As Filed With The Securities And Exchange Commission On
September 24, 1997.
File Nos. 333-03093 and 811-07615
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 1 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 (X)
Amendment No. 3 (X)
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
(Exact Name of Registrant)
GREAT AMERICAN RESERVE INSURANCE COMPANY
(Name of Insurance Company)
11815 North Pennsylvania Street, Carmel, Indiana 46032
(Address of Insurance Company's Principal Executive Offices)
(Zip Code)
(800) 437-3506
(Insurance Company's Telephone Number, Including Area Code)
Karl W. Kindig, Esq.
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
(Name and Address of Agent for Service of Process)
Copies to:
Michael Berenson, Esq.
Ann B. Furman, Esq.
Jorden Burt Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Suite 400 East
Washington, D. C. 20007-0805
Approximate Date of Commencement of the Proposed Public
Offering of the Securities:<PAGE>
It is proposed that this filing will become effective (check
appropriate box):
immediately upon filing pursuant to paragraph (b) of
rule 485
on (date) pursuant to paragraph (b)(1)(v) of rule
485
X 60 days after filing pursuant to paragraph (a)(1) of
rule 485
on (date) pursuant to paragraph (a)(1) of rule 485
75 days after filing pursuant to paragraph (a)(2) of
rule 485
on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
This post-effective amendment designates a new
effective date for a previously-filed post-effective
amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of
1940, the Registrant declares that an indefinite amount of
individual variable annuity contracts is being registered
under the Securities Act of 1933.<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
REGISTRATION STATEMENT ON FORM N-3
CROSS REFERENCE SHEET
N-3 Location in
Item No. Registration Statement
Part A: Information Required In Prospectus
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis or Highlights Prospectus Summary; Fees and
Expenses of the Subaccounts
4. Condensed Financial Financial Statements;
Information Financial Highlights of the
Subaccounts
5. General Description of Great American Reserve
Registrant Insurance Company;
and Insurance Company The Separate Account;
Investment Objectives and
Policies of the Subaccounts;
Investment Techniques and
Other Investment Policies
6. Management Management of the Separate
Account
7. Deductions and Exchanges Charges and Deductions;
Management of the Separate
Account
8. General Description of Description of the Contract;
Variable Annuity Contracts Separate Account Voting
Rights
9. Annuity Period Description of the Contract
-- Annuity Period
10. Death Benefit Description of the Contract
-- Payment on Death
11. Purchases and Contract Value Description of the Contract
-- Purchase Payments,
Accumulation Provisions;
Distribution of Contracts<PAGE>
12. Redemptions Description of the Contract
-- Withdrawals, Suspension
of Payments, Ten Day Right
to Review
13. Taxes Federal Income Taxes
14. Legal Proceedings Legal Proceedings
15. Table of Contents of Table of Contents of
Statement of Additional Statement of Additional
Information Information<PAGE>
N-3 Location in
Item No. Registration Statement
Part B: Information Required In
Statement of Additional Information
16. Cover Page Cover Page
17. Table of Contents Table of Contents
18. General Information General Information and
and History
19. Investment Objectives and Investment Policies and
Policies Techniques of the
Subaccounts; Investment
Restrictions of the
Subaccounts
20. Management Management of the Separate
Account
21. Investment Advisory and Management of the Separate
Other Services Account; Custody
22. Brokerage Allocation Portfolio Transactions and
Brokerage
23. Purchase and Pricing of Determination of
Securities Being Offered Accumulation Unit Values
24. Underwriters Underwriter of the Contracts
25. Calculation of Performance Performance Information;
Data Calculation of
Return Quotations
26. Annuity Payments Not Applicable
27. Financial Statements Financial Statements;
Independent Accountants<PAGE>
N-3 Location in
Item No. Registration Statement
Part C: Other Information
28. Financial Statements and Financial Statements and
Exhibit Exhibits
29. Directors and Officers Directors and Officers
of the Insurance Company of the Insurance Company
30. Persons Controlled by or Persons Controlled by or
Under Common Control with Under Common Control with
the Insurance Company the Insurance Company
or Registrant or Registrant
31. Number of Contract Owners Number of Contract Owners
32. Indemnification Indemnification
33. Business and Other Business and Other
Connection of Connections of
Investment Adviser Investment Adviser
34. Principal Underwriters Principal Underwriters
35. Location of Accounts and Location of Accounts and
Records Records
36. Management Services Management Services
37. Undertakings Undertakings
38. Signatures Signatures
<PAGE>
PART A
PROSPECTUS<PAGE>
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 available under the Contract involve
certain aggressive investment techniques, which may include
engaging in short sales and transactions in futures contracts
a n d options on securities, stock indexes, and futures
contracts. As discussed more fully below, these techniques
are specialized and involve risks that are not traditionally
associated with otherwise similar contracts.
Accumulation of the Contract values may be on either a fixed
or variable basis, or on a combination fixed and variable
basis. Accumulation on a variable basis is provided by
allocations to the Rydex Advisor Variable Annuity Account (the
"Separate Account"). Variable benefits are not guaranteed and
will vary according to investment performance. Accumulation
on a fixed basis is provided by allocations to the General
Account of Great American Reserve Insurance Company. (See
"The Fixed Account" on page I-__.) 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.
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<PAGE>
separate investment portfolios ("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.
The Money Market Subaccount - To provide current income
consistent with stability of capital and liquidity.
S i x of these Subaccounts seek investment results that
correspond over time to a specified benchmark, as follows:
SUBACCOUNT BENCHMARK
The Nova Subaccount 125% of the performance of the S&P500
Composite Stock Price Index TM
The Ursa Subaccount Inverse (opposite) of the S&P500
Composite Stock Price Index TM
The OTC Subaccount NASDAQ 100 Index TM (NDX)
The Precious Metals Philadelphia Stock Exchange
Subaccount Gold/Silver Index TM (XAU)
The U.S. Government 120% of the price movement of current
Bond Subaccount Long Treasury Bond
I-2<PAGE>
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").
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 UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus contains information about the Contract and
the Separate Account that a prospective Contract Owner should
know before investing. It should be read and retained for
future reference. Additional information about the Contract
and the Separate Account is contained in a Statement of
Additional Information, dated December 1, 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 December 1, 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-
I-4<PAGE>
Page
Subaccount Administration Fee I-
Payments of Certain Charges and Deductions I-
Premium Taxes I-
DESCRIPTION OF THE CONTRACT I-
Purchase Payments I-
Changing Financial Advisors I-
Accumulation Provisions I-
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-
Systematic Withdrawal Plan 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-
Page
Income Tax Withholding I-
Tax Treatment of Withdrawals;
Non-Qualified Contracts I-
Tax Treatment of Withdrawals;
Qualified Plans I-
Tax Treatment of Withdrawals;
I-5<PAGE>
Qualified Contracts I-
Tax-Sheltered Annuities;
Withdrawal Limitations I-
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-
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-
I-6<PAGE>
Page
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-
General II-
Total Return Information II-
PORTFOLIO TRANSACTIONS
AND BROKERAGE II-
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-7<PAGE>
PART I
No person has been authorized to give any information or
to make any representations other than those contained in this
Prospectus in connection with the offer contained in this
Prospectus and, if given or made, such information or repre-
sentation must not be relied upon as having been authorized.
T h i s Prospectus does not constitute an offer of, or
solicitation of an offer to acquire, any variable annuity
contracts offered by this Prospectus in any jurisdiction to
anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
DEFINITIONS
Accumulation Unit: An accounting unit of measure used to
compute the value of your interest in a Subaccount prior to
the Annuity Date. (See page I-__.)
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.
I-8<PAGE>
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
p e r son (e.g., a corporation, trust, or certain other
entities). (See page I-__.)
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).
Non-Qualified Contract: A Contract issued under a non-
qualified plan, which is not a Qualified Contract.
PADCO: PADCO Advisors II, Inc.
PFS: PADCO Financial Services, Inc.
I-9<PAGE>
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
I n t ernal 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.
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-__.)
I-10<PAGE>
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-11<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
S e p a rate Account" on page I-__, "Investments of the
Subaccounts" on page I-__, "Account Transfers" on page I-__,
and "Tactical Allocation Services" on page I-__.)
T h e seven Subaccounts, including the Money Market
Subaccount, are managed by PADCO. (See "PADCO" in Part II of
this Prospectus.)
Retirement Plans
T h e Contract may currently be issued pursuant to
nonqualified retirement plans, individual retirement annuities
("IRAs"), or Section 403(b) Annuities ("TSAs").
Purchase Payments
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-__.)
T h e full amount of your Purchase Payments, less
applicable premium tax due, if any, will be invested.
However, certain charges and deductions will be made from your
Contract Value. (See "Charges and Deductions" on page I-__.)
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
I-12<PAGE>
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-__.)
Administrative Fee. Great American Reserve will deduct a
daily administrative fee equal to an annual rate of 0.15% of
the average daily net assets of each Subaccount. This charge
is made to reimburse Great American Reserve for expenses
r e l a t e d to administration of the Contracts. (See
"Administrative Fee" on page I-__.)
Mortality and Expense Risk Charge. Great American
Reserve will deduct a daily mortality and expense risk charge
equal to an annual rate of 1.25% of the average daily net
assets of each Subaccount. This charge is made to compensate
Great American Reserve for the risk of guaranteeing not to
i n c r ease the administrative fee regardless of actual
administrative costs and for the mortality guarantees Great
American Reserve makes under the Contract. (See "Mortality
and Expense Risk Charge" on page I-__.)
S u baccount Administration Fee. Various Subaccount
administration fees, with maximum annual rates ranging from
0.20% to 0.25% of a Subaccount's average daily net assets,
also are payable by the Subaccounts 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,
u n der the Investment Advisers Act of 1940. Tactical
Allocation Services consist of making allocation and transfer
decisions. You are responsible for selecting, supervising,
I-13<PAGE>
and paying your Financial Advisor and must execute a power of
a t torney 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-__.)
U p o n notification to the Servicer of the death,
termination, or resignation of your Financial Advisor, your
Separate Account Value will 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
I-14<PAGE>
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-__.)
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
a n d options on securities, stock indexes, and futures
contracts.
Although liquidity risks are often inherent in market
timing arrangements, the Subaccounts have procedures designed
to maximize liquidity of the Subaccounts. In particular, the
S u b accounts' 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-15<PAGE>
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.
FEES AND EXPENSES OF THE SUBACCOUNTS
<TABLE>
<CAPTION>
<S> <C> 1/
Contract Owner Transaction Expenses
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
P u rchase Payments or from Contract Values at a later date.
Currently, state premium taxes range from 0% to 3.5%.
I-16<PAGE>
Subaccount Annual Expenses
<TABLE>
<CAPTION>
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 2.80% 2.90% 3/
reimbursement)
</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
e x p enses 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. Fees waived
or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements, after December 1, 1997, are subject to
reimbursement to PADCO and the Servicer by each of the Nova, Ursa,
OTC, Precious Metals, U.S. Government Bond, Juno, and Money Market
Subaccounts whenever the expense ratio of each such Subaccount is
b e l ow 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a Subaccount
after December 31, 1999.
I-17<PAGE>
<TABLE>
<CAPTION>
Precious
OTC Metals
Subaccount Subaccount
<S> <C> <C>
InvestmentAdvisory 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 (after3/
reimbursement) 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
e x p enses 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. Fees waived
or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements, after December 1, 1997, are subject to
reimbursement to PADCO and the Servicer by each of the Nova, Ursa,
OTC, Precious Metals, U.S. Government Bond, Juno, and Money Market
Subaccounts whenever the expense ratio of each such Subaccount is
b e l ow 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a Subaccount
after December 31, 1999.
I-18<PAGE>
<TABLE>
<CAPTION>
Bond Juno
Subaccount Subaccount
<S> <C> <C>
Investment Advisory Fees 0.50% 0.90%
Subaccount
Administration Fees 0.20% 0.25%
Other Expenses
(after reimbursement)2/ 0.30% 0.35%
Total Separate Account Annual
Expenses (after
reimbursement)3/ 2.40% 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
e x p enses 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. Fees waived
or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements, after December 1, 1997, are subject to
reimbursement to PADCO and the Servicer by each of the Nova, Ursa,
OTC, Precious Metals, U.S. Government Bond, Juno, and Money Market
Subaccounts whenever the expense ratio of each such Subaccount is
b e l ow 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a Subaccount
after December 31, 1999.
I-19<PAGE>
<TABLE>
<CAPTION>
Money
Market
Subaccount
<S> <C>
Investment Advisory Fees 0.50%
Subaccount
Administration Fees 0.20%
Other Expenses
(after reimbursement)2/ 0.10%
Total Separate Account Annual
Expenses (after
reimbursement)3/ 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
e x p enses 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. Fees waived
or expenses paid or assumed by PADCO and the Servicer under these
voluntary agreements, after December 1, 1997, are subject to
reimbursement to PADCO and the Servicer by each of the Nova, Ursa,
OTC, Precious Metals, U.S. Government Bond, Juno, and Money Market
Subaccounts whenever the expense ratio of each such Subaccount is
b e l ow 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a Subaccount
after December 31, 1999.
I-20<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.
I-21<PAGE>
Similarly, the assumed 5% annual rate of return is not an estimate or a
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 September 30, 1997, are included in the Statement of Additional
Information.
I-22<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
the Subaccounts, for the periods 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 Subaccount The Ursa Subaccount
For the Period From For the Period From
May 7, 1997, to May 7, 1997, to
September 30, 1997 September 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income
Expenses
Net Investment Income (Loss)
Net Realized and Unrealized
Gains (Losses)on Securities ______ ____
Net Increase (Decrease) in
Accumulation Unit Value
Accumulation Unit Value
at End of Period $ $
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value % %
Ratios to Average Net Assets*
Net Expenses+ % %
Net Investment Income % %
Supplementary Data
I-23<PAGE>
Portfolio Turnover Rate** % %
Number of Accumulation Units
Outstanding at End of Period
</TABLE>
____________________
+ The annualized ratios of gross expenses to average net assets for the
Nova Subaccount and the Ursa Subaccount are _____% and _____%,
respectively, for the period from May 7, 1997 to September 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-24<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
September 30, 1997 September 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income
Expenses
Net Investment Income (Loss)
Net Realized and Unrealized
Gains (Losses)
on Securities
Net Increase (Decrease)
in Accumulation Unit Value
Accumulation Unit Value
at End of Period $ $
Net Increase (Decrease)
in Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value % %
Ratios to Average Net Assets*
Net Expenses+ % %
Net Investment Income % %
Supplementary Data
Portfolio Turnover Rate** % %
Number of Accumulation Units
Outstanding at End of Period
</TABLE>
____________________
+ The annualized ratios of gross expenses to average net assets for the
OTC Subaccount and the Precious Metals Subaccount are _____% and
_____%, respectively, for the period from May 7, 1997 to September
30, 1997 (for the OTC Subaccount), and the period from May 29, 1997
I-25<PAGE>
to September 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-26<PAGE>
<TABLE>
<CAPTION>
The U.S. Government
Bond Subaccount The Juno Subaccount
For the Period From For the Period From
May 29, 1997, to May 7, 1997, to
September 30, 1997 September 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income
Expenses
Net Investment Income (Loss)
Net Realized and Unrealized
Gains (Losses)
on Securities
Net Increase (Decrease) in
Accumulation Unit Value
Accumulation Unit Value
at End of Period $ $
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value % %
Ratios to Average Net Assets*
Net Expenses+ % %
Net Investment Income % %
Supplementary Data
Portfolio Turnover Rate** % %
Number of Accumulation
Units Outstanding
at End of Period
</TABLE>
______________________
+ The annualized ratios of gross expenses to average net assets for the
Bond Subaccount and the Juno Subaccount are _____% and _____%,
I-27<PAGE>
respectively, for the period from May 29, 1997 to September 30, 1997
(for the Bond Subaccount), and May 7, 1997 to September 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-28<PAGE>
<TABLE>
<CAPTION>
The Money Market
Subaccount
For the Period From
May 7, 1997, to
September 30, 1997
<S> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value at
Beginning of Period $ 10.00
Investment Income
Expenses
Net Investment Income (Loss)
Net Realized and Unrealized Gains (Losses)
on Securities
Net Increase (Decrease) in Accumulation
Unit Value
Accumulation Unit Value at End of Period $
Net Increase (Decrease) in Accumulation Unit
Value as a % of Beginning Accumulation
Unit Value %
Ratios to Average Net Assets*
Net Expenses+ %
Net Investment Income %
Supplementary Data
Portfolio Turnover Rate** 0%
Number of Accumulation Units Outstanding
at End of Period
</TABLE>
______________________
+ The annualized ratio of gross expenses to average net assets for the
Money Market Subaccount is _____% for the period from May 7, 1997 to
September 30, 1997. (See Footnote 3 under "Fees and Expenses of the
Subaccounts" at page I-___.)
* Annualized.
I-29<PAGE>
** Portfolio turnover rate is calculated without regard to short-term
securities having a maturity of less than one year.
I-30<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-31<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-32<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-33<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-34<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.
I-35<PAGE>
Addition or Deletion of Subaccounts
Great American Reserve may, at its discretion, no longer make
available any of the Subaccounts shown on the Contract Schedule. Great
American Reserve may also offer additional new Subaccounts.
TACTICAL ALLOCATION SERVICES
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
I-36<PAGE>
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
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
I-37<PAGE>
and later, any otherwise applicable withdrawal charge will be multiplied by
a factor ranging from 0.9 to 0 for Contract years one through 10.
A Contract Owner may make one free withdrawal per Contract year from
Contract Value of an amount up to 10% of the Contract Value (as determined
on the date of receipt of the withdrawal request). Additional withdrawals
in excess of that amount in any Contract year during the period when any
withdrawal charge is applicable will be subject to the appropriate charge
as set forth above.
Withdrawals which are authorized by you to remit 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" 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 that all amounts
proposed to be withdrawn will be used to make distributions required under
Section 664 of the Code for the year in which such amounts are withdrawn or
for a prior year; (ii) that the required distribution exceeds the one free
withdrawal of 10% of the Contract Value which is permitted without a
withdrawal charge; and (iii) that the funds necessary to make the required
distribution could not otherwise be made available without hardship to the
trust or its beneficiaries. (See "Withdrawals" on page I-__.)
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-38<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-39<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.
I-40<PAGE>
DESCRIPTION OF THE CONTRACT
Purchase Payments
The minimum initial Purchase Payment for a Contract is $25,000. The
minimum subsequent Purchase Payment is $1,000. Subsequent Purchase
Payments may be paid at any time to the Administrative Office. The maximum
deposit without prior approval from Great American Reserve is $500,000.
Application for a Contract or acceptance of the first Purchase
Payment is subject to Great American Reserve's underwriting rules for such
transactions. Great American Reserve reserves the right to reject any
application. A properly-completed application that is accompanied by the
initial Purchase Payment and all information necessary for the processing
of the application will be accepted within two business days of Great
American Reserve's receipt of the properly- completed application (i.e.,
information sufficient to permit Great American Reserve to determine to
issue a Contract). Great American Reserve may retain an initial Purchase
Payment for up to five business days while attempting to obtain information
sufficient to issue the Contract. If an application is not completed
properly and cannot be processed and necessary information obtained within
five business days, Great American Reserve will inform you of the reasons
for the delay and offer to return your Purchase Payment unless you consent
to Great American Reserve retaining the initial Purchase Payment until we
have received the information we require.
Changing Financial Advisors
You may change your Financial Advisor. However, prior to a change
taking effect, the new Financial Advisor must satisfy 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-__.)
I-41<PAGE>
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.
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;
I-42<PAGE>
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
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
I-43<PAGE>
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-__.)
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.
I-44<PAGE>
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" 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.
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.
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
I-45<PAGE>
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
d e t ermined 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" at page I-___.) There is no
charge on withdrawals of (a) Purchase Payments that have been in the
Contract more than seven complete Contract years or (b) free withdrawal
amounts described above. (See "Charges and Deductions -- Withdrawal
Charge" at page I-___.) 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 or Deferral of Payments" below
and "Federal Income Taxes" on page I-__).
I-46<PAGE>
Systematic Withdrawal Plan
Great American Reserve administers a systematic withdrawal plan (the
"SWP") which enables a Contract Owner to pre-authorize a periodic exercise
of the contractual withdrawal rights described above. Contract Owners
entering into an SWP agreement with Great American Reserve instruct Great
American Reserve to withdraw a level dollar amount from specified
investment options on a periodic basis. The total of SWP withdrawals by a
Contract Owner in a Contract year is limited to free withdrawal amounts to
ensure that no withdrawal charge will ever apply to an SWP withdrawal (see
"Charges and Deductions -- Withdrawal Charge" at page I-___). If an
additional withdrawal is made from a Contract by a Contract Owner
participating in an SWP, the SWP will terminate automatically and may be
reinstated only on or after a written request to Great American Reserve.
SWP withdrawals, however, may be subject to the ten percent (10%) federal
tax penalty imposed on withdrawals, which penalty generally will apply to
the income portion of any distribution (see "Federal Income Taxes -- Tax
T r eatment of Withdrawals; Non-Qualified Contracts" at page I-___).
Contract Owners interested in participating in an SWP may elect to
participate in this program by written request to Great American Reserve s
Administrative Office.
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
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
I-47<PAGE>
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
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.
Because it provides a specified minimum number of annuity payments,
this option results in somewhat lower payments per month than the First
Option.
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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
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.
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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
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
I-50<PAGE>
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 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
I-51<PAGE>
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 Reserve 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
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.
I-52<PAGE>
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 tactical 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.
Participants should consult their own tax counsel or other tax
advisor regarding withholding requirements.
Tax Treatment of Withdrawals; Non-Qualified Contracts
I-53<PAGE>
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
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
I-54<PAGE>
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
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
I-55<PAGE>
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 1/4 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 1/4. Required distributions must be made
over a period not exceeding the life expectancy of the individual or the
joint lives or life expectancies of the individual and his or her
designated beneficiary. If the required minimum distributions are not
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.
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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.
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.
I-57<PAGE>
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-58<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-59<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 Bond To provide investment results that correspond to
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 December 1, 1997,
aggregate net assets in excess of $2 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.
II-9<PAGE>
The Benchmarks
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
II-10<PAGE>
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.
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
II-11<PAGE>
Subaccount for Accumulation Units in other Subaccounts frequently, pursuant
to the exchange policy of the Separate Account, in order to attempt to take
advantage of anticipated changes in market conditions (see "Investments of
the Subaccounts; Addition and Deletion of Subaccounts" in Part I of this
Prospectus). The strategies employed by Contract Owners invested in the
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
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investments (which will cause divergence between the Subaccount and its
benchmark over time due to the mathematical effects of leveraging).
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
II-13<PAGE>
contracts to close out their positions on or before the expiration date by
use of offsetting contract positions and physical delivery is thereby
avoided.
The Nova Subaccount and the OTC Subaccount may purchase call options
and write (sell) put options, and the Ursa Subaccount may purchase put
options and write call options, on stock index futures contracts. The Bond
Subaccount may purchase call options and write put options on U.S.
Government Securities futures contracts and the Juno Subaccount may write
call options and purchase put options on futures contracts on U.S.
Government Securities.
When a Subaccount purchases a put or call option on a futures
contract, the Subaccount pays a 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.
II-14<PAGE>
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
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
II-15<PAGE>
the underlying futures contract at a price greater than or equal to the
strike price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of
the written put, the Subaccount will maintain in a segregated account cash
or 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,
II-16<PAGE>
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
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
II-17<PAGE>
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
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.
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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
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
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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
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
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which a Subaccount invests, since the U.S. Government is not obligated to
do so. These other agencies and instrumentalities are supported by either
the issuer s right to borrow, under certain circumstances, an amount
limited to a specific line of credit from the U.S. Treasury, the
discretionary authority of the U.S. Government to purchase certain
obligations of an agency or instrumentality, or the credit of the agency or
instrumentality itself.
U.S. Government Securities may be purchased at a discount. 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
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bought U.S. Treasury bonds and issued receipts representing an ownership
interest in the interest coupons or in the principal portion of the bonds.
Subsequently, the U.S. Treasury began directly issuing zero coupon bonds
with the introduction of "Separate Trading of 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.
II-22<PAGE>
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
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
II-23<PAGE>
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
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
II-24<PAGE>
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.
PERFORMANCE INFORMATION
General
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.
Because the Subaccounts have only recently been offered through the
Separate Account, as of the date of this Prospectus these Subaccounts have
limited prior operating history or performance. The Subaccounts, however,
are modeled after seven existing funds (the "Rydex Funds") of Rydex Series
Trust (the "Trust"), an open-end management investment company that
commenced operations on July 12, 1993 (the Money Market Subaccount is
modeled after the Rydex U.S. Government Money Market Fund (the "Money
Market Fund") series of the Trust). These comparable Rydex Funds
(including the Money Market Fund) are managed by an affiliate of PADCO,
PADCO Advisors, Inc. ("PADCO I"), and have investment objectives and
policies substantially similar to the corresponding Subaccounts. In
II-25<PAGE>
addition, PADCO employs the same portfolio managers to manage the
Subaccounts as PADCO I employs to manage the corresponding Rydex Funds.
The Rydex Funds are publicly available mutual funds and, similar to the
Subaccounts, are principally designed for money managers and investors who
intend to invest as part of an asset allocation or market timing investment
strategy.
Below you will find information about the performance of the
comparable Rydex Funds (other than the Money Market Fund). Although the
Subaccounts have substantially similar investment objectives and policies,
an affiliated investment adviser, and the same portfolio managers as their
comparable Rydex Funds, you should not assume that the Subaccounts offered
by this Prospectus will have the same future performance as these Rydex
Funds. For example, a Subaccount s performance will tend to be less than
the performance of the corresponding Rydex Fund due to, among other things,
differences in expenses and cash flows between a Subaccount and the
corresponding Rydex Fund. Moreover, past performance information is based
on historical earnings and is not intended to indicate future performance.
The investment characteristics of each Subaccount will resemble the
investment characteristics of the Subaccount s corresponding Rydex Fund.
D e p e n d ing on the Subaccount involved, similarity of investment
characteristics may involve factors such as industry diversification,
portfolio beta, portfolio quality, average maturity of fixed-income assets,
equity/non-equity mixes, and individual holdings and investment techniques
used to manage the Subaccount and the corresponding Rydex Fund.
