<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, Suite 400, 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
a v a i lable under the Contract involve 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
below, these techniques are specialized and involve risks that
a r e 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-__.) 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.
I-1<PAGE>
The Separate Account is a segregated investment account of Great
American Reserve Insurance Company ("Great American Reserve"),
and is comprised of seven 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
p o r tfolios ("Subaccounts") selected. You bear the full
investment risk with respect to the Separate Account. Seven
Subaccounts are currently available under the Contract 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.
T h e Money Market Subaccount - To provide current income
consistent with stability of capital and liquidity.
Six 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&P500
Composite Stock Price Index
The Ursa Subaccount Inverse (opposite) of the S&P500
Composite Stock Price Index
The OTC Subaccount NASDAQ 100 Index (NDX)
I-2<PAGE>
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. 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 -- Pre-Retirement
Distributions").
Investments in the Money Market Subaccount 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
U P ON 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
I n formation, dated November 1, 1996, and as supplemented
September 17, 1997, 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-__ of this Prospectus.
The date of this Prospectus is November 1, 1996, as Supplemented
September 17, 1997.
I-3<PAGE>
TABLE OF CONTENTS
Page
PART I
DEFINITIONS I-
PROSPECTUS SUMMARY I-
FEES AND EXPENSES OF THE SUBACCOUNTS I-
FINANCIAL STATEMENTS I-
FINANCIAL HIGHLIGHTS OF THE SUBACCOUNTS I-
GREAT AMERICAN RESERVE INSURANCE COMPANY I-
THE SEPARATE ACCOUNT I-
INVESTMENTS OF THE SUBACCOUNTS I-
Eligible Investments I-
Investment Objectives I-
The Nova Subaccount I-
The Ursa Subaccount I-
The OTC Subaccount I-
The Precious Metals Subaccount I-
The U.S. Government Bond Subaccount I-
The Juno Subaccount I-
The Money Market Subaccount I-
Special Risk Considerations I-
Addition or Deletion of Subaccounts I-
TACTICAL ALLOCATION SERVICES I-
CHARGES AND DEDUCTIONS I-
Withdrawal Charge I-
Mortality and Expense Risk Charge I-
Administrative Fee I-
Investment Advisory Fee and Other Expenses I-
Subaccount Administration Fee I-
Payments of Certain Charges and Deductions I-
Page
Premium Taxes I-
DESCRIPTION OF THE CONTRACT I-
Purchase Payments I-
Changing Financial Advisors I-
Accumulation Provisions I-
I-4<PAGE>
Accumulation Units I-
Value of an Accumulation Unit I-
Valuation Periods I-
The Fixed Account I-
Payment on Death I-
Beneficiary I-
Ownership I-
Account Transfers I-
Withdrawals I-
Suspension or Deferral of Payments I-
Annuity Provisions I-
General I-
Selection of Annuity Date and Annuity Options I-
Change of Annuity Date or Annuity Option I-
Annuity Options I-
Minimum Annuity Payments I-
Proof of Age, Sex, and Survival I-
Notices and Elections I-
Amendment of Contract I-
Ten-Day Right to Review I-
FEDERAL INCOME TAXES I-
Pre-Retirement Distributions I-
General I-
Diversification I-
Multiple Contracts I-
Contracts Owned by Non-Natural Persons I-
Tax Treatment of Assignments I-
Income Tax Withholding I-
Tax Treatment of Withdrawals;
Non-Qualified Contracts I-
Tax Treatment of Withdrawals; Qualified Plans I-
Tax Treatment of Withdrawals; Qualified Contracts I-
Tax-Sheltered Annuities; Withdrawal Limitations I-
Page
SEPARATE ACCOUNT VOTING RIGHTS I-
REPORTS TO CONTRACT OWNERS I-
DISTRIBUTION OF CONTRACTS I-
STATE REGULATION I-
LEGAL PROCEEDINGS I-
INDEPENDENT ACCOUNTANTS I-
REGISTRATION STATEMENT I-
I-5<PAGE>
LEGAL MATTERS I-
PART II
THE SEPARATE ACCOUNT II-
INVESTMENT OBJECTIVES AND POLICIES OF THE SUBACCOUNTS II-
General II-
The Nova Subaccount II-
The Ursa Subaccount II-
The OTC Subaccount II-
The Precious Metals Subaccount II-
The U.S. Government Bond Subaccount II-
The Juno Subaccount II-
The Money Market Subaccount II-
The Benchmarks II-
SPECIAL RISK CONSIDERATIONS II-
Portfolio Turnover II-
Tracking Error II-
Aggressive Investment Techniques II-
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES II-
PERFORMANCE INFORMATION II-
PORTFOLIO TRANSACTIONS AND BROKERAGE II-
Page
MANAGEMENT OF THE SEPARATE ACCOUNT II-
Board of Managers II-
PADCO Advisors II, Inc. II-
PADCO Service Company, Inc. II-
Costs and Expenses II-
TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION II-
I-6<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 representation must not be relied upon as having been
authorized. This 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-__.)
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-__.)
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.
Contract: 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-__.)
I-7<PAGE>
Contract Value: The sum of the amounts allocated to the Fixed Account and the
amounts allocated to the Separate Account. (See page I-__.)
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 with 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).
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-__.)
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.
I-8<PAGE>
Servicer: PADCO Service Company, Inc.
Subaccount: A segment of the Rydex Advisor Variable Annuity Account
consisting of a portfolio of investment securities. (See page I-__.)
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 Subaccount and the Fixed
Account, this time is 4:00 P.M., Eastern Time. For transfers involving
different transaction end times, the earlier of the times indicated above
applies. Telephone and electronic withdrawal and transfer orders will be
accepted only prior to the Transaction Cut-Off Times. If the primary exchange
or market on which a Subaccount transacts business closes early, the above
cut-off time will be approximately thirty minutes (forty-five minutes, in the
case of the Precious Metals Subaccount) prior to the close of such exchange or
market. Telephone and electronic withdrawal and transfer privileges may be
terminated or modified by the Separate Account at any time. (See page I-__.)
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-__.)
Written Request: A request in writing, in a form satisfactory to Great
American Reserve.
I-9<PAGE>
PROSPECTUS 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 seven 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
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
Separate Account" on page I-__, "Investments of the Subaccounts" on page I-__,
"Account Transfers" on page I-__, and "Tactical Allocation Services" on page
I-__.)
The seven Subaccounts, including the Money Market Subaccount, are
managed by PADCO. (See "PADCO" in Part II of this Prospectus.)
Retirement Plans
The Contract may currently be issued pursuant to nonqualified retirement
plans, individual retirement annuities ("IRAs"), or Section 403(b) Annuities
("TSAs").
Purchase Payments
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 that Great American Reserve will accept is $25,000.
The minimum subsequent Purchase Payment is $1,000. (See "Purchase Payments"
on page I-__.)
The 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-
__.)
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-__.)
I-10<PAGE>
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 related to administration of the Contracts. (See
"Administrative Fee" on page I-__.)
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 increase
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-__.)
Subaccount 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 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-__.)
Investment Advisory Fee. Various investment advisory fees, with maximum
annual rates ranging from 0.50% to 0.90% of 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-__.)
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-
__.)
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.
Tactical Allocation Services consist of making allocation and transfer
decisions. You are responsible for selecting, supervising, and paying your
Financial Advisor and must execute a power of attorney authorizing 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 the Servicer with allocation and transfer decisions. 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-__.)
Upon notification to the Servicer of the death, termination, or
resignation of your Financial Advisor, your Separate Account Value will
I-11<PAGE>
immediately be transferred into the Money Market Subaccount. (See "Changing
Financial Advisors" at page I-__ for a description of the applicable
procedures when your Financial Advisor dies, resigns, or has been terminated.)
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-__.)
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-__ and "Tax
Treatment of Withdrawals; Qualified Contracts" at page I-__. 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-__.)
Account Transfers
All or part of your Contract Value may be transferred among the
Subaccounts by your Financial Advisor at any time and without charge prior to
the Annuity Date. Transfers to and from the Fixed Account are also permitted,
but are subject to certain limitations. (See "Account Transfers" on page I-
__.)
Payment on Death
If the Contract Owner dies prior to the Annuity Date, Great American
Reserve will pay the greater of Purchase Payments (less withdrawals) or the
Contract Value (subject to certain state variations). (See "Payment on Death"
on page I-__.)
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 withdrawal charge may be imposed. (See "Withdrawals" on
page I-__.) Withdrawals may be subject to a 10% penalty tax under the Code.
(See "Tax Treatment of Withdrawals; Non-Qualified Contracts" at page I-__ and
"Tax Treatment of Withdrawals; Qualified Contracts" at page I-__.)
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-__.)
I-12<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.
Consequently, 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 Money Market Subaccount) 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.
A l t h ough liquidity risks are often inherent in market timing
arrangements, the Subaccounts have procedures designed to maximize liquidity
of the Subaccounts. In particular, the Subaccounts' 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.
I-13<PAGE>
FEES AND EXPENSES OF THE SUBACCOUNTS
<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 Expense Risk Charge 1.25%
Administrative Fee 0.15%
</TABLE>
1/ Neither state premium taxes nor fees that you pay to your Financial
Advisor are 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%.
I-14<PAGE>
<TABLE>
<CAPTION>
Subaccount Annual Expenses
Nova Ursa
Subaccount Subaccount
<S> <C> <C>
Investment Advisory Fees 0.75% 0.90%
Subaccount Administration Fees 0.25% 0.25%
Other Expenses (after
reimbursement)2/ 0.40% 0.35%
Total Separate Account Annual Expenses
(after reimbursement)3/ 2.80% 2.90%
</TABLE>
2/ Other Expenses are based on estimates.
3/ The total subaccount annual expense ratios for the Nova, Ursa, OTC,
Precious Metals, Bond, Juno, and Money Market Subaccounts (as of June
30, 1997) would have been 3.41%, 8.11%, 4.69%, 10.75%, 4.43%, 4.73%, and
2.23%, respectively, had PADCO and the Servicer not agreed to reduce
advisory and subaccount administration fees, respectively, in accordance
with the expense limitation described below. To limit the expenses of
the Subaccounts during their initial period of operations, PADCO and the
Servicer voluntarily agreed to waive their respective fees and to bear
any Subaccount expenses through June 30, 1997 (and such later date as
PADCO and the Servicer may determine), which would cause the ratios of
expenses to average net assets for the Nova, Ursa, OTC, Precious Metals,
Bond, Juno, and Money Market Subaccounts to exceed 2.80%, 2.90%, 2.80%,
2.80%, 2.40%, 2.90%, and 2.20%, respectively. Effective July 1, 1997,
PADCO and the Servicer voluntarily agreed to extend these existing
expense limitations for a period of six months through December 31,
1997, and may be continued thereafter at the discretion of PADCO and the
Servicer.
