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<PAGE>
THE PAUL REVERE VARIABLE ANNUITY
CONTRACT ACCUMULATION FUND
Annual Report
December 31, 1997
THE PAUL REVERE
VARIABLE ANNUITY
INSURANCE COMPANY
Worcester, Massachusetts
<PAGE>
BOARD OF MANAGERS OF
THE ACCUMULATION FUND
Donald Boggs, Chairman
Gordon T. Miller, Vice Chairman
Aubrey K. Reid, Jr.
Joan Sadowsky
William J. Short
This report and the financial statements attached are submitted for the
general information of contract owners and are not authorized for distribution
to prospective investors unless preceded or accompanied by an effective
prospectus. Nothing herein contained is to be considered an offer or sale of
The Paul Revere Variable Annuity Insurance Company contracts. Such offering is
made only by prospectus, which includes details as to offering price and other
material information.
<PAGE>
TO OUR CONTRACT OWNERS AND PARTICIPANTS:
The U.S. equity market finished 1997 on a positive note with the S&P 500
advancing 2.8% in the fourth quarter and 33.3% for the year, completing its
strongest three calendar year advance on record. We are pleased to report that
your diversified large cap growth equity portfolio outperformed the Russell 1000
Growth Index during the fourth quarter and for the full year. The accumulation
unit values of the Qualified Fund and Non-Qualified Fund increased 31.7% and
30.1% respectively for the year.
The portfolio's relative outperformance in the quarter can be attributed to
strong stock selection and sector weightings in the Health Care, Retailing, and
Financial Services sectors. The portfolio's significant overweightings in
Retailing and Financial Services strongly contributed to relative performance in
the quarter. Technology stocks, in general, dramatically underperformed the
market in the fourth quarter, largely due to Asian Pacific business exposure.
At year-end, the portfolio's Technology weighting was at its lowest level in one
year. Portfolio holdings in this sector continued to be skewed towards software
companies, while minimizing those companies with revenue exposure in Asia,
focusing on companies with strong secular growth opportunities.
The domestic equity market's performance over the last several years has
been little short of spectacular. While we are pleased with the market's past
advances, we see more historically average years ahead. The fallout from Asia's
problems, the increasing age of the current economic expansion, slowing profit
growth, and the market's current high level of valuation relative to historical
averages argue against above-average returns going forward. We will pursue
companies within attractive sectors of the equity markets which are positioned
to become leaders in their industries and therefore offer excellent long-term
growth potential. Through close examination of company fundamentals, we will
seek to provide strong relative performance in this challenging US economic
environment.
Sincerely,
/s/ DONALD BOGGS
-----------------------------
Donald Boggs
Chairman, Board of Managers
The Paul Revere Variable Annuity Contract
Accumulation Fund
Senior Vice-President
The Paul Revere Variable Annuity Insurance
Company
<PAGE>
[LOGO & LETTERTHEAD OF ERNST & YOUNG LLP]
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
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 Schedule 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 OWNERS' 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 year $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 year $ 6,017,276 $ 4,939,806 $ 4,261,421
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS 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
========== =========== ==========
<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 $ 57,959 $ 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
<PAGE>
REALIZED AND UNREALIZED GAIN 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.
<PAGE>
SCHEDULE 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.
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- ------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST (A) VALUE ASSETS SHARES COST (A) VALUE ASSETS
-------- --------- ------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 Communications, 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 700 44,543 65,494 200 12,726 18,713
Services Group Inc.
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 1,100 42,826 45,307 300 11,662 12,356
Corporation
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
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED)
--------------------
NUMBER % OF
OF MARKET NET
SHARES COST (A) VALUE ASSETS
--------- --------- ------ ------
<C> <C> <C> <C>
<S>
MEDICAL & HEALTH PRODUCTS (CONT.)
Mentor Corporation 3,300 $ 116,325 $ 120,450
Pfizer Inc. 5,600 301,133 417,553
Schering Plough Corp. 5,000 144,098 310,625
Warner-Lambert Company 900 115,563 111,769
----------- -----------
1,602,182 2,359,583 11.0%
----------- -----------
MEDICAL & HEALTH TECH. SERVICES
(b) Boston Scientific Corp. 1,600 82,869 73,400
Cardinal Health, Inc. 1,700 114,357 127,712
(b) HEALTHSOUTH Corp. 8,900 171,714 246,975
Medtronic Inc. 2,000 97,966 105,000
Shared Medical Systems Corp. 2,100 127,424 138,600
(b) St. Jude MedicaL Inc. 2,350 85,706 71,675
(b) Tenet Healthcare Corp. 6,700 212,670 221,938
United Heathcare Corp. 6,700 325,660 332,910
----------- -----------
1,218,366 1,318,210 6.1%
----------- -----------
PRINTING & PUBLISHING
McGraw-Hill Cos, Inc. 0.0%
RAILROAD
Burlington Northern Santa Fe Corp. 1,000 85,051 92,938 0.4%
----------- -----------
STORES
(b) BJ's Wholesale Club, Inc. 4,400 132,131 138,050
CVS Corporation 4,000 188,296 256,252
(b) Fred Meyer, Inc. 8,400 239,624 305,550
Home Depot, Inc. 3,700 197,636 217,837
(b) Kroger Company 4,000 137,736 147,000
(b) Office Depot, Inc. 13,800 242,615 330,344
Rite Aid Corp. 11,550 466,699 678,563
----------- -----------
1,604,737 2,073,596 9.7%
----------- -----------
SUPERMARKETS
(b) Safeway Inc. 5,000 294,062 316,250 1.5%
----------- -----------
TELECOMMUNICATIONS
Alcatel Alsthom 7,400 204,016 187,316
AT&T Corp. 4,600 271,819 282,040
(b) Bay Networks Inc. 5,200 162,154 133,250
(b) Cisco Systems Inc. 3,850 179,397 214,638
MCI Communications Corp. 6,000 251,242 256,878
----------- -----------
1,068,628 1,074,122 5.0%
----------- -----------
UTILITIES-ELECTRIC
(b) AES Corporation 2,800 119,523 130,550 0.6%
----------- -----------
TOTAL COMMON STOCKS 418,721 16,845,841 20,875,390 97.2%
----------- -----------
PREFERRED STOCKS
CHEMICALS
Airtouch Communications Inc.
