<PAGE>
THE PAUL REVERE VARIABLE ANNUITY
CONTRACT ACCUMULATION FUND
ANNUAL REPORT
DECEMBER 31, 1998
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>
[LETTER HEAD OF PROVIDENT APPEARS HERE]
March 15, 1999
TO OUR CONTRACT OWNERS AND PARTICIPANTS:
The U.S. equity market staged a remarkable rebound during the final quarter
of 1998, with the S&P 500 producing a robust 21.32% return. The market's fourth
quarter surge was driven primarily by the Federal Reserve's decision to
aggressively lower interest rates and parallel actions by monetary authorities
throughout the industrialized world. The third quarter correction reduced stock
prices to more realistic levels and, in retrospect, created some attractive
buying opportunities. Large cash balances in mutual funds and the need to be
fully invested also fueled the rally. Investor concerns about global economic
turmoil seemed to abate despite weak corporate earnings in a number of
industries. Improving fundamentals sparked a major bounce in the Technology
sector, which played a significant role in the strong performance of the S&P
500. It is important to recognize that the rebound in the market and the
appreciation of the S&P 500 in 1998 was very narrow: for the full year, ten
stocks accounted for nearly half the 28.8% gain in the S&P 500, 25 stocks
generated almost three quarters of the increase, and 50 stocks were responsible
for more than 90% of the appreciation in this market index.
Your large cap growth equity portfolio outperformed the S&P 500 Index in
the fourth quarter and trailed the 26.7% return posted by the Russell 1000
Growth Index. For the full year, the portfolio returned well over 30%,
significantly ahead of the 28.8% gain for the S&P 500, but behind the stellar
38.7% gain of the Russell 1000 Growth Index. The portfolio's strong fourth
quarter performance was largely due to strong performance from its Technology
and Retailing holdings. Strong stock selection in Leisure, where the portfolio
maintains a relative overweighting also enhanced portfolio performance in the
fourth quarter.
We expect that corporate earnings growth will remain weak through the first
half of 1999. While low inflation and low interest rates continue to lend
support to equity valuations, these valuations are nevertheless high by
historical standards. We therefore remain cautious on the market for the near
term, and are especially wary of stocks with valuations that appear unrealistic
in relation to their growth prospects. We are focused on selecting stocks with
strong fundamentals that are capable of sustained earnings growth. We see basic
fundamental research as a critical element in maintaining above market
performance over the intermediate term, and we will continue to search for
companies that we feel can sustain their earnings growth.
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>
[LETTER HEAD OF ERNST & YOUNG LLP APPEARS HERE]
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, 1998 and 1997,
including the statement of investments as of December 31, 1998, and the related
statements of operations and changes in net assets for each of the three years
in the period ended December 31, 1998, and the supplementary information for
each of the ten years in the period then ended. These financial statements and
supplementary information are the responsibility of the 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, 1998 and 1997, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and supplementary information referred