I-15<PAGE>
<TABLE>
<CAPTION>
Subaccount Annual Expenses
Precious
OTC Metals
Subaccount Subaccount
<S> <C> <C>
Investment Advisory Fees 0.75% 0.75%
Subaccount Administration Fees 0.20% 0.20%
Other Expenses (after
reimbursement)2/ 0.45% 0.45%
Total Separate Account Annual
Expenses (after reimbursement)3/ 2.80% 2.80%
</TABLE>
2/ Other Expenses are based on estimates.
3/ The total subaccount annual expense ratios for the Nova, Ursa, OTC,
Precious Metals, Bond, Juno, and Money Market Subaccounts (as of June
30, 1997) would have been 3.41%, 8.11%, 4.69%, 10.75%, 4.43%, 4.73%, and
2.23%, respectively, had PADCO and the Servicer not agreed to reduce
advisory and subaccount administration fees, respectively, in accordance
with the expense limitation described below. To limit the expenses of
the Subaccounts during their initial period of operations, PADCO and the
Servicer voluntarily agreed to waive their respective fees and to bear
any Subaccount expenses through June 30, 1997 (and such later date as
PADCO and the Servicer may determine), which would cause the ratios of
expenses to average net assets for the Nova, Ursa, OTC, Precious Metals,
Bond, Juno, and Money Market Subaccounts to exceed 2.80%, 2.90%, 2.80%,
2.80%, 2.40%, 2.90%, and 2.20%, respectively. Effective July 1, 1997,
PADCO and the Servicer voluntarily agreed to extend these existing
expense limitations for a period of six months through December 31,
1997, and may be continued thereafter at the discretion of PADCO and the
Servicer.
I-16<PAGE>
<TABLE>
<CAPTION>
Subaccount Annual Expenses
Money
Bond Juno Market
<S> Subaccount Subaccount Subaccount
<C> <C> <C>
Investment Advisory Fees 0.50% 0.90% 0.50%
Subaccount Administration
Fees 0.20% 0.25% 0.20%
Other Expenses (after
reimbursement)2/ 0.30% 0.35% 0.10%
Total Separate Account Annual
Expenses (after
reimbursement)3/ 2.40% 2.90% 2.20%
</TABLE>
2/ Other Expenses are based on estimates.
3/ The total subaccount annual expense ratios for the Nova, Ursa, OTC,
Precious Metals, Bond, Juno, and Money Market Subaccounts (as of June
30, 1997) would have been 3.41%, 8.11%, 4.69%, 10.75%, 4.43%, 4.73%, and
2.23%, respectively, had PADCO and the Servicer not agreed to reduce
advisory and subaccount administration fees, respectively, in accordance
with the expense limitation described below. To limit the expenses of
the Subaccounts during their initial period of operations, PADCO and the
Servicer voluntarily agreed to waive their respective fees and to bear
any Subaccount expenses through June 30, 1997 (and such later date as
PADCO and the Servicer may determine), which would cause the ratios of
expenses to average net assets for the Nova, Ursa, OTC, Precious Metals,
Bond, Juno, and Money Market Subaccounts to exceed 2.80%, 2.90%, 2.80%,
2.80%, 2.40%, 2.90%, and 2.20%, respectively. Effective July 1, 1997,
PADCO and the Servicer voluntarily agreed to extend these existing
expense limitations for a period of six months through December 31,
1997, and may be continued thereafter at the discretion of PADCO and the
Servicer.
I-17<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 $98 $139
The Ursa Subaccount $99 $142
The OTC Subaccount $98 $139
The Precious Metals Subaccount $98 $139
The Bond Subaccount $94 $127
The Juno Subaccount $99 $142
The Money Market Subaccount $92 $121
</TABLE>
2. If you do not surrender 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 $28 $86
The Ursa Subaccount $29 $89
The OTC Subaccount $28 $86
The Precious Metals Subaccount $28 $86
The Bond Subaccount $24 $74
The Juno Subaccount $29 $89
The Money Market Subaccount $22 $68
</TABLE>
The purpose of the above 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
I-18<PAGE>
guarantee of future investment performance. Neither the table nor the
Examples reflect any state premium taxes that may be applicable to a
variable annuity contract, which taxes currently range from 0% to 3.5%, or
any fees that you pay your Financial Advisor. See "Charges and Deductions"
at page I-__.
FINANCIAL STATEMENTS
Financial statements of Great American Reserve, for the fiscal year
ended December 31, 1996, 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.
Unaudited financial statements of the Separate Account, for the period from
May 7, 1997 (the date that the Separate Account commenced operations),
through June 30, 1997, found in the Statement of Additional Information,
are included in the Separate Account's 1997 Semi-Annual Report to Contract
Owners, which was filed on Form N-30D with the SEC via EDGAR transmission
on September 2, 1997.
I-19<PAGE>
FINANCIAL HIGHLIGHTS OF THE SUBACCOUNTS
(For an Accumulation Unit Outstanding Throughout The Period)
The Separate Account, including the Nova, Ursa, OTC, Juno, and Money Market
Subaccounts, commenced operations on May 7, 1997; the Precious Metals
S u baccount and the U.S. Government Bond Subaccount each commenced
operations on May 29, 1997. The following financial highlights relating to
t h e Subaccounts, for the period identified, are unaudited. This
information should be read in conjunction with the financial statements and
related notes included in the Statement of Additional Information.
<TABLE>
<CAPTION>
The Nova The Ursa
Subaccount Subaccount
For the Period From For the Period From
May 7, 1997, to May 7, 1997, to
June 30, 1997 June 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value at
Beginning of Period $ 10.00 $ 10.00
Investment Income 0.03 0.04
Expenses 0.06 0.11
Net Investment Income (Loss) (0.03) (0.07)
Net Realized and Unrealized
Gains (Losses)on Securities 1.00 (0.77)
Net Increase (Decrease) in
Accumulation Unit Value 0.97 (0.84)
Accumulation Unit Value
at End of Period $ 10.97 $ 9.16
Net Increase (Decrease) in Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 9.7% (8.4)%
Ratios to Average Net Assets*
Net Expenses+ 2.80% 2.90%
Net Investment Income (1.77)% (5.20)%
Supplementary Data
Portfolio Turnover Rate** 101.18% 0%
Number of Accumulation Units
I-20<PAGE>
Outstanding at End of
Period 427,743 23,715
</TABLE>
____________________
+ The annualized ratios of gross expenses to average net assets for the
Nova Subaccount and the Ursa Subaccount are 3.41% and 8.11%,
respectively, for the period from May 7, 1997 to June 30, 1997. (See
Footnote 3 under "Fees and Expenses of the Subaccounts" at page I-
___.)
* Annualized.
** Portfolio turnover rate is calculated without regard to short-term
securities having a maturity of less than one year. Each of the Nova
Subaccount and the Ursa Subaccount typically holds most of its
investments in options and futures contracts which are deemed short-
term securities.
I-21<PAGE>
<TABLE>
<CAPTION>
The
Precious Metals
The OTC Subaccount Subaccount
For the Period From For the Period From
May 7, 1997, to May 29, 1997, to
June 30, 1997 June 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income 0.07 0.01
Expenses 0.07 0.09
Net Investment Income (Loss) 0 (0.08)
Net Realized and Unrealized
Gains (Losses)
on Securities 0.40 (1.05)
Net Increase (Decrease)
in Accumulation Unit Value 0.40 (1.13)
Accumulation Unit Value
at End of Period $ 10.40 $ 8.87
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 4.0% (11.3)%
Ratios to Average Net Assets*
Net Expenses+ 2.80% 2.80%
Net Investment Income (0.07)% (9.35)%
Supplementary Data
Portfolio Turnover Rate** 0% 97.1%
Number of Accumulation Units
Outstanding at End of Period 64,764 14,795
</TABLE>
____________________
I-22<PAGE>
+ The annualized ratios of gross expenses to average net assets for the
OTC Subaccount and the Precious Metals Subaccount are 4.69% and
10.75%, respectively, for the period from May 7, 1997 to June 30, 1997
(for the OTC Subaccount), and the period from May 29, 1997 to June 30,
1997 (for the Precious Metals Subaccount). (See Footnote 3 under
"Fees and Expenses of the Subaccounts" at page I-___.)
* Annualized.
** Portfolio turnover rate is calculated without regard to short-term
securities having a maturity of less than one year.
I-23<PAGE>
<TABLE>
<CAPTION>
The U.S. Government
Bond Subaccount The Juno Subaccount
<S> <C> <C>
For the Period From For the Period From
May 29, 1997, to May 7, 1997, to
June 30, 1997 June 30, 1997
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income 0.06 0.07
Expenses 0.04 0.07
Net Investment Income (Loss) 0.02 0
Net Realized and Unrealized
Gains (Losses)
on Securities 0.28 0.22
Net Increase (Decrease) in
Accumulation Unit Value 0.30 0.22
Accumulation Unit Value
at End of Period $ 10.30 $ 10.22
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 3.0% 2.2%
Ratios to Average Net Assets*
Net Expenses+ 2.40% 2.90%
Net Investment Income 2.30% 0.62%
Supplementary Data
Portfolio Turnover Rate** 189.7% 0%
Number of Accumulation
Units Outstanding
at End of Period 5,126 146,687
</TABLE>
______________________
+ The annualized ratios of gross expenses to average net assets for the
Bond Subaccount and the Juno Subaccount are 4.43% and 4.73%,
I-24<PAGE>
respectively, for the period from May 29, 1997 to June 30, 1997 (for
the Bond Subaccount), and the period from May 7, 1997 to June 30, 1997
(for the Juno Subaccount). (See Footnote 3 under "Fees and Expenses
of the Subaccounts" at page I-___.)
* Annualized.
** Portfolio turnover rate is calculated without regard to short-term
securities having a maturity of less than one year. The Juno
Subaccount typically holds most of its investments in options and
futures contracts which are deemed short-term securities.
I-25<PAGE>
<TABLE>
<CAPTION>
The Money Market
Subaccount
For the Period From
May 7, 1997, to
June 30, 1997
<S> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value at
Beginning of Period $ 10.00
Investment Income 0.24
Expenses 0.10
Net Investment Income (Loss) 0 .14
Net Realized and Unrealized
Gains (Losses)on Securities 0.01
Net Increase (Decrease) in
Accumulation Unit Value 0.15
Accumulation Unit Value at End of
Period $ 10.15
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 1.5%
Ratios to Average Net Assets*
Net Expenses+ 2.20%
Net Investment Income 3.32%
Supplementary Data
Portfolio Turnover Rate** 0%
Number of Accumulation Units
Outstanding at End of Period 193,123
</TABLE>
______________________
+ The annualized ratio of gross expenses to average net assets for the
Money Market Subaccount is 2.23% for the period from May 7, 1997 to June
30, 1997. (See Footnote 3 under "Fees and Expenses of the Subaccounts"
at page I-___.)
