prospectus is May 1, 1998.
The date of the Statement of Additional Information is May 1,
1998.
7
<PAGE>
DEFINITIONS
Accumulation Unit - an accounting device used to determine the value of a
contract before annuity payments begin, the value of which varies in accordance
with the investment experience of the appropriate Series of the Accumulation
Fund.
Annuitant - the person or persons whose life determines the duration of annuity
payments involving life contingencies.
Annuity - a series of payments generally for life or for life with specified
minimums.
Annuity Commencement Date - the date on which annuity payments will begin.
Annuity Unit - an accounting device used to determine the amount of annuity
payments.
Contract Owner - the person or entity with legal rights of ownership of the
annuity contract.
Fixed Annuity - an annuity with payments fixed in amount throughout the annuity
period.
Plan - an employer pension plan, profit sharing plan, or annuity purchase plan
under which benefits are to be provided by the Variable Annuity Contracts
described herein.
Purchase Payments - payments to the Company, after specific deductions, under an
annuity contract.
Variable Annuity - an annuity providing for payments varying in amount in
accordance with the investment experience of the appropriate Series of the
Accumulation Fund.
SUMMARY
<TABLE>
<CAPTION>
FLEXIBLE* SINGLE* LEVEL* GROUP*
--------- ------- ------ ------
CONTRACTS
---------
CONTRACT OWNER TRANSACTION EXPENSES:
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases 7.5% 6.0% 5.0% 5.0%
(as a percentage of purchase payments)
Collection Fee (per payment) $1.00 $1.00 $1.00 $1.00
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
ANNUAL EXPENSES (as a percentage of
average net assets):
Management Fees .5% .5% .5% .5%
Mortality and Expense Risk Fees 1.0% 1.0% 1.0% 1.0%
Total Annual Expenses 1.5% 1.5% 1.5% 1.5%
</TABLE>
*See page 10 for full contract name.
If you either surrender or annuitize your contract at the end of the
applicable time period, you would have paid the following expenses on a $1,000
investment (or annual $1,000 investments), assuming a 5% annual return on
assets:
<TABLE>
<CAPTION>
YEAR
---------
<S> <C> <C> <C> <C>
1 3 5 10
-- --- --- -----
Flexible (one time $1000 deposit) 90 120 152 242
Flexible (annual $1000 deposits) 90 315 603 1,628
Single 75 106 138 230
Level/Group 66 96 129 222
</TABLE>
This fee table is designed to summarize and illustrate all of the
deductions and expenses described on pages 8 and 9 for the contracts offered by
this Prospectus. State premium taxes, as described on page 8 may also
apply.
General Information:
The Accumulation Fund is registered under the Investment Company Act of 1940 as
an open-end diversified investment company. It is the separate account through
which the Company sets aside, separate and apart from its general assets, assets
attributable to the variable portion of its variable annuity contracts.
Registration under the Investment Company Act of 1940 ("1940 Act") does not
involve supervision of management or investment practices or policies by the
Securities and Exchange Commission.
Four types of variable annuity contracts are offered by this Prospectus.
Three of these contracts are issued to individuals and one is a group contract.
Two of the "individual" contracts provide for a series of purchase payments to
be made over a period of time and one calls for only a single purchase
payment.
9
<PAGE>
These contracts are designed for use in connection with retirement plans,
some of which may qualify for federal income tax advantages available under
Sections 401, 403, or 408 of the IRC.
This Prospectus generally describes only the variable portion of contracts
issued by the Company, except where fixed accumulation or fixed annuity payments
are specifically mentioned. Fixed annuities are funded by the Company's general
assets and are not placed in the Accumulation Fund. (See Fixed Accumulation,
page 15).
The portion of contract values placed in either Series of the Accumulation
Fund are subject to the investment risks inherent in any equity investment.
These risks include changing economic conditions as well as the risks inherent
in management's ability to make appropriate investment choices. There is no
guarantee under a variable annuity contract that the variable annuity payments
or the accumulation values will equal or exceed total purchase payments.
All contracts contain the Company's promise that on the annuity
commencement date, the contract owner or annuitant may elect to have provided an
annuity payable for the lifetime of the annuitant provided the initial monthly
annuity payment equals or exceeds $25. If the initial monthly annuity payment
would be less than $25, payment shall be made at less frequent intervals or the
value of the account shall be distributed in a lump sum as selected by the
annuitant. The annuity payment will be based on the contract value and in case
of variable annuity payments, will be affected only by the investment
performance of the appropriate Series of the Accumulation Fund and not by
adverse mortality experience or by increases in the Company's expenses above
those assumed and for which deductions are provided for in the contract. Owners
of individual contracts and participants in group contracts to which variable
accumulation units are credited, have the right to vote on particular questions
affecting the management of the Accumulation Fund. (see Voting Rights, page
12)
Withdrawal or redemption of funds from certain contracts may result in tax
penalties. (see Federal Tax Status, page 15)
10
<PAGE>
SELECTED PER UNIT DATA AND RATIOS (a)
<TABLE>
<CAPTION>
Series N 1997(b) 1996(b) 1995(b) 1994(b) 1993(b) 1992(b) 1991 1990 1989 1988 1987
(Non-qualified)
Year Ended December 31,
-----------------------
Income and Expenses
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ .135 $ .137 $ .117 $ .099 $ .055 $ .071 $ .085 $ .111 $ .104 $ .070 $ .042
Operating expenses .166 .134 .109 .102 .092 .094 .076 .072 .059 .047 .038
Net investment income (loss) (0.031) .003 .008 (.003) (.037) (.023) .009 .039 .045 .023 .004
Capital Changes
Net realized and unrealized 2.660 1.459 1.769 (.023) .318 .194 1.361 (.102) 1.002 .201 .019
gains (losses) from
securities
Net increase (decrease) in 2.629 1.462 1.777 (.026) .281 .171 1.370 (.063) 1.047 .224 .023
net asset value
Accumulation unit net asset
value: Beginning of year 8.729 7.267 5.490 5.516 5.235 5.064 3.694 3.757 2.710 2.486 2.463
End of year $11.358 $8.729 $7.267 $5.490 $5.516 $5.235 $5.064 $3.694 $3.757 $2.710 $2.486
Ratios
Operating expenses to average 1.67% 1.69% 1.71% 1.73% 1.73% 1.74% 1.76% 1.80% 1.80% 1.81% 1.80%
accumulation fund balance
Net investment income (loss) (0.31%) 0.04% 0.13% (0.05%) (0.69%) (0.42%) 0.21% 0.96% 1.36% 0.88% 0.17%
to average accumulation fund
balance
Portfolio turnover rate 139% 94% 67% 62% 62% 66% 109% 84% 84% 64% 138%
Accumulation units 530 566 586 604 640 662 684 735 774 942 1,085
outstanding at end of year
(in thousands)
</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.
(b) See the Report of Independent Auditors on page 13 of the Statement of
Additional Information.
11
<PAGE>
SELECTED PER UNIT DATA AND RATIOS (a)
<TABLE>
<CAPTION>
Series Q 1997(b) 1996(b) 1995(b) 1994(b) 1993(b) 1992(b) 1991 1990 1989 1988 1987
(Qualified)
Year Ended December 31,
-----------------------
Income and Expenses
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ .177 $ .153 $ .119 $ .081 $ .054 $ .068 $ .093 $ .116 $ .122 $ .078 $ .037
Operating expenses .159 .133 .096 .073 .079 .076 .066 .055 .051 .041 .028
Net investment income (loss) .018 .020 .023 .008 (.025) (.008) .027 .061 .071 .037 .009
Capital Changes
Net realized and unrealized 2.723 1.551 1.711 (.020) .291 .159 1.295 (.107) .928 .194 .030
gains (losses) from
securities
Net increase (decrease) in 2.741 1.571 1.734 (.012) .266 .151 1.322 (.046) .999 .231 .039
net asset value
Accumulation unit net asset
value:
Beginning of year 8.633 7.062 5,328 5.340 5.074 4.923 3.601 3.647 2.648 2.417 2.378
End of year $11.374 $8.633 $7.062 $5.328 $5.340 $5.074 $4.923 $3.601 $3.647 $2.648 $2.417
Ratios
Operating expenses to 1.59% 1.57% 1.55% 1.55% 1.56% 1.56% 1.56% 1.58% 1.58% 1.59% 1.63%
average accumulation fund
balance
Net investment income (loss) 0.18% 0.24% 0.38% 0.17% (0.50%) (0.17%) 0.64% 1.76% 2.20% 1.45% 0.51%
to average accumulation
fund balance
Portfolio turnover rate 130% 78% 64% 64% 59% 61% 98% 80% 89% 66% 133%
Accumulation units 1.887 2,093 5,491 5,597 5,700 5,753 5,839 5,961 6,157 6,385 6,703
outstanding at end of year
(in thousands)
</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.
(b) See the Report of Independent Auditors on page 13 of the Statement of
Additional Information.
12
<PAGE>
DESCRIPTION OF THE COMPANY
AND THE ACCUMULATION FUND
The Company, with an address of 18 Chestnut Street, Worcester,
Massachusetts, is a stock insurance company organized under the laws of
Massachusetts. Its principal business is the sale and administration of life and
annuity insurance policies. The Company was organized on August 6, 1965. The
Accumulation Fund was organized on December 22, 1965 and is registered as a
diversified open-end investment company under the 1940 Act.
Under Massachusetts law, regulation of the Company by the Insurance
Commissioner of Massachusetts includes regulation of its Accumulation Fund which
is not a separately incorporated entity.
The Company is a wholly-owned subsidiary of The Paul Revere Life Insurance
Company, a Massachusetts corporation. The Paul Revere Life Insurance Company is
wholly-owned by The Paul Revere Corporation ("Paul Revere"), a Massachusetts
corporation with its principal office at 18 Chestnut Street, Worcester,
Massachusetts 01608. Paul Revere is comprised of The Paul Revere Life Insurance
Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere
Protective Life Insurance Company and other non-insurance affiliates.
Paul Revere was formerly 83%-owned by Textron Inc. and 17%-owned publicly.
On April 29, 1996, Paul Revere and Provident Companies, Inc. ("Provident")
announced they had signed a definitive merger agreement pursuant to which
Patriot Acquisition Corporation, a wholly owned subsidiary of Provident would
merge with and into Paul Revere with Paul Revere as the surviving corporation.
On November 6, 1996, Paul Revere 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
13
<PAGE>
Provident common stock that Textron will receive in the transaction (as amended,
the "Merger Agreement"). The transaction closed on March 27, 1997. Provident is
a Delaware corporation with its principal office at 1 Fountain Square,
Chattanooga, Tennessee 37402.
Income, gains and losses, whether or not realized, resulting from assets
allocated to the Accumulation Fund are, in accordance with applicable variable
annuity contracts, credited to or charged against the Accumulation Fund without
regard to other income gains or losses of the Company. For this purpose, each
Series of the Accumulation Fund under Massachusetts law may not be charged with
liabilities arising out of any other business of the Company to the extent they
are set aside for variable annuity contracts. However, obligations arising under
such contracts are the obligation of the Company.
The Accumulation Fund consists of two Series. Series Q is made up of
qualified contracts which were afforded special tax treatment under the IRC.
Series N is made up of all other contracts.
The Home Office and Agency retirement plans of The Paul Revere Life
Insurance Company, 18 Chestnut Street, Worcester, Massachusetts 01608 held 34%
of the outstanding units of the Accumulation Fund at December 31, 1997.
A. Investment Policies and Restrictions
The fundamental investment policies and restrictions of the Accumulation Fund
(including Series Q and Series N) are enumerated in Items 1 and 4 through 10
below. They may not be changed without the approval of a majority in interest of
contracts having a voting interest in the Accumulation Fund. A majority as used
in this Prospectus, means (a) 67% or more of the voting interests of the
contract owners present and entitled to vote if voting interests of over 50% are
present or represented by proxy or (b) more than 50% of the voting interest in
the Accumulation Fund, whichever is less. Items 2, 3 and 11 through 15 are not
fundamental investment policies and may be changed by the Board of Managers.
1. The growth of capital is the primary investment objective of the
Accumulation Fund. Assets of the Accumulation Fund, including any earned income
and realized capital gains, shall be kept fully invested except for reasonable
amounts held in cash to meet current expenses or normal contract payments and
for reasonable amounts held for temporary periods pending investment in
accordance with the investment policy.
2. Common stocks believed to have potential for growth will usually
constitute a major portion of the Accumulation Fund portfolio but in keeping
with the objective of growth of capital, the investments may be made from time
to time in other securities. When deemed necessary for defensive purposes, the
Accumulation Fund may substantially increase the portion of its assets invested
in fixed income obligations and held in cash.
3. Investments of the Accumulation Fund are controlled by provisions of
Sections 132H, Chapter 175 of the General Laws of Massachusetts. In general,
this releases the
14
<PAGE>
Accumulation Fund assets from investment restrictions applicable to life
insurance company reserve investments, limits investments in securities of any
one issuer to 10% of the value of the Accumulation Fund assets and requires
common stock purchases to be listed or admitted to trading on a securities
exchange located in the United States or Canada or to be traded in the over-the-
counter securities market. Such section as may be amended from time to time will
be followed.
The Accumulation Fund will not:
4. Acquire more than 5% of the voting securities of any one issuer.
5. Purchase the securities of an issuer, if, immediately after and as a
result of such purchase, the value of its holdings in the securities of such
issuer shall exceed 5% of the value of its total assets.
6. Invest more than 25% of the value of its assets in any one industry.
7. Engage in the purchase or sale of interests in real estate which are
not readily marketable.
8. Borrow money except from banks as a temporary measure for extraordinary
or emergency purposes and then not to exceed 5% of the value of its assets.
9. Engage in the purchase or sale of commodities or commodity contracts.
10. Act as an underwriter of securities of another issuer (except where the
Accumulation Fund may be deemed to be a statutory underwriter in connection with
the disposition of restricted securities).
11. Make purchases on margin, except such short-term credit as is necessary
for clearance of transactions.
12. Make short sales of securities.
13. Invest for the purpose of exercising control or management.
14. Purchase securities of other investment companies except (i) of closed-
end companies in the open market at customary brokerage commissions and then
with an aggregate investment in such securities not exceeding 5% of the value of
its assets and the total outstanding voting interest in any one such investment
company not to exceed 3% or (ii) as a part of a merger or consolidation.
15. Invest in excess of 10% of the value of its assets in restricted
securities.
15
<PAGE>
As of the year ended December 31, 1997, the Accumulation Fund did not
engage in the purchase or sale of interests in real estate, invest in repurchase
agreements or non-negotiable time deposits maturing in more than seven days, or
make loans of securities. The Accumulation Fund has never engaged in puts, calls
or straddles and has no intention to do so at the present time.
MANAGEMENT
The property and business of the Accumulation Fund are managed by a Board
of Managers selected by the owners of the contracts to which variable
accumulation units are credited. A majority of the Accumulation Funds five
managers are not deemed to be "interested persons" of the Accumulation Fund or
the Company as defined in the 1940 Act.
16
<PAGE>
The Board of Managers has the following responsibilities and duties: a) to
select and approve annually an independent certified public accountant, b) to
execute and approve annually an agreement providing for sales and administrative
services, c) to execute and approve annually an agreement providing for
investment advisory services, d) to recommend any changes in the fundamental
investment policies of the Accumulation Fund, and e) to authorize all
investments of the assets of the Accumulation Fund in accordance with the
fundamental investment policies of the Accumulation Fund, and to submit semi-
annual and annual reports to the contract owners.
The Company pursuant to a written agreement currently acts as Investment
Advisor and Administrative Manager of the Accumulation Fund and also assumes
certain expenses and mortality and expense risks in connection with the variable
annuity contracts.
Pursuant to the Investment Advisory Agreement between the Accumulation Fund
and the Company, the Company is authorized, and has employed, at its own
expense, the services of an Investment Sub-Advisor. An Investment Sub-Advisory
Agreement between the Company and MFS Institutional Advisors, Inc. ("MFSI"),
formerly MFS Asset Management, Inc., went into effect on August 16, 1984. MFSI
is registered with the Securities and Exchange Commission as an investment
advisor. Its principal offices are located at 500 Boylston Street, Boston,
Massachusetts 02116. MFSI serves as investment advisor to substantial private
and institutional accounts. MFS serves as investment advisor to certain mutual
fund and insurance company separate accounts. As of December 31, 1997,
Massachusetts Financial Services Company ("MFS") and its subsidiaries including
MFSI, had over $70 billion in assets under management, which included $10
billion of institutional assets, of which approximately $5 billion was managed
by MFSI. Under the Sub-Advisory Agreement, MFSI will provide the Board of
Managers with an investment program for their consideration and will execute the
program approved by the Board.
This Sub-Advisory Agreement was approved by a majority of the members of
the Board of Managers who were not interested persons of the Accumulation Fund,
the Company or MFS. The continuation of both agreements was approved by a vote
of the majority of the Board of Managers who were not interested persons and by
a majority of the entire Board at the first meeting called for that purpose
following the Annual Meeting of Variable Annuity Contract Owners which occurred
on March 27, 1997.
Both agreements shall continue in full force and effect unless terminated
by the Board of Managers of the Accumulation Fund or by a vote of the majority
in interest of the contracts, which termination may be accomplished without the
payment of any penalty with not more than 60 days written notice. Both
agreements shall (i) automatically terminate upon assignment by either party;
(ii) continue in effect from year to year, after it has been in effect for two
years, only if approved annually by a vote of a majority of the Board of
Managers of the Accumulation Fund who are not parties to the agreements or not
interested persons of any of the parties to the agreement.
17
<PAGE>
DEDUCTIONS AND EXPENSES
A. Sales and Administrative Functions and Expenses
The Company acts as principal underwriter and performs detailed
administrative functions relative to the variable annuity contracts offered by
this Prospectus and the Accumulation Fund. The Company incurs distribution costs
which exceed the sales charges received in the first contract year and finances
these excess costs. This financing procedure results in no additional expenses
to the Accumulation Fund.
As a consequence of an Asset Transfer and Acquisition Agreement entered
into by Provident Companies, Inc., et. al. and American General Corporation, et.
al., dated as of December 8, 1997, The Variable Annuity Life Insurance Company
will become the Administrator of the Accumulation Fund pursuant to an agreement
which is currently being negotiated. The change in Administrator will not
result in any changes in administrative or sales fees.
The total amounts received by the Company in connection with the sales and
administrative functions in 1997, 1996 and 1995 were $2,707, $4,434 and $4,452,
respectively.
1. Sales Charges
Sales charges deducted from purchase payments received are in
accordance with the following:
(a) Flexible Purchase Payment Variable Annuity Contracts.
Purchase Sales
Payments Charge
1st $ 15,000 7.5%
Next 10,000 6.0
Next 25,000 5.0
Next 50,000 4.0
Over 100,000 2.0
(b) Single Payment Variable Annuity Contracts.
First $25,000 6.0%
Next 25,000 3.0
18
<PAGE>
Over 50,000 1.5
(c) Level Variable Annuity Contracts.
Sales charge equals 5% of each purchase payment.
(d) Group Variable Annuity Contracts.
(i) For contracts with anticipated annual purchase payments under
$50,000 - 5%.
(ii) For contracts with anticipated annual purchase payments of
$50,000 or more - 2% plus a charge of the lesser of $50 or 0.5%
of amount withdrawn except payments upon the death of a
participant.
(iii) No sales charge on an initial purchase payment of $250,000 if
being transferred from another Section 403(b) plan. Funds in
the hands of the Company or its parent, The Paul Revere Life
Insurance Company, may be transferred without charge, once each
year, into a variable annuity contract if the funds are already
held in connection with a plan qualifying under Section 403(b)
of the IRC.
2. Collection Fee
A collection fee for administrative expenses incurred in processing
purchase payments in the amount of $1 is deducted from each purchase payment.
This collection fee is not guaranteed and may be increased up to a maximum of $3
if necessary to reflect actual administrative expenses.
3. State Premium Taxes
The Company will, where such taxes are imposed by state law, make a
deduction for premium taxes when incurred, which could be (i) at the annuity
commencement date, (ii) when total surrender occurs or (iii) when premiums are
paid. It is the Company's practice to compute and deduct at the time of receipt
of each purchase payment a charge for premium tax only upon that portion equal
to the sales charges and collection fee delaying the charge on other amounts
until the annuity commencement date. The Company gains no special benefit from
its charge for premium taxes. The 0% to 3.5% premium tax rates vary by state and
are subject to change by legislation, administrative interpretation or judicial
acts.