to above present fairly, in all material respects, the financial position of The
Paul Revere Variable Annuity Contract Accumulation Fund at December 31, 1998 and
1997, the results of its operations and the changes in its net assets for each
of the three years in the period ended December 31, 1998, and the supplementary
information for each of the ten years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
March 1, 1999
1
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1998 1997
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 1998-$19,178,659, 1997-$17,640,824)
(Cost: Series N 1998-$ 5,278,593, 1997-$ 4,742,855)
(see Statement of Investments) $26,260,278 $21,762,332 $7,250,200 $5,883,989
Cash 85,709 2,777 16,461 201,066
Dividends receivable 16,612 31,617 4,480 8,681
Receivable for investments sold 75,057 39,158 26,456 11,207
----------- ----------- ---------- ----------
Total assets 26,437,656 21,835,884 7,297,597 6,104,943
----------- ----------- ---------- ----------
LIABILITIES
Surrenders payable 15,146 150,875 3,663 29,098
Payable for investments purchased 114,052 160,152 29,197 43,845
Payable to The Paul Revere Variable Annuity
Insurance Company 362,848 28,991 81,081 8,458
Other 2,202 29,618 58 6,266
----------- ----------- ---------- ----------
Total liabilities 494,248 369,636 113,999 87,667
----------- ----------- ---------- ----------
TOTAL NET ASSETS $25,943,408 $21,466,248 $7,183,598 $6,017,276
=========== =========== ========== ==========
CONTRACT OWNERS' EQUITY
Deferred contracts terminable by owner $21,615,662 $17,565,862 $5,144,222 $4,156,586
Currently payable contracts 4,327,746 3,900,386 2,039,376 1,860,690
----------- ----------- ---------- ----------
Total net assets $25,943,408 $21,466,248 $7,183,598 $6,017,276
=========== =========== ========== ==========
ACCUMULATION UNITS OUTSTANDING 1,715,402 1,887,352 474,699 529,795
=========== =========== ========== ==========
NET ASSET VALUE PER ACCUMULATION UNIT $ 15.124 $ 11.374 $ 15.133 $ 11.358
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
Series Q Series Q Series Q
(Qualified) (Qualified) (Qualified)
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ (154,286) $ 34,747 $ 52,342
Net realized gain on investments 3,927,590 5,091,490 8,351,181
Net increase (decrease) in unrealized appreciation of investments 2,960,111 307,210 (4,309,054)
----------- ----------- ------------
Increase in net assets from operations 6,733,415 5,433,447 4,094,469
Contract receipts:
Gross purchase payments received 66,629 47,982 106,019
Deductions from purchase payments 852 2,060 3,892
----------- ----------- ------------
Net purchase payments received 65,777 45,922 102,127
Payments to contract owners:
Annuity payments to contract owners 490,751 378,254 304,504
Terminations and withdrawals to contract owners 1,548,428 1,783,911 24,628,563
----------- ----------- ------------
Total payments to contract owners 2,039,179 2,162,165 24,933,067
----------- ----------- ------------
Net contract payments to contract owners (1,973,402) (2,116,243) (24,830,940)
Other increases (decreases) (282,853) 78,932 31,550
----------- ----------- ------------
Total increase (decrease) in net assets 4,477,160 3,396,136 (20,704,921)
NET ASSETS
Beginning of year 21,466,248 18,070,112 38,775,033
----------- ----------- ------------
End of period $25,943,408 $21,466,248 $ 18,070,112
=========== =========== ============
<CAPTION>
For the years ended December 31,
1998 1997 1996