I-26<PAGE>
* Annualized.
** Portfolio turnover rate is calculated without regard to short-term
securities having a maturity of less than one year.
I-27<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Great American Reserve, originally organized in 1937, is principally
engaged in the life insurance business in 48 states and the District of
Columbia. Great American Reserve is a stock company organized under the
laws of the State of Texas 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 the development, marketing and
administration of specialized annuity and life insurance products. Conseco
is located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032.
All inquiries regarding the Separate Account, the Contracts, or any
r e l a t e d 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,
1996, Great American Reserve had total assets of $2.7 billion and total
shareholder's equity of $396.9 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
d i versified open-end management investment company pursuant to the
provisions of the Investment Company Act of 1940, as amended (the "1940
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 Great 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, from 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 seven 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
I-28<PAGE>
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 Account will
first be allocated to the Money Market Subaccount. 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 at any time and without charge after the first 14 days following
the Contract Date. (See "Account Transfers" at page I-__.)
A summary of the investment objectives of each Subaccount follows.
More detailed information, including risks of investing in, 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
Each Subaccount has its own distinct investment objective. There is,
of course, no guarantee that any Subaccount will achieve its investment
objective. The investment 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. Except for the Money Market Subaccount, 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." A
Subaccount's benchmark may be changed by the Managers. For further
information regarding the investment objectives and benchmarks of the
Subaccounts, see "Investment Objectives and Policies of the Subaccounts" at
page II-__. 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. The Nova Subaccount's current
benchmark is 125% of the performance of the Standard & Poor s 500 Composite
Stock Price Index (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 including certain
transactions in stock index futures contracts, options on stock index
futures contracts, and options on securities and stock indexes. In
I-29<PAGE>
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, utility, and transportation companies. The
Nova Subaccount is not sponsored, endorsed, sold, or promoted by Standard &
P o o r ' s Corporation and Standard & Poor's Corporation makes no
representation regarding the advisability of investing in the Nova
Subaccount through the Contract or otherwise (see "The Benchmarks" at page
II-__).
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. 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. 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, or decrease for that day in direct proportion to any increase in the
level of the S&P500 Index. While a close correlation can be achieved on
any single trading day, over time the cumulative percentage increase or
decrease in the Accumulation Unit Value of the Ursa Subaccount may diverge
significantly from the respective cumulative percentage decrease or
increase in the S&P500 Index due to a compounding effect. 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 with Contract Value allocated to 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 (see "The
Benchmarks" at page II-__).
The OTC Subaccount. The investment objective of the OTC Subaccount
(the "OTC Subaccount") is to attempt to provide investment results that
c o rrespond 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 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
I-30<PAGE>
securities listed on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") Stock Market. The OTC Subaccount is not
sponsored, endorsed, sold, or promoted by the NASDAQ and the NASDAQ makes
no representation regarding the advisability of investing in the OTC
Subaccount through the Contract or otherwise (see "The Benchmarks" at page
II-__).
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. The Precious Metals
S u baccount 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 eleven widely-held securities in
the gold and silver mining and production industry or companies investing
in such mining and production companies. The Precious Metals Subaccount is
not sponsored, endorsed, sold, or promoted by the Philadelphia Stock
Exchange and the Philadelphia Stock Exchange makes no representation
regarding the advisability of investing in the Precious Metals Subaccount
through the Contract or otherwise (see "The Benchmarks" at page II-__).
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. 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.
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. The Juno Subaccount s
current benchmark is the Long Bond. In seeking its objective, the Juno
Subaccount will employ certain investment techniques including engaging in
short sales and transactions in futures contracts on U.S. Treasury bonds
and options thereon. If the Juno Subaccount is successful in meeting its
objective for any single trading day, the Juno Subaccount's total return
I-31<PAGE>
before expenses and costs would increase for that day proportionally to any
decreases in the price of the Long Bond, or decrease for that day
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 Subaccount. The investment objective of the Money
Market Subaccount is to seek current income consistent with stability of
capital and liquidity. To achieve its objective, the 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 Securities, 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. Consequently,
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 "Financial Highlights of the Subaccounts;"
" S pecial Risk Considerations" in Part II of this Prospectus; and
"Investment Policies and Techniques of the Subaccounts" in the Statement of
Additional Information.
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 "Investment 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 Subaccount) may engage
in certain aggressive investment techniques, which may include engaging in
s h ort 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 Considerations,"
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
I-32<PAGE>
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
This Contract is sold only to Contract Owners who are provided
tactical allocation or market-timing investment services by Financial
Advisors to whom fees may be paid by Contract Owners. The Servicer
maintains a list of Financial Advisors, but does not recommend any
particular 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. Tactical Allocation Services consist of making allocation and
transfer decisions. You are responsible for selecting, supervising, and
paying your Financial Advisor and must execute a power of attorney
authorizing 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 the Servicer with allocation and
transfer decisions. The Servicer 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, the Servicer, nor PADCO selects,
supervises, or recommends any Financial Advisor to you, nor does Great
American Reserve, PFS, the Servicer, or PADCO provide tactical allocation
advice to you. Accordingly, neither Great American Reserve, PFS, the
Servicer, 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. 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.
The Servicer will transfer your Separate Account Value into the Money
Market Subaccount when the Servicer receives notice of the death of your
Financial Advisor, when the Servicer receives notice from you or your
Financial Advisor terminating the relationship, or when the Servicer
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 the Servicer that no Financial Advisor is
serving in relation to your Contract. This notice will include a reminder
that you will be required to notify the Servicer of the name of your new
I-33<PAGE>
Financial Advisor and that until you designate a new Financial Advisor, you
may (i) keep your Separate Account Value in the Money Market 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.
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 variations, 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 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 (subject to certain state variations) 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. (See "Payment on Death" on page I-__.) The withdrawal charge
equals:
<TABLE>
<CAPTION>
Complete Years
Withdrawal Charge Since Receipt of Payment
<S> <C>
7% 0
7% 1
6% 2
5% 3
4% 4
3% 5
2% 6
0% 7 and thereafter </TABLE>
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.
I-34<PAGE>
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 fees paid to your
Financial Advisor are treated as free withdrawals, and are not counted
t o ward the 10% limit; however, there may be certain adverse tax
consequences. (See "Federal Income Taxes -- Pre-Retirement Distributions"
on page I-__.) In addition, with respect to any Contract which is owned by
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, 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
t h at 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-__.)
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.
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.
I-35<PAGE>
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-__.)
The expense risk that 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 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.
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 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
bear 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
The Subaccounts also pay Subaccount administration fees to the
Servicer. Pursuant to a subaccount administration agreement between the
S e parate 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 provides the Subaccounts with tactical
allocation administrative services, including, among others, communications
I-36<PAGE>
with Financial Advisors (including receipt of and acting upon transfer
requests), bookkeeping, determination of Accumulation Unit Values, and
S u b a c c ount accounting services. Information on the Subaccount
a d ministration 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.
Payments of Certain Charges and Deductions
The mortality and expense risk charge, the administrative fee, the
investment advisory fees, 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 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%.
Premium 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
I-37<PAGE>
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 the requirements of
Great American Reserve, the Servicer, and PADCO, as set forth in the
Contract application, and you must execute a new power of attorney
authorizing a new Financial Advisor to provide Tactical Allocation Services
with respect to your Contract or select one of the options discussed below.
After the Servicer 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, the
Servicer will (unless the Servicer concurrently receives the name of your
new Financial Advisor) transfer all of your Separate Account Value into the
Money Market Subaccount. Until you designate a new Financial Advisor, you
may (i) keep your Separate Account Value in the Money Market Subaccount,
(ii) transfer all or part of your Separate Account Value to the Fixed
Account and become subject to Fixed Account transfer restrictions, or (iii)
surrender your Contract, subject to applicable withdrawal charges and tax
penalties. Great American Reserve will notify you upon receipt of
notification from the Servicer that the Servicer has received notice
terminating the relationship, or if the Servicer receives notice from
either a court of competent jurisdiction or the applicable regulatory
authority terminating such relationship. (See "Tactical Allocation
Services" on page I-__.)
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 Subaccount. During the
first 14 days following the Contract Date, no transfers are allowed. (See
discussion under "Eligible Investments" on page I-__.) After this 14-day
period, the Separate Account Value may be transferred to the Subaccounts
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.
I-38<PAGE>
Value of an Accumulation Unit
F o r each Subaccount, the value of an Accumulation Unit was
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 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, and the Subaccount administration fee, as
discussed above, are not deducted from the Fixed Account. The Fixed
Account is subject to certain transfer restrictions (i.e., in any six-month
period, a maximum of 20% of the Fixed Account Value may be transferred;
this restriction, however, is not effective until one year after the
Contract Date). (See "Account Transfers" at page I-__.) 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
accuracy 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
I-39<PAGE>
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 (subject to certain state variations).
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 Subaccount. 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 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
a n n uity payment, see "Tax Treatment of Withdrawals; Non-Qualified
Contracts" at page I-__ and "Tax Treatment of Withdrawals; Qualified
Contracts" at page I-__.)
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 continue 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 thirty 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-__.)
I-40<PAGE>
Beneficiary
The Beneficiary and any Contingent Beneficiary are named in 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 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 unless 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,
pledged, 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 to another 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 Subaccount. Until you
designate a new Financial Advisor, you may: (i) keep your Separate Account
Value in the Money Market Subaccount; (ii) transfer all or part of your
Separate Account Value to the Fixed Account and become subject to Fixed
Account transfer restrictions; or (iii) surrender your Contract, subject to
applicable withdrawal charges and tax penalties. The Servicer maintains a
list of Financial Advisors, but does not recommend any particular Financial
Advisor. (See "Federal Income Taxes -- Pre-Retirement Distributions" at
page I-__).
Transfers may be made in writing, by telephone, or by electronic
medium only from your Financial Advisor directed to the Servicer. By
authorizing the Servicer to accept telephone and electronic transfer
instructions, a Contract Owner agrees to accept and be bound by the
conditions and procedures established by the Servicer from time to time.
I-41<PAGE>
Transfer requests must be made by your Financial Advisor acting pursuant to
a power-of-attorney, and may be made only between 8:30 A.M., Eastern Time,
and the Transaction Cut-Off Times indicated below (all times are Eastern
Time). For transfers involving Subaccounts with different Transaction Cut-
Off Times, the earlier of the times indicated below for the Subaccounts
whose Accumulation Units are being transferred applies.
The Nova, Ursa, and OTC Subaccounts 3:30 P.M.
The Precious Metals Subaccount 3:15 P.M.
The U.S. Government Bond and Juno
Subaccounts 2:30 P.M.
The Money Market Subaccount and the
Fixed Account 4:00 P.M.
