PAGE
<PAGE>
Rule 497(e)
Registration No. 333-03093
Rydex Advisor Variable Annuity Account
of
Great American Reserve Insurance Company
Administrative Office: 11815 North Pennsylvania Street,
Carmel, Indiana 46032
Phone: (800) 437-3506
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS - NONPARTICIPATING
Offered through
PADCO Financial Services, Inc.
6116 Executive Boulevard, Rockville, Maryland 20852
Phone: (888) 667-4936
The variable annuity contract described in this Prospectus
(the "Contract") is designed to provide retirement benefits
for certain types of purchasers. This Contract is intended
for use by Contract Owners who intend to invest as part of a
tactical asset allocation or market timing investment
strategy advised by professional money managers. Tactical
asset allocation involves moving assets among several or all
of the investment portfolios available for investment under
the Contracts (the Subaccounts ); market timing involves
moving assets between the Nova and Money Market Subaccounts.
The investment options available under the Contract involve
certain aggressive investment techniques, which may include
engaging in short sales and transactions in futures contracts
a n d options on securities, stock indexes, and futures
contracts. As discussed more fully below, these techniques
are specialized and involve risks that are not traditionally
associated with otherwise similar contracts.
Accumulation of the Contract values may be on either a fixed
or variable basis, or on a combination fixed and variable
basis. Accumulation on a variable basis is provided by
allocations to the Rydex Advisor Variable Annuity Account (the
"Separate Account"). Variable benefits are not guaranteed and
will vary according to investment performance. Accumulation
on a fixed basis is provided by allocations to the General
Account of Great American Reserve Insurance Company. (See
"The Fixed Account" on page I-20.) Annuity payments are only
available on a fixed basis. This Prospectus describes only
the Separate Account features of the Contract except where
specific reference is made to the Fixed Account.
PAGE
<PAGE>
The Separate Account is a segregated investment account of
Great American Reserve Insurance Company ("Great American
Reserve"), and is comprised of eight investment portfolios
each of which is managed by PADCO Advisors II, Inc. ("PADCO").
Allocations to the Separate Account will be invested in the
separate investment portfolios ("Subaccounts") selected. You
bear the full investment risk with respect to the Separate
Account. Eight Subaccounts are currently available under the
Contract (one of which is available only under certain
circumstances, described below) with the following investment
objectives:
The Nova Subaccount - To provide investment returns that
correspond to the performance of a benchmark for common stock
securities.
The Ursa Subaccount - To provide investment results that will
inversely correlate to the performance of a benchmark for
common stock securities.
The OTC Subaccount - To attempt to provide investment results
that correspond to the performance of a benchmark for over-
the-counter securities.
The Precious Metals Subaccount - To attempt to provide
investment results that correspond to the performance of a
benchmark primarily for metals-related securities.
The U.S. Government Bond Subaccount - To provide investment
results that correspond to the performance of a benchmark for
U.S. Government securities.
The Juno Subaccount - To provide total return before expenses
and costs that inversely correlates to the price movements of
a benchmark for U.S. Treasury debt instruments or futures
contracts on a specified debt instrument.
The Money Market Subaccounts - To provide current income
consistent with stability of capital and liquidity.
S i x of these Subaccounts seek investment results that
correspond over time to a specified benchmark, as follows:
SUBACCOUNT BENCHMARK
The Nova Subaccount 125% of the performance of the S&P
500 Composite Stock Price Index
The Ursa Subaccount Inverse (opposite) of the S&P 500
Composite Stock Price Index
<PAGE> I-3<PAGE>
The OTC Subaccount NASDAQ 100 Index (NDX)
The Precious Metals Philadelphia Stock Exchange
Subaccount Gold/Silver Index (XAU)
The U.S. Government 120% of the price movement of current
Bond Subaccount Long Treasury Bond
The Juno Subaccount Inverse (opposite) of the price
movement of the current Long Treasury
Bond
This Contract is designed to be used with tactical asset
allocation or market-timing investment services. Providers of
such services are engaged by you to make allocation and
transfer decisions on your behalf. A charge is deducted for
these services. You should consider whether this Contract
with such services is appropriate for your needs as well as
the tax consequences related to such services (see "Tactical
Allocation Services" and Federal Income Taxes; Tactical
Allocation Fees ).
Investments in the Money Market Subaccounts are neither
insured nor guaranteed by the U.S. Government.
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.
This Prospectus contains information about the Contract and
the Separate Account that a prospective Contract Owner should
know before investing. It should be read and retained for
future reference. Additional information about the Contract
and the Separate Account is contained in a Statement of
Additional Information, dated November 1, 1996, and as
supplemented December 1, 1996, which has been filed with the
Securities and Exchange Commission and is incorporated herein
by reference. The Statement of Additional Information is
available without charge upon request by writing to or calling
PADCO Financial Services, Inc. ("PFS"), at the above address
or number. The table of contents for the Statement of
Additional Information is included on page II-19 of this
Prospectus.
The date of this Prospectus is November 1, 1996,
as supplemented December 1, 1996.
<PAGE> I-4<PAGE>
TABLE OF CONTENTS
Page
PART I
DEFINITIONS I-5
FEE TABLE I-8
FINANCIAL STATEMENTS I-10
SUMMARY I-10
GREAT AMERICAN RESERVE
INSURANCE COMPANY I-13
THE SEPARATE ACCOUNT I-13
INVESTMENTS OF THE
SUBACCOUNTS I-13
Eligible Investments I-13
Investment Objectives I-14
The Nova Subaccount I-14
The Ursa Subaccount I-14
The OTC Subaccount I-14
The Precious Metals
Subaccount I-15
The U.S. Government
Bond Subaccount I-15
The Juno Subaccount I-15
The Money Market Subaccounts I-15
Special Risk Considerations I-16
Addition or Deletion of
Subaccounts I-16
TACTICAL ALLOCATION
SERVICES I-16
CHARGES AND DEDUCTIONS I-17
Withdrawal Charge I-17
Mortality and Expense
Risk Charge I-18
Tactical Allocation Fee I-18
Administrative Fee I-18
<PAGE> I-5<PAGE>
Page
Investment Advisory Fee
and Other Expenses I-19
Subaccount Administration Fee I-19
Payments of Certain Charges
and Deductions I-19
Premium Taxes I-19
DESCRIPTION OF THE
CONTRACT I-19
Purchase Payments I-19
Changing Financial Advisors I-20
Accumulation Provisions I-20
Accumulation Units I-20
Value of an Accumulation Unit I-20
Valuation Periods I-20
The Fixed Account I-20
Payment on Death I-20
Beneficiary I-21
Ownership I-21
Account Transfers I-21
Withdrawals I-22
Suspension or Deferral
of Payments I-23
Annuity Provisions I-23
General I-23
Selection of Annuity Date and
Annuity Options I-23
Change of Annuity Date or
Annuity Option I-23
Annuity Options I-23
Minimum Annuity Payments I-24
Proof of Age, Sex, and
Survival I-24
Notices and Elections I-24
Amendment of Contract I-24
Ten-Day Right to Review I-24
FEDERAL INCOME TAXES I-24
Tactical Allocation Fees I-24
General I-25
Diversification I-25
Page
Multiple Contracts I-26
Contracts Owned by Non-
Natural Persons I-26
Tax Treatment of Assignments I-26
Income Tax Withholding I-26
Tax Treatment of Withdrawals;
<PAGE> I-6<PAGE>
Non-Qualified Contracts I-27
Tax Treatment of Withdrawals;
Qualified Plans I-27
Tax Treatment of Withdrawals;
Qualified Contracts I-28
Tax-Sheltered Annuities;
Withdrawal Limitations I-29
SEPARATE ACCOUNT VOTING
RIGHTS I-29
REPORTS TO CONTRACT
OWNERS I-29
PERFORMANCE INFORMATION I-30
DISTRIBUTION OF CONTRACTS I-30
STATE REGULATION I-30
LEGAL PROCEEDINGS I-30
EXPERTS I-30
REGISTRATION STATEMENT I-30
LEGAL MATTERS I-31
PART II
THE SEPARATE ACCOUNT II-1
INVESTMENT OBJECTIVES AND
POLICIES OF THE SUBACCOUNTS II-2
General II-2
<PAGE> I-7<PAGE>
Page
The Nova Subaccount II-3
The Ursa Subaccount II-3
The OTC Subaccount II-4
The Precious Metals Subaccount II-4
The U.S. Government Bond
Subaccount II-5
The Juno Subaccount II-5
The Money Market Subaccounts II-6
The Benchmarks II-7
SPECIAL RISK
CONSIDERATIONS II-7
Portfolio Turnover II-7
Tracking Error II-8
Aggressive Investment
Techniques II-8
INVESTMENT TECHNIQUES
AND OTHER INVESTMENT
POLICIES II-9
PORTFOLIO TRANSACTIONS
AND BROKERAGE II-16
MANAGEMENT OF THE
SEPARATE ACCOUNT II-16
Board of Managers II-16
PADCO II-16
PADCO Service Company, Inc. II-18
Costs and Expenses II-18
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL
INFORMATION II-19
<PAGE> I-8<PAGE>
PART I
No person has been authorized to give any information or
to make any representations other than those contained in this
Prospectus in connection with the offer contained in this
Prospectus and, if given or made, such information or repre-
sentation must not be relied upon as having been authorized.
T h i s Prospectus does not constitute an offer of, or
solicitation of an offer to acquire, any variable annuity
contracts offered by this Prospectus in any jurisdiction to
anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
DEFINITIONS
Accumulation Unit: An accounting unit of measure used to
compute the value of your interest in a Subaccount prior to
the Annuity Date. (See page I-20.)
Accumulation Unit Value: For any Valuation Period, the
current market value of the total assets of a Subaccount, less
liabilities, divided by the number of units of that Subaccount
outstanding.
Administrative Office: The office indicated on the cover
page of this Prospectus to which notices and purchase payments
must be sent. All sums payable to Great American Reserve
under the Contract are payable at the Administrative Office or
an address designated by Great American Reserve.
Age: The age of any Contract Owner or Annuitant on his
or her last birthday. For Joint Contract Owners, all
provisions which are based on age are based on the age of the
older of the Joint Contract Owners.
Annuitant: The named individual on whose continuation of
life under the Contract annuity payments may depend.
Annuity: A series of payments for life; or for life with
guaranteed periods; or for the installment refund period; or
for a certain period; or to a joint and surviving annuitant.
Annuity Date: The date on which annuity payments of the
Contract begin. (See page I-23.)
Beneficiary: The persons to whom payment is to be made
on the death of the Contract Owner.
Code: The Internal Revenue Code of 1986, as amended.
<PAGE> I-9<PAGE>
C o n tract: The annuity contract offered by this
Prospectus.
Contract Date: The date a Contract is issued to a
Contract Owner.
Contract Owner: The person entitled to exercise all
rights under a Contract. This person is also referred to in
this Prospectus as "you." A Contract Owner may be a non-
natural person (e.g., a corporation, trust, or certain other
entities). (See page I-26.)
Contract Value: The sum of the amounts allocated to the
Fixed Account and the amounts allocated to the Separate
Account. (See page I-20.)
Financial Advisor: A registered investment adviser, or
an investment adviser who is excluded from registration with
the Securities and Exchange Commission, selected to provide
your tactical allocation or market-timing investment services.
Fixed Account: The general account of Great American
Reserve which provides guaranteed values and periodically
adjusted interest rates.
Fixed Account Value: The value of the portion of your
Contract Value allocated to the Fixed Account.
Fixed Annuity: A series of periodic payments of
predetermined amounts beginning with the Annuity Date that do
not vary with investment experience.
General Account: The assets of Great American Reserve
w i th the exception of the Separate Account and other
segregated asset accounts.
Great American Reserve: Great American Reserve Insurance
Company.
Joint Contract Owner: If named, a person entitled to
exercise all rights under a Contract along with the Contract
Owner. Any Joint Contract Owner must be the spouse of the
Contract Owner.
Market Timing: An investment strategy involving
potentially frequent shifting of assets between investments in
domestic equity securities (e.g., the Nova Subaccount) and
investments in cash items (e.g., the Money Market Subaccount).
Money Market Subaccounts: The Money Market I Subaccount
and the Money Market II Subaccount.
<PAGE> I-10<PAGE>
Nonqualified Contract: A Contract issued under a
nonqualified plan, which is not a Qualified Contract.
PADCO: PADCO Advisors II, Inc.
PFS: PADCO Financial Services, Inc.
Purchase Payments: Premium payments made to Great
American Reserve under the terms of the Contract.
Qualified Contract: A Contract issued under a retirement
plan which receives favorable tax treatment under Sections
401(a), 403(a) and (b), 408, or 457, or any similar provision
of the Internal Revenue Code where pre-tax contributions are
accepted. (See page I-25.)
Separate Account: The segregated asset account that
Great American Reserve has established pursuant to the
provisions of the insurance code of the State of Texas, and
identified as the Rydex Advisor Variable Annuity Account.
Separate Account Value: The value of the portion of your
Contract Value allocated to the Separate Account.
Servicer: PADCO Service Company, Inc.
Subaccount: A segment of the Rydex Advisor Variable
Annuity Account consisting of a portfolio of investment
securities. (See page 1-13.)
Tactical Allocation Fees: Fees charged by Financial
Advisors for tactical allocation services.
Tactical Allocation Services: Tactical allocation
services or market-timing services provided by Financial
Advisors.
Tactical Asset Allocation: An investment strategy
involving potentially frequent shifting of assets among a
variety of investment sectors (e.g., by transfers among the
Subaccounts).
Transaction Cut-Off Time: The cut-off time on each
valuation day for all Separate Account trading activity,
including transfers and withdrawals. With respect to all
purchases and withdrawals, this time is 2:30 P.M., Eastern
Time. With respect to transfers for the Nova, Ursa, and OTC
Subaccounts, this time is 3:30 P.M., Eastern Time; for the
Precious Metals Subaccount, this time is 3:15 P.M., Eastern
Time; for the Bond and Juno Subaccounts, this time is 2:30
P.M., Eastern Time; and for the Money Market Subaccounts and
the Fixed Account, this time is 4:00 P.M., Eastern Time. For
<PAGE> I-11<PAGE>
transfers involving different transaction end times, the
earlier of the times indicated above applies. (See page I-
21.)
Valuation Date: Each day the New York Stock Exchange
(the "NYSE") is open for business.
Valuation Period: The interval from one valuation day of
any Subaccount to the next valuation day, measured from the
time each day the Subaccount is valued. (See page I-20.)
Written Request: A request in writing, in a form
satisfactory to Great American Reserve.
FEE TABLE
<TABLE>
<CAPTION>
<S> <C>
Contract Owner Transaction Expenses1/
Sales Load Imposed on Purchases None
Withdrawal Charge (as a percentage of
purchase payments)
First and Second Years Since Payment 7%
Third Year Since Payment 6%
Fourth Year Since Payment 5%
Fifth Year Since Payment 4%
Sixth Year Since Payment 3%
Seventh Year Since Payment 2%
Eighth Year or More Since Payment 0%
Surrender Fee None
Exchange Fee None
Annual Contract Fee None
Separate Account Annual Expenses (as a percentage of average
daily net assets in each Subaccount)
Mortality and Expenses Risk Charge 1.25%
Administrative Fee 0.15%
Tactical Allocation Fee2/ 2.00%
________________
1/ Premium taxes are not shown. Any premium tax due will be deducted from purchase payments or from
Contract Values at a later date. Currently, state premium taxes range from 0% to 3.5%.
<PAGE> I-12<PAGE>
2/ Unless and until a ruling is obtained from the Internal Revenue Service to permit the deduction of
the tactical allocation fee from your Contract, this fee will not be deducted as a percentage of
average daily net assets in each Subaccount and you will be solely responsible for the payment of
the applicable tactical allocation fee to your Financial Advisor. Upon our receipt of the
necessary regulatory approvals, you will be notified of the commencement of the deduction of this
fee. (See "Tactical Allocation Fee" at page I-18.) The tactical allocation fee is not an
expense of the Money Market II Subaccount.
</TABLE>
<PAGE> I-13<PAGE>
<TABLE>
<CAPTION>
Subaccount Annual Expenses
Precious
Nova Ursa OTC Metals
<S> <C> <C> <C> <C>
Advisory Fees 0.75% 0.90% 0.75% 0.75%
Subaccount
Administration 0.25% 0.25% 0.20% 0.20%
Fees
Other Expenses
(after
reimbursement)3/ 0.40% 0.35% 0.45% 0.45%
Total Separate
Account Annual
Expenses (after
4.80% 4.90% 4.80% 4.80%
(reimbursement)3/
</TABLE>
________________________
3/ PADCO has voluntarily agreed to reimburse each Subaccount
for Other Expenses in excess of those shown (up to the
amount of the applicable Advisory Fee) through June 30,
1997, and until such later date as PADCO may determine.
Other Expenses are based on estimates.
<PAGE> I-14<PAGE>
<TABLE>
<CAPTION>
Money Money
Bond Juno Market Market II
I
<S> <C> <C> <C> <C>
Advisory Fees 0.50% 0.90% 0.50% 0.25%
Subaccount
Administration 0.20% 0.25% 0.20% 0
Fees
Other Expenses
(after
reimbursement)3/ 0.30% 0.35% 0.10% 0.10%
Total Separate
Account Annual
Expenses (after
4.40% 4.90% 4.20% 1.75%
(reimbursement)3/
</TABLE>
___________________________
3/ PADCO has voluntarily agreed to reimburse each Subaccount
for Other Expenses in excess of those shown (up to the
amount of the applicable Advisory Fee) through June 30,
1997, and until such later date as PADCO may determine.
Other Expenses are based on estimates.
<PAGE> I-15<PAGE>
Examples
1. If you surrender your Contract, or if you annuitize, at
the end of the applicable period:
<TABLE>
<CAPTION>
You would pay the following
expenses on a $1,000
investment, assuming 5%
annual return on assets: 1 year 3 years
<S> <C> <C>
The Nova Subaccount $118 $198
The Ursa Subaccount $119 $201
The OTC Subaccount $118 $198
The Precious Metals $118 $198
Subaccount
The Bond Subaccount $114 $187
The Juno Subaccount $119 $201
The Money Market I $112 $181
Subaccount
The Money Market II $ 88 $108
Subaccount
</TABLE>
2. If you do not surrender at the end of the applicable
period:
<TABLE>
You would pay the following
expenses on a $1,000
investment, assuming 5%
annual return on assets: 1 year 3 years
<S> <C> <C>
The Nova Subaccount $48 $144
The Ursa Subaccount $49 $147
The OTC Subaccount $48 $144
The Precious Metals $48 $144
Subaccount
The Bond Subaccount $44 $133
The Juno Subaccount $49 $147
<PAGE> I-16<PAGE>
The Money Market I $42 $127
Subaccount
The Money Market II $18 $ 54
Subaccount
</TABLE>
The purpose of the Fee Table is to assist you in
understanding the various costs and expenses that you will
bear directly or indirectly. The Examples should not be
considered a representation of future expenses and charges.
Actual expenses may be greater or less than those shown.
Similarly, the assumed 5% annual rate of return is not an
estimate or a guarantee of future investment performance. The
Examples include, as an expense, the tactical allocation fee
of 2.00%. However, deduction of this fee will not be
i m p lemented unless and until the necessary regulatory
approvals are obtained. See "Charges and Deductions" at page
I-17.
FINANCIAL STATEMENTS
Financial statements for Great American Reserve can be
found in the Statement of Additional Information, copies of
which are available upon request and without charge. This
information may be obtained by writing or calling PFS at the
address or telephone number set forth on the cover page of
this Prospectus. No financial statements for the Separate
A c c o unt are included in the Statement of Additional
Information because the Separate Account had not commenced
operations at the date of this Prospectus.
<PAGE> I-17<PAGE>
SUMMARY
"You" refers to the Contract Owner. "We," "us," or
"Great American Reserve" refers to Great American Reserve
Insurance Company.
The Separate Account
The Separate Account is currently divided into eight
Subaccounts in which purchase payments under this Contract may
be invested. Initial purchase payments allocable to the
Separate Account will first be allocated to the Money Market I
Subaccount. During the first 14 days following the date of
issue of the Contract (the "Contract Date"), no transfers will
be allowed. Subsequently, transfers may only be made by your
Financial Advisor. Your Contract Value will reflect the
investment performance of your Subaccounts. (See "The
S e p a rate Account" on page I-13, "Investments of the
Subaccounts" on page I-13, "Account Transfers" on page I-21
and "Tactical Allocation Services" on page I-16.)
T h e eight Subaccounts, including the Money Market
Subaccounts, are managed by PADCO. (See "PADCO" in Part II of
this Prospectus.) The Money Market II Subaccount is
available only upon the death, resignation, or termination of
your Financial Advisor.
Retirement Plans
T h e Contract may currently be issued pursuant to
nonqualified retirement plans, individual retirement annuities
("IRAs"), or Section 403(b) Annuities ("TSAs").
Purchase Payments
T h e full amount of your purchase payments, less
applicable premium tax due, if any, will be invested.
However, certain charges and deductions will be made from your
Contract Value. (See "Charges and Deductions" on page I-17.)
The Contract permits purchase payments to be paid on a
flexible basis at any time in any amount meeting specified
minimum requirements. The minimum initial purchase payment
Great American Reserve will accept is $25,000. The minimum
subsequent purchase payment is $1,000. (See "Purchase
Payments" on page I-19.)
<PAGE> I-18<PAGE>
Charges and Deductions
Withdrawal Charge. A withdrawal charge is deducted in
the event of withdrawal of Contract Values, subject to certain
exceptions. If the withdrawal charge applies, it will equal a
specified percentage of each purchase payment paid under the
Contract within seven complete years prior to the date of
withdrawal. This charge permits Great American Reserve to
recover a portion of the sales expenses that it has incurred.
(See "Withdrawal Charge" on page I-17.)
Administrative Fee. Great American Reserve will deduct a
daily administrative fee equal to an annual rate of 0.15% of
the average daily net assets of each Subaccount. This charge
is made to reimburse Great American Reserve for expenses
r e l a t e d to administration of the Contracts. (See
"Administrative Fee" on page I-18.)
Mortality and Expense Risk Charge. Great American
Reserve will deduct a daily mortality and expense risk charge
equal to an annual rate of 1.25% of the average daily net
assets of each Subaccount. This charge is made to compensate
Great American Reserve for the risk of guaranteeing not to
i n c r ease the administrative fee regardless of actual
administrative costs and for the mortality guarantees Great
American Reserve makes under the Contract. (See "Mortality
and Expense Risk Charge" on page I-18.)
Tactical Allocation Fee. Upon receipt of a ruling from
the Internal Revenue Service, Great American Reserve will
deduct a tactical allocation fee equal to an annual rate of
2.00% of the average daily net assets of each Subaccount other
than the Money Market II Subaccount (which Subaccount is only
available if no Financial Advisor is performing services in
relation to your Contract). This fee will be deducted on a
daily basis and paid quarterly to the Financial Advisor who
p r ovides you with tactical allocation services. (See
"Tactical Allocation Services" at page I-16 and Federal
Income Taxes; Tactical Allocation Fees at page I-24.)
S u baccount Administration Fee. Various Subaccount
administration fees, with maximum annual rates ranging from
0.20% to 0.25% of a Subaccount's average daily net assets,
also are payable by the Subaccounts (other than the Money
Market II Subaccount, which does not pay this fee) to PADCO
Service Company, Inc. (the "Servicer"), for expenses related
to tactical allocation administrative services provided by the
Servicer under the Contracts. (See "Subaccount Administration
Fee" on page I-19.)
Investment Advisory Fee. Various investment advisory
fees, with maximum annual rates ranging from 0.25% to 0.90% of
<PAGE> I-19<PAGE>
the average daily net assets of the Subaccounts, are payable
by the Subaccounts to PADCO. The Subaccounts also bear
certain of the expenses incurred in their operations. (See
"Investment Advisory Fee and Other Expenses" on page I-19.)
Premium Taxes. Premium taxes or similar assessments
payable to any government entity may be deducted from purchase
payments or from Contract Values when paid by Great American
Reserve or at a later date. Currently, state premium taxes
range from 0% to 3.5%. (See "Premium Taxes" on page I-19.)
Tactical Allocation Services
This Contract is sold only to Contract Owners who are
provided tactical allocation or market-timing services by
investment advisers registered, or excluded from registration,
under the Investment Advisers Act of 1940, to whom the
tactical allocation fees are paid. Tactical allocation
services consist of making allocation and transfer decisions.
You are responsible for selecting and supervising your
Financial Advisor and must execute a power of attorney
a u thorizing your Financial Advisor to provide tactical
allocation services. In this regard, you may redeem your
Contract in whole or in part, but only your Financial Advisor
may contact PADCO with allocation and transfer decisions.
PADCO or Great American Reserve must be provided with a copy
of a written power of attorney from each Contract Owner for
whom the Financial Advisor has been granted the power to
direct the allocation and transfer of funds under the
Contract. Neither Great American Reserve, PFS, nor PADCO
selects, supervises, or recommends any Financial Advisor to
you, nor does Great American Reserve, PFS or PADCO provide
tactical allocation advice to you. Accordingly, neither Great
American Reserve, PFS, nor PADCO is responsible for any advice
provided by any Financial Advisor. There can be no assurance
that any Financial Advisor will be able to predict market
moves successfully. The Board of Managers of the Separate
Account (the "Managers") has not reviewed the qualifications
of any Financial Advisor and has not considered payments to
Financial Advisors in connection with its review of investment
advisory contracts for the Separate Account. (See "Tactical
Allocation Services" at page I-16.)
Upon notification to PADCO of the death, termination, or
resignation of your Financial Advisor, your Separate Account
Value will immediately be transferred into the Money Market II
Subaccount. Great American Reserve will send you a notice not
more than five business days after receipt of information from
PADCO that no Financial Advisor is serving in relation to your
Contract. (See "Tactical Allocation Fee" on page I-18 for a
description of the applicable procedures when your Financial
<PAGE> I-20<PAGE>
Advisor dies, resigns or has been terminated, and "Changing
Financial Advisors" on page I-19.)
Annuity Payments
Monthly annuity payments will start on the Annuity Date.
You may select the Annuity Date. You may also select an
annuity payment option. You may change your selections later.
(See "Change of Annuity Date or Annuity Option" on page I-23.)
If the net Contract Value at the Annuity Date is less
than $10,000 ($3,500 for Qualified Contracts), Great American
Reserve reserves the right to pay the Contract Value in a lump
sum in lieu of annuity payments. For further information
regarding the tax consequences of a lump sum payment, see "Tax
Treatment of Withdrawals; Non-Qualified Contracts at page I-
27 and Tax Treatment of Withdrawals; Qualified Contracts at
page I-28. If any annuity payment would be less than $50,
Great American Reserve may change the frequency of payments to
intervals that will result in payments of at least $50. (See
"Minimum Annuity Payments" on page I-24.)
Account Transfers
All or part of your Contract Value may be transferred
among the Subaccounts (except the Money Market II Subaccount)
at any time and without charge prior to the Annuity Date.
Transfers to the Money Market II Subaccount are made only upon
n o t i fication to PADCO of the death, resignation, or
termination of your Financial Advisor. Transfers out of the
Money Market II Subaccount are subject to certain limitations.
Transfers to and from the Fixed Account are also permitted,
but are subject to certain limitations. (See "Account
Transfers" on page I-21.)
Payment on Death
If the Contract Owner dies prior to the Annuity Date and
(i) the age of the Contract Owner at death is less than 76,
Great American Reserve will pay the greater of purchase
payments (less withdrawals) or Contract Value, or (ii) the age
of the Contract Owner at death is 76 or greater, Great
American Reserve will pay the Contract Value less any
applicable withdrawal charges. (See "Payment on Death" on
page I-20.)