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) $ (57,763) $ (17,250) $ 1,718
Net realized gain on investments 1,106,946 1,359,361 718,025
Net increase in unrealized appreciation of investments 830,473 115,793 118,379
----------- ----------- ------------
Increase in net assets from operations 1,879,656 1,457,904 838,122
Contract receipts:
Gross purchase payments received 4,269 9,995 8,707
Deductions from purchase payments 307 647 542
----------- ----------- ------------
Net purchase payments received 3,962 9,348 8,165
Payments to contract owners:
Annuity payments to contract owners 244,083 198,891 170,686
Terminations and withdrawals to contract owners 308,059 254,751 58,037
----------- ----------- ------------
Total payments to contract owners 552,142 453,642 228,723
----------- ----------- ------------
Net contract payments to contract owners (548,180) (444,294) (220,558)
Other increases (decreases) (165,154) 63,860 60,821
----------- ----------- ------------
Total increase in net assets 1,166,322 1,077,470 678,385
NET ASSETS
Beginning of year 6,017,276 4,939,806 4,261,421
----------- ----------- ------------
End of period $ 7,183,598 $ 6,017,276 $ 4,939,806
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
Series Q Series Q Series Q
(Qualified) (Qualified) (Qualified)
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends $ 151,836 $ 211,880 $ 336,996
Interest 57,336 138,669 62,320
---------- ---------- -----------
Total income 209,172 350,549 399,316
---------- ---------- -----------
Expenses:
Mortality and expense risk fees 233,905 202,101 222,849
Investment management and advisory service fees 116,953 101,051 111,425
Professional services 12,600 12,650 12,700
---------- ---------- -----------
Total expenses 363,458 315,802 346,974
---------- ---------- -----------
Net investment income (loss) (154,286) 34,747 52,342
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments sold 3,927,590 5,091,490 8,351,181
Net increase (decrease) in unrealized appreciation of investments 2,960,111 307,210 (4,309,054)
---------- ---------- -----------
Net realized and unrealized gain on investments 6,887,701 5,398,700 4,042,127
---------- ---------- -----------
Increase in net assets from operations $6,733,415 $5,433,447 $ 4,094,469
========== ========== ===========
For the years ended December 31,
1998 1997 1996
Series N Series N Series N
(Non-qualified) (Non-qualified) (Non-qualified)
-------------- -------------- --------------
INVESTMENT INCOME
Income:
Dividends $ 42,373 $ 57,959 $ 67,817
Interest 5,231 16,943 10,620
---------- ---------- -----------
Total income 47,604 74,902 78,437
---------- ---------- -----------
Expenses:
Mortality and expense risk fees 65,204 56,375 46,066
Investment management and advisory service fees 32,603 28,187 23,033
Professional services 7,560 7,590 7,620
---------- ---------- -----------
Total expenses 105,367 92,152 76,719
---------- ---------- -----------
Net investment income (loss) (57,763) (17,250) 1,718
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments sold 1,106,946 1,359,361 718,025
Net increase in unrealized appreciation of investments 830,473 115,793 118,379
---------- ---------- -----------
Net realized and unrealized gain on investments 1,937,419 1,475,154 836,404
---------- ---------- -----------
Increase in net assets from operations $1,879,656 $1,457,904 $ 838,122
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
<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 VALUE ASSETS SHARES COST VALUE ASSETS