W h i le in most cases the Subaccounts closely resemble their
corresponding Rydex Fund, certain Subaccounts do have differences from
their corresponding Rydex Fund. Contract Owners should note the following
differences: the benchmark of the Nova Fund is 150% of the performance of
the S&P500 Index, whereas the current benchmark of the Nova Subaccount is
125% of the performance of the S&P500 Index; the benchmark for common
stock securities for each of the Nova and Ursa Subaccounts may be changed
by the Managers of the Separate Account without seeking Contract Owner
approval, whereas the benchmark for common stock securities for each of the
Nova and Ursa Funds is part of the corresponding Rydex Fund s investment
objective and, therefore, may be changed only by the shareholders of that
corresponding Rydex Fund; and the fees and expenses paid by each Subaccount
tend to be greater than the fees and expenses paid by that Subaccount s
corresponding Rydex Fund due to the 1.25% mortality and expense risk charge
deducted from each of the Subaccounts (in addition, state premium taxes may
be deducted from Purchase Payments or from Contract Values and Contract
Owners also pay fees to their Financial Advisors; Rydex Fund shares are not
subject to these premium taxes and Rydex Fund shareholders do not pay these
fees). See "Charges and Deductions" at page I-___.
The table below sets forth each Subaccount, and each Subaccount s
corresponding Rydex Fund, the date that PADCO I began managing the
corresponding Rydex Fund (referred to as the "Commencement Date"), and
asset size of the corresponding Rydex Fund, as of June 30, 1997.
II-26<PAGE>
<TABLE>
<CAPTION>
Asset Size
of
Corresponding
Corresponding Rydex Fund Rydex Fund
(Commencement Date) (as of
Subaccount June 30, 1997)
<S> <C> <C>
Nova Subaccount Nova Fund
(July 12, 1993) $650,763,554
Ursa Subaccount Ursa Fund
(January 7, 1994) $270,906,603
OTC Subaccount Rydex OTC Fund
(February 14, 1994) $287,177,694
Precious Metals Rydex Precious Metals Fund
Subaccount (December 1, 1993) $25,510,127
U.S. Government Bond Rydex U.S. Government Bond Fund
Subaccount (January 3, 1994) $11,483,027
Juno Subaccount Juno Fund
(March 3, 1995) $25,080,753
Money Market Subaccount Rydex U.S. Government Money
Market Fund
(December 8, 1993) $231,097,351
</TABLE>
Total Return Information
The asset levels of the Ursa, Bond, and Juno Subaccounts during
certain periods in the past have been at zero. When the asset level of a
Subaccount is at zero, the Separate Account s policy is to calculate the
Accumulation Unit Value for that Subaccount each day that the asset level
of that Subaccount is at zero based on the most-recent one-day change in
the net asset value of the Rydex Fund comparable to that Subaccount.
The Separate Account, including the Nova, Ursa, OTC, Juno, and Money
Market Subaccounts, commenced operations on May 7, 1997; the Precious
Metals Subaccount and the Bond Subaccount each commenced operations on May
29, 1997. The following table shows the average annual compounded rates of
returns for the Subaccounts (other than the Money Market Subaccount),
assuming the reinvestment of all dividends and distributions, for the
period from the respective commencement of operations of the Subaccounts to
June 30, 1997.
<TABLE>
<CAPTION>
II-27<PAGE>
Subaccounts Average Annual Compounded Rates of Return
For the Period
Subaccount from the
(Date of the Commencement
Commencement of Operations to
of Operations) June 30, 1997*
<S> <C>
The Nova Subaccount
(May 7, 1997) 86.96%
The Ursa Subaccount
(May 7, 1997) (44.64)%1/
The OTC Subaccount
(May 7, 1997) 29.96%
The Precious Metals Subaccount
(May 29, 1997) (74.69)%
The U.S. Government Bond Subaccount
(May 29, 1997) 40.47%2/
The Juno Subaccount
(May 7, 1997) (13.87)%3/
</TABLE>
____________
* Annualized.
1/ During this period, the asset level of the Ursa Subaccount was at
zero from May 22 through May 23, 1997, and from June 4 through June
9, 1997.
2/ During this period, the asset level of the Bond Subaccount was at
zero from June 6 through June 23, 1997.
3/ During this period, the asset level of the Juno Subaccount was at
zero from June 4 through June 13, 1997.
The following table, by comparison, shows the average annual
compounded rates of returns for the Rydex Funds (other than the Money
Market Fund), assuming the reinvestment of all dividends and distributions,
for the one-year period ended June 30, 1997, for the period from the
respective commencement of operations of the Rydex Funds to June 30, 1997,
and for the period from May 7, 1997 to June 30, 1997, as applicable. These
figures are based on the actual gross investment performance of the Rydex
Funds and assume the reinvestment of all dividends and distributions. From
the gross investment performance figures, the maximum Separate Account
Annual Expenses and Subaccount Annual Expenses reflected in the fee table
II-28<PAGE>
under "Fees and Expenses of the Subaccounts" on page I-__ are deducted to
arrive at the net return. Rydex Fund performance does not represent the
historical performance of the Subaccounts and should not be interpreted as
indicative of the future performance of the Subaccounts.
II-29<PAGE>
<TABLE>
<CAPTION>
Rydex Funds Average Annual Compounded Rates of Return
For the Period For the Period
from the from the
Rydex Fund For the Commencement Commencement of
(Date of the One-Year of Rydex Fund Subaccount
Commencement of Period Ended Operations to Operations 1/ to
Operations) June 30, 1997 2/ June 30, 1997 2/ June 30, 1997 2/
<S> <C> <C> <C>
The Nova Fund 3/
(July 12, 1993) 42.88% 24.77% 113.21%
The Ursa Fund
(January 7, 1994) (21.36)% (14.50)% (40.74)%
The Rydex OTC Fund
(February 14, 1994) 41.72% 27.97% 40.87%
The Rydex Precious
Metals Fund
(December 1, 1993) (23.88)% (10.80)% (70.86)%
The Rydex U.S. Government
Bond Fund
(January 3, 1994) 5.75% 0.80% 63.75%
The Juno Fund (11.36)%
(March 3, 1995) (1.90)% (3.83)%
</TABLE>
_________________
1/ The Separate Account, including the Nova, Ursa, OTC, and Juno
Subaccounts, commenced operations on May 7, 1997; the Precious Metals
Subaccount and the Bond Subaccount each commenced operations on May
29, 1997.
2/ These total return performance quotations for the Rydex Funds, for
the periods indicated, have been adjusted to reflect the charges,
deductions, fees, and expenses paid by and deducted from the
corresponding Subaccounts, rather than the fees and expenses paid by
the respective Rydex Funds.
3/ The total return performance quotations for the Nova Fund, for the
periods indicated, have not been further adjusted to reflect a
benchmark objective that seeks to provide investment returns that
correspond to 125% of the performance of the S&P500 Index (the Nova
S u baccount's current benchmark), rather than to 150% of the
II-30<PAGE>
performance of the S&P500 Index (the Nova Fund's current benchmark).
In a rising market (such as those in recent years), returns based on
125% of the performance of a benchmark would be significantly less
than those based on 150% of the performance of the benchmark; in a
falling market, returns based on 125% of the performance of the
benchmark would be significantly greater than 150% of the performance
of that benchmark.
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.
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
II-31<PAGE>
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
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
II-32<PAGE>
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
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
II-33<PAGE>
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
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.
II-34<PAGE>
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. Fees waived or expenses paid or
assumed by PADCO and the Servicer under these voluntary agreements, after
December 1, 1997, are subject to reimbursement to PADCO and the Servicer by
each of the Nova, Ursa, OTC, Precious Metals, U.S. Government Bond, Juno,
and Money Market Subaccounts whenever the expense ratio of each such
Subaccount is below 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a Subaccount after
December 31, 1999.
Great American Reserve and PADCO have advanced the organizational
expenses of the Separate Account. These expenses (a total of approximately
$571,080) will be reimbursed by the Subaccounts and amortized over a five
year period. These amortized reimbursements will be allocated among the
Subaccounts daily and reconciled and settled monthly on the basis of
relative Subaccount net assets.
II-35<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-36<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 1, 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 December 1, 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.
3<PAGE>
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
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.
4<PAGE>
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.
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
5<PAGE>
price, including any accrued interest earned on the repurchase agreement.
In the event of a default or bankruptcy by a selling financial institution,
a Subaccount will seek to liquidate such collateral. However, the
exercising of each Subaccount's right to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any
sale upon a default of the obligation to repurchase were less than the
repurchase price, the Subaccount could suffer a loss. The investments of
each of the Subaccounts in repurchase agreements, at times, may be
substantial when, in the view of the appropriate Subaccount Advisor,
liquidity or other considerations so warrant.
Borrowing
The Nova Subaccount and the Bond Subaccount do not presently, but may
in the future, borrow money, including borrowing for investment purposes.
Borrowing for investment is known as leveraging. Leveraging investments,
by purchasing securities with borrowed money, is a speculative technique
which increases investment risk, but also increases investment opportunity.
Since substantially all of a Subaccount s assets will fluctuate in value,
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.
6<PAGE>
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
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 &
7<PAGE>
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
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
8<PAGE>
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.
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.
9<PAGE>
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:
(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. Fees waived or expenses paid or
assumed by PADCO and the Servicer under these voluntary agreements, after
December 1, 1997, are subject to reimbursement to PADCO and the Servicer by
each of the Nova, Ursa, OTC, Precious Metals, U.S. Government Bond, Juno,
and Money Market Subaccounts whenever the expense ratio of each such
Subaccount is below 2.80%, 2.90%, 2.80%, 2.80%, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a Subaccount after
December 31, 1999.
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
19<PAGE>
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
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,
20<PAGE>
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
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.
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
21<PAGE>
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
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
22<PAGE>
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
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.
23<PAGE>
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
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
24<PAGE>
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 .
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.
25<PAGE>
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
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, including the series of Rydex Series Trust (the "Trust"),
an open-end management investment company that currently is composed of
nine separate series, including The Nova Fund, The Ursa Fund, The Rydex OTC
Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund,
The Juno Fund, The Rydex U.S. Government Money Market Fund, The Rydex
I n s t itutional Money Market Fund, and The Rydex High Yield Fund
(collectively, the "Rydex Funds"); other separate series of the Trust may
be added in the future. Similar to the Subaccounts of the Separate
Account, the Rydex Funds are principally designed for professional money
26<PAGE>
managers and investors who intend to follow an asset-allocation or market-
timing investment strategy. Except for the Rydex U.S. Government Money
Market Fund and the Rydex Institutional Money Market Fund (collectively,
the "Money Market Funds"), each Rydex Fund, as is each Subaccount other
than the Money Market Subaccount, is intended to provide investment
exposure with respect to a particular segment of the securities markets and
seeks investment results that correspond over time to a specified
benchmark. Similar to the Subaccounts, the Rydex Funds may be used
independently or in combination with each other as part of an overall
investment strategy.
Except as discussed below, the Rydex Funds have nearly identical
i n vestment objectives and policies as their respective counterpart
Subaccounts. The investment adviser for the Separate Account, PADCO
Advisors II, Inc., and the investment adviser for the Trust, PADCO
Advisors, Inc., are under the common control of Albert P. Viragh, Jr., who
is the Chairman of the Board of Directors, the President, and the sole
voting shareholder of both PADCO Advisors II, Inc. and PADCO Advisors, Inc.
As disclosed below, PADCO Advisors II, Inc. employs the same portfolio
managers to manage the Subaccounts as PADCO Advisors, Inc. employs to
manage the corresponding Rydex Funds.
The Nova Subaccount and The Nova Fund. The investment objectives
of the Nova Fund and the Nova Subaccount are similar, but not identical.
The investment objective of the Nova Fund is to provide investment returns
that correspond to 150% of the performance of the Standard & Poor s 500
Composite Stock Price IndexTM (the "S&P500 Index"). The investment
objective of the Nova Subaccount is to provide investment returns that
correspond to the performance of a benchmark for common stock securities,
and the Nova Subaccount's current benchmark is 125% of the performance of
the S&P500 Index.
In attempting to achieve its objective, each of the Nova Subaccount
and the Nova Fund 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 contrast to returns on a
mutual fund that seeks to approximate the return of the S&P500 Index, each
of the Nova Subaccount and the Nova Fund should increase gains during
periods when the prices of the securities in the S&P500 Index are rising
and increase losses to investors during periods when such prices are
declining. Investors in the Nova Subaccount and the Nova Fund could
experience substantial losses during sustained periods of falling equity
prices.
Both the Nova Subaccount and the Nova Fund are managed by the same
portfolio manager, Thomas Michael. Mr. Michael has managed the Nova
Subaccount since May 7, 1997, the date that the Nova Subaccount commenced
operations, and has managed the Nova Fund since March, 1994.
The Ursa Subaccount and The Ursa Fund. The investment objective of
the Ursa Fund is to provide investment results that will inversely
27<PAGE>
correlate to the performance of the S&P500 Index. Similarly, the
investment objective of the Ursa Subaccount is to provide investment
results that will inversely correlate to the performance of a benchmark for
common stock securities, and the Ursa Fund's current benchmark is the
S&P500 Index.
Each of the Ursa Subaccount and the Ursa Fund seeks to achieve this
inverse correlation result on each trading day. If the Ursa Subaccount is
successful in meeting its objective for any single trading day, the
Accumulation Unit Value of the Ursa Subaccount would increase for that day
in direct proportion to any decreases in the level of the S&P500 Index or
decrease for that day in direct proportion to any increases in the level of
the S&P500 Index. Similarly, if the Ursa Fund is successful in meeting its
objective for any single trading day, the net asset value on Ursa Fund
shares will increase for that day in direct proportion to any decreases in
the level of the S&P500 Index, or decrease for that day in direct
proportion to any increases in the level of the S&P500 Index. In seeking
to achieve its objective, each of the Ursa Subaccount and the Ursa Fund
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. Each of the Ursa Subaccount and the Ursa
Fund involves special risks not traditionally associated with investment
companies. Contract Owners with Contract Value allocated to the Ursa
Subaccount and investors in the Ursa Fund may experience substantial losses
during sustained periods of rising equity prices.
Both the Ursa Subaccount and the Ursa Fund are managed by the same
portfolio manager, Michael P. Byrum, the senior portfolio manager for both
the Separate Account and the Trust. Mr. Byrum has managed the Ursa
Subaccount since May 7, 1997, the date that the Ursa Subaccount commenced
operations, and has managed the Ursa Fund since January, 1994.
The OTC Subaccount and The Rydex OTC Fund. The investment
objective of each of the OTC Subaccount and the Rydex OTC Fund (the "OTC
Fund") is to provide investment results that correspond to a benchmark for
over-the-counter securities. The current benchmark for each of the OTC
Subaccount and the OTC Fund is the NASDAQ 100 IndexTM. Neither the OTC
Subaccount nor the OTC Fund aims to hold all of the 100 securities included
on the NASDAQ 100 IndexTM. Instead, each of the OTC Subaccount and the OTC
Fund intends to hold representative securities included in the NASDAQ 100
IndexTM or other instruments which are expected to provide returns that
correspond to those of the NASDAQ 100 IndexTM. In addition, each of the
OTC Subaccount and the OTC Fund also may engage in transactions on stock
index futures contracts, options on stock index futures contracts, and
options on securities and stock indexes.
Both the OTC Subaccount and the OTC Fund are managed by the same
portfolio manager, Michael P. Byrum. Mr. Byrum has managed the OTC
Subaccount since May 7, 1997, the date that the OTC Subaccount commenced
operations, and has managed the OTC Fund since February, 1994.
28<PAGE>
The Precious Metals Subaccount and The Rydex Precious Metals Fund.
The investment objective of each of the Precious Metals Subaccount (the
"Metals Subaccount") and the Rydex Precious Metals Fund (the "Metals Fund")
is to provide investment results that correspond to a benchmark primarily
for metals-related securities. The current benchmark for each of the
Metals Subaccount and the Metals Fund is the Philadelphia Stock Exchange
Gold/Silver IndexTM (the "XAU Index"). To achieve its objective, each of
the Metals Subaccount and the Metals Fund invests in securities included in
the XAU Index. In addition, each of the Metals Subaccount and the Metals
Fund may invest in other securities that are expected to perform in a
manner that will assist the Metals Subaccount's and the Metals Fund s
respective performance to track closely the XAU Index. Each of the Metals
Subaccount and the Metals Fund also 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.
Both the Metals Subaccount and the Metals Fund are managed by the
same portfolio manager, T. Daniel Gillespie. Mr. Gillespie has managed the
Metals Subaccount since May 29, 1997, the date that the Metals Subaccount
commenced operations, and has managed the Metals Fund since February, 1997.
The U.S. Government Bond Subaccount and The Rydex U.S. Government
Bond Fund. The investment objective of each of the U.S. Government Bond
Subaccount (the "Bond Subaccount") and the Rydex U.S. Government Bond Fund
(the "Bond Fund") is to provide investment results that correspond to a
benchmark for U.S. Government securities. The current benchmark of each of
the Bond Subaccount and the Bond Fund 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,
each of the Bond Subaccount and the Bond Fund invests primarily in
o b ligations 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"). Each of the Bond
Subaccount and the Bond Fund also may engage in transactions in futures
contracts and options on futures contracts on U.S. Treasury bonds. In
addition, each of the Bond Subaccount and the Bond Fund also may invest in
U.S. Treasury zero coupon bonds.
Both the Bond Subaccount and the Bond Fund are managed by the same
portfolio manager, Anne H. Ruff. Ms. Ruff has managed the Bond Subaccount
since May 29, 1997, the date that the Bond Subaccount commenced operations,
and has managed the Bond Fund since January, 1997.
The Juno Subaccount and The Juno Fund. The investment objective of
both the Juno Subaccount and the Juno Fund is to provide total return
before expenses and costs that will inversely correlate to the price
movements of a benchmark for U.S. Treasury debt instruments or futures
contract on a specified debt instrument. Each of the Juno Subaccount and
the Juno Fund seeks to achieve this inverse correlation result on each
trading day. The Long Bond is the current benchmark of each of the Juno
Subaccount and the Juno Fund. In seeking its objective, each of the Juno
29<PAGE>
Subaccount and the Juno Fund will employ certain investment techniques
including engaging in short sales and transactions in futures contracts and
options thereon. If the Juno Subaccount is successful in meeting its
objective for any single trading day, the Juno Subaccount's total return
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. If the Juno
Fund is successful in meeting its objective for any single trading day, the
total return on the Juno Fund's shares 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 and investors in the Juno Fund may experience
substantial losses during periods of falling interest rates/rising bond
prices.
Both the Juno Subaccount and the Juno Fund are managed by the same
portfolio manager, Thomas Michael. Mr. Michael has managed the Juno
Subaccount since May 7, 1997, the date that the Juno Subaccount commenced
operations, and has managed the Juno Fund since September, 1995.
The Money Market Subaccount and The Rydex U.S. Government Money
Market Fund. The investment objective of the Rydex U.S. Government Money
Market Fund (the "Money Market Fund") is to provide security of principal,
high current income, and liquidity. By contrast, the investment objective
of the Money Market Subaccount is to seek current income consistent with
stability of capital and liquidity. To achieve its objective, each of the
Money Market Subaccount and the Money Market Fund 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.
Each of the Money Market Subaccount and the Money Market Fund is
managed by the same portfolio manager, Anne H. Ruff. Ms. Ruff has managed
the Money Market Subaccount since May 7, 1997, the date that the Separate
Account and the Money Market Subaccount commenced operations, and has
managed the Money Market Fund since January, 1997.
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:
30<PAGE>
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
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.
31<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 September 30, 1997, are included at
the end of this Statement of Additional Information. A copy of the
Separate Account's Semi-Annual Report (for the period from May 7, 1997
through June 30, 1997), which was filed on Form N-30D with the SEC via
EDGAR transmission on September 2, 1997, 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.
32<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.
33<PAGE>
Standard & Poor's Rating Group
Commercial paper rated by Standard & Poor's Rating Group has the
following characteristics: (1) liquidity ratios adequate to meet cash
requirements; (2) long-term senior debt is rated "A" or better; (3) the
issuer has access to at least two additional channels of borrowing; (4)
basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances; (5) typically, the issuer's industry is well-
established and the issuer has a strong position within the industry; and
(6) the reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated "A-1," "A-2," or "A-3."
A-1 -- This designation rating indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2 -- The capacity for timely payment on issues with this
designation rating is strong; however, the relative degree of safety is not
as high as for issues designated "A-1."
Fitch Investors Service, Inc.
Commercial paper rated by Fitch Investors Service, Inc. ("Fitch"),
reflects Fitch's current appraisal of the degree of assurance of timely
payment of such debt. An appraisal results in the rating of an issuer's
paper as "F-1," "F-2," "F-3," or "F-4."
F-1 -- This designation rating indicates that the commercial paper
is regarded as having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this designation rating
reflect an assurance of timely payment only slightly less in degree than
those issues rated "F-1."
34<PAGE>
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
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.
35<PAGE>
IBCA, Inc.
In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the
companies for discussions with senior management. These meetings are
fundamental to the preparation of individual reports and ratings. To keep
abreast of any changes that may affect assessments, analysts maintain
contact throughout the year with the management of the companies that the
analysts cover.
IBCA's analysts speak the languages of the countries that the
analysts cover, which is essential to maximize the value of their meetings
with management and to analyze properly a company's written materials.
IBCA's analysts also have a thorough knowledge of the laws and accounting
practices that govern the operations and reporting of companies within the
various countries.
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot be
disclosed in reports, these data are taken into account by IBCA when
assigning IBCA's ratings. Before dispatch to subscribers, a draft of the
report is submitted to each company to permit the correction of any factual
errors and to enable the clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all
ratings and to ensure that individual ratings are assigned consistently for
institutions in all the countries covered. Following these committee
meetings, IBCA ratings are issued directly to subscribers. At the same
time, the company is informed of the ratings as a matter of courtesy, but
not for discussion.
A1+ -- This designation rating indicates obligations supported by
the highest capacity for timely repayment.
A1 -- This designation rating indicates obligations supported by a
very strong capacity for timely repayment.
A2 -- This designation rating indicates obligations supported by a
strong capacity for timely repayment, although such capacity may be
susceptible to adverse changes in business, economic, or financial
conditions.
36<PAGE>
AUDITED FINANCIAL STATEMENTS OF
GREAT AMERICAN RESERVE INSURANCE COMPANY
(For Great American Reserve Insurance Company's
Fiscal Year Ended December 31, 1996)<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Great American Reserve Insurance Company
We have audited the accompanying balance sheet of Great American Reserve
Insurance Company (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholder's equity and cash flows for the
year ended December 31, 1996 and the four months ended December 31, 1995. We
have also audited the accompanying statements of operations, shareholder's
equity and cash flows of the Company for the eight months ended August 31, 1995,
and the year ended December 31, 1994, based on the basis of accounting
applicable to periods prior to the adoption of push down accounting upon
Conseco, Inc.'s purchase of all common shares of the Company it did not
previously own (see note 1 of the notes to financial statements regarding the
adoption of push down accounting). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great American Reserve
Insurance Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996, the four
months ended December 31, 1995, the eight months ended August 31, 1995 and the
year ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
F-1
<PAGE>
<TABLE>
CAPTION
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET
December 31, 1996 and 1995
(Dollars in millions)
ASSETS
1996 1995
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1996 - $1,810.8; 1995 - $1,980.1)............................................... $1,795.1 $2,030.9
Mortgage loans..................................................................... 77.3 95.5
Credit-tenant loans................................................................ 93.4 79.4
Policy loans....................................................................... 80.8 84.7
Other invested assets ............................................................. 89.0 37.8
Short-term investments............................................................. 14.8 19.0
Assets held in separate accounts................................................... 232.4 137.5
-------- --------
Total investments............................................................ 2,382.8 2,484.8
Accrued investment income.............................................................. 32.9 34.0
Cost of policies purchased............................................................. 143.0 120.0
Cost of policies produced.............................................................. 38.2 24.0
Reinsurance receivables................................................................ 25.7 27.0
Goodwill (net of accumulated amortization: 1996 - $11.7; 1995 - $10.2)................. 49.7 53.0
Other assets........................................................................... 8.2 14.0
-------- --------
Total assets................................................................. $2,680.5 $2,756.8
======== ========<PAGE>
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
BALANCE SHEET (Continued)
December 31, 1996 and 1995
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.............................................................. $1,957.5 $2,039.1
Income tax liabilities............................................................. 29.8 39.0
Investment borrowings.............................................................. 48.4 84.2
Other liabilities.................................................................. 15.5 14.4
Liabilities related to separate accounts .......................................... 232.4 137.5
-------- --------
Total liabilities.......................................................... 2,283.6 2,314.2
-------- --------
Shareholder's equity:
Common stock and additional paid-in capital (par value $4.80 per share, 1,065,000
shares authorized, 1,043,565 shares issued and outstanding).................... 380.8 380.8
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $(2.4); 1995 - $6.8).................................................. (4.4) 11.8
Other investments (net of applicable deferred income taxes:
1996 - $(.1); 1995 - $.4).................................................... (.2) .6
Retained earnings.................................................................. 20.7 49.4
-------- --------<PAGE>
Total shareholder's equity................................................. 396.9 442.6
-------- --------
Total liabilities and shareholder's equity................................. $2,680.5 $2,756.8
======== ========
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(Dollars in millions)
Prior basis
---------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----<PAGE>
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
Net investment income................................. 218.4 74.2 136.4 187.9
Net investment gains.................................. 2.7 12.5 7.3 .2
------- ------ ------ ------
Total revenues................................ 302.5 118.5 204.2 286.7
------- ------ ------ ------
Benefits and expenses:
Insurance policy benefits............................. 54.9 18.9 45.9 66.2
Change in future policy benefits...................... (3.7) .2 (4.3) (1.3)
Interest expense on annuities and financial products.. 129.4 44.2 74.6 101.4
Interest expense on investment borrowings............. 6.2 1.0 3.6 2.9
Amortization related to operations.................... 17.8 5.3 11.7 16.0
Amortization related to investment gains............. 2.5 10.0 4.3 2.7
Other operating costs and expenses.................... 54.3 13.1 23.7 37.3
------- ------ ------ ------
Total benefits and expenses................... 261.4 92.7 159.5 225.2
------- ------ ------ ------
Income before income taxes.................... 41.1 25.8 44.7 61.5
Income tax expense........................................ 15.4 9.7 16.5 22.7
------- ------ ------ ------
Net income.................................... $ 25.7 $ 16.1 $ 28.2 $ 38.8
======= ====== ====== ======
The accompanying notes are an
integral part of the financial
statements.<PAGE>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period........................... $380.8 $380.8 $339.7 $339.7
Adjustment of balance due to new accounting basis... - - 41.1 -
------ ------ ------ ------
Balance, end of period................................. $380.8 $380.8 $380.8 $339.7
====== ====== ====== ======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period........................ $ 11.8 $ 1.3 $ (53.0) $ 33.3
Change in unrealized appreciation (depreciation).. (16.2) 10.5 55.7 (86.3)
Adjustment of balance due to new
accounting basis................................ - - (1.4) -
------ ------ ------- ------
Balance, end of period.............................. $ (4.4) $ 11.8 $ 1.3 $(53.0)
====== ====== ======= ======
Other investments:
Balance, beginning of period........................ $ .6 $ .6 $ (2.1) $ (.1)
Change in unrealized appreciation (depreciation).. (.8) - 3.3 (2.0)
Adjustment of balance due to new
accounting basis................................ - - (.6) -
------ ------ ------- ------
Balance, end of period.............................. $ (.2) $ .6 $ .6 $ (2.1)
====== ====== ======= ======<PAGE>
Retained earnings:
Balance, beginning of year............................. $ 49.4 $ 33.3 $ 80.3 $ 75.6
Net income ......................................... 25.7 16.1 28.2 38.8
Dividends on common stock........................... (54.4) - (41.2) (34.1)
Adjustment of balance due to new
accounting basis.................................. - - (34.0) -
------ ------ ------- ------
Balance, end of year................................... $ 20.7 $ 49.4 $ 33.3 $ 80.3
======= ====== ======= =======
Total shareholder's equity........................ $ 396.9 $442.6 $ 416.0 $ 364.9
======= ====== ======= =======
The accompanying notes are an
integral part of the financial
statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
GREAT AMERICAN RESERVE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(Dollars in millions)
Prior basis
-------------------------
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 25.7 $ 16.1 $ 28.2 $ 38.8<PAGE>
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization................................... 20.4 15.3 16.0 18.7
Income taxes................................... (3.9) 2.3 2.9 1.3
Insurance liabilities.......................... (40.5) (25.8) (14.0) (10.5)
Interest credited to insurance liabilities..... 129.4 44.2 74.6 101.4
Fees charged to insurance liabilities ......... (32.8) (10.3) (22.2) (36.5)
Accrual and amortization of investment income.. 3.1 3.2 (1.8) (1.2)
Deferral of cost of policies produced.......... (13.2) (3.0) (6.6) (9.4)
Investment gains............................... (2.7) (12.5) (7.3) (.2)
Other.......................................... (8.9) (8.9) (3.2) 5.0
-------- -------- ------- -------
Net cash provided by operating activities...... 76.6 20.6 66.6 107.4
-------- -------- ------- -------
Cash flows from investing activities:
Sales of investments................................... 988.9 513.2 406.5 586.0
Maturities and redemptions............................. 101.7 60.4 57.5 118.4
Purchases of investments............................... (954.2) (532.2) (476.2) (786.9)
-------- -------- ------- -------
Net cash provided (used) by investing
activities................................. 136.4 41.4 (12.2) (82.5)
-------- -------- ------- -------
Cash flows from financing activities:
Deposits to insurance liabilities...................... 169.8 50.8 104.4 146.0
Cash paid in reinsurance recapture .................... - (71.1) - -
Investment borrowings.................................. (35.8) (36.8) 121.0 (58.3)
Withdrawals from insurance liabilities................. (306.7) (71.9) (166.3) (171.4)
Dividends paid on common stock......................... (44.5) - (41.2) (34.1)
-------- -------- ------- -------
Net cash provided (used) by
financing activities....................... (217.2) (129.0) 17.9 (117.8)
-------- -------- ------- -------
Net increase (decrease) in short-term
investments................................ (4.2) (67.0) 72.3 (92.9)
Short-term investments, beginning of period................ 19.0 86.0 13.7 106.6
-------- -------- ------- -------
Short-term investments, end of period...................... $ 14.8 $ 19.0 $ 86.0 $ 13.7
======== ======== ======= =======
The accompanying notes are an
integral part of the financial
statements.<PAGE>
</TABLE>
F-6
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Great American Reserve Insurance Company (the "Company") markets
tax-qualified annuities and certain employee benefit- related insurance products
through professional independent agents. Since August 1995, the Company has been
a wholly owned subsidiary of Conseco, Inc. ("Conseco"), a financial services
holding company engaged in the development, marketing and administration of
annuity, individual health insurance and individual life insurance products.