Withdrawals
You may withdraw all or part of your accumulated Contract
Value prior to the Annuity Date. The amount withdrawn must be
at least $500. If your Contract is to continue in force, the
remaining Contract Value must be at least $10,000. A
<PAGE> I-21<PAGE>
withdrawal charge may be imposed. (See "Withdrawals" on page
I-22.) Withdrawals may be subject to a 10% penalty tax under
the Code. (See "Tax Treatment of Withdrawals; Non-Qualified
Contracts at page I-27 and Tax Treatment of Withdrawals;
Qualified Contracts at page I-28.)
Ten-Day Review Period
Within 10 days of your receipt of an issued Contract you
may return it to Great American Reserve for cancellation.
This period may be longer in certain states. (See "Ten Day
Right to Review" on page I-24.)
<PAGE> I-22<PAGE>
Special Risks
The strategies employed by a Contract Owner's Financial
Advisor may result in considerable assets moving in and out of
each Subaccount (except the Money Market II Subaccount).
C o n sequently, PADCO expects that each Subaccount will
generally experience significant portfolio turnover, which
will likely result in higher expenses, transaction costs, and
additional costs and may also adversely affect the ability of
the Subaccount to meet its investment objective. Each
Subaccount's investments will be managed without regard to
portfolio turnover rates. The Subaccounts (other than the
M o n ey Market Subaccounts) also may engage in certain
aggressive investment techniques, which may include engaging
in short sales and transactions in futures contracts and
options on securities, stock indexes, and futures contracts.
Although liquidity risks are often inherent in market
timing arrangements, the Subaccounts have procedures designed
to maximize liquidity of the Subaccounts. In particular, the
S u baccounts use of futures contracts and options on
securities, stock indexes and futures contracts offer a highly
liquid, cost-effective method of investing in securities and
are an effective means by which to accommodate the massive
switching and high portfolio turnover rates that may result
from asset allocation and market timing investment strategies.
A discussion of the special risks associated with the
investment in the Subaccounts is provided under "Special Risk
Considerations" under "Investments of the Subaccounts" in Part
I and in Part II of this Prospectus. For further information
concerning the investment policies and strategies of the
Subaccounts, see "Investments of the Subaccounts" in Part I
and "Investment Objectives and Policies" and "Investment
Techniques and Other Policies" in Part II of this Prospectus
and "Investment Policies and Techniques of the Subaccounts" in
the Statement of Additional Information.
As of the date of this Prospectus, Great American Reserve
has pending a request for a letter ruling from the Internal
Revenue Service that tactical allocation fee payments to
Financial Advisors need not be treated as distributions to
Contract Owners subject to tax. There is no assurance that
such a ruling will be issued. Unless and until a letter
ruling is obtained, Great American Reserve would be required
to treat these payments as taxable distributions, which
amounts may be subject to adverse tax consequences, including
a 10% penalty tax on the taxable portion withdrawn if you are
under 59 1/2 years old. In addition, even if such a ruling is
issued, it is likely that you will have a taxable distribution
if your Financial Advisor credits back to you or anyone else
any portion of the tactical allocation fee. Contract Owners
should consult a competent tax advisor as to the tax treatment
<PAGE> I-23<PAGE>
of tactical allocation fees. The deduction of tactical
allocation fees, as a percentage of average daily net assets
in each Subaccount, will not be implemented unless and until a
favorable letter ruling is obtained from the Internal Revenue
Service. However, pending receipt of a favorable letter
ruling from the Internal Revenue Service, Contract Owners
(other than owners of annuities held under retirement plans
qualified under Section 401 or owners of Section 403(b) tax
sheltered annuities) may authorize Great American Reserve to
withdraw amounts from his or her Contract Value for the
purpose of remitting the tactical allocation fee (2.00%) to
his or her Financial Advisor.
GREAT AMERICAN RESERVE INSURANCE COMPANY
Great American Reserve, originally organized in 1937, is
principally engaged in the life insurance business in 47
states and the District of Columbia. Great American Reserve
is a stock company organized under the laws of the State of
T e x as and a wholly-owned subsidiary of Conseco, Inc.
("Conseco"). The operations of Great American Reserve are
handled by Conseco. Conseco is a publicly-owned financial
services holding company, the principal operations of which
a r e the development, marketing and administration of
specialized annuity and life insurance products. Conseco is
located at 11825 N. Pennsylvania Street, Carmel, Indiana
46032.
A l l inquiries regarding the Separate Account, the
Contracts, or any related matter should be directed to Great
American Reserve's Administrative Office at the address and
telephone number shown on the cover page of this Prospectus.
The financial statements of Great American Reserve included in
the Statement of Additional Information should be considered
only as bearing upon the ability of Great American Reserve to
meet the obligations under the Contracts. Furthermore,
neither the assets of Conseco nor those of any company in the
Conseco group of companies other than Great American Reserve
support these obligations. As of December 31, 1995, Great
American Reserve had total assets of $2.8 billion and total
shareholder's equity of $442.6 million.
THE SEPARATE ACCOUNT
Great American Reserve established the Separate Account
on April 15, 1996, as a separate account under Texas law.
The Separate Account is registered with the Securities and
Exchange Commission (the "SEC") as a diversified open-end
management investment company pursuant to the provisions of
the Investment Company Act of 1940, as amended (the "1940
<PAGE> I-24<PAGE>
Act"), and meets the definition of "separate account" set
forth in the 1940 Act. The Separate Account's registration
under the 1940 Act does not involve any supervision by the SEC
of the investment practices or policies of any of the
Subaccounts of the Separate Account. The Managers are
responsible for the general supervision of the Separate
Account's business. While the assets of the Subaccounts are
G r eat American Reserve's property, the Subaccounts, as
segregated investment accounts of the Separate Account, are
not chargeable with liabilities arising out of any other
business that Great American Reserve may conduct. Obligations
of the Subaccounts, however, are obligations of Great American
Reserve. Income, gains, or losses, whether or not realized,
f r om assets allocated to each of the Subaccounts, in
accordance with the Contracts, are credited to or charged
against that Subaccount without regard to other income, gains,
or losses of Great American Reserve or any other Subaccount.
Great American Reserve does not guarantee the investment
performance of any Subaccount. The Separate Account has eight
separate Subaccounts. Each Subaccount has its own distinct
investment objective. There is, of course, no assurance that
any Subaccount will achieve its investment objective. A
discussion of each Subaccount s investment objective and
policies is provided below under "Investment Objectives and
Policies of the Subaccounts" and "Investment Techniques and
Other Investment Policies." The Contract Value prior to the
Annuity Date will vary with the performance of the Subaccounts
your Financial Advisor selects.
INVESTMENTS OF THE SUBACCOUNTS
Eligible Investments
Each Subaccount is a separate investment portfolio of the
Separate Account. Purchase payments allocated to a Subaccount
will be added to the assets of that Subaccount at Accumulation
Unit Value (without any fee or charge) and will be invested as
determined by PADCO.
All of your purchase payments allocable to the Separate
A c c ount will first be allocated to the Money Market
Subaccounts. No transfers will be allowed for the first 14
days following the Contract Date. After this 14-day period,
transfers may only be made by your Financial Advisor. All or
part of your Contract Value may be transferred from one
Subaccount to another (except the Money Market II Subaccount)
at any time and without charge after the first 14 days
following the Contract Date. (See "Account Transfers" at page
I-21.)
<PAGE> I-25<PAGE>
A summary of the investment objectives of each Subaccount
follows. More detailed information, including risks of
investing in and deductions from and expenses paid out of the
assets of the Separate Account and of the Subaccounts, may be
found in Part II of this Prospectus. Part II of this
Prospectus should be read in full for a complete evaluation of
the Contract and related investment risks.
Investment Objectives
E a c h Subaccount has its own distinct investment
objective. There is, of course, no guarantee that any
Subaccount will achieve its investment objective. The
i n v e stment objectives of the Subaccounts and certain
investment restrictions are fundamental policies and may not
be changed without the affirmative vote of the majority of the
Contract Owners of that Subaccount. The investment objectives
of the Subaccounts are as follows:
The Nova Subaccount. The Nova Subaccount s investment
objective is to provide investment returns that correspond to
the performance of a benchmark for common stock securities
selected from time to time by the Managers. The Nova
Subaccount's current benchmark is the Standard & Poor s 500
Composite Stock Price Index (the "S&P500 Index"), and the
Nova Subaccount currently expects to provide investment
returns that correspond to 125% of the performance of the
S&P500 Index. In attempting to achieve its objective, the
Nova Subaccount expects that a substantial portion of its
assets usually will be devoted to investment techniques
i n c luding certain transactions in stock index futures
contracts, options on stock index futures contracts, and
options on securities and stock indexes. In contrast to
returns on a mutual fund that seeks to approximate the return
of the S&P500 Index, the Nova Subaccount should increase gains
to Contract Owners during periods when the prices of the
securities in the S&P500 Index are rising and increase losses
to Contract Owners during periods when such prices are
declining. Contract Owners in the Nova Subaccount could
experience substantial losses during sustained periods of
falling equity prices. The S&P500 Index is an unmanaged index
of common stocks comprised of 500 industrial, financial,
u t i l i ty, and transportation companies. "Standard &
Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R),"
and "500" are trademarks of McGraw-Hill, Inc. The Nova
Subaccount is not sponsored, endorsed, sold, or promoted by
S t a n dard & Poor's Corporation and Standard & Poor's
Corporation makes no representation regarding the advisability
of investing in the Nova Subaccount through the Contract or
otherwise.
<PAGE> I-26<PAGE>
The Ursa Subaccount. The Ursa Subaccount s investment
objective is to provide investment results that will inversely
correlate to the performance of a benchmark for common stock
securities selected from time to time by the Managers. The
Ursa Subaccount's current benchmark is the S&P500 Index. The
Ursa Subaccount seeks to achieve this inverse correlation
result on each trading day. While a close correlation can be
achieved on any single trading day, the combined effects of
the reinvestment of the receipt of investment income and of
the compounding of successive changes in Accumulation Unit
Value can cause the percentage increase or decrease in the
Accumulation Unit Value of the Ursa Subaccount to diverge
significantly from the current inverse percentage decrease or
increase in the S&P500 Index. If the Ursa Fund achieved a
perfect inverse correlation for any single trading day, the
Accumulation Unit Value of the Ursa Subaccount would increase
for that day in direct proportion to any decrease in the level
of the S&P500 Index. Conversely, the Accumulation Unit Value
of the Ursa Subaccount would decrease for that day in direct
proportion to any increase in the level of the S&P500 Index
for that day. In seeking to achieve its objective, the Ursa
Subaccount primarily engages in short sales and certain
transactions in stock index futures contracts, options on
stock index futures contracts, and option on securities and
stock indexes. The Ursa Subaccount involves special risks not
traditionally associated with annuity contracts. Contract
Owners in the Ursa Subaccount may experience substantial
losses during sustained periods of rising equity prices. The
Ursa Subaccount is not sponsored, endorsed, sold, or promoted
by Standard & Poor's Corporation and Standard & Poor's
Corporation makes no representation regarding the advisability
of investing in the Ursa Subaccount through the Contract or
otherwise.
The OTC Subaccount. The investment objective of the OTC
Subaccount (the "OTC Subaccount") is to attempt to provide
investment results that correspond to the performance of a
benchmark for over-the-counter securities selected from time
to time by the Managers. The OTC Subaccount s current
benchmark is the NASDAQ 100 Index . The OTC Subaccount does
not aim to hold all of the 100 securities included on the
NASDAQ 100 Index. Instead, the OTC Subaccount intends to hold
representative securities included in the NASDAQ 100 Index or
other instruments which are expected to provide returns that
correspond to those of the NASDAQ 100 Index. The OTC
Subaccount may engage in transactions on stock index futures
contracts, options on stock index futures contracts, and
options on securities and stock indexes. The NASDAQ 100 Index
is a capitalization-weighted index composed of 100 of the
largest non-financial securities listed on the National
A s s ociation of Securities Dealers Automated Quotations
("NASDAQ") Stock Market. "NASDAQ(SM)," "NASDAQ 100(R)," and
<PAGE> I-27<PAGE>
"NASD(R)" are servicemarks and trademarks of the National
Association of Securities Dealers, Inc. ("NASD"). The OTC
Subaccount is not sponsored, endorsed, sold, or promoted by
the NASD and the NASD makes no representation regarding the
advisability of investing in the OTC Subaccount through the
Contract or otherwise.
The Precious Metals Subaccount. The investment objective
of the Precious Metals Subaccount (the "Metals Subaccount") is
to attempt to provide investment results that correspond to
the performance of a benchmark primarily for metals-related
securities selected from time to time by the Managers. The
P r ecious Metals Subaccount s current benchmark is the
Philadelphia Stock Exchange Gold/Silver Index (the "XAU
Index"). To achieve its objective, the Precious Metals
Subaccount invests in securities included in the XAU Index.
In addition, the Precious Metals Subaccount may invest in
other securities that are expected to perform in a manner that
will permit the Precious Metals Subaccount s performance to
track closely the XAU Index. The Precious Metals Subaccount
may invest in securities of foreign issuers. These securities
present certain risks not present in domestic investments and
expose the investor to general market conditions which differ
significantly from those in the United States. The XAU Index
is a capitalization-weighted index featuring nine widely-held
securities in the gold and silver mining and production
industry or companies investing in such mining and production
companies. "Philadelphia Stock Exchange(R)" and "PHLX(R)" are
trademarks of the Philadelphia Stock Exchange. The Precious
Metals Subaccount is not sponsored, endorsed, sold, or
p r o m oted by the Philadelphia Stock Exchange and the
Philadelphia Stock Exchange makes no representation regarding
t h e advisability of investing in the Precious Metals
Subaccount through the Contract or otherwise.
The U.S. Government Bond Subaccount. The investment
objective of the U.S. Government Bond Subaccount (the "Bond
Subaccount") is to provide investment results that correspond
to the performance of a benchmark for U.S. Government
securities selected from time to time by the Managers. The
Bond Subaccount s current benchmark is 120% of the price
movement of the Current Long Treasury Bond (the "Long Bond"),
without consideration of interest paid. In attempting to
achieve its objective, the Bond Subaccount invests primarily
in obligations of the U.S. Treasury or obligations either
issued or guaranteed, as to principal and interest, by
agencies or instrumentalities of the U.S. Government ("U.S.
Government Securities"). The Bond Subaccount may engage in
transactions in futures contracts and options on futures
contracts on U.S. Treasury bonds. The Bond Subaccount also may
invest in U.S. Treasury zero coupon bonds.
<PAGE> I-28<PAGE>
The Juno Subaccount. The Juno Subaccount s investment
objective is to provide total return before expenses and costs
that inversely correlate to the price movements of a benchmark
for U.S. Treasury debt instruments or futures contracts on a
specified debt instrument selected from time to time by the
Managers. The Long Bond is the Juno Subaccount s current
benchmark. In seeking its objective, the Juno Subaccount will
employ certain investment techniques including engaging in
short sales and transactions in futures contracts and options
thereon. If the Juno Subaccount is successful in meeting its
objective, its total return before expenses and costs will
increase proportionally to any decreases in the price of the
Long Bond. Conversely, its total return before expenses and
cost will decrease proportionally to any increases in the
price of the Long Bond. Contract Owners with Contract Value
allocated to the Juno Subaccount may experience substantial
losses during periods of falling interest rates/rising bond
prices.
The Money Market Subaccounts. The investment objective
of each of the Money Market Subaccounts is to seek current
income consistent with stability of capital and liquidity. To
achieve its objective, each Money Market Subaccount invests
primarily in money market instruments which are issued or
guaranteed, as to principal and interest, by the U.S.
Government, its agencies or instrumentalities, as well as in
repurchase agreements collateralized fully by U.S. Government
S e c urities, and in bank money market instruments and
commercial paper.
Special Risk Considerations
The assets of the Subaccounts will be derived from
Contract Owners who use the Subaccounts as part of a tactical
allocation or market-timing investment strategy pursuant to
advice received from professional money managers. In that
circumstance, Subaccount values may be transferred frequently
to take advantage of anticipated changes in market conditions.
The strategies employed by a Contract Owner's Financial
Advisor may result in considerable assets moving in and out of
the Subaccounts (except the Money Market II Subaccount).
C o n sequently, PADCO expects that the Subaccounts will
generally experience significant portfolio turnover, which
will likely cause higher expenses and additional costs and may
also adversely affect the ability of the Subaccount to meet
its investment objective. For further information concerning
the portfolio turnover of the Subaccounts, see "Special Risk
Considerations" in Part II of this Prospectus, and "Investment
Policies and Techniques of the Subaccounts" in the Statement
of Additional Information.
<PAGE> I-29<PAGE>
While PADCO does not expect that the returns over a year
will deviate adversely from the Subaccounts' respective
current benchmarks by more than ten percent, certain factors
may affect the ability to achieve this correlation. See
" I nvestment Objectives and Policies" and "Special Risk
Considerations" in Part II of this Prospectus for a discussion
of these factors.
The Subaccounts (other than the Money Market Subaccounts)
may engage in certain aggressive investment techniques, which
may include engaging in short sales and transactions in
futures contracts and options on securities, stock indexes,
and futures contracts. As discussed more fully under
"Investment Objectives and Policies," "Special Risk
C o n s iderations," and "Investment Techniques and Other
Investment Policies" in Part II of this Prospectus, these
techniques are specialized and involve risks that are not
traditionally associated with similar contracts.
Addition or Deletion of Subaccounts
Great American Reserve may, at its discretion, no longer
make available any of the Subaccounts shown on the Contract
Schedule. Great American Reserve may also offer additional
new Subaccounts.
TACTICAL ALLOCATION SERVICES
T h i s Contract is designed for use with tactical
allocation or market-timing investment services provided by a
Financial Advisor. Each Financial Advisor, before serving as
such, must represent that it is registered, or otherwise
excluded from registration, as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is not
subject to any federal or state regulatory agency action that
would prevent it from providing tactical allocation services.
You should carefully consider: (a) the nature and quality of
the tactical allocation services or any other services
proposed to be rendered by your Financial Advisor or a
prospective Financial Advisor; (b) the business relationships
of your Financial Advisor or affiliates of that Financial
Advisor with any entity that may be authorized to offer
Contracts or services on Great American Reserve's behalf or on
behalf of any of its affiliates or of PADCO or its affiliates;
and (c) the effects on your Contract at any time your
Financial Advisor dies, resigns, or is terminated.
PADCO will transfer your Separate Account Value into the
Money Market II Subaccount when PADCO receives notice of the
death of your Financial Advisor, when PADCO receives notice
f r o m you or your Financial Advisor terminating the
<PAGE> I-30<PAGE>
relationship, or when PADCO receives notice from either a
court of competent jurisdiction or an applicable regulatory
authority terminating such relationship. Great American
Reserve will send you a notice not more than five business
days after receipt of information from PADCO that no Financial
Advisor is serving in relation to your Contract. This notice
will include a reminder that you will be required to notify
PADCO of the name of your new Financial Advisor and that until
you designate a new Financial Advisor, you may (i) keep your
Separate Account Value in the Money Market II Subaccount until
you appoint a new Financial Advisor, (ii) transfer all or part
of your Separate Account Value to the Fixed Account and become
subject to the Fixed Account transfer restrictions, or (iii)
surrender your Contract, subject to applicable withdrawal
charges and tax penalties.
Once the necessary regulatory approval has been obtained
from the Internal Revenue Service to permit the deduction of
the tactical allocation fee from your Contract, Great American
R e serve's only responsibility with respect to tactical
allocation services will be to collect and remit this fee to
t h e Financial Advisor through PFS. See "Charges and
Deductions; Tactical Allocation Fee" on page I-18. Neither
Great American Reserve, PFS, nor PADCO bears responsibility
for, or liability in relation to, the activities of any
Financial Advisor. The payment of the tactical allocation fee
does not imply an endorsement of any particular Financial
Advisor by Great American Reserve, PFS, or PADCO. Great
American Reserve will not knowingly pay a fee to a Financial
Advisor that is an affiliate of Great American Reserve or an
affiliate of PADCO unless and until Great American Reserve
obtains any necessary approvals from the SEC and any other
applicable regulatory authorities.
CHARGES AND DEDUCTIONS
Withdrawal Charge
The withdrawal charge, when applicable, permits Great
American Reserve to recover a portion of its expenses relating
to the sale of the Contract. Great American Reserve may
assess a withdrawal charge against the purchase payments when
the payments are withdrawn. Subject to certain state
v a riations, the withdrawal charge will be a specified
percentage of the sum of the purchase payments paid within
seven years prior to the date of withdrawal, adjusted for any
prior withdrawals. There is no charge on withdrawals of (a)
purchase payments that have been in the Contract more than
seven complete Contract years or (b) free withdrawal amounts
described below. The length of time from receipt of a
purchase payment to the time of withdrawal determines the
withdrawal charge. For the purpose of calculating the
withdrawal charge, withdrawals will be deemed made first from
<PAGE> I-31<PAGE>
purchase payments on a first-in, first-out basis and then from
any gain.
No withdrawal charge is applicable in the event of the
death of the Contract Owner (if the age of the Contract Owner
at death is less than 76) or if payments are made under an
annuity option provided for under the Contract that begins at
least five years after the effective date of the Contract and
is paid under any life annuity option, or any option with
payments for a minimum of five years. The withdrawal charge
equals:
Complete Years
Withdrawal Charge Since Receipt of Payment
7% 0
7% 1
6% 2
5% 3
4% 4
3% 5
2% 6
0% 7 and thereafter
In addition, in certain states the following
circumstances further limit or reduce withdrawal charges: for
issue ages up to 56, there is no withdrawal charge made after
you attain age 67 and later; for issue ages 57 and later, any
otherwise applicable withdrawal charge will be multiplied by a
factor ranging from 0.9 to 0 for Contract years one through
10.
A Contract Owner may make one free withdrawal per
contract year from Contract Value of an amount up to 10% of
the Contract Value (as determined on the date of receipt of
the withdrawal request). Additional withdrawals in excess of
that amount in any Contract year during the period when any
withdrawal charge is applicable will be subject to the
appropriate charge as set forth above.
Withdrawals which are authorized by you to remit the
tactical allocation fee to your Financial Advisor are treated
as free withdrawals, and are not counted toward the 10% limit,
however, there may be certain adverse tax consequences. (See
"Federal Income Taxes; Tactical Allocation Fees" on page I-
24.) In addition, with respect to any Contract which is owned
b y a "charitable remainder unitrust" or a "charitable
remainder annuity trust" within the meaning of Section 664(d)
of the Code ("Charitable Remainder Trust"), Great American
Reserve may, in its discretion, permit an additional free
withdrawal necessary to fund required distributions by the
Charitable Remainder Trust in any contract year. In order for
a Charitable Remainder Trust to qualify for such an increase,
<PAGE> I-32<PAGE>
the trustee or trustees of the Charitable Remainder Trust will
be required to certify: (i) that such trust is a bona fide
"charitable remainder unitrust" or a "charitable remainder
annuity trust" within the meaning of Section 664 of the Code,
and that all amounts proposed to be withdrawn will be used to
make distributions required under Section 664 of the Code for
the year in which such amounts are withdrawn or for a prior
year; (ii) that the required distribution exceeds the one
free withdrawal of 10% of the Contract Value which is
permitted without a withdrawal charge; and (iii) that the
funds necessary to make the required distribution could not
otherwise be made available without hardship to the trust or
its beneficiaries. (See "Withdrawals" on page I-22.)
Great American Reserve also reserves the right to reduce
the withdrawal charge under certain circumstances when sales
of Contracts are made to a trustee, employer, or similar party
pursuant to a retirement plan or similar arrangement for sales
of Contracts to a group of individuals if the program results
in a savings of sales expenses. The amount of reduction will
depend on such factors as the size of the group, the total
amount of purchase payments, and other factors that might tend
to reduce expenses incurred in connection with such sales.
This reduction will not be unfairly discriminatory to any
Contract Owner. For issue ages 76 or younger, no charge will
be imposed on any payment made due to death of the Contract
Owner. (See "Payment on Death" on page I-20.)
Great American Reserve's sales expenses relating to the
Contracts initially will be provided for out of its surplus.
Withdrawal charges imposed on withdrawals from Contracts are
expected to recover only a portion of the sales expenses
relating to the Contract. Sales expenses not recovered
through the withdrawal charge will be recovered from Great
American Reserve's surplus.
Mortality and Expense Risk Charge
Great American Reserve assumes a mortality risk by virtue
of annuity rates in the Contract that cannot be changed.
Great American Reserve guarantees a minimum payment on the
death of the Contract Owner prior to the Annuity Date. (See
"Payment on Death" on page I-20.)
The expense risk Great American Reserve incurs is the
risk that the administrative fee, which is guaranteed not to
increase over the life of the Contract, will be insufficient
to cover Great American Reserve's actual expenses.
The mortality and expense risk charge, which is computed
and deducted on a daily basis from each Subaccount, is equal
to an annual rate of 1.25% of the daily net assets of each
<PAGE> I-33<PAGE>
Subaccount. If that amount is insufficient to cover the
actual cost of the mortality and expense risks, Great American
Reserve bears the loss. Conversely, if the amount proves more
than sufficient, the excess will be part of Great American
Reserve's surplus and can be used for any purpose including
payment of sales expenses not recovered through the withdrawal
charge.
Tactical Allocation Fee
This Contract is sold only to Contract Owners who are
provided tactical allocation or market-timing investment
services by Financial Advisors to whom a tactical allocation
fee is paid equal to an annual rate of 2.00% of the daily net
assets of each Subaccount (except the Money Market II
Subaccount, which Subaccount is only available if no Financial
Advisor is performing services in relation to your Contract).
Upon receipt of a favorable ruling from the Internal Revenue
Service, Great American will deduct this fee daily and remit
quarterly to your Financial Advisor. If you decide to change
your Financial Advisor, you may select a new Financial Advisor
by executing a new power of attorney or select one of the
options discussed below. After PADCO receives notification
from you, your Financial Advisor, or a court of competent
jurisdiction or an applicable regulatory authority of the
death, resignation, or termination of your Financial Advisor,
it will (unless it concurrently receives the name of your new
Financial Advisor), transfer all of your Separate Account
Value into the Money Market II Subaccount where you will not
be charged the tactical allocation fee. Until you designate a
new Financial Advisor, you may (i) keep your Separate Account
Value in the Money Market II Subaccount, (ii) transfer all or
part of your Separate Account Value to the Fixed Account and
become subject to Fixed Account transfer restrictions (a
maximum of 20% of the Fixed Account Value may be transferred
once in any six-month period), or (iii) surrender your
Contract, subject to applicable withdrawal charges and tax
penalties. PADCO maintains a list of Financial Advisors, but
does not recommend any particular Financial Advisor. (See
"Tactical Allocation Fees" in the "Federal Income Taxes"
Section at page I-24).
Administrative Fee
Great American Reserve deducts an administrative fee from
each Subaccount to reimburse Great American Reserve for
administrative expenses. This charge is equal to an annual
rate of 0.15% of the daily net assets of each Subaccount. The
fee reimburses Great American Reserve for, among other
expenses, preparation of the Contracts, confirmations, annual
reports and statements, maintenance of Contract Owner records
<PAGE> I-34<PAGE>
and other Contract Owner servicing. This administrative fee
will not be deducted from the Fixed Account.
Investment Advisory Fee and Other Expenses
Each Subaccount pays investment advisory fees to PADCO.
Pursuant to an investment advisory agreement between the
Separate Account and PADCO, the Subaccounts pay PADCO fees at
an annual rate applied to the daily net assets of each
Subaccount. The Separate Account and the Subaccounts also
b e a r certain expenses incurred in their operations.