--------- ---------- ---------- ------- ------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCKS
AEROSPACE
Raytheon Co. Class A 2,500 $ 130,944 $ 129,219 0.5% 650 $ 33,938 $ 33,597 0.5%
---------- ---------- ---------- ----------
BROADCASTING
CBS Corp. 4,900 138,549 160,475 1,400 40,178 45,850
Jacor Communications, Inc. 3,700 212,274 238,187 1,000 57,144 64,375
Media One Group Inc. 5,500 261,163 258,500 1,500 71,658 70,500
Reuters Hldgs Pic Spon ADR 1,900 111,675 120,413 500 29,342 31,687
Tele-Comm Liberty Media Group 3,600 120,038 199,125 1,000 33,343 55,313
Univision Communications, Inc. 4,000 139,935 144,750 1,200 41,640 43,425
Viacom, Inc. Class B 3,800 170,210 281,200 1,100 49,089 81,400
---------- ---------- ---------- ----------
1,153,844 1,402,650 5.4% 322,394 392,550 5.5%
---------- ---------- ---------- ----------
COMPUTER SOFTWARE-PC
Ceridian Corp 4,600 222,446 321,137 1,300 62,877 90,756
Compaq Computer Corp. 6,500 260,390 272,594 1,800 72,108 75,487
Computer Sciences Corp. 2,800 142,164 180,425 800 43,808 51,550
Microsoft Corp. 8,800 873,580 1,220,450 2,400 236,976 332,850
---------- ---------- ---------- ----------
1,498,580 1,994,606 7.7% 415,769 550,643 7.7%
---------- ---------- ---------- ----------
COMPUTER SOFTWARE-SYSTEMS
Affiliated Computer Services 4,600 158,047 207,000 1,300 45,026 58,500
Ascend Communications Inc. 5,000 194,818 328,750 1,310 50,845 86,132
BMC Software, Inc. 4,800 160,183 213,900 1,300 43,198 57,931
Cadence Design Systems, Inc. 7,270 181,042 216,283 2,020 51,023 60,095
Cisco Systems, Inc. 6,900 347,880 640,406 1,900 98,128 176,344
Computer Assoc. Intl. Inc. 8,000 353,215 341,000 2,250 99,116 95,906
Compuware Corporation 6,500 149,862 507,813 1,800 44,161 140,625
DST Systems Inc. 2,400 127,149 136,950 700 37,758 39,944
EMC Corp. 3,500 133,894 297,500 1,000 38,496 85,000
Galileo International Inc. 2,000 77,705 87,000 600 23,199 26,100
HBO & Company 2,400 71,290 68,850 700 20,576 20,081
Networks Associates, Inc. 3,850 169,531 255,062 1,050 45,324 69,563
Oracle Corp. 9,700 241,215 418,312 2,637 58,696 113,721
Policy Management Systems 6,000 247,011 303,000 1,800 74,327 90,900
Synopsys Inc. 2,600 91,512 141,050 400 13,974 21,700
3Com Corp. 3,400 147,327 152,363 900 38,890 40,331
---------- ---------- ---------- ----------
2,851,681 4,315,239 16.6% 782,737 1,182,873 16.5%
---------- ---------- ---------- ----------
CONSUMER GOODS & SERVICES
Clorox Company 800 54,044 93,450 200 13,511 23,362
Dial Corp. 7,300 172,314 210,787 2,100 49,484 60,638
Gillette Co. 4,500 189,098 217,406 1,240 51,797 59,908
Linens `N Things, Inc. 2,300 61,613 91,138 660 17,588 26,153
Newell Company 2,300 97,632 94,875 600 25,469 24,750
Procter & Gamble Co. 2,900 233,753 264,806 770 61,774 70,311
RJR Nabisco Holdings Corp. 1,700 58,933 50,469 500 17,331 14,844
Tyco International Ltd. 14,496 423,466 1,093,542 4,090 119,958 308,539
Wal-Mart Stores, Inc. 5,800 296,808 472,338 1,600 82,075 130,300
---------- ---------- ---------- ----------
1,587,661 2,588,811 10.0% 438,987 718,805 10.0%
---------- ---------- ---------- ----------
ELECTRICAL EQUIPMENT
General Electric Co. 3,400 222,978 347,013 1.3% 900 58,655 91,856 1.3%
---------- ---------- ---------- ----------
ELECTRONICS
Analog Devices, Inc. 4,600 83,614 144,325 1,300 23,718 40,788
Imation Corp. 150 25,976 2,625
Intel Corp. 4,100 400,006 486,106 1,100 108,475 130,419
Lattice Semiconductor Corp. 3,200 114,690 146,900 700 24,650 32,134
---------- ---------- ---------- ----------