B. Investment Advisory Fees
19
<PAGE>
The Company, as the Investment Advisor and Administrative Manager of the
Accumulation Fund, assesses a service charge as of each valuation, which, on an
annual basis, equals 0.50% of the average daily net asset value of each Series
of the Accumulation Fund.
MFSI, pursuant to an Investment Sub-Advisory Agreement with the Company,
receives an advisory fee in an amount each month equal, on an annual basis, to
0.35% of the average daily net assets of the Accumulation Fund. This fee does
not affect the charges made by the Company to the Accumulation Fund.
The advisory fee paid to the Company for the three years 1997, 1996 and
1995 amounted to $129,238, $134,458 and $191,061, respectively. The fees paid to
MFSI by the Company in 1997, 1996 and 1995 were $90,536, $94,120, and $133,743,
respectively.
C. Expense and Mortality and Expense Risk Assumptions
Although variable annuity payments will vary in accordance with investment
performance of the Series of the Accumulation Fund in which the reserves are
invested, the Company assures that the payments will not vary by reason of
either increased life expectancy or increased expenses to amounts in excess of
expense amounts provided for in the contract.
The Company, as the Sales and Administrative Manager of the Accumulation
Fund, in return for a charge to the Accumulation Fund on each valuation in an
amount which on an annual basis equals 1% of the average daily net asset value
of the Accumulation Fund, assumes the risks that (i) annuitants may live longer
than foreseen in the actuarial estimates of life expectancies; (ii) the
aggregate purchase payments may exceed the redemption value as of the date of
death of the annuitant (See Payments at Death, page 13); and (iii) charges by
the Company for services and expenses as provided by the contract may not prove
sufficient to cover the actual expenses. It is the opinion of the Company that
an appropriate estimate of the division of the charge would attribute 0.55% to
(i) and (ii) and 0.45% to expenses and (iii) but there has not been sufficient
experience in this area to provide other than an estimate. If these charges
prove insufficient the loss will fall on the Company. The charges for expense
and mortality and expense risk assumed for the 3 years 1997, 1996 and 1995
amounted to $258,476, $268,915, and $382,123, respectively.
At the present time, the Company believes that there are no statutory or
regulatory limitations on expenses that may be deducted from the Accumulation
Fund but assures that all expense deductions (i.e., Company charges and direct
expenses other than for taxes, such as charges for investment advisory service
and expense and mortality and expense risk assumptions, audit expenses and fees
and expenses of the Board of Managers) will not annually exceed 2% of the
average daily net asset value of the Accumulation Fund.
D. Brokerage Expenses and Portfolio Turnover
20
<PAGE>
MFSI in its capacity as sub-advisor selects the securities for purchase and
sale by the Accumulation Fund. The Company has no set formula for the
distribution of brokerage business in connection with the placing of orders for
the purchase and sale of investments, as it is the Company's policy to place
orders with the primary objective of obtaining the most favorable price and
execution. Consideration may be given in the allocation of business, however, to
services provided by a broker, including the furnishing of statistical data and
research, if the commissions charged are reasonable.
Under the Sub-Advisory Agreement and as permitted by Section 28 (e) of the
Securities Exchange Act of 1934, MFSI may cause the Accumulation Fund to pay a
broker-dealer who provides brokerage and research services to the Accumulation
Fund and to MFSI, an amount of commission for effecting a securities transaction
for the Accumulation Fund in excess of the amount another broker-dealer would
have charged for the transaction. This will be done if MFSI determines in good
faith that the greater commission is reasonable in relation to the value of the
brokerage research services provided by the executing broker-dealer viewed in
terms of either a particular transaction or MFSI's overall responsibility to the
Accumulation Fund or to its other clients.
The advisory fee paid by the Company to MFSI will not be reduced as a
consequence of MFSI's receipt of brokerage and research services. To the extent
that the Accumulation Fund's portfolio transactions are used to obtain such
services, the brokerage commissions paid by the Accumulation Fund will exceed
those that might otherwise be paid by an amount which cannot be determined. Such
services are useful and of value to MFSI in serving both the Accumulation Fund
and other clients and conversely such service obtained by placement of brokerage
business of other clients would be useful to MFSI in carrying out its
obligations to the Accumulation Fund. While such services are not expected to
reduce the expenses of MFSI, through the use of the services, MFSI avoids the
additional expense which would be incurred if it should attempt to develop
comparable information through its own staff.
Brokerage commissions paid in the years ended December 31, 1997, 1996 and
1995 amounted to $63,648, $56,322, and $62,318, respectively. Stated as a
percentage of gross purchase payments received, brokerage commissions aggregated
110%, 49.1%, and 9.4% for these three periods. Brokerage commissions were paid
to 87 brokers in 1997. In the years ended December 31, 1997, 1996 and 1995 the
aggregate rates of portfolio turnover were 132%, 81%, and 65%, respectively. The
1997 portfolio rate was greater than 100% due to volatile market conditions and
active trading by portfolio managers.
DESCRIPTION OF CONTRACTS
A. Types of Contracts
21
<PAGE>
The Company is registered with the Securities and Exchange Commission as a
broker dealer and is a member of the National Association of Securities Dealers,
Inc. The variable annuity contracts will be sold by registered representatives
of the Company who are also licensed with the State Insurance Department for the
sale of such contracts.
There are 4 types of variable annuity contracts offered by this Prospectus.
They are:
22
<PAGE>
1. Flexible Purchase Payment Variable Annuity Contract.
The Flexible Contract provides for purchase payments to be made in the
amounts and at such times as the contract owner desires with certain contract
limits and limits provided for by the IRC when contracts are issued in
connection with plans qualifying for special tax treatment.
2. Single Payment Variable Annuity Contract.
The Single Contract provides for additional payments after the first only
at the option of the Company.
3. Individual "Level Charge" Variable Annuity Contract.
The Level Contract is designed to be issued to an individual qualifying for
tax deferred treatment under Section 403(b) of the IRC.
4. Group Variable Annuity Contract.
The Group Contract is issued as a master group contract to an employer in
connection with a plan qualifying under Section 403(b) of the IRC. Each
participant employee is issued a certificate evidencing his interest in the
Accumulation Fund which at all times is fully vested.
All Contracts except Group provide for accumulation of values within the
general assets of the Company as well as the Accumulation Fund.
The Company reserves the right to reject any application. If an initial
purchase payment cannot be credited within 5 business days of receipt by the
Company it will be returned to the payor immediately unless the applicant
consents to its being held for a longer period. Initial purchase payments
accompanied by properly completed applications will be credited no later than 2
business days following receipt.
Any inquiries concerning these Contracts can be made at the principal
offices of the Company, 18 Chestnut Street, Worcester, Massachusetts 01608.
B. Purchase Payment Provisions
Purchase payments are payable to the Company at its Home Office. In the
case of Flexible Contracts each purchase payment must be at least $50 except
when paid by pre-authorized check plan or under a payroll deduction plan when
the minimum purchase payment is $25. In the case of Level Contracts, the minimum
purchase payment is $25. Purchase payments for Group Contracts must aggregate a
minimum of $300 annually with respect to each participant. The minimum initial
purchase payment under a Single Contract is $2,500. Subsequent payments may be
made only with the consent of the Company.
23
<PAGE>
Under Flexible Contracts the maximum purchase payment is $2,500 except
where a larger purchase payment is being made on a regular basis. In such case
the maximum purchase payment that can be made in any contract year without the
consent of the Company is an amount 3 times the amount paid in the first
contract year.
Purchase payments for Level and Group Contracts must be made monthly or
such other frequency agreed to by the Company.
Under all contracts and certificates (in the case of Group Contracts) the
purchase payment, net of sales charge, deductions for applicable premium tax
charge and collection fee or contract charge (in the case of Single Contracts)
will be credited to the contract (or certificate) as accumulation units. The
number of accumulation units to be credited will be determined by dividing the
net purchase payment by the value of an accumulation unit next determined after
receipt of the purchase payment (or the issue of the contract or certificate in
the case of an initial purchase payment.)
C. Accumulation Units
Accumulation units are a measure of the value of the contract before the
annuity commencement date. Accumulation units are credited separately for
variable and fixed accumulations. The number of accumulation units credited is
equal to the net purchase payment applied divided by the value of the
accumulation unit next determined following the receipt of the purchase payment
by the Company at its Home Office (or the issue of the contract or certificate).
The number of accumulation units credited is not changed by any subsequent
variation in the value of an accumulation unit. The value of variable
accumulation units will vary from valuation to valuation reflecting the
investment experience of the Accumulation Fund.
The value of a variable accumulation unit for each Series is determined as
of a valuation date by dividing (a) the net asset value of that Series of the
Accumulation Fund by (b) the number of accumulation units within that Series.
Changes in the value of a Series of the Accumulation Fund depend on investment
experience, such as, realized and unrealized capital gains and losses on
portfolio securities and upon net income from such securities.
D. Net Asset Value
The net asset value of a Series of the Accumulation Fund is determined each
business day of the Company as of the close of the New York Stock Exchange and
on such other business days when there is sufficient activity in the portfolio
securities of the Series to affect the value thereof by adding the cash held
plus the value of securities plus other assets and subtracting any liabilities
or obligations chargeable to the Series. Securities are valued at the closing
price for such securities traded on organized exchanges and at the last bid
price for non-traded securities and securities not traded on an organized
exchange. Other assets including restricted securities are valued at fair value
as determined in good faith by or under
24
<PAGE>
the direction of the Board of Managers. Obligations chargeable are (i) incurred
expenses for audit (ii) fees and expenses of the Board of Managers and (iii)
charges made by the Company for expenses and mortality and expense risk assumed
and investment management and advisory services in an amount which on an annual
basis is not to exceed 2.0% of the average daily net asset value of the Series
of the Accumulation Fund.
E. Annuity Unit
1. Value of Variable Annuity Unit
The value of a variable annuity unit as of any valuation date is determined
by multiplying the value of the preceding annuity unit value by a factor to
neutralize the assumed net investment rate (3 1/2% or 5% per annum as
selected by the contract owner and included in the annuity tables used to
determine the first payment) and further multiplied by the ratio of the value of
a variable accumulation unit as of the current valuation to the value of a
variable accumulation unit of the preceding valuation. The number of variable
annuity units determining annuity payments remains constant once the number has
been determined. Generally, the election of the 5% net investment rate will
produce higher initial annuity payments but such payments will rise more slowly
or fall more rapidly than annuity payments based on 3 1/2% assumed net
investment rate under conditions of similar investment performance.
2. Amount of Monthly Annuity Payments
The number of annuity units determining each monthly annuity payment is
equal to (a) the value applied to provide the annuity payment (less any
applicable premium tax); multiplied by (b) the applicable annuity purchase
rates; and divided by (c) the annuity unit value when the number is being
determined. The number of annuity units will remain fixed unless the units are
split as described herein.
Each monthly annuity payment will be equal to the number of annuity units
as determined above, multiplied by the value of an annuity unit determined in
the daily valuation two weeks preceding the date on which payment is due, but in
no event as of a time preceding the effective date of the contract. The amount
of each variable annuity payment will vary from month to month depending on the
investment experience of the appropriate Series of the Accumulation Fund but the
Company guarantees that the amount of each payment will not be affected by
variations in mortality experience among annuitants or by expenses incurred in
excess of expense assumptions. (See Expense and Mortality and Expense Risk
Assumptions, page 9).
25
<PAGE>
F. Payments to Annuitants
1. Annuity Settlement Options
Under the variable annuity contracts offered by this Prospectus, the
contract owner or participant in a group contract may elect to have the
annuitant receive variable annuity benefit payments in accordance with one or
more of the options described below under each of which payments will be made
from the Accumulation Fund. If no option is selected, Option I with 120 monthly
payments guaranteed will be assumed to have been elected.
OPTION I - Variable Life Annuity with 120 or 240 monthly payments
guaranteed
A variable annuity payable monthly during the lifetime of the annuitant
ceasing with the last monthly payment due immediately preceding or coincident
with the annuitant's death with a guarantee if, at the death of the annuitant,
payments have been made for less than 120 months or 240 months, as selected,
variable annuity payments will be continued to the beneficiary during the
remainder of the guaranteed period.
OPTION II - Unit Refund Variable Life Annuity
A variable annuity payable for a period certain and after that during the
lifetime of the annuitant. The number of period certain payments is equal to the
amount applied under the option divided by the amount of the first annuity
payment, provided however, that the final period certain payment shall be
multiplied by that part of the answer to the above calculation which is not a
whole number.
OPTION III - Joint and Survivor Variable Life Annuity
A variable annuity payable monthly during the joint lifetime of the primary
annuitant and a secondary annuitant and continuing during the lifetime of the
survivor. SINCE THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED IT WOULD BE
POSSIBLE UNDER THIS OPTION FOR ONLY ONE MONTHLY ANNUITY PAYMENT TO BE MADE, IF
THE ANNUITANT AND THE SECONDARY ANNUITANT BOTH DIE PRIOR TO THE DUE DATE OF THE
SECOND PAYMENT; OR ONLY TWO IF THEY BOTH DIED BEFORE THE THIRD, ETC.
26
<PAGE>
OPTION IV - Variable Life Annuity
A variable annuity payable monthly during the lifetime of the annuitant and
ceasing with the last monthly payment due immediately preceding or coincident
with the annuitant's death. SINCE THERE IS NO MINIMUM NUMBER OF PAYMENTS
GUARANTEED, IT WOULD BE POSSIBLE UNDER THIS OPTION FOR ONLY ONE MONTHLY PAYMENT
TO BE MADE IF THE ANNUITANT DIES PRIOR TO THE DUE DATE OF THE SECOND PAYMENT; OR
ONLY TWO IF DEATH WERE BEFORE THE THIRD, ETC.
27
<PAGE>
Additional annuity options as may be agreed to by the Company are
available.
2. Fixed Annuity Options
In lieu of any options payable from the Accumulation Fund, the contract
owner or participant may, on 30 days written notice of the Company prior to the
annuity commencement date, specify that all or part of the value of the
contract, less any applicable premium taxes not previously charged for, may be
applied to provide a fixed annuity. The annuity purchase rates will be
determined from either the rate table set forth in the contract or the Company's
published rate tables applicable on the day the first monthly payment falls due,
whichever is more favorable to the annuitant. A fixed annuity is payable from
the Company's general assets and does not participate in the investment
experience of the Accumulation Fund.
3. Provisions Affecting Annuity Benefit Payments
If the initial monthly annuity payment would be less than $25, payments
shall be made at less frequent intervals or the values of the participant's
interest shall be distributed in a lump sum as selected by the contract owner or
participant.
G. Payments at Death
If an annuitant dies prior to the annuity commencement date, the redemption
value of the contract will be payable to the beneficiary named in the contract.
If the redemption value as of the valuation following the date of death is less
than the total amount of purchase payments made adjusted for partial withdrawals
or redemptions, the Company will also pay a death benefit from its general
assets equal to the difference between the adjusted purchase payments and the
redemption value.
At the death of the annuitant after the annuity has commenced, if no other
provision for settlement is applicable, the amount payable, if any, will be
determined as of the valuation following the date of election, which may be made
within 60 days of the date of death by the beneficiary and paid in one sum to
the beneficiary on receipt of acceptable proof of death by the Company at its
Home Office. The beneficiary may, within 60 days following such death, elect in
lieu of a lump sum payment to receive annuity payments subject to the provisions
of the contract as to minimum amounts and time of election in accordance with
Option I or IV or elect to have the amount payable, if any, remain in the
Accumulation Fund to the credit of the beneficiary. Payment options in lieu of
lump sum payment shall not be available to any estate, fiduciary, corporation,
partnership or association without the consent of the Company. A
28
<PAGE>
BENEFICIARY ENTITLED TO RECEIVE PAYMENTS NOT BASED ON LIFE CONTINGENCIES MAY
ELECT A SINGLE SUM PAYMENT EQUAL TO THE VALUE OF THE CONTRACT.
29
<PAGE>
H. Early or Deferred Commencement Dates
The contract provides for monthly annuity benefit payments beginning on a
selected annuity commencement date. However, upon written request to the
Company, the contract owner or participant may change this date by electing a
prior annuity commencement date or, with the Company's consent, a later annuity
commencement date.
I. Redemption
The redemption value of any contract on any date prior to the annuity
commencement date is the product of the number of accumulation units credited to
the contract multiplied by the value of an accumulation unit as the valuation
next following receipt of the written request for redemption at the Home Office
of the Company. The contract owner or participant may redeem his contract in
whole or in part at any time prior to the annuity commencement date for an
amount not exceeding its redemption value provided that the value of the
contract following any partial redemption shall at least equal the minimum
initial payment required to purchase such contract. The Company reserves the
right to require the surrender of the variable annuity contract upon its
termination.
Payment for any redemption will be made within 7 days following receipt of
the request at the Home Office of the Company. The right of redemption may be
suspended or the date of payment postponed (a) for any period (i) during which
the New York Stock Exchange is "closed" for other than weekends or holidays or
(ii) during which trading on the New York Stock Exchange is restricted; (b) for
any period during which an emergency exists as a result of which (i) disposal of
securities of the Accumulation Fund is not reasonably practical or (ii) it is
not reasonably practical for the Accumulation Fund to clearly determine the
value of its net assets; or (c) for such other period as the Securities and
Exchange Commission by order permits for the protection of the contract owners.
J. Voting Rights
Individual Contract owners and participants in Group Contracts described in
this Prospectus (whether prior to or after the annuity commencement date) will
be entitled to vote at meetings of the Accumulation Fund with respect to: (i)
any change in fundamental investment or other policies of the Accumulation Fund
requiring approval of interests therein; (ii) approval of the Investment
Advisory Agreement; (iii) election of members of the Board of Managers of the
Accumulation Fund; (iv) ratification of an independent certified public
accountant for the Accumulation Fund; and (v) any other business which may
properly come before the meeting.
30
<PAGE>
The number of votes to which a contract owner or participant is entitled is
equal to the number of variable accumulation units credited to his contract or
certificate as of an evaluation not earlier than 120 days nor later than 30 days
prior to the meeting as selected by the Board of Managers. Persons with a voting
interest will be given written notice of the meeting and of the number of votes
to which such person is entitled. Voting may be in person or by proxy. The Home
Office and Agency retirement plans of the Paul Revere Life Insurance Company
held a voting interest of 34% of the total vote as of December 31, 1997.
K. Miscellaneous Provisions
1. Ownership Rights and Limitations
During the lifetime of the annuitant, the contract owner or participant
may, subject to the rights of any designated irrevocable beneficiary or any
assignee, exercise any rights and enjoy any privileges granted by the contract
including the right to designate, change or revoke any beneficiary nomination
and to designate a new contract owner. Any change of beneficiary or ownership or
assignment of the contract or of any benefit under it shall not be binding upon
the Company unless filed at its Home Office.
The Company may rely upon the correctness of information, notice and other
material furnished it by the contract owner or participant including any
determination of classification of any party thereto. The contract owner shall
in no event be considered an agent of the Company for any purposes under these
contracts.
To the extent permitted by law, no annuitant, contingent annuitant,
beneficiary or participant shall have the right to assign, alienate, encumber,
anticipate or commute any benefit or payment under the contract and no payment
shall be subject by attachment or otherwise to claims of creditors of any
contract owner, participant, annuitant, a secondary annuitant or beneficiary.
2. Transfer and Exchange Privileges
Once each calendar year a contract owner (except under a Group Contract)
may direct the Company to transfer all or a portion of a variable accumulation
value to the general assets of the Company to provide fixed accumulation value,
or all or a portion of any fixed accumulation to the variable accumulation value
of the contract. The transfer will be made without charge to the contract owner
and will be effected at current value at the valuation next following the
receipt of the request in the Home Office of the Company. The privileges of
exchange and transfer may be discontinued or modified at any time by the
Company.
<PAGE>
3. Splitting Units
The Company reserves the right to split the value of an accumulation unit,
an annuity unit, or both, if such action is deemed to be in the best interest of
the contract owner, annuitant and the Company. In effecting any split of unit
value, strict equity will be preserved and the split will have no material
effect on the benefits, provisions, or investment return of the contract owner,
participant, annuitant, beneficiary or to the Company. A split may be effected
to either increase or decrease the number of units.