Information on the investment advisory fees and other expenses
payable by the Separate Account is set forth under "Management
of the Separate Account" in Part II of this Prospectus and
"Board of Managers of the Separate Account" in the Statement
of Additional Information.
Subaccount Administration Fee
T h e Subaccounts (other than the Money Market II
Subaccount) also pay Subaccount administration fees to the
Servicer. Pursuant to a subaccount administration agreement
between the Separate Account and the Servicer, the Subaccounts
pay Subaccount administration fees at an annual rate applied
to the daily net assets of each Subaccount. The Servicer
p r o vides the Subaccounts with tactical allocation
administrative services, including, among others,
communications with Financial Advisors (including receipt of
and acting upon transfer requests), tactical allocation
bookkeeping, determination of Accumulation Unit Values, and
Subaccount accounting services. Information on the Subaccount
administration fee payable by the Subaccounts is set forth
under "Management of the Separate Account" in Part II of this
Prospectus and "Board of Managers of the Separate Account" in
the Statement of Additional Information. The Money Market II
Subaccount does not pay any Subaccount administration fees.
Payments of Certain Charges and Deductions
The mortality and expense risk charge, the administrative
fee, the investment advisory fees, the asset allocation
advisory fee, and the Subaccount administration fee will be
computed for each day prior to the Annuity Date the Contract
is in force. The withdrawal charge will be deducted, when
applicable, from the Fixed Account and/or from each Subaccount
from which amounts are withdrawn.
Premium Taxes
Some states and municipalities impose a premium tax on
annuity purchase payments received by insurance companies.
These taxes may be deducted by Great American Reserve when
<PAGE> I-35<PAGE>
paid by Great American Reserve or at a later date. It is
currently Great American Reserve's practice to deduct premium
taxes at the time annuity payments begin or when amounts are
withdrawn. State premium taxes currently range from 0% to
3.5%.
P r emium tax rates are subject to change by law,
administrative interpretations, or court decisions. Premium
tax amounts will depend on, among other things, your state of
residence, Great American Reserve's status within your state,
and the premium tax laws of your state.
DESCRIPTION OF THE CONTRACT
Purchase Payments
The minimum initial purchase payment for a Contract is
$25,000. The minimum subsequent purchase payment is $1,000.
Subsequent purchase payments may be paid at any time to the
Administrative Office. The maximum deposit without prior
approval from Great American Reserve is $500,000.
Application for a Contract or acceptance of the first
purchase payment is subject to Great American Reserve's
underwriting rules for such transactions. Great American
Reserve reserves the right to reject any application. A
properly-completed application that is accompanied by the
initial purchase payment and all information necessary for the
processing of the application will be accepted within two
business days of Great American Reserve's receipt of the
properly- completed application (i.e., information sufficient
to permit Great American Reserve to determine to issue a
Contract). Great American Reserve may retain an initial
purchase payment for up to five business days while attempting
to obtain information sufficient to issue the Contract. If an
application is not completed properly and cannot be processed
and necessary information obtained within five business days,
Great American Reserve will inform you of the reasons for the
delay and offer to return your purchase payment unless you
consent to Great American Reserve retaining the initial
purchase payment until we have received the information we
require.
Changing Financial Advisors
You may change your Financial Advisor. However, prior to
a change taking effect the new Financial Advisor must satisfy
Great American Reserve and PADCO's requirements as set forth
in the Contract application and you must execute a new power
of attorney authorizing a Financial Advisor to provide
tactical allocation services with respect to your Contract.
<PAGE> I-36<PAGE>
Great American Reserve will notify you upon receipt of
notification from PADCO that PADCO has received notice
terminating the relationship, or if PADCO receives notice from
either a court of competent jurisdiction or the applicable
regulatory authority terminating such relationship. (See
"Tactical Allocation Fee" on page I-18.)
Accumulation Provisions
Accumulation Units
Purchase payments may be allocated to the Fixed Account
or the Separate Account. Initial purchase payments allocated
to the Separate Account will first be deposited in the Money
Market I Subaccount. During the first 14 days following the
Contract Date, no transfers are allowed. (See discussion
under "Eligible Investments" on page I-13.) After this 14-day
period, the Separate Account Value may be transferred to the
S u baccounts selected pursuant to instructions from the
Financial Advisor. Upon allocation, purchase payments are
converted into Accumulation Units for that Subaccount. The
number of Accumulation Units is determined by dividing the
amount allocated to the Subaccount by the dollar value of an
Accumulation Unit for that Subaccount for the Valuation Period
in which the purchase payment is received at Great American
Reserve's Administrative Office or, in the case of the initial
purchase payment in accordance with the procedures described
above under "Purchase Payments." The number of Accumulation
Units will not change as a result of investment experience.
Value of an Accumulation Unit
For each Subaccount, the value of an Accumulation Unit
w a s arbitrarily set at $10 when the Subaccount was
established. The value of an Accumulation Unit may increase
or decrease from one Valuation Period to the next. The value
for any Valuation Period is determined by dividing the current
market value of total Subaccount assets, less liabilities, by
the total number of units of that Subaccount outstanding.
Valuation Periods
A Valuation Period is the interval from one valuation day
of any Subaccount to the next valuation day, measured from the
time each day the Subaccount is valued.
The Fixed Account
In addition to providing for the allocation of purchase
payments to the Separate Account, the Contract also provides
for allocation of purchase payments and transfer of Contract
Values to the Fixed Account, which accumulate at a guaranteed
<PAGE> I-37<PAGE>
interest rate and become part of Great American Reserve's
General Account. Fixed Annuity Cash Values increase based on
interest rates that may change from time to time. Great
American Reserve guarantees that it will credit daily interest
of at least 3% on an annual basis, compounded annually.
Purchase payments and transfers to the Fixed Account become
part of the general account of Great American Reserve. The
gains achieved or losses suffered by the Subaccounts have no
effect on the Fixed Account. The mortality and expense risk
charge, administrative fee, investment advisory fees, tactical
a l location fee, and the Subaccount administration fee,
discussed above are not deducted from the Fixed Account. The
interests of Contract Owners arising from the allocation of
purchase payments or the transfer of Contract Values to the
Fixed Account are not registered under the Securities Act of
1933. Great American Reserve's general account is not
registered as an investment company under the Investment
Company Act of 1940. Accordingly, the Fixed Account values
are not subject to the provisions that would apply if
registration under those acts were required.
Great American Reserve has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus
that relate to the Fixed Account. Disclosures regarding the
Fixed Account and Great American Reserve's general account,
however, may be subject to certain generally applicable
provisions of the Federal securities laws relating to the
a c c u racy and completeness of statements made in the
Prospectus.
Payment on Death
If a Contract Owner, or any Joint Contract Owner, dies
prior to the Annuity Date, Great American Reserve will pay to
the Beneficiary, upon receipt of due proof of death, the death
benefit representing the Contract Owner's interest in the
Contract. Upon the death of any Joint Contract Owner, the
surviving Joint Contract Owner, if any, will be treated as the
Beneficiary. The death benefit is the greater of the Contract
Value or the Purchase Payments less any applicable withdrawals
on the date due proof of death (as specified in your Contract)
is received at Great American Reserve's Administrative Office
(minus any applicable withdrawal charge if the age of the
Contract Owner at death is 76 or greater). Upon Great
American Reserve's receipt of notification of a Contract
Owner's death, the Separate Account Value under the Contract
will be transferred to the Money Market II Subaccount. (See
"Tactical Allocation Services" on page I-16.) Payment will be
in a lump sum unless an annuity option is chosen. A
Beneficiary other than the surviving spouse of the deceased
Contract Owner may choose only an annuity option providing for
full payout within five years of death, or for the life or
<PAGE> I-38<PAGE>
within the life expectancy of the Beneficiary. The life or
life expectancy option generally must be chosen within one
year of the Contract Owner's death. If the surviving spouse
of a deceased Contract Owner is the beneficiary, he or she may
choose to continue the Contract in force after the Contract
Owner's death. If so, the surviving spouse must execute a new
power of attorney in order to appoint a Financial Advisor to
provide tactical allocation services. (For information
regarding the tax consequences of a lump sum annuity payment,
see "Tax Treatment of Withdrawals; Non-Qualified Contracts" at
page I-27 and Tax Treatment of Withdrawals; Qualified
Contracts at page I-28.)
If the Contract Owner, or any Joint Contract Owner, who
is not the Annuitant, dies after the Annuity Date, any
remaining payments under the Annuity Option elected will
c o ntinue at least as rapidly as under the method of
distribution in effect at such Contract Owner's or Joint
Contract Owner's death. Upon the death of any Contract Owner
during the Annuity Period, the Beneficiary becomes the
Contract Owner. Upon the death of any Joint Contract Owner
during the Annuity Period, the surviving Joint Contract Owner,
if any, will be treated as the Primary Beneficiary. Any other
Beneficiary designation on record at the time of death will be
treated as a Contingent Beneficiary.
If the Contract Owner is not the Annuitant and the
Annuitant dies prior to the Annuity Date, the Contract will
continue in force on the same terms and the Contract Owner
shall thereafter be the Annuitant, unless another person is
designated by the Contract Owner to Great American Reserve's
Administrative Office within 30 days. If the Contract Owner
is not an individual, this paragraph shall not apply and the
first paragraph of this section shall apply as if the
Annuitant were the Contract Owner.
If the Annuitant dies after the Annuity Date, any
guaranteed amounts remaining unpaid will continue to be paid
pursuant to the annuity option in force at the date of death,
unless the Beneficiary chooses to receive the present value of
the remaining guaranteed payments in a lump sum. (See
"Annuity Provisions" on page I-23.)
Beneficiary
The Beneficiary and any Contingent Beneficiary are named
i n the application. Unless the Beneficiary has been
irrevocably designated, the Beneficiary may be changed upon
written request to Great American Reserve's Administrative
Office. If acceptable to Great American Reserve, a change of
Beneficiary will take effect as of the date signed, unless
Great American Reserve has already acted in reliance on the
<PAGE> I-39<PAGE>
prior status. The estate or heirs of a Beneficiary who dies
before the annuity payment is due have no rights under the
Contract. If no Beneficiary survives when the annuity payment
is due, payment will be made to the Contract Owner's estate.
Ownership
The Contract Owner is the person entitled to all rights
under the Contract. The Annuitant is the Contract Owner
u n l ess otherwise designated in the application or by
endorsement. No contingent owner may be named. Ownership of
the Contract may be transferred to a new Contract Owner. A
transfer of ownership must be in writing and a new power of
attorney to appoint a Financial Advisor must be executed.
These documents must be received by Great American Reserve's
Administrative Office before the transfer of ownership becomes
effective. Such a transfer of ownership does not affect a
designation of Beneficiary. Contracts may not be assigned,
p l edged, or transferred, unless permitted by law. A
collateral assignment does not change contract ownership. The
rights of a collateral assignee have priority over the rights
of a Beneficiary. Any assignment may have adverse tax
consequences. You should consult a competent tax adviser
before making any such designations, transfers, or
assignments.
Account Transfers
Before the Annuity Date, Separate Account Value may be
transferred from one Subaccount (except the Money Market II
Subaccount) to another Subaccount (except the Money Market II
Subaccount) and/or to the Fixed Account. The Contract allows
an unlimited number of Subaccount transfers so long as a
Financial Advisor is performing services under the Contract.
Without the services of a Financial Advisor, your Separate
Account Value will be automatically transferred into the Money
Market II Subaccount, where you will not be charged a tactical
allocation fee. Until you designate a new Financial Advisor,
you may (i) keep your Separate Account Value in the Money
Market II Subaccount, (ii) transfer all or part of your
Separate Account Value to the Fixed Account and become subject
to Fixed Account transfer restrictions (a maximum of 20% of
the Fixed Account Value may be transferred once in any six-
month period), or (iii) surrender your Contract, subject to
applicable withdrawal charges and tax penalties. PADCO
maintains a list of Financial Advisors, but does not recommend
any particular Financial Advisor. (See "Tactical Allocation
Fees" in the "Federal Income Taxes" Section at page I-24).
Transfers may be made in writing or by telephone only
from your Financial Advisor directed to PADCO. By authorizing
PADCO to accept telephone transfer instructions, a Contract
<PAGE> I-40<PAGE>
Owner agrees to accept and be bound by the conditions and
procedures established by PADCO from time to time. PADCO has
i n s t ituted reasonable procedures to confirm that any
instructions communicated by telephone are genuine. All
telephone calls will be recorded, and the caller will be asked
to produce personalized data prior to PADCO's initiating any
transfer requests by telephone. Additionally, as with other
transactions, you will receive a written confirmation of your
transfer. If reasonable procedures are employed, neither
Great American Reserve, PFS, nor PADCO will be liable for
following telephone instructions which it reasonably believes
to be genuine. Transfer requests must be made by your
Financial Advisor acting pursuant to a power-of-attorney.
Transfer requests received by PADCO before 2:30 P.M.,
Eastern Time, with respect to the Bond and Juno Subaccounts,
before 3:15 P.M., Eastern Time, with respect to the Precious
Metals Subaccount, before 3:30 P.M., Eastern Time, with
respect to the Nova, Ursa, and OTC Subaccounts, and before
4:00 P.M., Eastern Time, with respect to the Money Market
Subaccounts and the Fixed Account will be initiated at the
close of business that day. For transfers involving different
transaction cut-off times, the earlier of these times applies.
Any request received later than these times will be initiated
at the close of business on the next business day.
Withdrawals
Prior to the earlier of the Annuity Date or the death of
the Annuitant, you may withdraw all or part of your Contract
Value upon written request, less any charges. You may make
one free withdrawal per Contract year from Contract Value of
an amount up to 10% of the Contract Value (as determined on
the date of receipt of the requested withdrawal). There is no
charge on withdrawals of (a) purchase payments that have been
in the Contract more than seven complete Contract years or (b)
free withdrawal amounts described above. (See "Charges and
Deductions; Withdrawal Charge" and "Charges and Deductions;
Tactical Allocation Fee.") A Contract Owner's election to
withdraw must be in writing. The election must be received by
Great American Reserve prior to the Annuity Date. Under
certain Qualified Plans, withdrawals by Contract Owners prior
to age 59 1/2 may be restricted and the consent of your spouse
may be required.
On receipt of a Contract Owner's election, Great American
Reserve will cancel the number of Accumulation Units necessary
to equal the dollar amount of the withdrawal plus any
applicable withdrawal charge. (See "Charges and Deductions"
on page I-17.) When making a partial withdrawal, the Contract
Owner must specify the Subaccounts from which the withdrawal
is to be made. Any withdrawals to remit the tactical
<PAGE> I-41<PAGE>
allocation fee to your Financial Advisor, if permitted, will
be deducted from the Subaccount with the largest balance.
Withdrawals and related charges will be based on values for
the Valuation Period in which the election (and the Contract,
if required) are received by written request at Great American
R e s erve's Administrative Office. Withdrawal elections
received before 2:30 P.M., Eastern Time, will be initiated at
the close of business that day. The amount requested from a
Subaccount may not exceed the value of that Subaccount less
any applicable withdrawal charge.
A partial withdrawal must be at least $500, and the
remaining Contract Value must be at least $10,000 ($3,500 for
Q u a lified Contracts); otherwise Great American Reserve
reserves the right to treat the partial withdrawal as a total
withdrawal of the Contract Value. Payment of withdrawals may
be deferred (see "Suspension of Payments" below and "Federal
Income Taxes" on page I-24).
Suspension of or Deferral of Payments
Payment of withdrawals will normally be made within seven
days of Great American Reserve's receipt of a written request
for withdrawal. However, Great American Reserve reserves the
right to suspend or defer any withdrawal payment or transfer
of values if: (a) the NYSE, the Chicago Board of Trade (the
"CBOT"), or the Chicago Mercantile Exchange (the "CME"), as
appropriate, is closed (other than customary weekend and
holiday closings); (b) trading on the NYSE, the CBOT, or the
C M E , as appropriate, is restricted; (c) an emergency
(including severe weather conditions) exists such that it is
not reasonably practical to dispose of securities held in the
Subaccounts or to determine the value of their assets; or (d)
the SEC by order so permits for the protection of security
holders. Conditions described in events (b) and (c) generally
will be decided by, or in accordance with, rules of the SEC.
Annuity Provisions
General
Annuity payments will be made to the Annuitant unless you
specify otherwise in writing. The Contract Owner may or may
not be the Annuitant. The choice is made by the Contract
Owner in the application.
Selection of Annuity Date and Annuity Options
You may select the Annuity Date and an annuity option in
the application. The Annuity Date may not be later than the
first day of the next month after the Annuitant's 90th
birthday or the maximum date permitted under state law. If
<PAGE> I-42<PAGE>
the issue age is 85 or greater, the Annuity Date may not be
later than the fifth Contract year. If no Annuity Date is
selected, then the latest possible Annuity Date will be
assumed. (For Qualified Contracts, the Annuity Date generally
may not be later than April 1 of the year after the year in
which the Annuitant attains age 70 1/2.)
Change of Annuity Date or Annuity Option
You may change the Annuity Date or the annuity option
upon written notice received at Great American Reserve's
Administrative Office at least 30 days prior to the current
Annuity Date.
Annuity Options
You may select any one of the following annuity options
which currently are available on a fixed basis only or any
other option satisfactory to you and Great American Reserve.
First Option--Life Annuity. An Annuity payable monthly
during the lifetime of the Annuitant and ceasing with the last
monthly payment due prior to the death of the Annuitant. This
option offers a greater level of monthly payments than the
second option, since there is no minimum number of payments
guaranteed (nor a provision for a death benefit payable to a
Beneficiary). It would be possible under this option to
receive only one annuity payment if the Annuitant died prior
to the due date of the second annuity payment. This option is
generally not available for Contract Owners annuitizing over
the age of 85.
Second Option--Life Annuity With Guaranteed Periods. An
Annuity payable monthly during the lifetime of the Annuitant
with the guarantee that if, at the death of the Annuitant,
payments have been made for less than 5, 10 or 20 years, as
elected, annuity payments will be continued during the
remainder of such period to the Beneficiary designated by the
Contract Owner. If no Beneficiary is designated, Great
American Reserve will, in accordance with the Contract
provisions, pay in a lump sum to the Annuitant's estate the
present value, as of the date of death, of the number of
g u aranteed annuity payments remaining after that date,
computed on the basis of the assumed net investment rate used
in determining the first monthly payment. See "Determination
of Amount of the First Monthly Variable Annuity Payment"
below.
Because it provides a specified minimum number of annuity
payments, this option results in somewhat lower payments per
month than the First Option.
<PAGE> I-43<PAGE>
Third Option--Installment Refund Life Annuity. Payments
are made for the installment refund period, which is the time
required for the sum of the payments to equal the amount
applied, and thereafter for the life of the payee.
Fourth Option--Payments for a Fixed Period. Payments are
made for the number of years selected, which may be from three
through 20. Should the Annuitant die before the specified
number of monthly payments is made, the remaining payments
will be commuted and paid to the designated Beneficiary in a
lump sum payment.
Fifth Option--Joint and Survivor Annuity. Great American
Reserve will make monthly payments during the joint lifetime
of the Annuitant and a joint Annuitant. Payments will
continue during the lifetime of the surviving Annuitant and
will be computed on the basis of 100%, 50%, or 66 % of the
Annuity payment (or limits) in effect during the joint
lifetime.
Minimum Annuity Payments
Annuity payments will be made monthly. However, if any
payment would be less than $50, Great American Reserve may
change the frequency so payments are at least $50 each. If
the net Contract Value to be applied at the Annuity Date is
less than $10,000 ($3,500 for Qualified Contracts), Great
American Reserve reserves the right to pay such amount in a
lump sum. For information regarding the tax consequences of a
lump sum payment, see Tax Treatment of Withdrawals; Non-
Qualified Contracts at page I-27 and Tax Treatment of
Withdrawals; Qualified Contracts at page I-28.
Proof of Age, Sex, and Survival
Great American Reserve may require proof of age, sex, or
survival of any person upon whose continuation of life annuity
payments depend.
Notices and Elections
All notices and elections under the Contract must be in
writing, signed by the proper party, and be received at Great
American Reserve's Administrative Office to be effective,
except that account transfers may be made by telephone
p u r s uant to procedures specified above (see "Account
Transfers" at page I-21). Great American Reserve is not
responsible for the validity of any notices or elections. If
acceptable to Great American Reserve, notices or elections
relating to beneficiaries and ownership will take effect as of
the date signed unless Great American Reserve has already
acted in reliance on the prior status.
<PAGE> I-44<PAGE>
Amendment of Contract
At any time, Great American Reserve may amend the
Contract as required to make it conform with any law,
regulation, or ruling issued by any government agency to which
the Contract is subject.
Ten-Day Right to Review
Within 10 days of your receipt of an issued Contract you
may cancel the Contract by returning it to Great American
Reserve for cancellation. Great American Reserve deems this
period as ending 14 days after the Contract Date. This period
may be longer in certain states, as required. If the Contract
is returned under the terms of the Ten Day Right to Review,
Great American Reserve will refund either the Contract Value
or all your purchase payments within seven days in compliance
with State requirements, if any. Any amounts refunded in
excess of your Contract Value will be at Great American
Reserve's expense, not the expense of the Subaccounts.
FEDERAL INCOME TAXES
THE FOLLOWING DESCRIPTION IS BASED UPON GREAT AMERICAN
RESERVE'S UNDERSTANDING OF CURRENT FEDERAL INCOME TAX LAW
APPLICABLE TO ANNUITIES IN GENERAL. GREAT AMERICAN RESERVE
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS
WILL BE MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX
ADVICE REGARDING THE TAXATION OF THE CONTRACTS. GREAT
AMERICAN RESERVE DOES NOT GUARANTEE THE TAX STATUS OF THE
CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE
CONTRACTS MAY NOT BE TREATED AS "ANNUITY CONTRACTS" UNDER
FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER UNDERSTOOD THAT
THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE APPLICABLE IN
CERTAIN SITUATIONS. MOREOVER, NO ATTEMPT HAS BEEN MADE TO
CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Tactical Allocation Fees
A tactical allocation fee is not commonly found in other
variable annuities, so the income tax treatment of the payment
of the tactical allocation fee to a Financial Advisor is not
based on long-standing practice, but rather on Great American
Reserve's understanding of the law. The Internal Revenue
Service has previously issued favorable letter rulings only
with respect to certain contracts that were being used in
conjunction with Section 403(b) annuities. Moreover, the
Internal Revenue Service is not required to treat the tactical
allocation fee in the same way it has treated other investment
advisory fees in similar letter rulings.
<PAGE> I-45<PAGE>
Pre-retirement distributions can disqualify a pension
plan, because such distributions are inconsistent with the
purpose of such a plan which is to provide a retirement
income, or a Section 403(b) tax-sheltered annuity, because
Section 403(b)(11) of the Code prohibits distributions from
such annuities under the circumstances described above. You
should consult with a competent tax counselor regarding the
use of the Contract in relation to such retirement plans.
Great American Reserve cannot take any responsibility for the
tax consequences resulting from additional or alternative
payment arrangements that may be made in relation to a
Contract used in or used in connection with such retirement
plans.
As of the date of this Prospectus, Great American Reserve
is requesting a letter ruling from the Internal Revenue
Service that payments to Financial Advisors need not be
treated as distributions to Contract Owners subject to tax.
There is no assurance that such a ruling will be issued. In
addition, even if such a ruling is issued, it is likely that
you will have a taxable distribution if your Financial Advisor
credits back to you or a related person any portion of the
tactical allocation fee. Unless and until a favorable letter
ruling is obtained, Great American Reserve will be required to
treat tactical allocation fees paid from the Contract as
taxable distributions to the Contract Owner subject to the 10%
penalty tax if applicable. Great American Reserve will take
all steps which it believes are required in relation to the
reporting and withholding requirements under the Code in
connection with such payments. Contract Owners should consult
a competent tax adviser as to the tax treatment of tactical
allocation fees.
<PAGE> I-46<PAGE>
General
Section 72 of the Code governs the taxation of annuities
in general. A Contract Owner is not taxed on increases in the
value of a Contract until distribution occurs, either in the
form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a
total withdrawal (total surrender), the recipient is taxed on
the portion of the payment that exceeds the Contract Owner's
"investment in the Contract." For Non-Qualified Contracts,
the investment in the Contract is generally the Purchase
Payments, while for Qualified Contracts the investment in the
Contract may be zero. The taxable portion of the lump sum
payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess
of an exclusion amount is includible in taxable income. The
exclusion amount for payments based on a fixed annuity option
is determined by multiplying the payment by the ratio that the
investment in the Contract (adjusted for any period certain or
refund feature) bears to the expected return under the
Contract. Payments received after the investment in the
Contract has been recovered (i.e., when the total of the
excludible amounts equals the investment in the Contract) are
fully taxable. The taxable portion is taxed at ordinary
i n c o m e tax rates. Contract Owners, Annuitants and
Beneficiaries under the Contracts should seek competent
f i n a n cial advice about the tax consequences of any
distributions.
Great American Reserve is taxed as a life insurance
company under the Code. For federal income tax purposes, the
Separate Account is not a separate entity from Great American
Reserve and its operations form a part of Great American
Reserve.
Diversification
S e c tion 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable
annuity contracts. The Code provides that a variable annuity
contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the
United States Treasury Department ("Treasury Department"),
adequately diversified. Disqualification of the Contract as
an annuity contract would result in the imposition of federal
income tax on the Contract Owner with respect to any earnings
allocable to the Contract prior to the receipt of payments
under the Contract. The Code contains a safe harbor provision
which provides that annuity contracts such as the Contracts
meet the diversification requirements if, as of the end of
<PAGE> I-47<PAGE>
each quarter, the underlying assets meet the diversification
standards for a regulated investment company and no more than
fifty-five percent (55%) of the total assets consist of cash,
cash items, U.S. Government securities, and securities of
other regulated investment companies. PADCO intends to manage
each of the Subaccounts in a manner that ensures that the
u n d erlying investments of each Subaccount will remain
"adequately diversified" in accordance with the
diversification requirements of Section 817(h) of the Code.
O n March 2, 1989, the Treasury Department issued
Regulations (Treas. Reg. Section 1.817-5), which established
diversification requirements for the investment portfolios
underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for
variable contracts set forth in the Code and provide an
alternative to the safe harbor provision described above.
Under the Regulations, an investment portfolio will be
adequately diversified if: (1) no more than 55% of the value
of the total assets of the subaccount is represented by any
one investment; (2) no more than 70% of the value of the total
a s s e ts of the subaccount is represented by any two
investments; (3) no more than 80% of the value of the total
a s sets of the subaccount is represented by any three
investments; and (4) no more than 90% of the value of the
total assets of the subaccount is represented by any four
investments.
The Code provides that, for purposes of determining
whether or not the diversification standards imposed on the
underlying assets of variable contracts by Section 817(h) of
the Code have been met, each United States government agency
or instrumentality shall be treated as a separate issuer.
The Treasury Department has indicated that guidelines may
be issued concerning the extent to which variable annuity
contract owners may direct their investments to particular
divisions of a separate account. It is possible that if and
when such guidelines are issued, the Contract may need to be
modified to comply with such guidelines. For these reasons,
Great American Reserves the right to modify the Contract as
necessary to prevent the Contract Owner from being considered
the owner of the assets of the Separate Account.
Multiple Contracts
The Code provides that multiple non-qualified annuity
contracts which are issued within a calendar year to the same
contract owner by one company or its affiliates are treated as
one annuity contract for purposes of determining the tax
consequences of any distribution. Such treatment may result
in adverse tax consequences including more rapid taxation of
<PAGE> I-48<PAGE>
the distributed amounts from such combination of contracts.