Telephone and electronic transfer orders will be accepted only prior
to the Transaction Cut-Off Times indicated above; any transfer request
received later than these times will be initiated at the close of business
on the next business day. If the primary exchange or market on which a
Subaccount transacts business closes early, the above Transaction Cut-Off
Times will be approximately thirty minutes (forty-five minutes, in the case
of the Precious Metals Subaccount) prior to the close of such exchange or
market. Telephone and electronic transfer privileges may be terminated or
modified by the Separate Account at any time. (See page I-__.)
When acting on instructions believed to be genuine, neither Great
American Reserve nor the Servicer will be liable for any loss resulting
from a fraudulent telephone or electronic transaction request and the
Contract Owner would bear the risk of any such loss. The Servicer will
employ reasonable procedures to confirm that any instructions communicated
by telephone or electronic medium are genuine; and if the Servicer does not
employ such procedures, then Great American Reserve and the Servicer, as
appropriate, may be liable for any losses due to unauthorized or fraudulent
instructions. The Servicer follows specific procedures for transactions
initiated by telephone or electronic medium, including, among others,
requiring some form of personal identification or password prior to acting
upon instructions received by telephone or electronic medium, and/or tape
recording of telephone and electronic instructions. Contract Owners also
should be aware that telephone and electronic transfers may be difficult to
implement in a timely manner during periods of drastic economic or market
changes. If such conditions occur, transfer orders can be made by mail.
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). Withdrawals
which are authorized by you to remit fees paid to your Financial Advisor
are treated as free withdrawals, and are not counted toward this 10% limit.
Withdrawals may have certain adverse tax consequences. (See "Federal
Income Taxes -- Pre-Reimbursement Distributions" at page I-___.) There is
I-42<PAGE>
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.") A Contract Owner's election to withdraw must be in writing. The
withdrawal 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-__.) Unless a Contract Owner instructs
otherwise, a partial withdrawal made by a Contract Owner (including any
withdrawals to remit fees payable to a Financial Advisor) will be made pro
rata among the Subaccounts and the Fixed Account in which the Contract
Owner is invested. Withdrawals and related charges will be based on values
for the Valuation Period in which the withdrawal election (and the
Contract, if required) are received by written request at Great American
Reserve's Administrative Office. Withdrawal requests may be made only
between 8:30 A.M., Eastern Time, and 2:30 P.M., Eastern Time; withdrawal
elections received after 2:30 P.M., Eastern Time, will be initiated at the
close of business on the next business day.
A partial withdrawal must be at least $500, and the remaining
Contract Value must be at least $10,000 ($3,500 for Qualified 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-__).
Suspension 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 Federal
Reserve Bank of New York (the "New York Fed"), the NASDAQ, 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 NASDAQ, the CBOT, or the CME, 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.
On any day that the New York Fed or the NYSE closes early, the
principal government securities and corporate bond markets close early
(such as on days in advance of holidays generally observed by participants
in these markets), or as permitted by the SEC, the right is reserved to
I-43<PAGE>
advance the time on that day by which purchase and redemption orders must
be received. (See "Determination of Accumulation Unit Values" in the
Statement of Additional Information).
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 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
I-44<PAGE>
Annuitant's estate the present value, as of the date of death, of the
number of guaranteed 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.
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 3 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-__ and
"Tax Treatment of Withdrawals; Qualified Contracts" at page I-__.
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 pursuant to procedures specified above (see "Account
Transfers" at page I-__). 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
I-45<PAGE>
take effect as of the date signed unless Great American Reserve has already
acted in reliance on the prior status.
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.
Pre-Retirement Distributions
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 deductions that you
may authorize in connection with payment arrangements with your Financial
Advisor that may be made in relation to a Contract used in or used in
connection with such retirement plans.
General
I-46<PAGE>
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 income tax rates. Contract Owners, Annuitants and
Beneficiaries under the Contracts should seek competent financial 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
Section 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
T r easury 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 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 underlying investments of each Subaccount will
remain "adequately diversified" in accordance with the diversification
requirements of Section 817(h) of the Code.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
Section 1.817-5), which established diversification requirements for the
I-47<PAGE>
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 assets of the
subaccount is represented by any two investments; (3) no more than 80% of
the value of the total assets 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 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 is generally exempt from federal income tax, but the
I-48<PAGE>
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 any (i) 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 payments that you may
authorize to your Financial Advisor are treated as distributions, but are
not treated as eligible rollover distributions, then these 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, 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 includible 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
m a ndatory regular income tax withholding, rather than the pension
withholding rules described above.
I-49<PAGE>
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 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
a r e not incorporated into Great American Reserve's administrative
p r o cedures. 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
I-50<PAGE>
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals; Qualified Contracts" at page I-__.)
A. Tax-Sheltered Annuities. Section 403(b) of the Code permits the
purchase of "tax-sheltered annuities" by public schools and certain
charitable, educational scientific organizations described in Section
501(c)(3) of the Code. These qualifying employers may make contributions
to the Contracts 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 governing
s u ch 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 individual 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
subject 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
p e rmit self-employed 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 with respect to service for
state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. All investments are
I-51<PAGE>
owned by the sponsoring employer and are subject to the claims of the
general creditors of the employer, until December 31, 1998, or such earlier
date as may be established by plan amendment. However, amounts deferred
under a plan created on or after August 20, 1996, and amounts deferred
under any Section 457 plan after December 31, 1998, must be held in a
trust, a custodial account, or an annuity contract for the exclusive
benefit of plan participants and their beneficiaries. 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.
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 403(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 (as 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 expectancies)
of such Contract Owner or Annuitant (as applicable) and his or her
designated Beneficiary; (d) distributions 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 first calendar year following the later of (i) the
calendar year in which the employee attains 70 1/2 or (ii) the calendar
year in which the employee retires. Distributions from an IRA must begin
no later than April 1 of the calendar year following the calendar year in
which the IRA holder attains age 70 1/2. Required distributions must be
I-52<PAGE>
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
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 own 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 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.
I-53<PAGE>
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.
DISTRIBUTION OF CONTRACTS
PFS, 6116 Executive Boulevard, Suite 400, 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
registered 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.
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
R e serve'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
operations 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, the Servicer, 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.
I-54<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of Great American Reserve Insurance Company,
for Great American Reserve's fiscal year ended December 31, 1996, included
in the Statement of Additional Information, have been audited by Coopers &
Lybrand LLP, Indianapolis, 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.
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.
I-55<PAGE>
PART II
THE SEPARATE ACCOUNT
The Separate Account is an open-end management investment company
with seven 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 Subaccount, 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 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.
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 results that
Subaccount correspond to the performance of a benchmark
primarily for metals-related securities.
The U.S. Government To provide investment results that correspond to
Bond Subaccount 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 To provide current income consistent with
Subaccount stability of capital and
liquidity.
The Subaccounts (other than the Money Market Subaccount) may engage
in certain aggressive investment techniques, which include short sales and
transactions in options and futures contracts. Contract Owners invested in<PAGE>
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/rising bond prices, 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-_.
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-_.
P A DCO, headquartered at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, provides the Subaccounts with investment
advisory services (since May 7, 1997) pursuant to an investment advisory
agreement, dated November 1, 1996. PADCO was incorporated in the State of
Maryland on July 5, 1994. 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 September 1, 1997,
aggregate net assets in excess of $1.8 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.
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 Subaccount, 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
II-2<PAGE>
investments the Subaccount makes and techniques the Subaccount 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
the Subaccount's benchmark. PADCO does not expect that the total returns
of the Subaccounts will vary adversely from their respective current
benchmarks by more than ten percent over a year. See "Special Risk
Considerations" at page II-__. 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.
The 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.
The Managers may consider changing a Subaccount s benchmark (to the
e x t ent 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
s u f ficiently 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. See "The Benchmarks" at page II-__.
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. The Nova Subaccount's current benchmark is 125%
of the performance of the Standard & Poor's 500 Composite Stock Price
Index (the "S&P500 Index"). (See "The Benchmarks" at page II-__.) 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
II-3<PAGE>
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 premium (i.e., the purchase payment required under the
investment technique) 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 approximate 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 Subaccount could
experience substantial losses during sustained periods of falling equity
prices.
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. The S&P500 Index is the Ursa Subaccount's current
benchmark. (See "The Benchmarks" at page II-__.) 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, over
time the cumulative percentage increase or decrease in the Accumulation
Unit Value of the Ursa Subaccount may diverge significantly from the
cumulative percentage decrease or increase in the S&P500 Index due to a
compounding effect.
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, or decrease for that day in direct proportion to
any increase in the level of the S&P500 Index. For example, 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. Conversely, if the S&P500 Index were to increase by 1% by the close
of business on a particular trading day, Contract Owners with Contract
Value allocated to the Ursa Subaccount would experience a loss 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 on a daily basis, 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
II-4<PAGE>
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, there would be a compounding effect with
the result that the Accumulation Unit Value of the Ursa Subaccount for that
period should generally decrease by a percentage that is slightly less than
the percentage increase in the level of the S&P500 Index for that period.
T h e Ursa 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 Owners 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
o p erating 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 premium or amounts in lieu of dividends or interest that 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 . (See "The Benchmarks" at page II-__.)
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 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.
Companies whose securities are traded on the over-the-counter ("OTC")
markets may include 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 may have limited product lines,
or relatively new products or services, and may lack established markets,
II-5<PAGE>
depth of experienced management, or financial resources and the ability to
generate funds. The securities of these companies also 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 and the
greater sensitivity of smaller-capitalized companies to changing economic
conditions than larger-capitalized, exchange-traded securities.
Conversely, because many of these OTC securities may be overlooked by
investors and undervalued in the marketplace, there may be potential for
significant capital appreciation.
The Precious Metals Subaccount
The 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. The Precious Metals
S u baccount s current benchmark is the Philadelphia Stock Exchange
Gold/Silver Index (the "XAU Index"). (See "The Benchmarks" at page II-
__.) 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 tracking of the
XAU Index.
M e tals-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,
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 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
information about the operations of foreign companies. Foreign securities
II-6<PAGE>
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. 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. (See "The Benchmarks" at
page II-__.) 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 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 three
times a year) in an attempt to track the price movement of the newly-issued
Long Bond.
The Juno Subaccount
The Juno Subaccount s investment objective is to provide total 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. The Juno Subaccount s current benchmark is the Long Bond.
(See "The Benchmarks" at page II-__.) In attempting to achieve its
objective, the Subaccount intends to devote its assets primarily to
employing certain investment techniques, including engaging in short sales
and transactions in futures contracts on U.S. Treasury bonds and options on
such contracts. 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 for any
single trading day, the Juno Subaccount s total return before expenses and
II-7<PAGE>
costs would increase for that day proportionally to any decreases in the
price of the Long Bond, or decrease for that day 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 in the open market, however, does change. The market value
of U.S. Treasury bonds rises when long-term interest rates decrease and
falls when long-term interest rates increase. Accordingly, if the Juno
S u baccount is successful in meeting its investment objective, the
Subaccount s total return should rise with increases in long-term interest
rates and fall with decreases in long-term interest rates. Contract Owners
with Contract Value allocated to the Juno Subaccount may experience
substantial losses during periods of falling interest rates.