4. Adjustments
The contract owners, participants, annuitants, contingent annuitants and
beneficiaries are required to furnish all information and evidence which the
Company may reasonably require in order to administer the contract. If the age,
sex or other relevant facts with respect to any participant, annuitant,
contingent or beneficiary are misstated, the amount of any benefit payable shall
be payable on the basis of correct information. Any underpayment by the Company
will be paid in full with the next payment due following the determination of
the true facts and any overpayment may be deducted with interest at the rate of
5% per annum for any amounts payable thereafter or charged to the person
overpaid or his representative. The Company may require proof of age before
making any annuity payments and reserves the right to require evidence
satisfactory to it that the annuitant is living on the date on which any annuity
payment is due.
5. Experience Credits - Group Contracts
Experience credits may be allowed on Group Contracts as of any contract
anniversary in accordance with the experience credit plan of the Company in
force at the time. Any experience credits allowed will be credited or applied in
accordance with plan provisions. In no event will experience credits reduce the
number of accumulation units credited to the contract or any participant in the
Accumulation Fund. The granting of experience credits is at the sole discretion
and expense of the Company and it is not obligated to grant such credits.
Experience credits will not be available under Individual Contracts.
For each of the last three fiscal years ended December 31, 1997, no
experience credits have been granted.
6. Modification of Group Contracts
The Group Contract may be modified in any respect by written agreement
between the contract owner and the Company so long as such modification does not
reduce or take away accumulation value credited to a participant or any annuity
previously provided under the contract. No such modification by the Company will
modify the annuity purchase rates with
<PAGE>
respect to any accumulation value credited to the contract unless the
modification is for the purpose of conforming the contract to requirements of
the IRC.
PRIOR CONTRACTS
A. Flexible Payment Contracts Issued Prior to June 1, 1977
The following contract provisions shall remain in effect for contracts
issued prior to June 1, 1977 and shall not apply to contracts issued after that
date.
The charge for sales and administration is based upon the aggregate amount
of all purchase payments made under the contract, including payments then being
made, in accordance with the following:
<TABLE>
<CAPTION>
Purchase Total Sales Administrative
Payments Charges Charges Charges
<S> <C> <C> <C> <C>
First $ 5,000 8.0% 5.5% 2.5%
Next 5,000 7.5 5.0 2.5
Next 5,000 7.0 4.5 2.5
Next 5,000 6.5 4.0 2.5
Next 5,000 6.0* 3.5 2.5*
Next 25,000 5.0* 2.5 2.5*
Next 50,000 4.0* 1.5 2.5*
Over 100,000 2.0* 1.25 0.75*
</TABLE>
*Maximum administrative charge deducted from one purchase payment is $500.
Total purchase payments in force under Individual Flexible Purchase Payment
Annuity Contracts issued by the Insurance Company and owned by contract owner,
his spouse or his children under age 21 years are combined for the purpose of
determining the aggregate amount of purchase payments.
Contracts issued prior to June 1, 1977 shall not be subject to the $1
collection fee assessed against each purchase payment.
<PAGE>
B. Group Contracts Issued Prior to June 1, 1977
The following provisions shall remain in effect for all Group Contracts
issued prior to June 1, 1977 and shall not apply to such contracts after that
date.
The charge for sales and administration will be 6% of each purchase
payment, 3.5% representing the sales charge and 2.5% the administration charge.
A participant may request transfer of the accumulation value credited to
any other Group Contract issued by the Company under which the participant also
qualifies as a participant or to an Individual Contract issued by the Company,
in either case without charge.
Contracts issued prior to June 1, 1977 shall not be subject to the $1
collection fee assessed against each purchase payment.
C. Group Deposit Administration Variable Annuity Contracts
Prior to 1984, the Company issued Group Deposit Administration Variable
Annuity Contracts which were issued as master group contracts to employers or
trustees to cover all present and future participants under a plan. The basic
features of these contracts were substantially the same as those outlined for
contracts in this Prospectus.
Certain of these contracts remain in force and purchase payments are
continuing to be received in connection therewith.
Such contracts issued between June 1, 1980 and January 1, 1984 were subject
to a sales charge based on the aggregate amount of all purchase payments made
under the contract including the payment then being made in accordance with the
following table.
<TABLE>
<CAPTION>
Purchase Sales
Payments Charges
<S> <C> <C>
First $15,000 5.0%
Next 10,000 3.5
Next 25,000 2.5
Over 50,000 2.0
</TABLE>
Contracts issued between June 1, 1977 and June 1, 1980 were subject to one
of two sets of sales charges. Those contracts where the Insurance Company
provided service functions including but not limited to assistance in initial
establishment of employee benefit plan, plan
<PAGE>
design, employee booklet preparation, actual evaluation, tax reporting and
individual record keeping were subject to the following sales charges:
<TABLE>
<CAPTION>
Purchase Sales
Payments Charges
<S> <C> <C>
First $ 15,000 7.5%
Next 10,000 6.0
Next 25,000 5.0
Next 50,000 4.0
Over 100,000 2.0
</TABLE>
Contracts to which the Company provided no service functions were subject
to the same sales charges as applied to contracts issued between June 1, 1980
and January 1, 1984.
Contracts issued prior to June 1, 1977 were, and continue to be, subject to
sales charges as shown below except where the sales charges of the later
contracts are more favorable to the contract owner. In such cases the more
favorable sales charge is made.
<TABLE>
<CAPTION>
Purchase Total Sales Administrative
Payments Charges Charges Charges
<S> <C> <C> <C> <C>
First $ 5,000 8.0% 5.5% 2.5%
Next 5,000 7.5 5.0 2.5
Next 5,000 7.0 4.5 2.5
Next 5,000 6.5 4.0 2.5
Next 5,000 6.0* 3.5 2.5*
Next 25,000 5.0* 2.5 2.5*
Next 50,000 4.0* 1.5 2.5*
Over 100,000 2.0* 1.25 0.75*
</TABLE>
*The maximum administrative charge deducted from one purchase payment is
$500.
Only contracts issued after June 1, 1977 are subject to a collection fee,
which is currently $1. (See Collection Fee, page 8.)
The Company reserves the right to modify these contracts in any respect on
the 10th or subsequent contract anniversary including the right to increase
sales and administrative charges or annuity purchase rates as to payments
received subsequent to such modification.
<PAGE>
FIXED ACCUMULATION
Individual Variable Annuity Contracts described in this Prospectus have a
fixed accumulation provision which if selected by the contract owner permits an
accumulation at a fixed current rate of interest. This rate is set from time to
time for a specific period. The interest rate credited will never be less than
3 1/2%. Accumulations under the fixed accumulation provision of these
annuity contracts become part of the general assets of the Company which support
insurance and obligations generally. Because of exemptive and exclusionary
provisions, interest in the general assets have not been registered under the
Securities Act of 1933 ("1933 Act") nor are the general assets of the Company
registered as an investment company under the 1940 Act. Accordingly neither the
general assets nor any assets therein are generally subject to the provisions of
the 1933 or 1940 Acts. Disclosure regarding the fixed portion of the annuity
contracts and the general assets, however, may be subject to certain generally
applicable provisions of Federal Securities Law related to the accuracy and
completeness of the statements made in prospectuses.
FEDERAL TAX STATUS
Introduction
The variable annuity contracts described in this Prospectus are designed
for use in connection with retirement plans that may or may not be qualified
plans under Section 401, 403, and 408 of the IRC. The ultimate effect of federal
income tax on variable accumulation value, on the annuity payments, and on the
economic benefit to the owner, participant, annuitant, payee or the beneficiary
depends on the Company's tax status, upon the type of retirement plan for which
the contract was purchased and upon the tax and employment status of the
individual concerned. The discussion contained herein is general in nature, is
based upon the Company's understanding of current federal income tax law
(including recently enacted amendments), and is not intended as tax advice. Any
person concerned with these tax implications should consult a competent tax
advisor.
Taxation of Annuities in General
Section 72 of the IRC governs taxation of annuities in general. No taxes
are imposed on increases in value of the variable annuity contract until
distribution occurs as either annuity payments under an annuity option elected
or in the form of a cash withdrawal or lump sum payment prior to the annuity
commencement date, except where the variable annuity contract is owned by a
person who is not a natural person (e.g. corporation). In such cases, the income
of the contract is treated as ordinary income received or accrued by the owner
during that taxable year (See IRC (S)72 (u)(l)). Section 72 of the IRC has been
amended by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), the
Tax Reform Act of 1984 ("The 1984 Act"), the Tax Reform Act of 1986 ("TRA-86"),
and more recently the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"),
the Omnibus Budget Reconciliation Act of 1989 ("OBRA") and the Revenue
Recognition Act of 1990. The following discussion of
<PAGE>
annuity taxation applies only to contributions and attributable earnings made to
contracts after August 13, 1982 as affected by TEFRA, the 1984 Act, TRA-86,
TAMRA, OBRA and the Revenue Recognition Act of 1990. If an owner or participant
has made contributions before August 14, 1982 to another annuity contract and
exchanges that contract for a variable annuity contract offered by this
Prospectus, then different tax treatment may apply to contributions (and
attributable earnings) made before August 14, 1982.
In the case of a non-qualified variable annuity contract (Flexible or
Single) a partial cash withdrawal (i.e., a withdrawal of less than the entire
value of the contract) or if the annuity contract is assigned or pledged as
collateral for a loan, the amount of the loan or withdrawal will be treated as
taxable income until all amounts in excess of cost basis are accounted for. In
the case of a qualified contract, the portion of the distribution which bears
the same ratio to the total distribution as the investment in the contract bears
to the total value of the accrued benefit as of the date of the distribution, is
excludable from gross income. In the case of most qualified contracts, however,
the cost basis of the employee beneficiary will be zero and distributions prior
to the annuity commencement date will therefore be taxable in full. The taxable
portion of a withdrawal or lump sum payment prior to the annuity commencement
date is subject to taxes as ordinary income. In case of payments after the
annuity commencement date under an annuity option, a portion of each payment,
generally, is taxable as ordinary income. The taxable portion is determined by
applying to each payment an "exclusion ratio" which is the ratio the cost basis
in the contract bears to the expected return on the contract. The amount in
excess of the "exclusion amount" is taxable. If the owner recovers his entire
cost basis during the term of annuity payments, then the "exclusion ratio" will
no longer apply and the whole annuity payment will be taxable. In the case of
Flexible and Single Contracts issued on a non-qualified basis, taxable cash
withdrawals and lump sum payments will be subject to a 10% penalty except when
made under certain circumstances. This 10% penalty also affects certain annuity
payments. This penalty will not apply to distributions which are: (a) made to an
owner after the owner reaches 59 1/2; (b) made to a beneficiary or the
estate of an annuitant upon death of the annuitant; (c) attributable to owners
becoming disabled so as to be unable to engage in any substantial gainful
occupation or activity by reason of any medically determinable mental or
physical impairment which can be expected to result in death or to be of long,
continuing and indefinite duration; (d) allocable to purchase payments made
before August 14, 1982; (e) made from a qualified pension plan; (f) one in a
series of substantially equal periodic payments made for the life of the
annuitant or the joint lives of that annuitant and his beneficiary; (g)
distributions under an immediate variable annuity contract; or (h) which is
purchased by an employer upon termination of a qualified plan and held by the
employer until such time as the employee separates from service.
In addition, contracts will not be treated as annuity contracts for
purposes of section 72 unless the contract provides (a) that if the contract
owner dies on or after the annuity starting date but prior to the time before
the entire interest in the contract has been distributed the remaining portion
of the interest must be distributed at least as rapidly as under the method of
distribution in effect at the time of the contract owners death; and (b) if the
contract owner
<PAGE>
dies prior to the annuity commencement date the entire interest must be (i)
distributed within five years after the death of the owner or (ii) distributed
as annuity payment over the life of a designated beneficiary (or over a period
that does not extend beyond the life expectancy of a designated beneficiary) and
such distribution begins within one year of the contract owner's death. However,
the contract may be continued in the name of the spouse of the contract
owner.
THE COMPANY BELIEVES THAT THE CONTRACTS DESCRIBED IN THIS PROSPECTUS MEET
THESE REQUIREMENTS.
Withholding for federal income taxes on some distributions may be required
unless the recipient elects not to have such amounts withheld and properly
notifies the Company of that election.
Qualified Plans
The variable annuity contracts may be used with several types of qualified
plans. The tax rules applicable to participants in such qualified plans vary
according to the type of plan and terms and conditions of the plan itself.
Purchasers of variable annuity contracts for use with any qualified plan should
seek competent legal and tax advice regarding the suitability of the contracts.
A. Section 403(b) Plans
Under Section 403(b) of the IRC payments made by public school systems and
certain tax exempt organizations to purchase annuity contracts for their
employees are excludable from the gross income of the employee subject to
certain limitations. However, such payments may be subject to FICA (Social
Security) taxes.
B. Individual Retirement Annuities
Sections 219 and 408 of the IRC permit individuals or their employers to
contribute to an individual retirement program known as "Individual Retirement
Annuity" or "IRA". IRA's are subject to limitations on the amount which may be
contributed and the time when distributions may commence. In addition,
distribution from certain other types of qualified plans may be placed into an
IRA on a tax deferred basis.
C. Corporate Pension and Profit Sharing Plans
Sections 401(a) and 403(a) of the IRC permit corporate employers to
establish various types of plans for employees. Such retirement plans may permit
the purchase of a variable annuity contract to provide benefits under the plans.
<PAGE>
D. H.R.-10 Plans
The Self-Employed Individual Tax Retirement Act of 1962 as amended,
commonly referred to as "H.R.-10" permits self- employed individuals to
establish tax qualified plans for themselves and their employees. These plans
are limited by law to maximum permissible contribution, distribution dates and
non-forfeitability of interest. In order to establish such a plan, a plan
document, usually in the form approved in advance by the Internal Revenue
Service, is adopted and implemented by the employer.
CHANGES IN OPERATION OF THE SEPARATE ACCOUNT
The Company reserves the right, subject to compliance with applicable law,
(1) to operate the Separate Account as a management investment company under the
1940 Act or in any other form permitted by law, (2) to deregister the Separate
Account under the 1940 Act in accordance with the requirements of the 1940 Act
and (3) to substitute the shares of any other registered investment company for
the Fund shares held by the Separate Account, in the event that Fund shares are
unavailable for Separate Account investment, or if the Company shall determine
that further investment in such fund shares is inappropriate in view of the
purpose of the Separate Account. In no event will the changes described above be
made without notice to contract owners in accordance with the 1940 Act.
The company reserves the right, subject to compliance with applicable law,
to change the name of the Separate Account.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or the
Accumulation Fund is a party or of which property of either of them is subject.
LEGAL OPINION
Legal matters relating to Federal securities laws applicable to the
contracts as well as all matters relating to Federal income tax laws and the
insurance laws of Tennessee and other states in which contracts have been
offered, have been passed upon by Susan N. Roth, vice president and secretary
of the Paul Revere Variable Annuity Insurance Company.
EXPERTS
The financial statements of The Paul Revere Variable Annuity Contract
Accumulation Fund at December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997, and of The Paul Revere Variable Annuity
Insurance Company at December 31, 1997 and 1996, and for each of the two years
ended December 31, 1997, appearing in this Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
<PAGE>
The
Paul Revere
VARIABLE ANNUITY
CONTRACT ACCUMULATION FUND
STATEMENT OF
ADDITIONAL INFORMATION
(To Be Used With Prospectus, May, 1,
1998)
. "Level Charge" Variable Annuity
Contracts
. Individual Variable Annuity
Contracts
. Group
Variable
Annuity
Contracts
May 1, 1998 (R)
WORCESTER, MASSACHUSETTS
508-799-4441
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TO BE USED WITH MAY 1, 1998 PROSPECTUS
THE PAUL REVERE VARIABLE ANNUITY CONTRACT ACCUMULATION FUND
VARIABLE ANNUITY CONTRACTS
SOLD BY
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
WORCESTER, MASSACHUSETTS 01608 508-799-4441
This Statement of Additional Information should be used to supplement
information provided by the May 1, 1998 Prospectus, which describes Variable
Annuity Contracts ("Contracts") offered by The Paul Revere Variable Annuity
Insurance Company ("Company" or "PRV").
This Statement of Additional Information is not a Prospectus. Please read
the Prospectus carefully before purchasing any of the contracts offered by the
Company. The Statement of Additional Information should be read with the
Prospectus. The Prospectus sets forth information about the contracts and the
Paul Revere Variable Annuity Contract Accumulation Fund ("Accumulation Fund" or
"Fund") that a prospective investor ought to know before investing. The
Prospectus may be obtained, without charge, upon written or oral request
received by the Insurance Company at its Home Office located at 18 Chestnut
Street, Worcester, Massachusetts 01608. Please refer to the Table of Contents
for a cross-reference index to the Prospectus.
The date of this Statement of Additional Information is May 1, 1998. The
date of the Prospectus is May 1, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History 3
of the Company and
the Accumulation Fund..................................................................................
Investment Objective and Policies...................................................................... 4
Management:
Board of Managers of the 5
Accumulation Fund......................................................................................
Directors and Principal Officers 6
of the Company.........................................................................................
Remuneration of the Board of Managers............................................................... 7
Remuneration of the Directors 8
and Principal Officers of
the Company............................................................................................
Election of the Board of Managers................................................................... 8
Investment Advisory Services
Investment Advisory Agreement....................................................................... 8
Sales and Administrative 8
Services Agreement.....................................................................................
Investment Sub-Advisory Agreement................................................................... 9
Ownership and Control............................................................................... 10
Brokerage Allocation................................................................................... 10
Underwriters........................................................................................... 11
Purchase and Pricing of Contracts...................................................................... 11
Annuity Payments....................................................................................... 12
Report of Independent Auditors......................................................................... 13
Financial Statements of the Contract Accumulation Fund................................................. 14
Report of Independent Auditors......................................................................... 24
Financial Statements of The Paul Revere Variable Annuity Insurance Company............................. 25
</TABLE>
WHERE THIS INFORMATION
CAN BE FOUND IN THE
PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History 3
of the Company and
the Accumulation Fund..................................................................................
Investment Objective and Policies...................................................................... 7
Management:
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Board of Managers of the 8
Accumulation Fund......................................................................................
Investment Advisory Services:
Investment Advisory Agreement........................................................................ 8
Sales and Administrative
Services Agreement..................................................................................... 8
Investment Sub-Advisory Agreement.................................................................... 8
Brokerage Allocation................................................................................... 10
Purchase and Pricing of Contracts...................................................................... 11
Annuity Payments....................................................................................... 12
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY OF
THE COMPANY AND THE
ACCUMULATION FUND
The Company serves as insurer and principal underwriter, and as investment
advisor to The Accumulation Fund. The Company was organized on August 6, 1965
under Massachusetts General Laws and is a stock life insurance company, wholly-
owned by The Paul Revere Life Insurance Company ("PRL"), a Massachusetts
corporation. Each has its principal office at 18 Chestnut Street, Worcester,
Massachusetts. The Paul Revere Life Insurance Company is wholly-owned by The
Paul Revere Corporation ("Paul Revere"), a Massachusetts corporation with its
principal office at 18 Chestnut Street, Worcester, Massachusetts. Paul Revere is
comprised of The Paul Revere Life Insurance Company, The Paul Revere Variable
Annuity Insurance Company, The Paul Revere Protective Life Insurance Company and
other non-insurance affiliates.
Paul Revere was formerly 83%-owned by Textron Inc. and 17%-owned publicly.
On April 29, 1996, Paul Revere and Provident Companies, Inc. ("Provident")
announced they had signed a definitive merger agreement pursuant to which
Patriot Acquisition Corporation, a wholly owned subsidiary of Provident would
merge with and into Paul Revere with Paul Revere as the surviving corporation.
On November 6, 1996, Paul Revere 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 will receive in the transaction (as amended, the
"Merger Agreement"). The transaction closed on March 27, 1997. Provident is a
Delaware corporation with its principal office at 1 Fountain Square,
Chattanooga, Tennessee 37402.
The Accumulation Fund was organized on December 22, 1965 and is registered
as a diversified, open-end investment company under the Investment Company Act
of 1940 ("1940 Act"). The Accumulation Fund is the separate account through
which the Company sets aside separate and apart from its general assets, assets
attributable to variable annuity contracts. Under Massachusetts law, regulation
of the Company by the Insurance Commissioner of Massachusetts includes
regulation of its Accumulation Fund which is not a separately incorporated
entity. The Company is subject to the laws of Massachusetts governing life
insurance through the regulation of the Massachusetts Commissioner of Insurance
("the Commissioner"). An Annual Statement in prescribed form is filed with the
Commissioner on or before March 1 of each year covering the operations of the
Company for the preceding year and its financial condition as of December 31 of
such year. Its books and assets are subject to review and examination by the
Commissioner or his agent at all times. A full examination of its operations is
conducted by the Commissioner at least once every 3 years. In addition, the
Company is subject to insurance laws and regulations of other states where it is
licensed to operate.