Contract Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any
calendar year.
Contracts Owned by Non-Natural Persons
Under Section 72(u) of the Code, the investment earnings
on premiums paid for the Contracts generally will be taxed
currently to the Contract Owner if the Contract Owner is a
non-natural person (e.g., a corporation, a trust, or certain
other entities). Such Contracts generally will not be treated
as annuities for federal income tax purposes. However, this
treatment is not applied to Contracts which are held by (a) a
trust or other entity as agent for a natural person; (b)
Qualified Plans; or (c) the estate of a decedent by reason of
the death of the decedent. Additionally, this treatment is
not applied to a Contract which is a qualified funding asset
for a structured settlement under Section 130(d) of the Code.
If the Contract Owner is a charitable remainder trust (a
CRT ), it is probable that the CRT will not be treated as
holding the Contract as an agent for a natural person. A CRT
i s generally exempt from federal income tax, but the
provisions of Section 72(u) of the Code may affect the
computation and taxation of the distributions to the income
beneficiary. Purchasers should consult their own tax counsel
or other adviser before purchasing a Contract to be owned by a
non-natural person.
Tax Treatment of Assignments
An assignment or pledge of all or any portion of a
Contract may be treated as a taxable event. Any gain in the
Contract subsequent to the assignment may also be treated as
taxable income in the year in which it is earned. Contract
Owners should therefore consult competent tax advisers should
they wish to assign or pledge their Contracts.
Income Tax Withholding
Section 3405(a) of the Code generally requires the payor
of certain "designated distributions" from (i) any pension,
profit-sharing, stock bonus, or other deferred compensation
plan, (ii) IRA, or (iii) annuity contract to withhold certain
taxes from its payments. Generally, amounts are withheld from
periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. If the payment of tactical
allocation fees are treated as distributions, but are not
t r e ated as eligible rollover distributions, then such
distributions would be considered non-periodic payments and
subject to withholding at a rate of 10%. Subject to certain
exceptions, some of which are discussed immediately below,
<PAGE> I-49<PAGE>
Contract Owners may elect not to have such withholding apply
to designated distributions.
Effective January 1, 1993, certain distributions from
retirement plans qualified under Section 401 and 403(b)
annuity contracts which are not directly rolled over to
another eligible retirement plan or individual retirement
account or individual retirement annuity, are subject to a
mandatory 20% withholding for Federal income tax. The 20%
withholding requirement generally does not apply to: a) a
series of substantially equal payments made at least annually
for the life or life expectancy of the participant or joint
and last survivor expectancy of the participant and a
designated beneficiary or for a specified period of 10 years
or more; or b) distributions which are required minimum
distributions; or c) the portion of the distributions not
i n cludible in gross income (i.e., return of after-tax
contributions).
If the payment of asset allocation advisory fees from
retirement plans qualified under Section 401 and Section
403(b) annuity contracts are treated as distributions, then
Great American Reserve believes that the payment of such fees
will be treated as "eligible rollover distributions," which
are subject to mandatory 20% withholding.
Furthermore, payments from Section 457 plans are wages
subject to mandatory regular income tax withholding, rather
than the pension withholding rules described above.
Participants should consult their own tax counsel or
other tax advisor regarding withholding requirements.
Tax Treatment of Withdrawals; Non-Qualified Contracts
Section 72 of the Code governs treatment of distributions
from annuity contracts. It generally provides that if the
Contract Value exceeds the aggregate purchase payments made,
any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted,
as coming from the principal. Withdrawn earnings are
includible in gross income. It further provides that a ten
percent (10%) penalty generally will apply to the income
portion of any distribution. However, the penalty is not
imposed on amounts received: (a) on or after the taxpayer
reaches age 59 1/2; (b) after the death of the Contract Owner;
(c) if the taxpayer is totally disabled (as defined in Section
72(m)(7) of the Code); (d) in a series of substantially equal
periodic payments made not less frequently than annually for
the life (or life expectancy) of the taxpayer or for the joint
lives (or joint life expectancies) of the taxpayer and his or
<PAGE> I-50<PAGE>
her Beneficiary; or (e) which are allocable to purchase
payments made prior to August 14, 1982.
Tax Treatment of Withdrawals; Qualified Plans
The Contracts offered by this Prospectus are designed to
be suitable for use under various types of qualified plans.
Generally, participants in a qualified plan are not taxed on
increases to the value of the contributions to the plan until
a distribution occurs, regardless of whether the plan assets
are held under an annuity contract. Taxation of the
participants in each qualified plan varies with the type of
plan and the terms and conditions of each specific plan.
Contract Owners, Annuitants and Beneficiaries are cautioned
that benefits under a qualified plan may be subject to the
terms and conditions of the plan regardless of the terms and
conditions of the Contract issued pursuant to the plan. Some
retirement plans are subject to distribution and other
requirements that are not incorporated into Great American
R e s erve's administrative procedures. Contract Owners,
participants and Beneficiaries are responsible for determining
that contributions, distributions and other transactions with
respect to the Contract comply with applicable law. Following
are general descriptions of the types of qualified plans,
although, at the present time, the Contract only is issued to
Tax-Sheltered Annuities and Individual Retirement Accounts.
The tax rules presented here are not exhaustive and are for
general informational purposes only. The tax rules regarding
qualified plans are very complex and will have differing
applications depending on individual facts and circumstances.
Each purchaser should obtain competent tax advice prior to
purchasing a Contract issued under a qualified plan.
Generally, Contracts issued pursuant to qualified plans
are not transferable except upon surrender or annuitization.
Various penalty and excise taxes may apply to contributions or
distributions made in violation of applicable limitations.
Furthermore, certain withdrawal penalties and restrictions may
apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals; Qualified Contracts" at page I-28.)
A. Tax-Sheltered Annuities. Section 403(b) of the Code
permits the purchase of "tax-sheltered annuities" by public
s c h ools and certain charitable, educational scientific
organizations described in Section 501(c)(3) of the Code.
These qualifying employers may make contributions to the
C o n tracts for the benefit of their employees. Such
contributions are not includible in the gross income of the
employees until the employees receive distributions from the
Contracts. The amount of contributions to the tax-sheltered
annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions
<PAGE> I-51<PAGE>
g o verning such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of
Withdrawals; Qualified Contracts" and "Tax Sheltered
Annuities; Withdrawal Limitations," below.) Any employee
should obtain competent tax advice as to the suitability of
such an investment.
B. Individual Retirement Annuities. Section 408(b) of
the Code permits eligible individuals to contribute to an
i n d ividual retirement program known as an "Individual
Retirement Annuity" ("IRA"). Under applicable limitations,
certain amounts may be contributed to an IRA which will be
deductible from the individual's gross income. These IRAs are
s u b j ect to limitations on eligibility, contributions,
transferability and distributions. (See "Tax Treatment of
Withdrawals; Qualified Contracts," below.) Under certain
conditions, distributions from other IRAs and other qualified
plans may be rolled over or transferred on a tax-deferred
basis into an IRA. Sales of Contracts for use with IRAs are
subject to special requirements imposed by the Code, including
the requirement that certain informational disclosure be given
to persons desiring to establish an IRA. Purchasers of
Contracts to be qualified as Individual Retirement Annuities
should obtain competent tax advice as to the tax treatment
suitability of such an investment.
C. Qualified Pension and Profit-Sharing Plans for
Corporations and Self-Employed Individuals. Sections 401(a)
and 403(a) of the Code permit employers to establish various
types of retirement plans for employees, and permit self-
e m ployed individuals to establish retirement plans for
themselves and their employees which qualify for special
federal income tax treatment. These retirement plans may
permit the purchase of the Qualified Contracts to provide
benefits under the plans. The Code sets forth restrictions on
contributions and distributions which depend on the design of
the specific plan. Any purchaser should obtain competent tax
advice as to the suitability of such an investment.
D. Section 457 Plans. Section 457 of the Code provides
for certain deferred compensation plans which qualify for
special federal income tax treatment and which may be offered
w i t h respect to service for state governments, local
g o v e r n m ents, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and
tax exempt organizations. The plans may permit participants
t o specify the form of investment for their deferred
compensation account. All investments are owned by the
sponsoring employer and are subject to the claims of the
general creditors of the employer. The Code sets forth
restrictions on contributions and distributions which depend
on the design of the specific plan. Any purchaser should
<PAGE> I-52<PAGE>
obtain competent tax advice as to the suitability of such an
investment.
Tax Treatment of Withdrawals; Qualified Contracts
In the case of a withdrawal under a Qualified Contract
other than a Section 457 Plan, a ratable portion of the amount
received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued
benefit under the retirement plan. Special tax rules may be
available for certain distributions from a Qualified Contract.
Section 72(t) of the Code imposes a 10% penalty tax on the
taxable portion of any distribution from qualified plans,
including Contracts issued and qualified under Code Sections
4 0 3(b) (Tax-Sheltered Annuities) and 408(b) (Individual
Retirement Annuities). To the extent amounts are not
includible in gross income because they have been rolled over
to an IRA or to another eligible qualified plan, no tax
penalty will be imposed. The tax penalty will not apply to
the following distributions: (a) if any distribution is made
on or after the date on which the Contract Owner or Annuitant
( a s applicable) reaches age 59 1/2; (b) distributions
following the death or disability of the Contract Owner or
Annuitant (as applicable) (for this purpose disability is as
defined in Section 72(m)(7) of the Code); (c) after separation
from service, distributions that are part of substantially
equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the Contract Owner or
Annuitant (as applicable) or the joint lives (or joint life
e x pectancies) of such Contract Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d)
d i s t ributions to an Contract Owner or Annuitant (as
applicable) who has separated from service after he or she has
attained age 55; (e) distributions made to the Contract Owner
or Annuitant (as applicable) to the extent such distributions
do not exceed the amount allowable as a deduction under Code
Section 213 to the Contract Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; and
(f) distributions made to an alternate payee pursuant to a
qualified domestic relations order. The exceptions stated in
(d), (e) and (f) above do not apply in the case of an
Individual Retirement Annuity. The exception stated in (c)
above applies to an Individual Retirement Annuity without the
requirement that there be a separation from service.
Generally, distributions from a qualified plan must
commence no later than April 1 of the calendar year, following
the year in which the employee attains age 70 1/2. Required
distributions must be made over a period not exceeding the
life expectancy of the individual or the joint lives or life
expectancies of the individual and his or her designated
beneficiary. If the required minimum distributions are not
<PAGE> I-53<PAGE>
made, a 50% penalty tax is imposed as to the amount not
distributed. In addition, distributions in excess of $150,000
per year may be subject to an additional 15% excise tax unless
an exemption applies.
Tax-Sheltered Annuities; Withdrawal Limitations
Section 403(b)(11) of the Code limits the withdrawal of
amounts attributable to contributions made pursuant to a
salary reduction agreement to circumstances only on or after
the Contract Owner: (1) attains age 59 1/2; (2) separates
from service; (3) dies; (4) becomes disabled (within the
meaning of Section 72(m)(7) of the Code); or (5) in the case
of hardship. However, withdrawals for hardship are restricted
to the portion of the Contract Owner's Contract Value which
represents contributions made by the Contract Owner and does
not include any investment results. The limitations on
withdrawals became effective on January 1, 1989 and apply only
to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to
income attributable to amounts held as of December 31, 1988.
The limitations on withdrawals do not affect transfers between
certain qualified plans. Contract Owners should consult their
o w n tax counsel or other tax adviser regarding any
distributions.
SEPARATE ACCOUNT VOTING RIGHTS
Prior to the Annuity Date, Contract Owners participating
in the Separate Account will have certain voting rights with
respect to (i) the election of the Managers, (ii) the removal
of such members and of officers of the Separate Account
elected or appointed by the Managers, (iii) the ratification
of the selection by the Managers of independent public
accountants for the Separate Account and the termination of
the employment of such accountants, (iv) the adoption,
amendment, termination, or continuation of any agreement
providing for investment advisory services to the Separate
Account, (v) the change in the fundamental investment policies
of a Subaccount, (vi) the alteration, amendment, or repeal of
the rules and regulations adopted for the Separate Account,
and (vii) the approval of any acts, transactions, or other
agreements that may be submitted to a Contract Owner vote by
the Managers. Such voting rights are provided for in the rules
and regulations adopted by the Managers and are subject to
alteration or elimination by the Managers or by vote of the
Contract Owners, if permitted by applicable law.
The person having the voting interest under a Contract is
the Contract Owner. The number of votes entitled to be cast
by a Contract Owner having an interest in the Separate Account
<PAGE> I-54<PAGE>
is equal to the number of Accumulation Units credited to his
or her Contract. The number of Accumulation Units for which
voting instructions may be given will be determined as of a
date chosen by Great American Reserve, not more than 90 days
prior to the meeting of the Contract Owners of the Separate
Account, as applicable.
Each person having a voting interest in a Subaccount will
receive periodic reports relating to the Subaccounts in which
he or she has an interest, including proxy materials and a
form with which to give voting instructions.
REPORTS TO CONTRACT OWNERS
Great American Reserve will mail you at least annually
prior to the Annuity Date a report containing any information
that may be required by any applicable law or regulation and a
statement showing your current number of Accumulation Units,
the value per Accumulation Unit, and your total Contract
Value. You will also receive annual and semi-annual reports
of the Separate Account.
<PAGE> I-55<PAGE>
PERFORMANCE INFORMATION
Performance information for the Subaccounts may appear
from time to time in advertisements or sales literature.
Performance information reflects only the performance of a
h y p othetical investment in the Subaccounts during the
particular time period on which the calculations are based.
Performance information will include yield, effective yield,
and average annual total return quotations reflecting the
deduction of all applicable charges for recent one-year and,
when applicable, five- and 10-year periods and, where less
than 10 years, for the period subsequent to the date each
Subaccount first became available for investment. Additional
total return quotations may be made that do not reflect a
surrender charge deduction (assuming no surrender at the end
of the illustrated period). Performance information may be
shown by means of schedules, charts, or graphs. Past
performance information is based on historical earnings and is
not intended to indicate future performance. See "Performance
I n f o rmation," "Calculation of Return Quotations," and
"Information on Computation of Yield" in the Statement of
Additional Information for a description of the methods used
to determine total return and yield information for the
Subaccounts.
DISTRIBUTION OF CONTRACTS
PFS, 6116 Executive Boulevard, Rockville, Maryland 20852,
is the principal underwriter of the Contracts. PFS is a
broker-dealer registered under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and a member of the
National Association of Securities Dealers, Inc. Sales of the
Contracts will be made by authorized broker-dealers and their
r e g i s tered representatives, including registered
representatives of PFS. These registered representatives are
also Great American Reserve's licensed insurance agents. See
"Underwriter of the Contracts" in the Statement of Additional
Information for more information.
<PAGE> I-56<PAGE>
STATE REGULATION
Great American Reserve is subject to the laws of the
State of Texas governing insurance companies and to the
regulations of the Texas Insurance Department (the "Insurance
Department"). An annual statement in the prescribed form is
filed with the Insurance Department each year covering Great
American Reserve's operation for the preceding year and its
financial condition as of the end of such year. Regulation by
the Insurance Department includes periodic examination to
determine Great American Reserve's contract liabilities and
reserves so that the Insurance Department may certify that
these items are correct. Great American Reserve's books and
accounts are subject to review by the Insurance Department at
all times. A full examination of Great American Reserve's
o p e r ations is conducted periodically by the National
Association of Insurance Commissioners. Such regulation does
not, however, involve any supervision of management or Great
American Reserve's investment practices or policies. In
addition, Great American Reserve is subject to regulation
under the insurance laws of other jurisdictions in which it
operates.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate
Account is a party or to which the assets of the Separate
Account is subject. Neither Great American Reserve, PADCO nor
PFS is involved in any litigation that is of material
importance in relation to their total assets or that relates
to the Separate Account.
EXPERTS
The financial statements of Great American Reserve
Insurance Company included in the Statement of Additional
Information have been audited by Coopers & Lybrand LLP,
I n d ianapolis, Indiana, independent certified public
accountants, whose reports thereon appear elsewhere therein,
and have been included in reliance on the reports of Coopers &
Lybrand LLP, given upon their authority as experts in
accounting and auditing. No financial statements for the
Separate Account are included in the Statement of Additional
Information because the Separate Account had not commenced
operations at the date of this Prospectus.
<PAGE> I-57<PAGE>
REGISTRATION STATEMENT
A registration statement has been filed with the SEC
under the Securities Act of 1933, as amended, with respect to
the variable portion of the Contracts. This Prospectus does
not contain all information set forth in the registration
statement, its amendments, and exhibits, to all of which
reference is made for further information concerning the
Separate Account, Great American Reserve, and the Contract.
Statements contained in this Prospectus as to the content of
the Contract and other legal instruments are summaries. For a
complete statement of the terms thereof, reference is made to
such instruments as filed.
LEGAL MATTERS
Legal matters involving the applicability of the Federal
securities laws have been reviewed by Jorden Burt Berenson &
Johnson LLP, Suite 400 East, 1025 Thomas Jefferson Street,
N.W., Washington, D. C. 20007, and, the validity of the
Contracts under state law has been passed upon by Karl W.
Kindig, Esquire, Great American Reserve Insurance Company,
11815 North Pennsylvania Street, Carmel, Indiana 46032.
<PAGE> I-58<PAGE>
PART II
THE SEPARATE ACCOUNT
The Separate Account is an open-end management investment
company with eight diversified separate Subaccounts. The
Subaccounts are designed for Contract Owners who intend to
invest in the Subaccounts as part of a tactical asset
allocation or market-timing investment strategy. Except for
the Money Market Subaccounts, each Subaccount is intended to
provide investment exposure with respect to a particular
segment of the securities markets. Each of these Subaccounts
seeks investment results that correspond over time to a
s p e c i f ied benchmark. The Subaccounts may be used
independently or in combination with each other as part of an
overall investment strategy. Additional Subaccounts may be
created from time to time.
The following are the Subaccounts and their investment
objectives:
Subaccount Investment Objective
The Nova Subaccount To provide investment returns that
correspond to a specified percentage
of the performance of a benchmark for
common stock securities.
The Ursa Subaccount To provide investment results that
will inversely correlate to the
performance of a benchmark for common
stock securities.
The OTC Subaccount To attempt to provide investment
results that correspond to the
performance of a benchmark for over-
the-counter securities.
The Precious Metals To attempt to provide investment
Subaccount results that correspond to the
performance of a benchmark primarily
for metals-related securities.
The U.S. Government To provide investment results that
Bond correspond to the performance of a
Subaccount benchmark for U.S. Government
securities.
The Juno Subaccount To provide total return before
expenses and costs that inversely
correlates to the price movements of
a benchmark for U.S. Treasury debt
instruments or futures contracts on a
specified debt instrument.<PAGE>
The Money Market To provide current income consistent
Subaccounts with stability of capital and
liquidity.
The Subaccounts (other than the Money Market Subaccounts)
may engage in certain aggressive investment techniques, which
include short sales and transactions in options and futures
contracts. Contract Owners invested in the Nova Subaccount
may experience substantial losses during sustained periods of
falling equity prices, while Contract Owners invested in the
Ursa Subaccount and the Juno Subaccount may experience
substantial losses during sustained periods of rising equity
prices and declining interest rates respectively. Because of
the inherent risks in any investment, there can be no
assurance that any Subaccount s investment objective will be
achieved. See "Investment Objectives and Policies" at page
II-2.
None of the Subaccounts alone constitutes a balanced
investment plan, and certain of the Subaccounts involve
special risks not traditionally associated with variable
annuity contracts. The nature of the Subaccounts generally
will result in significant portfolio turnover which would
likely cause higher expenses and additional costs. The
Separate Account is not intended for Contract Owners whose
principal objective is current income or preservation of
capital and may not be a suitable investment for persons who
intend to follow an "invest and hold" strategy. See "Special
Risk Considerations" at page II-7.
P A D CO, headquartered at 6116 Executive Boulevard,
Rockville, Maryland 20852, provides the Subaccounts with
i n vestment advisory services pursuant to an investment
advisory agreement, dated November 1, 1996. PADCO was
incorporated in the State of Maryland on July 5, 1994, and has
not previously served as an investment adviser to a registered
investment company. An investment adviser affiliated with
PADCO currently provides investment advisory services to an
open-end management investment company (the "Rydex Series
Trust") that consists of nine publicly-available no-load
mutual funds having, as of December 1, 1996, aggregate net
assets in excess of $1 billion.
This Part II of the Prospectus sets forth information
relating to the Separate Account, particularly information on
the investment objectives, policies, and restrictions of the
Subaccounts and on PADCO. Additional information concerning
the Separate Account and the Subaccounts is also contained in
the Statement of Additional Information.
<PAGE> II-2<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
OF THE SUBACCOUNTS
General
The Subaccounts are designed for Contract Owners who
intend to follow a tactical allocation or market-timing
investment strategy. Except for the Money Market Subaccounts,
each Subaccount is intended to provide investment exposure
with respect to a particular segment of the securities
markets. These Subaccounts seek investment results that
correspond over time to a specified "benchmark." The
Subaccounts may be used independently or in combination with
each other as part of an overall investment strategy.
Additional Subaccounts may be created from time to time.
Fundamental securities analysis is not generally used by
PADCO in seeking to correlate with the respective benchmarks.
Rather, PADCO primarily uses statistical and quantitative
analysis to determine the investments the Subaccount makes and
techniques it employs. While PADCO attempts to minimize any
"tracking error" (that statistical measure of the difference
between the investment results of a Subaccount and the
performance of its benchmark), certain factors will tend to
cause the Subaccount's investment results to vary from a
perfect correlation to its benchmark. PADCO does not expect
that the Subaccounts' total returns will vary adversely from
their respective current benchmarks by more than ten percent
over a year. See "Special Risk Considerations." It is the
policy of these Subaccounts to pursue their investment
objectives regardless of market conditions, to remain nearly
fully invested, and not to take defensive positions.
T h e investment objectives and certain investment
restrictions of the Subaccounts are fundamental policies and
may not be changed without the affirmative vote of the
majority of the Contract Owners of that Subaccount. All other
investment policies of the Subaccounts not specified as
fundamental (including the benchmarks of the Subaccounts) may
be changed by the Managers of the Separate Account without the
approval of Contract Owners.
None of the Subaccounts will invest 25% or more of the
value of the Subaccount s total assets in the securities of
one or more issuers conducting their principal business
activities in the same industry; except, that to the extent
that the benchmark index selected for a particular Subaccount
is concentrated in a particular industry, that Subaccount will
be concentrated in that industry, but will not otherwise be
concentrated.
<PAGE> II-3<PAGE>
The Managers may consider changing a Subaccount s
benchmark (to the extent permitted) if, for example, the
current benchmark becomes unavailable; the Managers believe
the current benchmark no longer serves the investment needs of
a majority of Contract Owners or another benchmark better
serves their needs; or the financial or economic environment
makes it difficult for the Subaccount s investment results to
correspond sufficiently to the Subaccount's current benchmark.
If believed appropriate, the Managers may specify a benchmark
for a Subaccount that is "leveraged" or proprietary. Of
course, there can be no assurance that a Subaccount will
achieve its objective.
The Nova Subaccount
The investment objective of the Nova Subaccount is to
provide investment returns that correspond to the performance
of a benchmark for common stock securities selected from time
to time by the Managers. The Nova Subaccount's current
benchmark is the S&P500 Index, and the Nova Subaccount
c u r r ently expects to provide investment returns that
correspond to 125% of the performance of the S&P500 Index. In
attempting to achieve its objective, the Nova Subaccount
expects that a substantial portion of its assets usually will
be devoted to employing certain investment techniques. These
techniques include engaging in certain transactions in stock
index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. Under
the techniques in which the Nova Subaccount engages, the Nova
Subaccount will generally incur a loss if the price of the
underlying security or index decreases between the date of the
employment of the technique and the date on which the Nova
Subaccount terminates the position. The amount of any gain or
loss on an investment technique may be affected by any
purchase payment or amounts in lieu of dividends or interest
income the Nova Subaccount pays or receives as the result of
the transaction. The Nova Subaccount may also invest in shares
of individual securities which are expected to track the Nova
Fund s benchmark.
In contrast to returns on a mutual fund that seeks to
a p proximate the return of the S&P500 Index, the Nova
Subaccount should increase gains to Contract Owners invested
in the Nova Fund during periods when the prices of the
securities in the S&P500 Index are rising and increase losses
to Contract Owners invested in the Nova Fund during periods
when they are declining. Contract Owners invested in the Nova
S u b a ccount could experience substantial losses during
sustained periods of falling equity prices.
The Ursa Subaccount
<PAGE> II-4<PAGE>
The Ursa Subaccount's investment objective is to provide
investment results that will inversely correlate to the
performance of a benchmark for common stock securities
selected from time to time by the Managers. The S&P500 Index
is the Ursa Subaccount's current benchmark. The Ursa
Subaccount seeks to achieve this inverse correlation result on
each trading day. While a close correlation can be achieved
on any single trading day, the combined effects of the
reinvestment of the receipt of investment income and of the
compounding of successive changes in Accumulation Unit Value
c a n cause the percentage increase or decrease in the
Accumulation Unit Value of the Ursa Subaccount to diverge
significantly from the concurrent inverse percentage decrease
or increase in the S&P500 Index.
If the Ursa Subaccount achieved a perfect inverse
correlation for any single trading day, the Accumulation Unit
Value of the Ursa Subaccount would increase for that day in
direct proportion to any decrease in the level of the S&P500
Index. Conversely, the Accumulation Unit Value of the Ursa
Subaccount would decrease for that day in direct proportion to
any increase in the level of the S&P500 Index for that day.
For example, if the S&P500 Index were to increase by 1% by the
close of business on a particular trading day, Contract Owners
invested in the Ursa Subaccount would experience a loss in
Accumulation Unit Value of approximately 1% for that day.
Conversely, if the S&P500 Index were to decrease by 1% by the
close of business on a particular trading day, Contract Owners
invested in the Ursa Subaccount would experience a gain in
Accumulation Unit Value of approximately 1% for that day.
Even if there is a perfect inverse correlation between
the Ursa Subaccount and the S&P500 Index, however, the
symmetry between the changes in the S&P500 Index and the
changes in the Accumulation Unit Value in the Ursa Subaccount
can be significantly altered over time by a compounding
effect. Thus, if the Ursa Subaccount achieved a perfect
inverse correlation with the S&P500 Index on every trading day
over an extended period, and if there were a significant
decrease in the level of the S&P500 Index during that period,
there would be a compounding effect with the result that the
Accumulation Unit Value of the Ursa Subaccount for that period
should generally increase by a percentage that is slightly
greater than the percentage of decrease in the level of the
S&P500 Index. Conversely, if a perfect inverse correlation
were maintained over an extended period and if there were a
significant increase in the level of the S&P500 Index over
that period, then there would be a compounding effect with the
result that the percentage decrease in the Accumulation Unit
Value of the Ursa Subaccount for that period should generally
decrease by a percentage that is slightly less than the
<PAGE> II-5<PAGE>
percentage increase in the level of the S&P500 Index for that
period.
The compounding effect discussed above will be reinforced
to the extent that the reinvested net investment income of the
Ursa Subaccount exceeds the reinvested dividend income taken
i n to account in the computation of the S&P500 Index.
Conversely, if the reinvested income taken into account in the
computation of the S&P500 Index exceeds the Ursa Subaccount's
investment income, that excess will partially offset the
effect of the compounding factor.
T h e U rsa Subaccount involves special risks not
traditionally associated with annuity contracts, and intends
to pursue its investment objective regardless of market
conditions and does not intend to take defensive positions in
anticipation of rising equity prices. Consequently, Contract
O w ners invested in the Ursa Subaccount may experience
substantial losses during sustained periods of rising equity
prices.