During 1994, Conseco effectively owned 36 percent of the Company, through its
ownership interest in CCP Insurance, Inc. ("CCP"), a holding company organized
for companies previously acquired by Conseco Capital Partners, L.P. (the
"Partnership"), a limited partnership organized by Conseco. The Company was
acquired by the Partnership in 1990 (the "Partnership Acquisition"). During
1995, Conseco's ownership in CCP (and in the Company) increased to 49 percent as
a result of purchases of CCP common stock by CCP and Conseco. In August 1995,
Conseco completed the purchase of the remaining shares of CCP common stock it
did not already own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the "Conseco
Acquisition").
The accompanying financial statements give effect to "push down" purchase
accounting to reflect the Partnership Acquisition and the Conseco Acquisition.
As a result of applying "push down" purchase accounting: (i) the Company's
financial position and results of operations for periods subsequent to the
Partnership Acquisition and before the Conseco Acquisition (the "prior basis")
reflect the Partnership's cost to acquire the Company's asset and liability
accounts based upon their estimated fair values at the purchase date; and (ii)
the Company's financial position and results of operations for periods
subsequent to the Conseco Acquisition reflect Conseco's cost to acquire the
Company's asset and liability accounts based upon their estimated fair values at
the purchase date.
The effect of the adoption of the new basis of accounting on the Company's
balance sheet accounts on August 31, 1995, was as follows (dollars in millions):
<TABLE>
<CAPTION>
Debit<PAGE>
(Credit)
--------
<S> <C>
Cost of policies purchased.............................................. $ 59.0
Cost of policies produced .............................................. (27.0)
Goodwill................................................................ (15.1)
Insurance liabilities................................................... (1.2)
Income tax liabilities.................................................. (11.9)
Other................................................................... 1.3
Common stock and additional paid-in capital............................. (41.1)
Net unrealized appreciation of fixed maturity securities................ 1.4
Net unrealized appreciation of other investments........................ .6
Retained earnings....................................................... 34.0
</TABLE>
The accompanying financial statements also include the effect of the
December 31, 1994, merger of Jefferson National Life Insurance Company
("Jefferson National", which was acquired by the Partnership in 1990) into the
Company. This merger has been accounted for as a pooling of interests;
therefore, the assets and liabilities of each company have been combined at
their book values and the statements of operations, shareholder's equity and
cash flows have been reported as if the merger had occurred on January 1, 1994.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which differ in some respects
from statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments. The financial statements
prepared in conformity with GAAP include amounts based on informed estimates and
judgment of management, with consideration given to materiality. Significant
estimates and assumptions are utilized in the calculation of cost of policies
produced, cost of policies purchased, insurance liabilities, guaranty fund
assessment accruals and deferred income taxes. Actual experience may differ from
those estimates. Certain amounts from the 1995 and 1994 financial statements and
notes have been reclassified to conform with the 1996 presentation.
F-7
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Investments
Fixed maturity investments are securities that mature more than one year
after issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
Actively managed - fixed maturity securities that may be sold prior to
maturity due to changes that might occur in market interest rates,<PAGE>
issuer credit quality or the Company's liquidity requirements. Actively
managed fixed maturity securities are carried at estimated fair value
and the unrealized gain or loss is recorded net of tax and related
adjustments described below as a component of shareholder's equity.
Trading account - fixed maturity securities are bought and held
principally for the purpose of selling them in the near term. Trading
account securities are carried at estimated fair value. Unrealized
gains or losses are included in net investment gains (losses). The
Company did not hold any trading account securities during 1996, 1995
or 1994.
Held to maturity - (all other fixed maturity securities) are those
securities which the Company has the ability and positive intent to
hold to maturity, and are carried at amortized cost. The Company may
dispose of these securities if the credit quality of the issuer
deteriorates, if regulatory requirements change or under other
unforeseen circumstances. The Company has not held any securities in
this classification during 1996, 1995 or 1994.
Anticipated returns, including investment gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity securities are stated at
estimated fair value, an adjustment to the cost of policies purchased and the
cost of policies produced may be necessary if a change in amortization would
have been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows (including investment income),
are insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, as
a component of shareholder's equity. The following table summarizes the effect
of these adjustments as of December 31, 1996:
<TABLE>
<CAPTION>
Effect of fair
Balance value adjustment on
before actively managed Reported
adjustment fixed maturities amount
---------- ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $1,810.8 $(15.7) $1,795.1
Cost of policies purchased.................................... 135.2 7.8 143.0
Cost of policies produced..................................... 37.1 1.1 38.2
Income tax liabilities........................................ 32.2 2.4 29.8
Net unrealized depreciation of fixed maturities............... - (4.4) (4.4)
/TABLE
<PAGE>
When changes in conditions cause a fixed maturity investment to be
transferred to a different category (e.g. actively managed, held to maturity or
trading), the security is transferred to the new category at its fair value at
the date of the transfer. There were no such transfers in 1996, 1995 or 1994. At
the transfer date, the security's unrealized gain or loss is recorded as
follows:
o For transfers to the trading category, the unrealized gain or loss
is recognized in earnings;
o For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
o For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholder's equity; and
F-8
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
o For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
recognized in shareholder's equity, but is amortized as a yield
adjustment until ultimately sold.
Credit-tenant loans are loans for commercial properties which require: (i)
the lease of the principal tenant to be assigned to the Company; (ii) the lease
to produce adequate cash flow to fund substantially all the cash requirements of
the loan; and (iii) the principal tenant, or the guarantor of such tenant's
obligations, to have an investment-grade credit rating when the loan is made.
These loans also must be collateralized by the value of the related property.
Underwriting guidelines take into account such factors as: (i) the lease term of
the property; (ii) the borrower's management ability, including business
experience, property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the income generated
by the property or its value. The underwriting guidelines generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans and traditional
mortgage loans are carried at amortized cost.
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months and are carried
at amortized cost, which approximates fair value. The Company considers all
short-term investments to be cash equivalents.
Fees received and costs incurred in connection with origination of<PAGE>
investments, principally mortgage loans, are deferred. Fees, costs, discounts
and premiums are amortized as yield adjustments over the contractual life of the
investments. Anticipated prepayments on mortgage-backed securities are taken
into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as investment gains and losses, or as adjustments to investment income
if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates investment securities, credit-tenant loans
and mortgage loans based on current economic conditions, past credit loss
experience and other circumstances of the investee. A decline in a security's
net realizable value that is other than temporary is treated as an investment
loss and the cost basis of the security is reduced to its estimated fair value.
Impaired loans are revalued at the present value of expected cash flows
discounted at the loan's effective interest rate when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the agreement. The Company accrues interest on the net carrying amount
of impaired loans.
As part of the Company's investment strategy, the Company may enter into
reverse repurchase agreements and dollar-roll transactions to increase its
investment return or to improve liquidity. These transactions are accounted for
as collateral borrowings, where the amount borrowed is equal to the sales price
of the underlying securities.
Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims which may arise out of
any other business of the Company. The Company reports separate account assets
at market value; the underlying investment risks are assumed by the contract
holders. The Company records the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities equals their carrying
amount.
F-9
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY<PAGE>
Notes to Financial Statements
------------------------------
Cost of Policies Purchased
The cost of policies purchased represents the portion of the acquisition
cost that was allocated to the value of the right to receive future cash flows
from insurance contracts existing at the date such insurance contracts were
acquired. The value of cost of policies purchased is the actuarially determined
present value of the projected future cash flows from the insurance contracts
existing at the acquisition date. The method used to value the cost of policies
purchased is consistent with the valuation methods used most commonly to value
blocks of insurance business, which is also consistent with the basic
methodology generally used to value assets. The method used is summarized as
follows:
o Identify the expected future cash flows from the blocks of business.
o Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
o Identify the rate of return necessary considering the risks inherent
in realizing the cash flows.
o Determine the value of the policies by discounting the expected
future cash flows by the discount rate required.
The expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of the Company's management.
Actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order to invest in the business
being acquired. In determining this required rate of return, the following
factors are considered:
o The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows.
o The cost of capital required to fund the acquisition.
o The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
o The acquired business compatibility with other activities of the
Company that may favorably affect future cash flows.<PAGE>
o The complexity of the acquired business.
o Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After the cost of policies purchased is determined, it is amortized based
on the incidence of the expected cash flows. This asset is amortized using the
interest rate credited to the underlying policies.
If renewal premiums collected, investment spread, investment gains or
losses, mortality and morbidity costs or other factors differ from expectations,
amortization of the cost of policies purchased is adjusted. For example, the
sale of a fixed maturity investment may result in a gain (or loss). If the sale
proceeds are reinvested at a lower (or higher) earnings rate, there may also be
a reduction (or increase) in future investment spread. Amortization must be
increased (decreased) to reflect the change in the incidence of expected cash
flows consistent with the methods used with the cost of policies produced
(described below).
F-10
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Each year, the recoverability of the cost of policies purchased is
evaluated by line of business within each block of purchased insurance business.
If current estimates indicate that the existing insurance liabilities, together
with the present value of future net cash flows from the blocks of business
purchased, will be insufficient to recover the cost of policies purchased, the
difference is charged to expense. Amortization is adjusted consistent with the
methods used with the cost of policies produced (as described below).
The cost of policies purchased related to the original acquisition of the
Company by the Partnership in 1990 is amortized under a slightly different
method than that described above. However, the effect of the different method on
1996 net income was insignificant.
Cost of Policies Produced
Costs which vary with and are primarily related to the acquisition of new
business are deferred to the extent that such costs are deemed recoverable.
These costs include commissions, certain costs of policy issuance and
underwriting and certain agency expenses. For traditional life and health<PAGE>
contracts, deferred costs are amortized with interest in relation to future
anticipated premium revenue using the same assumptions that are used in
calculating the insurance liabilities. For immediate annuities with mortality
risks, deferred costs are amortized in relation to the present value of benefits
to be paid. For universal life-type, interest-sensitive and investment-type
contracts, deferred costs are amortized in relation to the present value of
expected gross profits from these contracts, discounted using the interest rate
credited to the policy (currently, 5 percent to 8 percent).
Recoverability of the unamortized balance of cost of policies produced is
evaluated regularly and considers anticipated investment income. For universal
life-type contracts and investment-type contracts, the accumulated amortization
is adjusted (whether an increase or a decrease) whenever there is a change in
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between amortization and the present
value (discounted at the rate of interest that accrues to the policies) of
expected gross profits. For traditional and most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum of
the present value of discounted future cash flows and the policy liabilities is
not sufficient to cover such asset balance.
Goodwill
The excess of the cost of acquiring the Company's net assets over its
estimated fair values is recorded as goodwill and is being amortized on the
straight-line basis over a 40-year period. The Company periodically assesses the
recoverability of goodwill through projections of future earnings of the
acquired business. Such assessment is made based on whether goodwill is fully
recoverable from projected undiscounted net cash flows from earnings of the
acquired business over the remaining amortization period. If future evaluations
of goodwill indicate a material change in the factors supporting recoverability
over the remaining amortization period, all or a portion of goodwill may need to
be written off or the amortization period shortened (no such changes have
occurred).
Insurance Liabilities, Recognition of Insurance Policy Income and Related
Benefits and Expenses
Reserves for traditional and limited-payment life insurance contracts are
generally calculated using the net level premium method based on assumptions as
to investment yields, mortality, morbidity, withdrawals and dividends. The
assumptions are based on projections using past and expected experience and
include provisions for possible adverse deviation. These assumptions are made at
the time the contract is issued or, in the case of contracts acquired by
purchase, at the purchase date.
Reserves for universal life-type and investment-type contracts are based on
the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows including investment income are
insufficient to cover future benefits and expenses.
For investment-type contracts without mortality risk (such as deferred<PAGE>
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single- premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy
F-11
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
administration and surrender penalties are recorded as revenues. Interest
credited to the liability account and benefit payments made in excess of the
contract liability account balance are charged to expense.
For traditional life insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums resulting in
their level recognition over the premium paying period of the contracts. Such
recognition is accomplished through the provision for future policy benefits and
the amortization of deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments.
Liabilities for incurred claims are determined using historical experience
and represent an estimate of the present value of the ultimate net cost of all
reported and unreported claims. Management believes these estimates are
adequate. Such estimates are periodically reviewed and any adjustments are
reflected in current operations.
For participating policies, the amount of dividends to be paid (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid over
such limit by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts. The Company has set its
retention limit for acceptance of risk on life insurance policies at various
levels up to $.5 million.<PAGE>
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities relating to the underlying reinsured insurance contracts.
Income Taxes
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. The effects of a tax rate change on current and accumulated
deferred income taxes are reflected in the period in which the change was
enacted.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. If future income does not occur as expected,
deferred income taxes may need to be written off.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values of fixed maturity
securities (including redeemable preferred stocks) are based on quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, the estimated fair values are
determined using values obtained from broker-dealer market makers or by
discounting expected future cash flows using current market interest rates
applicable to the yield, credit quality of the investments and maturity of
the investments.
F-12
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Mortgage loans, credit-tenant loans and policy loans: The estimated fair
values of mortgage loans, credit-tenant loans and policy loans are
determined by discounting future expected cash flows using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of<PAGE>
the calculations.
Other invested assets: The estimated fair values of these assets have been
assumed to be equal to their carrying value. Such value is believed to be a
reasonable approximation of the fair value of these investments.
Short-term investments: The estimated fair values of short-term investments
are based on quoted market prices, where available. The carrying amount
reported in the balance sheet for these assets approximates their estimated
fair value.
Insurance liabilities for investment contracts: The estimated fair values
of liabilities under investment-type insurance contracts are determined
using discounted cash flow calculations based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued.
Investment borrowings: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying amount reported in the balance sheet.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes other than trading:
Actively managed fixed maturity securities........... $1,795.1 $1,795.1 $2,030.9 $2,030.9
Mortgage loans....................................... 77.3 77.0 95.5 108.9
Credit-tenant loans.................................. 93.4 92.5 79.4 79.7
Policy loans......................................... 80.8 80.8 84.7 84.7
Other invested assets................................ 89.0 89.0 37.8 37.8
Short-term investments............................... 14.8 14.8 19.0 19.0
Financial liabilities issued for purposes other than trading:
Insurance liabilities for investment contracts (1)... $1,282.1 $1,282.1 $1,346.5 $1,346.5
Investment borrowings................................ 48.4 48.4 84.2 84.2
<FN>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1996
and 1995, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar
investments and because these rates are not generally guaranteed
beyond one year. The Company is not required to disclose fair values
for insurance liabilities, other than those for investment contracts.
However, the Company takes into consideration the estimated fair
values of all insurance liabilities in its overall management of<PAGE>
interest rate risk. The Company attempts to minimize exposure to
changing interest rates by matching investment maturities with
amounts due under insurance contracts.
</FN>
</TABLE>
F-13
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
2. JEFFERSON NATIONAL MERGER
On December 31, 1994, Jefferson National was merged with the Company, with
the Company being the surviving corporation. The merger has been accounted for
as a pooling of interests and, accordingly, the financial statements for 1994
have been restated to include the accounts of Jefferson National. Certain 1994
balances for the separate companies are as follows:
<TABLE>
<CAPTION>
Amount prior to Jefferson
effect of merger National Combined
---------------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Insurance policy income................................................... $ 53.2 $ 45.4 $ 98.6
Net investment income..................................................... 101.9 86.0 187.9
Total revenues............................................................ 154.1 132.6 286.7
Income before income taxes................................................ 25.9 35.6 61.5
Net income................................................................ 16.7 22.1 38.8
</TABLE>
3. INVESTMENTS
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations<PAGE>
of United States government corporations and
agencies............................................ $ 29.9 $ .3 $ .3 $ 29.9
Obligations of state and political subdivisions........ 6.1 .1 .1 6.1
Debt securities issued by foreign governments.......... 11.6 - .5 11.1
Public utility securities.............................. 234.8 2.4 7.0 230.2
Other corporate securities............................. 950.1 10.9 17.6 943.4
Mortgage-backed securities............................. 578.3 2.3 6.2 574.4
-------- ----- ----- --------
Total............................................... $1,810.8 $16.0 $31.7 $1,795.1
======== ===== ===== ========
</TABLE>
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations and
agencies............................................ $ 59.2 $ 2.1 $ - $ 61.3
Obligations of state and political subdivisions........ 9.3 .2 .1 9.4
Debt securities issued by foreign governments.......... 8.3 .3 - 8.6
Public utility securities.............................. 351.6 11.4 2.0 361.0
Other corporate securities............................. 888.0 34.0 6.4 915.6
Mortgage-backed securities ............................ 663.7 12.2 .9 675.0
-------- ----- ---- --------
Total........................................... $1,980.1 $60.2 $9.4 $2,030.9
======== ===== ==== ========
</TABLE>
F-14
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------<PAGE>
Actively managed fixed maturity securities, summarized by the source of
their estimated fair value, were as follows at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services.......................................... $1,516.7 $1,500.4
Broker-dealer market makers..................................................... 242.9 243.6
Internally developed methods (calculated based
on a weighted-average current market yield of 10.2 percent).................. 51.2 51.1
-------- --------
Total ................................................................. $1,810.8 $1,795.1
======== ========
</TABLE>
The following table sets forth actively managed fixed maturity securities
at December 31, 1996, classified by rating categories. The category assigned is
the highest rating by a nationally recognized statistical rating organization
or, as to $23.5 million fair value of fixed maturity securities not rated by
such firms, the rating assigned by the National Association of Insurance
Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included
in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below":
<TABLE>
<CAPTION>
Percent of Percent of
Investment fixed total
Rating maturities investments
------ ---------- -----------
<S> <C> <C>
AAA................................................................................... 37% 28%
AA ................................................................................. 6 5
A ................................................................................. 21 15
BBB+.................................................................................. 9 6
BBB................................................................................... 13 10
BBB-.................................................................................. 7 5
---- ----
Investment-grade................................................................. 93 69
---- ----
BB+................................................................................... 1 1
BB ................................................................................. 1 1
BB-................................................................................... 2 2
B+ and below ......................................................................... 3 2
---- ----
Below investment-grade........................................................... 7 6<PAGE>
---- ----
Total actively managed fixed maturities...................................... 100% 75%
=== ==
</TABLE>
Below investment-grade actively managed fixed maturity securities,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by more than 15%.................................. $ 3.1 $ 1.7
Amortized cost exceeds fair value by more than 5% but not more than 15%............. 18.4 16.8
All others.......................................................................... 111.1 113.3
------- -------
Total...................................................................... $132.6 $131.8
====== ======
</TABLE>
F-15
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company had no fixed maturity investments in technical or substantive
default as of December 31, 1996. The Company recorded writedowns of fixed
maturity investments and other invested assets totaling $.8 million in 1996,
$1.6 million in 1995 and $1.0 million in 1994, as a result of changes in
conditions which caused it to conclude the decline in the fair value of the
investment was other than temporary. As of December 31, 1996, there were no
fixed maturity investments about which the Company had serious doubts as to the
ability of the issuer to comply with the contractual terms of their obligations
on a timely basis. Investment income foregone due to defaulted securities was
$.2 million in 1996, $.1 million in the four months ended December 31, 1995 and
$1.3 million in 1994. There was no investment income foregone due to defaulted
securities during the eight months ended August 31, 1995.
Actively managed fixed maturity securities at December 31, 1996, summarized
by contractual maturity date, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or<PAGE>
prepay obligations with or without call or prepayment penalties and because most
mortgage-backed securities provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less......................................................... $ 10.7 $ 10.6
Due after one year through five years........................................... 102.3 103.1
Due after five years through ten years.......................................... 314.7 313.5
Due after ten years............................................................. 804.8 793.5
-------- --------
Subtotal................................................................. 1,232.5 1,220.7
Mortgage-backed securities...................................................... 578.3 574.4
-------- --------
Total ................................................................... $1,810.8 $1,795.1
======== ========
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturity securities....... $146.4 $53.9 $110.2 $157.9
Mortgage loans................................... 11.8 4.8 8.0 13.0
Credit-tenant loans ............................. 7.2 1.7 4.1 3.8
Policy loans..................................... 5.0 1.9 3.5 5.2
Short-term investments........................... 2.3 .8 1.9 3.8
Other invested assets............................ 11.4 .3 1.6 3.2
Separate accounts................................ 35.6 11.3 7.9 2.3
------ ------ ------ -------
Gross investment income..................... 219.7 74.7 137.2 189.2
Investment expenses.............................. 1.3 .5 .8 1.3
------ ------ ------ -------
Net investment income....................... $218.4 $74.2 $136.4 $187.9
====== ===== ====== ======
/TABLE
<PAGE>
The Company did not have any fixed maturity investments and mortgage loans
not accruing investment income in 1996, 1995 and 1994.
F-16
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The proceeds from sales of actively managed fixed maturity securities were
$938.3 million in 1996, $512.5 million in the four months ended December 31,
1995, $406.0 million in the eight months ended August 31, 1995 and $578.3
million in 1994. Net investment gains consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains................................... $16.6 $16.5 $14.4 $17.6
Gross losses.................................. (9.2) (2.2) (2.3) (9.3)
Other than temporary decline in fair value.... (.2) (.4) (1.2) (1.0)
------ ------ ----- -----
Net investment gains from fixed maturities
before expenses........................... 7.2 13.9 10.9 7.3
Mortgage loans................................... - - (.2) -
Other .......................................... - - (1.0) (3.1)
Other than temporary decline in fair value....... (.6) - - -
------ ------ ----- -----
Net investment gains before expenses........ 6.6 13.9 9.7 4.2
Investment gain expenses......................... 3.9 1.4 2.4 4.0
------ ------ ----- -----
Net investment gains........................ $ 2.7 $12.5 $ 7.3 $ .2
====== ===== ===== ======
</TABLE>
The change in net unrealized appreciation (depreciation) on investments
consisted of the following:
TABLE
<PAGE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturities................ $(66.5) $45.5 $164.1 $(254.9)
Other invested assets............................ (1.3) .1 5.1 (3.2)
------ ----- ------ -------
Subtotal................................ (67.8) 45.6 169.2 (258.1)
Less effect on other balance sheet accounts:
Cost of policies purchased.................... 36.6 (26.3) (64.1) 93.1
Cost of policies produced..................... 4.5 (2.7) (12.0) 27.6
Income taxes.................................. 9.7 (6.1) (34.1) 49.1
------ ----- ------- -------
Change in net unrealized appreciation
(depreciation) of securities.................. $(17.0) $10.5 $ 59.0 $ (88.3)
====== ===== ======= =======
</TABLE>
Investments in mortgage-backed securities at December 31, 1996, included
collateralized mortgage obligations ("CMOs") of $221.6 million and
mortgage-backed pass-through securities of $352.8 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return which occurs
through regular monthly principal payments on pass-through securities.