6.00% Class B. 2,684 69,122 95,617
4.25% Class C. 1,788 46,040 111,415
----------- -----------
TOTAL PREFERRED STOCKS 4,472 115,162 207,032 1.0%
----------- -----------
TOTAL STOCKS 423,193 16,961,003 21,082,422 98.2%
----------- -----------
<CAPTION>
SERIES N (NON-QUALIFIED)
-----------------------
NUMBER % OF
OF MARKET NET
SHARES COST (A) VALUE ASSETS
------ -------- ----- ------
<S> <C> <C> <C> <C>
MEDICAL & HEALTH PRODUCTS (CONT.) 900 31,725 $ 32,850
Mentor Corporation 1,600 81,757 119,301
Pfizer Inc. 1,400 38,476 86,975
Schering Plough Corp. 300 38,718 37,256
Warner-Lambert Company ---------- ----------
448,912 667,164 11.1%
---------- ----------
MEDICAL & HEALTH TECH. SERVICES 450 23,108 20,644
(b) Boston Scientific Corp. 500 33,433 37,563
Cardinal Health, Inc. 2,400 46,310 66,600
(b) HEALTHSOUTH Corp. 600 29,390 31,500
Medtronic Inc. 600 36,346 39,600
Shared Medical Systems Corp. 800 29,047 24,400
(b) St. Jude Medical Inc. 1,900 60,288 62,937
(b) Tenet Healthcare Corp. 1,900 91,179 94,407
United Heathcare Corp. ---------- ----------
349,101 377,651 6.3%
---------- ----------
PRINTING & PUBLISHING 600 23,162 44,400 0.7%
McGraw-Hill Cos, Inc. ---------- ----------
RAILROAD 300 25,440 27,881 0.5%
Burlington Northern Santa Fe Corp. ---------- ----------
STORES 1,200 36,000 37,650
(b) BJ's Wholesale Club, Inc. 1,100 54,158 70,469
CVS Corporation 2,400 69,083 87,300
(b) Fred Meyer, Inc. 1,000 53,415 58,875
Home Depot, Inc. 1,100 37,875 40,425
(b) Kroger Company 3,800 66,841 90,964
(b) Office Depot, Inc. 3,250 132,635 190,938
Rite Aid Corp. ---------- ----------
450,007 576,621 9.6%
---------- ----------
SUPERMARKETS 1,400 82,679 88,550 1.5%
(b) Safeway Inc. ---------- ----------
TELECOMMUNICATIONS 2,000 55,212 50,626
Alcatel Alsthom 1,300 76,819 79,707
AT&T Corp. 1,400 43,624 35,875
(b) Bay Networks Inc. 1,075 58,573 59,931
(b) Cisco Systems Inc. 1,700 71,388 72,782
MCI Communications Corp. ---------- ----------
305,616 298,921 5.0%
---------- ----------
UTILITIES-ELECTRIC 800 34,149 37,300 0.6%
(b) AES Corporation ---------- ----------
116,722 4,721,398 5,839,585 97.1%
TOTAL COMMON STOCKS ---------- ----------
PREFERRED STOCKS
CHEMICALS
Airtouch Communications Inc. 587 13,066 20,912
6.00% Class B. 377 8,391 23,492
4.25% Class C. ---------- ----------
964 21,457 44,404 0.7%
TOTAL PREFERRED STOCKS ---------- ----------
117,686 4,742,855 5,883,989 97.8%
TOTAL STOCKS ---------- ----------
</TABLE>
See accompanying notes to financial statements
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- -----------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST (A) VALUE ASSETS SHARES COST (A) VALUE ASSETS
------ -------- ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
<PAGE>
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.
<PAGE>
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 subsidiaries of American General Corporation will
reinsure Provident's individual and tax-sheltered annuity business and its
two registered separate accounts, Provident National Assurance Company
Separate Account B and The Paul Revere Variable Annuity Contract
Accumulation Fund, as well as certain group annuity business. The
transaction is pending appropriate state approvals and is expected to close
in the first quarter of 1998.
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