3
<PAGE>
The Company is taxed as a life insurance company under Sub-Chapter L of the
Internal Revenue Code. Although the operations of the Accumulation Fund are
accounted for separately from other operations of the Company for purposes of
federal taxation, the Accumulation Fund is not separately taxed as a regulated
investment company or otherwise as a taxable entity separate from the Company.
Under existing federal income tax laws, the income (consisting primarily of
interest, dividends and net capital gains) of the Accumulation Fund, to the
extent that it is applied to increase reserves under variable annuity contracts,
is not taxable to the Company.
The Rules and Regulations of the Accumulation Fund provide for a five-
member Board of Managers, members being elected at annual meetings for 3-year
terms. A majority of the Board of Managers will not be "interested persons" as
defined in Section 2(a) of the 1940 Act.
Investment custodial services are provided through an agreement between the
Company and The Chase Manhattan Bank, 3 Chase MetroTech Center, 6th Floor,
Brooklyn, New York 11245. The Accumulation Fund's independent certified public
accountant is Ernst & Young LLP, 300 Krystal Bldg, One Union Square,
Chattanooga, Tennessee 37402.
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
contracts and the Accumulation Fund discussed in the Prospectus. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus. Statements contained in the
Prospectus concerning the content of the contract and legal instruments are only
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Commission.
The laws and regulations of the states in which the Company is licensed
contain various requirements as to the amounts of stockholder's equity which the
Company is required to maintain. The Company's statutory capital and surplus of
$89,768,857 and $72,583,484 as of December 31, 1997 and 1996, respectively, is
in compliance with the requirements of all such states. The Company is subject
to various state insurance regulatory restrictions that limit the maximum
amounts of dividends available for payment without prior approval. Under current
law, during 1998, approximately $9,351,071 will be available for payment of
dividends by the Company without state insurance regulatory approval. Dividends
in excess of this amount may only be paid with regulatory approval. Statutory
net income for 1997, 1996 and 1995 was $17,527,180, $12,450,268, and $8,948,085,
respectively. The Company declared and paid dividends to its parent, PRL of
$2,000,000 in 1997, $8,000,000 in 1996, and $8,000,000 in 1995.
INVESTMENT OBJECTIVES AND POLICIES
4
<PAGE>
The primary investment objective of both Series of the Accumulation Fund is
growth of capital. The assets of the Accumulation Fund will usually be invested
in common stocks believed to have potential for growth but may, from time to
time, be invested in other securities. When deemed necessary for defensive
purposes, the Accumulation Fund may substantially increase that portion of its
assets invested in fixed income obligations and held in cash. As the contracts
are subject to the risks associated with common stock investments and changing
economic conditions, there can be no assurance that the investment objective
will be attained. Please refer to the Prospectus for a description of all
fundamental and non-fundamental investment policies.
Fundamental investment policies may not be changed without the approval of
a majority in interest of the owners of annuity contracts to which variable
accumulation units are credited. A majority in interest of the owners of
variable annuity contracts means the vote of (a) 67% or more of the vote of the
contract owners present and entitled to vote at the meeting, if contract owners
who hold with the power to vote over 50% of the variable accumulation units
outstanding are present or represented by proxy; or (b) more than 50% of the
variable accumulation units outstanding, whichever is less. Non-fundamental
investment policies may be changed by a vote of the Board of Managers.
On December 31, 1997, the Accumulation Fund did not own any restricted
securities. If the Accumulation Fund buys restricted securities in the future,
the Board of Managers will be required to value such securities in good faith in
determining the net asset value of the Accumulation Fund. If the Accumulation
Fund sells such securities, it may be deemed an "Underwriter" (as such term is
defined in the Securities Act of 1933 and the Rules and Regulations promulgated
by the Securities and Exchange Commission thereon) with respect thereto, and
registration of such securities under the Securities Act may be required. The
Accumulation Fund will endeavor to have the issuer or some other person agree to
bear the expenses of such registration but if there is no agreement, the
Accumulation Fund might have to bear such expenses which could be substantial.
Where registration is required a considerable period may elapse between the time
when the decision may be made to sell securities and the time the Accumulation
Fund may be permitted to sell under an effective registration statement. During
such period, if adverse market conditions develop, the Accumulation Fund may not
be able to obtain as favorable a price as that prevailing at the time the
decision to sell is made.
The Company has at various times deemed it necessary for defensive purposes
to substantially increase the portion of the Fund's assets in unsecured short-
term notes, normally maturing within two weeks of the date of purchase. It is
the Fund's policy to limit purchases in corporate short-term notes to notes
rated "Prime-I" by Moody's Investors Services. The percentage of the Fund's net
assets held in short-term notes at December 31, 1997, 1996 and 1995 amounted to
2.47%, 0%, and 5.6%, respectively. MFS Institutional Advisors, Inc. ("MFSI"),
formerly MFS Asset Management, Inc., in its capacity
<PAGE>
as sub-advisor selects the securities for purchase and sale by the Accumulation
Fund. Changes in the Accumulation Fund's investments are reviewed by the Board
of Managers. The aggregate portfolio turnover rates for the years 1997, 1996 and
1995 were 132%, 81%, and 65%, respectively. The 1997 portfolio rate was greater
than 100% due to volatile market conditions and active trading by portfolio
managers.
MANAGEMENT
A. BOARD OF MANAGERS OF THE ACCUMULATION FUND
The property and business of the Accumulation Fund are managed by a Board
of Managers elected by the owners of contracts to which variable accumulation
units are credited. A majority of the Accumulation Fund's five managers namely
Messr. Short and Miller and Ms. Sadowsky are not deemed to be "interested
persons" of the Accumulation Fund or the Company as defined in the Investment
Company Act of 1940 ("1940 Act").
<TABLE>
<CAPTION>
Name and Address Age Principal Occupations
During Past 5 Years
<S> <C> <C>
*Donald E. Boggs, Chairman 52 Senior Vice President, Underwriting and Deputy Risk
1 Fountain Square Manager, previously Executive Vice President of PRV.
Chattanooga, TN
Gordon T. Miller, Vice Chairman 75 Retired; Former Vice President and Director of Industrial
14 Eastwood Road Relations of Barry Wright Corporation, Newton Lower Falls,
Shrewsbury, Massachusetts Massachusetts.
*Aubrey K. Reid, Jr. 70 Retired; Director Emeritus and Former President of PRV and PRL.
6 Crocker Hill Drive
Paxton, Massachusetts 01612
Joan Sadowsky 67 Retired; Former Vice President of Human Resources, Atlas
142 Winifred Avenue Distributing Corporation, Auburn, Massachusetts.
Worcester, Massachusetts
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
William J. Short 62 President, Worcester Area Chamber of Commerce, Worcester,
33 Waldo Street Massachusetts
Worcester, Massachusetts
</TABLE>
*indicates "interested persons" as defined in the Investment Company Act of
1940.
B. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
The following table shows the names, addresses, and principal occupations
of all directors and principal executive officers of the Company as of December
31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation
<S> <C> <C>
William L. Armstrong 61 Chairman, Cherry Creek Mortgage Company
1625 Broadway, Suite 780
Denver, CO 80202
William H. Bolinder 54 Member of the Corporate Executive Board, Zurich Insurance Company
1400 American Lane
Schaumburg, IL 60196
J. Harold Chandler 48 Chairman, President & CEO, Provident Companies, Inc.
1 Fountain Square
Chattanooga, TN 37402
Steven M. Gluckstern 46 Member of the Corporate Executive Board, Zurich Insurance Company
1 Chase Manhattan Plaza
New York, NY 10005
Charlotte M. Heffner 60 Trustee, The Maclellan Foundation
1991 West Paces Ferry Road, N.W.
Atlanta, Georgia 30327
Hugh B. Jacks 63 President, Potential Enterprises
101 Carnoustie
Shoal Creek, AL 35242
William B. Johnson 60 Chairman & Chief Executive Officer, W.B. Johnson Properties
3412 Peachtree Road, NE
Suite 2075
Atlanta, GA 30326
Hugh O. Maclellan, Jr. 58 President, The Maclellan Foundation
The Maclellan Foundation
Suite 501
Chattanooga, TN 37402
A. S. "Pat" MacMillan 54 Chief Executive Officer, Team Resources, Inc.
2100 River Edge Parkway
Suite 800
Atlanta, GA 30328-4604
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
C. William Pollard 59 Chairman, The ServiceMaster Company
One ServiceMaster Way
Downers Grove, IL 60515
Scott L. Probasco, Jr. 69 Director and Chairman of the Executive Committee, SunTrust Banks, Inc.
736 Market Street, 16th floor
Chattanooga, TN 37402
Steven S. Reinemund 49 Chairman and Chief Executive Officer, Frito-Lay, Inc.
7701 Legacy Drive
Plano, TX 75024
Burton E. Sorensen 68 Retired Chairman and Chief Executive Officer, Lord Securities Corporation
2 Wall Street
New York, NY 10005
Thomas R. Watjen 43 Vice Chairman and Chief Financial Officer, Provident Companies, Inc.
1 Fountain Square
Chattanooga, TN 37402
</TABLE>
C. REMUNERATION OF THE BOARD OF MANAGERS
The Accumulation Fund is responsible for payment of fees and expenses of
the members of the Board of Managers as well as expenses for audit of the
Accumulation Fund. All other expenses or services relative to the operation of
the Accumulation Fund are paid for by the Company for which it deducts certain
amounts from purchase payments and from the Accumulation Fund (See Prospectus,
page 8). Members of the Board of Managers who are also active or retired
officers, directors or employees of the Company do not receive any fees from the
Accumulation Fund. These members are deemed to be interested persons and receive
direct remuneration or an indirect benefit as active or retired officers and/or
stockholders of the Company. The total aggregate remuneration paid by the
Accumulation Fund to all members of the Board of Managers for the fiscal year
ended December 31, 1997 was $7,800. This amount represents consideration paid
for attendance at meetings of the Board of Managers. Reimbursement for expenses
incurred may also be made if and when applicable.
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual From Registrant and
Name of Person, Compensation From As Part of Fund Benefits Upon Fund Complex Paid to
Position Registrant Expenses Retirement Directors
<S> <C> <C> <C> <C>
Donald E. Boggs 0 0 0 0
Chairman
Gordon T. Miller $3,000 0 0 $3,000
Vice Chairman
Aubrey K. Reid, Jr. 0 0 0 0
Member
Joan Sadowsky $1,800 0 0 $1,800
Member
William J. Short $3,000 0 0 $3,000
Member
</TABLE>
D. ELECTION OF THE BOARD OF MANAGERS
Under Article III of the Rules and Regulations of the Accumulation Fund,
members of the Board of Managers are elected at the annual meeting to serve for
the term of three years, following those whose terms are then expiring, provided
that when terms of more than two members of the Board expire in the same year,
the term of members to be elected shall be adjusted in such a manner that terms
of at least one but not more than two members shall expire in each of the next
three years.
Under the terms of the 1940 Act, the Accumulation Fund must have a Board of
Managers, not more than sixty-percent of the members of which are deemed to be
"interested persons" of the Accumulation Fund or its
<PAGE>
Investment Advisor/Principal Underwriter as defined in the 1940 Act. Two members
of the Board of Managers whose terms continue, namely Mr. Short and Mr. Miller,
are not deemed to be "interested persons" as defined in the 1940 Act. Of the
two nominees for election, Mrs. Sadowsky is not deemed to be an "interested
person" as defined in the 1940 Act whereas Mr. Budd is so deemed. Of the three
members of the Board of Managers whose terms continue, Mr. Reid is deemed to be
an "interested person" by virtue of his status as active or retired officer
and/or director of the Investment Advisor.
INVESTMENT ADVISORY SERVICES
The Company currently serves as investment adviser to the Accumulation Fund
pursuant to an Investment Advisory Agreement, which was approved by contract
owners on August 8, 1996. The agreement must be renewed each year by a majority
of the Accumulation Fund's Board of Managers who are not parties to the
agreement or not interested persons of any part to the agreement.
Under the agreement, the Company agrees to provide "investment advisory
services" to the Accumulation Fund. In that connection, it is required
specifically to provide the Board of Managers continuously with an investment
program for its approval or rejection and, if rejected, to submit another
program for consideration.
Pursuant to the agreement, the Company is responsible for all duties
related to the investment, reinvestment and safekeeping of the assets of the
Accumulation Fund and for all expenses attributable to performing its investment
advisory services, including costs of compensating officers and employees of the
Company connected with providing investment advisory services to the Fund.
In connection with the Company's obligations under the agreement, the
Company bears the cost of all services and expenses attributable to the
maintenance and operation of the Accumulation Fund (other than costs relating to
the administration and distribution of the variable annuity contracts, which are
provided for in the current Sales and Administration Agreement for the
Accumulation Fund). These costs include, among other things: fees paid to MFSI
pursuant to the Investment Sub-Advisory Agreement between the Company and MFSI
as described below; fees required by federal and state securities regulatory
authorities and the National Association of Securities Dealers, Inc.; costs of
maintaining the books and records of the Fund; outside legal, accounting,
actuarial and other professional costs; costs of determining the net asset value
of each series of the Accumulation Fund; and other out-of-pocket expenses
relating to the Fund, including salaries, rent, postage, telephone, travel,
office equipment and stationery. All brokerage commissions and other fees
relating to purchases and sales of investments for the Accumulation Fund are
paid out of the assets of the Fund.
<PAGE>
For its advisory services to the Fund under the agreement, the Company
charges an amount which equals, on an annual basis, 0.50% of the average daily
net asset value of each Series of the Fund. This charge is paid weekly by the
Fund. At December 31, 1997, the net asset values for each series of the Fund
were $6,017,276(Series N) and $21,466,248(Series Q). For the fiscal years
ended December 31, 1997, 1996 and 1995, the Company received fees under the
agreement aggregating $129,238, $134,458, and $191,061, respectively.
SALES AND ADMINISTRATIVE SERVICES AGREEMENT
The Company also acts as principal underwriter and performs administrative
functions pursuant to a Sales and Administrative Services Agreement between the
Company and the Accumulation Fund dated February 19, 1970 and re-executed on
February 16, 1989.
As a consequence of an Asset Transfer and Acquisition Agreement entered
into by Provident Companies, Inc., et. al. and American General Corporation, et.
al., dated as of December 8, 1997, The Variable Annuity Life Insurance Company
will become the Administrator of the Accumulation Fund pursuant to an agreement
which is currently being negotiated. The change in Administrator will not
result in any changes in administrative and sales fees.
Under the agreement, the Company acts as principal underwriter and performs
administrative functions relative to variable annuity contracts, receiving as
compensation the sales and administration charge deducted from purchase payments
as described in the Prospectus. The total sales and administration charges
received by the Company in 1997, 1996 and 1995 were $2,707, $4,434, and $4,452,
respectively.
The Company also received $258,476, $268,915, and $382,123, from the
Accumulation Fund during 1997, 1996 and 1995, respectively, as its charge for
assuming the mortality and expense risks under its variable annuity contracts,
this representing a charge on each valuation date of an amount which, on an
annual basis, equals 1% of the average daily net asset value of the Accumulation
Fund as permitted under the Sales and Administrative Services Agreement. At the
present time the Company believes there are no statutory or regulatory
limitations on the expenses that may be deducted from the Accumulation Fund, but
the Company assures that all expense deductions, other than for taxes, will not
exceed 2% annually based upon the average daily net asset value of the
Accumulation Fund.
<PAGE>
The average daily net asset value of the Accumulation Fund means the sum of
the net asset value of the appropriate Series of the Accumulation Fund
respectively computed on each valuation during the period divided by the number
of valuations.
INVESTMENT SUB-ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Accumulation Fund and
Company, the Company is specifically authorized to employ one or more sub-
advisors in connection with the services to be performed and obligations to be
assumed by the Company. Pursuant thereto, the Company entered into an Investment
Sub-Advisory Agreement ("Sub-Agreement") with Massachusetts Financial Services
Company ("MFS") which was approved by a majority of contract owners on August
16, 1984. In 1996, this relationship was taken over by MFSI, a wholly-owned
subsidiary of MFS. The Sub-Agreement is subject to the same terms for approval,
renewal and termination as the Agreement itself.
Under the Sub-Agreement, MFSI, subject to the supervision of the Company
and the Board of Managers, is responsible for all aspects of day-to-day
management of the investments of the Accumulation Fund. Among other things, it
is required to (i) perform research and evaluate pertinent data; (ii) provide
the Board with an investment program for the Fund for its approval; (iii) make
investment decisions and carry them out by placing orders for the execution of
portfolio transactions consistent with the investment policies of the Fund as
set forth in its current Prospectus; (iv) report to the Board of Managers at
least quarterly with respect to the implementation of the approved investment
plan; (v) transmit to the Company information necessary for the Company to
perform its responsibilities with respect to the Fund; (vi) create and maintain
brokerage records as required by law; and (vii) provide the office space,
material and personnel necessary to fulfill its obligations under the Sub-
Agreement and to pay all expenses incurred by it in connection with its
activities. However, MFSI is not required to perform services or bear expenses
related to the maintenance and operation of the Fund. (These expenses are
properly assumed by the Company pursuant to the Agreement.)
For the services MFSI furnishes to the Company and the Accumulation Fund as
sub-advisor, the Sub-Agreement provides that the Company will pay MFSI each
month an amount which, on an annual basis, will equal 0.35% of the average daily
net assets of each Series of the Fund. In 1997, 1996 and 1995, respectively, the
Company paid MFSI a total of $90,536, $94,120, and $133,743, as provided for
under the Sub-Agreement. These payments did not affect the amount of the
advisory fees to be paid to the Company by the Accumulation Fund under the
Agreement.
MFSI, formerly MFS Asset Management, Inc. is a Delaware corporation with
its principal offices at 500 Boylston Street, Boston, Massachusetts 02116. MFSI,
together with its parent corporation, Massachusetts Financial
<PAGE>
Services Company and its predecessor organizations, have a history of money
management dating from 1924. MFSI is a wholly-owned subsidiary of MFS.
MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which is ultimately a subsidiary of Sun Life Assurance Company
of Canada, 150 King Street West, Toronto, Canada M5H 1J9.
As of December 31, 1997, MFS and its subsidiaries had over $70 billion in
assets under management, including $10 billion of institutional assets, of which
approximately $5 billion was managed by MFSI.
MFSI serves as investment advisor to substantial private and institutional
accounts. MFS serves as investment advisor to certain mutual fund and insurance
company separate accounts.
The following list shows the names and addresses and principal occupations
of all directors and principal officers of MFSI.
Name and Address Principal Occupation
*Thomas J. Cashman, Jr. President, Director and Chief Investment Officer
of MFSI
*Arnold D. Scott Senior Executive Vice President, Director and
Secretary of MFS and Director of MFSI.
*Jeffrey L. Shames Chairman, Chief Executive Officer and Director
of MFS and Chairman of MFSI.
<PAGE>
*Address is:
500 Boylston Street
Boston, Massachusetts
OWNERSHIP AND CONTROL
As of December 31, 1997, the members of the Board of Managers of the
Accumulation Fund and the directors and principal officers of the Company as a
group, through their ownership of individual variable annuity contracts, owned
beneficially and of record 11,500 units, being .47% of the total. The Home
Office and the Agency retirement plans of The Paul Revere Corporation were the
only contract owners who, as of the above date, directly or indirectly owned,
controlled or held with power to vote units representing 5% or more of the total
vote. Their combined interests were represented by 820,668 units, representing
34% of the total vote.
BROKERAGE ALLOCATION
MFSI, a sub-advisor to the Company, selects the securities for purchase and
sale by the Accumulation Fund. Changes in the Accumulation Fund's investments
are reviewed by the Board of Managers.
The Company has no set formula for the distribution of brokerage business
in connection with the placing of orders for the purchase and sale of
investments. The primary consideration in placing portfolio security
transactions with broker/dealers is execution at the most favorable prices and
in the most effective manner possible.