F-17
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The following table sets forth the par value, amortized cost and estimated
fair value of investments in mortgage-backed securities including CMOs at
December 31, 1996, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated<PAGE>
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent ..................................................... $209.6 $205.1 $201.5
7 percent - 8 percent................................................ 247.4 241.5 240.6
8 percent - 9 percent................................................ 70.9 69.7 69.3
9 percent and above.................................................. 60.1 62.0 63.0
------ ------ ------
Total mortgage-backed securities................................ $588.0 $578.3 $574.4
====== ====== ======
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
----------------------
Percent
Amortized of fixed
cost Amount maturities
---- ------ ----------
Type (Dollars in millions)
- ----
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes........... $458.7 $454.9 25%
Accrual (Z tranche) bonds................................................ 9.6 9.7 1
Planned amortization classes and accretion directed bonds................ 77.2 76.7 4
Subordinated classes .................................................... 32.8 33.1 2
------ ------ ---
Total mortgage-backed securities................................ $578.3 $574.4 32%
====== ====== ==
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of mortgage-backed securities as of December 31, 1996, based upon the pricing
source used to determine estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services ............................................. $515.1 $511.3
Broker-dealer market makers......................................................... 52.7 52.5<PAGE>
Internally developed methods (calculated based on a
weighted-average current market yield of 7.4 percent)........................ 10.5 10.6
------ ------
Total mortgage-backed securities........................................... $578.3 $574.4
====== ======
</TABLE>
At December 31, 1996, no mortgage loans or credit-tenant loans had
defaulted as to principal or interest for more than 60 days, were in
foreclosure, had been converted to foreclosed real estate or had been
restructured while the Company owned them. At December 31, 1996, the Company had
a loan loss reserve of $.9 million. Approximately 30 percent, 18 percent, 16
percent and 6 percent of the mortgage loan balance were on properties located in
California, Indiana, Texas and Florida, respectively. No other state comprised
greater than 5 percent of the mortgage loan balance.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. These transactions are accounted for as
short-term borrowings collateralized by pledged securities with book values
approximately equal to the loan value. Such borrowings averaged approximately
F-18
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
$115.3 million during 1996 compared to $84.4 million during 1995. The weighted
average interest rate on short-term collateralized borrowings was 5.3 percent
and 5.4 percent during 1996 and 1995, respectively. The primary risk associated
with short-term collateralized borrowings is that the counterparty will be
unable to perform under the terms of the contract. The Company's exposure is
limited to the excess of the net replacement cost of the securities over the
value of the short-term investments (which was not material at December 31,
1996). The Company believes that the counterparties to its reverse repurchase
and dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
Investments on deposit for regulatory authorities as required by law were
$17.1 million at December 31, 1996.
No investments of a single issuer were in excess of 10 percent of
shareholder's equity at December 31, 1996, other than investments issued or
guaranteed by the United States government.
4. INSURANCE LIABILITIES<PAGE>
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest December 31,
Withdrawal Mortality rate ---------------------
assumption assumption assumption 1996 1995
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts................ N/A N/A (b) $1,282.1 $1,346.5
Limited-payment contracts........... None (a) 8% 105.3 96.7
Traditional life insurance Company
contracts........................ experience (a) 8% 146.2 153.5
Universal life-type contracts....... N/A N/A N/A 354.4 367.6
Claims payable and other
policyholders' funds............... N/A N/A N/A 69.5 74.8
-------- --------
Total.......................... $1,957.5 $2,039.1
======== ========
<FN>
(a) Principally modifications of the 1975-80 Basic Table, Select and Ultimate
Table.
(b) At December 31, 1996 and 1995, approximately 98 percent of this liability
represented account balances where future benefits were not guaranteed. The
weighted average interest rate on the remainder of the liabilities,
representing the present value of guaranteed future benefits, was
approximately 7 percent at December 31, 1996.
</FN>
</TABLE>
Participating policies represented approximately 3.5 percent, 3.7 percent
and 3.6 percent of total life insurance in force at December 31, 1996, 1995 and
1994, respectively, and approximately 2.7 percent, 2.4 percent and 7.5 percent
of premium income for 1996, 1995 and 1994, respectively. Dividends on
participating policies amounted to $1.9 million, $1.8 million and $1.7 million
in 1996, 1995 and 1994, respectively.
5. REINSURANCE
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $24.6 million in 1996, $29.1 million in 1995 and $35.3 million in
1994. This cost was deducted from insurance premium revenue. The Company is
contingently liable for claims reinsured if the assuming company is unable to
pay. Reinsurance recoveries netted against insurance policy benefits totaled
$19.4 million in 1996, $19.5 million in 1995 and $27.5 million in 1994.
Effective October 1, 1995, Western National Life Insurance Company, a
former subsidiary of Conseco, recaptured certain annuity businesses ceded to the
Company through a reinsurance agreement. Reserves related to these policies<PAGE>
totaled $72.8 million. Recapture fees of $.7 million were recognized as income
during the four months ended December 31, 1995.
F-19
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company's reinsurance receivable balance at December 31, 1996, relates
to many reinsurers. No balance from a single reinsurer exceeds $7.0 million.
6. INCOME TAXES
Income tax liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax liabilities (assets):
Cost of policies purchased and cost of policies produced.................. $ 60.3 $ 44.7
Investments............................................................... (3.3) 8.6
Insurance liabilities..................................................... (19.7) (21.7)
Unrealized appreciation (depreciation).................................... (2.5) 7.2
Other..................................................................... (5.0) (7.7)
------- ------
Deferred income tax liabilities....................................... 29.8 31.1
Current income tax liabilities............................................... - 7.9
------- ------
Income tax liabilities................................................ $ 29.8 $39.0
======= ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)<PAGE>
<S> <C> <C> <C> <C>
Current tax provision............................... $10.5 $11.9 $19.9 $20.0
Deferred tax provision (benefit).................... 4.9 (2.2) (3.4) 2.7
----- ------ ------ -----
Income tax expense........................... $15.4 $ 9.7 $16.5 $22.7
===== ====== ===== =====
</TABLE>
Income tax expense differed from that computed at the applicable statutory
rate of 35 percent for the following reasons:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Federal tax on income before income taxes at
statutory rate.................................... $14.4 $9.0 $15.6 $21.5
State taxes and other................................ .6 .5 .4 .5
Nondeductible items.................................. .4 .2 .5 .7
----- ---- ----- -----
Income tax expense.............................. $15.4 $9.7 $16.5 $22.7
===== ==== ===== =====
</TABLE>
The Company is currently being examined by the Internal Revenue Service for
the 1994 tax year. The Company believes that the outcome of this examination
will not have a material impact on its financial position or results of
operations.
F-20
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
7. RELATED PARTY TRANSACTIONS
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) were based on negotiated rates for periods prior to January 1, 1996.
Pursuant to new service agreements effective January 1, 1996, such fees are<PAGE>
based on Conseco's direct and directly allocable costs plus a 10 percent margin.
Total fees incurred by the Company under such agreements were $44.1 million in
1996, $26.6 million in 1995 and $25.1 million in 1994.
During 1996, the Company purchased $31.5 million par value of senior
subordinated notes issued by subsidiaries of Conseco. Such notes had a carrying
value of $34.7 million at December 31, 1996, and are classified as "other
invested assets" in the accompanying balance sheet. In addition, during 1996,
the Company forgave receivables from Conseco totaling $9.9 million. This
transaction is reflected as a dividend to Conseco in the accompanying statement
of shareholder's equity.
8. OTHER OPERATING INFORMATION
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Direct premiums collected............................ $241.3 $ 82.8 $158.6 $ 240.3
Reinsurance assumed.................................. 1.7 .7 2.0 3.1
Reinsurance ceded.................................... (24.6) (11.2) (17.9) (35.3)
------ ------ ------ -------
Premiums collected, net of reinsurance.......... 218.4 72.3 142.7 208.1
Less premiums on universal life and products without
mortality risk which are recorded as additions to
insurance liabilities............................. (169.8) (50.8) (104.4) (146.0)
------- ------ ------- -------
Premiums on products with mortality and morbidity
risk, recorded as insurance policy income..... 48.6 21.5 38.3 62.1
Fees and surrender charges........................... 32.8 10.3 22.2 36.5
------- ------ ------- -------
Insurance policy income....................... $ 81.4 $ 31.8 $ 60.5 $ 98.6
======= ====== ======= =======
</TABLE>
The four states with the largest shares of the Company's premiums collected
in 1996 were Texas (29 percent), Florida (19 percent), California (9 percent)
and Michigan (7 percent). No other state's share of premiums collected exceeded
5 percent.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended<PAGE>
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Policy maintenance expense........................... $37.8 $ 6.5 $14.0 $19.0
State premium taxes and guaranty assessments......... 4.4 1.6 1.1 3.0
Commission expense................................... 12.1 5.0 8.6 15.3
----- ----- ----- -----
Other operating costs and expenses............ $54.3 $13.1 $23.7 $37.3
===== ===== ===== =====
</TABLE>
F-21
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments during 1996, 1995
and 1994, changed the incidence of profits on such policies because investment
gains and losses were recognized currently and the expected future yields on the
investment of policyholder balances were affected. Accordingly, amortization of
the cost of policies purchased and cost of policies produced was increased by
$2.5 million in 1996, $10.0 million in the four months ended December 31, 1995,
$4.3 million for the eight months ended August 31, 1995, and $2.7 million in
1994.
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $120.0 $159.0 $173.9 $ 93.0
Amortization related to operations:
Cash flow realized.............................. (26.2) (9.4) (19.1) (30.4)
Interest added.................................. 13.1 5.0 12.7 20.8<PAGE>
Amortization related to sales of fixed maturity
investments..................................... (2.2) (8.3) (3.4) (2.6)
Amounts related to fair value adjustment of actively
managed fixed maturity securities............... 36.6 (26.3) (64.1) 93.1
Adjustment of balance due to new accounting
basis and other................................. 1.7 - 59.0 -
------ ------ ------ ------
Balance, end of period............................... $143.0 $120.0 $159.0 $173.9
====== ====== ====== ======
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 9.2 percent, 9.2 percent, 8.3 percent, 7.3
percent and 6.7 percent of the cost of policies purchased as of December 31,
1996, are expected to be amortized in each of the next five years, respectively.
The discount rates used to determine the amortization of the cost of policies
purchased ranged from 5 percent to 8 percent and averaged 5.5 percent.
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of period......................... $24.0 $25.9 $ 63.2 $30.8
Additions......................................... 13.2 3.0 6.6 9.4
Amortization related to operations................ (3.2) (.5) (4.0) (4.5)
Amortization related to sales of fixed maturity
investments..................................... (.3) (1.7) (.9) (.1)
Amounts related to fair value adjustment of actively
managed fixed maturity securities............... 4.5 (2.7) (12.0) 27.6
Adjustment of balance due to new accounting basis - - (27.0) -
----- ----- ------- -----
Balance, end of period............................... $38.2 $24.0 $ 25.9 $63.2
===== ===== ======= =====
</TABLE>
F-22
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY<PAGE>
Notes to Financial Statements
------------------------------
9. STATEMENT OF CASH FLOWS
Income taxes paid during 1996, 1995, and 1994, were $18.1 million, $19.3
million and $20.3 million, respectively.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
10. STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory agencies:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $140.3 $156.2
Asset valuation reserve ("AVR")................................................ 28.7 26.2
Interest maintenance reserve ("IMR")........................................... 63.1 64.7
------ ------
Total...................................................................... $232.1 $247.1
====== ======
</TABLE>
The Company had statutory net income of $32.6 million, $38.4 million and
$37.7 million in 1996, 1995 and 1994, respectively.
Statutory accounting practices classify certain segregated portions of
surplus, called AVR and IMR, as liabilities. The purpose of these accounts is to
stabilize statutory net income and surplus against fluctuations in the market
value and creditworthiness of investments. The IMR captures all realized
investment gains and losses resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss experience
of the investment portfolio.
The following table compares the pre-tax income determined on a statutory
accounting basis with such income reported herein in accordance with GAAP:<PAGE>
<TABLE>
<CAPTION>
Year Four months Eight months Year
ended ended ended ended
December 31, December 31, August 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Pre-tax income as reported on a statutory accounting
basis before transfers to and from and
amortization of the IMR........................... $40.2 $ 33.6 $ 50.2 $ 58.6
GAAP adjustments:
Investments valuation............................. 4.9 (3.3) .8 7.5
Amortization related to operations................ (17.8) (5.3) (11.7) (16.0)
Amortization related to investment gains.......... (2.5) (10.0) (4.3) (2.7)
Deferral of cost of policies produced............. 13.2 3.0 6.6 9.4
Insurance liabilities............................. 3.2 5.1 2.5 2.5
Other ............................................ (.1) 2.7 .6 2.2
----- ------ ------ ------
Net effect of GAAP adjustments................ .9 (7.8) (5.5) 2.9
----- ------ ------ ------
GAAP pre-tax income........................... $41.1 $ 25.8 $ 44.7 $ 61.5
===== ====== ====== ======
</TABLE>
F-23
<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Notes to Financial Statements
------------------------------
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Approximately $32.7 million of the
Company's net assets at December 31, 1996, are available for distribution in
1997 without permission of state regulatory authorities.
Q:\FINTEMP\GARCO\1996\GARCO97.#2
F-24<PAGE>
UNAUDITED FINANCIAL STATEMENTS
OF
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
(For the Period from May 7, 1997 to September 30, 1997)<PAGE>
To be filed by amendment.<PAGE>
UNAUDITED FINANCIAL STATEMENTS
OF
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
(For the Period from May 7, 1997 to June 30, 1997)<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RYDEX ADVISOR VARIABLE ANNUITY
ACCOUNT
SEMI-ANNUAL REPORT
June 30, 1997
6116 Executive Boulevard, Suite 400
Rockville, MD 20852
LOGO
301/468-8520 888/667-4936
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dear Policy Owners,
In our first letter to Rydex Advisor Variable Annuity policy owners, we would
like to take this opportunity to again welcome you to the Rydex family. It is
our continuing goal to provide our advisors with innovative investment vehicles
that offer you flexibility to take advantage of market fluctuations.
You'll notice that this first report on the Rydex Advisor Variable Annuity
covers a shorter period than usual--only 54 days--because the annuity was
introduced in May and our standard reporting period ends June 30. Although
brief, this period did experience the volatility that has characterized
financial markets in recent quarters.
The market pullback that began at the end of the first quarter ended in mid-
April as the indexes returned to their ascent. Stock prices were propelled by
low inflation, corporate share buybacks and strong earnings growth. By late
June, the Dow Jones, the S&P 500 and the Nasdaq 100 all reached record highs.
The climb was interrupted when Japanese Prime Minister Ryutaro Hashimoto
remarked that if the U.S. did not attempt to maintain exchange rate stability,
the Japanese would be tempted to sell off U.S. Treasury bills. Traders
interpreted his remarks as a threat that the Japanese might begin a large scale
sell-off of U.S. Treasury bonds and U.S. equities. This triggered the second
largest decline in points ever as the Dow Jones industrial average lost 192.25
points. In June, wholesale prices fell for the sixth consecutive month. This
was the longest streak of producer-price deflation since the government started
measuring these figures 50 years ago. These new signs of low inflation were
welcomed by the financial markets and both stocks and bonds continued their
upward trend.
On June 30, investors closed the books on the best stock market quarter in a
decade with the Dow up 16.55%, the S&P 500 up 16.91%, and the technology laden
Nasdaq 100 gaining 20.14%. The precious metals index did not fare as well due
to several negative factors including scandals involving a junior exploration
company, continued European Central bank selling, and low inflation which
caused precious metal stocks to continue their downward trend. The XAU Index
closed the 2nd quarter down 8.04%.
<PAGE>
The economic environment of moderate growth and low inflation also proved to
be good for bonds as the yield on the benchmark 30-year U.S. Treasury bond
dropped from 7.07% to 6.78% causing bond prices to rise during the quarter.
Once again, thank you for investing with Rydex. If you need additional
information, please call us at (888) 667-4936.
Sincerely,
/s/ Albert P. Viragh, Jr.
- -------------------------
Albert P. Viragh, Jr.
Chairman of the Board
2
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOVA SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Shares (Note 1)
---------- ----------
<S> <C> <C>
COMMON STOCKS 23.6%
Standard & Poor's Depository Receipts (Cost
$1,074,636) 12,520 $1,105,672
----------
<CAPTION>
Contracts
----------
<S> <C> <C>
OPTIONS PURCHASED 16.9%
Call Options on:
S&P 500 Index Expiring July 1997 at 760 6 792,800
----------
Total Call Options (Cost $849,660) 792,800
----------
<CAPTION>
Face
Amount
----------
<S> <C> <C>
REPURCHASE AGREEMENT 59.5%
Repurchase Agreement through a joint account
collateralized by U.S. Treasury Obligations--
5.95% 7/01/97 $2,784,664 2,784,664
----------
Total Investments 100% (Cost $4,708,960) $4,683,136
==========
</TABLE>
See Notes to Financial Statements
3
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
URSA SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Face Amount (Note 1)
----------- --------
<S> <C> <C>
REPURCHASE AGREEMENT 100%
Repurchase Agreement through a joint account
collateralized by U.S. Treasury Obligations--
5.95% 7/01/97 $50,863 $ 50,863
--------
Total Investments 100% (Cost $50,863) $ 50,863
========
- -------------------------------------------------------------------------------
<CAPTION>
Market
Value
Shares (Note 1)
----------- --------
<S> <C> <C>
COMMON STOCK SOLD SHORT
Standard & Poor's Depository Receipts (Proceeds $
217,175)................................................ 2,450 $216,366
========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
OVER-THE-COUNTER SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Contracts (Note 1)
----------- --------
<S> <C> <C>
OPTIONS PURCHASED 2.1%
Call Options on:
NASDAQ 100 Index Expiring July 1997 at 950 1 $ 3,025
NASDAQ 100 Index Expiring July 1997 at 980 6 9,375
--------
Total Call Options Purchased (Cost $26,858) $ 12,400
--------
<CAPTION>
Face Amount
-----------
<S> <C> <C>
REPURCHASE AGREEMENT 97.9%
Repurchase Agreement through a joint account
collateralized by U.S.
Treasury Obligations--
5.95% 7/01/97 $568,642 568,642
--------
Total Investments 100% (Cost $595,500) $581,042
========
- -------------------------------------------------------------------
<CAPTION>
Market
Value
Contracts (Note 1)
----------- --------
<S> <C> <C>
WRITTEN OPTIONS CONTRACTS
Put Options On:
NASDAQ 100 Index Expiring July 1997 at 950 1 $ 2,050
NASDAQ 100 Index Expiring July 1997 at 980 6 21,150
--------
Total Put Options Written (Proceeds $19,178) $ 23,200
========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
PRECIOUS METALS SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Shares (Note1)
----------- --------
<S> <C> <C>
COMMON STOCKS 98.3%
Mining and Precious Metals Stocks
Barrick Gold Corp., Class A 2,000 $ 44,000
Newmont Mining Corp. 800 31,200
Placer Dome, Inc. 1,300 21,288
Homestake Mining Co. 800 10,450
Battle Mountain Gold Co. 1,200 6,825
TVX Gold, Inc.* 870 4,622
Echo Bay Mines, Ltd. 700 4,025
ASA Limited 100 3,063
Hecla Mining Co.* 300 1,612
Coeur D'Alene Mines 120 1,552
Pegasus Gold, Inc.* 200 1,225
--------
Total Common Stocks (Cost $136,750) $129,862
--------
<CAPTION>
Market
Value
Face Amount (Note 1)
----------- --------
<S> <C> <C>
REPURCHASE AGREEMENT 1.7%
Repurchase Agreement through a joint account
collateralized by U.S.
Treasury Obligations--
5.95% 7/01/97 2,228 2,228
--------
Total Investments 100% (Cost $138,978) $132,090
========
</TABLE>
* Non-Income Producing Securities.
See Notes to Financial Statements
6
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
MONEY MARKET I SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face Amount
-----------
<S> <C> <C>
REPURCHASE AGREEMENT 100%
Repurchase Agreement through a joint account
collateralized by U.S.
Treasury Obligations--
5.95% 7/01/97 $1,976,045 $1,976,045
----------
Total Investments 100% (Cost $1,976,045) $1,976,045
==========
</TABLE>
See Notes to Financial Statements
7
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
U.S. GOVERNMENT BOND SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Face Amount (Note1)
----------- -------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS 98.8%
U.S. Treasury Bond 6.625% due 02/15/2027 (Cost $53,596) $54,000 $52,819
-------
REPURCHASE AGREEMENT 1.2%
Repurchase Agreement through a joint account
collateralized by U.S.
Treasury Obligations--
5.95% due 7/01/97 657 657
-------
Total Investments 100.0% (Cost $54,253) $53,476
=======
</TABLE>
See Notes to Financial Statements
8
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
JUNO SUBACCOUNT
SCHEDULE OF INVESTMENTS (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Value
Contracts (Note 1)
---------- ----------
<S> <C> <C>
OPTIONS PURCHASED 0.4 %
Put options on:
U.S. Treasury Bond Futures Contracts Expiring September
1997 at 112 (Cost $4,779) 3 $ 5,625
----------
<CAPTION>
Face
Amount
----------
<S> <C> <C>
REPURCHASE AGREEMENT 99.6%
Repurchase Agreement through a joint account
collateralized by U.S. Treasury Obligations--
5.95% 7/01/97 $1,396,557 1,396,557
----------
Total Investments 100% (Cost $1,401,336) $1,402,182
==========
- ------------------------------------------------------------------------------
<CAPTION>
Unrealized
Contracts Gain
---------- ----------
<S> <C> <C>
FUTURES CONTRACTS
U.S. Treasury Bond Futures Contract Expiring September
1997
(Underlying Face Amount at Market Value $1,332,750) 12 $ 11,136
==========
</TABLE>
See Notes to Financial Statements
9
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Money
Nova Ursa Market I Market II
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Securities at Value (Note 1)--See
Accompanying Schedules $4,683,136 $ 50,863 $1,976,045 $ 0
Receivable for Securities Sold 17,702 217,174 0 0
Receivable from Advisor 1,048 2,506 149 0
Investment Income Receivable 459 0 327 0
Cash in Custodian Bank 0 166,283 0 0
Receivable for Units Purchased 0 0 11,158 0
Unamortized Organization Costs
(Note 1) 92,364 92,364 4,586 5,000
Other Assets 0 11 580 0
---------- -------- ---------- ------
Total Assets 4,794,709 529,201 1,992,845 5,000
---------- -------- ---------- ------
LIABILITIES
Short Sale at Market 0 216,366 0 0
Investment Advisory Fee 2,111 126 5,076 0
Transfer Agent Fee 756 36 2,536 0
Organization Expense Payable to
Advisor 95,180 95,180 5,000 5,000
Amounts due to GARCO 4,013 198 20,602 0
Other Liabilities 347 0 99 0
---------- -------- ---------- ------
Total Liabilities 102,407 311,906 33,313 5,000
---------- -------- ---------- ------
NET ASSETS $4,692,302 $217,295 $1,959,532 $ 0
========== ======== ========== ======
Units Outstanding 427,743 23,715 193,123 0
========== ======== ========== ======
Unit Value $10.97 $9.16 $10.15 $0
====== ===== ====== ==
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Over-the- Precious U.S.
Counter Metals Government
Subaccount Subaccount Bond Subaccount Juno Subaccount
---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Securities at Value
(Note 1)--See
Accompanying Schedules $581,042 $132,090 $53,476 $1,402,182
Receivable for Futures
Contracts Settlement 0 0 0 6,750
Receivable from Advisor 694 986 1,555 1,497
Investment Income
Receivable 94 0 1,344 230
Cash on Deposit with
Broker 120,086 0 0 29,160
Unamortized Organization
Costs (Note 1) 92,364 93,511 93,511 92,364
-------- -------- ------- ----------
Total Assets 794,280 226,587 149,886 1,532,183
-------- -------- ------- ----------
LIABILITIES
Written Options at
Market Value 23,200 0 0 0
Investment Advisory Fee 842 79 73 761
Transfer Agent Fee 225 21 29 211
Organization Expense
Payable to Advisor 95,180 95,180 95,180 95,180
Amounts due to GARCO 1,572 147 205 1,184
Other Liabilities 8 0 1,581 14
-------- -------- ------- ----------
Total Liabilities 121,027 95,427 97,068 97,350
-------- -------- ------- ----------
NET ASSETS $673,253 $131,160 $52,818 $1,434,833
======== ======== ======= ==========
Units Outstanding 64,764 14,795 5,126 146,687
======== ======== ======= ==========
Unit Value $10.40 $8.87 $10.30 $9.78
====== ===== ====== =====
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS (Unaudited)
- -------------------------------------------------------------------------------
Period Ended June 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money
Nova Ursa Market I
Subaccount* Subaccount* Subaccount*
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 4,696 $ 409 $81,614
-------- ------- -------
Total Income 4,696 409 81,614
-------- ------- -------
EXPENSES
Advisory Fees (Note 7) 2,150 127 7,359
Transfer Agent Fees (Note 7) 717 35 2,944
Mortality and Expense Risk Fee (Note 5) 3,583 176 18,397
Organizational Expenses 2,816 2,816 414
Administration Fees 430 21 2,208
Custodian Fees 800 471 2,362
Miscellaneous 347 2 222
-------- ------- -------
Total Expenses 10,843 3,648 33,906
Less Expenses Waived and Reimbursed by
Investment Advisor 1,048 2,510 1,113
-------- ------- -------
Net Expenses 9,795 1,138 32,793
-------- ------- -------
NET INVESTMENT INCOME (LOSS) (5,099) (729) 48,821
-------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net Realized Gain (Loss) on:
Investment Securities 100,843 0 0
Securities Sold Short 0 (9,200) 0
-------- ------- -------
Total Net Realized Gain (Loss) 100,843 (9,200) 0
Net Change in Unrealized Appreciation
(Depreciation)
On Investments, Options and Futures
Contracts (25,824) 809 0
-------- ------- -------
Net Gain (Loss) on Investments 75,019 (8,391) 0
-------- ------- -------
Net Increase (Decrease) in Net Assets
from Operations $ 69,920 $(9,120) $48,821
======== ======= =======
</TABLE>
* Commencement of Operations, May 7, 1997--Nova Subaccount and Ursa
Subaccount, January 27, 1997--Money Market I Subaccount
See Note to Financial Statements
12
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS (Unaudited)
- -------------------------------------------------------------------------------
Period Ended June 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Over-the- Precious Government
Counter Metals Bond Juno
Subaccount* Subaccount* Subaccount* Subaccount*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 5,198 $ 102 $ 987 $ 4,518
Dividends 0 48 0 0
-------- -------- ------ -------
Total Income 5,198 150 987 4,518
-------- -------- ------ -------
EXPENSES
Advisory Fees (Note 7) 842 78 73 761
Transfer Agent Fees (Note 7) 225 21 29 211
Mortality and Expense Risk Fee
(Note 5) 1,404 130 183 1,057
Organizational Expenses 2,816 1,669 1,669 2,816
Administration Fees 168 16 22 127
Custodian Fees 510 216 230 508
Miscellaneous 9 2 0 15
-------- -------- ------ -------
Total Expenses 5,974 2,132 2,206 5,495
Less Expenses Reimbursed by
Investment Advisor 694 985 1,556 1,497
-------- -------- ------ -------
Net Expenses 5,280 1,147 650 3,998
-------- -------- ------ -------
Net Investment Income (Loss) (82) (997) 337 520
-------- -------- ------ -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net Realized Gain (Loss) on:
Investment Securities 21,078 (7,935) 9,930 (1,736)
Written Options 24,885 0 0 0
Futures Contracts 0 0 0 (3,728)
-------- -------- ------ -------
Total Net Realized Gain (Loss) 45,963 (7,935) 9,930 (5,464)
Net Change in Unrealized
Appreciation/(Depreciation) on
Investments, Options and
Futures Contracts (18,480) (6,888) (777) 11,982
-------- -------- ------ -------
27,483 (14,823) 9,153 6,518
-------- -------- ------ -------
Net Increase (Decrease) in Net
Assets from Operations $ 27,401 $(15,820) $9,490 $ 7,038
======== ======== ====== =======
</TABLE>
* Commencement of Operations: May 7, 1997--OTC Subaccount, May 29, 1997--
Precious Metals Subaccount, May 29, 1997--U.S. Government Bond Subaccount,
May 7, 1997--Juno Subaccount
See Notes to Financial Statements.