In pursuing its investment objective, the Ursa Subaccount
generally does not invest in traditional securities, such as
common stock of operating companies. Rather, the Ursa
Subaccount employs certain investment techniques, including
engaging in short sales and in certain transactions in stock
index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. Under
these techniques, the Ursa Subaccount will generally incur a
loss if the price of the underlying security or index
increases between the date of the employment of the technique
and the date on which the Ursa Subaccount terminates the
position. The Ursa Subaccount will generally realize a gain
if the underlying security or index declines in price between
those dates. The amount of any gain or loss on an investment
technique may be affected by any purchase payment or amounts
in lieu of dividends or interest the Ursa Subaccount pays or
receives as the result of the transaction.
The OTC Subaccount
The investment objective of the OTC Subaccount is to
attempt to provide investment results that correspond to the
performance of a benchmark for over-the-counter securities.
The OTC Subaccount's current benchmark is the NASDAQ 100
Index. The OTC Subaccount does not aim to hold all of the 100
securities included in the NASDAQ 100 Index. Instead, the OTC
Subaccount intends to hold representative securities included
in the NASDAQ 100 Index or other instruments which PADCO
believes will provide returns that correspond to those of the
N A SDAQ 100 Index. The OTC Subaccount may engage in
transactions on stock index futures contracts, options on
<PAGE> II-6<PAGE>
stock index futures contracts, and options on securities and
stock indexes.
Companies whose securities are traded on the over-the-
c o u nter ("OTC") markets generally are smaller market-
capitalization or newer companies than those listed on the New
York Stock Exchange (the "NYSE") or the American Stock
Exchange (the "AMEX"). OTC companies often have limited
product lines, or relatively new products or services, and may
lack established markets, depth of experienced management, or
financial resources and the ability to generate funds. The
securities of these companies may have limited marketability
and may be more volatile in price than securities of larger-
capitalized or more well-known companies. Among the reasons
for the greater price volatility of securities of certain
smaller OTC companies are the less certain growth prospects of
comparably smaller firms, the lower degree of liquidity in the
OTC markets for such securities, and the greater sensitivity
o f s maller-capitalized companies to changing economic
c o nditions than larger-capitalized, exchange-traded
securities. Conversely, because many of these OTC securities
may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital
appreciation.
The Precious Metals Subaccount
T h e investment objective of the Precious Metals
Subaccount is to attempt to provide investment results that
correspond to the performance of a benchmark primarily for
metals-related securities selected from time to time by the
Managers. The Precious Metals Subaccount s current benchmark
is the Philadelphia Stock Exchange Gold/Silver Index (the
"XAU Index"). To achieve its objective, the Precious Metals
Subaccount invests in securities included in the XAU Index.
In addition, the Precious Metals Subaccount may invest in
other securities that are expected to perform in a manner that
will assist the Precious Metals Subaccount s performance to
track closely the XAU Index.
Metals-related investments are considered speculative and
are influenced by a host of world-wide economic, financial,
and political factors. Historically, the prices of gold and
precious metals have been subject to wide price movements
caused by political as well as economic factors, and,
accordingly, prices of equity securities of companies involved
in the precious metals-related industry have been volatile.
Such fluctuation and volatility may be due to changes in
inflation or in expectations regarding inflation in various
countries, the availability of supplies of such precious
metals and minerals, changes in industrial and commercial
demand, metal and mineral sales by governments, central banks,
<PAGE> II-7<PAGE>
or international agencies, investment speculation, monetary
and other economic policies of various governments, and
governmental restrictions on the private ownership of certain
precious metals and minerals. Such price volatility in
precious metals prices will have a similar effect on the
Precious Metals Subaccount's Accumulation Unit prices. The
Precious Metals Subaccount may invest in other securities that
are expected to perform in a manner that will assist the
Precious Metals Subaccount s performance to closely track the
XAU Index.
The Precious Metals Subaccount may invest up to 5% of its
assets in securities of foreign issuers other than American
Depository Receipts traded in U.S. dollars on United States
exchanges. These securities present certain risks not present
in domestic investments and expose the investor to general
market conditions which differ significantly from those in the
United States. Securities of foreign issuers may be affected
by the strength of foreign currencies relative to the U.S.
dollar or by political or economic developments in foreign
countries. Foreign companies may not be subject to accounting
standards or governmental regulations comparable to those that
affect United States companies, and there may be less public
i n formation about the operations of foreign companies.
Foreign securities also may be subject to foreign government
taxes that could reduce the yield on such securities.
The U.S. Government Bond Subaccount
The investment objective of the Bond Subaccount is to
provide investment results that correspond to the performance
of a benchmark for U.S. Government Securities selected from
time to time by the Managers. The Bond Subaccount s current
benchmark is 120% of the price movement of the Current Long
Treasury Bond (the "Long Bond"), without consideration of
interest paid. In attempting to achieve this objective, the
Bond Subaccount invests primarily in obligations of the U.S.
Treasury or obligations either issued or guaranteed, as to
principal and interest, by agencies or instrumentalities of
the U.S. Government ("U.S. Government Securities"). U.S.
Government Securities are obligations of the U.S. Treasury or
obligations either issued or guaranteed, as to principal and
interest, by agencies or instrumentalities of the U.S.
Government.
The Bond Subaccount also may engage in transactions in
futures contracts and options on futures contracts on U.S.
Treasury bonds. The Bond Subaccount also may invest in U.S.
Treasury zero coupon bonds. While U.S. Government Securities
provide substantial protection against credit risk, investment
in those securities do not protect against price changes due
to changing interest rate levels and, as such, the unit price
<PAGE> II-8<PAGE>
of the Bond Subaccount is not guaranteed and will fluctuate
over time. Accordingly, the return of the Bond Subaccount
should move inversely with movements in prevailing interest
rates on the Long Bond. The Subaccount intends to adjust its
portfolio each time the Long Bond is issued (currently twice
yearly) in an attempt to track the price movement of the
newly-issued Long Bond. See "The Benchmarks."
The Juno Subaccount
The Juno Subaccount s investment objective is to provide
t o tal return before expenses and costs that inversely
correlates to the price movements of a benchmark debt
instrument or futures contract on a specified debt instrument
selected from time to time by the Managers. The Long Bond has
been designated as the Juno Subaccount s current benchmark.
In attempting to achieve its objective, the Subaccount intends
to devote its assets primarily to employing certain investment
techniques, including engaging in short sales on U.S. Treasury
bonds and engaging in transactions in futures contracts on
U.S. Treasury bonds and options on such contracts to produce
synthetic short positions. These techniques are highly
specialized and involve certain risks not traditionally
associated with variable annuity contracts. Under these
techniques, the Subaccount will generally incur a loss if the
price of the underlying security or futures contract increases
between the date of the employment of the technique and the
date on which the Subaccount terminates the position. The
Subaccount will generally realize a gain if the underlying
security or futures contract declines in price between those
dates.
If the Juno Subaccount is successful in meeting its
objective, the Juno Subaccount s total return before expenses
and costs will increase proportionally to any decreases in the
price of the Long Bond. Conversely, the Juno Subaccount s
t o t al return before expenses and costs will decrease
proportionally to any increases in the price of the Long Bond.
For this purpose, costs include the Subaccount s "carrying
cost" in maintaining short positions. When entering an actual
or synthetic short position on the Long bond, the Subaccount
must effectively pay interest equal to interest accrued on the
underlying U.S. Treasury bond. The difference, if any,
between the interest effectively paid by the Subaccount on its
short positions and any interest earned by the Subaccount on
its assets is the Subaccount s carrying cost.
The interest rate on a U.S. Treasury bond is set at the
time the particular bond is issued and does not change for the
maturity of the bond so that the interest paid on the bond is
constant throughout the life of the bond. The price at which
a previously-issued U.S. Treasury bond can be bought and sold
<PAGE> II-9<PAGE>
in the open market, however, does change. The market value of
U.S. Treasury bonds rises when interest rates in general
decrease and falls when interest rates in general increase.
Accordingly, if the Juno Subaccount is successful in meeting
its investment objective, the Subaccount s total return should
rise with increases in interest rates and fall with decreases
in interest rates. Contract Owners invested in the Juno
Subaccount may experience substantial losses during periods of
falling interest rates.
The Money Market Subaccounts
The investment objective of each of the Money Market
Subaccounts is to seek to provide current income consistent
with stability of capital and liquidity. Each Money Market
Subaccount seeks to achieve its objectives by investing in
U.S. Government Securities, including money market instruments
which are issued or guaranteed, as to principal and interest,
by the U.S. Government, its agencies or instrumentalities, as
well as in repurchase agreements collateralized fully by U.S.
Government Securities. An investment in a Money Market
Subaccount is neither insured nor guaranteed by the U.S.
Government.
Each Money Market Subaccount may invest in securities
that take the form of participation interests in, and may be
evidenced by deposit or safekeeping receipts for, any of the
foregoing securities. Participation interests are pro rata
interests in U.S. Government Securities; and instruments
evidencing deposit or safekeeping are documentary receipts for
such original securities held in custody by others.
Each Money Market Subaccount also may purchase bank money
market instruments, including certificates of deposit, time
deposits, bankers' acceptances, and other short-term
obligations issued by United States banks which are members of
the Federal Reserve System. Certificates of deposit are
negotiable certificates evidencing the obligation of a bank to
repay funds deposited with the bank for a specified period of
time. Time deposits are non-negotiable deposits maintained in
a banking institution for a specified period of time (in no
event longer than seven days) at a stated interest rate. Time
deposits which may be held by a Money Market Subaccount will
not benefit from insurance from the Bank Insurance Fund or the
Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation. Investments in time deposits
and certificates of deposits are limited to domestic banks
that have total assets in excess of one billion dollars.
Bankers' acceptances are credit instruments evidencing the
obligation of a bank to a draft drawn on the bank by a
customer of the bank. These credit instruments reflect the
obligation both of the bank and of the drawer to pay the face
<PAGE> II-10<PAGE>
amount of the instrument upon maturity. Other short-term bank
obligations in which a Money Market Subaccount may invest
include uninsured, direct obligations of a bank that bear
fixed, floating, or variable interest rates.
E a c h Money Market Subaccount also may invest in
c o m m e rcial paper, including corporate notes. These
instruments are short-term obligations issued by banks and
corporations that have maturities ranging from two to 270
days. Each commercial paper instrument may be backed only by
the credit of the issuer or may be backed by some form of
credit enhancement, typically in the form of a guarantee by a
commercial bank. Investments in commercial paper and other
short-term promissory notes issued by corporations (including
variable and floating rate instruments) must be rated at the
time of purchase "A-2" or better by Standard & Poor's Ratings
Group, "Prime-2" or better by Moody's Investors Service, Inc.
("Moody's"), "F-2" or better by Fitch Investors Service, Inc.
("Fitch"), "Duff 2" or better by Duff & Phelps Credit Rating
Co. ("Duff"), or "A2" or better by IBCA, Inc., or, if not
rated by Standard & Poor's Ratings Group, Moody's, Fitch,
Duff, or IBCA, Inc., must be determined by PADCO Advisors II,
Inc. ("PADCO"), the Separate Account's investment adviser, to
be of comparable quality pursuant to guidelines approved by
the managers of the Separate Account (the "Managers"). Please
refer to Appendix A to the Statement of Additional Information
for more detailed information concerning commercial paper
ratings.
Each Money Market Subaccount also may make limited
investments in guaranteed investment contracts ("GICs") issued
by United States insurance companies. A Money Market
Subaccount will purchase a GIC only when PADCO has determined,
under guidelines established by the Managers of the Separate
Account, that the GIC presents minimal credit risks to the
Money Market Subaccount and is of comparable quality to
i n s truments that are rated "high quality" by certain
nationally-recognized statistical rating organizations.
Money market instruments are generally described as
short-term debt obligations having maturities of 13 months or
less. Yields on such instruments are very sensitive to short-
term lending conditions. The principal value of such
instruments tends to decline as interest rates rise and
conversely tends to rise as interest rates decline. In
addition, there is an element of risk in money market
instruments that the issuer may become insolvent and may not
make timely payment of interest and principal obligations.
The Benchmarks
<PAGE> II-11<PAGE>
The S&P500 Index. Standard & Poor's Corporation chooses
the 500 stocks comprising the S&P500 Index on the basis of
market values and industry diversification. Most of the
stocks in the S&P500 Index are issued by the 500 largest
companies, in terms of the aggregate market value of their
outstanding stock, and such companies are generally listed on
the NYSE. Additional stocks that are not among the 500
largest market value stocks are included in the S&P500 Index
for diversification purposes. Standard & Poor's Corporation
will not be a sponsor of, or in any other way affiliated
with, the Subaccounts.
The NASDAQ 100 Index. The NASDAQ 100 Index is a
capitalization-weighted index composed of 100 of the largest
non-financial securities listed on the NASDAQ Stock Market.
The index was created in 1985.
The XAU Index. The XAU Index is a capitalization-
weighted index featuring eleven widely-held securities in the
gold and silver mining and production industry or companies
investing in such mining and production companies. The XAU
Index was set to an initial value of 100 in January 1979. The
following issuers are currently included in the XAU Index:
Barrick Gold Corp.; ASA Limited; Battle Mountain Gold Co.;
Echo Bay Mines Limited; Hecla Mining Co.; Homestake Mining
Co.; Newmont Mining Corp.; Placer Dome Inc.; Pegasus Gold
Inc.; TVX Gold, Inc.; and Santa Fe Pacific Gold Corp. While
the majority of these companies are based in North America,
these companies generally also have operations in countries
based outside North America.
The Long Bond. The Long Bond is the U.S. Treasury bond
with the longest maturity. Currently, the longest maturity of
a U.S. Treasury bond is 30 years. At this time, the 30-year
U.S. Treasury bond is issued twice yearly. In the future, the
U.S. Treasury may change the number of times each year that
the Long Bond is issued.
SPECIAL RISK CONSIDERATIONS
Contract Owners should consider the special factors
discussed below that are associated with the investment
policies of the Subaccounts in determining the appropriateness
of investing in the Subaccounts.
Portfolio Turnover
PADCO expects that the assets of the Subaccounts will be
derived from Contract Owners who intend to invest in the
Subaccounts as part of a tactical allocation or market-timing
investment strategy. These Contract Owners are likely to
<PAGE> II-12<PAGE>
exchange their Accumulation Units of a particular Subaccount
f o r Accumulation Units in other Subaccounts frequently
pursuant to the exchange policy of the Separate Account, in
order to attempt to take advantage of anticipated changes in
market conditions (see "Investments of the Subaccounts;
Addition and Deletion of Subaccounts" in Part I of this
Prospectus). The strategies employed by Contract Owners
invested in the Subaccounts may result in considerable assets
moving in and out of the Subaccounts. Consequently, PADCO
e x pects that the Subaccounts will generally experience
significant portfolio turnover, which will likely cause higher
expenses and additional costs and may also adversely affect
the ability of a Subaccount to meet its investment objective.
Because each Subaccount's portfolio turnover rate to a great
extent will depend on the purchase, redemption, and exchange
activity of the Subaccount's Contract Owners, it is very
difficult to estimate what the Subaccount's actual turnover
rate generally will be. Pursuant to the formula prescribed by
the SEC, the portfolio turnover rate for each Subaccount is
calculated without regard to securities, including options and
futures contracts, having a maturity of less than one year.
The Nova Subaccount, the Ursa Subaccount, and the Juno
Subaccount typically hold most of their investments in short-
term options and futures contracts, which, therefore, are
excluded for purposes of computing portfolio turnover.
A higher portfolio turnover rate would likely involve
c o rrespondingly greater brokerage commissions and other
expenses which would be borne by a Subaccount, and would
directly reduce the return to a Contract Owner from an
investment in the Subaccount. Furthermore, a Subaccount's
portfolio turnover level may adversely affect the ability of
the Subaccount to achieve its investment objective. For
further information concerning the portfolio turnover of the
Subaccounts, see "Investment Policies and Techniques" in the
Statement of Additional Information.
Tracking Error
While PADCO does not expect that the Subaccounts' returns
over a year will deviate adversely from their respective
benchmarks by more than ten percent, several factors may
affect their ability to achieve this correlation, especially
during the commencement of operations of a Subaccount when the
level of assets of the Subaccount may be relatively small.
Among these factors are: (1) Subaccount expenses, including
brokerage (which may be increased by high portfolio turnover);
(2) less than all of the securities in the benchmark being
held by a Subaccount and securities not included in the
benchmark being held by a Subaccount; (3) an imperfect
correlation between the performance of instruments held by a
Subaccount, such as futures contracts and options, and the
<PAGE> II-13<PAGE>
performance of the underlying securities in the cash market;
(4) bid-ask spreads (the effect of which may be increased by
portfolio turnover); (5) holding instruments traded in a
market that has become illiquid or disrupted; (6) Subaccount
Accumulation Unit prices being rounded to the nearest cent;
(7) changes to the benchmark index that are not disseminated
in advance; or (8) the need to conform a Subaccount s
portfolio holdings to comply with investment restrictions or
policies or regulatory or tax law requirements.
Aggressive Investment Techniques
Each of the Subaccounts (other than the Money Market
Subaccounts) may engage in certain aggressive investment
techniques which may include engaging in short sales and
transactions in futures contracts and options on securities,
securities indexes, and futures contracts. These techniques
are specialized and involve risks that are not traditionally
associated with variable annuity contracts. The Separate
Account expects that the Nova Subaccount, the Ursa Subaccount,
and the Juno Subaccount will primarily use these techniques in
seeking to achieve their objectives and that a significant
portion (up to 100%) of the assets of these Subaccounts will
be held in high-grade liquid debt in a segregated account by
these Subaccounts as "cover" for these investment techniques.
Participation in the options or futures markets by a
Subaccount involves investment risks and transaction costs to
which the Subaccount would not be subject absent the use of
these strategies. Risks inherent in the use of options,
futures contracts, and options on futures contracts include:
(1) adverse changes in the value of such instruments; (2)
imperfect correlation between the price of options and futures
contracts and options thereon and movements in the price of
the underlying securities, index, or futures contracts; (3)
the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities;
and (4) the possible absence of a liquid secondary market for
a n y particular instrument at any time. For further
i n f ormation regarding these investment techniques, see
"Investment Techniques and Other Investment Policies" in this
Part II of the Prospectus.
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES
Futures Contracts and Options Thereupon
The Nova Subaccount and the OTC Subaccount may purchase
stock index futures contracts as a substitute for a comparable
market position in the underlying securities. The Ursa
<PAGE> II-14<PAGE>
Subaccount may sell stock index futures contracts. The Bond
Subaccount may purchase futures contracts on U.S. Government
Securities as a substitute for a comparable market position in
the cash market. The Juno Subaccount may sell futures
contracts on U.S. Government Securities.
A futures contract obligates the seller to deliver (and
the purchaser to take delivery of) the specified commodity on
the expiration date of the contract. A stock index futures
contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock
index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. It is
the practice of holders of other futures contracts to close
out their positions on or before the expiration date by use of
offsetting contract positions and physical delivery is thereby
avoided.
The Nova Subaccount and the OTC Subaccount may purchase
call options and write (sell) put options, and the Ursa
Subaccount may purchase put options and write call options, on
stock index futures contracts. The Bond Subaccount may
purchase call options and write put options on U.S. Government
Securities futures contracts and the Juno Subaccount may write
call options and purchase put options on futures contracts on
U.S. Government Securities.
When a Subaccount purchases a put or call option on a
futures contract, the Subaccount pays a purchase payment for
the right to sell or purchase the underlying futures contract
for a specified price upon exercise at any time during the
option period. By writing a put or call option on a futures
contract, a Subaccount receives a purchase payment in return
for granting to the purchaser of the option the right to sell
to or buy from the Subaccount the underlying futures contract
for a specified price upon exercise at any time during the
option period.
Whether a Subaccount realizes a gain or loss from futures
activities depends generally upon movements in the underlying
commodity. The extent of the Subaccount s loss from an
unhedged short position in futures contracts or from writing
call options on futures contracts is potentially unlimited.
The Subaccounts may engage in related closing transactions
with respect to options on futures contracts. The Subaccounts
will only engage in transactions in futures contracts and
options thereupon that are traded on a United States exchange
or board of trade. In addition to the uses set forth
hereunder, each Subaccount may also engage in futures and
futures options transactions in order to hedge or limit the
<PAGE> II-15<PAGE>
exposure of its position to create a synthetic money market
position.
The Subaccounts may purchase and sell futures contracts,
index futures contracts, and options thereon only to the
extent that such activities would be consistent with the
requirements of Section 4.5 of the regulations under the
Commodity Exchange Act promulgated by the Commodity Futures
Trading Commission (the "CFTC Regulations"), under which each
of these Subaccounts would be excluded from the definition of
a "commodity pool operator." Under Section 4.5 of the CFTC
Regulations, a Subaccount may engage in futures transactions,
either for "bona fide hedging" purposes, as this term is
defined in the CFTC Regulations, or for non-hedging purposes
to the extent that the aggregate initial margins and purchase
payments required to establish such non-hedging positions do
not exceed 5% of the liquidation value of the Subaccount s
portfolio. In the case of an option on futures contracts that
is "in-the-money" at the time of purchase (i.e., the amount by
which the exercise price of the put option exceeds the current
market value of the underlying security or the amount by which
the current market value of the underlying security exceeds
the exercise price of the call option), the in-the-money
amount may be excluded in calculating this 5% limitation.
When a Subaccount purchases or sells a stock index
futures contract, or sells an option thereon, the Subaccount
"covers" its position. To cover its position, a Subaccount
may maintain with its custodian bank (and mark to market on a
daily basis) a segregated account consisting of cash or high-
quality liquid debt instruments, including U.S. Government
Securities or repurchase agreements secured by U.S. Government
Securities, that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market
value of the futures contract or otherwise "cover" its
position. If the Subaccount continues to engage in the
described securities trading practices and properly segregates
assets, the segregated account will function as a practical
limit on the amount of leverage which the Subaccount may
undertake and on the potential increase in the speculative
c h a r a cter of the Subaccount s outstanding portfolio
securities. Additionally, such segregated accounts will
generally assure the availability of adequate funds to meet
the obligations of the Subaccount arising from such investment
activities.
A Subaccount may cover its long position in a futures
contract by purchasing a put option on the same futures
contract with a strike price (i.e., an exercise price) as high
or higher than the price of the futures contract, or, if the
strike price of the put is less than the price of the futures
contract, the Subaccount will maintain in a segregated account
<PAGE> II-16<PAGE>
cash or high-grade liquid debt securities equal in value to
the difference between the strike price of the put and the
price of the future. A Subaccount may also cover its long
position in a futures contract by taking a short position in
the instruments underlying the futures contract, or by taking
positions in instruments the prices of which are expected to
move relatively consistently with the futures contract. A
Subaccount may cover its short position in a futures contract
by taking a long position in the instruments underlying the
futures contract, or by taking positions in instruments the
prices of which are expected to move relatively consistently
with the futures contract.
A Subaccount may cover its sale of a call option on a
futures contract by taking a long position in the underlying
futures contract at a price less than or equal to the strike
price of the call option, or, if the long position in the
underlying futures contract is established at a price greater
than the strike price of the written call, the Subaccount will
maintain in a segregated account cash or high-grade liquid
debt securities equal in value to the difference between the
strike price of the call and the price of the future. A
Subaccount may also cover its sale of a call option by taking
positions in instruments the prices of which are expected to
move relatively consistently with the call option. A
Subaccount may cover its sale of a put option on a futures
contract by taking a short position in the underlying futures
contract at a price greater than or equal to the strike price
of the put option, or, if the short position in the underlying
futures contract is established at a price less than the
strike price of the written put, the Subaccount will maintain
in a segregated account cash or high-grade liquid debt
securities equal in value to the difference between the strike
price of the put and the price of the future. A Subaccount
may also cover its sale of a put option by taking positions in
i n struments the prices of which are expected to move
relatively consistently with the put option.
Although the Subaccounts intend to sell futures contracts
only if there is an active market for such contracts, no
assurance can be given that a liquid market will exist for any
particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading
day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond
that limit or trading may be suspended for specified periods
during the day. Futures contract prices could move to the
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures
p o s i tions and potentially subjecting a Subaccount to
substantial losses. If trading is not possible, or a
<PAGE> II-17<PAGE>
Subaccount determines not to close a futures position in
anticipation of adverse price movements, the Subaccount will
be required to make daily cash payments of variation margin.
The risk that the Subaccount will be unable to close out a
futures position will be minimized by entering into such
transactions on a national exchange with an active and liquid
secondary market.
Index Options Transactions
The Nova Subaccount, the OTC Subaccount, and the Precious
Metals Subaccount may purchase call options and write (sell)
put options, and the Ursa Subaccount may purchase put options
and write call options, on stock indexes. All of the
Subaccounts may write and purchase put and call options on
stock indexes in order to hedge or limit the exposure of their
positions.
A stock index fluctuates with changes in the market
values of the stocks included in the index. Options on stock
indexes give the holder the right to receive an amount of cash
upon exercise of the option. Receipt of this cash amount will
depend upon the closing level of the stock index upon which
the option is based being greater than (in the case of a call)
or less than (in the case of a put) the exercise price of the
option. The amount of cash received, if any, will be the
difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar
multiple. The writer (seller) of the option is obligated, in
return for the purchase payments received from the purchaser
of the option, to make delivery of this amount to the
purchaser. Unlike the options on securities discussed below,
all settlements of index options transactions are in cash.
Some stock index options are based on a broad market
index such as the S&P500 Index, the NYSE Composite Index, or
the AMEX Major Market Index, or on a narrower index such as
t h e Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board Options
E x c hange (the "CBOE"), the AMEX, and other exchanges
(collectively, the "Exchanges"). Purchased over-the-counter
options and the cover for written over-the-counter options
will be subject to the respective Subaccount s 15% limitation
o n investment in illiquid securities. See "Illiquid
Securities," below.
E a ch of the Exchanges has established limitations
governing the maximum number of call or put options on the
same index which may be bought or written (sold) by a single
investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more
<PAGE> II-18<PAGE>
accounts or through one or more brokers). Under these
limitations, option positions of all investment companies
advised by the same investment adviser are combined for
purposes of these limits. Pursuant to these limitations, an
Exchange may order the liquidation of positions and may impose
other sanctions or restrictions. These position limits may
restrict the number of listed options which a Subaccount may
buy or sell.
Index options are subject to substantial risks, including
the risk of imperfect correlation between the option price and
the value of the underlying securities comprising the stock
index selected and the risk that there might not be a liquid
secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather
than the price of a particular stock, whether a Subaccount
will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of
stock prices in the stock market generally or, in the case of
certain indexes, in an industry or market segment, rather than
upon movements in the price of a particular stock. Whether a
Subaccount will realize a profit or loss by the use of options
on stock indexes will depend on movements in the direction of
the stock market generally or of a particular industry or
market segment. This requires different skills and techniques
than are required for predicting changes in the price of
individual stocks. A Subaccount will not enter into an option
position that exposes the Subaccount to an obligation to
another party, unless the Subaccount either (i) owns an
offsetting position in securities or other options and/or (ii)
maintains with the Subaccount s custodian bank (and marks-to-
market on a daily basis) a segregated account consisting of
cash, U.S. Government Securities, or other liquid high-grade
debt securities that, when added to the purchase payments
deposited with respect to the option, are equal to the market
value of the underlying stock index not otherwise covered.
Options on Securities
The Nova Subaccount, the OTC Subaccount, and Precious
Metals Subaccount may buy call options and write (sell) put
options on securities, and the Ursa Subaccount may buy put
options and write call options on securities. By buying a
call option, a Subaccount has the right, in return for a
purchase payment paid during the term of the option, to buy
the securities underlying the option at the exercise price.