MFSI attempts to achieve this result by selecting broker/dealers to execute
portfolio transactions on behalf of the Accumulation Fund and its other clients
on the basis of their professional capability, the value and quality of the
brokerage services and the level of their brokerage commissions. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but prices include a dealer's markup or markdown), MFSI normally seeks
to deal directly with the primary market makers, unless in its opinion, best
execution is available elsewhere. In the case of such securities purchased from
underwriters, the cost of such securities generally included a fixed
underwriting commission or concession. From time to time soliciting dealer fees
may be available to MFSI on the tender of Accumulation Fund portfolio securities
in so-called Tender or Exchange Offers. Such soliciting dealer fees will be, in
effect, recaptured for the Accumulation Fund by MFSI to the extent possible. At
present no other recapture agreements are in effect. Brokerage business is not
allocated based on the sale of variable annuity contracts.
<PAGE>
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, MFSI may cause the Accumulation Fund to pay a
broker/dealer who provides brokerage and research services to the Accumulation
Fund and to MFSI, an amount of commission for effecting a securities transaction
for the Accumulation Fund in excess of the amount other broker/dealers would
have charged for the transaction, if MFSI determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage
research services provided by the executing broker/dealer viewed in terms of
either a particular transaction or MFSI's overall responsibility to the
Accumulation Fund or to its other clients. Not all such services are useful or
of value in advising the Accumulation Fund.
The term "broker and research services" includes advice as to the value of
the securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or of purchasers or sellers of
securities.
It also includes furnishing analysis reports and reports concerning issues,
industries, securities, economic factors, trends, portfolio strategies,
performance of accounts, as well as effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
MFSI, be reasonable in relation to the value of the brokerage services provided,
commissions exceeding those which another broker/dealer might charge may be paid
to broker/dealers who were selected to execute transactions on behalf of the
Accumulation Fund and MFSI's other clients.
This could occur, in part, when a broker/dealer provides advice as to the
availability of securities or purchasers or sellers of securities and services
in effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
Broker/dealers may be willing to furnish statistical research and other
factual information or services ("research") to MFSI for no consideration other
than brokerage and underwriting commissions. Securities may be bought or sold
through such broker/dealers but, at present, unless otherwise directed by the
Accumulation Fund, a commission higher than one charged, will not be paid to
such a firm solely because it provided such "research" to MFSI.
MFSI's investment management personnel attempt to evaluate the quality of
"research" provided by brokers. Results of this effort are sometimes used by
MFSI as a consideration in selection of brokers to execute portfolio
transactions. However, MFSI is unable to quantify the amount of commission which
was paid as a result of such "research" because a substantial number of
transactions were effected through brokers who provide "research" but were
selected principally because of their execution capabilities.
<PAGE>
In certain instances, there may be securities which are suitable for the
Accumulation Fund's portfolio as well as that of one or more of the other
clients of MFSI. Investment decisions for the Accumulation Fund and for MFSI's
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by or bought or sold for other clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling that same security. Some simultaneous
transactions are unavoidable because several clients have similar investment
objectives. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized in some cases this
system could have a detrimental effect on the price or volume of the securities
as far as the Accumulation Fund is concerned. In other cases, it is believed
that the Accumulation Fund's ability to participate in volume transactions will
produce better transaction results for the Accumulation Fund.
Brokerage commissions paid in the years ended December 31, 1997, 1996 and
1995 amounted to $63,648, $56,322, and $62,318, respectively. Brokerage
commissions were paid to 87 brokers in 1997. No brokerage commission was paid
to any broker who was or is an affiliated person of the Company, the
Accumulation Fund or MFSI.
UNDERWRITERS
The Company is the principal underwriter for contracts offered by the
Prospectus. The contracts offered by the Prospectus are available at any time
during the year covered by the Prospectus. The Company did not receive any
underwriting commissions for the sale of these contracts.
17
<PAGE>
PURCHASE AND PRICING
OF CONTRACTS
The contracts offered by the Prospectus will only be sold by registered
representatives of the Company who are also licensed with the State Insurance
Department for the sale of such contracts. Purchase payments are due and payable
by the contract owner at the Home Office at a time required by either the
contract or any other basis mutually agreeable by the contract owner and the
Company. The contract owner is to furnish any information that may be required
by the Company as reasonably necessary for the proper crediting of the purchase
payment.
Please refer to the Prospectus for a description of each contract offered
by the Prospectus (Prospectus, page 11) and the amount of any sales charge and
collection fee assessed against any purchase payment (Prospectus, page 8).
The balance of a purchase payment, after deduction of the sales charge, any
applicable premium tax charge and the collection fee will be applied to provide
accumulation units to the credit of the contract. Variable accumulation units
will be credited on the basis of the value of a variable accumulation unit as of
the valuation date next following its receipt of the purchase payment by the
Company at its Home Office.
The Flexible Purchase Payment Variable Annuity Contract ("Flexible")
provides for an annuity to begin at some future date with voluntary purchase
payments in addition to the initial purchase payment being permitted at the
discretion of the Company, but with certain limits on the exercise of such
discretion where the contract qualifies for special tax treatment under the
Internal Revenue Code.
The Single Payment Variable Annuity Contract ("Single") provides for a
purchase of the contract in one sum at the time the contract is issued and for
an annuity subsequent to the issue date of the contract.
Both contracts permit accumulation on a full variable, fully fixed or
combined variable and fixed basis.
The Individual "Level Charge" Variable Annuity Contract ("Level") is
designed primarily to be issued to an individual who desires to fund a
retirement plan involving a reduction of salary which qualifies for tax-deferred
treatment under the Internal Revenue Code. This contract permits accumulation on
a fully variable, fully fixed or combined variable and fixed basis.
<PAGE>
The Group Variable Annuity Contract ("Group") is designed primarily to be
issued as a master group contract to an employer to fund a plan involving
reduction of salary which qualifies for tax-deferred treatment under the
Internal Revenue Code, or plans involving allocation of accumulation values to
participants. A participant has at all times a fully vested interest in the
value of his certificate. This contract provides for variable accumulation
only.
Please refer to the Prospectus for a detailed explanation as to how the
accumulation unit is valued (Prospectus, page 12).
ANNUITY PAYMENTS
The number of annuity units determining each monthly annuity payment is
equal to the value applied to annuity payments less any applicable premium tax
multiplied by the applicable annuity purchase rates and divided by the annuity
unit value when the number is being determined. The number of annuity units will
remain fixed unless the units are split as described in the Prospectus
(Prospectus, page 15).
Each monthly annuity payment will be equal to the number of annuity units
as determined above multiplied by the value of an annuity unit determined in the
daily valuation two weeks preceding the date on which payments are due but in no
event as of the time preceding the effective date of the contract. The amount of
each variable annuity payment will vary from month to month depending on the
investment experience of the appropriate Series of the Accumulation Fund but the
Company guarantees the amount of each payment will not be affected by variations
in mortality experience among annuitants or by expenses incurred in excess of
expense assumptions (see Prospectus, page 10).
Illustration of Variable
Annuity Payment Calculation
Value applied to provide an annuity: $ 47,750
multiplied by
Annuity purchase rate $6.40 per
(from tables): $ $1,000
equals
Tabular annuity amount: $ 305.60
divided by
Annuity unit value on the valuation when the
number of annuity units is determined: $0.522602
equals
<PAGE>
Number of annuity units determining each monthly annuity payment: 584.766
multiplied by
Annuity unit value for valuation two weeks preceding date annuity
benefit payable: $0.533170
equals
Annuity payment for month in dollars: $ 311.78
The annuity payment due for each succeeding month is computed in the same
manner using the fixed figure determined for the number of annuity units (e.g.
584.766) and the then applicable annuity unit value for the valuation two weeks
preceding the date the annuity benefit is payable.
<PAGE>
<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 statements of assets and liabilities of The
Paul Revere Variable Annuity Contract Accumulation Fund (comprising the
Qualified and Non-qualified Portfolios) as of December 31, 1997 and 1996,
including the schedule of investments as of December 31, 1997, and the related
statements of operations and changes in net assets for each of the three years
in the period ended December 31, 1997, 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 Fund'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, 1997 and 1996, 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 The
Paul Revere Variable Annuity Contract Accumulation Fund at December 31, 1997 and
1996, the results of its operations and the changes in its net assets for each
of the three years in the period ended December 31, 1997, and the supplementary
information for each of the ten years in the period then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chattanooga, Tennessee
January 29, 1998
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1997 1996
Series Q Series Q Series N Series N
(Qualified) (Qualified) (Non-Qualified) (Non-Qualified)
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities at market value
(Cost: Series Q 1997-$17,640,824, 1996-$13,796,376)
(Cost: Series N 1997-$ 4,742,855, 1996-$ 3,738,252
(see Statement of Investments) $21,762,332 $17,610,584 $5,883,989 $4,763,593
Cash 2,777 532,088 201,066 148,183
Dividends and interest receivable 31,617 28,314 8,681 7,312
Receivable for investments sold 39,158 56,721 11,207 7,563
Due from the Paul Revere Variable Annuity
Insurance Company 0 0 0 23,252
----------- ----------- ---------- ----------
Total assets 21,835,884 18,227,707 6,104,943 4,949,903
----------- ----------- ---------- ----------
LIABILITIES
Surrenders payable 150,875 6,566 29,098 0
Payable for investments purchased 160,152 11,612 43,845 5,806
Payable to The Paul Revere Variable Annuity
Insurance Company 28,991 112,172 8,458 0
Other 29,618 27,245 6,266 4,291
----------- ----------- ---------- ----------
Total liabilities 369,636 157,595 87,667 10,097
----------- ----------- ---------- ----------
TOTAL NET ASSETS $21,466,248 $18,070,112 $6,017,276 $4,939,806
----------- ----------- ---------- ----------
CONTRACT OWNER'S EQUITY
Deferred contracts terminable by owner $17,565,862 $14,863,418 $4,156,586 $3,400,213
Currently payable contracts 3,900,386 3,206,694 1,860,690 1,539,593
----------- ----------- ---------- ----------
Total net assets $21,466,248 $18,070,112 $6,017,276 $4,939,806
----------- ----------- ---------- ----------
ACCUMULATION UNITS OUTSTANDING 1,887,352 2,093,030 529,795 565,935
=========== =========== ========== ==========
NET ASSET VALUE PER ACCUMULATION UNIT $11.374 $8.633 $11.358 $8.729
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
Series Q Series Q Series Q
(Qualified) (Qualified) (Qualified)
--------------- --------------- ---------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income $ 34,747 $ 52,342 $ 129,286
Net realized gain on investments (unaffiliated companies) 5,091,490 8,351,181 4,293,754
Net increase (decrease) in unrealized appreciation of investments
(unaffiliated companies) 307,210 (4,309,054) 5,138,033
----------- ------------ -----------
Increase in net assets from operations 5,433,447 4,094,469 9,561,073
Contract receipts:
Gross purchase payments received 47,982 106,019 653,977
Deductions from purchase payments 2,060 3,892 3,969
----------- ------------ -----------
Net purchase payments received 45,922 102,127 650,008
Payments to contract owners:
Annuity payments to contract owners 378,254 304,504 260,591
Terminations and withdrawals to contract owners 1,783,911 24,628,563 1,128,000
----------- ------------ -----------
Total payments to contract owners 2,162,165 24,933,067 1,388,591
----------- ------------ -----------
Net contract payments to contract owners (2,116,243) (24,830,940) (738,583)
Other additions 78,932 31,550 128,917
----------- ------------ -----------
Total increase (decrease) in net assets 3,396,136 (20,704,921) 8,951,407
NET ASSETS
Beginning of year 18,070,112 38,775,033 29,823,626
----------- ------------ -----------
End of period $21,466,248 $ 18,070,112 $38,775,033
=========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
Series N Series N Series N
(Non-qualified) (Non-qualified) (Non-qualified)
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ (17,250) $ 1,718 $ 4,785
Net realized gain on investments (unaffiliated companies) 1,359,361 718,025 465,264
Net increase in unrealized appreciation of investments
(unaffiliated companies) 115,793 118,379 581,843
----------- ------------ -----------
Increase in net assets from operations 1,457,904 838,122 1,051,892
Contract receipts:
Gross purchase payments received 9,995 8,707 7,770
Deductions from purchase payments 647 542 483
----------- ------------ -----------
Net purchase payments received 9,348 8,165 7,287
Payments to contract owners:
Annuity payments to contract owners 198,891 170,686 142,452
Terminations and withdrawals to contract owners 254,751 58,037 43,041
----------- ------------ -----------
Total payments to contract owners 453,642 228,723 185,493
----------- ------------ -----------
Net contract payments to contract owners (444,294) (220,558) (178,206)
Other additions 63,860 60,821 71,953
----------- ------------ -----------
Total increase in net assets 1,077,470 678,385 945,639
NET ASSETS
Beginning of year 4,939,806 4,261,421 3,315,782
----------- ------------ -----------
End of period $ 6,017,276 $ 4,939,806 $ 4,261,421
=========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
Series Q Series Q Series Q
(Qualified) (Qualified) (Qualified)
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income (unaffiliated companies):
Dividends $ 211,880 $ 336,996 $ 529,196
Interest 138,669 62,320 128,928
---------- ----------- ----------
Total income 350,549 399,316 658,124
Expenses:
Mortality and expense risk fees 202,101 222,849 344,159
Investment management and advisory service fees 101,051 111,425 172,079
Professional services 12,650 12,700 12,600
---------- ----------- ----------
Total expenses 315,802 346,974 528,838
---------- ----------- ----------
Net investment income 34,747 52,342 129,286
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments sold (unaffiliated companies) 5,091,490 8,351,181 4,293,754
Net increase (decrease) in unrealized appreciation of investments
(unaffiliated companies) 307,210 (4,309,054) 5,138,033
---------- ----------- ----------
Net realized and unrealized gain on investments 5,398,700 4,042,127 9,431,787
---------- ----------- ----------
Increase in net assets from operations $5,433,447 $ 4,094,469 $9,561,073
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
Series N Series N Series N
(Non-qualified) (Non-qualified) (Non-qualified)
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income (unaffiliated companies):
Dividends $ 59,959 $ 67,817 $ 59,172
Interest 16,943 10,620 10,119
---------- ----------- ----------
Total income 74,902 78,437 69,291
Expenses:
Mortality and expense risk fees 56,375 46,066 37,964
Investment management and advisory service fees 28,187 23,033 18,982
Professional services 7,590 7,620 7,560
---------- ----------- ----------
Total expenses 92,152 76,719 64,506
---------- ----------- ----------
Net investment income (loss) (17,250) 1,718 4,785
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments sold (unaffiliated companies) 1,359,361 718,025 465,264
Net increase in unrealized appreciation of investments
(unaffiliated companies) 115,793 118,379 581,843
---------- ----------- ----------
Net realized and unrealized gain on investments 1,475,154 836,404 1,047,108
---------- ----------- ----------
Increase in net assets from operations $1,457,904 $ 838,122 $1,051,892
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- ------------------------
SECURITIES OF NUMBER % OF NUMBER % OF
UNAFFILIATED COMPANIES 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. 2,300 $ 50,965 $ 89,270 0.4% 600 $ 14,175 $ 23,288 0.4%
---------- ---------- -------- ----------
BANKS AND CREDIT COMPANIES
Bank of Boston Corp. 1,300 117,145 122,119 400 36,045 37,575
Comerica Inc. 2,500 94,844 225,625 700 26,127 63,175
Crestar Financial Corp. 3,400 91,095 193,800 800 21,483 45,600
Northern Trust Corp. 3,800 76,257 265,050 1,100 29,317 76,725
Norwest Corp. 4,800 72,510 186,000 1,200 15,494 46,500
---------- ---------- -------- ----------
451,851 992,594 4.6% 128,466 269,575 4.5%
---------- ---------- -------- ----------
BUSINESS SERVICES
Danka Business Systems ADR 6,900 219,135 109,972 1,800 58,275 28,688
IKON Office Solutions, Inc. 2,500 85,148 70,313 800 27,070 22,500
---------- ---------- -------- ----------
304,283 180,285 0.8% 85,345 51,188 0.8%
---------- ---------- -------- ----------
CHEMICALS
Air Products & Chemicals, Inc. 2,500 176,129 205,625 1.0% 700 49,147 57,575 1.0%
---------- ---------- -------- ----------
COMPUTER SOFTWARE-PC
First Data Corp. 3,805 126,303 111,296 1,100 36,844 32,175
(b) Computer Sciences Corporation 3,200 224,227 267,200 950 66,644 79,325
(b) Microsoft Corp. 1,500 196,375 193,875 400 52,025 51,700
---------- ---------- -------- ----------
546,905 572,371 2.7% 155,513 163,200 2.7%
---------- ---------- -------- ----------
COMPUTER SOFTWARE-SYSTEMS
(b) BMC Software, Inc. 4,400 226,639 288,750 1,200 74,727 78,750
(b) Cadence Design Systems, Inc. 3,370 80,190 82,565 920 21,950 22,540
Compaq Computer Corp. 2,700 170,880 152,550 750 47,471 42,375
Computer Assoc. Intl. Inc. 7,050 191,407 373,650 1,950 53,243 103,350
(b) Compuware Corporation 8,000 157,004 256,000 2,300 45,697 73,600
HBO & Company 3,700 132,860 177,600 1,000 33,091 48,000
(b) Oracle Corp. 6,300 155,314 140,572 1,737 41,833 38,758
---------- ---------- -------- ----------
1,114,294 1,471,687 6.9% 318,012 407,373 6.8%
---------- ---------- -------- ----------
CONSUMER GOODS & SERVICES
Browning-Ferris
Industries, Inc. 3,900 118,906 144,300 1,100 33,539 40,700
(b) Cendant Corporation 15,000 405,157 515,625 4,100 110,697 140,937
Clorox Company 2,500 168,888 198,437 700 47,288 55,563
Gillette Co. 2,200 176,971 220,964 600 47,500 60,263
Kimberly-Clark Corporation 4,600 228,010 226,840 1,300 64,516 64,107
Newell Company 4,200 158,594 178,500 1,200 45,586 51,000