624,286 779,956 3.0% 156,843 203,341 2.8%
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- -------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST VALUE ASSETS SHARES COST VALUE ASSETS
------------ --------- -------- -------- -------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ENERGY
Amoco Corp. 2,300 $ 127,134 $ 138,862 600 $ 33,167 $ 36,225
British Petroleum Company 1,341 117,945 127,395 412 36,022 39,140
Conoco, Inc. 2,900 66,700 60,538 800 18,400 16,700
Halliburton Company 1,500 61,256 44,438 400 16,335 11,850
Noble Drilling Corporation 1,600 47,059 20,700 400 11,818 5,175
Varco International, Inc. 1,700 51,044 13,175 500 15,013 3,875
---------- --------- -------- --------
471,138 405,108 1.6% 130,755 112,965 1.6%
---------- --------- -------- --------
ENTERTAINMENT
Walt Disney Co. 2,700 79,909 81,000 500 14,755 15,000
Time Warner Inc. 7,000 237,992 434,437 2,000 65,330 124,125
---------- --------- -------- --------
317,901 515,437 2.0% 80,085 139,125 1.9%
---------- --------- -------- --------
FINANCIAL INSTITUTIONS
American Express Company 1,300 107,738 132,925 400 32,756 40,900
Associates First Capital Corp. 11,800 402,886 500,025 3,300 113,208 139,838
Morgan Stanley, Dean Witter,
Discover and Co. 3,700 242,715 262,700 1,000 65,393 71,000
Northern Trust Corp. 1,400 106,699 122,237 400 30,485 34,925
Wells Fargo & Company 3,600 136,080 143,775 1,000 37,783 39,938
---------- --------- -------- --------
996,118 1,161,662 4.5% 279,625 326,601 4.5%
---------- --------- -------- --------
FOOD & BEVERAGE PRODUCTS
Anheuser-Busch Companies, Inc. 3,000 182,444 196,875 800 48,469 52,500
Dean Foods Company 2,100 112,383 85,706 600 31,728 24,487
Hershey Foods Corp. 1,900 107,705 118,156 550 29,430 34,203
Hormel Foods Corp. 4,100 113,413 134,275 1,100 30,439 36,025
Nabisco Holdings Corp. Class A 2,800 98,399 116,200 800 28,106 33,200
PepsiCo Inc. 4,900 177,209 200,594 1,400 50,769 57,313
Ralston-Purina Group 1,600 53,980 51,800 400 13,417 12,950
Tootsie Roll Industries, Inc. 2,290 65,098 89,596 624 17,739 24,414
---------- --------- -------- --------
910,631 993,202 3.8% 250,097 275,092 3.8%
---------- --------- -------- --------
GOVERNMENT SPONSORED
Federal Home Loan Mortg. Corp. 8,000 384,715 515,500 2,000 90,129 128,875
Federal National Mortgages Assoc. 1,600 89,694 118,400 400 21,246 29,600
---------- --------- -------- --------
474,409 633,900 2.4% 111,375 158,475 2.2%
---------- --------- -------- --------
INSURANCE
Aetna Inc. 1,500 120,247 117,937 400 32,191 31,450
AFLAC Inc. 1,500 51,250 66,000 400 13,667 17,600
Conseco Inc. 1 47 31 1 47 31
Equitable Cos., Inc. 3,500 175,625 202,563 1,000 50,389 57,875
Lincoln National Corp. 1,800 146,371 147,263 500 41,547 40,906
Progressive Corporation 1,900 221,490 321,813 530 60,894 89,769
Reliastar Financial Corporation 2,900 126,267 133,763 800 34,747 36,900
---------- --------- -------- --------
841,297 989,370 3.8% 233,482 274,531 3.8%
---------- --------- -------- --------
MEDICAL & HEALTH PRODUCTS
American Home Products Corp. 3,400 181,770 191,462 1,000 53,527 56,312
Bristol-Myers Squibb Co. 2,300 188,618 307,769 600 46,262 80,287
Elan Corp. ADR 2,326 157,019 161,802 592 40,299 41,181
Eli Lilly and Co. 2,700 201,947 239,963 800 59,976 71,100
Guidant Corp. 3,900 272,281 429,975 1,100 76,728 121,275
McKesson Corp. 3,400 287,582 268,813 950 80,532 75,109
Medtronic, Inc. 2,000 97,966 148,500 600 29,390 44,550
Pfizer Inc. 3,600 297,698 451,575 1,000 83,387 125,437