13
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nova Subaccount Ursa Subaccount
--------------- ---------------
Period Ended Period Ended
June 30,1997* June 30,1997*
--------------- ---------------
<S> <C> <C>
Changes from Operations
Net Investment Income (Loss) $ (5,099) $ (729)
Net Realized Gain (Loss) on Investments 100,843 (9,200)
Net Change in Unrealized Appreciation
(Depreciation) of Investments (25,824) 809
----------- ---------
Net Increase (Decrease) in Net Assets from
Operations 69,920 (9,120)
----------- ---------
Changes from Principal Transactions
Contract purchase payments less sales and
administration expenses and applicable
premium taxes 8,135,805 557,641
Contract terminations (3,513,423) (331,226)
----------- ---------
Net Increase (Decrease) in Net Assets derived
from Principal Transactions 4,622,382 226,415
----------- ---------
Net Increase in Net Assets 4,692,302 217,295
----------- ---------
NET ASSETS--Beginning of Period 0 0
----------- ---------
NET ASSETS--End of Period $ 4,692,302 $ 217,295
=========== =========
</TABLE>
* Commencement Of Operations: May 7, 1997--Nova Subaccount and Ursa Subaccount
See Notes to Financial Statements.
14
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Market I
Subaccount
--------------
Period Ended
June 30,1997*
--------------
<S> <C>
Changes from Operations
Net Investment Income (Loss) $ 48,821
Net Realized Gain (Loss) on Investments 0
Net Change in Unrealized Appreciation (Depreciation) of
Investments 0
------------
Net Increase (Decrease) in Net Assets from Operations 48,821
------------
Changes from Principal Transactions
Contract purchase payments less sales and administrative
expenses
and applicable premium taxes 15,553,063
Contract termination (13,642,352)
------------
Net Increase (Decrease) in Net Assets derived from Principal
Transactions 1,910,711
------------
Net Increase in Net Assets 1,959,532
------------
NET ASSETS--Beginning of Period 0
------------
NET ASSETS--End of Period $ 1,959,532
============
</TABLE>
* Commencement Of Operations: January 27, 1997--Money Market I Subaccount
See Notes to Financial Statements.
15
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Over-the- Precious Metals
Counter Subaccount Subaccount
------------------ ---------------
Period Ended Period Ended
June 30,1997* June 30,1997*
------------------ ---------------
<S> <C> <C>
Changes from Operations
Net Investment Income (Loss) $ (82) $ (997)
Net Realized Gain (Loss) on Investments 45,963 (7,935)
Net Change in Unrealized Appreciation
(Depreciation) of Investments (18,480) (6,888)
----------- --------
Net Increase (Decrease) in Net Assets from
Operations 27,401 (15,820)
----------- --------
Changes from Principal Transactions
Contract purchase payments less sales and
administrative expenses and applicable
premium taxes 2,586,825 238,933
Contract terminations (1,940,973) (91,953)
----------- --------
Net Increase (Decrease) in Net Assets
derived from Principal Transactions 645,852 146,980
----------- --------
Net Increase in Net Assets 673,253 131,160
----------- --------
NET ASSETS--Beginning of Period 0 0
----------- --------
NET ASSETS--End of Period $ 673,253 $131,160
=========== ========
</TABLE>
* Commencement Of Operations: May 7, 1997--OTC Subaccount, May 29, 1997--
Precious Metals Subaccount
See Notes to Financial Statements.
16
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Government Juno
Bond Subaccount Subaccount
--------------- -------------
Period Ended Period Ended
June 30,1997* June 30,1997*
--------------- -------------
<S> <C> <C>
Changes from Operations
Net Investment Income (Loss) $ 337 $ 520
Net Realized Gain (Loss) on Investments 9,930 (5,464)
Net Change in Unrealized Appreciation
(Depreciation) of Investments (777) 11,982
--------- -----------
Net Increase (Decrease) in Net Assets from
Operations 9,490 7,038
--------- -----------
Changes from Principal Transactions
Contract purchase payments less sales and
administrative expenses and applicable premium
taxes 757,382 2,772,633
Contract terminations (714,054) (1,344,838)
--------- -----------
Net Increase (Decrease) in Net Assets derived
from Principal Transactions 43,328 1,427,795
--------- -----------
Net Increase in Net Assets 52,818 1,434,833
--------- -----------
NET ASSETS--Beginning of Period 0 0
--------- -----------
NET ASSETS--End of Period $ 52,818 $ 1,434,833
========= ===========
</TABLE>
* Commencement Of Operations: May 29, 1997--U.S. Government Bond Subaccount,
May 7, 1997--Juno Subaccount
See Notes to Financial Statements.
17
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
SUPPLEMENTARY INFORMATION (Unaudited)
- -------------------------------------------------------------------------------
Period Ended June 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money
Nova Ursa Market I
Subaccount* Subaccount* Subaccount*
----------- ----------- -----------
<S> <C> <C> <C>
Per Unit Data:
Net Asset Value--Beginning of Period $10.00 $10.00 $10.00
------ ------ ------
Net Investment Income (.03) (.07) .14
Net Realized and Unrealized
Gains (Losses) on Securities 1.00 (.77) .01
------ ------ ------
Net Increase (Decrease) in Net Asset
Value Resulting from Operations .97 (.84) .15
Dividends to Shareholders .00 .00 .00
Distributions to Shareholders From
Net Realized Capital Gain .00 .00 .00
------ ------ ------
Net Increase (Decrease) in Net Asset
Value .97 (.84) .15
------ ------ ------
Net Asset Value--End of Period $10.97 $ 9.16 $10.15
====== ====== ======
Total Investment Return** 65.56% (56.8%) 3.56%
Ratios to Average Net Assets** +
Expenses 3.41% 8.11% 2.23%
Net Investment Income (1.77%) (5.20%) 3.32%
Supplementary Data:
Portfolio Turnover Rate*** 101.18% 0% 0%
Net Assets,
End of Period (000's omitted) $4,692 $ 217 $1,959
</TABLE>
* Commencement of Operations: May 7, 1997--Nova Subaccount and Ursa
Subaccount, January 27, 1997--Money Market I Subaccount
** Annualized
*** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
+ Ratios are net of voluntarily expense waiver/reimbursed made by Padco
Advisors II, Inc. as described in footnote 1.
See Notes to Financial Statements.
18
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
SUPPLEMENTARY INFORMATION (Unaudited)
- -------------------------------------------------------------------------------
Period Ended June 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Over-the- Precious Government
Counter Metals Bond Juno
Subaccount* Subaccount* Subaccount* Subaccount*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Per Unit Data:
Net Asset Value--Beginning of
Period $10.00 $ 10.00 $10.00 $ 10.00
------ -------- ------ --------
Net Investment Income .00 (.08) .02 .00
Net Realized and Unrealized
Gains (Losses) on Securities .40 (1.05) .28 (.22)
------ -------- ------ --------
Net Increase (Decrease) in
Net Asset
Value Resulting from
Operations .40 (1.13) .30 (.22)
Dividends to Shareholders .00 .00 .00 .00
Distributions to Shareholders
From
Net Realized Capital Gain .00 .00 .00 .00
------ -------- ------ --------
Net Increase (Decrease) in
Net Asset
Value .40 (1.13) .30 (.22)
------ -------- ------ --------
Net Asset Value--End of
Period $10.40 $ 8.87 $10.30 $ 9.78
====== ======== ====== ========
Total Investment Return** 27.04% (100.00%) 34.22% (14.870%)
Ratios to Average Net Assets**+
Expenses 4.69% 10.75% 4.43% 4.73%
Net Investment Income (0.07%) (9.35%) 2.30% 0.62%
Supplementary Data:
Portfolio Turnover Rate*** 0% 97.10% 189.73% 0%
Net Assets,
End of Period (000's
omitted) $ 673 $ 131 $ 53 $ 1,435
</TABLE>
* Commencement of Operations: May 7, 1997--OTC Subaccount, May 29, 1997--
Precious Metals Subaccount, May 29, 1997--U.S. Government Bond Subaccount,
May 7, 1997--Juno Subaccount
** Annualized
*** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
+ Ratios are net of voluntarily expense waiver/reimbursed made by Padco
Advisors II, Inc. as described in footnote 1.
See Notes to Financial Statements.
19
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Rydex Advisor Variable Annuity Account (the "Account") is registered with
the Securities and Exchange Commission under the Investment Company Act of 1940
as a non-diversified, open-ended investment company. The Trust consists of
eight Subaccounts, the Nova Subaccount, the Ursa Subaccount, the Money Market I
Subaccount, the Money Market II Subaccount, the Over-the-Counter Subaccount,
the Precious Metals Subaccount, the U.S. Government Bond Subaccount, and the
Juno Subaccount and is managed by Padco Advisors II Inc. Padco Financial
Services Inc. ("Padco") acts as principal underwriter only for the Account. The
following significant accounting policies are in conformity with generally
accepted accounting principles and are consistently followed by the Account in
the preparation of its financial statements.
The Account was established as a segregated investment account for individual
variable annuity contracts issued by Great American Reserve Insurance Company
("Garco"). Garco is an indirect wholly owned subsidiary of Conseco, Inc., a
publicly-held specialized financial services company listed on the New York
Stock Exchange.
Securities listed on an exchange are valued at the latest quoted sales prices
as of 4:00 P.M. on the valuation date. Securities not traded on an exchange are
valued at their last sales price. Listed options held by the Account are valued
at their last bid price. Over-the-counter options and U.S. Government
obligations held by the Account are valued using the average bid price obtained
from one or more security dealers. The value of futures contracts purchased and
sold by the Account are accounted for using the unrealized gain or loss on the
contracts that is determined by marking the contracts to their current realized
settlement prices. Short term securities with less than sixty days to maturity
are valued at amortized cost, which approximates market. Security and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under direction of the Board of Trustees.
Securities transactions are recorded on a trade date plus one basis (the
following business day the order to buy or sell is executed). Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Dividend income is recorded on the ex-dividend date. Interest income and
expenses are accrued on a daily basis.
Deferred organization and initial offering costs represent expenses incurred by
GARCO and PADCO in connection with this offering and will be amortized on a
straight line basis over five years commencing on the effective date of the
Separate Account's initial prospectus. These costs have been allocated to the
subaccounts based on estimates of expenses incurred. The Separate Account has
agreed to reimburse GARCO and PADCO for the organization expenses advanced by
GARCO and PADCO, respectively. The advances are repayable on demand but must be
fully repaid within five years. The proceeds realized by
20
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GARCO upon withdrawal during the amortization period of any of the accumulation
units constituting initial capital will be reduced by a proportionate amount of
the unamortized deferred organization expenses which the number of initial
units redeemed bears to the number of initial units then outstanding. At,
June 30, 1997, accrued organizational expenses payable to GARCO and PADCO were
$195,435 and $385,645, respectively.
A Subaccount is considered active when the first unit is purchased. There were
no units of the Money Market II Subaccount purchased for the period ended June
30, 1997. The Money Market II Subaccount was not active for this period and,
therefore, the Statement of Operations, Statement of Changes, and Supplementary
Information was not prepared for this Subaccount. The Money Market II
Subaccount has an asset and an offsetting liability of $5,000 related to
organization cost.
Padco Advisors II, Inc. has voluntarily agreed to waive advisory fees for any
subaccount for expenses in excess of the specified expense limitations (up to
the amount of the applicable Advisory Fee). In addition, Padco Advisors II,
Inc. at its discretion may reimburse additional expenses.
2. INVESTMENT TRANSACTIONS
Consistent with its investment objective, the Account engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the Account are
described more fully in the Account's prospectus and Statement of Additional
Information.
When the Account engages in a short sale, an amount equal to the proceeds
received by the Account is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect the
market value of the short sale. The Account maintains a segregated account of
securities as collateral for the short sales. The Account is exposed to market
risk based on the amount, if any, that the market value of the stock exceeds
the market value of the securities in the segregated account.
When the Account writes (sells) an option, an amount equal to the premium
received is entered in the Account's accounting records as an asset and
equivalent liability. The amount of the liability is subsequently marked to
market to reflect the current value of the option written. When an option
expires, or if the Account enters into a closing purchase transaction, the
Account realizes a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was sold).
The Account may purchase or sell stock index futures contracts and options on
such futures contracts. Futures contracts are contracts for delayed delivery of
securities at a specified future delivery date and at a specific price. Upon
entering into a contract, the Account deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Account agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and are
recorded by
21
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the Account as unrealized gains or losses. When the contract is closed, the
Account records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it
was closed.
Futures contracts and written options involve to varying degrees, elements of
market risk and risks in excess of the amount recognized in the Statements of
Assets and Liabilities. The face or contract amounts reflect the extent of the
involvement each subaccount has in the particular classes of instruments. Risks
may be caused by an imperfect correlation between movements in the price of the
instruments and the price of the underlying securities.
3. FEDERAL INCOME TAXES
No provision for federal income taxes has been made in the accompanying
financial statements because the operations of the Account are included in the
operations of Garco, which is treated as a life insurance company for federal
income tax purposes under the Internal Revenue Code. Net investment income and
net realized gains (losses) are retained in the Account and are not taxable
until received by the contract owner or beneficiary in the form of annuity
payments or other distributions.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5. DEDUCTIONS AND EXPENSES
Although periodic retirement payments to contract owners vary according to the
investment performance of the portfolios, such expenses are not affected by
expense or mortality experience because Garco assumes the mortality risk and
the expense risk under the contracts.
The mortality risk assumed by Garco results from the life annuity payment
option in the contracts in which Garco agrees to make annuity payments
regardless of how long a particular annuitant or other payee lives. The annuity
payments are determined in accordance with annuity purchase rate provisions
established at the time the contracts are issued. Based on the actual
determination of expected mortality, Garco is required to fund any deficiency
in the annuity payment reserves from its general account assets.
A fee, which is equal on an annual basis to 1.25% of the daily value of the
account, is deducted on a daily basis from each account for assuming the
mortality and expense risks. These fees were $24,930 for the period ended June
30, 1997.
An administrative charge, which is equal on an annual basis to .15% of the
daily value of the Account, is deducted on a daily basis from each account for
contract administrative charges. These fees were $2,992 for the period ended
June 30, 1997.
22
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. REPURCHASE AGREEMENTS
The Account transfers uninvested cash balances into a single joint account, the
daily aggregate balance of which is invested a repurchase agreement
collateralized by Federal agency obligations. Collateral is in the possession
of the account's custodian and it is evaluated daily to ensure that its market
value exceeds the delivery value of the repurchase agreements at maturity. As
of June 30,1997 the repurchase agreement with Fuji Securities in the joint
account and the collateral therefore was as follows:
<TABLE>
<CAPTION>
Security Type Rates Par Value Market Value
- ------------- ----- ---------- ------------
<S> <C> <C> <C>
United States Treasury Notes 5.95% $6,680,000 $6,779,656
</TABLE>
7. INVESTMENT ADVISORY AND TRANSFER AGENT SERVICES
Under the terms of an investment advisory contract, the Account pays PADCO
Advisors II, Inc. investment advisory fees calculated at an annual percentage
rate of one half of one percent (0.50%) of the net assets of the Money Market I
Subaccount and the U.S. Government Bond Subaccount, three-quarters of one
percent (0.75%) of the net assets of the Nova Subaccount, the Precious Metals
Fund, and the Over-the-Counter Subaccount, and nine-tenths of one percent
(0.90%) of the net assets of the Ursa Subaccount and the Juno Subaccount.
Garco provides transfer agent service to the Trust at an annual rate of two-
tenths of one percent (0.20%) of the net assets of the Money Market I
Subaccount, U.S. Government Bond Subaccount, Precious Metals Subaccount, and
the Over-the-Counter Subaccount; and at annual rate of one-quarter of one
percent (0.25%) of the Nova Subaccount, the Ursa Subaccount, and the Juno
Subaccount.
8. SECURITIES TRANSACTIONS
During the period ended June 30, 1997 purchases and sales of investment
securities were:
<TABLE>
<CAPTION>
Money
Nova Ursa Market I
Subaccount Subaccount Subaccount
---------- ---------- ----------
<S> <C> <C> <C>
Purchases $2,224,099 $ 0 $ 0
Sales $1,149,462 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
U.S.
Over-the- Precious Government
Counter Metals Bond Juno
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Purchases $ 0 $240,361 $703,526 $ 0
Sales $ 0 $ 95,676 $657,793 $ 0
</TABLE>
The transactions shown above exclude short term and temporary cash investments.
23
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. NET ASSETS
Net assets consisted of the following at June 30, 1997:
<TABLE>
<CAPTION>
Money
Nova Ursa Market I
Subaccount Subaccount Subaccount
---------- ---------- ----------
<S> <C> <C> <C>
Paid-In-Capital $4,622,382 $226,415 $1,910,711
Net Investment Income 0 0 48,821
Net Investment Loss (5,099) (729) 0
Accumulated Net Realized Gain
(Loss) on Investments 100,843 (9,200) 0
Net Unrealized Appreciation
(Depreciation) on Investments, Options and
Futures
Contracts (25,824) 809 0
---------- -------- ----------
Net Assets $4,692,302 $217,295 $1,959,532
========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
U.S.
Over-the- Precious Government
Counter Metals Bond Juno
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Paid-In-Capital $645,853 $146,980 $43,328 $1,427,795
Net Investment Income 0 0 337 520
Net Investment Loss (82) (997) 0 0
Accumulated Net Realized Gain
(Loss) on Investments 45,963 (7,935) 9,930 (5,464)
Net Unrealized Appreciation
(Depreciation) on Investments,
Options and Futures
Contracts (18,481) (6,888) (777) 11,982
-------- -------- ------- ----------
Net Assets $673,253 $131,160 $52,818 $1,434,833
======== ======== ======= ==========
</TABLE>
24
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. INCREASE/DECREASE IN ACCUMULATION UNITS
Transactions in units for the period ended June 30, 1997 were:
<TABLE>
<CAPTION>
Money
Nova Ursa Market I
Subaccount Subaccount Subaccount
---------- ---------- -----------
<S> <C> <C> <C>
Units Purchased 751,064 58,390 1,540,596
Units Withdrawn (323,321) (34,675) (1,347,473)
--------- -------- -----------
Net Units Purchased 427,743 23,715 193,123
========= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
U.S.
Over-the- Precious Government
Counter Metals Bond Juno
Subaccount Subaccount Subaccount Subaccount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Units Purchased 251,128 24,929 75,510 281,901
Units Withdrawn (186,364) (10,134) (70,384) (135,214)
--------- -------- -------- ---------
Net Units Purchased 64,764 14,795 5,126 146,687
========= ======== ======== =========
</TABLE>
Transactions in dollars for the period ended June 30, 1997 were:
<TABLE>
<CAPTION>
Money
Nova Ursa Market I
Subaccount Subaccount Subaccount
----------- ---------- ------------
<S> <C> <C> <C>
Units Purchased $ 8,135,805 $ 557,641 $ 15,553,063
Units Withdrawn (3,513,423) (331,226) (13,642,352)
----------- --------- ------------
Net Units Purchased $ 4,622,382 $ 226,415 $ 1,910,711
=========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
U.S.
Over-the- Precious Government
Counter Metals Bond Juno
Subaccount Subaccount Subaccount Subaccount
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Units Purchased $ 2,586,825 $238,933 $ 757,381 $ 2,772,632
Units Withdrawn (1,940,972) (91,953) (714,053) (1,344,837)
----------- -------- --------- -----------
Net Units Purchased $ 645,853 $146,980 $ 43,328 $ 1,427,795
=========== ======== ========= ===========
</TABLE>
25
<PAGE>
OFFERED THROUGH
PADCO FINANCIAL SERVICES, INC.
6116 EXECUTIVE BLVD., SUITE 400
ROCKVILLE, MD 20852
888/667-4936
BY
GREAT AMERICAN RESERVE
INSURANCE COMPANY
11815 NORTH PENNSYLVANIA STREET
CARMEL, IN 46032
800/437-3506
LOGO
RYDEX ADVISOR
VARIABLE ANNUITY ACCOUNT
OF GREAT AMERICAN RESERVE
INSURANCE COMPANY
SEMI-ANNUAL REPORT
JUNE 30, 1997
NOVA SUBACCOUNT
URSA SUBACCOUNT
JUNO SUBACCOUNT
OTC SUBACCOUNT
PRECIOUS METALS SUBACCOUNT
U.S. GOVERNMENT BOND SUBACCOUNT
MONEY MARKET I SUBACCOUNT
<PAGE>
PART C
OTHER INFORMATION<PAGE>
PART C: OTHER INFORMATION
Item 28. Financial Statements and Exhibits
(a) Financial Statements:
(1) Unaudited Financial Statements of the Registrant, the Rydex
Advisor Variable Annuity Account, for the period from May
7, 1997, the date that the Registrant commenced operations,
through June, 30, 1997.4/
(2) Unaudited Financial Statements of the Registrant, the Rydex
Advisor Variable Annuity Account, for the period from May
7, 1997, the date that the Registrant commenced operations,
through September 30, 1997.5/
(3) Audited Financial Statements of the Insurance Company,
Great American Reserve Insurance Company, for the fiscal
year ended December 31, 1996.4/
(b) Exhibits:
(1) Resolutions of the Executive Committee of the Board of
Directors of Great American Reserve Insurance Company.1/
(2) Separate Account Rules for the Rydex Advisor Variable
Annuity Account.2/
(3) Custodian Agreement Between the Rydex Advisor Variable
A n n uity Account and Boston Safe Deposit and Trust
Company.4/
(4) Investment Advisory Agreement Between the Rydex Advisor
Variable Annuity Account and PADCO Advisors II, Inc.4/
(5)(a) Underwriting Agreement Among Great American Reserve
Insurance Company, the Rydex Advisor Variable Annuity
Account, and PADCO Financial Services, Inc.4/
(5)(b) Form of Group Selling Agreement Among Great American
Reserve Insurance Company, PADCO Financial Services,
Inc., Broker, and Insurance Agent.3/
(6) Form of Variable Annuity Contract Endorsement (regarding
the Death Benefit).4/
(7) Form of Applications for Variable Annuity Contract.4/
C-1<PAGE>
1/ Incorporated herein by reference to initial Registration
Statement, filed on May 2, 1996 (CIK No. 0001013169;
Accession No. 0000906287-96-000070).
2/ Incorporated herein by reference to Pre-Effective Amendment
No. 1 to this Registration Statement, filed on September
27, 1996.
3/ Incorporated herein by reference to Pre-Effective Amendment
No. 2 to this Registration Statement, filed on October 31,
1996.
4/ Filed herewith.
5/ To be filed by amendment.
C-2<PAGE>
Item 28. Financial Statements and Exhibits (Continued)
(8) Certificate of Incorporation and Bylaws of Great American
Reserve Insurance Company.1/
(9) Not Applicable.
(10) Not Applicable.
(11)(a) Subaccount Administration Agreement Between the Rydex
Advisor Variable Annuity Account and PADCO Service
Company, Inc.4/
(11)(b) A c counting Services Agreement Between the Rydex
Advisor Variable Annuity Account and PADCO Service
Company, Inc.4/
(11)(c) Fidelity Bond Allocation Agreement Among the Rydex
Advisor Variable Annuity Account, PADCO Advisors II,
Inc., Rydex Series Trust, PADCO Advisors, Inc., and
PADCO Service Company, Inc.4/
(11)(d) Joint Account Agreement Between the Rydex Advisor
Variable Annuity Account and PADCO Advisors II, Inc.4/
(12) O p inion of Great American Reserve Insurance Company
Counsel.2/
(13)(a) Consent of Coopers & Lybrand LLP.4/
(13)(b) Consent of Jorden Burt Berenson & Johnson LLP.4/
(14) Not Applicable.
(15) Not Applicable.
(16)(a) Schedules of Performance Quotations for the Rydex
Subaccounts of the Rydex Advisor Variable Annuity
Account.4/
(16)(b) Schedules of Performance Quotations and Adjusted
Performance Quotations for the Rydex Funds of Rydex
S e r ies Trust, a registered open-end management
investment company (File Nos. 33-59692 and 811-
7584).4/
(17) Financial Data Schedules for Registrant.4/
C-3<PAGE>
1/ Incorporated herein by reference to initial Registration
Statement, filed on May 2, 1996 (CIK No. 0001013169;
Accession No. 0000906287-96-000070).
2/ Incorporated herein by reference to Pre-Effective Amendment
No. 1 to this Registration Statement, filed on September
27, 1996.
3/ Incorporated herein by reference to Pre-Effective Amendment
No. 2 to this Registration Statement, filed on October 31,
1996.
4/ Filed herewith.
5/ To be filed by amendment.