Philip Morris Cos. Inc. 12,100 482,985 547,525 3,400 136,210 153,850
Procter & Gamble Co. 2,800 122,582 223,476 800 34,162 63,850
RJR Nabisco Holdings Corp. 4,800 168,518 180,000 1,300 45,632 48,750
Service Corporation
International 5,800 191,097 213,150 1,600 53,005 58,800
Tyco Intl. Ltd. 23,396 564,349 1,054,294 6,390 152,010 287,953
Wal-Mart Stores, Inc. 3,200 101,392 126,202 900 28,517 35,494
---------- ---------- -------- ----------
2,887,449 3,829,313 17.8% 798,662 1,061,267 17.6%
---------- ---------- -------- ----------
ELECTRICAL EQUIPMENT
General Electric Co. 7,700 391,214 564,988 2.6% 2,100 106,995 154,088 2.6%
---------- ---------- -------- ----------
ELECTRONICS
(b) Altera Corporation 1,700 86,039 56,312 500 25,344 16,563
(b) Analog Devices, Inc. 1,600 51,501 44,301 400 13,016 11,075
(b) Imation Corp. 150 25,976 2,400
Intel Corp. 2,900 208,394 203,725 800 57,439 56,200
---------- ---------- -------- ----------
371,910 306,738 1.4% 95,799 83,838 1.4%
---------- ---------- -------- ----------
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- ------------------------
SECURITIES OF NUMBER % OF NUMBER % OF
UNAFFILIATED COMPANIES 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>
ENERGY
British Petroleum Company 1,300 $114,414 $103,594 400 $34,989 $ 31,875
Diamond Offshore Drilling, Inc. 1,400 66,561 67,375 400 19,017 19,250
Halliburton Company 1,500 61,256 77,813 400 16,335 20,750
(b) Noble Drilling Corporation 4,400 131,412 134,750 1,200 35,919 36,750
---------- ---------- -------- ----------
373,643 383,532 1.8% 106,260 108,625 1.8%
---------- ---------- -------- ----------
ENTERTAINMENT
Carnival Corporation 700 33,554 38,762 200 9,587 11,075
(b) Clear Channel Communication, Inc. 1,900 121,067 150,932 500 31,961 39,719
(b) Mirage Resorts, Inc. 6,700 146,586 152,425 1,900 41,564 43,225
Royal Caribbean Cruises LTD 2,900 134,958 154,608 800 37,209 42,650
(b) Viacom, Inc. Class B 4,100 139,726 169,896 1,100 41,531 45,582
---------- ---------- -------- ----------
575,891 666,623 3.1% 161,852 182,251 3.0%
---------- ---------- -------- ----------
FINANCIAL INSTITUTIONS
American Express Company 2,100 151,851 187,425 600 43,386 53,550
Compass Bancshares, Inc. 2,900 117,415 126,875 800 32,386 35,000
Fannie Mae 6,600 284,363 376,616 1,800 77,538 102,713
Fleet Financial Group, Inc. 1,200 84,450 90,150 300 21,112 22,538
Household International, Inc. 400 33,559 51,050 100 8,390 12,763
Merrill Lynch & Co. 2,000 143,687 145,876 500 35,922 36,469
Morgan Stanley, Dean Witter,
Discover and Co. 1,500 79,211 88,688 400 21,123 23,650
U. S. Bancorp 1,900 118,564 212,682 500 31,201 55,969
Union Planters Corporation 2,000 116,584 135,750 500 29,146 33,937
Wells Fargo & Company 400 119,110 135,775 100 30,034 33,944
---------- ---------- -------- ----------
1,248,794 1,550,887 7.2% 330,238 410,533 6.8%
---------- ---------- -------- ----------
FOOD & BEVERAGE PRODUCTS
Dean Foods Company 1,600 79,521 95,600 400 19,880 23,900
Flowers Industries, Inc. 3,700 76,626 76,083 1,000 20,710 20,563
Hershey Foods Corp. 1,200 51,222 74,326 300 12,806 18,581
McCormick & Co. 6,000 157,602 168,000 1,700 44,708 47,600
PepsiCo Inc. 5,900 212,800 213,875 1,600 57,802 58,000
Ralston-Purina Group 1,800 136,621 167,288 500 38,935 46,469
(b) Robert Mondavi Corporation 1,600 79,892 78,000 500 24,625 24,375
Tootsie Roll Industries, Inc. 1,500 87,840 93,750 400 23,424 25,000
Wrigley (WM) Jr. Co. 2,100 132,000 167,082 600 37,460 47,738
---------- ---------- -------- ----------
1,014,124 1,134,004 5.3% 280,350 312,226 5.2%
---------- ---------- -------- ----------
INSURANCE
Allstate Corporation 3,000 250,752 271,500 800 66,738 72,400
Chubb Corp. 3,300 195,740 249,562 900 52,976 68,062
Conseco Inc. 5,700 248,833 258,997 1,600 69,840 72,701
The Hartford Financial Services
Group Inc. 700 44,543 65,494 200 12,726 18,713
Lincoln National Corp. 4,000 287,998 312,500 1,100 78,668 85,937
Progressive Corporation 1,000 110,596 119,875 300 33,179 35,963
Reliastar Financial Corporation 1,100 42,826 45,307 300 11,662 12,356
Torchmark Corporation 2,600 104,260 109,689 700 28,063 29,532
Travelers Group Inc. 2,400 60,292 129,300 750 17,666 40,406
---------- ---------- -------- ----------
1,345,840 1,562,224 7.3% 371,518 436,070 7.2%
---------- ---------- -------- ----------
MEDICAL & HEALTH PRODUCTS
American Home Products Corp. 2,100 159,271 160,650 600 45,506 45,900
(b) AmeriSource Health Corp. 3,100 147,260 180,575 900 42,875 52,425
Bristol-Myers Squibb Co. 5,800 345,283 548,825 1,600 96,420 151,400
(b) Elan Corp. ADS 2,600 68,860 133,089 700 18,567 35,832
Lilly (Eli) Co. 4,000 138,864 278,510 1,200 40,227 83,550
McKesson Corp. 900 65,525 97,537 200 14,641 21,675
Mentor Corporation 3,300 116,325 120,450 900 31,725 32,850
Pfizer Inc. 5,600 301,133 417,553 1,600 81,757 119,301
Schering Plough Corp. 5,000 144,098 310,625 1,400 38,476 86,975
Warner-Lambert Company 900 115,563 111,769 300 38,718 37,256
---------- ---------- -------- ----------
1,602,182 2,359,583 11.0% 448,912 667,164 11.1%
---------- ---------- -------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- ------------------------
SECURITIES OF NUMBER % OF NUMBER % OF
UNAFFILIATED COMPANIES 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 TECH. SERVICES
(b) Boston Scientific Corp. 1,600 $ 82,869 $ 73,400 450 $ 23,108 $ 20,644
Cardinal Health, Inc. 1,700 114,357 127,712 500 33,433 37,563
(b) HEALTHSOUTH Corp. 8,900 171,714 246,975 2,400 46,310 66,600
Medtronic Inc. 2,000 97,966 105,000 600 29,390 31,500
Shared Medical Systems Corp. 2,100 127,424 138,600 600 36,346 39,600
(b) St. Jude Medical Inc. 2,350 85,706 71,675 800 29,047 24,400
(b) Tenet Healthcare Corp. 6,700 212,670 221,938 1,900 60,288 62,937
United Healthcare Corp. 6,700 325,660 332,910 1,900 91,179 94,407
---------- ---------- -------- ----------
1,218,366 1,318,210 6.1% 349,101 377,651 6.3%
---------- ---------- -------- ----------
PRINTING & PUBLISHING
McGraw-Hill Cos, Inc. 0.0% 600 23,162 44,400 0.7%
-------- ----------
RAILROAD
Burlington Northern
Santa Fe Corp. 1,000 85,051 92,938 0.4% 300 25,440 27,881 0.5%
---------- ---------- -------- ----------
STORES
(b) BJ's Wholesale Club, Inc. 4,400 132,131 138,050 1,200 36,000 37,650
CVS Corporation 4,000 188,296 256,252 1,100 54,158 70,469
(b) Fred Meyer, Inc. 8,400 239,624 305,550 2,400 69,083 87,300
Home Depot, Inc. 3,700 197,636 217,837 1,000 53,415 58,875
(b) Kroger Company 4,000 137,736 147,000 1,100 37,875 40,425
(b) Office Depot, Inc. 13,800 242,615 330,344 3,800 66,841 90,964
Rite Aid Corp. 11,550 466,699 678,563 3,250 132,635 190,938
---------- ---------- -------- ----------
1,604,737 2,073,596 9.7% 450,007 576,621 9.6%
---------- ---------- -------- ----------
SUPERMARKETS
(b) Safeway Inc. 5,000 294,062 316,250 1.5% 1,400 82,679 88,550 1.5%
---------- ---------- -------- ----------
TELECOMMUNICATIONS
Alcatel Alsthon 7,400 204,016 187,316 2,000 55,212 50,626
AT&T Corp. 4,600 271,819 282,040 1,300 76,819 79,707
(b) Bay Networks Inc. 5,200 162,154 133,250 1,400 43,624 35,875
(b) Cisco Systems Inc. 3,850 179,397 214,638 1,075 58,573 59,931
MCI Communications Corp. 6,000 251,242 256,878 1,700 71,388 72,782
---------- ---------- -------- ----------
1,068,628 1,074,122 5.0% 305,616 298,921 5.0%
---------- ---------- -------- ----------
UTILITIES-ELECTRIC
(b) AES
Corporation 2,800 119,523 130,550 0.6% 800 34,149 37,300 0.6%
----------- ----------- ---------- -----------
TOTAL COMMON
STOCKS 418,721 16,845,841 20,875,390 97.2% 116,722 4,721,398 5,839,585 97.1%
----------- ----------- ---------- -----------
PREFERRED STOCKS
CHEMICALS
Airtouch Communications Inc.
6.00% Class B. 2,684 69,122 95,617 587 13,066 20,912
4.25% Class C. 1,788 46,040 111,415 377 8,391 23,492
---------- ---------- -------- ----------
TOTAL PREFERRED STOCKS 4,472 115,162 207,032 1.0% 964 21,457 44,404 0.7%
---------- ---------- -------- ----------
TOTAL STOCKS 423,193 16,961,003 21,082,422 98.2% 117,686 4,742,855 5,883,989 97.8%
---------- ---------- -------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- ------------------------
SECURITIES OF NUMBER % OF NUMBER % OF
UNAFFILIATED COMPANIES 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>
SHORT TERM INVESTMENTS
Federal Home Loan Bond
4.75% due January 2, 1998 $ 679,821 $ 679,910 3.2%
----------- -----------
TOTAL INVESTMENTS IN SECURITIES
OF UNAFFILIATED COMPANIES $17,640,824 $21,762,332 101.4% $4,742,855 $5,883,989 97.8%
----------- ----------- ---------- ----------
CASH AND RECEIVABLES
LESS LIABILITIES -296,084 -1.4% 133,287 2.2%
----------- ----------
TOTAL NET ASSETS $21,466,248 100.0% $6,017,276 100.0%
----------- ----------
</TABLE>
- ------------
(a) Effective cost for federal income tax purposes.
(b) Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
SUPPLEMENTAL INFORMATION
SELECTED PER UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
-------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA (A)
SERIES Q (QUALIFIED)
Investment income $ 0.177 $0.153 $0.119 $ 0.081 $ 0.054
Expenses 0.159 0.133 0.096 0.073 0.079
------- ------ ------ ------- -------
Net investment income (loss) 0.018 0.020 0.023 0.008 (0.025)
Net realized and unrealized gains (losses) from securities 2.723 1.551 1.711 (0.020) 0.291
------- ------ ------ ------- -------
Net increase (decrease) in net asset value 2.741 1.571 1.734 (0.012) 0.266
Accumulation unit net asset value:
Beginning of year 8.633 7.062 5.328 5.340 5.074
------- ------ ------ ------- -------
End of year $11.374 $8.633 $7.062 $ 5.328 $ 5.340
======= ====== ====== ======= =======
SERIES N (NON-QUALIFIED)
Investment income $ 0.135 $0.137 $0.117 $ 0.099 $ 0.055
Expenses 0.166 0.134 0.109 0.102 0.092
------- ------ ------ ------- -------
Net investment income (loss) (0.031) 0.003 0.008 (0.003) (0.037)
Net realized and unrealized gains (losses) from securities 2.660 1.459 1.769 (0.023) 0.318
------- ------ ------ ------- -------
Net increase (decrease) in net asset value 2.629 1.462 1.777 (0.026) 0.281
Accumulation unit net asset value:
Beginning of year 8.729 7.267 5.490 5.516 5.235
------- ------ ------ ------- -------
End of year $11.358 $8.729 $7.267 $ 5.490 $ 5.516
======= ====== ====== ======= =======
</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>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RATIOS
Series Q (Qualified)
Operating expenses to average accumulation fund balance 1.59% 1.57% 1.55% 1.55% 1.56%
Net investment income to average accumulation fund balance 0.18% 0.24% 0.38% 0.17% (0.50%)
Portfolio turnover rate 130% 78% 64% 64% 59%
Accumulation units outstanding at the end of the period
(in thousands) 1,887 2,093 5,491 5,597 5,700
SERIES N (NON-QUALIFIED)
Operating expenses to average accumulation fund balance 1.67% 1.69% 1.71% 1.73% 1.73%
Net investment income to average accumulation fund balance (0.31%) 0.04% 0.13% (0.05%) (0.69%)
Portfolio turnover rate 139% 94% 67% 62% 62%
Accumulation units outstanding at the end of the period
(in thousands) 530 566 586 604 640
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SUPPLEMENTAL INFORMATION
SELECTED PER UNIT DATA AND RATIOS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1991 1990 1989 1988
-------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA (A)
SERIES Q (QUALIFIED)
Investment income $ 0.068 $0.093 $ 0.116 $0.122 $0.078
Expenses 0.076 0.066 0.055 0.051 0.041
------- ------ ------- ------ ------
Net investment income (loss) (0.008) 0.027 0.061 0.071 0.037
Net realized and unrealized gains (losses) from securities 0.159 1.295 (0.107) 0.928 0.194
------- ------ ------- ------ ------
Net increase (decrease) in net asset value 0.151 1.322 (0.046) 0.999 0.231
Accumulation unit net asset value:
Beginning of year 4.923 3.601 3.647 2.648 2.417
------- ------ ------- ------ ------
End of year $ 5.074 $4.923 $ 3.601 $3.647 $2.648
======= ====== ======= ====== ======
SERIES N (NON-QUALIFIED)
Investment income $ 0.071 $0.085 $ 0.111 $0.104 $0.070
Expenses 0.094 0.076 0.072 0.059 0.047
------- ------ ------- ------ ------
Net investment income (loss) (0.023) 0.009 0.039 0.045 0.023
Net realized and unrealized gains (losses) from securities 0.194 1.361 (0.102) 1.002 0.201
------- ------ ------- ------ ------
Net increase (decrease) in net asset value 0.171 1.370 (0.063) 1.047 0.224
Accumulation unit net asset value:
Beginning of year 5.064 3.694 3.757 2.710 2.486
------- ------ ------- ------ ------
End of year $ 5.235 $5.064 $ 3.694 $3.757 $2.710
======= ====== ======= ====== ======
</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>
YEAR ENDED DECEMBER 31,
1992 1991 1990 1989 1988
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RATIOS
SERIES Q (QUALIFIED)
Operating expenses to average accumulation fund balance 1.56% 1.56% 1.58% 1.58% 1.59%
Net investment income to average accumulation fund balance (0.17%) 0.64% 1.76% 2.20% 1.45%
Portfolio turnover rate 61% 98% 80% 89% 66%
Accumulation units outstanding at the end of the period
(in thousands) 5,753 5,839 5,961 6,157 6,385
SERIES N (NON-QUALIFIED)
Operating expenses to average accumulation fund balance 1.74% 1.76% 1.80% 1.80% 1.81%
Net investment income to average accumulation fund balance (0.42%) 0.21% 0.96% 1.36% 0.88%
Portfolio turnover rate 66% 109% 84% 84% 64%
Accumulation units outstanding at the end of the period
(in thousands) 662 684 735 774 942
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 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.
("Provident"). 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, 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 date. 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.
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 The Paul
Revere Life Insurance Company. 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>
December 31, 1997 $26,404,332 $28,331,204 $7,410,011 $7,764,770
December 31, 1996 $17,913,759 $40,511,084 $4,024,116 $4,120,878
</TABLE>
At December 31, 1997, net unrealized appreciation of investments in Series
Q, amounting to $4,121,518, consisted of unrealized gains of $4,669,003 and
unrealized losses of $547,485; net unrealized appreciation of investment in
Series N, amounting to $1,141,134, consisted of unrealized gains of
$1,278,237 and unrealized losses of $137,103.
7. ACCUMULATION UNITS
The change in the number of accumulation units outstanding were as follows:
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED)
-----------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Units outstanding at beginning of year 2,093,030 5,490,718 5,597,405
Units credited to contracts:
Net purchase payments 4,552 13,534 114,907
Units withdrawn from contracts:
Annuity payments 37,490 39,287 42,202
Terminations and withdrawals 179,873 3,375,395 190,226
--------- ---------- ---------
Net units withdrawn 217,363 3,414,682 232,428
--------- ---------- ---------
Contract units withdrawn in excess of units credited (212,811) (3,401,148) (117,521)
Other additions 7,133 3,460 10,834
--------- ---------- ---------
Net decrease in units (205,678) (3,397,688) (106,687)
--------- ---------- ---------
Units outstanding at end of period 1,887,352 2,093,030 5,490,718
========= ========== =========
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
7. ACCUMULATION UNITS (CONTINUED)
The change in the number of accumulation units outstanding were as follows:
<TABLE>
<CAPTION>
SERIES N (NON-QUALIFIED)
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Units outstanding at beginning of year 565,935 586,396 604,004
Units credited to contracts:
Net purchase payments 927 1,056 1,152
Units withdrawn from contracts:
Annuity payments 19,617 21,645 22,386
Terminations and withdrawals 24,629 7,179 6,906
------- ------- -------
Net units withdrawn 44,246 28,824 29,292
------- ------- -------
Contract units withdrawn in excess of units credited (43,319) (27,768) (28,140)
Other additions 7,179 7,307 10,532
------- ------- -------
Net decrease in units (36,140) (20,461) (17,608)
------- ------- -------
Units outstanding at end of period 529,795 565,935 586,396
======= ======= =======
</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 acquired The Paul Revere Corporation at a
price of approximately $1.2 billion.
9. COMMITMENTS
On December 8, 1997 Provident signed an Asset Transfer and Acquisition
Agreement under which American General Corporation will assume Provident's
individual and tax-sheltered annuity business including all individual
annuities and its two registered separate accounts. Separate Account B and
The Paul Revere Variable Annuity Contract Accumulation Fund. The
transaction is pending appropriate state approvals and is expected to close
in the first quarter of 1998.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Paul Revere Variable Annuity Insurance Company
We have audited the accompanying statutory-basis statements of financial
condition of The Paul Revere Variable Annuity Insurance Company, a wholly-owned
subsidiary of The Paul Revere Life Insurance Company, as of December 31, 1997
and 1996, and the related statutory-basis statements of income, capital and
surplus, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Division of Insurance of the Commonwealth of Massachusetts,
which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
also are described in Note 1. The effects on the financial statements of these
variances are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of The Paul Revere Variable Annuity Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for the years then
ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Paul Revere
Variable Annuity Insurance Company at December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting practices prescribed or permitted by the Division of
Insurance of the Commonwealth of Massachusetts.
ERNST & YOUNG LLP
Chattanooga, Tennessee
February 3, 1998
-1-
<PAGE>
STATEMENTS OF FINANCIAL CONDITION -STATUTORY BASIS
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
<TABLE>
<CAPTION>
December 31
1997 1996
(in thousands of dollars)
-------------------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTED ASSETS--NOTE 3
Bonds $1,546,640 $1,309,289
Preferred Stocks 11,879 7,812
Common Stocks 244 14,812
Mortgage Loans 6,360 100,526
Real Estate - 1,050
Policy Loans 33,868 31,911
Cash and Short-term Investments 4,560 20,474
Other Invested Assets 5,990 8,337
Receivable for Securities 13,751 -
---------- ----------
Total Cash and Invested Assets 1,623,292 1,494,211
OTHER ASSETS
Reinsurance Balances Receivable 1,569 51
Federal Income Tax Recoverable - 1,002
Guaranty Funds Receivable or on Deposit 506 344
Deferred and Uncollected Premiums 4,995 5,186
Investment Income Due and Accrued 25,612 23,904
Receivable from Parent, Subsidiaries, and Affiliates - 89
Other Assets 970 810
---------- ----------
TOTAL ASSETS EXCLUDING SEPARATE ACCOUNTS BUSINESS 1,656,944 1,525,597
From Separate Accounts Statement 27,941 23,178
---------- ----------
TOTAL ADMITTED ASSETS $1,684,885 $1,548,775
========== ==========
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
(in thousands of dollars)
---------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Life and Annuity Reserves $ 100,566 $ 93,914
Policy and Contract Claims 618 322
Premiums and Other Contract Deposit Funds 1,367,888 1,320,758
Other Reserves Held for Policyholders 767 54
Interest Maintenance Reserve 5,158 2,529
Asset Valuation Reserve 11,153 24,402
Insurance Expenses Due or Accrued 3,098 3,312
Federal Income Taxes 6,578 -
Amounts Withheld or Retained as Agent or Trustee 4,288 3,955
Borrowed Money and Interest Thereon 45,741 -
Payable to Parent, Subsidiaries, and Affiliates 2,630 2,892
Drafts Outstanding 3,769 -
Payable for Securities 13,760 -
Other Liabilities 1,161 876
---------- ----------
TOTAL LIABILITIES EXCLUDING SEPARATE ACCOUNTS BUSINESS 1,567,175 1,453,014
From Separate Accounts Statement 27,941 23,178
---------- ----------
TOTAL LIABILITIES 1,595,116 1,476,192
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES--NOTE 12
CAPITAL AND SURPLUS
Common Capital Stock, $5.00 par
Authorized and Issued--500,000 shares 2,500 2,500
Gross Paid in and Contributed Surplus 48,800 48,800
Unassigned Surplus 38,469 21,283
---------- ----------
TOTAL CAPITAL AND SURPLUS 89,769 72,583
---------- ----------
TOTAL LIABILITIES AND CAPITAL AND SURPLUS $1,684,885 $1,548,775
========== ==========
</TABLE>
See notes to financial statements--statutory basis.