Schering Plough Corp. 5,800 142,091 320,450 1,600 38,265 88,400
Warner-Lambert Company 2,300 129,373 172,931 650 34,537 48,872
---------- --------- -------- --------
1,956,345 2,693,240 10.4% 542,903 752,523 10.5%
---------- --------- -------- --------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
STATEMENT OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED) SERIES N (NON-QUALIFIED)
-------------------- ------------------------
NUMBER % OF NUMBER % OF
OF MARKET NET OF MARKET NET
SHARES COST VALUE ASSETS SHARES COST VALUE ASSETS
------ ----------- ----------- ------ ------ ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MEDICAL & HEALTH TECH. SERVICES
Cardinal Health, Inc. 3,600 $ 194,533 $ 273,150 975 $ 52,785 $ 73,978
HealthSouth Corp. 13,600 261,823 209,950 3,800 73,565 58,662
United Healthcare Corp. 7,300 347,369 314,356 2,100 98,836 90,431
----------- ----------- ---------- -----------
803,725 797,456 3.1% 225,186 223,071 3.1%
----------- ----------- ---------- -----------
PRINTING & PUBLISHING
Scholastic Corp 2,300 96,600 123,338 0.5% 600 25,200 32,175 0.4%
----------- ----------- ---------- -----------
RESTAURANTS
McDonald's Corp. 2,000 127,229 153,250 0.6% 600 38,831 45,975 0.6%
----------- ----------- ---------- -----------
STORES
BJ's Wholesale Club, Inc. 4,100 127,362 189,881 1,100 35,098 50,944
CVS Corporation 6,000 184,300 330,000 1,700 54,951 93,500
Dayton Hudson Corp. 1,200 53,015 65,100 300 13,254 16,275
Fred Meyer, Inc. 9,400 310,373 566,350 2,700 90,517 162,675
Lowe's Companies, Inc. 4,300 158,344 220,106 1,200 44,830 61,425
Office Depot, Inc. 9,200 167,845 339,825 2,600 47,316 96,038
Rite Aid Corp. 16,000 344,236 793,000 4,400 96,412 218,075
TJX Companies, Inc. 5,200 136,674 150,800 1,500 39,349 43,500
----------- ----------- ---------- -----------
1,482,149 2,655,062 10.2% 421,727 742,432 10.3%
----------- ----------- ---------- -----------
SUPERMARKETS
Safeway Inc. 2,300 79,113 140,156 0.6% 700 23,923 42,656 0.6%
----------- ----------- ---------- -----------
TELECOMMUNICATIONS
Airtouch Communications, Inc. 2,500 148,547 180,312 700 41,548 50,488
ALLTEL Corp. 5,600 270,302 334,950 1,600 77,678 95,700
Lucent Technologies, Inc. 2,800 228,233 308,000 770 60,475 84,700
MCI Worldcom Inc. 8,400 352,712 602,700 2,300 96,419 165,025
Nokia Corp. ADR-Series A 1,000 107,231 120,438 300 32,180 36,131
Tellabs, Inc. 1,700 96,038 116,556 500 28,262 34,281
----------- ----------- ---------- -----------
1,203,063 1,662,956 6.4% 336,562 466,325 6.5%
----------- ----------- ---------- -----------
TOBACCO
Phillip Morris Cos. Inc. 11,200 478,671 599,200 2.3% 3,100 131,666 165,850 2.3%
----------- ----------- ---------- -----------
TRANSPORTATION
Harley-Davidson, Inc. 2,600 102,042 123,175 700 27,412 33,163
Kansas City Southern Ind. 2,200 100,335 108,212 600 27,380 29,512
----------- ----------- ---------- -----------
202,377 231,387 0.9% 54,792 62,675 0.9%
----------- ----------- ---------- -----------
UTILITIES
Century Telephone Enterprises 5,000 189,745 337,500 1,400 54,880 94,500
Columbia Energy Group 2,700 159,234 155,925 800 47,158 46,200
SBC Communications, Inc. 5,500 249,817 294,937 1,500 67,957 80,437
----------- ----------- ---------- -----------
598,796 788,362 3.0% 169,995 221,137 3.1%
----------- ----------- ---------- -----------
TOTAL COMMON STOCKS 19,109,536 26,100,580 100.6% 5,265,527 7,215,273 100.4%
----------- ----------- ---------- -----------
PREFERRED STOCKS
TELECOMMUNICATIONS
Airtouch Communications Inc.