The Money Market Subaccount
The investment objective of the Money Market Subaccount is to seek to
provide current income consistent with stability of capital and liquidity.
The 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 the
Money Market Subaccount is neither insured nor guaranteed by the U.S.
Government.
The 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.
The 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 the Money Market
II-8<PAGE>
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
o n e 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 amount of the instrument upon
maturity. Other short-term bank obligations in which the Money Market
Subaccount may invest include uninsured, direct obligations of a bank that
bear fixed, floating, or variable interest rates.
The Money Market Subaccount also may invest in commercial 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
c o m mercial 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.
The Money Market Subaccount also may make limited investments in
guaranteed investment contracts ("GICs") issued by United States insurance
companies. The 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 instruments 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
II-9<PAGE>
The S&P500 Index. The S&P500 Index is composed of 500 common
stocks, which are chosen by Standard & Poor's Corporation ("S&P"), a
division of The McGraw-Hill Companies, Inc., on a statistical basis to be
included in the S&P500 Index. The inclusion of a stock in the S&P500 Index
in no way implies that the S&P believes the stock to be an attractive
investment. The 500 securities, most of which trade on the NYSE,
represented, as of December 31, 1996, approximately 70% of the market value
of all United States common stocks. Each stock included in the S&P500
Index is weighted by the stock s market value.
Because of the market-value weighting, the 50 largest companies
included in the S&P500 Index currently account for approximately 47% of the
S&P500 Index. Typically, companies included in the S&P500 Index are the
largest and most dominant firms in their respective industries. As of
December 31, 1996, the five largest companies in the S&P500 Index were:
General Electric (2.9%); Coca Cola (2.3%); Exxon Corporation (2.2%); Intel
Corporation (1.9%); and Microsoft Corporation (1.7%). The largest industry
categories for the S&P500 Index were: banks (7.7%); telephone companies
(6.6%); pharmaceutical companies (6.4%); international oil companies
(5.8%); and computer companies (4.6%).
The NASDAQ 100 Index . The NASDAQ 100 Index (NDX) is a
capitalization-weighted index composed of 100 of the largest non-financial
securities listed on the National Association of Securities Dealers
Automated Quotations Stock Market (the "Nasdaq"). The Nasdaq, which
represents the fastest-growing stock market in the United States, also is
one of the first fully-electronic stock markets in the world. This modern-
day securities market began operations in 1971, and today lists more
companies than any other market in the United States. The NASDAQ 100
Index , which was created in 1985, is limited to one issue per company. At
the time of inclusion in the NASDAQ 100 Index , index securities must have
a minimum market value of at least $500 million. Only domestic issues are
included in the NASDAQ 100 Index .
As of January 31, 1997, the NASDAQ 100 Index was comprised of the
following industry sectors: electronic technology (36.35%); technology
services (29.9%); industrial services (20.83%); telecommunications (8.36%);
health technology (3.79%); and transportation (0.74%). As used herein,
electronic technology describes companies that manufacture computer chips
and other computer hardware (such as Intel Corporation, Cisco Systems,
Inc., and Apple Computer, Inc.), whereas technology services describes
publishers of computer software and operating systems (such as Microsoft
Corporation and Oracle Corporation).
The XAU Index. The Philadelphia Stock Exchange (the "XAU")
Gold/Silver 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: ASA
Limited; Barrick Gold Corp.; Battle Mountain Gold Co.; Echo Bay Mines
Limited; Hecla Mining Co.; Homestake Mining Co.; Newmont Mining Corp.;
II-10<PAGE>
Placer Dome Inc.; Pegasus Gold, Inc.; TVX Gold, Inc.; and Coeur D'Alene
Mines 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 current 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
three times a year. In the future, the U.S. Treasury may change the number
of times each year that the Long Bond is issued.
NEITHER THE NOVA SUBACCOUNT NOR THE URSA SUBACCOUNT IS SPONSORED,
ENDORSED, SOLD, OR PROMOTED BY THE S&P; THE OTC SUBACCOUNT IS NOT
SPONSORED, ENDORSED, SOLD, OR PROMOTED BY THE NASDAQ OR ANY OF THE NASDAQ'S
AFFILIATES (THE NASDAQ AND ITS AFFILIATES HEREINAFTER COLLECTIVELY REFERRED
TO AS THE "NASDAQ"); AND THE PRECIOUS METALS SUBACCOUNT IS NOT SPONSORED,
ENDORSED, SOLD, OR PROMOTED BY THE XAU. NONE OF THE S&P, THE NASDAQ, AND
THE XAU MAKES ANY REPRESENTATION OR WARRANTY, IMPLIED OR EXPRESS, TO THE
CONTRACT OWNERS INVESTED IN THE SUBACCOUNTS, OR ANY MEMBER OF THE PUBLIC,
REGARDING THE ADVISABILITY OF INVESTING IN INDEX FUNDS OR THE ABILITY OF
THE S&P500 INDEX, NASDAQ 100 INDEX , AND THE XAU INDEX, RESPECTIVELY, TO
TRACK GENERAL STOCK MARKET PERFORMANCE. NONE OF THE S&P500 INDEX, THE
NASDAQ, AND THE XAU INDEX GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS
OF THE S&P500 INDEX, NASDAQ 100 INDEX , AND THE XAU INDEX, RESPECTIVELY, OR
ANY DATA INCLUDED THEREIN.
NONE OF THE S&P, THE NASDAQ, AND THE XAU MAKES ANY WARRANTY, EXPRESS
OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY ANY OF THE SUBACCOUNTS, THE
CONTRACT OWNERS OF THE SUBACCOUNTS, OR ANY PERSON OR ENTITY FROM THE USE OF
THE S&P500 INDEX, THE NASDAQ 100 INDEX , THE XAU INDEX, RESPECTIVELY, OR
ANY DATA INCLUDED THEREIN. NONE OF THE S&P, THE NASDAQ, AND THE XAU MAKES
ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE S&P500 INDEX, THE NASDAQ 100
INDEX , THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN.
For additional information regarding these benchmark indexes, see
"The Benchmarks" in the Statement of Additional Information.
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 exchange their Accumulation Units of a particular
Subaccount for Accumulation Units in other Subaccounts frequently, pursuant
to the exchange policy of the Separate Account, in order to attempt to take
II-11<PAGE>
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
S u b a ccounts may result in considerable asset movement among the
Subaccounts. Consequently, 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 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 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 correspondingly
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 "Financial Highlights of the
Subaccounts" in Part I of this Prospectus and "Investment Policies and
Techniques" in the Statement of Additional Information.
Tracking Error
While PADCO does not expect that the returns of the Subaccounts 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 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)
changes to the benchmark index that are not disseminated in advance; (7)
the need to conform a Subaccount s portfolio holdings to comply with
investment restrictions or policies or regulatory or tax law requirements;
or (8) market movements that run counter to a leveraged Subaccount's
investments (which will cause divergence between the Subaccount and its
benchmark over time due to the mathematical effects of leveraging).
II-12<PAGE>
Aggressive Investment Techniques
Each of the Subaccounts (other than the Money Market Subaccount) 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 cash or liquid securities 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 any particular instrument at any time. For further information
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 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.
II-13<PAGE>
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 premium 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 premium 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 exposure of its
position, or 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
premiums 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 a futures contract 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
II-14<PAGE>
liquid securities, including U.S. Government Securities or repurchase
agreements collateralized 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 character of the Subaccount s outstanding portfolio securities.
A d d i tionally, 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 cash
or liquid securities equal in value to the difference between the strike
price of the put and the price of the futures contract. 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
purchasing a call option on the same futures contract with a strike price
(i.e., an exercise price) that is less than or equal to the price of the
futures contract, or, if the strike price of the call is greater than the
price of the futures contract, the Subaccount will maintain in a segregated
account cash or liquid securities equal in value to the difference between
the strike price of the call and the price of the futures contract. A
Subaccount may also 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 liquid 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
II-15<PAGE>
or liquid 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 instruments 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 positions and potentially subjecting a Subaccount to substantial
losses. If trading is not possible, or a 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 premiums 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 the Philadelphia Stock Exchange Over-the-
Counter Index. Options currently are traded on the Chicago Board Options
Exchange (the "CBOE"), the AMEX, and other exchanges (collectively, the
"Exchanges"). Purchased over-the-counter options and the cover for written
II-16<PAGE>
over-the-counter options will be subject to the respective Subaccount s 15%
l i m i tation on investment in illiquid securities. See "Illiquid
Securities," below.
Each of the Exchanges has established limitations (i.e., position
limits) 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 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 or liquid securities that, when added to the premiums 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 premium 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 premium, 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 premium paid during the term of the option, to
II-17<PAGE>
sell the securities 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 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
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
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 premiums, 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 premium, plus commission costs, paid by the
Subaccount to purchase the call or put option to close the transaction is
less (or greater) than the premium, 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 put option which the Subaccount has
written lapses unexercised, because the Subaccount would retain the
premium.
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 premium, less commission costs, received by the
II-18<PAGE>
Subaccount on the sale of the call or the put option to close the
transaction is greater (or less) than the premium, 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 premium 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 premiums 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 Subaccount also may be
required to pay a premium, 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 short
position or replaces the borrowed security, the Subaccount will: (a)
maintain a segregated account containing cash or liquid 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 the security
sold short, or (b) otherwise cover the Subaccount s short position.
The Nova Subaccount, the OTC Subaccount, and the Metals Subaccount
each 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. These Subaccounts may make a short sale
when the Subaccount wants to sell the security the Subaccount owns at a
II-19<PAGE>
current attractive price, in order to hedge, or limit, the exposure of the
Subaccount's position.
U.S. Government Securities
The Bond Subaccount and the Money Market Subaccount may invest in
U.S. Government Securities in pursuit of their investment objectives, while
all of the Subaccounts, except for the Money Market Subaccount, 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 years 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 Subaccount 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.
Certain 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 National 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 Marketing Association, and the
National Credit Union Administration.
S o m e 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. 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
II-20<PAGE>
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. These
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 agreement, 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
t h e Federal Reserve 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.
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
II-21<PAGE>
with the introduction of "Separate Trading of Registered Interest and
Principal of Securities" (or "STRIPS"). While zero coupon bonds eliminate
the reinvestment risk 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
Subaccount 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
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
II-22<PAGE>
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 the Money Market Subaccount) 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 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
the Money Market Subaccount 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 Subaccount 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
Subaccount) 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
II-23<PAGE>
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 Subaccount 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.
Illiquid Securities
While none of the Subaccounts anticipates doing so, each Subaccount
may purchase illiquid securities, including securities that are not readily
marketable. A Subaccount will not invest more than 15% (10% with respect
to the Money Market Subaccount) 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 unavailability of reliable
m a rket 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.