Item 29. Directors and Officers of the Insurance Company
The following table sets forth certain information regarding the
executive officers of Great American Reserve who are engaged
directly or indirectly in activities relating to the Separate
Account or the Contracts. Their principal business address is
11815 North Pennsylvania Street, Carmel, Indiana 46032.
Positions and Offices with
Name Great American Reserve
Stephen C. Hilbert Chairman and Director
Donald F. Gongaware President, Chief Executive
Officer and Director
Rollin M. Dick Chief Financial Officer
and Director
James S. Adams Chief Accounting Officer
Ngaire E. Cuneo Director
Item 30. Persons Controlled by or Under Common Control with the
Insurance Company or Registrant
The following information concerns those companies that may be
deemed to be controlled by or under common control with Great
American Reserve Insurance Company. Conseco, Inc. owns 100% of
each of the companies listed below, unless indicated otherwise:
Conseco, Inc.
Conseco Capital Management, Inc.
Conseco Private Capital Group, Inc.
Conseco Global Investments, Inc.
Conseco Risk Management, Inc.
Wells & Company
C-4<PAGE>
CRM Acquisition Company
Wellsco, Inc.
Conseco Mortgage Capital, Inc.
Lincoln American Life Insurance Company
Marketing Distribution Systems Consulting Group, Inc.
MDS Securities Incorporated
BankMark School of Business
Investment Services Center of Delaware, Inc.
Bankmark, Inc.
Community Insurance Agency, Inc. (NH)
InveStar Insurance Agency, Inc. (IN)
InveStar Insurance Agency, Inc. (OH)
Marketing Distribution Systems, Inc.
MDS of New Jersey, Inc.
Investment & Insurance Services, Inc. (CT)
Community Insurance Agency, Inc. (MA)
CIHC, Incorporated
Conseco L.L.C.
Conseco Services, L.L.C.
Conseco Distribution Systems, L.L.C.
NACT, Inc.
C-5<PAGE>
Item 30. Persons Controlled by or Under Common Control with the
Insurance Company or Registrant (Continued)
Bankers National Life Insurance Company
National Fidelity Life Insurance Company
K.F. Agency Inc.
Bankers Life Insurance Company of Illinois
Bankers Life and Casualty Company
Certified Life Insurance Company
Jefferson National Life Insurance Company of Texas
Beneficial Standard Life Insurance Company
Great American Reserve Insurance Company
American Travellers Insurance Services Company, Inc.
American Travellers Life Insurance Company
American Travellers Insurance Company of New York
United General Life Insurance Company
TLSD, Inc.
THD, Inc.
TLIC Life Insurance Company
Transport Life Insurance Company
Continental Life Insurance Company
Capitol American Financial Corporation
Capitol Insurance Company of Ohio
Capital American Life Insurance Company
Capitol National Life Insurance Company
Frontier National Life Insurance Company
Conseco Equity Sales, Inc.
CNC Real Estate, Inc.
Conseco Entertainment, Inc.
Conseco Entertainment, L.L.C.
Conseco HPLP, L.L.C.
Conseco Partnership Management, Inc.
Conseco Capital Partners II, L.P.
American Life Holdings, Inc.
American Life Holding Company
American Life and Casualty Marketing Division Co.
American Life and Casualty Insurance Company
Vulcan Life Insurance Company*
C-6<PAGE>
Item 30. Persons Controlled by or Under Common Control with the
Insurance Company or Registrant (Continued)
Life Partners Group, Inc.
Partners Risk Management Company
Eagles' National Management Company
Wabash Life Insurance Company
Travel Partners Group, Inc.
Independent Processing Services, Inc.
Stratford Capital Group, Inc.
Massachusetts General Life Insurance Company
Philadelphia Life Insurance Company
Lamar Life Insurance Company
Conseco Financial Services, Inc.
InvestCo, Inc.
* Conseco, Inc. owns 98% of Vulcan Life Insurance Company s voting
securities.
C-7<PAGE>
Item 30. Persons Controlled by or Under Common Control with the
Insurance Company or Registrant (Continued)
The following persons may be deemed to be directly or indirectly
under the common control with the Registrant, a managed separate
account organized under the laws of the State of Texas:
<TABLE>
<CAPTION>
Percentage of Voting
Securities Owned
State of and/or
Organization Controlled By the
and Relationship Controlling Person
(If Any) to or
Company the Registrant Other Basis of
<S> <C> Common Control
<C>
PADCO Advisors II, a Maryland 100% of the voting
Inc.("PADCO II") corporation and securities of PADCO
the Registrant's II are owned by
investment Albert P. Viragh,
adviser Jr., the Chairman of
the Board of
Directors, the
President, and the
Treasurer of PADCO
II
PADCO Service Company, a Maryland 100% of the voting
Inc. (the"Servicer") corporation, a securities of the
registered Servicer are owned
transfer agent, by Albert P. Viragh,
and the Jr., the Chairman of
Registrant's the Board of
shareholder and Directors, the
transfer agent President, and the
servicer Treasurer of the
Servicer
PADCO Financial a Maryland 100% of the voting
Services, Inc. corporation, a securities of the
(the "Distributor") registered Distributor are
broker-dealer, owned by Albert P.
and the Viragh, Jr., the
distributor of Chairman of the
the shares of The Board of Directors,
Rydex the President, and
Institutional the Treasurer of the
Money Market Fund Distributor
and The Rydex
PADCO Advisors, Inc. a Maryland 80% of the voting
C-8<PAGE>
Rydex Series Trust a Delaware the investment
(the "Trust") business trust advisers for the
registered as an Trust and the
open-end Registrant are under
management the common control
investment of Albert P. Viragh,
company and Jr., the Chairman of
advised by PADCO the Board of
I Trustees, President,
and Treasurer of the
Registrant
</TABLE>
Item 31. Number of Contract Owners
As of August 26, 1997, there were 197 Contract Owners of variable
annuity contracts offered by the Rydex Advisor Variable Annuity
Account.
Item 32. Indemnification
The Board of Managers of the Separate Account is indemnified by
Great American Reserve against claims and liabilities to which
such person may become subject by reason of having been a member
of such Board or by reason of any action alleged to have been
taken or omitted by him as such member, and the member shall be
indemnified for all legal and other expenses reasonably incurred
by him in connection with any such claim or liability; however,
no indemnification shall be made in connection with any claim or
liability unless such person (i) conducted himself in good faith,
(ii) in the case of conduct in his official capacity as a member
of the Board of Directors, reasonably believed that his conduct
was at least not opposed to the best interests of the Separate
Account, and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be
permitted to members of the Board of Managers, officers, and
controlling persons of the Registrant pursuant to the provisions
described under "Indemnification" or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses
incurred or paid by a member of the Board of Managers, officer,
or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such member of
the Board of Managers, officer, or controlling person in
connection with the securities being registered, the Registrant
C-9<PAGE>
will, unless in the opinion of its counsel the matter has been
s e t tled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the 1933 Act and will be governed by the final adjudication of
such issue.
Item 33. Business and Other Connections of Investment Adviser
Each of the directors of the Rydex Advisor Variable Annuity
Account's investment adviser, PADCO Advisors II, Inc. ("PADCO"),
Albert P. Viragh, Jr., the Chairman of the Board of Directors,
President, and Treasurer of PADCO, and Amanda C. Viragh, the
Secretary of PADCO, is an employee of PADCO at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852. Albert P.
Viragh, Jr. also has served (and continues to serve) as: (i) the
Chairman of the Board of Managers and the President of the Rydex
Advisor Variable Annuity Account since the Rydex Advisor Variable
Annuity Account's establishment as a separate account of Great
American Reserve Insurance Company on April 15, 1996; (ii) the
Chairman of the Board of Trustees and the President of Rydex
Series Trust (the "Trust"), an open-end management investment
company, since the Trust's organization as a Delaware business
trust on March 9, 1993; (iii) the Chairman of the Board of
Directors, the President, and the Treasurer of PADCO Service
Company, Inc. (the "Servicer"), the Rydex Advisor Variable
Annuity Account's asset allocation administrative servicer and
Contract Owner servicer, and the Trust's transfer agent, since
the incorporation of the Servicer in the State of Maryland on
October 6, 1993; (iv) the Chairman of the Board of Directors, the
President, and the Treasurer of PADCO Advisors, Inc. ("PADCO I"),
a registered investment adviser and the Trust's investment
adviser, since the incorporation of PADCO I in the State of
Maryland on February 5, 1993; and (v) the Chairman of the Board
of Directors, the President, and the Treasurer of PADCO Financial
Services, Inc. (the "Distributor"), the Rydex Advisor Variable
Annuity Account's principal underwriter and the distributor of
t h e shares of the Rydex High Yield Fund and the Rydex
Institutional Money Market Fund, each a series of the Trust,
since the incorporation of the Distributor in the State of
Maryland on March 21, 1996. Amanda C. Viragh also has served
(and continues to serve) as the Secretary of the Servicer and
PADCO I, and as the Assistant Treasurer of the Servicer.
Item 34. Principal Underwriters
(a) P A D C O Financial Services, Inc. acts as principal
underwriter for (i) the Rydex Advisor Variable Annuity
Account, and (ii) the Rydex Institutional Money Market Fund
and Rydex High Yield Fund, each a series of Rydex Series
Trust, a registered investment company advised by PADCO I,
C-10<PAGE>
but does not currently serve as the principal underwriter
for the securities of any other investment company.
(b) T h e following table sets forth certain information
r e garding directors and officers of PADCO Financial
Services, Inc. The principal business address of these
directors and officers is 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852.
<TABLE>
<CAPTION>
Positions and
Positions and Offices Offices with
Name with Underwriter Registrant
<S> <C> <C>
Albert P. Viragh, Jr. Director, Chairman of Chairman of the
the Board of Board of Managers
Directors, President, and President
Treasurer, Chief
Operating Officer,
Chief Financial
Officer, and Principal
Amanda C. Viragh Director and Assistant none
Treasurer
Robert M. Steele Vice President Secretary and Vice
President
Timothy M. Meyer Vice President and none
Principal
Michael P. Byrum Secretary and Assistant
Principal Secretary
Sothara Chin Compliance Officer and Compliance Officer
Principal
</TABLE>
Item 35. Location of Accounts and Records
The accounts, books, or other documents required to be
maintained by the Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Great American Reserve
Insurance Company, 11815 North Pennsylvania Street, Carmel,
Indiana 46032, or PADCO Advisors II, Inc., 6116 Executive
Boulevard, Suite 440, Rockville, Maryland 20852.
Item 36. Management Services
C-11<PAGE>
There are no management-related service contracts other than
those discussed in Parts A and B.
Item 37. Undertakings
(a) The Registrant hereby undertakes to file a post-effective
amendment, using financial statements of the Registrant
which need not be certified, within four to six months
from the effective date of the Registrant's Securities
Act of 1933 registration statement.
(b) The Registrant hereby undertakes to file a post-effective
amendment to this registration statement as frequently as
is necessary to ensure that the audited financial
statements in the registration statement are never more
than 16 months old for so long as payments under the
Contracts may be accepted.
(c) The Registrant hereby undertakes to include, as part of
any application to purchase a Contract, a space that an
applicant can check to request a Statement of Additional
Information.
(d) The Registrant hereby undertakes to deliver any Statement
of Additional Information and any financial statements
required to be made available under this Form promptly
upon written or oral request.
(e) The Registrant is relying on a no-action letter issued to
t h e American Council of Life Insurance, published
November 28, 1988, relating to Section 403(b)(11) of the
Internal Revenue Code and Sections 22(e), 27(c)(1), and
27(d) of the Investment Company Act of 1940. The
Registrant hereby represents that it has complied with
the provisions of paragraphs (1) through (4) of said no-
action letter.
(f) Great American Reserve Insurance Company hereby
represents that the fees and charges deducted under the
Contract, in the aggregate, are reasonable in relation to
the services rendered, the expenses to be incurred, and
the risks assumed by Great American Reserve Insurance
Company.
C-12<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant's
sponsor, GREAT AMERICAN RESERVE INSURANCE COMPANY, has duly
c a u s e d this post-effective amendment no. 1 to this
registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, and the seal of the
sponsor to be hereunto affixed and attested, all in the City
of Carmel, State of Indiana, on the 23rd day of September,
1997.
GREAT AMERICAN RESERVE
INSURANCE COMPANY
By: /s/ Donald F. Gongaware
D o n ald F. Gongaware,
President
Great American Reserve
Insurance Company<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant,
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT, has duly caused this
post-effective amendment no. 1 to this registration statement
to be signed on its behalf by the undersigned thereunto duly
authorized in the City of Rockville, State of Maryland, on the
23rd day of September, 1997.
RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT
/s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr., Chairman of
the
Board of Managers,
Rydex Advisor Variable Annuity
Account
A s required by the Securities Act of 1933, this
Registration Statement has been signed by the following
persons in the capacities with the Registrant and on the dates
indicated on this 23rd day of September, 1997.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Albert P. Viragh, Jr. Chairman of the September 23, 1997
Albert P. Viragh, Jr. Board of Managers,
Principal Executive
Officer, and
President
Corey A. Colehour* Member of the Board September 23, 1997
Corey A. Colehour of Managers
J. Kenneth Dalton* Member of the Board September 23, 1997
J. Kenneth Dalton of Managers
Roger Somers* Member of the Board September 23, 1997
Roger Somers of Managers
Member of the Board September 23, 1997
/s/ L. Gregory Gloeckner of Managers
L. Gregory Gloeckner
/s/ Carl G. Verboncoeur Vice President and September 23, 1997
Carl G. Verboncoeur Treasurer
</TABLE>
C-14<PAGE>
*By: /s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr.
Attorney-in-Fact
C-15<PAGE>
EXHIBITS<PAGE>
EXHIBIT INDEX<PAGE>
Exhibit
Number Description of Exhibit
(3) Custodian Agreement Between Rydex
Advisor Variable Annuity Account and
Boston Safe Deposit and Trust Company
Investment Advisory Agreement Between
(4) Rydex Advisor Variable Annuity Account
and PADCO Advisors II, Inc.
Underwriting Agreement Among Great
A m erican Reserve Insurance Company,
(5)(a) Rydex Advisor Variable Annuity Account,
and PADCO Financial Services, Inc.
F o r m of Variable Annuity Contract
Endorsement
(6)
(7) F o r m of Applications for Variable
Annuity Contract
(11)(a) Subaccount Administration Agreement
Between Rydex Advisor Variable Annuity
Account and PADCO Service Company, Inc.
Accounting Services Agreement Between
(11)(b) Rydex Advisor Variable Annuity Account
and PADCO Service Company, Inc.
Fidelity Bond Allocation Agreement Among
Rydex Advisor Variable Annuity Account,
(11)(c) PADCO Advisors II, Inc., Rydex Series
Trust, PADCO Advisors, Inc., and PADCO
Service Company, Inc.
Joint Account Agreement Between Rydex
(11)(d) Advisor Variable Annuity Account and
PADCO Advisors II, Inc.
(13)(a) Consent of Coopers & Lybrand LLP
(13)(b) Consent of Jorden Burt Berenson &
Johnson LLP<PAGE>
(16)(a) Schedules of Performance Quotations for
the Rydex Subaccounts of the Rydex
Advisor Variable Annuity Account
Schedules of Performance Quotations and
(16)(b) Adjusted Performance Quotations for the
Rydex Funds of Rydex Series Trust, a
r e gistered open-end management
investment company (File Nos. 33-59692
and 811-7584)
Financial Data Schedules for Registrant
(17)
C-19<PAGE>
EXHIBIT 3
Custodian Agreement Between Rydex
Advisor Variable Annuity Account and
Boston Safe Deposit and Trust Company<PAGE>
CUSTODY AGREEMENT
AGREEMENT dated as of November 12, 1996, between RYDEX
ADVISOR VARIABLE ANNUITY ACCOUNT, a segregated investment
account of Great American Reserve Insurance Company, a
diversified open-end management investment company organized
under Texas law (the "Separate Account"), having its principal
office and place of business at 11815 North Pennsylvania
Street, Carmel, Indiana 46032, and BOSTON SAFE DEPOSIT AND
TRUST COMPANY (the "Custodian"), a Massachusetts trust company
with its principal place of business at One Boston Place,
Boston, Massachusetts 02108.
W I T N E S S E T H:
That for and in consideration of the mutual promises
hereinafter set forth, the Separate Account and the Custodian
agree as follows:
1. Definitions.
Whenever used in this Agreement or in any Schedules to
this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
(a) Affiliated Person shall have the meaning of the term
within Section 2(a)3 of the 1940 Act.
(b) "Authorized Person" shall be deemed to include the
Chairman of the Board of Managers, the President, and any
Vice President, the Secretary, the Treasurer or any other
person, whether or not any such person is an officer or
employee of the Separate Account, duly authorized by the
Board of Managers of the Separate Account to give Oral
Instructions and Written Instructions on behalf of the
Separate Account and listed in the certification annexed
hereto as Appendix A or such other certification as may be
received by the Custodian from time to time.
(c) " B ook-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and
federal agency Securities, its successor or successors and
its nominee or nominees.
(d) Business Day shall mean any day on which the
Separate Account, the Custodian, the Book-Entry System and
appropriate clearing corporation(s) are open for business.
(e) "Certificate" shall mean any notice, instruction or
other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, which is
actually received by the Custodian and signed on behalf of<PAGE>
the Separate Account by any two Authorized Persons or any
two officers thereof.
(f) "Separate Account Rules" shall mean the rules and
regulations of the Separate Account adopted June 26, 1996
as the same may be amended from time to time.
(g) "Depository" shall mean The Depository Trust
Company ( DTC ), a clearing agency registered with the
Securities and Exchange Commission under Section 17(a) of
the Securities Exchange Act of 1934, as amended, its
successor or successors and its nominee or nominees, in
which the Custodian is hereby specifically authorized to
make deposits. The term "Depository" shall further mean
and include any other person to be named in a Certificate
authorized to act as a depository under the 1940 Act, its
successor or successors and its nominee or nominees.
(h) "Money Market Security" shall be deemed to include,
without limitation, debt obligations issued or guaranteed
as to interest and principal by the government of the
United States or agencies or instrumentalities thereof
("U.S. government securities"), commercial paper, bank
certificates of deposit, bankers' acceptances and short-
term corporate obligations, where the purchase or sale of
such securities normally requires settlement in federal
Separate Accounts on the same day as such purchase or
sale, and repurchase and reverse repurchase agreements
with respect to any of the foregoing types of securities.
(i) "Oral Instructions" shall mean verbal instructions
a c t ually received by the Custodian from a person
reasonably believed by the Custodian to be an Authorized
Person.
(j) "Prospectus" shall mean the Separate Account's
current prospectus and statement of additional information
relating to the registration of the Separate Account's
Units under the Securities Act of 1933, as amended.
(k) "Units" refers to the unit of measure used to compute
the value of interest in the Separate Account [which is
arbitrarily set at $10].
(l) "Security" or "Securities" shall be deemed to include
bonds, debentures, notes, stocks, Units, evidences of
indebtedness, and other securities, commodities interests
and investments from time to time owned by the Separate
Account.
(m) "Transfer Agent" shall mean the person which performs
t h e transfer agent, dividend disbursing agent and
2<PAGE>
shareholder servicing agent functions for the Separate
Account.
(n) "Written Instructions" shall mean a written
communication actually received by the Custodian from a
person reasonably believed by the Custodian to be an
Authorized Person by any system, including, without
limitation, electronic transmissions, facsimile and telex.
(o) The "1940 Act" refers to the Investment Company Act of
1940, and the Rules and Regulations thereunder, all as
amended from time to time.
2. Appointment of Custodian.
(a) The Separate Account hereby constitutes and appoints
the Custodian as custodian of all the Securities and
monies at the time owned by or in the possession of the
Separate Account during the period of this Agreement.
(b) The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as
hereinafter set forth.
3. Compensation.
(a) The Custodian shall be entitled to receive, and the
Separate Account agrees to pay to the Custodian, such
compensation as may be agreed upon from time to time
between the Custodian and the Separate Account. The
Custodian may charge against any monies held on behalf of
the Separate Account pursuant to this Agreement such
compensation and any expenses incurred by the Custodian in
the performance of its duties pursuant to this Agreement.
The Custodian shall also be entitled to charge against any
money held on behalf of the Separate Account pursuant to
this Agreement the amount of any loss, damage, liability
or expense incurred with respect to the Separate Account,
including counsel fees, for which it shall be entitled to
reimbursement under the provisions of this Agreement. The
expenses which the Custodian may charge against such
account include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian
incurred in settling transactions outside of Boston,
Massachusetts or New York City, New York involving the
purchase and sale of Securities.
(b) The Separate Account will compensate the Custodian for
its services rendered under this Agreement in accordance
3<PAGE>
with the fees set forth in the Fee Schedule annexed hereto
as Schedule A and incorporated herein. Such Fee Schedule
does not include out-of-pocket disbursements of the
Custodian for which the Custodian shall be entitled to
b i ll separately. Out-of-pocket disbursements shall
include, but shall not be limited to, the items specified
in the Schedule of Out-of-Pocket charges annexed hereto as
Schedule B and incorporated herein, which schedule may be
modified by the Custodian upon not less than thirty days
prior written notice to the Separate Account.
(c) Any compensation agreed to hereunder may be adjusted
from time to time by attaching to Schedule A of this
Agreement a revised Fee Schedule, dated and signed by an
Authorized Person or authorized representative of each
party hereto.
(d) The Custodian will bill the Separate Account as soon
as practicable after the end of each calendar month, and
said billings will be detailed in accordance with Schedule
A, as amended from time to time. The Separate Account
will promptly pay to the Custodian the amount of such
billing.
4. Custody of Cash and Securities.
(a) Receipt and Holding of Assets.
The Separate Account will deliver or cause to be delivered
to the Custodian all Securities and monies owned by it at
any time during the period of this Agreement. The
Custodian will not be responsible for such Securities and
monies until actually received by it. The Separate
Account shall instruct the Custodian from time to time in
its sole discretion, by means of Written Instructions, or,
in connection with the purchase or sale of Money Market
Securities, by means of Oral Instructions confirmed in
writing in accordance with Section 11(h) hereof or Written
Instructions, as to the manner in which and in what
amounts Securities and monies are to be deposited on
behalf of the Separate Account in the Book-Entry System or
the Depository; provided, however, that prior to the
deposit of Securities of the Separate Account in the Book-
Entry System or the Depository, including a deposit in
connection with the settlement of a purchase or sale, the
Custodian shall have received a Certificate specifically
approving such deposits by the Custodian in the Book-Entry
System or the Depository. Securities and monies of the
Separate Account deposited in the Book-Entry System or the
Depository will be represented in accounts which include
only assets held by the Custodian for customers, including
4<PAGE>
but not limited to accounts for which the Custodian acts
in a fiduciary or representative capacity.
(b) Accounts and Disbursements. The Custodian shall
establish and maintain a separate account for the Separate
Account and shall credit to the separate account all
monies received by it for the account of such Separate
Account and shall disburse the same only:
1. In payment for Securities purchased for the
Separate Account, as provided in Section 5 hereof;
2. In payment of dividends or distributions with
respect to the Units, as provided in Section 7
hereof;
3. In payment of original issue or other taxes with
respect to the Units, as provided in Section 8
hereof;
4. In payment for Units which have been redeemed by
the Separate Account, as provided in Section 8
hereof;
5. Pursuant to Written Instructions setting forth
the name and address of the person to whom the
payment is to be made, the amount to be paid and the
purpose for which payment is to be made, provided
that in the event of disbursements pursuant to this
sub-section 4(b)(5), the Separate Account shall
indemnify and hold the Custodian harmless from any
claims or losses arising out of such disbursements in
reliance on such Written Instructions which it, in
good faith, believes to be received from duly
Authorized Persons; or
6. In payment of fees and in reimbursement of the
e x penses and liabilities of the Custodian
attributable to the Separate Account, as provided in
Sections 3 and 11(i).
(c) Confirmation and Statements. Promptly after the close
of business on each day, the Custodian shall furnish the
Separate Account with confirmations and a summary of all
transfers to or from the account of the Separate Account
during said day. Where securities purchased by the
Separate Account are in a fungible bulk of securities
registered in the name of the Custodian (or its nominee)
or shown on the Custodian's account on the books of the
Depository or the Book-Entry System, the Custodian shall
by book entry or otherwise identify the quantity of those
securities belonging to the Separate Account. At least
5<PAGE>
monthly, the Custodian shall furnish the Separate Account
with a detailed statement of the Securities and monies
held for the Separate Account under this Agreement.
(d) Registration of Securities and Physical Separation.
All Securities held for the Separate Account which are
issued or issuable only in bearer form, except such
Securities as are held in the Book-Entry System, shall be
held by the Custodian in that form; all other Securities
held for the Separate Account may be registered in the
name of the Separate Account, in the name of the
Custodian, in the name of any duly appointed registered
nominee of the Custodian as the Custodian may from time to
time determine, or in the name of the Book-Entry System or
the Depository or their successor or successors, or their
nominee or nominees. The Separate Account reserves the
right to instruct the Custodian as to the method of
registration and safekeeping of the Securities. The
Separate Account agrees to furnish to the Custodian
appropriate instruments to enable the Custodian to hold or
deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-
Entry System or the Depository, any Securities which it
may hold for the account of the Separate Account and which
may from time to time be registered in the name of the
Separate Account. The Custodian shall hold all such
Securities specifically allocated to the Separate Account
which are not held in the Book-Entry System or the
Depository in a separate account for the Separate Account
in the name of the Separate Account physically segregated
at all times from those of any other person or persons.
(e) Segregated Accounts. Upon receipt of a Written
I n struction the Custodian will establish segregated
accounts on behalf of the Separate Account to hold liquid
or other assets as it shall be directed by a Written
Instruction and shall increase or decrease the assets in
such segregated accounts only as it shall be directed by
subsequent Written Instruction.