-3-
<PAGE>
STATEMENTS OF INCOME-STATUTORY BASIS
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
(in thousands of dollars)
----------------------------
<S> <C> <C>
REVENUE
Premium Income $ 19,446 $ 29,120
Annuity and Other Fund Deposits 135,798 121,783
Considerations for Supplementary Contracts 1,019 -
Net Investment Income 111,961 107,576
Amortization of Interest Maintenance Reserve 257 317
Other Income 133 311
-------- --------
TOTAL REVENUE 268,614 259,107
-------- --------
BENEFITS AND EXPENSES
Death Benefits 3,173 1,863
Annuity Benefits 7,058 6,888
Disability Benefits 182 223
Surrender Benefits and Other Fund Withdrawals 165,353 138,285
Interest on Policy or Contract Funds 75,144 7
Change in Life and Annuity Reserves 6,041 9,186
Change in Liability for Premium and Other Deposit Funds (27,951) 62,299
Other Benefits and Reserve Changes 1,170 6
Commissions 9,741 11,523
General Expenses 9,068 12,979
Insurance Taxes, Licenses, and Fees 2,685 2,103
Other Expenses (743) (11)
-------- --------
TOTAL BENEFITS AND EXPENSES 250,921 245,351
-------- --------
NET GAIN FROM OPERATIONS BEFORE FEDERAL INCOME
TAXES AND NET REALIZED CAPITAL GAINS 17,693 13,756
Federal Income Taxes 8,342 3,625
-------- --------
NET GAIN FROM OPERATIONS BEFORE NET REALIZED CAPITAL GAINS 9,351 10,131
Net Realized Capital Gains--Note 3 8,171 2,319
-------- --------
NET INCOME $ 17,522 $ 12,450
======== ========
</TABLE>
See notes to financial statements--statutory basis.
-4-
<PAGE>
STATEMENTS OF CAPITAL AND SURPLUS-STATUTORY BASIS
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
(in thousands of dollars)
------------------------------
<S> <C> <C>
COMMON CAPITAL STOCK
Balance at Beginning and End of Year $ 2,500 $ 2,500
-------- -------
GROSS PAID IN AND CONTRIBUTED SURPLUS
Balance at Beginning and End of Year 48,800 48,800
-------- -------
UNASSIGNED SURPLUS
Balance at Beginning of Year 21,283 15,226
Net Income 17,522 12,450
Change in Net Unrealized Capital Gains and Losses (11,045) 3,920
Change in Non-admitted Assets and Related Items 71 18
Change in Reserve on Account of Change in Valuation Basis (611) -
Change in Asset Valuation Reserve 13,249 (3,355)
Dividends to Stockholder (2,000) (8,000)
Change in Voluntary Investment Reserve - 1,011
Prior Years' State Income Taxes - 13
-------- -------
Balance at End of Year 38,469 21,283
-------- -------
TOTAL CAPITAL AND SURPLUS $ 89,769 $72,583
======== =======
</TABLE>
See notes to financial statements--statutory basis.
-5-
<PAGE>
STATEMENTS OF CASH FLOWS-STATUTORY BASIS
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
(in thousands of dollars)
----------------------------
<S> <C> <C>
CASH FROM OPERATIONS
Premiums and Other Considerations Received $ 21,367 $ 28,776
Annuity and Other Fund Deposits 135,798 121,783
Investment Income Received 107,049 101,902
Other Income Received 133 311
Surrender Benefits and Other Fund Withdrawals Paid (165,353) (138,285)
Other Benefits Paid (12,121) (8,866)
Insurance Expenses Paid (21,731) (27,173)
Transfers to Separate Accounts - (250)
Federal Income Taxes Paid (4,603) (2,890)
--------- ---------
NET CASH FROM OPERATIONS 60,539 75,308
--------- ---------
CASH FROM INVESTMENTS
Proceeds from Investments Sold, Matured, or Repaid 225,711 226,519
Tax on Capital Gains and Losses Paid (1,463) (3,282)
Cost of Long-term Investments Acquired (346,614) (304,582)
Net Increase in Policy Loans (1,957) (2,225)
--------- ---------
NET CASH FROM INVESTMENTS (124,323) (83,570)
--------- ---------
CASH FROM FINANCING AND MISCELLANEOUS SOURCES
Borrowed Money 45,733 -
Dividends Paid to Stockholder (2,000) (8,000)
Other Sources 4,137 5,670
--------- ---------
NET CASH FROM FINANCING AND MISCELLANEOUS SOURCES 47,870 (2,330)
--------- ---------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (15,914) (10,592)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 20,474 31,066
--------- ---------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 4,560 $ 20,474
========= =========
</TABLE>
See notes to financial statements--statutory basis.
-6-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS: The Paul Revere Variable Annuity Insurance Company (the Company) is
a wholly-owned subsidiary of The Paul Revere Life Insurance Company. The Paul
Revere Life Insurance Company is wholly-owned by The Paul Revere Corporation,
which was acquired from Textron Inc. on March 27, 1997, by Provident Companies,
Inc., a non-insurance holding company incorporated in Delaware. The Company is
domiciled in the State of Massachusetts and is licensed to do business in forty-
eight states and the District of Columbia. The Company's primary business is the
sale of life insurance and annuity products, which are marketed through branch
offices, financial institutions, and independent agents and brokers.
USE OF ESTIMATES: The preparation of financial statements requires management
to make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the amounts
reported and disclosed herein.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in conformity with statutory accounting practices prescribed by or permitted by
the National Association of Insurance Commissioners (NAIC) and the Division of
Insurance of the Commonwealth of Massachusetts. Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the NAIC. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. The Company does not apply any
permitted statutory accounting practices that differ from prescribed statutory
accounting practices. Certain 1996 amounts have been reclassified to conform to
1997 presentation.
The NAIC currently is in the process of recodifying statutory accounting
practices, the result of which is expected to standardize prescribed statutory
accounting practices. Accordingly, that project, which is expected to be
completed in 1998, will likely change, to some extent, prescribed statutory
accounting practices and may result in changes to the accounting practices the
Company uses to prepare its statutory financial statements.
Statutory accounting practices differ from generally accepted accounting
principles (GAAP). Specific differences are as follows:
Policy Acquisition Costs and Value of Business Acquired: The costs of acquiring
new business are expensed when incurred rather than deferred and amortized.
Securities: Bonds are carried at amortized cost with the discount or premium
amortized using the interest method. Non-sinking fund preferred stocks are
carried principally at cost. Common stocks are carried at fair value, but income
taxes are not provided on unrealized capital gains and losses. For GAAP,
securities not bought and held for the purpose of selling in the near term but
for which the Company does not have the positive intent and ability to hold to
maturity are classified as available-for-sale and are carried at fair value.
Unrealized holding gains and losses on available-for-sale securities are
reported as a separate component of stockholder's equity. Bonds and preferred
stocks that the Company has the positive intent and ability to hold to maturity
are classified as held-to-maturity and are generally reported at amortized cost.
Non-admitted Assets: Non-admitted assets, principally receivables, are excluded
from the statements of financial condition, and changes therein are charged or
credited directly to unassigned surplus.
Asset Valuation Reserve: The asset valuation reserve is reported as a liability
rather than as capital, and changes in this reserve are charged or credited
directly to unassigned surplus.
Policy Reserves: Policy reserves are provided based on assumptions and methods
prescribed or permitted by insurance regulatory authorities rather than on
mortality, interest, and withdrawal assumptions deemed to be appropriate when
the contracts were issued.
-7-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Federal Income Taxes: Federal income taxes are provided based on the estimated
liability for taxes incurred. The tax effects of temporary differences in
reporting income for financial statement purposes and for income tax purposes
are not included in the liability for federal income taxes.
Revenue and Expense Recognition: Amounts collected from policyholders are
recognized as premium income over the premium paying period. Expenses include
the increase in benefit reserves and gross benefit claims incurred. Under GAAP,
revenues for interest-sensitive products consist of policy charges for the cost
of insurance, policy administration, and surrenders assessed during the period,
and expenses include interest credited to policy account balances and benefit
claims incurred in excess of policy account balances.
Deposits to contract deposit funds are reported as revenue. Benefits include
fund withdrawals and the change in deposit fund liabilities. Under GAAP,
deposits collected from contract holders and withdrawals on contract deposit
funds are not reported as revenue and benefit expense.
Under GAAP, considerations for supplementary contracts are reported as a
deduction to payments and change in reserves for supplementary contracts.
Realized Capital Gains and Losses: Realized capital gains and losses are
included net of tax in the determination of net income rather than on a pre-tax
basis. The Company defers the portion of realized capital gains and losses, net
of tax, on sales of fixed income investments, principally bonds and mortgage
loans, which are attributable to changes in the general level of interest rates.
The deferred gains and losses are accumulated in the interest maintenance
reserve (IMR) and are amortized over the remaining period to maturity based on
groupings of securities sold in five-year bands.
The effects of the foregoing variances from GAAP on the accompanying statutory-
basis financial statements have not been determined, but are presumed to be
material.
Other significant accounting practices are as follows:
INVESTMENTS: Bonds not backed by other loans are generally carried at amortized
cost with the discount or premium amortized using the interest method. Loan-
backed bonds and structured securities are generally carried at amortized cost
using the interest method including anticipated prepayments at the date of
purchase. The prepayment assumptions for loan-backed bonds and structured
securities are obtained from broker dealer survey values or internal estimates
and are consistent with the current interest rate and economic environment;
significant changes in estimated cash flows from the purchase assumptions are
accounted for using the retrospective method. Non-sinking fund preferred stocks
are carried at cost. Common stocks are stated at fair values prescribed by the
NAIC. Mortgage loans are generally carried at the unpaid balance, except those
loans expected to be sold, which are carried at the lower of the unpaid balance
or the fair value of collateral. Foreclosed real estate is carried at lower of
cost or fair value, giving consideration to current occupancy rates and economic
conditions, less accumulated depreciation from the date of foreclosure. Policy
loans are presented at unpaid balances. Short-term investments are carried at
cost. Other long-term invested assets are carried at amortized cost or at cost
plus the Company's equity in undistributed net earnings. Realized capital gains
and losses are determined based upon specific identification of the investments
sold and do not include amounts allocable to separate accounts. At the time a
decline in the value of an investment is determined to be other than temporary,
a provision for loss is recorded which is included in realized capital gains and
losses. Changes in admitted asset carrying amounts of investments are recorded
directly in unassigned surplus.
-8-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swaps are valued in accordance
with the NAIC Accounting Practices and Procedures manual and the Purposes and
Procedures manual of the Securities Valuation Office.
Interest rate swaps are agreements in which the Company agrees with other
parties to exchange, at specified intervals, the difference between fixed rate
and variable rate interest amounts, calculated by reference to an agreed upon
notional principal amount. No cash is exchanged at the outset of the contract,
and no principal payments are made by either party. A single net payment is
usually made by one counterparty at each due date. The Company has certain
forward interest rate swap agreements where the exchange of interest payments
does not begin until a specified future date. The Company intends to settle, for
cash, the forward interest rate swap agreements prior to the commencement of the
exchange of interest payment streams.
The fair values of interest rate swap agreements are not reported in the
statements of financial condition. Amounts to be paid or received pursuant to
interest rate swap agreements are accrued and recognized in the statements of
income as an adjustment to net investment income.
The Company accounts for all of its interest rate swap agreements as hedges.
Accordingly, any gains or losses realized on closed or terminated interest rate
swap agreements are deferred and amortized to net investment income over the
expected remaining life of the hedged item. If the hedged item matures or
terminates earlier than anticipated, the remaining unamortized gain or loss is
amortized to net investment income in the current period. Gains or losses
realized on interest rate swap agreements which are terminated when the hedged
assets are sold are allocated to the IMR and amortized into earnings over the
remaining life of the assets sold. Gains or losses on interest rate swap
agreements which are terminated because the hedged anticipated transaction is no
longer likely to occur are reported in the statements of income as a component
of net realized capital gains and losses. The Company regularly monitors the
effectiveness of its hedging programs. In the event a hedge becomes ineffective,
it is marked-to-market, resulting in a charge or credit to net investment
income.
RESERVES FOR LIFE POLICIES AND CONTRACTS: Reserves for future policy and
contract benefits on traditional life products have been provided on the net
level premium or preliminary term method. The reserves are calculated based upon
assumptions as to interest, mortality, and withdrawal that are prescribed or
permitted by insurance regulatory authorities. The interest rate assumption on
current year issues for traditional life products is principally 4.5%. The
assumptions vary by plan and year of issue.
For life insurance policies, reserves for the excess of valuation net premiums
over corresponding gross premiums are computed according to the valuation
standards required by the Division of Insurance of the Commonwealth of
Massachusetts.
Reserves for future policy and contract benefits on single premium annuities
have been provided on a net single premium method. The reserves are calculated
based upon assumptions as to interest, mortality, and retirement that are
prescribed or permitted by insurance regulatory authorities. The assumptions
vary by year of issue.
Reserves for interest-sensitive products are calculated as the greater of the
net surrender value and the Commissioners Reserve Valuation Method reserve
defined in the universal life model regulation. The net surrender value is
calculated as the cash value less the surrender charge. The reserves are
calculated based upon assumptions as to interest and mortality that are
prescribed or permitted by insurance regulatory authorities. The interest rate
assumption on current year issues is 4.5%.
-9-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company waives deduction of deferred fractional premiums upon death of the
insured and returns any portion of the final premium beyond the date of death.
Surrender values are not promised in excess of legally computed reserves. The
extra reserve on annual premium policies subject to an extra premium is one-half
the extra annual gross premium. The extra reserve for single premium policies
subject to an extra premium is one-half the extra gross single premium.
Reserves for future policy and contract benefits on all products meet the
minimum valuation standards requirements for the Division of Insurance of the
Commonwealth of Massachusetts.
OTHER CONTRACT DEPOSIT FUNDS: Other contract deposit funds represent customer
deposits plus interest credited at contract rates. The Company controls its
interest rate risk by investing in quality assets which have an aggregate
duration that closely matches the expected duration of the liabilities.
SEPARATE ACCOUNTS: The separate account amounts shown in the accompanying
financial statements represent funds that are separately administered for
variable annuity contracts and for which the contract holder, rather than the
Company, bears the investment risk. The contract purchase payments and the
assets of the separate accounts are segregated from other Company funds for both
investment and administrative purposes. Contract purchase payments received
under variable annuity contracts are subject to deductions for sales and
administrative fees. Also, the Company receives management fees which are based
on the net asset values of the separate accounts.
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31
(in thousands of dollars)
-----------------------------------------------------
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $1,546,640 $1,617,955 $1,309,289 $1,329,435
Preferred Stocks 11,879 14,101 7,812 8,275
Common Stocks 244 244 14,812 14,812
Mortgage Loans 6,360 6,360 100,526 99,204
Policy Loans 33,868 33,102 31,911 31,911
Cash 4,560 4,560 (1,950) (1,950)
Short-term Investments - - 22,424 22,424
LIABILITIES
Investment-type Insurance Contracts
Supplementary Contracts without
Life Contingencies 749 749 4 4
Other Contract Deposit Funds 1,367,888 1,364,866 1,320,758 1,318,210
Borrowed Money 45,733 45,733 - -
</TABLE>
-10-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 2--FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
The following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:
BONDS AND PREFERRED STOCKS: Fair values for bonds and preferred stocks are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. See Note 3 for the amortized cost and fair values
of securities by security type and by maturity date.
COMMON STOCKS: Fair values for common stocks represent values prescribed by the
NAIC.
MORTGAGE LOANS: At December 31, 1997, the fair value for mortgage loans was
based on the expected sales price as of that date. At December 31, 1996, the
fair value for mortgage loans was estimated using discounted cash flow analyses.
POLICY LOANS: At December 31, 1997, the fair value for policy loans was
estimated using discounted cash flow analyses, using interest rates currently
being offered. Loans with similar characteristics were aggregated for purposes
of the calculations. At December 31, 1996, fair value approximated the carrying
value.
CASH AND SHORT-TERM INVESTMENTS: Carrying amounts for cash and short-term
investments approximate fair value.
SUPPLEMENTARY CONTRACTS WITHOUT LIFE CONTINGENCIES: The carrying amounts for
supplementary contracts without life contingencies approximate fair value.
OTHER CONTRACT DEPOSIT FUNDS: Fair values of the Company's liability for other
contract deposit funds are estimated using the cash surrender values of the
annuity contracts.
BORROWED MONEY: The carrying amount of borrowed money approximates fair value.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values of the Company's derivative
financial instruments are based on market quotes, pricing models, or formulas
using current interest rates and assumptions and represent the net amount of
cash the Company would have received or paid if the contracts had been settled
or closed on December 31. The fair values are as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
(in thousands of dollars)
---------------------------
<S> <C> <C>
Interest Rate Swaps $ 289 $ 238
</TABLE>
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
-11-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - Continued
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 3--INVESTMENTS
SECURITIES:
The amortized cost and fair values of securities by security type are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
(in thousands of dollars)
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
Government Agencies and Authorities $ 93,100 $ 514 $ 6 $ 93,608
Public Utilities 144,815 5,465 97 150,183
Mortgage-backed Securities 405,635 11,627 549 416,713
All Other Corporate Bonds 903,090 55,660 1,299 957,451
Preferred Stocks 11,879 2,389 167 14,101
----------- ------- ------ -----------
Total $1,558,519 $75,655 $2,118 $1,632,056
========== ======= ====== ==========
Common Stocks $ 740 $ - $ 496 $ 244
========== ======= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
(in thousands of dollars)
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
Government Agencies and Authorities $ 4,379 $ 127 $ 73 $ 4,433
Mortgage-backed Securities 362,410 9,521 4,665 367,266
All Other Corporate Bonds 942,500 28,461 13,225 957,736
Preferred Stocks 7,812 554 91 8,275
----------- ------- ------- -----------
Total $1,317,101 $38,663 $18,054 $1,337,710
========== ======= ======= ==========
Common Stocks $ 4,263 $10,582 $ 33 $ 14,812
========== ======= ======= ==========
</TABLE>
-12-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - Continued
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
The amortized cost and fair values of bonds by maturity date are shown below.
The maturity dates have not been adjusted for possible calls or prepayments.
<TABLE>
<CAPTION>
December 31, 1997
(in thousands of
dollars)
-------------------------
Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
1 year or less $ 17,362 $ 17,608
Over 1 year through 5 years 308,883 326,828
Over 5 years through 10 years 539,703 564,549
Over 10 years 275,057 292,257
---------- ----------
1,141,005 1,201,242
Mortgage-backed Securities 405,635 416,713
---------- ----------
$1,546,640 $1,617,955
========== ==========
</TABLE>
For the years ended December 31, 1997 and 1996, there were changes in net
unrealized gains and losses on bonds and preferred stocks of $52,928,000 and
$(47,871,000), respectively. These unrealized gains and losses are not reflected
in the financial statements.
At December 31, 1997, the total investment in below-investment-grade bonds
(securities rated below Baa3 by Moody's Investor Services or an equivalent
internal rating) was $52,757,000 or 3.3 percent of cash and invested assets. The
fair value of these investments was $57,091,000.
MORTGAGE LOANS:
In 1997, the Company sold 27 mortgage loans with a principal amount of
$92,397,000 and a book value of $92,784,000. The transactions resulted in a
before-tax realized capital gain of $1,660,000.
-13-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
NET INVESTMENT INCOME:
Sources for net investment income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
(in thousands of dollars)
---------------------------
<S> <C> <C>
Bonds $102,518 $ 97,183
Preferred Stocks 700 312
Common Stocks 82 281
Mortgage Loans 5,041 7,298
Real Estate 103 (114)
Policy Loans 2,404 2,334
Cash 219 662
Short-term Investments 1,598 -
Derivative Instruments 128 114
Other Investment Income 346 712
-------- --------
Gross Investment Income 113,139 108,782
Investment Expenses 1,178 1,206
-------- --------
Net Investment Income $111,961 $107,576
======== ========
</TABLE>
Due and accrued income on bonds where collection of interest is uncertain and on
mortgage loans more than 30 days delinquent or where collection of interest is
uncertain is excluded from investment income. No amounts were excluded at
December 31, 1997 and 1996.
-14-
<PAGE>
NOTES TO FINANCIAL STATEMENTS-STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 3--INVESTMENTS - CONTINUED
REALIZED CAPITAL GAINS AND LOSSES:
Realized capital gains (losses) on investments are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
(in thousands of dollars)
---------------------------
<S> <C> <C>
Bonds $ 1,716 $2,058
Preferred Stocks - (52)
Common Stocks 12,713 4,950
Mortgage Loans 1,209 -
Real Estate 717 (348)
Other 6 -
------- ------
Total 16,361 6,608
Federal Income Tax 5,304 2,983
------- ------
Pre-IMR Capital Gains, Net of Tax 11,057 3,625
------- ------
Transferred to IMR
Pre-tax Capital Gains 4,440 2,009
Federal Income Tax 1,554 703
------- ------
2,886 1,306
------- ------
Net Realized Capital Gains $ 8,171 $2,319
======= ======
</TABLE>
Proceeds from sales of bonds and preferred stocks for the years ended
December 31, 1997 and 1996 were $145,204,000 and $117,389,000, respectively.