By writing a call option and receiving a purchase payment, a
Subaccount becomes obligated during the term of the option to
deliver the securities underlying the option at the exercise
price if the option is exercised. By buying a put option, a
Subaccount has the right, in return for a purchase payment
paid during the term of the option, to sell the securities
<PAGE> II-19<PAGE>
underlying the option at the exercise price. By writing a put
option, a Subaccount becomes obligated during the term of the
option to purchase the securities underlying the option at the
exercise price. The Subaccounts will only write options that
are traded on recognized securities exchanges.
When writing call options on securities, a Subaccount may
cover its position by owning the underlying security on which
the option is written. Alternatively, the Subaccount may
cover its position by owning a call option on the underlying
security, on a unit for unit basis, which is deliverable under
the option contract at a price no higher than the exercise
price of the call option written by the Subaccount or, if
higher, by owning such call option and depositing and
maintaining in a segregated account cash or liquid high-grade
debt securities equal in value to the difference between the
two exercise prices. In addition, a Subaccount may cover its
position by depositing and maintaining in a segregated account
cash or liquid high-grade debt securities equal in value to
the exercise price of the call option written by the
Subaccount. When a Subaccount writes a put option, the
Subaccount will have and maintain on deposit with its
custodian bank cash or liquid high-grade debt securities
having a value equal to the exercise value of the option. The
principal reason for a Subaccount to write call options on
stocks held by the Subaccount is to attempt to realize,
through the receipt of purchase payments, a greater return
than would be realized on the underlying securities alone.
If a Subaccount that writes an option wishes to terminate
the Subaccount s obligation, the Subaccount may effect a
"closing purchase transaction." The Subaccount accomplishes
this by buying an option of the same series as the option
previously written by the Subaccount. The effect of the
purchase is that the writer s position will be canceled by the
Options Clearing Corporation. However, a writer may not
effect a closing purchase transaction after the writer has
been notified of the exercise of an option. Likewise, a
Subaccount which is the holder of an option may liquidate its
position by effecting a "closing sale transaction." The
Subaccount accomplishes this by selling an option of the same
series as the option previously purchased by the Subaccount.
There is no guarantee that either a closing purchase or a
closing sale transaction can be effected. If any call or put
option is not exercised or sold, the option will become
worthless on its expiration date.
A Subaccount will realize a gain (or a loss) on a closing
purchase transaction with respect to a call or a put option
previously written by the Subaccount if the purchase payment,
plus commission costs, paid by the Subaccount to purchase the
call or put option to close the transaction is less (or
<PAGE> II-20<PAGE>
greater) than the purchase payment, less commission costs,
received by the Subaccount on the sale of the call or the put
option. The Subaccount also will realize a gain if a call or
p u t o ption which the Subaccount has written lapses
unexercised, because the Subaccount would retain the purchase
payment.
A Subaccount will realize a gain (or a loss) on a closing
sale transaction with respect to a call or a put option
previously purchased by the Subaccount if the purchase
payment, less commission costs, received by the Subaccount on
the sale of the call or the put option to close the
transaction is greater (or less) than the purchase payment,
plus commission costs, paid by the Subaccount to purchase the
call or the put option. If a put or a call option which the
Subaccount has purchased expires out-of-the-money, the option
will become worthless on the expiration date, and the
Subaccount will realize a loss in the amount of the purchase
payment paid, plus commission costs.
Although certain securities exchanges attempt to provide
continuously liquid markets in which holders and writers of
options can close out their positions at any time prior to the
expiration of the option, no assurance can be given that a
market will exist at all times for all outstanding options
purchased or sold by a Subaccount. If an options market were
to become unavailable, the Subaccount would be unable to
realize its profits or limit its losses until the Subaccount
could exercise options it holds, and the Subaccount would
remain obligated until options it wrote were exercised or
expired.
Because option purchase payments paid or received by a
Subaccount are small in relation to the market value of the
investments underlying the options, buying and selling put and
call options can be more speculative than investing directly
in common stocks.
Short Sales
The Ursa Subaccount and the Juno Subaccount also may
engage in short sales transactions under which the Subaccount
sells a security it does not own. To complete such a
transaction, the Subaccount must borrow the security to make
delivery to the buyer. The Subaccount then is obligated to
replace the security borrowed by purchasing the security at
the market price at the time of replacement. The price at
that time may be more or less than the price at which the
security was sold by the Subaccount. Until the security is
replaced, the Subaccount is required to pay to the lender
amounts equal to any dividends or interest which accrue during
the period of the loan. To borrow the security, the
<PAGE> II-21<PAGE>
Subaccount also may be required to pay a purchase payment,
which would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker, to
the extent necessary to meet the margin requirements, until
the short position is closed out.
Until the Ursa Subaccount or Juno Subaccount closes its
s h ort position or replaces the borrowed security, the
Subaccount will: (a) maintain a segregated account containing
cash or liquid high grade debt securities at such a level that
the amount deposited in the account plus the amount deposited
with the broker as collateral will equal the current value of
t h e security sold short, or (b) otherwise cover the
Subaccount s short position.
<PAGE> II-22<PAGE>
U.S. Government Securities
The Bond Subaccount and the Money Market Subaccounts may
invest in U.S. Government Securities in pursuit of their
investment objectives, while all of the Subaccounts, except
f o r the Money Market Subaccounts, may invest in U.S.
Government Securities as "cover" for the investment techniques
these Subaccounts employ as part of a cash reserve or for
liquidity purposes.
U.S. Treasury securities are backed by the full faith and
credit of the U.S. Treasury. U.S. Treasury securities differ
only in their interest rates, maturities, and dates of
issuance. Treasury Bills have maturities of one year or less.
Treasury Notes have maturities of one to ten years, and
Treasury Bonds generally have maturities of greater than ten
y e a r s at the date of issuance. Yields on short-,
intermediate-, and long-term U.S. Government Securities are
dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt
securities with longer maturities tend to produce higher
yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S.
Government Securities generally varies inversely with changes
in market interest rates. An increase in interest rates,
therefore, would generally reduce the market value of a
S u b account s portfolio investments in U.S. Government
Securities, while a decline in interest rates would generally
increase the market value of a Subaccount s portfolio
investments in these securities.
C e r tain U.S. Government Securities are issued or
guaranteed by agencies or instrumentalities of the U.S.
Government including, but not limited to, obligations of U.S.
Government agencies or instrumentalities such as the Federal
N a t ional Mortgage Association, the Government National
Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan
Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the
Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan
M a r k eting Association, and the National Credit Union
Administration.
Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government are backed by the
full faith and credit of the U.S. Treasury. Such agencies and
instrumentalities may borrow funds from the U.S. Treasury.
<PAGE> II-23<PAGE>
However, no assurances can be given that the U.S. Government
will provide such financial support to the obligations of the
other U.S. Government agencies or instrumentalities in which a
Subaccount invests, since the U.S. Government is not obligated
to do so. These other agencies and instrumentalities are
supported by either the issuer s right to borrow, under
certain circumstances, an amount limited to a specific line of
credit from the U.S. Treasury, the discretionary authority of
the U.S. Government to purchase certain obligations of an
agency or instrumentality, or the credit of the agency or
instrumentality itself.
U . S. Government Securities may be purchased at a
discount. Such securities, when held to maturity or retired,
may include an element of capital gain.
Repurchase Agreements
U.S. Government Securities include repurchase agreements
secured by U.S. Government Securities. Under a repurchase
a g reement, a Subaccount purchases a debt security and
simultaneously agrees to sell the security back to the seller
at a mutually agreed-upon future price and date, normally one
day or a few days later. The resale price is greater than the
purchase price, reflecting an agreed-upon market interest rate
during the purchaser s holding period. While the maturities
of the underlying securities in repurchase transactions may be
more than one year, the term of each repurchase agreement will
always be less than one year. A Subaccount will enter into
repurchase agreements only with member banks of the Federal
R e s erve System or primary dealers of U.S. Government
Securities. PADCO will monitor the creditworthiness of each
of the firms which is a party to a repurchase agreement with
any of the Subaccounts. In the event of a default or
bankruptcy by the seller, the Subaccount will liquidate those
securities (whose market value, including accrued interest,
must be at least equal to 100% of the dollar amount invested
by the Subaccount in each repurchase agreement) held under the
applicable repurchase agreement, which securities constitute
collateral for the seller s obligation to pay. However,
liquidation could involve costs or delays and, to the extent
proceeds from the sales of these securities were less than the
agreed-upon repurchase price, the Subaccount would suffer a
loss. A Subaccount also may experience difficulties and incur
certain costs in exercising its rights to the collateral and
may lose the interest the Subaccount expected to receive under
the repurchase agreement. Repurchase agreements usually are
for short periods, such as one week or less, but may be
longer. It is the current policy of the Subaccounts to treat
repurchase agreements that do not mature within seven days as
illiquid for the purposes of their investment policies.
<PAGE> II-24<PAGE>
Zero Coupon Bonds
The Bond and Juno Subaccounts may invest in U.S. Treasury
zero coupon securities. Unlike regular U.S. Treasury bonds
which pay semi-annual interest, U.S. Treasury zero coupon
bonds do not generate semi-annual coupon payments. Instead,
zero coupon bonds are purchased at a substantial discount from
the maturity value of such securities, and this discount is
amortized as interest income over the life of the security.
Zero coupon U.S. Treasury issues originally were created by
government bond dealers who bought U.S. Treasury bonds and
issued receipts representing an ownership interest in the
interest coupons or in the principal portion of the bonds.
Subsequently, the U.S. Treasury began directly issuing zero
coupon bonds with the introduction of "Separate Trading of
R e g i stered Interest and Principal of Securities" (or
"STRIPS"). While zero coupon bonds eliminate the reinvestment
r i sk of regular coupon issues, that is, the risk of
subsequently investing the periodic interest payments at a
lower rate than that of the security held, zero coupon bonds
fluctuate much more sharply than regular coupon-bearing bonds.
Thus, when interest rates rise, the value of zero coupon bonds
will decrease to a greater extent than will the value of
regular bonds having the same interest rate.
Reverse Repurchase Agreements
The Ursa Subaccount, the Juno Subaccount, and the Money
Market Subaccounts each may also use reverse repurchase
agreements as part of the Subaccount s investment strategy.
Reverse repurchase agreements involve sales by the Subaccount
of portfolio assets concurrently with an agreement by the
Subaccount to repurchase the same assets at a later date at a
fixed price. Generally, the effect of such a transaction is
that the Subaccount can recover all or most of the cash
invested in the portfolio securities involved during the term
of the reverse repurchase agreement, while the Subaccount will
be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only
if the interest cost to the Subaccount of the reverse
repurchase transaction is less than the cost of obtaining the
cash otherwise. Opportunities to achieve this advantage may
not always be available, and the Subaccounts intend to use the
reverse repurchase technique only when it will be to the
Subaccount s advantage to do so. Each Subaccount will
establish a segregated account with the Separate Account s
custodian bank in which the Subaccount will maintain cash or
cash equivalents or other portfolio securities equal in value
to the Subaccount s obligations in respect of reverse
repurchase agreements.
Borrowing
<PAGE> II-25<PAGE>
Each Subaccount may borrow money to facilitate management
of the Subaccount s portfolio by enabling the Subaccount to
meet transfer or withdrawal requests when the liquidation of
portfolio instruments would be inconvenient or
disadvantageous. Such borrowing is not for investment
purposes and will be repaid by the borrowing Subaccount
promptly.
As required by the 1940 Act, a Subaccount must maintain
continuous asset coverage (total assets, including assets
acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If, at any time,
the value of the Subaccount s assets should fail to meet this
300% coverage test, the Subaccount, within three days (not
including Sundays and holidays), will reduce the amount of the
Subaccount s borrowings to the extent necessary to meet this
300% coverage. Maintenance of this percentage limitation may
result in the sale of portfolio securities at a time when
investment considerations otherwise indicate that it would be
disadvantageous to do so.
In addition to the foregoing, the Subaccounts are
authorized to borrow money from a bank as a temporary measure
for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of the Subaccount s total assets.
This borrowing is not subject to the foregoing 300% asset
coverage requirement. The Subaccounts are authorized to
pledge portfolio securities as PADCO deems appropriate in
connection with any borrowings.
When-Issued and Delayed-Delivery Securities
The Subaccounts may purchase securities on a when-issued
or delayed-delivery basis (i.e., delivery and payment can take
place a month or more after the date of the transaction).
These securities are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the
time a Subaccount makes the commitment to purchase securities
on a when-issued or delayed-delivery basis, the Subaccount
will record the transaction and thereafter reflect the value,
each day, of that security in determining the Subaccount's
Accumulation Unit Value. A Subaccount will not purchase
securities on a when-issued or delayed-delivery basis if, as a
result, more than 15% (10% with respect to each of the Money
Market Subaccounts) of the Subaccount s net assets would be so
invested.
Lending of Portfolio Securities
The Subaccounts may lend portfolio securities to brokers,
dealers, and financial institutions, provided that cash equal
to at least 100% of the market value of the securities loaned
<PAGE> II-26<PAGE>
is deposited by the borrower with the lending Subaccount and
is maintained each business day in a segregated account
pursuant to applicable regulations. While such securities are
on loan, the borrower will pay the lending Subaccount any
income accruing thereon, and the Subaccount may invest the
cash collateral in portfolio securities, thereby earning
additional income. A Subaccount will not lend its portfolio
securities if such loans are not permitted by the laws or
regulations of any state in which the Contracts are sold and
will not lend more than 33 % of the value of the Subaccount s
total assets, except that each of the Money Market Subaccounts
will not lend more than 10% of its total assets. Loans of
portfolio securities are subject to termination by the lending
Subaccount on four business days' notice, or by the borrower
on one day's notice. Borrowed securities must be returned
when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term
of the loan inures to the lending Subaccount. A lending
S u b account may pay reasonable finders, borrowers,
administrative, and custodial fees in connection with a loan.
Investments in Other Investment Companies
The Subaccounts (other than the Bond Subaccount and the
Money Market Subaccounts) may invest in the securities of
another investment company (the "acquired company") provided
that the Subaccount, immediately after such purchase or
acquisition, does not own in the aggregate: (i) more than 3%
of the total outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total
assets of the Subaccount; or (iii) securities issued by the
acquired company and all other investment companies (other
than Treasury stock of the Subaccount) having an aggregate
value in excess of 10% of the value of the total assets of the
Subaccount. The Bond Subaccount and the Money Market
Subaccounts may invest in the securities of other investment
companies only as part of a merger, reorganization, or
acquisition, subject to the requirements of the 1940 Act.
If a Subaccount invests in, and, thus, is a shareholder
of, another investment company, the Subaccount s Contract
Owners will indirectly bear the Subaccount s proportionate
share of the fees and expenses paid by such other investment
company, including advisory fees, in addition to both the
advisory fees payable directly by the Subaccount to PADCO and
the other expenses that the Subaccount bears directly in
connection with the Subaccount s own operations.
<PAGE> II-27<PAGE>
Illiquid Securities
While none of the Subaccounts anticipates doing so, each
S u b account may purchase illiquid securities, including
securities that are not readily marketable. A Subaccount will
not invest more than 15% (10% with respect to each of the
Money Market Subaccounts) of the Subaccount s net assets in
illiquid securities. Each Subaccount will adhere to a more
restrictive limitation on the Subaccount s investment in
illiquid securities as required by the insurance laws of those
jurisdictions where Contracts are sold. The term "illiquid
securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of
business at approximately the amount at which the Subaccount
has valued the securities. Under the current guidelines of
the SEC staff, illiquid securities also are considered to
include, among other securities, purchased over-the-counter
options, certain cover for over-the-counter options,
repurchase agreements with maturities in excess of seven days,
and certain securities whose disposition is restricted under
the federal securities laws. The Subaccount may not be able
to sell illiquid securities when PADCO considers it desirable
to do so or may have to sell such securities at a price that
is lower than the price that could be obtained if the
securities were more liquid. In addition, the sale of
illiquid securities also may require more time and may result
in higher dealer discounts and other selling expenses than
does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the
u n a vailability of reliable market quotations for such
securities, and investment in illiquid securities may have an
adverse impact on Accumulation Unit Value.
Cash Reserve
As a cash reserve or for liquidity purposes, each
Subaccount may temporarily invest all or part of its assets in
cash or cash equivalents, which include, but are not limited
to, short-term money market instruments, U.S. Government
Securities, certificates of deposit, banker s acceptances, or
repurchase agreements secured by U.S. Government Securities.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
Subject to policies established by the Managers, PADCO
determines which securities to purchase and sell for each
S u baccount, selects brokers and dealers to effect the
transactions, and negotiates commissions. PADCO expects that
t h e Subaccounts may execute brokerage or other agency
t r a n sactions through registered broker-dealers, for a
<PAGE> II-28<PAGE>
commission, in conformity with the 1940 Act, the Securities
E x change Act of 1934, as amended, and the rules and
regulations thereunder. In placing orders for portfolio
transactions, PADCO's policy is to obtain the most favorable
p r i c e and efficient execution available. Brokerage
commissions are normally paid on exchange-traded securities
transactions and on options and futures transactions, as well
as on common stock transactions. In order to obtain the
brokerage and research services described below, a higher
commission may sometimes be paid.
W h en selecting broker-dealers to execute portfolio
transactions, PADCO considers many factors, including the rate
of commission or size of the broker-dealer s "spread," the
size and difficulty of the order, the nature of the market for
t h e security, the willingness of the broker-dealer to
p o sition, the reliability, financial condition, general
execution and operational capabilities of the broker-dealer,
and the research, statistical and economic data furnished by
the broker-dealer to PADCO. Conversely, broker-dealers which
supply research may be selected for execution of transactions
for such other accounts, while the data may be used by PADCO
in providing investment advisory services to the Subaccounts.
MANAGEMENT OF THE SEPARATE ACCOUNT
Board of Managers
Although the assets of the Separate Account are the
property of Great American Reserve, certain responsibilities
and powers with respect to the Separate Account have been
conferred upon the Managers of the Separate Account in order
to comply with applicable provisions of the 1940 Act. Those
responsibilities and powers are: (i) to approve the Separate
Account's investment advisory agreement and its continuance;
(ii) to select the Separate Account's independent public
accountants; (iii) to recommend changes in the fundamental
investment policies of the Subaccount for approval by Contract
Owners and to make changes in non-fundamental investment
policies of the Subaccounts; (iv) to review periodically the
investment portfolios of the Subaccounts to ascertain that the
S u b accounts are being managed in accordance with the
investment objectives and policies of the Subaccounts; (v) to
make findings or determinations contemplated for an investment
company's board of directors by the 1940 Act or rules or
interpretations thereunder; and (vi) to approve agreements,
acts, or transactions respecting the Separate Account that are
submitted to the Separate Account by Great American Reserve.
The identity and principal occupations of the initial members
of the Managers appointed by Great American Reserve and
certain officers of the Separate Account elected or appointed
<PAGE> II-29<PAGE>
by the Managers are set forth in the Statement of Additional
Information.
PADCO
As discussed above, PADCO provides the Subaccounts in the
Separate Account investment advice. PADCO is a Maryland
corporation with offices at 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852. PADCO was incorporated in the
State of Maryland on July 5, 1994. Albert P. Viragh, Jr., the
Chairman of the Board and the President of PADCO, owns a
controlling interest in PADCO and in PADCO Advisors, Inc.
("PADCO I"), an affiliated person of PADCO that serves as the
investment adviser to Rydex Series Trust, a registered
investment company. From 1985 until the incorporation of
PADCO I, Mr. Viragh was a Vice President of Money Management
Associates ("MMA"), a Maryland-based registered investment
adviser. From 1992 to June 1993, Mr. Viragh was the portfolio
manager of The Rushmore Nova Portfolio, a series of The
Rushmore Fund, Inc., an investment company managed by MMA.
From 1989 to 1992, Mr. Viragh was the Vice President of Sales
and Marketing for The Rushmore Fund, Inc. Since 1993, Mr.
Viragh has served as the Chairman of the Board and the
President of PADCO I, a Maryland corporation with offices at
6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852. From January 1994 to June 1996, Mr. Viragh served as
the portfolio manager for the Ursa Fund, a series of Rydex
Series Trust. Mr. Viragh received his bachelor s degree in
Business Administration from Spring Hill College, of Mobile,
Alabama, in 1964.
The portfolio manager for the Nova Subaccount and the
Juno Subaccount is Thomas Michael, who joined PADCO in March
1994. Since March 1994, Mr. Michael has served as the
portfolio manager for the Nova Fund, a series of Rydex Series
Trust. From 1992 to February 1994, Mr. Michael was a
f i n a ncial markets analyst at Cedar Street Investment
M a nagement Co., of Chicago, Illinois, an institutional
c o nsulting firm specializing in developing hedging and
speculative strategies in stock index futures contracts and
U.S. Treasury bond futures contracts. From 1989 to 1991, Mr.
Michael was the Director of Research for Chronometrics, Inc.,
of Chicago, Illinois, a registered commodity trading adviser
and was responsible for managing the firm s proprietary, on-
line trading model for twelve financial futures contracts.
Mr. Michael received his bachelor of arts degree in Geology
from Colgate University, of Hamilton, New York, in 1974.
The portfolio manager for the OTC Subaccount and the Bond
Subaccount is Terry Apple, who joined PADCO in January 1994.
Since January 1994, Mr. Apple has served as the portfolio
manager for the Rydex OTC Fund and the Rydex U.S. Government
<PAGE> II-30<PAGE>
Bond Fund, each a series of Rydex Series Trust. From 1992 to
December 1993, Mr. Apple was employed by MMA and was the
Director of Investments for The Rushmore Fund, Inc. From 1985
to 1991, Mr. Apple was a Vice President and the Director of
Technical Research for Cale Futures, Inc. ( Cale ), of Hilton
Head, South Carolina, a registered commodity trading adviser,
and managed Multitech Partners, a commodity pool advised by
Cale. Mr. Apple received his bachelor s degree in Business
Administration from Baylor University, of Waco, Texas, in
1964.
The portfolio manager for the Ursa Subaccount, the
Precious Metals Subaccount, and the Money Market Subaccounts
is Michael P. Byrum. Mr. Byrum has served as the portfolio
manager for the Ursa Fund since June 1996, the Rydex Precious
Metals Fund since December 1993, the Juno Fund since March
1995, and the Rydex U.S. Government Money Market Fund since
December 1993 (each of these mutual funds is a series of Rydex
Series Trust). Prior to July 1993, Mr. Byrum worked for one
year as an investor representative with MMA. Mr. Byrum s
responsibilities at MMA included brokerage solicitation and
investor relations. Mr. Byrum received his bachelor s degree
in Business Administration from Miami University, of Oxford,
Ohio, in 1992.
Pursuant to an investment advisory agreement between the
Separate Account and PADCO, dated November 1, 1996 (the "PADCO
Advisory Agreement"), subject to the general supervision and
control of the Separate Account's Board of Managers and the
officers of the Separate Account, and in conformity with the
stated investment objectives, policies, and restrictions of
the Separate Account, PADCO will manage the investment and
reinvestment of the assets of each of the Subaccounts and
determine the composition of assets of each Subaccount,
i n c luding the purchase, retention, and disposition of
securities and other investments. Under the PADCO Advisory
Agreement, the Subaccounts each pay PADCO a fee at an
annualized rate, based on the average daily net assets of each
respective Subaccount, of 0.75% for the Nova Subaccount, the
OTC Subaccount, and the Precious Metals Subaccount, 0.90% for
the Ursa Subaccount and the Juno Subaccount, 0.50% for the
Bond Subaccount and the Money Market I Subaccount, and 0.25%
for the Money Market II Subaccount. The advisory fee paid by
each of the Nova Subaccount, the OTC Subaccount, the Precious
M e t als Subaccount, the Juno Subaccount, and the Ursa
Subaccount, is higher than the advisory fee paid by most other
investment companies.
PADCO bears all costs associated with providing these
advisory services to the Subaccounts and the expenses of the
Managers who are affiliated persons of PADCO. Additional
<PAGE> II-31<PAGE>
information concerning the PADCO Advisory Agreement and PADCO
is set forth in the Statement of Additional Information.
PADCO Service Company, Inc.
As discussed above, the Subaccounts (other than the Money
Market II Subaccount) are provided Contract Owner services,
including, among others, asset allocation administrative
services, Financial Advisor communications (including receipt
of and acting upon transfer requests), asset allocation
bookkeeping, determination of Accumulation Unit Values, and
portfolio accounting services, by PADCO Service Company, Inc.
(the "Servicer"), a Maryland corporation with offices at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852,
subject to the general supervision and control of the Managers
and the officers of the Separate Account, and pursuant to a
Subaccount administration agreement between the Separate
Account and the Servicer, dated November 1, 1996. The
Servicer is wholly-owned by Albert P. Viragh, Jr., who is the
Chairman of the Board of Managers and the President of the
Separate Account and the sole controlling person and majority
owner of PADCO. The Servicer was incorporated in the State of
Maryland on October 6, 1993.
Pursuant to the Subaccount Administration Agreement, each
Subaccount (other than the Money Market II Subaccount) pays
the Servicer a fee at an annualized rate, based on the average
daily net assets for that Subaccount, of 0.25% for the Nova,
Ursa, and Juno Subaccounts, and 0.20% for the OTC, Precious
Metals, Bond, and Money Market I Subaccounts. The Servicer
provides these Subaccounts with all required Subaccount
administrative services, including, without limitation, office
space, equipment, and personnel; clerical and general back
o f fice services; asset allocation bookkeeping, internal
accounting, and secretarial services; and the determination of
Accumulation Unit Values. The Servicer pays all fees and
expenses that are directly related to the services provided by
the Servicer to these Subaccounts; each Subaccount reimburses
the Servicer for all fees and expenses incurred by the
Servicer which are not directly related to the services the
Servicer provides to the Subaccount under the Subaccount
Administration Agreement. Additional information concerning
the Subaccount Administration Agreement and the Servicer is
set forth in the Statement of Additional Information.
T h e Money Market II Subaccount does not pay any
Subaccount administration fee.
Costs and Expenses
Each Subaccount bears all expenses of its operations
other than those assumed by PADCO or the Servicer. Subaccount
<PAGE> II-32<PAGE>
e x p e nses include: the advisory fee; the Subaccount
a d m inistration fee; custodian and accounting fees and
expenses; legal and auditing fees; securities valuation
e x penses; fidelity bonds and other insurance premiums;
e x p e nses of preparing and printing prospectuses,
confirmations, proxy statements, and Contract Owner reports
and notices; registration fees and expenses; proxy and annual
meeting expenses, if any; all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and
franchise taxes); organizational costs; and non-interested
Managers fees and expenses; the costs and expenses of
surrendering Accumulation Units of a Subaccount; fees and
expenses paid to any securities pricing organization; dues and
expenses associated with membership in any mutual fund or
insurance organization; and costs for incoming telephone WATTS
lines. In addition, each of the eight Subaccounts pays an
equal portion of the fees and expenses for attendance at
Manager meetings to the Managers who are not affiliated with
or interested persons of PADCO or Great American Reserve.
Great American Reserve and PADCO have advanced the
organizational expenses of the Separate Account. These costs,
which are approximately $5,000 per Money Market Subaccount and
$95,180 per the remaining six Subaccounts, will be reimbursed
by each Subaccount, and each Subaccount will amortize these
costs over a five year period from the date the Subaccount
commences operations.