(f) Collection of Income and Other Matters Affecting
Securities. Unless otherwise instructed to the contrary
by a Written Instruction, the Custodian by itself, or
through the use of the Book-Entry System or the Depository
with respect to Securities therein deposited, shall with
respect to all Securities held for the Separate Account in
accordance with this Agreement:
1. Collect all income due or payable;
2. Present for payment and collect the amount
payable upon all Securities which may mature or be
6<PAGE>
c a l led, redeemed, retired or otherwise become
p a y a ble. Notwithstanding the foregoing, the
C u stodian shall have no responsibility to the
Separate Account for monitoring or ascertaining any
call, redemption or retirement dates with respect to
put bonds which are owned by the Separate Account and
held by the Custodian or its nominees. Nor shall the
Custodian have any responsibility or liability to the
Separate Account for any loss by the Separate Account
for any missed payments or other defaults resulting
therefrom; unless the Custodian received timely
notification from the Separate Account specifying the
time, place and manner for the presentment of any
such put bond owned by the Separate Account and held
by the Custodian or its nominee. The Custodian shall
not be responsible and assumes no liability to the
Separate Account for the accuracy or completeness of
any notification the Custodian may furnish to the
Separate Account with respect to put bonds;
3. S u rrender Securities in temporary form for
definitive Securities;
4. Execute any necessary declarations or
certificates of ownership under the Federal income
tax laws or the laws or regulations of any other
taxing authority now or hereafter in effect; and
5. Hold directly, or through the Book-Entry System
or the Depository with respect to Securities therein
deposited, for the account of the Separate Account
all rights and similar Securities issued with respect
to any Securities held by the Custodian hereunder for
the Separate Account.
(g) Delivery of Securities and Evidence of Authority.
Upon receipt of a Written Instruction and not otherwise,
except for subparagraphs 5, 6, 7, and 8 of this section
4 ( g ) which may be effected by Oral or Written
Instructions, the Custodian, directly or through the use
of the Book-Entry System or the Depository, shall:
1. Execute and deliver or cause to be executed and
delivered to such persons as may be designated in
such Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the
authority of the Separate Account as owner of any
Securities may be exercised;
2. Deliver or cause to be delivered any Securities
held for the Separate Account in exchange for other
Securities or cash issued or paid in connection with
7<PAGE>
the liquidation, reorganization, refinancing, merger,
consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege;
3. Deliver or cause to be delivered any Securities
held for the Separate Account to any protective
committee, reorganization committee or other person
in connection with the reorganization, refinancing,
merger, consolidation or recapitalization or sale of
assets of any corporation, and receive and hold under
the terms of this Agreement in the separate account
f o r the Separate Account such certificates of
deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such
delivery;
4. Make or cause to be made such transfers or
exchanges of the assets specifically allocated to the
separate account of the Separate Account and take
such other steps as shall be stated in Written
Instructions to be for the purpose of effectuating
a n y duly authorized plan of liquidation,
r e o r ganization, merger, consolidation or
recapitalization of the Separate Account;
5. Deliver Securities upon sale of such Securities
for the account of the Separate Account pursuant to
Section 5;
6. Deliver Securities upon the receipt of payment in
connection with any repurchase agreement related to
such Securities entered into by the Separate Account;
7. Deliver Securities owned by the Separate Account
to the issuer thereof or its agent when such
Securities are called, redeemed, retired or otherwise
become payable; provided, however, that in any such
case the cash or other consideration is to be
delivered to the Custodian. Notwithstanding the
foregoing, the Custodian shall have no responsibility
to the Separate Account for monitoring or
ascertaining any call, redemption or retirement dates
with respect to the put bonds which are owned by the
Separate Account and held by the Custodian or its
n o m i nee. Nor shall the Custodian have any
responsibility or liability to the Separate Account
for any loss by the Separate Account for any missed
payment or other default resulting therefrom; unless
the Custodian received timely notification from the
Separate Account specifying the time, place and
manner for the presentment of any such put bond owned
by the Separate Account and held by the Custodian or
8<PAGE>
its nominee. The Custodian shall not be responsible
and assumes no liability to the Separate Account for
the accuracy or completeness of any notification the
Custodian may furnish to the Separate Account with
respect to put bonds;
8. Deliver Securities for delivery in connection
with any loans of Securities made by the Separate
A c c ount but only against receipt of adequate
collateral as agreed upon from time to time by the
Custodian and the Separate Account which may be in
the form of cash or U.S. government securities or a
letter of credit;
9. Deliver Securities for delivery as security in
connection with any borrowings by the Separate
Account requiring a pledge of Separate Account
assets, but only against receipt of amounts borrowed;
10. D e liver Securities upon receipt of Written
Instructions from the Separate Account for delivery
to the Transfer Agent or to the holders of Units in
connection with distributions in kind, as may be
described from time to time in the Separate Account's
Prospectus, in satisfaction of requests by holders of
Units for repurchase or redemption;
11. Deliver Securities as collateral in connection
with short sales by the Separate Account of common
stock for which the Separate Account owns the stock
o r o wns preferred stocks or debt securities
convertible or exchangeable, without payment or
further consideration, into Units of the common stock
sold short;
12. Deliver Securities for any purpose expressly
permitted by and in accordance with procedures
described in the Separate Account's Prospectus; and
13. Deliver Securities for any other proper business
purpose, but only upon receipt of, in addition to
W r i t ten Instructions, a certified copy of a
resolution of the Board of Managers signed by an
Authorized Person and certified by the Secretary of
the Separate Account, specifying the Securities to be
delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be
a proper business purpose, and naming the person or
persons to whom delivery of such Securities shall be
made.
(h) Endorsement and Collection of Checks, Etc. The
9<PAGE>
Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money
received by the Custodian for the account of the Separate
Account.
5. Purchase and Sale of Investments of the Separate Account.
(a) Promptly after each purchase of Securities for the
Separate Account, the Separate Account shall deliver to
the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a
Written Instruction, and (ii) with respect to each
purchase of Money Market Securities, either a Written
Instruction or Oral Instruction, in either case specifying
with respect to each purchase: (1) the name of the issuer
and the title of the Securities; (2) the number of Units
or the principal amount purchased and accrued interest, if
any; (3) the date of purchase and settlement; (4) the
purchase price per unit; (5) the total amount payable upon
such purchase; (6) the name of the person from whom or the
broker through whom the purchase was made, if any; (7)
whether or not such purchase is to be settled through the
Book-Entry System or the Depository; and (8) whether the
Securities purchased are to be deposited in the Book-Entry
System or the Depository. The Custodian shall receive the
Securities purchased by or for the Separate Account and
upon receipt of Securities shall pay out of the monies
held for the account of the Separate Account the total
amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such
Written or Oral Instruction.
(b) Promptly after each sale of Securities of the Separate
Account, the Separate Account shall deliver to the
Custodian (i) with respect to each sale of Securities
w h i ch are not Money Market Securities, a Written
Instruction, and (ii) with respect to each sale of Money
Market Securities, either Written Instruction or Oral
Instructions, in either case specifying with respect to
such sale: (1) the name of the issuer and the title of
the Securities; (2) the number of Units or principal
amount sold, and accrued interest, if any; (3) the date of
sale; (4) the sale price per unit; (5) the total amount
payable to the Separate Account upon such sale; (6) the
name of the broker through whom or the person to whom the
sale was made; and (7) whether or not such sale is to be
settled through the Book-Entry System or the Depository.
The Custodian shall deliver or cause to be delivered the
Securities to the broker or other person designated by the
Separate Account upon receipt of the total amount payable
to the Separate Account upon such sale, provided that the
10<PAGE>
same conforms to the total amount payable to the Separate
Account as set forth in such Written or Oral Instruction.
Subject to the foregoing, the Custodian may accept payment
in such form as shall be satisfactory to it, and may
deliver Securities and arrange for payment in accordance
with the customs prevailing among dealers in Securities.
11<PAGE>
6. Lending of Securities.
If the Separate Account is permitted by the terms of
the Separate Account Rules and as disclosed in its
Prospectus to lend securities, within 24 hours before each
loan of Securities, the Separate Account shall deliver to
the Custodian a Written Instruction specifying with
respect to each such loan: (a) the name of the issuer and
the title of the Securities; (b) the number of Units or
the principal amount loaned; (c) the date of loan and
delivery; (d) the total amount to be delivered to the
Custodian, and specifically allocated against the loan of
the Securities, including the amount of cash collateral
and the premium, if any, separately identified; (e) the
name of the broker, dealer or financial institution to
which the loan was made; and (f) whether the Securities
loaned are to be delivered through the Book-Entry System
or the Depository.
P r o mptly after each termination of a loan of
Securities, the Separate Account shall deliver to the
Custodian a Written Instruction specifying with respect to
each such loan termination and return of Securities: (a)
the name of the issuer and the title of the Securities to
be returned; (b) the number of Units or the principal
amount to be returned; (c) the date of termination; (d)
the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus
any offsetting credits as described in said Written
Instruction); (e) the name of the broker, dealer or
financial institution from which the Securities will be
returned; and (f) whether such return is to be effected
through the Book-Entry System or the Depository. The
Custodian shall receive all Securities returned from the
broker, dealer or financial institution to which such
Securities were loaned and upon receipt thereof shall pay
the total amount payable upon such return of Securities as
set forth in the Written Instruction. Securities returned
to the Custodian shall be held as they were prior to such
loan.
12<PAGE>
7. Payment of Dividends or Distributions.
(a) The Separate Account shall furnish to the Custodian
the vote of the Board of Managers of the Separate Account
certified by the Secretary (i) authorizing the declaration
of distributions on a specified periodic basis and
authorizing the Custodian to rely on Oral or Written
Instructions specifying the date of the declaration of
such distribution, the date of payment thereof, the record
date as of which shareholders entitled to payment shall be
d e t e rmined, the amount payable per share to the
shareholders of record as of the record date and the total
amount payable to the Transfer Agent on the payment date,
or (ii) setting forth the date of declaration of any
distribution by the Separate Account, the date of payment
thereof, the record date as of which shareholders entitled
to payment shall be determined, the amount payable per
share to the shareholders of record as of the record date
and the total amount payable to the Transfer Agent on the
payment date.
(b) Upon the payment date specified in such vote, Oral
Instructions or Written Instructions, as the case may be,
the Custodian shall pay out the total amount payable to
the Transfer Agent of the Separate Account.
8. Sale and Redemption of Units of the Separate Account.
(a) Whenever the Separate Account shall sell any Units,
the Separate Account shall deliver or cause to be
delivered to the Custodian a Written Instruction duly
specifying:
1. The number of Units sold, trade date, and price;
and
2. The amount of money to be received by the
Custodian for the sale of such Units.
The Custodian understands and agrees that Written
Instructions may be furnished subsequent to the purchase
of Units and that the information contained therein will
be derived from the sales of Units as reported to the
Separate Account by the Transfer Agent.
(b) Upon receipt of money from the Transfer Agent, the
Custodian shall credit such money to the separate account
of the Separate Account.
(c) Upon issuance of any Units in accordance with the
foregoing provisions of this Section 8, the Custodian
shall pay all original issue or other taxes required to be
13<PAGE>
paid in connection with such issuance upon the receipt of
a Written Instruction specifying the amount to be paid.
(d) Except as provided hereafter, whenever any Units are
redeemed, the Separate Account shall cause the Transfer
Agent to promptly furnish to the Custodian Written
Instructions, specifying:
1. The number of Units redeemed; and
2. The amount to be paid for the Units redeemed.
The Custodian further understands that the information
contained in such Written Instructions will be derived
from the redemption of Units as reported to the Separate
Account by the Transfer Agent.
(e) Upon receipt from the Transfer Agent of advice setting
forth the number of Units received by the Transfer Agent
for redemption and that such Units are valid and in good
form for redemption, the Custodian shall make payment to
the Transfer Agent of the total amount specified in a
Written Instruction issued pursuant to paragraph (d) of
this Section 8.
(f) Notwithstanding the above provisions regarding the
redemption of Units, whenever such Units are redeemed
pursuant to any check redemption privilege which may from
time to time be offered by the Separate Account, the
Custodian, unless otherwise instructed by a Written
Instruction shall, upon receipt of advice from the
Separate Account or its agent stating that the redemption
is in good form for redemption in accordance with the
check redemption procedure, honor the check presented as
part of such check redemption privilege out of the monies
specifically allocated to the Separate Account in such
advice for such purpose.
9. Indebtedness.
(a) The Separate Account will cause to be delivered to the
Custodian by any bank (excluding the Custodian) from which
t h e Separate Account borrows money for temporary
administrative or emergency purposes using Securities as
collateral for such borrowings, a notice or undertaking in
the form currently employed by any such bank setting forth
the amount which such bank will loan to the Separate
Account against delivery of a stated amount of collateral.
The Separate Account shall promptly deliver to the
Custodian Written Instructions stating with respect to
each such borrowing: (1) the name of the bank; (2) the
amount and terms of the borrowing, which may be set forth
14<PAGE>
by incorporating by reference an attached promissory note,
duly endorsed by the Separate Account, or other loan
agreement; (3) the time and date, if known, on which the
loan is to be entered into (the "borrowing date"); (4) the
date on which the loan becomes due and payable; (5) the
total amount payable to the Separate Account on the
borrowing date; (6) the market value of Securities to be
delivered as collateral for such loan, including the name
of the issuer, the title and the number of Units or the
principal amount of any particular Securities; (7) whether
the Custodian is to deliver such collateral through the
Book-Entry System or the Depository; and (8) a statement
that such loan is in conformance with the 1940 Act and the
Separate Account's Prospectus.
(b) Upon receipt of the Written Instruction referred to in
subparagraph (a) above, the Custodian shall deliver on the
borrowing date the specified collateral and the executed
promissory note, if any, against delivery by the lending
bank of the total amount of the loan payable, provided
that the same conforms to the total amount payable as set
forth in the Written Instruction. The Custodian may, at
the option of the lending bank, keep such collateral in
its possession, but such collateral shall be subject to
all rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Custodian shall
deliver as additional collateral in the manner directed by
the Separate Account from time to time such Securities as
may be specified in Written Instruction to collateralize
further any transaction described in this Section 9. The
Separate Account shall cause all Securities released from
c o l lateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to
time such return of collateral as may be tendered to it.
In the event that the Separate Account fails to specify in
Written Instruction all of the information required by
this Section 9, the Custodian shall not be under any
obligation to deliver any Securities. Collateral returned
to the Custodian shall be held hereunder as it was prior
to being used as collateral.
10. Persons Having Access to Assets of the Separate Account.
(a) No trustee or agent of the Separate Account, and no
officer, director, employee or agent of the Separate
A c count's investment adviser, of any sub-investment
adviser of the Separate Account, or of the Separate
Account's administrator, shall have physical access to the
assets of the Separate Account held by the Custodian or be
authorized or permitted to withdraw any investments of the
Separate Account, nor shall the Custodian deliver any
15<PAGE>
assets of the Separate Account to any such person. No
officer, director, employee or agent of the Custodian who
holds any similar position with the Separate Account's
investment adviser, with any sub-investment adviser of the
S e p a r ate Account or with the Separate Account's
administrator shall have access to the assets of the
Separate Account.
(b) Nothing in this Section 10 shall prohibit any duly
authorized officer, employee or agent of the Separate
A c count, or any duly authorized officer, director,
employee or agent of the investment adviser, of any sub-
investment adviser of the Separate Account or of the
S e p arate Account's administrator, from giving Oral
Instructions or Written Instructions to the Custodian or
executing a Certificate so long as it does not result in
delivery of or access to assets of the Separate Account
prohibited by paragraph (a) of this Section 10.
11. Concerning the Custodian.
(a) Standard of Conduct. Notwithstanding any other
provision of this Agreement, neither the Custodian nor its
nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act
or otherwise, except for any such loss or damage arising
out of the gross negligence or willful misconduct of the
Custodian or any of its employees, sub-custodians or
agents. The Custodian may, with respect to questions of
law, apply for and obtain the advice and opinion of
counsel to the Separate Account or of its own counsel, at
the expense of the Separate Account, and shall be fully
protected with respect to anything done or omitted by it
in good faith in conformity with such advice or opinion.
The Custodian shall not be liable to the Separate Account
for any loss or damage resulting from the use of the Book-
Entry System or the Depository.
(b) Limit of Duties. Without limiting the generality of
the foregoing, the Custodian shall be under no duty or
obligation to inquire into, and shall not be liable for:
1. The validity of the issue of any Securities
purchased by the Separate Account, the legality of
the purchase thereof, or the propriety of the amount
paid therefor;
2. The legality of the sale of any Securities by the
Separate Account or the propriety of the amount for
which the same are sold;
16<PAGE>
3. The legality of the issue or sale of any Units,
or the sufficiency of the amount to be received
therefor;
4. The legality of the redemption of any Units, or
the propriety of the amount to be paid therefor;
5. The legality of the declaration or payment of any
distribution of the Separate Account;
6. The legality of any borrowing for temporary or
emergency administrative purposes.
(c) No Liability Until Receipt. The Custodian shall not
be liable for, or considered to be the Custodian of, any
money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it
on behalf of the Separate Account until the Custodian
actually receives and collects such money directly or by
the final crediting of the account representing the
Separate Account's interest in the Book-Entry System or
the Depository.
(d) Amounts Due from Transfer Agent. The Custodian shall
not be under any duty or obligation to take action to
effect collection of any amount due to the Separate
Account from the Transfer Agent nor to take any action to
effect payment or distribution by the Transfer Agent of
any amount paid by the Custodian to the Transfer Agent in
accordance with this Agreement.
(e) Collection Where Payment Refused. The Custodian shall
not be under any duty or obligation to take action to
effect collection of any amount, if the Securities upon
which such amount is payable are in default, or if payment
is refused after due demand or presentation, unless and
until (i) it shall be directed to take such action by a
C e r tificate and (ii) it shall be assured to its
satisfaction of reimbursement of its costs and expenses in
connection with any such action.
(f) A p pointment of Agents and Sub-Custodians. The
Custodian may appoint one or more banking institutions,
including but not limited to banking institutions located
in foreign countries, to act as Depository or Depositories
or as sub-custodian or as sub-custodians of Securities and
monies at any time owned by the Separate Account. The
Custodian shall use reasonable care in selecting a
Depository and/or sub-custodian located in a country other
than the United States ("Foreign Sub-Custodian"), and
shall oversee the maintenance of any Securities or monies
of the Separate Account by any Foreign Sub-Custodian. In
addition, the Custodian shall hold the Separate Account
17<PAGE>
harmless from, and indemnify the Separate Account against,
any loss that occurs as a result of the failure of any
Foreign Sub-Custodian to exercise reasonable care with
respect to the safekeeping of Securities and monies of the
Separate Account. Notwithstanding the generality of the
foregoing, however, the Custodian shall not be liable for
a n y losses resulting from or caused by events or
circumstances beyond its reasonable control, including,
but not limited to, losses resulting from nationalization,
expropriation, devaluation, revaluation, confiscation,
seizure, cancellation, destruction or similar action by
any governmental authority, de facto or de jure; or
enactment, promulgation, imposition or enforcement by any
such governmental authority of currency restrictions,
e x c hange controls, taxes, levies or other charges
affecting the Separate Account's property; or acts of war,
terrorism, insurrection or revolution; or any other
similar act or event beyond the Custodian's or its agent s
control. This Section shall survive the termination of
this Agreement.
(g) No Duty to Ascertain Authority. The Custodian shall
not be under any duty or obligation to ascertain whether
any Securities at any time delivered to or held by it for
the Separate Account are such as may properly be held by
the Separate Account under the provisions of the Separate
Account Rules and the Prospectus.
(h) Reliance on Certificates and Instructions. The
Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the
Custodian and reasonably believed by the Custodian to be
genuine and to be signed by an officer or Authorized
Person of the Separate Account. The Custodian shall be
entitled to rely upon any Written Instructions or Oral
Instructions actually received by the Custodian pursuant
t o the applicable Sections of this Agreement and
reasonably believed by the Custodian to be genuine and to
be given by an Authorized Person. The Separate Account
agrees to forward to the Custodian Written Instructions
from an Authorized Person confirming such Oral
I n s tructions in such manner so that such Written
Instructions are received by the Custodian, whether by
hand delivery, telex or otherwise, by the close of
business on the same day that such Oral Instructions are
given to the Custodian. The Separate Account agrees that
the fact that such confirming instructions are not
received by the Custodian shall in no way affect the
validity of the transactions or enforceability of the
transactions hereby authorized by the Separate Account.
The Separate Account agrees that the Custodian shall incur
no liability to the Separate Account in acting upon Oral
18<PAGE>
Instructions given to the Custodian hereunder concerning
such transactions provided such instructions reasonably
appear to have been received from a duly Authorized
Person.
(i) Overdraft Facility and Security for Payment. In
the event that the Custodian is directed by Written
Instruction (or Oral Instructions confirmed in writing in
accordance with Section 11(h) hereof) to make any payment
or transfer of monies on behalf of the Separate Account
for which there would be, at the close of business on the
date of such payment or transfer, insufficient monies held
by the Custodian on behalf of the Separate Account, the
C u stodian may, in its sole discretion, provide an
overdraft (an "Overdraft") to the Separate Account in an
amount sufficient to allow the completion of such payment
or transfer. Any Overdraft provided hereunder: (a) shall
be payable on the next Business Day, unless otherwise
agreed by the Separate Account and the Custodian; and (b)
shall accrue interest from the date of the Overdraft to
the date of payment in full by the Separate Account at a
rate agreed upon in writing, from time to time, by the
Custodian and the Separate Account. The Custodian and the
Separate Account acknowledge that the purpose of such
Overdraft is to temporarily finance the purchase of
Securities for prompt delivery in accordance with the
terms hereof, to meet unanticipated or unusual redemption,
to allow the settlement of foreign exchange contracts or
t o m e et other emergency expenses not reasonably
foreseeable by the Separate Account. The Custodian shall
promptly notify the Separate Account in writing (an
" O v erdraft Notice") of any Overdraft by facsimile
transmission or in such other manner as the Separate
Account and the Custodian may agree in writing. To secure
payment of any Overdraft, the Separate Account hereby
grants to the Custodian a continuing security interest in
and right of setoff against the Securities and cash in the
Separate Account's account from time to time in the full
amount of such Overdraft. Should the Separate Account
fail to pay promptly any amounts owed hereunder, the
Custodian shall be entitled to use available cash in the
Separate Account's account and to liquidate Securities in
the account as is necessary to meet the Separate Account's
obligations under the Overdraft. In any such case, and
without limiting the foregoing, the Custodian shall be
entitled to take such other actions(s) or exercise such
other options, powers and rights as the Custodian now or
h e r e a f ter has as a secured creditor under the
M a ssachusetts Uniform Commercial Code or any other
applicable law.
(j) Inspection of Books and Records. The books and
19<PAGE>
records of the Custodian shall be open to inspection and
audit at reasonable times by officers and auditors
employed by the Separate Account and by the appropriate
employees of the Securities and Exchange Commission.
The Custodian shall provide the Separate Account with
any report obtained by the Custodian on the system of
internal accounting control of the Book-Entry System or
the Depository and with such reports on its own systems of
internal accounting control as the Separate Account may
reasonably request from time to time.
12. Term and Termination.
(a) This Agreement shall become effective on the date
first set forth above (the "Effective Date") and shall
continue in effect thereafter until such time as this
Agreement may be terminated in accordance with the
provisions hereof.
(b) Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be
not less than 60 days after the date of receipt of such
notice. In the event such notice is given by the Separate
Account, it shall be accompanied by a certified vote of
the Board of Managers of the Separate Account, electing to
terminate this Agreement and designating a successor
custodian or custodians, which shall be a person qualified
to so act under the 1940 Act.
In the event such notice is given by the Custodian,
the Separate Account shall, on or before the termination
date, deliver to the Custodian a certified vote of the
Board of Managers of the Separate Account, designating a
successor custodian or custodians. In the absence of such
designation by the Separate Account, the Custodian may
designate a successor custodian, which shall be a person
qualified to so act under the 1940 Act. If the Separate
Account fails to designate a successor custodian, the
Separate Account shall upon the date specified in the
notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than
Securities held in the Book-Entry System which cannot be
delivered to the Separate Account) and monies then owned
by the Separate Account, be deemed to be its own custodian
and the Custodian shall thereby be relieved of all duties
and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book-
Entry System which cannot be delivered to the Separate
Account.
20<PAGE>
(c) Upon the date set forth in such notice under paragraph
(b) of this Section 12, this Agreement shall terminate to
the extent specified in such notice, and the Custodian
shall upon receipt of a notice of acceptance by the
successor custodian on that date deliver directly to the
successor custodian all Securities and monies then held by
the Custodian on behalf of the Separate Account, after
deducting all fees, expenses and other amounts for the
payment or reimbursement of which it shall then be
entitled.
13. Limitation of Liability.
The Separate Account and the Custodian agree that the
obligations of the Separate Account under this Agreement
s h a l l not be binding upon any of the Managers,
shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Separate Account,
individually, but are binding only upon the assets and
property of the Separate Account, as provided in the
Separate Account Rules. The execution and delivery of
this Agreement have been authorized by the Managers of the
Separate Account, and signed by an authorized officer of
the Separate Account, acting as such, and neither such
authorization by such Managers nor such execution and
delivery by such officer shall be deemed to have been made
by any of them or any shareholder of the Separate Account
individually or to impose any liability on any of them or
any shareholder of the Separate Account personally, but
shall bind only the assets and property of the Separate
Account as provided in the Separate Account Rules.
14. Miscellaneous.
(a) Annexed hereto as Appendix A is a certification signed
by the Secretary of the Separate Account setting forth the
names and the signatures of the present Authorized
Persons. The Separate Account agrees to furnish to the
Custodian a new certification in similar form in the event
that any such present Authorized Person ceases to be such
an Authorized Person or in the event that other or
additional Authorized Persons are elected or appointed.
Until such new certification shall be received, the
Custodian shall be fully protected in acting under the
provisions of this Agreement upon Oral Instructions or
signatures of the present Authorized Persons as set forth
in the last delivered certification.
(b) Annexed hereto as Appendix B is a certification signed
by the Secretary of the Separate Account setting forth the
21<PAGE>
names and the signatures of the present officers of the
Separate Account. The Separate Account agrees to furnish
to the Custodian a new certification in similar form in
the event any such present officer ceases to be an officer
of the Separate Account or in the event that other or
additional officers are elected or appointed. Until such
new certification shall be received, the Custodian shall
be fully protected in acting under the provisions of this
Agreement upon the signature of an officer as set forth in
the last delivered certification.
(c) Any notice or other instrument in writing, authorized
or required by this Agreement to be given to the
Custodian, shall be sufficiently given if addressed to the
Custodian and mailed or delivered to it at its offices at
One Boston Place, Boston, Massachusetts 02108 or at such
other place as the Custodian may from time to time
designate in writing.
(d) Any notice or other instrument in writing, authorized
or required by this Agreement to be given to the Separate
Account, shall be sufficiently given if addressed to the
Separate Account and mailed or delivered to it at its
offices at 11815 North Pennsylvania Street, Carmel,
Indiana 46032 or at such other place as the Separate
Account may from time to time designate in writing.
(e) This Agreement may not be amended or modified in any
manner except by a written agreement executed by both
parties with the same formality as this Agreement (i)
authorized, or ratified and approved by a vote of the
Board of Managers of the Separate Account, including a
majority of the members of the Board of Managers of the
Separate Account who are not "interested persons" of the
Separate Account (as defined in the 1940 Act), or (ii)
authorized, or ratified and approved by such other
procedures as may be permitted or required by the 1940
Act.