II-24<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 hypothetical investment in the
Subaccounts during the particular time period on which the calculations are
based. Performance information will include average annual total return
quotations reflecting the deduction of all applicable charges for recent
one-year and, when applicable, five- and ten-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 Information" and "Calculation of
Return Quotations" in the Statement of Additional Information for a
description of the methods used to determine total return information for
the Subaccounts.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
Subject to policies established by the Managers, PADCO determines
which securities to purchase and sell for each Subaccount, selects brokers
and dealers to effect the transactions, and negotiates commissions. PADCO
expects that the Subaccounts may execute 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. In placing orders for
portfolio transactions, PADCO's policy is to obtain the most favorable
price 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.
When 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 the security, the willingness of the broker-dealer
to position, the reliability, financial condition, general execution and
o p e r ational 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.
II-25<PAGE>
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 Subaccounts
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 by the Managers are set forth in the Statement of Additional
Information.
PADCO Advisors II, Inc.
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 Ursa Subaccount and the OTC Subaccount
is Michael P. Byrum, who is PADCO's senior portfolio manager. Mr. Byrum
II-26<PAGE>
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.
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. Since September 1995, Mr. Michael also has served as
the portfolio manager for the Juno Fund, also a series of Rydex Series
Trust. From 1992 to February 1994, Mr. Michael was a financial markets
analyst at Cedar Street Investment Management Co., of Chicago, Illinois, an
institutional consulting 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 of the Previous Metals Subaccount is T. Daniel
Gillespie, who joined the Advisor in January 1997. From July 1994 to
January 1997, Mr. Gillespie was a portfolio manager for GIT Investment
Funds, a registered investment company in Arlington, Virginia, where Mr.
Gillespie managed over $160 million in equity, bond, and money market
mutual fund assets. From 1991 to 1994, Mr. Gillespie worked as a portfolio
manager for The Rushmore Funds, Inc., in Bethesda, Maryland, a registered
investment company, where Mr. Gillespie managed over $900 million in mutual
fund assets. From 1988 to 1991, Mr. Gillespie worked as an account
executive and stock broker for Wheat First Securities, of Bethesda,
Maryland, where Mr. Gillespie managed portfolios for individual investors.
From 1986 to 1988, Mr. Gillespie worked as an account executive and stock
broker with Smith Barney, Inc., of Washington, D. C. Mr. Gillespie
received his bachelor of arts degree in Accounting from the University of
Maryland, at College Park, Maryland, in 1980, and received a masters degree
in Business Administration from Averett College, at Danville, Virginia, in
1997.
The portfolio manager of the Bond Subaccount and the Money Market
Subaccount is Anne H. Ruff, who joined the Advisor in August, 1996. From
1989 to 1995, Ms. Ruff worked as a portfolio manager for United Services
Life Insurance Company ("USLICO"), in Arlington, Virginia, where Ms. Ruff
managed $2.5 billion in fixed-income portfolios. From 1985 to 1989, Ms.
Ruff worked as an assistant portfolio manager/securities analyst for
USLICO. From 1979 to 1985, Ms. Ruff worked as a bank investment officer
for First Union Corp. (formerly, First American Bank of Virginia) in
McLean, Virginia, where Ms. Ruff managed the bank's federal funds and
II-27<PAGE>
investment portfolio operations. Ms. Ruff received her bachelor of arts
degree in French and Economics from Mary Grove College, at Detroit,
Michigan, in 1966.
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
c o n f o rmity 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
c o mposition of assets of each Subaccount, including 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, and 0.50% for the Bond Subaccount and the Money Market
Subaccount. The advisory fee paid by each of the Nova Subaccount, the OTC
Subaccount, the Precious Metals Subaccount, the Juno Subaccount, and the
Ursa Subaccount, is higher than the advisory fee paid by most other
investment companies. See "Costs and Expenses."
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 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 are provided Contract Owner
s e r vices, including, among others, asset allocation administrative
services, Financial Advisor communications (including receipt of and acting
upon transfer requests), 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
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
Subaccounts. The Servicer provides these Subaccounts with all required
Subaccount administrative services, including, without limitation, office
II-28<PAGE>
space, equipment, and personnel; clerical and general back office services;
a s s et allocation bookkeeping, internal accounting, and secretarial
services; and the determination of Accumulation Unit Values. See "Costs
and Expenses."
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.
Costs and Expenses
Each Subaccount bears all expenses of its operations other than those
assumed by PADCO or the Servicer. Subaccount expenses include: the
advisory fee; the Subaccount administration fee; custodian and accounting
fees and expenses; legal and auditing fees; securities valuation expenses;
fidelity bonds and other insurance premiums; expenses 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,
w i t h out 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
seven 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.
To limit the expenses of the Subaccounts during their initial period
of operations, PADCO and the Servicer voluntarily agreed to waive their
respective fees and to bear any Subaccount expenses through June 30, 1997
(and such later date as PADCO and the Servicer may determine), which would
cause the ratios of expenses to average net assets for the Nova, Ursa, OTC,
Precious Metals, U.S. Government Bond, Juno, and Money Market Subaccounts
t o exceed 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively. Effective July 1, 1997, PADCO and the Servicer voluntarily
agreed to extend these existing expense limitations for a period of six
months through December 31, 1997, and may be continued thereafter at the
discretion of PADCO and the Servicer.
Great American Reserve and PADCO have advanced the organizational
expenses of the Separate Account. These expenses, which are approximately
$5,000 for the Money Market Subaccount and $95,180 per the remaining six
Subaccounts, will be reimbursed by the Subaccounts, and each Subaccount
will amortize these expenses over a five year period from the date the
Subaccount commences operations.
II-29<PAGE>
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
Page
GENERAL INFORMATION AND HISTORY
INVESTMENT POLICIES AND TECHNIQUES OF THE SUBACCOUNTS
General
Options Transactions
Foreign Securities
Repurchase Agreements
Borrowing
When-Issued and Delayed-Delivery Securities
Portfolio Turnover
The Benchmarks
INVESTMENT RESTRICTIONS OF THE SUBACCOUNTS
MANAGEMENT OF THE SEPARATE ACCOUNT
Managers
Officers
PADCO Advisors II, Inc.
PORTFOLIO TRANSACTIONS AND BROKERAGE
DETERMINATION OF ACCUMULATION UNIT VALUES
PERFORMANCE INFORMATION
CALCULATION OF RETURN QUOTATIONS
UNDERWRITER OF THE CONTRACTS
INDEPENDENT ACCOUNTANTS
CUSTODY
FINANCIAL STATEMENTS
APPENDIX A
II-30<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1997,
as Supplemented September 17, 1997
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, Suite 400, 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 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 September 17, 1997. 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
INVESTMENT POLICIES AND TECHNIQUES OF THE SUBACCOUNTS
General
Options Transactions
Foreign Securities
Repurchase Agreements
Borrowing
When-Issued and Delayed-Delivery Securities
Portfolio Turnover
The Benchmarks
INVESTMENT RESTRICTIONS OF THE SUBACCOUNTS
MANAGEMENT OF THE SEPARATE ACCOUNT
Managers
Officers
PADCO Advisors II, Inc.
PORTFOLIO TRANSACTIONS AND BROKERAGE
DETERMINATION OF ACCUMULATION UNIT VALUES
PERFORMANCE INFORMATION
CALCULATION OF RETURN QUOTATIONS
UNDERWRITER OF THE CONTRACTS
INDEPENDENT ACCOUNTANTS
CUSTODY FINANCIAL STATEMENTS
APPENDIX A
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 Texas 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 Subaccount 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 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
3<PAGE>
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.
Investing in foreign companies may involve risks not typically
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.
4<PAGE>
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.
Repurchase Agreements
As discussed in the Separate Account's Prospectus, each of the
S u b a c counts 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,
5<PAGE>
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,
w h ereas the interest obligations on borrowings may be fixed, the
Accumulation Unit Value of the Subaccount will increase more when the
Subaccount s portfolio assets 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 interest or
principal payments at a time investment considerations 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
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 between 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.
Portfolio Turnover
As discussed in the Separate Account's prospectus, PADCO anticipates
that owners of the Contract ("Contract Owners") whose Purchase Payments are
being allocated to the Subaccounts, as part of an asset allocation or
m a rket-timing investment strategy, will frequently transfer amounts
allocated under the Contract ("Contract Values") among the Subaccounts.
Because each Subaccount's portfolio turnover rate to a great extent will
d e pend 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 value of the
securities purchased or securities sold, excluding 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 futures contracts and option contracts in which the
Subaccounts invest since such contracts generally have a remaining maturity
6<PAGE>
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.
The Benchmarks
The S&P500 Index. Standard & Poor's Corporation ("S&P"), a division
of The McGraw-Hill Companies, Inc., chooses the 500 stocks comprising the
S&P500 Index on the statistical 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 these companies are generally listed on the NYSE.
Additional stocks that are not among the 500 largest companies in terms of
the aggregate market value of their outstanding stock, are included in the
S&P500 Index for diversification purposes. Each stock in the S&P500 Index
is weighted by its market value, and inclusion of a stock in the S&P500
Index in no way implies an opinion by the S&P as to the stock's
attractiveness as an investment. A Subaccount may use the S&P500 Index as
t h e standard performance comparison because this index represents
approximately 70% of the total market value of all common stocks and is
well known to investors. "Standard & Poor's ," "S&P ," "S&P 500 ,"
"Standard & Poor's 500 ," and "500 " are trademarks, trade names, and
service marks of The McGraw-Hill Companies, Inc.
Neither the Nova Subaccount nor the Ursa Subaccount is sponsored,
endorsed, sold, or promoted by the S&P. The S&P's only relationship to the
Nova and Ursa Subaccounts is the use by these Subaccount of the Standard &
Poor's , S&P , S&P 500 , Standard & Poor's 500 , and 500 trademarks or
service marks, and certain trade names of the S&P, and the use by these
Subaccounts of the S&P500 Index, which is determined, composed, and
calculated by the S&P without regard to the Servicer or these Subaccounts,
but which is used by these Subaccounts as the benchmark of these
Subaccounts.
The NASDAQ 100 Index . The NASDAQ 100 Index (NDX) is a
capitalization-weighted index composed of 100 of the largest non-financial
securities listed on the National Association of Securities Dealers
Automated Quotations Stock Market (the "Nasdaq"). The Nasdaq, which
represents the fastest-growing stock market in the United States, also is
one of the first fully-electronic stock markets in the world. This modern-
day securities market began operations in 1971, and today lists more
companies than any other market in the United States. The NASDAQ 100
Index , which was created in 1985, is limited to one issue per company.
"NASDAQ ," "NASDAQ 100 ," "NASDAQ 100 Index ," and "NASD " are trademarks,
trade names, and service marks of the Nasdaq.