<PAGE> II-33<PAGE>
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
Page
GENERAL INFORMATION AND HISTORY 3
INVESTMENT POLICIES AND TECHNIQUES OF THE SUBACCOUNTS 3
General 3
Options Transactions 3
Foreign Securities 4
Repurchase Agreements 5
Borrowing 5
When-Issued and Delayed-Delivery Securities 6
Portfolio Turnover 6
INVESTMENT RESTRICTIONS OF THE SUBACCOUNTS 7
BOARD OF MANAGERS OF THE SEPARATE ACCOUNT 11
Managers 12
Other Officers of PADCO 13
PADCO 14
PORTFOLIO TRANSACTIONS AND BROKERAGE 14
DETERMINATION OF ACCUMULATION UNIT VALUES 16
PERFORMANCE INFORMATION 17
UNDERWRITER OF THE CONTRACTS 23
INDEPENDENT ACCOUNTANTS 23
CUSTODY 24
FINANCIAL STATEMENTS 24
APPENDIX A 25
<PAGE> II-34<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1996,
as supplemented December 1, 1996
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
of
GREAT AMERICAN RESERVE INSURANCE COMPANY
Administrative Office Address: 11815 North Pennsylvania
Street, Carmel, Indiana 46032
Phone: (800) 437-3506
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS -- NONPARTICIPATING
Offered through
PADCO Financial Services, Inc.
Address: 6116 Executive Boulevard, Rockville, Maryland 20852
Phone: (888) 667-4936
Purchase payments for the variable annuity contract
described in the Prospectus (the "Contract") will be allocated
to the Rydex Advisor Variable Annuity Account (the "Separate
Account"), a segregated investment account of Great American
Reserve Insurance Company ("Great American Reserve"), unless
allocation to Great American Reserve's Fixed Account is
selected. Initial purchase payments allocated to the Separate
Account will first be placed in the Money Market I Subaccount
for the 14 days following the date of issue (the "Contract
Date"). You bear the full investment risk with respect to the
Separate Account.
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the Separate Account, dated November 1, 1996,
and as supplemented December 1, 1996. The Prospectus may be
obtained without charge by writing or calling PADCO Financial
Services, Inc., at the addresses or phone numbers set forth
above.<PAGE>
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
Page
GENERAL INFORMATION AND HISTORY 3
INVESTMENT POLICIES AND TECHNIQUES OF THE SUBACCOUNTS 3
General 3
Options Transactions 3
Foreign Securities 4
Repurchase Agreements 5
Borrowing 5
When-Issued and Delayed-Delivery Securities 6
Portfolio Turnover 6
INVESTMENT RESTRICTIONS OF THE SUBACCOUNTS 7
BOARD OF MANAGERS OF THE SEPARATE ACCOUNT 11
Managers 12
Other Officers of PADCO 13
PADCO 14
PORTFOLIO TRANSACTIONS AND BROKERAGE 14
DETERMINATION OF ACCUMULATION UNIT VALUES 16
PERFORMANCE INFORMATION 17
UNDERWRITER OF THE CONTRACTS 23
INDEPENDENT ACCOUNTANTS 23
CUSTODY 24
FINANCIAL STATEMENTS 24
APPENDIX A 25
<PAGE> 2<PAGE>
GENERAL INFORMATION AND HISTORY
Great American Reserve, originally organized in 1937, is
principally engaged in the life insurance business in 47
states and the District of Columbia. Great American Reserve
is a stock company organized under the laws of the State of
T e x as and a wholly-owned subsidiary of Conseco, Inc.
("Conseco"). The operations of Great American Reserve are
handled by Conseco. Conseco is a publicly-owned financial
services holding company, the principal operations of which
are in the development, marketing, and administration of
specialized annuity and life insurance products. Conseco is
located at 11825 N. Pennsylvania Street, Carmel, Indiana
46032.
The Separate Account was established by Great American
Reserve.
INVESTMENT POLICIES AND TECHNIQUES
OF THE SUBACCOUNTS
The following discussion supplements the discussion under
"Investment Objectives and Policies of the Subaccounts" and
"Investment Techniques and Other Investment Policies" in Part
II of the Prospectus.
General
Set forth below is further information relating to the
Subaccounts. Portfolio investment advice is provided to each
Subaccount by PADCO Advisors II, Inc. ("PADCO"), a Maryland
corporation with offices at 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852. The investment strategies of
the Subaccounts discussed below, and as discussed in the
Separate Account's Prospectus, may be used by a Subaccount if,
in the opinion of PADCO, these strategies will be advantageous
to the Subaccount. A Subaccount is free to reduce or
eliminate the Subaccount's activity in any of those areas
without changing the Subaccount's fundamental investment
policies. There is no assurance that any of these strategies
or any other strategies and methods of investment available to
a S u baccount will result in the achievement of the
Subaccount's objectives.
Options Transactions
The Nova Subaccount, The OTC Subaccount, and the Precious
Metals Subaccount may buy call options and write (sell) put
options on securities, and the Ursa Subaccount may buy put
options and write call options on securities for the purpose
of realizing the Subaccount's investment objective. By
<PAGE> 3<PAGE>
writing a call option on securities, a Subaccount becomes
obligated during the term of the option to sell the securities
underlying the option at the exercise price if the option is
exercised. By writing a put option, a Subaccount becomes
obligated during the term of the option to purchase the
securities underlying the option at the exercise price if the
option is exercised.
During the term of the option, the writer may be assigned
an exercise notice by the broker-dealer through whom the
option was sold. The exercise notice would require the writer
to deliver, in the case of a call, or take delivery of, in the
case of a put, the underlying security against payment of the
exercise price. This obligation terminates upon expiration of
the option, or at such earlier time that the writer effects a
closing purchase transaction by purchasing an option covering
the same underlying security and having the same exercise
price and expiration date as the one previously sold. Once an
option has been exercised, the writer may not execute a
closing purchase transaction. To secure the obligation to
deliver the underlying security in the case of a call option,
the writer of a call option is required to deposit in escrow
the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation (the "OCC"), an
institution created to interpose itself between buyers and
sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so,
gives its guarantee to the transaction.
Foreign Securities
The Precious Metals Subaccount may invest in issuers
located outside the United States. These purchases may be
made by purchasing American Depository Receipts ("ADRs"),
"ordinary shares," or "New York shares" in the United States.
ADRs are dollar-denominated receipts representing interests in
the securities of a foreign issuer, which securities may not
necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are
receipts typically issued by United States banks and trust
companies which evidence ownership of underlying securities
issued by a foreign corporation. Generally, ADRs in registered
form are designed for use in domestic securities markets and
are traded on exchanges or over-the-counter in the United
States. Ordinary shares are shares of foreign issuers that
are traded abroad and on a United States exchange. New York
shares are shares that a foreign issuer has allocated for
trading in the United States. ADRs, ordinary shares, and New
York shares all may be purchased with and sold for U.S.
dollars, which protects the Precious Metals Subaccount from
the foreign settlement risks described below.
<PAGE> 4<PAGE>
Investing in foreign companies may involve risks not
t y p i cally associated with investing in United States
companies. The value of securities denominated in foreign
currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than
United States markets, and prices in some foreign markets can
be very volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those that
apply to United States companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's
financial condition and operations. In addition, the costs of
foreign investing, including withholding taxes, brokerage
commissions, and custodial fees, generally are higher than for
United States investments.
Investing in companies located abroad carries political
and economic risks distinct from those associated with
investing in the United States. Foreign investments may be
affected by actions of foreign governments adverse to the
interests of United States Contract Owners, including the
possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on United States
investment, or on the ability to repatriate assets or to
convert currency into U.S. dollars. There may be a greater
possibility of default by foreign governments or foreign-
government sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or
social instability, military action or unrest, or adverse
diplomatic developments.
At the present time, there are five major producers and
processors of gold bullion and other precious metals and
minerals. In order of magnitude, these producers and
processors are: the Republic of South Africa, the former
republics of the former Soviet Union, Canada, the United
States, and Australia. Political and economic conditions in
several of these countries may have a direct effect on the
mining, distribution, and price of precious metals and
minerals, and on the sales of central bank gold holdings,
particularly in the case of South Africa and the former
republics of the former Soviet Union. South African mining
stocks represent a special risk in view of the history of
political unrest in that country. Besides that factor,
various government bodies such as the South African Ministry
of Mines and the Reserve Bank of South Africa exercise
regulatory authority over mining activity and the sale of
gold. The policies of these South African government bodies
in the future could be detrimental to the Precious Metals
Subaccount's objectives.
<PAGE> 5<PAGE>
Repurchase Agreements
As discussed in the Separate Account's Prospectus, each
of the Subaccounts may enter into repurchase agreements with
financial institutions. The Subaccounts each follow certain
procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-
established financial institutions whose condition will be
continually monitored by PADCO. In addition, the value of the
collateral underlying the repurchase agreement will always be
at least equal to the repurchase price, including any accrued
interest earned on the repurchase agreement. In the event of
a default or bankruptcy by a selling financial institution, a
Subaccount will seek to liquidate such collateral. However,
the exercising of each Subaccount's right to liquidate such
collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price,
the Subaccount could suffer a loss. The investments of each
of the Subaccounts in repurchase agreements, at times, may be
substantial when, in the view of the appropriate Subaccount
Advisor, liquidity or other considerations so warrant.
Borrowing
The Nova Subaccount and the Bond Subaccount do not
presently, but may in the future, borrow money, including
borrowing for investment purposes. Borrowing for investment
is known as leveraging. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique
which increases investment risk, but also increases investment
opportunity. Since substantially all of a Subaccount s assets
will fluctuate in value, whereas the interest obligations on
borrowings may be fixed, the Accumulation Unit Value of the
Subaccount will increase more when the Subaccount s portfolio
a s s ets increase in value and decrease more when the
Subaccount s portfolio assets decrease in value than would
otherwise be the case. Moreover, interest costs on borrowings
may fluctuate with changing market rates of interest and may
partially offset or exceed the returns on the borrowed funds.
Under adverse conditions, the Nova Subaccount and the Bond
Subaccount might have to sell portfolio securities to meet
i n t e rest or principal payments at a time investment
c o nsiderations would not favor such sales. The Nova
Subaccount and the Bond Subaccount intend to use leverage
during periods when PADCO believes that the respective
Subaccount s investment objective would be furthered.
When-Issued and Delayed-Delivery Securities
<PAGE> 6<PAGE>
As discussed in the Separate Account's Prospectus, each
Subaccount, from time to time, in the ordinary course of
business, may purchase securities on a when-issued or delayed-
delivery basis, (i.e., delivery and payment can take place
b e tween a month and 120 days after the date of the
transaction). At the time of delivery of the securities, the
value of the securities may be more or less than the purchase
price. The Subaccount will also establish a segregated
account with the Subaccount's custodian bank in which the
Subaccount will maintain cash or cash equivalents or other
portfolio securities equal in value to commitments for such
when-issued or delayed-delivery securities.
<PAGE> 7<PAGE>
Portfolio Turnover
As discussed in the Separate Account's prospectus, PADCO
anticipates that owners of the Contract ("Contract Owners")
w h o s e purchase payments are being allocated to the
Subaccounts, as part of an asset allocation or market-timing
i n v e stment strategy, will frequently transfer amounts
allocated under the Contract ("Contract Values") among the
Subaccounts (other than the Money Market II Subaccount).
Because each Subaccount's portfolio turnover rate to a great
extent will depend on the purchase, withdrawal, and exchange
activity of the Subaccount's Contract Owners, it is very
difficult to estimate what the Subaccount's actual turnover
rate will be in the future.
"Portfolio Turnover Rate" is defined under the rules of
the Securities and Exchange Commission (the "SEC") as the
v a lue of the securities purchased or securities sold,
e x c luding all securities whose maturities at time of
acquisition were one year or less, divided by the average
monthly value of such securities owned during the year. Based
on this definition, instruments with remaining maturities of
less than one year are excluded from the calculation of
portfolio turnover rate. Instruments excluded from the
calculation of portfolio turnover generally would include the
f u t u res contracts and option contracts in which the
Subaccounts invest since such contracts generally have a
remaining maturity of less than one year. All instruments
held by a Subaccount during a specified period may have a
remaining maturity of less than one year in which case the
portfolio turnover rate for that period, under the definition,
would be equal to zero. However, because of the nature of the
Subaccounts, as described above, it is anticipated that their
portfolio turnover will be unusually high.
INVESTMENT RESTRICTIONS OF THE
SUBACCOUNTS
As described in the section of the Prospectus entitled
"Investment Objectives and Policies," each of the Subaccounts
has adopted certain investment restrictions as fundamental
policies which cannot be changed without the approval of the
holders of a "majority" of the outstanding units of interest
in the Subaccount ("Accumulation Units"), as defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
As relevant, the term "majority" is defined in the 1940 Act as
the lesser of: (i) 67% or more of Subaccount Accumulation
Units present at a meeting of Contract Owners, if the holders
of more than 50% of the outstanding Accumulation Units of the
Subaccount are present or represented by proxy; or (ii) more
than 50% of the outstanding Subaccount Accumulation Units.
<PAGE> 8<PAGE>
For purposes of the following limitations, all percentage
limitations apply immediately after a purchase or initial
investment. Any subsequent change in a particular percentage
resulting from fluctuations in value does not require the
elimination of any security from a Subaccount's portfolio.
Policies 1 to 19 below are fundamental investment policies of
each affected Subaccount and may not be changed without a vote
of the Contract Owners with Contract Value allocated to the
Subaccount.
T h e f ollowing restriction is applicable to all
Subaccounts:
A Subaccount shall not:
1. Purchase the securities of any issuer if the
purchase would cause more than 5% of the value of
the Subaccount's total assets to be invested in the
s e curities of any one issuer (excluding U.S.
Government Securities) or cause more than 10% of the
voting securities of the issuer to be held by the
Subaccount, except that up to 25% of the value of
each Subaccount's total assets may be invested
without regard to these restrictions.
2. Invest 25% or more of the value of the Subaccount's
total assets in the securities of one or more
issuers conducting their principal business
activities in the same industry; except that the
Precious Metals Subaccount will invest 25% or more
of the value of the Precious Metals Subaccount's
total assets in the securities in the metals-related
and minerals-related industries; and except, that to
the extent that the benchmark index selected for a
particular Subaccount is concentrated in a
p a r ticular industry, that Subaccount will be
c o n centrated in that industry, but will not
otherwise be concentrated. This limitation does not
apply to investments or obligations of the U.S.
G o v e rnment or any of its agencies or
instrumentalities.
T h e following restrictions are applicable to all
Subaccounts other than the Money Market Subaccounts:
A Subaccount shall not:
3. Lend any security or make any other loan if, as a
result, more than 33 % of the value of the
Subaccount's total assets would be lent to other
parties, except (i) through the purchase of a
portion of an issue of debt securities in accordance
<PAGE> 9<PAGE>
with the Subaccount's investment objective,
policies, and limitations, or (ii) by engaging in
repurchase agreements with respect to portfolio
securities, or (iii) through the loans of portfolio
s e curities provided the borrower maintains
collateral equal to at least 100% of the value of
the borrowed security and marked-to-market daily.
4. Underwrite securities of any other issuer.
5. Purchase, hold, or deal in real estate or oil and
gas interests, although the Subaccount may purchase
and sell securities that are secured by real estate
or interests therein and may purchase mortgage-
related securities and may hold and sell real estate
acquired for the Subaccount as a result of the
ownership of securities.
6. Issue any senior security (as such term is defined
in Section 18(f) of the 1940 Act) (including the
amount of senior securities issued but excluding
liabilities and indebtedness not constituting senior
securities), except that the Subaccount may issue
senior securities in connection with transactions in
options, futures, options on futures, and other
s i m ilar investments, and except as otherwise
permitted herein and in Investment Restriction Nos.
6, 8, 9, 10, 11, and 12, as applicable to the
Subaccount.
7. Pledge, mortgage, or hypothecate the Subaccount's
assets, except to the extent necessary to secure
permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with
(i) the writing of covered put and call options,
(ii) the purchase of securities on a forward-
commitment or delayed-delivery basis, and (iii)
collateral and initial or variation margin
arrangements with respect to currency transactions,
options, futures contracts, including those relating
to indexes, and options on futures contracts or
indexes.
8. Invest in commodities except that (i) the Subaccount
may purchase and sell futures contracts, including
those relating to securities, currencies, indexes,
and options on futures contracts or indexes and
currencies underlying or related to any such futures
contracts, and purchase and sell currencies (and
o p tions thereon) or securities on a forward-
commitment or delayed-delivery basis, and (ii) the
<PAGE> 10<PAGE>
Precious Metals Subaccount may invest in precious
metals and precious minerals.
The following restriction is applicable to the Ursa
S u b a c count, the OTC Subaccount, the Precious Metals
S u baccount, the Juno Subaccount, and the Money Market
Subaccounts:
A Subaccount shall not:
9. Borrow money, except (i) as a temporary measure for
extraordinary or emergency purposes and then only in
amounts not in excess of 5% of the value of the
Subaccount's total assets from a bank or (ii) in an
a m ount up to one-third of the value of the
Subaccount's total assets, including the amount
borrowed, in order to meet redemption requests
without immediately selling portfolio instruments.
This provision is not for investment leverage but
solely to facilitate management of the portfolio by
enabling the Subaccount to meet redemption requests
when the liquidation of portfolio instruments would
be inconvenient or disadvantageous. The Juno
Subaccount shall not make purchases while borrowing
in excess of 5% of the value of its total assets.
For purposes of this limitation, Subaccount assets
i n vested in reverse repurchase agreements are
included in the amounts borrowed.
The following restriction is applicable to the Nova
S u b a c count, the OTC Subaccount, the Precious Metals
Subaccount, and the Bond Subaccount:
A Subaccount shall not:
10. Make short sales of portfolio securities or purchase
any portfolio securities on margin, except for
short-term credits necessary for the clearance of
transactions. The deposit or payment by the
S u baccount of initial or variation margin in
connection with futures or options transactions is
not considered to be a securities purchase on
margin. The Subaccount may engage in short sales
if, at the time of the short sale, the Subaccount
owns or has the right to acquire an equal amount of
the security being sold at no additional cost
("selling against the box"); except that the Bond
Subaccount may not engage in short sales against the
box.
The following restriction is applicable to the Nova
Subaccount and the Bond Subaccount:
<PAGE> 11<PAGE>
A Subaccount shall not:
11. Borrow money, except the Subaccount may borrow money
(i) from a bank in an amount not in excess of 33 %
of the total value of the Subaccount's assets
( i ncluding the amount borrowed) less the
Subaccount's liabilities (not including the
Subaccount's borrowings), and (ii) for temporary
purposes in an amount not in excess of 5% of the
total value of the Subaccount's assets.
The following restriction is applicable to the Ursa
Subaccount and the Juno Subaccount:
A Subaccount shall not:
12. Make short sales of portfolio securities or maintain
a short position unless at all times when a short
position is open (i) the Subaccount maintains a
segregated account with the Subaccount's custodian
to cover the short position in accordance with the
position of the SEC or (ii) the Subaccount owns an
equal amount of such securities or securities
convertible into or exchangeable, without payment of
any further consideration, for securities of the
s a me issue as, and equal in amount to, the
securities sold short.
The following restrictions are applicable to the Money
Market Subaccounts:
A Subaccount shall not:
13. Make loans to others except through the purchase of
qualified debt obligations, loans of portfolio
securities and entry into repurchase agreements.
14. Lend the Subaccount's portfolio securities in excess
of 15% of the Subaccount's total assets. Any loans
of the Subaccount's portfolio securities will be
made according to guidelines established by the
Board of Managers of the Separate Account, including
maintenance of cash collateral of the borrower equal
at all times to the current market value of the
securities loaned.
15. Issue senior securities, except as permitted by the
Subaccount's investment objectives and policies.
16. Write or purchase put or call options.
<PAGE> 12<PAGE>
17. Invest in securities of other investment companies,
except as these securities may be acquired as part
of a merger, consolidation, acquisition of assets,
or plan of reorganization.
18. Mortgage, pledge, or hypothecate the Subaccount's
assets except to secure permitted borrowings. In
those cases, the Subaccount may mortgage, pledge, or
h y pothecate assets having a market value not
exceeding the lesser of the dollar amounts borrowed
or 10% of the value of total assets of the
Subaccount at the time of the borrowing.
19. Make short sales of portfolio securities or purchase
any portfolio securities on margin, except for
short-term credits necessary for the clearance of
transactions.
The Managers have adopted additional investment
restrictions for each Subaccount. These restrictions are not
fundamental investment policies, but rather are operating
policies of each Subaccount, as indicated, and may be changed
by the Managers without Contract Owner approval. With respect
to each of the Subaccounts, except as otherwise indicated,
these additional investment restrictions adopted by the
Managers, to date, are as follows:
1. The Subaccount will not invest in warrants.
2. The Subaccount will not invest in real estate
limited partnerships.
3. The Subaccount will not invest in mineral leases;
except that the Precious Metals Subaccount may
invest in mineral leases although the Precious
Metals Subaccount does not presently intend to
invest in such leases.
In addition, none of the Subaccounts presently intends:
1. To enter into currency transactions; except that the
Precious Metals Subaccount may enter into currency
transactions although the Precious Metals Subaccount
does not presently intend to enter into such
transactions.
2. To purchase illiquid securities. If in the future,
a Subaccount does purchase illiquid securities, the
Subaccount will not invest more than 15% of its
assets in illiquid securities; except that each of
the Money Market Subaccounts will not invest more
than 10% of its assets in illiquid securities. Each
<PAGE> 13<PAGE>
S u baccount will adhere to a more restrictive
l i m itation on the Subaccount's investment in
illiquid securities as required by the insurance
l a w s of those jurisdictions where Subaccount
Accumulation Units are offered for sale.
3. To purchase and sell real property (including
limited partnership interests), to purchase and sell
securities that are secured by real estate or
interests therein, to purchase mortgage-related
securities, or to hold and sell real estate acquired
for the Subaccount as a result of the ownership of
securities.
If a percentage restriction is adhered to at the time of
a n i nvestment, a later increase or decrease in the
investment's percentage of the value of the Subaccount's total
assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction.
BOARD OF MANAGERS
OF THE SEPARATE ACCOUNT
The Board of Managers of the Separate Account (the
"Managers") are responsible for the general supervision of the
Separate Account's business. The day-to-day operations of the
Separate Account are the responsibilities of the Separate
Account's officers. The names, addresses, and ages of the
Managers of the Separate Account and the officers of PADCO,
together with information as to their principal business
occupations during the past five years, are set forth below.
Fees and expenses for non-interested Managers will be paid by
the Separate Account.
Managers
Albert P. Viragh, Jr. (54)*
Chairman of the Board of Managers of the Separate
Account; Chairman of the Board, President, and Treasurer
of PADCO Advisors II, Inc., investment adviser to the
Separate Account, 1996 to present; Chairman of the Board
of Trustees and President of Rydex Series Trust, a
registered investment company; Chairman of the Board,
P r esident, and Treasurer of PADCO Advisors, Inc.,
investment adviser to Rydex Series Trust, 1993 to
present; portfolio manager of the Ursa Fund, a series of
Rydex Series Trust, 1994 to present; Chairman of the
Board, President, and Treasurer of PADCO Service Company,
Inc., shareholder and transfer agent servicer to the
Separate Account, 1993 to present; Chairman of the Board,
<PAGE> 14<PAGE>
President, and Treasurer of PADCO Financial Services,
Inc., a registered broker-dealer firm, and the Separate
Account's principal underwriter, 1996 to present; Vice
P r esident of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852.
Corey A. Colehour (50)
Manager of the Separate Account; Trustee of Rydex Series
T r ust, 1993 to present; Senior Vice President of
Marketing of Schield Management Company, a registered
investment adviser, 1985 to present. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland
20852.
J. Kenneth Dalton (54)
Manager of the Separate Account; Trustee of Rydex Series
Trust, 1995 to present; Mortgage Banking Consultant and
Investor, The Dalton Group, April 1995 to present;
President, CRAM Mortgage Group, Inc. 1966 to April 1995.
Address: 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852.
Roger Somers (51)
Manager of the Separate Account; Trustee of Rydex Series
Trust, 1993 to present; President, Arrow Limousine, 1963
to present. Address: 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852.
<PAGE> 15<PAGE>
L. Gregory Gloeckner (42)*
Manager of the Separate Account; Senior Vice President,
Conseco, Inc., October 1994 to present; Vice President,
Continuum, August to October 1994; Vice President,
Variable Product Administration, Monarch Life Insurance
Company and First Variable Life Company, 1993 to 1994;
self-employed consultant from 1991 to 1993; and Vice
President, Beneficial Standard Life Insurance Company,
1989 to 1991. Address: 11815 North Pennsylvania Street,
Carmel, Indiana 46032.
_________________________
* This Manager is deemed to be an "interested person" of
the Separate Account, within the meaning of Section
2(a)(19) of the 1940 Act, because this person is
affiliated with PADCO, as described herein.
Other Officers of PADCO
Timothy P. Hagan (52)
Treasurer and Vice President of the Separate Account;
Vice President of PADCO; Treasurer and Vice President of
Rydex Series Trust, 1993 to present; Employee of PADCO
Service Company, Inc., 1993 to present; President and
D i rector of Rushmore Services, Inc., a registered
transfer agent, 1981 to 1993. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
Robert M. Steele (37)
Secretary and Vice President of the Separate Account;
Vice President of PADCO; Secretary and Vice President of
Rydex Series Trust, 1995 to present; Vice President of
PADCO Advisors, Inc., 1994 to present; Vice President of
T h e Boston Company, Inc., an institutional money
management firm, 1987 to 1994. Address: 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
Messrs. Colehour, Dalton, and Somers comprise the Audit
Committee of the Managers. The Audit Committee reviews, and
reports to the Managers on the scope and results of, the
Separate Account's audits and related matters.
The Separate Account pays each Manager who is not an
interested person of the Separate Account and Great American
Reserve $1,500 per meeting attended and reimbursement for
actual out-of-pocket expenses relating to attendance at
meetings.
<PAGE> 16<PAGE>
PADCO
PADCO, which has its office at 6116 Executive Boulevard,
S u i t e 400, Rockville, Maryland 20852, provides the
Subaccounts with investment advisory services. PADCO was
incorporated in the State of Maryland on July 5, 1994. Albert
P. Viragh, Jr., the Chairman of the Board of Managers of the
S e p arate Account and the President of PADCO, owns a
controlling interest in PADCO.
Under an investment advisory agreement with PADCO, dated
November 1, 1996, PADCO serves as the investment adviser for
e a ch Subaccount and provides investment advice to the
Subaccounts and oversees the day-to-day operations of the
Subaccounts, subject to direction and control by the Managers.
Pursuant to the advisory agreement with PADCO, the Subaccounts
pay PADCO the following fees at an annual rate based on the
a v e r age daily Accumulation Units for each respective
Subaccount, as set forth below:
Nova Subaccount 0.75%
Ursa Subaccount 0.90%
OTC Subaccount 0.75%
Precious Metals Subaccount 0.75%
Bond Subaccount 0.50%
Juno Subaccount 0.90%
Money Market I Subaccount 0.50%
Money Market II Subaccount 0.25%
PADCO manages the investment and the reinvestment of the
assets of each of the Subaccounts, in accordance with the
investment objectives, policies, and limitations of the
Subaccount, subject to the general supervision and control of
the Managers. PADCO bears all costs associated with providing
these advisory services and the expenses of the Managers of
the Separate Account who are affiliated with or interested
persons of PADCO. In addition, PADCO has voluntarily agreed
to reimburse each Subaccount (up to the amount of the
applicable advisory fee) through June 30, 1997, and until such
later date as PADCO may determine, for other expenses incurred
by the Subaccount so that the total annual expenses, including
advisory fees, for the respective Subaccounts do not exceed
4.80% for the Nova Subaccount, 4.90% for the Ursa Subaccount,
4.80% for the OTC Subaccount, 4.80% for the Precious Metals
Subaccount, 4.40% for the Bond Subaccount, 4.90% for the Juno
Subaccount, 4.20% for the Money Market I Subaccount, and 1.75%
for the Money Market II Subaccount.