Gross gains of $1,845,000 and $2,452,000 and gross losses of $129,000 and
$446,000, respectively, were realized during 1997 and 1996 on sales and calls of
bonds and preferred stocks.
-15-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 4--DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swaps contracts to hedge interest rate risks and
to match assets with its insurance liabilities.
DERIVATIVE RISKS
The basic types of risks associated with derivatives are market risk (that the
value of the derivative will be adversely impacted by changes in the market,
primarily the change in interest rates) and credit risk (that the counterparty
will not perform according to the terms of the contract). The market risk of
derivatives should generally offset the market risk associated with the hedged
financial instrument or liability. The credit exposure of derivatives is limited
to the value of those contracts in a net gain position. The Company mitigates
credit risk by entering into master agreements with its counterparties whereby
contracts in a gain position can be offset against contracts in a loss position.
Additionally, the Company typically enters into bilateral, cross-
collateralization agreements with its counterparties. These agreements require
the counterparty in a loss position to submit acceptable collateral with the
other counterparty in the event the net loss position meets or exceeds an agreed
upon amount. The Company's current credit exposure on derivatives, which is
limited to the value of those contracts in a net gain position, was $289,000 at
December 31, 1997.
HEDGING ACTIVITY
At December 31, 1997 and 1996, the Company had outstanding a receive fixed/pay
variable interest rate swap agreement with a notional amount of $9,402,000. This
swap is due to mature in the year 2000. The related weighted average interest
receive rate is 8.18% and the pay rate is 6.98% assuming current market
conditions. The purpose of this swap is to convert the interest received on a
bond held by the Company from a variable rate to a fixed rate.
-16-
<PAGE>
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 5--DEFERRED AND UNCOLLECTED PREMIUMS
Deferred and uncollected life insurance premiums and annuity considerations are
as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
(in thousands of dollars)
-------------------------
<S> <C> <C>
Gross
Ordinary First Year $ 89 $ 973
Ordinary Renewal 5,746 5,795
------ ------
$5,835 $6,768
====== ======
Net of Loading
Ordinary First Year $ 46 $ 323
Ordinary Renewal 4,949 4,863
------ ------
$4,995 $5,186
====== ======
</TABLE>
NOTE 6--REINSURANCE
The Company routinely cedes reinsurance with other insurance companies. The
primary purpose of ceded reinsurance is to limit losses from large exposures;
however, if the reinsurer is unable to meet its obligations, the originating
issuer of the insurance coverage retains the liability.
Reinsurance ceded information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
(in thousands of dollars)
--------------------------
<S> <C> <C>
Life Insurance in Force (Amount of Insurance) $430,270 $492,063
Insurance Liabilities 5,825 6,162
Premium Income 1,309 1,300
Death Benefits 2,454 2,277
Change in Reserves for Life and Annuity Benefits (337) (2,384)
</TABLE>
-17-
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 7--ANNUITY ACTUARIAL RESERVES AND DEPOSIT LIABILITIES
The withdrawal characteristics of annuity actuarial reserves and deposit
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1997
(in thousands of dollars)
-------------------------
Amount %
----------- ------------
<S> <C> <C>
Subject to Discretionary Withdrawal at Market Value $ 21,722 1.5%
Subject to Discretionary Withdrawal Without Adjustment 1,368,637 94.9
Not Subject to Discretionary Withdrawal 51,828 3.6
---------- -----
Total (Gross) 1,442,187 100.0%
=====
Reinsurance Ceded 1,961
----------
Total (Net) $1,440,226
==========
</TABLE>
NOTE 8--FEDERAL INCOME TAXES
The Company is included along with its affiliates in a consolidated tax return
filed by The Paul Revere Life Insurance Company. The total federal income tax
liability of the consolidated group is allocated among the members of the group
in proportion of the consolidated federal taxable income of the group directly
attributable to each member. Reimbursement is made among the members of the
group to the extent losses are used to offset income within the group.
A reconciliation of the federal income tax computed at the statutory corporate
tax rate and the federal income tax expense in the statements of income follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
-------------------------
<S> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0%
Tax-preferred Investment Income (0.2) (1.2)
Deferred Policy Acquisition Costs 2.6 4.9
Accrual of Market Discount Bonds (2.5) (1.7)
Adjustment to Prior Year Provision 10.2 (1.0)
Other Items, Net 2.0 (9.6)
---- ----
Effective Federal Income Tax Rate 47.1% 26.4%
==== ====
</TABLE>
-18-
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 9--SEPARATE ACCOUNTS
Separate accounts held by the Company primarily represent funds which the
Company invests on behalf of the accounts' contract holders. The assets of these
accounts are carried at market value.
Information regarding the separate accounts, which have non-indexed guarantees
less than or equal to four percent, is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
(in thousands of dollars)
-------------------------
<S> <C>
Premiums, Considerations or Deposits $ 516
=======
Reserves for Accounts With Assets at Fair Value $27,484
=======
By Withdrawal Characteristics:
At Fair Value $27,484
=======
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
(in thousands of dollars)
------------------------
Transfers as Reported in the Summary of Operations
of the Separate Accounts Statement:
<S> <C>
Transfers to Separate Accounts $ 516
Transfers from Separate Accounts 3,344
-------
Net Transfers from Separate Accounts (2,828)
Increase in Liability for Deposit Funds and
Reserves Less Investment Income 2,420
Investment Management Fees 408
-------
Transfer as Reported in the Summary of Operations of the
Life, Accident and Health Annual Statement $ 0
=======
</TABLE>
NOTE 10--RETIREMENT BENEFITS
The Company has no employees and, therefore, has no retirement benefits. The
Company purchases services at cost from its affiliate, Provident Life and
Accident Insurance Company. The cost of these services includes the cost of the
affiliate's benefit plans; however, there is no obligation on the part of the
Company beyond the amounts paid as part of the cost of services rendered.
-19-
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 11--RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company paid common stock dividends to The Paul Revere
Life Insurance Company of $2,000,000 and $8,000,000, respectively.
During 1997, the Company purchased $10,000 in book value of bonds (par value
$10,000) from The Paul Revere Protective Life Insurance Company at the market
value of $10,000. In addition, the Company purchased $4,973,000 in book value of
bonds (par value $5,000,000) from The Paul Revere Protective Life Insurance
Company at the market value of $5,041,000.
During 1997, the Company sold $3,517,000 in book value of stock to The Paul
Revere Corporation for $16,230,000.
At December 31, 1996, the Company owned 152,575 shares of Textron Inc. common
stock with a market value of $14,099,000. In 1997, the Company's holdings of
Textron Inc. stock were sold in conjunction with the purchase of The Paul Revere
Corporation by Provident Companies, Inc., resulting in a realized before-tax
capital gain of $12,713,000 and a $10,582,000 decrease in unrealized capital
gains.
During 1997, the Company borrowed short-term funds from its various affiliates.
The related interest expense is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
(in thousands of dollars)
-------------------------
<S> <C>
Interest Expense
Provident Companies, Inc. $ 8
The Paul Revere Life Insurance Company 72
</TABLE>
Affiliated borrowings outstanding at December 31, 1997 consisted of a
$45,733,000 short-term note from Provident Companies, Inc. The note payable was
issued on December 31, 1997, and bears interest at 6.41%. The note matured and
was repaid in full on January 2, 1998.
Total interest paid during 1997, including amounts to affiliates, was $218,000.
Interest expense was $226,000.
During 1997, the Company paid investment management fees to Provident Investment
Management, LLC of $522,000.
-20-
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS - CONTINUED
THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
NOTE 12--COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In December 1997, the Company entered into a definitive agreement with American
General Corporation (American General) under which the Company will reinsure
with various affiliates of American General the Company's in-force block of
individual and tax-sheltered annuity business. The transaction is expected to be
completed during the second quarter of 1998.
Contingent Liabilities
Two alleged class action lawsuits have been filed in Superior Court in
Worcester, Massachusetts against the Company and several affiliates. One of the
alleged lawsuits purports to represent all career agents of The Paul Revere Life
Insurance Company whose employment relationships ended on June 30, 1997, and who
were offered contracts to sell insurance policies as independent producers, and
the other purports to represent independent brokers who sold certain individual
disability income policies with benefit riders for The Paul Revere Life
Insurance Company. Motions have been filed by the Company and affiliates to
dismiss most of the counts in the complaints, which allege various breach of
contract and statutory claims. To date no class has been certified in either
lawsuit. The Company and affiliates have strong defenses to both lawsuits and
will vigorously defend their position and resist certification of the classes.
In addition, the same plaintiff's attorney who has filed the purported class
action lawsuits has filed 41 individual lawsuits on behalf of current and former
sales managers of The Paul Revere Life Insurance Company alleging various breach
of contract claims. The Company and affiliates have strong defenses and will
vigorously defend their position in these cases as well. Although the alleged
class action lawsuits and the 41 individual lawsuits are in the early stages,
management does not currently expect these suits to materially affect the
financial position or results of operations of the Company.
Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not deemed
likely to materially affect the financial position or results of operations of
the Company.
NOTE 13--SHAREHOLDER DIVIDEND RESTRICTIONS AND DEPOSITS
The Company is subject to various regulatory restrictions which limit the amount
of dividends available for distribution, without prior approval by regulatory
authorities, to the greater of ten percent of surplus as regards policyholders
as of the preceding year end or the net gain from operations of the preceding
year. Only the amount of statutory unassigned surplus is available for the
payment of dividends. Based upon these restrictions, the Company is permitted a
maximum of $9,351,000 in dividend distributions in 1998.
At December 31, 1997, the Company had on deposit with regulatory authorities
securities with a statement value of $3,052,000 held for the protection of
policyholders.
-21-
<PAGE>
THE PAUL REVERE VARIABLE ANNUITY
CONTRACT ACCUMULATION FUND
PART C
OTHER INFORMATION
This registration statement contains the following financial statements,
condensed financial information and exhibits:
ITEM 28(A) FINANCIAL STATEMENTS AND EXHIBITS
INCLUDED IN PROSPECTUS
Per unit income and capital changes and variable annuity unit values -
- condensed financial information for the ten years ended December 31,
1997.
INCLUDED IN STATEMENT OF ADDITIONAL INFORMATION
The Paul Revere Variable Annuity Contract Accumulation Fund:
Report of Independent Auditors
Statement of assets and liabilities at December 31, 1997.
Statement of investments at December 31, 1997.
Statement of changes in net assets for the two years ended December
31, 1997.
Statement of operations for the year ended December 31, 1997.
Notes to financial statements.
The Paul Revere Variable Annuity Insurance Company:
Report of Independent Auditors
Balance sheets at December 31, 1997 and 1996.
Statements of income for the three years ended December 31, 1997.
Statements of changes in shareholder's equity for the three years
ended December 31, 1997.
Statements of cash flows for the three years ended December 31, 1997.
Notes to financial statements.
ITEM 28(B) LIST OF EXHIBITS
1. Consent of Legal Counsel
2. Consent of Independent Auditors
1
<PAGE>
4. Financial Data Schedules
ITEM 29 DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
This information is listed in the Statement of Additional Information,
Part B of this Registration Statement under Management, Page 6, and
incorporated in Part C by reference.
ITEM 30 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 31 NUMBER OF CONTRACTOWNERS NUMBER OF HOLDERS
TITLE OF CLASS OF RECORD*
Series Q 461
Series N 166
* As of December 31, 1997.
ITEM 32 INDEMNIFICATION
The Paul Revere Variable Annuity Insurance Company maintained a
blanket fidelity bond in the amount of $1,000,000 with National Union
Fire Insurance Company, Pittsburgh, Pennsylvania, covering its
officers and employees and those of the registrant. This bond is
numbered 985-5437.
ITEM 33 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
This information is included in the Prospectus and Statement of
Additional Information, Parts A and B of this Registration Statement,
and incorporated in Part C by reference.
ITEM 34 PRINCIPAL UNDERWRITERS
(a) None.
(b) Included in the Statement of Additional Information, Part B and
incorporated in Part C by reference.
(c) None.
2
<PAGE>
ITEM 35 LOCATION OF ACCOUNTS AND RECORDS
NAME OF PERSON
MAINTAINING
POSSESSION THEREOF ADDRESS DESCRIPTION
RALPH ROGERS, 1 Fountain Square Financial
Senior Vice President Chattanooga, TN Records
and Treasurer
THE PAUL REVERE VARIABLE
ANNUITY INSURANCE COMPANY
PAMELA DAVIS, 18 Chestnut Street Contractowner
Vice President, Worcester, MA 01608 Accounts and
Client Services Records
THE PAUL REVERE VARIABLE
ANNUITY INSURANCE COMPANY
ITEM 36 MANAGEMENT SERVICES
None.
ITEM 37 UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, to file with the Securities and
Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore and hereafter duly
adopted pursuant to authority conferred in that Section.
(b) To file with the Securities and Exchange Commission, a Post
Effective Amendment to this Registration Statement, as
frequently as is necessary to ensure that the audited financial
statements in the Registration Statement are never more than 16
months old for so long as payments under the variable annuity
contracts may be accepted.
(c) To include either (1) as part of any application to purchase a
contract offered by the Prospectus, a space that an applicant can
check to request a Statement of Additional Information or (2) a
postcard or similar written communication affixed to or included
in the Prospectus that the applicant can remove to send for a
Statement of Additional Information.
3
<PAGE>
(d) To deliver any Statement of Additional Information and financial
statements that are required by this Registration Statement
promptly upon written or oral request.
4
<PAGE>
POST EFFECTIVE AMENDMENT - SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, The Paul Revere Variable Annuity Contract
Accumulation Fund has caused this Post Effective Amendment No. 52 to
Registration Statement No. 2-24380 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Worcester, Commonwealth
of Massachusetts on the 30th day of April, 1998.
Paul Revere Variable Annuity Contract Accumulation Fund
By: /s/ Donald E. Boggs
--------------------------------
Donald E. Boggs
Chairman, Board of Managers
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Post Effective Amendment No. 52 to
Registration Statement No. 2-24380 has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ Gordon T. Miller Vice Chairman 04/30/98
- ---------------------
Gordon T. Miller Board of Managers
/s/ Aubrey K. Reid Jr Member 04/30/98
- ---------------------
Aubrey K. Reid, Jr. Board of Managers
/s/ Joan Sadowsky Member 04/30/98
- ---------------------
Joan Sadowsky Board of Managers
/s/ William J. Short Member 04/30/98
- ---------------------
William J. Short Board of Managers
/s/ Donald E. Boggs Chairman 04/30/98
- ---------------------
Donald E. Boggs Board of Managers
5
<PAGE>
POST EFFECTIVE AMENDMENT - SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, The Paul Revere Variable Annuity Contract
Accumulation Fund has caused this Post Effective Amendment No. 52 to
Registration Statement No. 2-24380 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chattanooga, State of
Tennessee on the 30th day of April, 1998.
The Paul Revere Variable Annuity Insurance Company
By:/s/ J. Harold Chandler, Chairman, President & CEO
-----------------------------------------------------
J. Harold Chandler, Chairman, President & CEO
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Post Effective Amendment No. 52 to
Registration Statement No. 2-24380 has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ William L. Armstrong Director 04/30/98
- -------------------------
William L. Armstrong
/s/ William H. Bolinder Director 04/30/98
- -------------------------
William H. Bolinder
/s/ J. Harold Chandler Chairman, President & CEO 04/30/98
- -------------------------
J. Harold Chandler
/s/ Steven M. Gluckstern Director 04/30/98
- -------------------------
Steven M. Gluckstern
6
<PAGE>
SIGNATURE TITLE DATE
/s/ Charlotte M. Heffner Director 04/30/98
- --------------------------
Charlotte M. Heffner
/s/ Hugh B. Jacks Director 04/30/98
- --------------------------
Hugh B. Jacks
/s/ William B. Johnson Director 04/30/98
- --------------------------
William B. Johnson
/s/ Hugh O. Maclellan, Jr. Director 04/30/98
- --------------------------
Hugh O. Maclellan, Jr.
/s/ A.S. MacMillan Director 04/30/98
- --------------------------
A.S. MacMillan
/s/ C. William Pollard Director 04/30/98
- --------------------------
C. William Pollard
/s/ Scott L. Probasco, Jr. Director 04/30/98
- --------------------------
Scott L. Probasco, Jr.
/s/ Steven S. Reinemund Director 04/30/98
- --------------------------
Steven S. Reinemund
/s/ Burton E. Sorensen Director 04/30/98
- --------------------------
Burton E. Sorensen
/s/ Thomas R. Watjen Director, Vice Chairman & 04/30/98
- --------------------------
Thomas R. Watjen Chief Financial Officer
7
<PAGE>
EXHIBIT 1
CONSENT OF LEGAL COUNSEL
I hereby consent to the use of my name in the disclosure statement included
as part of this Post-Effective Amendment No. 52 to this Registration Statement
and to the reference made to me under the caption "Legal Opinion" in such
disclosure statement.
____________________________________
Susan N. Roth
<PAGE>
EXHIBIT 2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 3, 1998, with respect to the financial
statements of The Paul Revere Variable Annuity Insurance Company and of our
reports dated January 29, 1998, with respect to the financial statements and
financial statement schedules of The Paul Revere Variable Annuity Contract
Accumulation Fund in this Post-Effective Amendment No. 52 under the Securities
Act of 1933 and Amendment No. 52 under the Investment Company Act of 1940 to the
Registration Statement and in the Disclosure Statement.
ERNST & YOUNG LLP
Chattanooga, Tennessee
April 30, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
CONTRACT ACCUMULATION FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 17,640,824
<INVESTMENTS-AT-VALUE> 21,762,332
<RECEIVABLES> 70,775
<ASSETS-OTHER> 2,777
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,835,884
<PAYABLE-FOR-SECURITIES> 160,152
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 209,484
<TOTAL-LIABILITIES> 369,636
<SENIOR-EQUITY> 21,466,248
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,887,352
<SHARES-COMMON-PRIOR> 2,093,030
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,121,508
<NET-ASSETS> 21,466,248
<DIVIDEND-INCOME> 211,880
<INTEREST-INCOME> 138,669
<OTHER-INCOME> 0
<EXPENSES-NET> 315,802
<NET-INVESTMENT-INCOME> 34,747
<REALIZED-GAINS-CURRENT> 5,091,490
<APPREC-INCREASE-CURRENT> 307,210
<NET-CHANGE-FROM-OPS> 5,433,447
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24,716
<NUMBER-OF-SHARES-REDEEMED> 230,394
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,396,136
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 101,051
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 315,802
<AVERAGE-NET-ASSETS> 19,854,788
<PER-SHARE-NAV-BEGIN> 8.63
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 2.72
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.37
<EXPENSE-RATIO> 1.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE PAUL REVERE VARIABLE ANNUITY INSURANCE COMPANY
CONTRACT ACCUMULATION FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4,742,855
<INVESTMENTS-AT-VALUE> 5,883,989
<RECEIVABLES> 19,888
<ASSETS-OTHER> 201,066
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,104,943
<PAYABLE-FOR-SECURITIES> 43,845
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43,822
<TOTAL-LIABILITIES> 87,667
<SENIOR-EQUITY> 6,017,276
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 529,795
<SHARES-COMMON-PRIOR> 565,935
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,141,134
<NET-ASSETS> 6,017,276
<DIVIDEND-INCOME> 57,959
<INTEREST-INCOME> 16,943
<OTHER-INCOME> 0
<EXPENSES-NET> 92,152
<NET-INVESTMENT-INCOME> (17,250)
<REALIZED-GAINS-CURRENT> 1,359,361
<APPREC-INCREASE-CURRENT> 115,793
<NET-CHANGE-FROM-OPS> 1,457,904
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,364
<NUMBER-OF-SHARES-REDEEMED> 46,504
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,077,470
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28,187
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92,152
<AVERAGE-NET-ASSETS> 5,527,101
<PER-SHARE-NAV-BEGIN> 8.73
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 2.66
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.36
<EXPENSE-RATIO> 1.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