At the time of inclusion in the NASDAQ 100 Index , index securities
must have a minimum market value of at least $500 million. Only domestic
issues are included in the NASDAQ 100 Index . As of January 31, 1997, the
7<PAGE>
NASDAQ 100 Index was comprised of the following industry sectors:
electronic technology (36.35%); technology services (29.9%); industrial
services (20.83%); telecommunications (8.36%); health technology (3.79%);
and transportation (0.74%). As used herein, electronic technology
describes companies that manufacture computer chips and other computer
hardware (such as Intel Corporation, Cisco Systems, Inc., and Apple
Computer, Inc.), whereas technology services describes publishers of
computer software and operating systems (such as Microsoft Corporation and
Oracle Corporation).
In the event that a security is deleted from the NASDAQ 100 Index ,
the largest non-financial issue not then included in the NASDAQ 100 Index
which meets the applicable criteria of the NASDAQ 100 Index will be
substituted. The Nasdaq and its affiliates (collectively, the "NASDAQ")
have established procedures for and controls over, substitutions of
securities, and may periodically, at the NASDAQ s discretion, make changes
in component stocks so that the NASDAQ 100 Index will more accurately
reflect the overall composition of the non-financial sector of the Nasdaq.
Each security in the NASDAQ 100 Index is represented by the security s
market capitalization in relation to the total market value of the NASDAQ
100 Index . Companies are selected for inclusion in the NASDAQ 100 Index
using criteria that includes company trading volume, company visibility,
continuity of the components in the NASDAQ 100 Index , and a good mix of
industries represented on the Nasdaq. Chicago Board Options Exchange, the
largest options exchange in the world, began trading NASDAQ 100 Index
options on February 7, 1994.
The OTC Subaccount is not sponsored, endorsed, sold, or promoted by
the Nasdaq or any of the Nasdaq's affiliates (the Nasdaq and its affiliates
hereinafter collectively referred to as the "NASDAQ"). The NASDAQ's only
relationship to the OTC Subaccount is the use by the OTC Subaccount of the
NASDAQ 100 , NASDAQ 100 Index , NASDAQ , and NASD trademarks or service
marks, and certain trade names of the NASDAQ, and the use of the NASDAQ 100
Index , which is determined, composed, and calculated by the NASDAQ without
regard to the Servicer or the Subaccounts, but which is used by the OTC
Subaccount as the OTC Subaccount s benchmark.
The XAU Index. The Philadelphia Stock Exchange (the "XAU")
Gold/Silver 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: ASA
Limited; Barrick Gold Corp.; 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 Coeur D'Alene
Mines Corp. While the majority of these companies are based in North
America, these companies generally also have operations in countries based
outside North America. "Philadelphia Stock Exchange Gold/Silver Index ,"
"Philadelphia Stock Exchange ," "PHLX ," and "XAU Index" are trademarks,
trade names, and service marks of the XAU.
8<PAGE>
The Precious Metals Subaccount is not sponsored, endorsed, sold, or
promoted by the XAU. The XAU's only relationship to the Precious Metals
Subaccount is the use by the Precious Metals Subaccount of the Philadelphia
Stock Exchange Gold/Silver Index , Philadelphia Stock Exchange , PHLX , and
XAU Index trademarks or service marks, and certain trade names of the XAU,
and the use of the XAU Index, which is determined, composed, and calculated
by the XAU without regard to the Servicer or the Subaccounts, but which is
used by the Precious Metals Subaccount as the Precious Metals Subaccount s
benchmark.
The Long Bond. The Long Bond is the current 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
three times a year. In the future, the U.S. Treasury may change the number
of times each year that the Long Bond is issued.
NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) HAS ANY OBLIGATION TO
TAKE THE NEEDS OF THE SUBACCOUNTS OR THE CONTRACT OWNERS OF THE SUBACCOUNTS
INTO CONSIDERATION IN DETERMINING, COMPOSING, OR CALCULATING THE S&P500
INDEX, THE NASDAQ 100 INDEX, AND THE XAU INDEX, RESPECTIVELY; (2) IS
RESPONSIBLE FOR OR HAS PARTICIPATED IN THE CALCULATION OF ANY SUBACCOUNT'S
ACCUMULATION UNIT VALUE, IN THE DETERMINATION OF THE TIMING OR PRICES AT,
OR QUANTITIES OF THE SUBACCOUNTS OR THE ACCUMULATION UNITS TO BE ISSUED, OR
IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH ACCUMULATION
UNITS MAY BE CONVERTED INTO CASH; (3) IS A DISTRIBUTOR OF THE SUBACCOUNTS;
(4) HAS ANY OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION,
MARKETING, OR TRADING OF THE SUBACCOUNTS; AND (5) HAS NOT PASSED ON THE
LEGALITY OR SUITABILITY OF, OR THE ACCURACY OR ADEQUACY OF DESCRIPTIONS AND
DISCLOSURES RELATING TO, THE SUBACCOUNTS.
NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) GUARANTEES THE
ACCURACY, COMPLETENESS, AND/OR THE UNINTERRUPTED CALCULATIONS OF THE S&P500
INDEX, THE NASDAQ 100 INDEX , AND THE XAU INDEX, RESPECTIVELY, OR ANY DATA
INCLUDED THEREIN; (2) MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE SUBACCOUNTS, THE CONTRACT
OWNERS OF THE SUBACCOUNTS, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF
THE S&P500 INDEX, THE NASDAQ 100 INDEX , AND THE XAU INDEX, RESPECTIVELY,
OR ANY DATA INCLUDED THEREIN, REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE SUBACCOUNTS PARTICULARLY, OR THE ABILITY OF
THE S&P500 INDEX, THE NASDAQ 100 INDEX , AND THE XAU INDEX, RESPECTIVELY,
TO TRACK GENERAL STOCK MARKET PERFORMANCE; AND (3) MAKES ANY EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OR
MERCHANTABILITY OR FITNESS, FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE S&P500 INDEX, THE NASDAQ 100 INDEX , AND THE XAU INDEX, OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
EITHER THE S&P, THE NASDAQ, OR THE XAU HAVE ANY LIABILITY FOR ANY SPECIAL,
INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS), EVEN IF NOTIFIED OR THE POSSIBILITY OF SUCH DAMAGES.
CERTAIN MATERIALS USED BY THE SERVICER, PADCO, PFS, AND GREAT
AMERICAN RESERVE RELATING TO THE CREATION AND ISSUANCE, MARKETING, AND
PROMOTION OF THE SEPARATE ACCOUNT AND THE SUBACCOUNTS MAY INDICATE THAT:
9<PAGE>
(1) THE S&P500 INDEX, NASDAQ 100 INDEX , OR THE XAU INDEX, AS APPLICABLE,
AND IN ACCORDANCE WITH ANY APPLICABLE FEDERAL AND STATE SECURITIES LAW,
SERVES AS A BASIS FOR DETERMINING THE COMPOSITION OF A SUBACCOUNT'S
PORTFOLIO; AND (2) THE S&P, THE NASDAQ, AND THE XAU ARE THE RESPECTIVE
SOURCES OF THE S&P500 INDEX, NASDAQ 100 INDEX , AND THE XAU INDEX.
10<PAGE>
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.
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.
The following 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 securities 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 particular industry, that Subaccount will be
concentrated in that industry, but will not otherwise be
concentrated. This limitation does not apply to investments or
obligations of the U.S. Government or any of its agencies or
instrumentalities.
The following restrictions are applicable to all Subaccounts other
than the Money Market Subaccount:
11<PAGE>
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 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
securities 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 similar
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 options thereon) or securities on a forward-commitment or
delayed-delivery basis, and (ii) the Precious Metals Subaccount
may invest in precious metals and precious minerals.
12<PAGE>
The following restriction is applicable to the Ursa Subaccount, the
OTC Subaccount, the Precious Metals Subaccount, the Juno Subaccount, and
the Money Market Subaccount:
A Subaccount shall not:
9. B o r r ow 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 amount up to one-third of the
value of the Subaccount's total assets, including the amount
b o rrowed, 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 invested in reverse repurchase agreements are included
in the amounts borrowed.
The following restriction is applicable to the Nova Subaccount, 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 Subaccount of initial or variation margin in
c o nnection 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:
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 (including 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.
13<PAGE>
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)
t h e Subaccount maintains a segregated account with the
S u b account's custodian to cover the short position in
accordance with the position of the SEC or (ii) the Subaccount
o w ns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short.
The following restrictions are applicable to the Money Market
Subaccount:
The 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. I s s u e senior securities, except as permitted by the
Subaccount's investment objectives and policies.
16. Write or purchase put or call options.
17. Invest in securities of other investment companies, except as
these securities may be acquired as part of a merger,
c o n solidation, 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 hypothecate 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.
14<PAGE>
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. T h e 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 the Money Market Subaccount will not
invest more than 10% of its 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 Subaccount
Accumulation Units are offered for sale.
3. T o 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 an
investment, 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.
MANAGEMENT
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.
15<PAGE>
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 the Separate Account,
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. (56)*
Chairman of the Board of Managers and the President 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,
President, 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, President, Treasurer, and
Principal of PADCO Financial Services, Inc., a registered broker-
dealer firm and the Separate Account's principal underwriter, 1996 to
present; Vice President of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Corey A. Colehour (52)
Manager of the Separate Account; Trustee of Rydex Series Trust, 1993
to present; Senior Vice President of Marketing of Schield Management
Company, a registered investment adviser, 1985 to present. Address:
1489 West Briarwood Avenue, Littleton, Colorado 80120.
J. Kenneth Dalton (56)
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: 3613 Lands Ends, Fort Worth, Texas
76109.
Roger Somers (53)
Manager of the Separate Account; Trustee of Rydex Series Trust, 1993
to present; President, Arrow Limousine, 1963 to present. Address: 72
Sugar Maple Lane, Tinton Falls, New Jersey 07724.
L. Gregory Gloeckner (44)*
16<PAGE>
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.
Officers
Robert M. Steele (39)
Secretary and Vice President of the Separate Account, June 1996 to
present; Vice President of PADCO Advisors II, Inc., 1995 to present;
Secretary and Vice President of Rydex Series Trust, 1995 to present;
Vice President of PADCO Advisors, Inc., 1994 to present; Vice
President of PADCO Financial Services, Inc., 1996 to present; Vice
President of The Boston Company, Inc., an institutional money
management firm, 1987 to 1994. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
17<PAGE>
Carl G. Verboncoeur (44)
Vice President of Operations and Treasurer of the Separate Account,
since June 1997; Vice President of Operations of Rydex Series Trust,
since June 1997; Senior Vice President, Crestar Bank, 1995 to 1997;
Senior Vice President, Crestar Asset Management Company, a registered
investment adviser, 1993 to 1995; Vice President, Perpetual Savings
Bank, 1987 to 1993. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Michael P. Byrum (27)
Assistant Secretary of the Separate Account, June 1996 to present;
Employee and senior portfolio manager of PADCO Advisors II, Inc.,
1995 to present; Assistant Secretary of Rydex Series Trust, 1993 to
present; Employee and senior portfolio manager of PADCO Advisors,
Inc., 1993 to present; Secretary and Principal of PADCO Financial
Services, Inc., 1996 to present; Investment Representative, Money
Management Associates, a registered investment adviser, 1992 to
1993; Student, Miami University, of Oxford, Ohio (B.A., Business
Administration, 1992). Address: 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852.