PORTFOLIO TRANSACTIONS AND BROKERAGE
<PAGE> 17<PAGE>
Subject to the general supervision by the Managers, PADCO
is responsible for decisions to buy and sell securities for
each of the Subaccounts, the selection of brokers and dealers
to effect the transactions, and the negotiation of brokerage
commissions, if any. PADCO expects that the Subaccounts may
e x ecute brokerage or other agency transactions through
registered broker-dealers, for a commission, in conformity
with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
PADCO, and its affiliates (collectively, the "PADCO
Advisors") may serve as investment managers to a number of
clients, including other investment companies. It is the
practice of the PADCO Advisors to cause purchase and sale
transactions to be allocated among the Subaccounts and others
whose assets the PADCO Advisors manage as the PADCO Advisors
deem equitable. The main factors considered by the PADCO
Advisors in making such allocations among the Subaccounts and
other client accounts of the PADCO Advisors are the respective
investment objectives, the relative size of portfolio holdings
of the same or comparable securities, the availability of cash
for investment, the size of investment commitments generally
held, and the opinions of the person(s) responsible, if any,
for managing the portfolios of the Subaccounts and the other
client accounts.
The policy of each Subaccount regarding purchases and
sales of securities for the Subaccount's portfolio is that
primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions.
Consistent with this policy, when securities transactions are
effected on a stock exchange, each Subaccount's policy is to
pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible
commissions are paid in all circumstances. Each Subaccount
believes that a requirement always to seek the lowest possible
commission cost could impede effective portfolio management
and preclude the Subaccount and the PADCO Advisors from
obtaining a high quality of brokerage and research services.
In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the PADCO Advisors rely
upon their experience and knowledge regarding commissions
generally charged by various brokers and on their judgment in
evaluating the brokerage and research services received from
the broker effecting the transaction. Such determinations are
necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
Purchases and sales of obligations of the U.S. Treasury,
or obligations either issued or guaranteed, as to principal
and interest, by agencies or instrumentalities of the U.S.
G o vernment ("U.S. Government Securities"), are normally
<PAGE> 18<PAGE>
transacted through issuers, underwriters, or major dealers in
U.S. Government Securities acting as principals. Such
transactions are made on a net basis and do not involve
payment of brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission
paid by the issuer to the underwriters; transactions with
dealers normally reflect the spread between bid and asked
prices.
In seeking to implement a Subaccount's policies, the
PADCO Advisors effect transactions with those brokers and
dealers whom the PADCO Advisors believe provide the most
favorable prices and are capable of providing efficient
executions. If the PADCO Advisors believe such prices and
executions are obtainable from more than one broker or dealer,
the PADCO Advisors may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish
research and other services to the Subaccount or the PADCO
Advisors. Such services may include, but are not limited to,
any one or more of the following: information as to the
availability of securities for purchase or sale; statistical
or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio
securities.
If the broker-dealer providing these additional services
is acting as a principal for its own account, no commissions
would be payable. If the broker-dealer is not a principal, a
higher commission may be justified, at the determination of
the PADCO Advisors, for the additional services.
The information and services received by the PADCO
Advisors from brokers and dealers may be of benefit to the
PADCO Advisors in the management of accounts of some of the
PADCO Advisors' other clients and may not in all cases benefit
a Subaccount directly. While the receipt of such information
and services is useful in varying degrees and would generally
reduce the amount of research or services otherwise performed
by the PADCO Advisors and thereby reduce the PADCO Advisors'
e x p enses, this information and these services are of
indeterminable value and the advisory fees paid to the PADCO
A d v isors are not reduced by any amount that may be
attributable to the value of such information and services.
DETERMINATION OF ACCUMULATION UNIT VALUES
The current market values of the Accumulation Units (the
"Accumulation Unit Values") for each of the Subaccounts are
determined each day on which the New York Stock Exchange (the
"NYSE") is open for business. Currently, the NYSE is closed
on weekends and on the following holidays: (i) New Year s Day,
<PAGE> 19<PAGE>
President s Day, Good Friday, Memorial Day, July Fourth, Labor
Day, Thanksgiving Day, and Christmas Day; and (ii) the
preceding Friday when any one of those holidays falls on a
Saturday or the subsequent Monday when any one of those
holidays falls on a Sunday. Accumulation Unit Values will be
determined at 4:00 P.M. Eastern Time for the Nova, Ursa,
Precious Metals, OTC and each of the Money Market Subaccounts
and at 3:00 P.M. Eastern Time for the Bond and Juno
Subaccounts.
For purposes of determining the Accumulation Unit Value
of a Subaccount, options and futures contracts will be valued
15 minutes after the 4:00 P.M., Eastern Time, close of trading
on the NYSE, except that U.S. Treasury bond options and
futures contracts traded on the CBOT will be valued at 3:00
P.M., Eastern Time, the close of trading of that exchange.
Options on securities and indices purchased by a Subaccount
generally are valued at their last bid price in the case of
exchange-traded options or, in the case of options traded in
the OTC market, the average of the last bid price as obtained
from two or more dealers unless there is only one dealer, in
which case that dealer s price is used. The value of a
futures contract equals the unrealized gain or loss on the
contract that is determined by marking the contract to the
current settlement price for a like contract acquired on the
day on which the futures contract is being valued. The value
of options on futures contracts is determined based upon the
current settlement price for a like option acquired on the day
on which the option is being valued. A settlement price may
not be used for the foregoing purposes if the market makes a
limit move with respect to a particular commodity.
OTC securities held by a Subaccount shall be valued at
the last sales price or, if no sales price is reported, the
mean of the last bid and asked price is used. The portfolio
securities of a Subaccount that are listed on a national
exchange or foreign stock exchange are taken at the last sales
price of such securities on that exchange; if no sales price
is reported, the mean of the last bid and asked price is used.
For valuation purposes, all assets and liabilities initially
expressed in foreign currency values will be converted into
U.S. dollar values at the mean between the bid and the offered
quotations of such currencies against U.S. dollars as last
quoted by any recognized dealer. If such quotations are not
available, the rate of exchange will be determined in good
f a i t h by the Managers. Dividend income and other
distributions are recorded on the ex-dividend date, except for
certain dividends from foreign securities which are recorded
as soon as the Separate Account is informed after the ex-
dividend date.
<PAGE> 20<PAGE>
I l liquid securities, securities for which reliable
quotations or pricing services are not readily available, and
all other assets will be valued at their respective fair value
a s determined in good faith by, or under procedures
established by, the Managers, which procedures may include the
delegation of certain responsibilities regarding valuation to
PADCO or the officers of the Separate Account. PADCO and
officers of the Separate Account report, as necessary, to the
Managers regarding portfolio valuation determination. The
Managers, from time to time, will review these methods of
valuation and will recommend changes which may be necessary to
assure that the investments of the Subaccounts are valued at
fair value.
PERFORMANCE INFORMATION
Total Return Calculations
From time to time, each of the Subaccounts (other than
the Money Market Subaccounts) may include its total return for
prior periods in advertisements or reports to Contract Owners
or prospective Contract Owners. Quotations of average annual
total return for a Subaccount will be expressed in terms of
the average annual compounded rate of return on a hypothetical
investment in the Subaccount over a period of at least 1, 5,
and 10 years (up to the life of the Subaccount) (the ending
date of the period will be stated), or for the life of the
Subaccount. Other total return quotations, aggregate over
other time periods for the Subaccount, also may be included.
Total return of a Subaccount is calculated from two factors:
the amount of dividends earned by each Subaccount unit and by
the increase or decrease in value of the Subaccount's unit
value.
The total return of a Subaccount for a particular period
represents the increase (or decrease) in the value of a
hypothetical investment in the Subaccount from the beginning
to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the
ending value and showing the difference as a percentage of the
initial investment; this calculation assumes that the initial
investment is made at the current Accumulation Unit Value and
that all income dividends or capital gains distributions
during the period are reinvested in Accumulation Units of the
Subaccount at Accumulation Unit Value. Total return is based
on historical earnings and asset value fluctuations and is not
intended to indicate future performance.
Average annual total return quotations for various
periods are computed by finding the average annual compounded
rate of return over the period that would equal the initial
<PAGE> 21<PAGE>
amount invested to the ending contract value available for
withdrawal. A more-detailed description of the method by
which the total return of a Subaccount is calculated is
contained in this Statement of Additional Information under
"Calculation of Return Quotations."
Yield Calculations
In addition to total return information, the Bond
Subaccount may also advertise its current "yield." Yield
figures are based on historical earnings and are not intended
to indicate future performance. Yield is determined by
analyzing the Bond Subaccount s net income per unit for a
thirty-day (or one-month) period (which period will be stated
in the advertisement), and dividing by the maximum offering
price per unit on the last day of the period. Calculation of
yield does not include any applicable withdrawal charges. A
"bond equivalent" annualization method is used to reflect a
semi-annual compounding.
For purposes of calculating yield quotations, net income
is determined by a standard formula prescribed by the SEC to
facilitate comparison with yields quoted by other investment
companies. Net income computed for this formula differs from
net income reported by the Bond Subaccount in accordance with
generally accepted accounting principles and from net income
computed for Federal income tax reporting purposes. Thus, the
yield computed for a period may be greater or less than the
Bond Subaccount s then-current dividend rate.
The Bond Subaccount s yield is not fixed and will
fluctuate in response to prevailing interest rates and the
market value of portfolio securities, and as a function of the
type of securities owned by the Bond Subaccount, portfolio
maturity, and the Bond Subaccount s expenses.
Yield quotations should be considered relative to changes
in the Accumulation Unit Value of the Bond Subaccount, the
Bond Subaccount s investment policies, and the risks of
investing in Bond Subaccount units. The investment return and
principal value of an investment in the Bond Subaccount will
fluctuate so that a Contract Owner's Accumulation Units, when
redeemed, may be worth more or less than their original cost.
From time to time, each of the Money Market Subaccounts
advertise their "yield" and "effective yield." Both yield
figures are based on historical earnings and are not intended
to indicate future performance. The "yield" of a Money Market
Subaccount refers to the income generated by an investment in
the Money Market Subaccount over a seven-day period (which
period will be stated in the advertisement). This income is
then "annualized." That is, the amount of income generated by
<PAGE> 22<PAGE>
the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage
of the investment. The "effective yield" is calculated
similarly, but, when annualized, the income earned by an
investment in a Money Market Subaccount is assumed to be
reinvested. The "effective yield" will be slightly higher
than the "yield" because of the compounding effect of this
assumed reinvestment. A description of the respective methods
by which the yield of the Bond Subaccount and the current and
e f f ective yields of the Money Market Subaccounts are
calculated is contained in this Statement of Additional
Information under "Information on Computation of Yield."
Since yield fluctuates, yield data cannot necessarily be
used to compare an investment in units of the Bond Subaccount
or the Money Market Subaccounts with bank deposits, savings
accounts, and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated
period of time. Contract Owners of the Bond Subaccount and
Money Market Subaccounts should remember that yield generally
is a function of the kind and quality of the instrument held
in portfolio, portfolio maturity, operating expenses, and
market conditions.
Comparisons of Investment Performance
Performance information for each of the Subaccounts
contained in reports to Contract Owners or prospective
C o n tract Owners, advertisements, and other promotional
literature may be compared to the record of various unmanaged
indexes for the same period. In conjunction with performance
reports, promotional literature, and/or analyses of Contract
Owner service for a Subaccount, comparisons of the performance
information of the Subaccount for a given period to the
performance of recognized, unmanaged indexes for the same
period may be made. Such indexes include, but are not limited
to, ones provided by Dow Jones & Company, Standard & Poor s
Corporation, Lipper Analytical Services, Inc., Shearson Lehman
Brothers, National Association of Securities Dealers, Inc.,
The Frank Russell Company, Value Line Investment Survey, the
American Stock Exchange, the Philadelphia Stock Exchange,
Morgan Stanley Capital International, Wilshire Associates, the
Financial Times-Stock Exchange, and the Nikkei Stock Average
and Deutcher Aktienindex, all of which are unmanaged market
indicators. Such comparisons can be a useful measure of the
quality of a Subaccount s investment performance.
In particular, performance information for the Nova
Subaccount, the Ursa Subaccount, and the Precious Metals
Subaccount may be compared to various unmanaged indexes,
including, but not limited to, the Standard & Poor's 500
Composite Stock Price Index (the "S&P500 Index") or the Dow
<PAGE> 23<PAGE>
Jones Industrial Average. Performance information for the
Precious Metals Subaccount also may be compared to its current
benchmark, the Philadelphia Stock Exchange Gold/Silver Index
(the "XAU Index"). Performance information for the OTC
Subaccount may be compared to various unmanaged indexes,
including, but not limited to, its current benchmark, the
NASDAQ 100 Index , and the NASDAQ Composite Index . The
NASDAQ Composite Index comparison may be provided to show how
the OTC Subaccount's total return compares to the record of a
broad average of over-the-counter stock prices over the same
period. The OTC Subaccount has the ability to invest in
securities not included in the NASDAQ 100 Index or the NASDAQ
Composite Index, and the OTC Subaccount's investment portfolio
may or may not be similar in composition to NASDAQ 100 Index
or the NASDAQ Composite Index. The NASDAQ Composite Index is
based on the prices of an unmanaged group of stocks and,
unlike the OTC Subaccount's returns, the returns of the NASDAQ
Composite Index, and such other unmanaged indexes, may assume
the reinvestment of dividends, but generally do not reflect
payments of brokerage commissions or deductions for operating
c o s t s and other expenses of investing. Performance
information for the Bond Subaccount and the Juno Subaccount
may be compared to the price movement of the Current Long
Treasury Bond (the "Long Bond") and to various unmanaged
indexes, including, but not limited to, the Shearson Lehman
Government (LT) Index . Such unmanaged indexes may assume the
reinvestment of dividends, but generally do not reflect
deductions for operating costs and expenses.
In addition, rankings, ratings, and comparisons of
investment performance and/or assessments of the quality of
Contract Owner service appearing in publications such as
Money, Forbes, Kiplinger s Magazine, Personal Investor,
Morningstar, Inc., the Morningstar Variable Annuity/Life
Reporter, VARDS, and similar sources which utilize information
compiled (i) internally, (ii) by Lipper Analytical Services,
Inc. ("Lipper"), or (iii) by other recognized analytical
services, may be used in sales literature. The Morningstar
Variable Annuity/Life Reporter consists of nearly 700 variable
life and annuity funds, all of which report their data net of
investment advisory fees, direct operating expenses, and
separate account charges. VARDS is a monthly reporting
service that monitors approximately 760 variable life and
variable annuity funds on performance and account information.
The total return of each Subaccount (other than the Money
Market Subaccounts) may be compared to the performance of
broad groups of comparable subaccounts or mutual funds with
similar investment goals, as such performance is tracked and
published by such independent organizations as Lipper, and CDA
Investment Technologies, Inc., among others. When Lipper's
tracking results are used, the Subaccount will be compared to
Lipper's appropriate fund category, that is, by fund objective
<PAGE> 24<PAGE>
and portfolio holdings. Accordingly, the Lipper ranking and
comparison, which may be used by the Separate Account in
p e r formance reports, will be drawn from the "Capital
Appreciation Subaccounts" grouping for each of the Nova
Subaccount and the Ursa Subaccount, from the "Small Company
Growth Subaccounts" grouping for the OTC Subaccount, from the
"Precious Metals Subaccounts" grouping for the Precious Metals
Subaccount, and from the "Bond Subaccounts" grouping for the
Bond Subaccount and the Juno Subaccount. In addition, the
broad-based Lipper groupings may be used for comparison to any
of the Subaccounts. Rankings may be listed among one or more
of the asset-size classes as determined by Lipper. Since the
assets in all Subaccounts are always changing, a Subaccount
may be ranked within one Lipper asset-size class at one time
and in another Lipper asset-size class at some other time.
Footnotes in advertisements and other marketing literature
will include the time period and Lipper asset-size class, as
applicable, for the ranking in question. Performance figures
are based on historical results and are not intended to
indicate future performance.
Calculation of Return Quotations
For purposes of quoting and comparing the performance of
a Subaccount (other than a Money Market Subaccount) to that of
relevant market indexes in advertisements or in reports to
Contract Owners, performance for the Subaccount may be stated
in terms of average annual total return. Total return is
calculated according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = e n d ing Contract Value
available for withdrawal of a
hypothetical $1,000 payment
made at the beginning of the
1, 5, or 10 year periods at
the end of the 1, 5, or 10
year periods (or fractional
portion thereof).
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters,
updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover
1, 5, and 10 year periods or a shorter period dating from the
<PAGE> 25<PAGE>
effectiveness of the Registration Statement of the Separate
Account. In calculating the ending redeemable value, all
dividends and distributions by a Subaccount are assumed to
have been reinvested. Total return, or "T" in the formula
above, is computed by finding the average annual compounded
rates of return over the 1, 5, and 10 year periods (or
fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. The deduction
for the asset allocation on advisory fee will be included in
the determination of standard total return in any performance
advertising for the Subaccounts.
From time to time, each Subaccount also may include in
such advertising an aggregate total return figure calculated
by assuming the allocation of $10,000 to the Subaccount and
assuming reinvestment of each dividend or other distribution.
Percentage increases are determined by subtracting the initial
value of the investment from the ending value and by dividing
the remainder by the beginning value. Each Subaccount may
show non-standardized total returns and average annual total
returns that do not include sales loads, which, if included,
would reduce the percentages reported.
Information on Computation of Yield
The Bond Subaccount. In addition to the total return
quotations discussed above, the Bond Subaccount also may
advertise its yield based on a thirty-day (or one month)
period ended on the date of the most recent balance sheet
included in the Separate Account's Registration Statement,
computed by dividing the net investment income per Bond
Subaccount unit earned during the period by the maximum
offering price per Bond Subaccount unit on the last day of the
period, according to the following formula:
YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = t h e average daily number of units
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per unit on
the last day of the period.
<PAGE> 26<PAGE>
Under this formula, interest earned on debt obligations, for
purposes of "a" above, is calculated by (i) computing the
yield to maturity of each obligation held by the Bond
Subaccount based on the market value of the obligation
(including actual accrued interest) at the close of business
on the last day of each month, or, with respect to obligations
purchased during the month, the purchase price (plus actual
accrued interest), (ii) dividing that figure by 360 and
multiplying the quotient by the market value of the obligation
(including actual accrued interest as referred to above) to
determine the interest income on the obligation that is in the
Bond Subaccount's portfolio (assuming a month of thirty days),
and (iii) computing the total of the interest earned on all
debt obligations and all dividends accrued on all equity
securities during the thirty-day or one month period. In
computing dividends accrued, dividend income is recognized by
accruing 1/360 of the stated dividend rate of a security each
day that the security is in the Bond Subaccount's portfolio.
U n d eclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted
from the maximum offering price calculation required pursuant
to "d" above.
The Bond Subaccount from time to time may also advertise
its yield based on a thirty-day period ending on a date other
than the most recent balance sheet included in the Separate
Account's Registration Statement, computed in accordance with
the yield formula described above, as adjusted to conform with
the differing period for which the yield computation is based.
Any quotation of performance stated in terms of yield
(whether based on a thirty-day or one month period) will be
given no greater prominence than the information prescribed
under SEC Rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing
that such performance data represents past performance and
t h at the investment return and principal value of an
investment will fluctuate so that a Contract Owner's units,
when redeemed, may be worth more or less than their original
value.
The Money Market Subaccounts. Each of the Money Market
Subaccounts' annualized current yield, as may be quoted from
time to time in advertisements and other communications to
Contract Owners and potential Contract Owners, is computed by
determining, for a stated seven-day period, the net change,
exclusive of capital changes and including the value of
additional Accumulation Units purchased with dividends and any
dividends declared therefrom (which reflect deductions of all
expenses of the Money Market Subaccount such as advisory
fees), in the value of a hypothetical pre-existing account
having a balance of one Accumulation Unit at the beginning of
<PAGE> 27<PAGE>
the period, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by
(365/7).
E a c h of the Money Market Subaccounts' respective
annualized effective yield, as may be quoted from time to time
in advertisements and other communications to Contract Owners
and potential Contract Owners, is computed by determining (for
the same stated seven-day period as the current yield) the net
change, exclusive of capital changes and including the value
of additional Accumulation Units purchased with dividends and
any dividends declared therefrom (which reflect deductions of
all expenses of the Money Market Subaccount, as appropriate,
such as advisory fees), in the value of a hypothetical pre-
existing account having a balance of one Accumulation Unit at
the beginning of the period, and dividing the difference by
the value of the account at the beginning of the base period
to obtain the base period return, and then compounding the
base period return by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
T h e yields quoted in any advertisement or other
communication should not be considered a representation of the
yields of either of the Money Market Subaccounts in the future
since the yield is not fixed. Actual yields will depend not
only on the type, quality, and maturities of the investments
held by the Money Market Subaccount and changes in interest
rates on such investments, but also on changes in the Money
Market Subaccount's expenses during the period.
Y i eld information may be useful in reviewing the
performance of the Money Market Subaccounts and for providing
a basis for comparison with other investment alternatives.
However, unlike bank deposits or other investments, which
typically pay a fixed yield for a stated period of time, the
yields of the Money Market Subaccounts fluctuate.
UNDERWRITER OF THE CONTRACTS
PADCO Financial Services, Inc. ("PFS"), is the principal
underwriter of the Contracts. The offering of the Contracts
is continuous, although Great American Reserve has reserved
the right to suspend the offer and sale of the Contracts
whenever, in its opinion, market or other conditions make a
suspension appropriate. The Contracts are sold by authorized
broker-dealers, including registered representatives of PFS.
These registered representatives are also Great American
Reserve's licensed insurance agents. Great American Reserve,
from its general account, pays commissions to PFS not to
exceed 6.0% of purchase payments.
<PAGE> 28<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of Great American Reserve and
the Statement of Assets and Liabilities of the Separate
Account included in the Prospectus and the Statement of
Additional Information have been examined by Coopers & Lybrand
LLP, independent accountants, for the periods indicated in
their reports as stated in their opinions, and have been so
included in reliance upon such opinion given upon the
authority of that firm as experts in accounting and auditing.
CUSTODY
Boston Safe Deposit and Trust Company, a Massachusetts
trust company with its principal place of business at One
Boston Place, Boston, Massachusetts 02108, acts as the
Custodian bank for the Separate Account and each of the
Subaccounts. The securities of the Subaccount are held by the
Custodian in the Federal book-entry system pursuant to a
custodial agreement.
FINANCIAL STATEMENTS
Financial statements of the Great American Reserve
included herein should be considered only as bearing on the
ability of Great American Reserve to meet its obligations
under the Contract. No financial statements for the Separate
Account are included herein, because the Separate Account had
not commenced operations as of the date of this Statement of
Additional Information.
<PAGE> 29<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Commercial paper rated "Prime" by Moody's Investors
Service, Inc. ("Moody's"), is based upon Moody's evaluation of
many factors including: (1) the management of the issuer; (2)
the issuer's industry or industries and the speculative-type
risks which may be inherent in certain areas; (3) the issuer's
products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6)
trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist
with the issue; and (8) recognition by the management of
obligations which may be present or may arise as a result of
public interest questions and preparations to meet such
obligations. Relative differences in these factors determine
whether the issuer's commercial paper is rated "Prime-1,"
"Prime-2," or "Prime-3" by Moody's.
"Prime-1" indicates a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity
will normally be evidenced by the following characteristics:
(1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage
of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial
markets and assured sources of alternative liquidity.
"Prime-2" indicates a strong capacity for repayment of
short-term promissory obligations. This repayment capacity
normally will be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to
v a riation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
<PAGE> 30<PAGE>
Standard & Poor's Rating Group
Commercial paper rated by Standard & Poor's Rating Group
has the following characteristics: (1) liquidity ratios
adequate to meet cash requirements; (2) long-term senior debt
is rated "A" or better; (3) the issuer has access to at least
two additional channels of borrowing; (4) basic earnings and
cash flow have an upward trend with allowance made for unusual
circumstances; (5) typically, the issuer's industry is well-
established and the issuer has a strong position within the
industry; and (6) the reliability and quality of management
are unquestioned. The relative strength or weakness of the
above factors determine whether the issuer's commercial paper
is rated "A-1," "A-2," or "A-3."
A-1 -- This designation rating indicates that the degree
of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 -- The capacity for timely payment on issues with
this designation rating is strong; however, the relative
degree of safety is not as high as for issues designated "A-
1."
Fitch Investors Service, Inc.
Commercial paper rated by Fitch Investors Service, Inc.
("Fitch"), reflects Fitch's current appraisal of the degree of
assurance of timely payment of such debt. An appraisal
results in the rating of an issuer's paper as "F-1," "F-2,"
"F-3," or "F-4."
F-1 -- This designation rating indicates that the
commercial paper is regarded as having the strongest degree of
assurance for timely payment.
F-2 -- Commercial paper issues assigned this designation
rating reflect an assurance of timely payment only slightly
less in degree than those issues rated "F-1."
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Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co.
("Duff") are consistent with the rating criteria utilized by
m o ney market participants. The ratings apply to all
obligations with maturities of under one year, including
commercial paper, the uninsured portion of certificates of
d e p o sit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper
is also rated according to this scale.
An emphasis of Duff's short-term ratings is placed on
" l i quidity," which is defined as not only cash from
operations, but also access to alternative sources of funds
including trade credit, bank lines, and the capital markets.
An important consideration is the level of an obligor's
reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff's short-term ratings
is the refinement of the traditional "1" category. The
majority of short-term debt issuers carry the highest rating,
yet quality differences exist within that tier. As a
consequence, Duff has incorporated gradations of "1+" (one
plus) and "1-" (one minus) to assist investors in recognizing
those differences.
Duff 1+ -- This designation rating indicates the highest
certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 -- This designation rating indicates a very high
certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk
factors are minor.
Duff 2 -- This designation rating indicates a good
certainty of timely payment. Liquidity factors and company
fundamental are sound. Although ongoing funding needs may
enlarge total financing requirements, access capital markets
is good. Risk factors are small.
<PAGE> 32<PAGE>
IBCA, Inc.
In addition to conducting a careful review of an
institution's reports and published figures, IBCA's analysts
regularly visit the companies for discussions with senior
management. These meetings are fundamental to the preparation
of individual reports and ratings. To keep abreast of any
changes that may affect assessments, analysts maintain contact
throughout the year with the management of the companies that
the analysts cover.
IBCA's analysts speak the languages of the countries that
the analysts cover, which is essential to maximize the value
of their meetings with management and to analyze properly a
company's written materials. IBCA's analysts also have a
thorough knowledge of the laws and accounting practices that
govern the operations and reporting of companies within the
various countries.
Often, in order to ensure a full understanding of their
position, companies entrust IBCA with confidential data.
While these data cannot be disclosed in reports, these data
are taken into account by IBCA when assigning IBCA's ratings.
Before dispatch to subscribers, a draft of the report is
submitted to each company to permit the correction of any
factual errors and to enable the clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to
review all ratings and to ensure that individual ratings are
assigned consistently for institutions in all the countries
covered. Following these committee meetings, IBCA ratings are
issued directly to subscribers. At the same time, the company
is informed of the ratings as a matter of courtesy, but not
for discussion.
A1+ -- This designation rating indicates obligations
supported by the highest capacity for timely repayment.
A1 -- This designation rating indicates obligations
supported by a very strong capacity for timely repayment.
A2 -- This designation rating indicates obligations
supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
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