6.00% Class B. 2,684 69,123 159,698 0.6% 587 13,066 34,927 0.5%
----------- ----------- ---------- -----------
TOTAL PREFERRED STOCKS 69,123 159,698 0.6% 13,066 34,927 0.5%
----------- ----------- ---------- -----------
TOTAL STOCKS $19,178,659 26,260,278 101.2% $5,278,593 7,250,200 100.9%
=========== ----------- ========== -----------
OTHER ASSETS LESS LIABILITIES (316,870) (1.2%) (66,602) (0.9%)
----------- -----------
TOTAL NET ASSETS $25,943,408 100.0% $7,183,598 100.0%
=========== ===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
SUPPLEMENTARY INFORMATION
SELECTED PER UNIT DATA AND RATIOS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
-------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA (a)
SERIES Q (QUALIFIED)
Investment income $ 0.116 $ 0.177 $0.153 $0.119 $ 0.081
Expenses 0.202 0.159 0.133 0.096 0.073
------- ------- ------ ------ -------
Net investment income (loss) (0.086) 0.018 0.020 0.023 0.008
Net realized and unrealized gains (losses) from securities 3.836 2.723 1.551 1.711 (0.020)
------- ------- ------ ------ -------
Net increase (decrease) in net asset value 3.750 2.741 1.571 1.734 (0.012)
Accumulation unit net asset value:
Beginning of year 11.374 8.633 7.062 5.328 5.340
------- ------- ------ ------ -------
End of year $15.124 $11.374 $8.633 $7.062 $ 5.328
======= ======= ====== ====== =======
SERIES N (NON-QUALIFIED)
Investment income $ 0.096 $ 0.135 $0.137 $0.117 $ 0.099
Expenses 0.212 0.166 0.134 0.109 0.102
------- ------- ------ ------ -------
Net investment income (loss) (0.116) (0.031) 0.003 0.008 (0.003)
Net realized and unrealized gains (losses) from securities 3.891 2.660 1.459 1.769 (0.023)
------- ------- ------ ------ -------
Net increase (decrease) in net asset value 3.775 2.629 1.462 1.777 (0.026)
Accumulation unit net asset value:
Beginning of year 11.358 8.729 7.267 5.490 5.516
------- ------- ------ ------ -------
End of year $15.133 $11.358 $8.729 $7.267 $ 5.490
======= ======= ====== ====== =======
</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,
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RATIOS
SERIES Q (QUALIFIED)
Operating expenses to average accumulation fund balance 1.57% 1.59% 1.57% 1.55% 1.55%
Net investment income (loss) to average accumulation fund balance (0.67%) 0.18% 0.24% 0.38% 0.17%
Portfolio turnover rate 143% 130% 78% 64% 64%
Accumulation units outstanding at the end of the period
(in thousands) 1,715 1,887 2,093 5,491 5,597
SERIES N (NON-QUALIFIED)
Operating expenses to average accumulation fund balance 1.63% 1.67% 1.69% 1.71% 1.73%
Net investment income (loss) to average accumulation fund balance (0.90%) (0.31%) 0.04% 0.13% (0.05%)
Portfolio turnover rate 143% 139% 94% 67% 62%
Accumulation units outstanding at the end of the period
(in thousands) 475 530 566 586 604
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
SUPPLEMENTARY INFORMATION
SELECTED PER UNIT DATA AND RATIOS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991 1990 1989
-------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
PER UNIT DATA (a)
SERIES Q (QUALIFIED)
Investment income $ 0.054 $ 0.068 $0.093 $ 0.116 $0.122
Expenses 0.079 0.076 0.066 0.055 0.051
------- ------- ------ ------- ------
Net investment income (loss) (0.025) (0.008) 0.027 0.061 0.071
Net realized and unrealized gains (losses) from securities 0.291 0.159 1.295 (0.107) 0.928
------- ------- ------ ------- ------
Net increase (decrease) in net asset value 0.266 0.151 1.322 (0.046) 0.999
Accumulation unit net asset value:
Beginning of year 5.074 4.923 3.601 3.647 2.648
------- ------- ------ ------- ------
End of year $ 5.340 $ 5.074 $4.923 $ 3.601 $3.647
======= ======= ====== ======= ======
SERIES N (NON-QUALIFIED)
Investment income $ 0.055 $ 0.071 $0.085 $ 0.111 $0.104
Expenses 0.092 0.094 0.076 0.072 0.059
------- ------- ------ ------- ------
Net investment income (loss) (0.037) (0.023) 0.009 0.039 0.045
Net realized and unrealized gains (losses) from securities 0.318 0.194 1.361 (0.102) 1.002
------- ------- ------ ------- ------
Net increase (decrease) in net asset value 0.281 0.171 1.370 (0.063) 1.047
Accumulation unit net asset value:
Beginning of year 5.235 5.064 3.694 3.757 2.710
------- ------- ------ ------- ------
End of year $ 5.516 $ 5.235 $5.064 $ 3.694 $3.757
======= ======= ====== ======= ======
</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,
1993 1992 1991 1990 1989
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RATIOS
SERIES Q (QUALIFIED)
Operating expenses to average accumulation fund balance 1.56% 1.56% 1.56% 1.58% 1.58%
Net investment income (loss) to average accumulation fund balance (0.50%) (0.17%) 0.64% 1.76% 2.20%
Portfolio turnover rate 59% 61% 98% 80% 89%
Accumulation units outstanding at the end of the period
(in thousands) 5,700 5,753 5,839 5,961 6,157
SERIES N (NON-QUALIFIED)
Operating expenses to average accumulation fund balance 1.73% 1.74% 1.76% 1.80% 1.80%
Net investment income (loss) to average accumulation fund balance (0.69%) (0.42%) 0.21% 0.96% 1.36%
Portfolio turnover rate 62% 66% 109% 84% 84%
Accumulation units outstanding at the end of the period
(in thousands) 640 662 684 735 774
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998, 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 day after
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 and underwriter 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.