Sothara Chin (31)
Compliance Officer of the Separate Account, June 1996 to present;
Compliance Officer of PADCO Advisors II, Inc., 1996 to present;
C o mpliance Officer of Rydex Series Trust, 1996 to present;
Compliance Officer of PADCO Advisors, Inc., 1996 to present;
Compliance Officer of PADCO Service Company, Inc., 1996 to present;
Compliance Officer and Principal of PADCO Financial Services, Inc.,
1 9 9 6 to present; Compliance Officer of USLICO Securities
Corporation, an insurance-affiliated broker-dealer company, 1990 to
1996. 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.
PADCO Advisors II, Inc.
PADCO, which has its office at 6116 Executive Boulevard, Suite 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
18<PAGE>
the Separate 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 each 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 average 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 Subaccount 0.50%
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.
To limit the expenses of the Subaccounts during their initial period
of operations, PADCO and the Servicer voluntarily agreed to waive their
respective fees and to bear any Subaccount expenses through June 30, 1997
(and such later date as PADCO and the Servicer may determine), which would
cause the ratios of expenses to average net assets for the Nova, Ursa, OTC,
Precious Metals, U.S. Government Bond, Juno, and Money Market Subaccounts
t o e xceed 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively. Effective July 1, 1997, PADCO and the Servicer voluntarily
agreed to extend these existing expense limitations for a period of six
months through December 31, 1997, and may be continued thereafter at the
discretion of PADCO and the Servicer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Managers, PADCO is
responsible for decisions to buy and sell securities for each of the
S u b accounts, the selection of brokers and dealers to effect the
transactions, and the negotiation of brokerage commissions, if any. PADCO
expects that the Subaccounts may execute 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
19<PAGE>
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
o f 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
d e termine 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. Government ("U.S. Government
Securities"), are normally transacted through issuers, underwriters, or
major dealers in U.S. Government Securities acting as principals. These
transactions are made on a net basis and do not involve payment of
b r okerage 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.
Portfolio turnover rate is defined as the value of the securities
purchased or securities sold, excluding 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,
it is anticipated that a Subaccount's policy of investing in government
securities with remaining maturities of less than one year will not result
in a quantifiable portfolio turnover rate. However, because of the short-
term nature of a Subaccount's portfolio securities, it is anticipated that
the number of purchases and sales or maturities of such securities will be
substantial. Nevertheless, as brokerage commissions are not normally
charged on purchases and sales of these securities, the large number of
20<PAGE>
these transactions does not have an adverse effect upon the net yield and
the current market value of the Accumulation Units of the Subaccount. See
"Determination of Accumulation Unit Values" in this Statement of Additional
Information.
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. These 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' expenses, this information
and these services are of indeterminable value and the advisory fees paid
to the PADCO Advisors are not reduced by any amount that may be
attributable to the value of such information and services.
21<PAGE>
DETERMINATION OF ACCUMULATION UNIT VALUES
T h e current market values of the Accumulation Units (the
"Accumulation Unit Values") for each of the Nova, Ursa, Metals, and OTC
Subaccounts are determined each day on which the New York Stock Exchange
(the "NYSE") is open for business as of the close of normal trading on the
NYSE (currently 4:00 P.M., Eastern Time). The Accumulation Unit Values for
the Money Market Subaccount are determined at 4:00 P.M., Eastern Time, each
day on which both the NYSE and the Federal Reserve Bank of New York (the
"New York Fed") are open for business. Currently, the NYSE and the New
York Fed are closed on weekends, and the following holiday closings have
been scheduled for 1997 and 1998: (i) New Year's Day, Martin Luther King
Jr.'s Birthday, Washington's Birthday, Good Friday, Memorial Day, July
Fourth, Labor Day, Columbus Day, Thanksgiving Day, and Christmas Day; and
(ii) the preceding Friday when any of those holidays falls on a Saturday or
the subsequent Monday when any of these holidays falls on a Sunday.
The Accumulation Unit Values for each of the Bond and Juno
Subaccounts are determined each day on which the Chicago Board of Trade
(the "CBOT") is open for trading futures contracts on U.S. Treasury bonds
as of the close of normal trading on the CBOT (normally 3:00 P.M., Eastern
Time). Currently, the CBOT is closed on weekends, and the following
holiday closings have been scheduled for 1997 and 1998: (i) New Year s Day,
Martin Luther King, Jr. Day, President s Day, Memorial Day, July Fourth,
Labor Day, Columbus Day, Veterans 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.
To the extent that portfolio securities of a Subaccount are traded
in other markets on days when the Subaccount's principal trading market(s)
is closed, the Subaccount's Accumulation Unit Value may be affected on days
when investors do not have access to the Subaccount to purchase or redeem
shares. Although the Separate Account expects the same holiday schedules
to be observed in the future, the NYSE, the CBOT, and the New York Fed each
may modify its holiday schedule at any time.
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
22<PAGE>
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 faith 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.
Illiquid 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 as 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.
Rule 2a-7 under the 1940 Act (the "Rule") requires that the Money
M a rket Subaccount limit its investments to U.S. dollar-denominated
instruments which the Managers determine present minimal credit risks and
which are Eligible Securities (as defined below). The Rule also requires
the Money Market Subaccount to maintain a dollar-weighted average portfolio
maturity (not more than ninety days) appropriate to the Money Market
Subaccount's objective of seeking to provide current income consistent with
stability of capital and liquidity and precludes the purchase of any
instrument with a remaining maturity of more than thirteen months. Should
the disposition of a portfolio security result in a dollar-weighted average
portfolio maturity of more than ninety days, the Money Market Subaccount
would be required to invest its available cash in such a manner as to
reduce such maturity to ninety days or less as soon as reasonably
practicable.
Generally, for purposes of the procedures adopted under the Rule,
the maturity of a portfolio instrument is deemed to be the period remaining
(calculated from the trade date or such other date on which the Money
Market Subaccount's interest in the instrument is subject to market action)
until the date noted on the face of the instrument as the date on which the
23<PAGE>
principal amount must be paid, or, in the case of an instrument called for
redemption, the date on which the redemption payment must be made.
A variable rate obligation that is subject to a demand feature is
deemed to have a maturity equal to the longer of the period remaining until
the next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand. A floating rate
instrument that is subject to a demand feature is deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
An Eligible Security is defined in the Rule to mean a security
which: (a) has a remaining maturity of thirteen months or less; (b) either
(i) is rated in the two highest short-term rating categories by any two
nationally-recognized statistical rating organizations ("NSROs") that have
issued a short-term rating with respect to the security or class of debt
obligations of the issuer, or (ii) if only one NSRO has issued a short-term
rating with respect to the security, then by that NSRO; (c) was a long-term
security at the time of issuance whose issuer has outstanding a short-term
debt obligation which is comparable in priority and security and has a
rating as specified in clause (b) above; or (d) if no rating is assigned by
any NSRO as provided in clauses (b) and (c) above, the unrated security is
determined by the Managers to be of comparable quality to any such rated
security.
As permitted by the Rule, the Managers have delegated to PADCO, the
Separate Account's investment adviser, subject to oversight by the
Managers pursuant to guidelines and procedures adopted by the Managers, the
authority to determine which securities present minimal credit risks and
which unrated securities are comparable in quality to rated securities.
PERFORMANCE INFORMATION
Total Return Calculations
From time to time, each of the Subaccounts (other than the Money
Market Subaccount) 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
24<PAGE>
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
c a p i tal 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 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."
Comparisons of Investment Performance
Performance information for each of the Subaccounts contained in
reports to Contract Owners or prospective Contract 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
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 .
25<PAGE>
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 costs 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 Subaccount) may be compared to the performance of broad
groups of comparable subaccounts or mutual funds with similar investment
goals, as described below, and as such performance is tracked and published
b y s uch 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 and portfolio holdings. Accordingly, the Lipper
ranking and comparison, which may be used by the Separate Account in
p e rformance 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.
In addition, to the extent permitted by the applicable rules of the
Securities and Exchange Commission and the National Association of
S e curities Dealers, Inc., performance information for each of the
26<PAGE>
Subaccounts contained in reports to Contract Owners or prospective Contract
Owners, advertisements, and other promotional literature may be compared to
the performance of comparable subaccounts or mutual funds with similar
investment goals.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of a
Subaccount (other than the 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 = ending 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 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, other than the Money Market
Subaccount, also may include in such advertising a total return figure that
is not calculated according to the formula set forth above in order to
compare more accurately the performance of the Subaccount with other
measures of investment return. For example, in comparing the total return
of a Subaccount with data published by Lipper Analytical Services, Inc., or
with the performance of the S&P500 Index or the Dow Jones Industrial
Average for each of the Nova Subaccount and the Ursa Subaccount, the NASDAQ
100 IndexTM for the OTC Subaccount, the XAU Index for the Metals
Subaccount, and the Lehman Government (LT) Index for the Bond Subaccount
and the Juno Subaccount, each respective Subaccount calculates its
27<PAGE>
aggregate total return for the specified periods of time by assuming the
allocation of $10,000 to the Subaccount and assuming the reinvestment of
each dividend or other distribution at Accumulation Unit Value on the
reinvestment date. 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 percentage
reported. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed
under SEC Rules.
28<PAGE>
UNDERWRITER OF THE CONTRACTS
PADCO Financial Services, Inc. ("PFS"), 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852, 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.
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 Great American Reserve, for the fiscal year
ended December 31, 1996, included herein, should be considered only as
bearing on the ability of Great American Reserve to meet its obligations
under the Contract. Unaudited financial statements of the Separate
Account, for the period from May 7, 1997 (the date that the Separate
Account commenced operations), through June 30, 1997, found at the end of
this Statement of Additional Information, are included in the Separate
Account's Semi-Annual Report, which was filed on Form N-30D with the SEC
via EDGAR transmission on September 2, 1997. A copy of the Separate
Account's Semi-Annual Report may be obtained without charge by contacting
the Separate Account at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852, or by telephoning the Separate Account at (888) 667-4936.
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
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is
maintained.
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."
30<PAGE>
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."
Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co. ("Duff") are
consistent with the rating criteria utilized by money 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 osit, 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 "liquidity,"
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
31<PAGE>
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.
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.
32<PAGE>
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.
33<PAGE>