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.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
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, 1998 $32,319,947 $34,029,792 $9,057,438 $9,643,236
December 31, 1997 $26,404,332 $28,331,204 $7,410,011 $7,764,770
</TABLE>
At December 31, 1998, net unrealized appreciation of investments in Series
Q, amounting to $7,081,530, consisted of unrealized gains of $7,360,500 and
unrealized losses of $278,970; net unrealized appreciation of investment in
Series N, amounting to $1,971,607, consisted of unrealized gains of
$2,042,779 and unrealized losses of $71,172.
7. ACCUMULATION UNITS
The change in the number of accumulation units outstanding were as follows:
<TABLE>
<CAPTION>
SERIES Q (QUALIFIED)
-----------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Units outstanding at beginning of year 1,887,352 2,093,030 5,490,718
Units credited to contracts:
Net purchase payments 5,076 4,552 13,534
Units withdrawn from contracts:
Annuity payments 37,790 37,490 39,287
Terminations and withdrawals 117,096 179,873 3,375,395
--------- --------- ----------
Net units withdrawn 154,886 217,363 3,414,682
Contract units withdrawn in excess of units credited (149,810) (212,811) (3,401,148)
Other increases (decreases) (22,140) 7,133 3,460
--------- --------- ----------
Net decrease in units (171,950) (205,678) (3,397,688)
--------- --------- ----------
Units outstanding at end of period 1,715,402 1,887,352 2,093,030
========= ========= ==========
</TABLE>
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
7. ACCUMULATION UNITS (CONTINUED)
<TABLE>
<CAPTION>
SERIES N (NON-QUALIFIED)
-----------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Units outstanding at beginning of year 529,795 565,935 586,396
Units credited to contracts:
Net purchase payments 317 927 1,056
Units withdrawn from contracts:
Annuity payments 18,886 19,617 21,645
Terminations and withdrawals 23,488 24,629 7,179
------- ------- -------
Net units withdrawn 42,374 44,246 28,824
------- ------- -------
Contract units withdrawn in excess of units credited (42,057) (43,319) (27,768)
Other increases (decreases) (13,039) 7,179 7,307
------- ------- -------
Net decrease in units (55,096) (36,140) (20,461)
------- ------- -------
Units outstanding at end of period 474,699 529,795 565,935
======= ======= =======
</TABLE>
8. COMMITMENTS
On May 15, 1998 Provident completed an Asset Transfer and Acquisition
Agreement under which American General Corporation assumed Provident's
individual and tax-sheltered annuity business including all individual
annuities. In accordance with the agreement, American General Corporation,
through its subsidiaries Variable Annuity Life Insurance Company and
American General Annuity, assumed the administration, but not the
ownership, of Provident's two registered separate accounts, Separate
Account B and The Paul Revere Variable Annuity Contract Accumulation Fund.
The administration services provided to the Fund by American General
Corporation include processing of unit transactions subsequent to June 1,
1998 and daily unit value calculations subsequent to September 1, 1998 as
well as accounting and other services. These services were previously
performed by Provident. Fees for such services are deducted from the Fund
as shown in the Statements of Operations.
12