(f) This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors
and assigns; provided, however, that this Agreement shall
not be assignable by the Separate Account without the
written consent of the Custodian, or by the Custodian
without the written consent of the Separate Account
authorized or approved by a vote of the Board of Managers
of the Separate Account provided, however, that the
Custodian may assign the Agreement to an Affiliated Person
and any attempted assignment without such written consent
shall be null and void. Nothing in this Agreement shall
give or be construed to give or confer upon any third
party any rights hereunder.
22<PAGE>
(g) The Separate Account represents that a copy of the
Separate Account Rules is on file with the Department of
Insurance of the State of Texas.
(h) This Agreement shall be construed in accordance with
the laws of The Commonwealth of Massachusetts.
(i) The captions of the Agreement are included for
convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect
their construction or effect.
(j) This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an
original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective representatives
duly authorized as of the day and year first above written.
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/ Albert P. Viragh, Jr.
Name: Albert P. Viragh, Jr.
Title: President
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By: /s/ Stephen Browne
Name: Stephen Browne
Title: Vice President
23<PAGE>
APPENDIX A
I, Robert Steele, the Secretary of RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT, a segregated investment account of Great
American Reserve Insurance Company, a diversified open-end
management investment company organized under Texas law (the
"Separate Account"), do hereby certify that:
The following individuals have been duly authorized as
Authorized Persons to give Oral Instructions and Written
Instructions on behalf of the Separate Account and the
specimen signatures set forth opposite their respective names
are their true and correct signatures:
Name Signature
For purchases and sales of Securities:
Michael Byrum /s/ Michael P. Byrum
Terry Apple /s/ Terry Apple
Thomas Michael /s/ Thomas Michael
Anne Ruff /s/ Anne Ruff
Adam Croll /s/ Adam Croll
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/ Robert Steele
Secretary: Robert Steele
Dated: November 12, 1996
24<PAGE>
APPENDIX B
I, Robert Steele, the Secretary of RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT, a segregated investment account of Great
American Reserve Insurance Company, a diversified open-end
management investment company organized under Texas law (the
"Separate Account"), do hereby certify that:
The following individuals serve in the following positions
with the Separate Account and each individual has been duly
elected or appointed to each such position and qualified
therefor in conformity with the Separate Account's Separate
Account Rules and the specimen signatures set forth opposite
their respective names are their true and correct signatures:
Name Position Signature
Albert P. Viragh Chairman of the /s/ Albert P. Viragh, Jr.
Board and President
Timothy P. Hagan Treasurer /s/ Timothy P. Hagan
Robert Steele Secretary /s/ Robert Steele
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/: Robert Steele
Secretary: Robert Steele
Dated: 11-12-96
25<PAGE>
SCHEDULE A
BOSTON SAFE DEPOSIT AND TRUST COMPANY
CUSTODY FEE SCHEDULE
FOR
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
Boston Safe Deposit and Trust Company ("Boston Safe"), acting as custodian
for the separate account assets of Rydex, would base its compensation
according to the schedule which follows.
Boston Safe s bid is provided in one format only, that being hard dollar
basis. It is not our policy to structure custody fees on a compensation
balance relationship linked to Demand Deposit Account (DDA) balances,
activity and credits.
The compensation schedule is based upon the understanding that the Rydex
Advisor Variable Account initially will consist of seven self-managed
funds. Asset value is undetermined as each fund is a start-up.
The attached fee schedule is based upon number of accounts, asset size, and
transaction volumes. Core services include safekeeping of assets,
transaction settlement, income collection, cash availability/forecasting
and corporate action processing.
Out-of-pocket and pass-thru fees include, but are not limited to, wire
charges, courier expenses, registration fees, stamp duties, etc. Clients
are responsible for communications, hardware, and software to support data
transmission to/from Boston Safe.
The minimum annual fee for custody-related services is $10,000 for a U.S.
Dollar (USD) denominated fund. Boston Safe is willing to guarantee the
attached fee schedule for three years. However, should the nature of the
account change dramatically, Boston Safe reserves the right to re-negotiate
its compensation based on the situation that exists in the account at such
time. If non-standard or special services are requested, Boston Safe may
negotiate additional compensation accordingly.
Structural Charges:
$2,500 per domestic fund
Administrative Fee:
1.0 basis points on the first $250 million of USD assets
0.5 basis points on all USD funds thereafter
26<PAGE>
Transaction Charges:
Book Entry Transactions $8.00
Physical Transactions $25.00
Futures Transactions $8.00
Paydowns $5.00
Margin Variation Wire $10.00
Options Round Trip $20.00
Wire Transfers $5.00
Minimum Annual Fee:
$10,000 per Fund
On-Line Access
Boston Safe can provide real time, on-line access to Rydex via
the Executive Workbench (EWB) Lite platform. One location of EWB
Lite will be provided at no additional cost as part of your
custody service. The cost of all commercial personal computer
( P C ) hardware, software, and telecommunications is the
responsibility of the client.
Cash Sweep
Rydex can sweep excess cash into any of a number of AAA-rated
Dreyfus investment vehicles that Boston Safe makes available to
its clients. Boston Safe does not charge a fee for cash sweep
services. Prospectus information will be provided upon request.
NOTE: Boston Safe offers other services not covered under the above
schedule. These services are covered under separate fee
schedules. Additional services include: Investment Management,
Non-Collectivized Real Estate and Mortgage Custody, Back Office
and Private Label Services.
27<PAGE>
SCHEDULE B
The Separate Account will pay to the Custodian as soon as possible after
the end of each month all out-of-pocket expenses reasonably incurred in
connection with the assets of the Separate Account.
/
28<PAGE>
29<PAGE>
EXHIBIT 4
Investment Advisory Agreement Between
Rydex Advisor Variable Annuity Account and
PADCO Advisors II, Inc.<PAGE>
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
AND
PADCO ADVISORS II, INC.
THIS INVESTMENT ADVISORY AGREEMENT (the "Agreement"),
dated as of November 1, 1996, is entered into by and between
THE RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT (the "Separate
Account"), a managed separate account of Great American
Reserve Insurance Company ("Great American Reserve")
established under the laws of the State of Texas on April 15,
1996, and PADCO ADVISORS II, INC. (the "Advisor"), a company
incorporated under the laws of the State of Maryland on July
5, 1994.
W I T N E S S E T H:
WHEREAS, the Separate Account is registered with the
Securities and Exchange Commission (the "Commission") as a
diversified open-end management investment company pursuant to
the provisions of the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, the Advisor is an investment adviser registered
as such with the Commission pursuant to the provisions of the
Investment Advisers Act of 1940, and is engaged in the
b u siness of rendering investment advice and investment
management services as an independent contractor;
WHEREAS, the assets of the Separate Account may be
segregated by eligible investments, thus establishing a series
of eligible investment portfolios (or "Subaccounts") within
the Separate Account pursuant to the laws of the State of
Texas and the 1940 Act;
WHEREAS, the variable annuity contracts proposed to be
sold by Great American Reserve and to be funded by the
Separate Account (the "Contracts") are designed for use by
purchasers of the Contracts (the "Contract Owners") who intend
to utilize an <PAGE>
asset-allocation or market-timing investment strategy and are
advised by professional money managers ("Financial Advisors");
WHEREAS, the board of managers of the Separate Account
(the "Managers"), pursuant to Article III, Section 2.m.,
"Board of Managers; Powers," of the rules and regulations of
the Separate Account, dated June 26, 1996 (the "Separate
Account Rules"), have created the following Subaccounts of the
Separate Account: The Nova Subaccount, The Ursa Subaccount,
The OTC Subaccount, The Precious Metals Subaccount, The Juno
Subaccount, The U.S. Government Bond Subaccount, The Money
Market I Subaccount, and The Money Market II Subaccount
(collectively, the "Subaccounts");
WHEREAS, the accounting unit of measure used to compute
the value of a Contract Owner's interest in a Subaccount is
the "Accumulation Unit," and the current market value of the
Accumulation Units of a Subaccount is the "Accumulation Unit
Value;"
WHEREAS, the Separate Account wishes to engage the
Advisor, and the Advisor wishes to be engaged, to manage the
investment portfolios of the Subaccounts of the Separate
Account with respect to the investment and reinvestment of the
assets of the Subaccounts of the Separate Account, and to act
in such capacity in accordance with the terms, conditions, and
other provisions of this Agreement; and
WHEREAS, the Separate Account wishes to engage the
Advisor, and the Advisor wishes to be engaged, to manage the
investment portfolios of all Subaccounts of the Separate
Account which are created subsequent to this Agreement with
respect to the investment and reinvestment of the assets of
such future Subaccounts of the Separate Account, and to act in
such capacity in accordance with the terms, conditions, and
other provisions of this Agreement.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, and for other good and
valuable consideration, the receipt, sufficiency, and adequacy
o f which are hereby acknowledged, the parties hereto,
intending to be legally bound, agree and promise as follows:
1. Services To Be Provided
a. Employment. The Separate Account hereby employs the
Advisor to manage the investment and reinvestment of the
assets of the Subaccounts, including each of the Subaccounts,
comprising the Separate Account in accordance with the
investment objectives and policies as set forth in the
Separate Account's registration statement filed pursuant to
the Securities Act of 1933, as amended (the "1933 Act"), and
2<PAGE>
the 1940 Act (the "Registration Statement"), and subject to
the direction and control of the officers and the Board of
Managers of the Separate Account, for the period and on the
terms set forth in this Agreement. The Advisor hereby accepts
such employment and agrees to render the services and to
assume the obligations herein set forth, for the compensation
herein provided.
b. Best Efforts. The Advisor hereby agrees to use its
best judgment and efforts in rendering the advice and services
with respect to the Subaccounts as contemplated by this
Agreement. The Advisor further agrees to use its best efforts
in the furnishing of such advice and recommendations with
respect to the Subaccounts, in the preparation of reports and
information, and in the management of the respective assets of
each Subaccount, all pursuant to this Agreement, and for this
purpose the Advisor shall, at its own expense, maintain such
staff and employ or retain such personnel and consult with
such other persons that the Advisor shall from time to time
determine to be necessary to the performance of the Advisor's
obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the
Advisor shall be deemed to include persons employed or
retained by the Advisor to furnish statistical, research, and
other factual information, advice regarding economic factors
a n d trends, information with respect to technical and
scientific developments, and such other information, advice,
and assistance as the Advisor may desire and request.
2. Payment of Fees and Expenses
The Advisor assumes and shall pay all expenses in
c o n nection with the management of the investment and
reinvestment of the portfolio assets of each Subaccount,
except that each Subaccount assumes and shall pay all broker's
commissions and transfer taxes chargeable to the Subaccount in
c o n n ection with securities transactions to which the
Subaccount is a party.
3. Authority of the Advisor
a. In connection with the investment and reinvestment
of the assets of each of the Subaccounts, the Advisor is
authorized on behalf of the Subaccount, to place orders for
the execution of the Subaccount's portfolio transactions in
accordance with the applicable policies of the Subaccount as
set forth in the Separate Account's Registration Statement, as
such Registration Statement may be amended from time to time.
The Advisor shall place orders for the purchase or sale of
securities either directly with the issuer or with a broker or
dealer selected by the Advisor. In placing the Subaccount's
securities trades, it is recognized that the Advisor will give
3<PAGE>
primary consideration to securing the most favorable price and
efficient execution, so that the Subaccount's total cost or
proceeds in each transaction will be the most favorable under
all circumstances. Within the framework of this policy, the
Advisor may consider the financial responsibility, research
and investment information, and other services provided by
brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of
the Advisor may be a party.
b. It is understood that it is desirable for each
Subaccount of the Separate Account that the Advisor have
access to investment and market research and securities and
economic analyses provided by brokers and others. It is also
understood that brokers providing such services may execute
brokerage transactions at a higher cost to the Subaccount than
might result from the allocation of brokerage to other brokers
purely based on seeking the most favorable price. Therefore,
the purchase and sale of securities for the Subaccount may be
made with brokers who provide such research and analysis,
subject to review by the Managers from time to time with
respect to the extent and continuation of this practice to
d e termine whether the Subaccount benefits, directly or
indirectly, from such practice. It is understood by both
parties that the Advisor may select broker-dealers for their
execution of the Subaccount's portfolio transactions who
provide research and analysis as the Advisor may lawfully and
appropriately use in its investment management and advisory
capacities, whether or not such research and analysis also may
be useful to the Advisor in connection with its services to
other clients.
c. On occasions when the Advisor deems the purchase or
sale of a security to be in the best interests of the
Subaccount, as well as of other clients, the Advisor to the
extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order
t o o btain the most favorable price, lower brokerage
commissions, and the most efficient execution. In such event,
allocation of the securities so purchased or sold, as well as
the expenses incurred in the transaction, will be made by the
Advisor in the manner its considers to be the most equitable
a n d consistent with its fiduciary obligations to the
Subaccount and to such other clients.
4. Compensation
a. Advisory Fee. In exchange for the rendering of
advice and services pursuant hereto, the Separate Account
shall pay the Advisor, and the Advisor shall accept as full
compensation for the services to be rendered and as full
reimbursement for all the charges and expenses to be assumed
4<PAGE>
and paid by the Advisor as provided in Section 2, a fee at an
annual rate applied to the daily net assets of a Subaccount in
accordance with the following schedule:
The Nova Subaccount 0.75% (75/100's of one
percent)
The Ursa Subaccount 0.90% (90/100's of one
percent)
The OTC Subaccount 0.75% (75/100's of one
percent)
The Precious Metals
Subaccount 0.75% (75/100's of one
percent)
The U.S. Government Bond
Subaccount 0.50% (50/100's of one
percent)
The Juno Subaccount 0.90% (90/100's of one
percent)
The Money Market I
Subaccount 0.50% (50/100's of one
percent)
The Money Market II
Subaccount 0.25% (25/100's of one
percent)
5<PAGE>
b. Payment. The fee will be accrued daily by each
Subaccount and paid to the Advisor monthly not later than the
fifth (5th) business day of the month following the month for
w h ich services have been provided. In the event of
termination of this Agreement, the fee shall be computed on
the basis of the period ending on the last business day on
which this Agreement is in effect subject to a pro rata
adjustment based on the number of days elapsed in the current
month as a percentage of the total number of days in such
month, and such fee shall be payable on the date of
termination of this Agreement with respect to the Subaccount.
For purposes of calculating the Advisor's fee, the value of
the net assets of each respective Subaccount of the Separate
Account shall be determined in the same manner as the
Subaccount uses to compute the value of the Subaccount's net
a s s e t s in connection with the determination of the
Accumulation Unit Value of the Subaccount, all as set forth
more fully in the current Prospectus and Statement of
Additional Information for the Subaccounts included in the
Registration Statement.
c. Reimbursement for Certain Expenses. Through June
30, 1997, the Advisor shall reimburse each Subaccount for
certain "Reimbursable Expenses" (i.e., expenses other than the
advisory fee, the Subaccount administration fee, mortality and
expense risk charges, the administrative fee or the asset
allocation advisory fee) in excess of the amounts listed
below. The amount of any expense reimbursement shall be the
a m o unt by which the Reimbursable Expenses exceed the
following:
The Nova Subaccount 0 . 40% (40/100's of one
percent);
The Ursa Subaccount 0 . 35% (35/100's of one
percent);
The OTC Subaccount 0 . 45% (45/100's of one
percent);
The Precious Metals
Subaccount 0 . 45% (45/100's of one
percent);
The U.S. Government
Bond Subaccount 0 . 30% (30/100's of one
percent);
The Juno Subaccount 0 . 35% (35/100's of one
percent);
The Money Market I
Subaccount 0 . 10% (10/100's of one
percent);
The Money Market II
Subaccount 0 . 10% (10/100's of one
percent);
6<PAGE>
7<PAGE>
provided, that no expense reimbursement will exceed the amount
of the applicable Subaccount's advisory fee for the period of
the reimbursement.
5. Affiliations of Parties; Change in Ownership or Control
of the Advisor
Subject to and in accordance with the Separate Account
Rules, the Bylaws and Articles of Incorporation of the
Advisor, and the 1940 Act, the Managers, officers, agents, and
Contract Owners of the Separate Account are or may be
interested persons of the Advisor or its affiliates (or any
successor thereof) as shareholders or officers, directors,
agents, or otherwise, and directors, officers, agents, or
shareholders of the Advisor or its affiliates are or may be
interested persons of the Separate Account as Managers,
officers, agents, Contract Owners, or otherwise, and the
Advisor or its affiliates may be interested persons of the
Separate Account, and such relationships shall be governed by
said governing instruments and the applicable provisions of
the 1940 Act. The Advisor shall notify the Separate Account
of any change in ownership or control of PADCO Advisors II,
Inc., that could cause an "assignment" of this Agreement (as
the term "assignment" is defined in the 1940 Act and the rules
and regulations promulgated thereunder) as soon as
practicable. In the case of a voluntary assignment, notice
will be provided at least 90 days prior to the voluntary
assignment if the circumstances are such that the Separate
Account could not rely on Rule 15a-4 under the 1940 Act (or
such shorter period approved by a majority of the Managers who
are not interested persons of the Separate Account).
6. Furnishing of Information
During the term of this Agreement, the Separate Account
agrees:
a. to provide the Advisor with copies of all
prospectuses, statements of additional
information, proxy statements, registration
statements, reports to Contract Owners, sales
literature, and other material prepared for
d i s t ribution to Contract Owners of the
Subaccounts of the Separate Account or the
public that refer in any way to the Advisor, no
later than ten (10) business days before the
date such material is first distributed to the
public, or sooner if practicable, and the
Separate Account shall not use such material,
or shall discontinue the use of such material,
if the Advisor reasonably objects in writing
within five (5) business days (or within such
8<PAGE>
other time as may be mutually agreed to by the
parties) after the Advisor's receipt thereof;
b. to provide the Advisor with true and correct
copies of each amendment or supplement to the
Separate Account's Registration Statement
(including any prospectus and statement of
additional information included therein) or the
Separate Account Rules not later than the date
such material is first distributed to the
public, or sooner if practicable; and
c. to provide the Advisor with (i) written notice
of any resolutions, policies, restrictions, or
procedures adopted by the Managers which affect
t h e Advisor's investment management
responsibilities hereunder, and (ii) a list of
every natural person or entity deemed by the
Separate Account to be an "affiliated person"
o f , or "promoter" of, or "principal
underwriter" for the Separate Account, or "an
affiliated person of such person," as these
terms are defined or used in Sections 2(a)(3),
2(a)(30), and 2(a)(29), respectively, of the
1940 Act, and the Separate Account shall
promptly notify the Advisor of any additions or
deletions to such list.
7. Term of Agreement; Termination
a. This Agreement shall become effective with respect to
each Subaccount on the date first above written, and continue
in effect until two years from the date hereof, and thereafter
only so long as such continuance is approved with respect to
the Subaccount at least annually by (i) a vote of a majority
of the Managers, and (ii) the vote of a majority of the
Managers who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called
for the purpose of voting such approval.
b. This Agreement may be terminated on sixty (60) days
prior written notice to the Advisor with respect to any or all
Subaccounts without penalty either by vote of the Managers or
by vote of a majority of the outstanding voting securities of
t h e Subaccount(s). This Agreement shall automatically
terminate in the event of its assignment (within the meaning
of the 1940 Act). This Agreement may be terminated by the
Advisor on sixty-days (60) prior written notice to the
Separate Account. Any notice under this Agreement shall be
given as provided in Section 12 below.
8. Non-Transferability
9<PAGE>
This Agreement may not be transferred, assigned, sold or
in any manner hypothecated or pledged without the affirmative
vote or prior written consent of the holders of a majority of
the outstanding voting securities of the Separate Account.
9. Other Activities of the Advisor
The services of the Advisor to the Separate Account
hereunder are not to be deemed exclusive, and the Advisor and
each of its affiliates shall be free to render similar
services to others so long as the Advisor's services hereunder
are not impaired thereby. The Advisor, for purposes herein,
shall be deemed to be an independent contractor and, unless
otherwise expressly provided or authorized, shall have no
authority to act for or represent the Separate Account,
including any of the Subaccounts of the Separate Account, in
any way or otherwise be deemed an agent of the Separate
Account, or the Subaccounts of the Separate Account.
10. Standard of Care; Indemnification
a. No provisions of this Agreement shall be deemed to
protect the Advisor against any liability to the Separate
Account, the Subaccounts of the Separate Account, or the
Contract Owners of the Subaccounts to which the Advisor
o t h erwise would be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance
of the Advisor's duties or the reckless disregard of the
Advisor's obligations under this Agreement. Nor shall any
provisions hereof be deemed to protect any Manager or officer
of the Separate Account against any such liability to which
said Manager or officer might otherwise be subject by reason
of any willful misfeasance, bad faith, or gross negligence in
the performance of the Manager's or officer's respective
duties or the reckless disregard of the Manager's or officer's
respective obligations.
b. In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the Advisor's
obligations or duties hereunder, the Advisor shall not be
s u bject to liability to the Separate Account, to the
Subaccounts, or to any Contract Owner of the Subaccounts for
any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security or
other property by a Subaccount. The Advisor shall not be
required to do or refrain from doing or concur in anything
which (by act or omission to act) may impose any liability on
the Advisor.
c. Any person, even though an officer, director,
partner, employee, or agent of the Manager, who may be or
10<PAGE>
become an officer, manager, director, trustee, partner,
employee, or agent of the Separate Account, shall be deemed
when rendering such services to the Separate Account or acting
on any business of the Separate Account to be rendering such
services to or acting solely for the Separate Account and not
as the Manager's officer, manager, director, trustee, partner,
employee, or agent or as one under the Manager's control or
direction even though paid by the Manager.
d. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule, or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. Representations and Warranties of the Separate Account
The Separate Account represents and warrants that the
Separate Account is duly registered with the Securities and
Exchange Commission under the 1940 Act, as an open-end
management investment company, and that all required action
has been taken by the Separate Account under the 1933 Act, as
amended, and the 1940 Act, to permit the public offering of,
and to consummate the sale of, the Contracts of the Separate
Account pursuant to the current prospectus of the Separate
Account.
12. Notices
All notices or other communications required or permitted
to be given hereunder shall be in writing and shall be
delivered or sent by prepaid, first-class letter posted to the
following addresses, or to such other address as shall be
designated in a notice given in accordance with this section,
and such notice shall be deemed to have been given at the time
of delivery of, if sent by post, five (5) week days after
posting by airmail.
If to the Separate Account:
Rydex Advisor Variable Annuity Account
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Office of the General Counsel
with a copy to:
Rydex Advisor Variable Annuity Account
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
11<PAGE>
If to the Advisor:
PADCO Advisors II, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
12<PAGE>
13. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland (without
reference to such state's conflict of law rules).
14. Counterparts
T h i s Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but
which together shall constitute one and the same instrument.
15. Definitions
As used in this Agreement, the terms "interested persons"
and "vote of a majority of the outstanding securities" shall
have the respective meanings set forth in Section 2(a)(19) and
Section 2(a)(42) of the 1940 Act.
IN WITNESS WHEREOF, the Separate Account and the Advisor
have caused this Agreement to be executed on the date first
above written.
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/ L. Gregory Gloeckner
L. Gregory Gloeckner
Vice President
PADCO ADVISORS II, INC.
By: /s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr.
President
13<PAGE>
EXHIBIT 5(a)
Underwriting Agreement Among
Great American Reserve Insurance Company,
Rydex Advisor Variable Annuity Account,
and PADCO Financial Services, Inc.<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
FOR THE CONTRACTS FUNDED BY
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
AGREEMENT made this 1st day of November, 1996, by and
among PADCO Financial Services, Inc., a Maryland corporation
("PFS"), on its own behalf and on behalf of Rydex Insurance
Agency, its insurance agency subsidiary (collectively with
PFS, PADCO ), Great American Reserve Insurance Company, a
stock company organized under the laws of the State of Texas
( Great American Reserve ), and Rydex Advisor Variable Annuity
Account, a managed separate account of Great American Reserve
(the Annuity Account ).
WITNESSETH:
WHEREAS, Great American Reserve has established the
Annuity Account to segregate assets funding the variable
benefits provided by individual, flexible premium, deferred
annuity contracts (the Contracts ), as well as by other
contracts that may be offered by Great American Reserve in the
future;
WHEREAS, the Annuity Account is registered as an open-end
management investment company under the Investment Company Act
of 1940, as amended (the 1940 Act ), and currently consists
of eight separate subaccounts and may consist of additional
subaccounts in the future (collectively, the Subaccounts );
WHEREAS, Great American Reserve and the Annuity Account
have registered the Contracts under the Securities Act of
1933, as amended (the 1933 Act ), and desire to retain PADCO
t o distribute the Contracts, and PADCO is willing to
distribute the Contracts in the manner and on the terms set
forth herein;
WHEREAS, PFS is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended (the 1934 Act ),
and is a member of the National Association of Securities
Dealers, Inc. ( NASD );
WHEREAS, under the applicable insurance licensing laws
and other insurance-licensing requirements of certain states
and other jurisdictions in which Contracts may be offered and
sold, Contracts may be offered and sold only through persons
who are licensed to market the Contracts in these states or
other jurisdictions; and
WHEREAS, Great American Reserve is willing to compensate
PADCO for the services to be provided in the manner and on the
terms set forth herein.<PAGE>
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, Great American Reserve, the
Annuity Account, and PADCO hereby agree as follows:
1. Distribution of the Contracts
(a) Great American Reserve and the Annuity Account
hereby grant to PADCO the exclusive right, subject to the
applicable requirements of the 1933 Act, the 1934 Act, the
1940 Act, state law, and the terms set forth herein, to
distribute the Contracts during the term of this Agreement.
PADCO agrees to use commercially reasonable efforts to
distribute the Contracts.
(b) To the extent necessary to offer and sell the
Contracts, PADCO shall be duly registered or otherwise
qualified under the securities and insurance laws of any state
or other jurisdiction in which the Contracts lawfully may be
sold and in which PADCO is licensed or otherwise authorized to
sell the Contracts. In addition, to the extent necessary,
e a c h of PADCO's agents or representatives soliciting
applications for Contracts also shall be duly licensed,
registered, or otherwise qualified for the offer and sale of
C o ntracts under the applicable insurance laws and any
a p p l i c able securities laws of each state or other
jurisdictions in which these agents or representatives are
soliciting applications for Contracts. PADCO shall be
responsible for the training, supervision, and control of its
registered representatives for the purpose of the NASD Rules
of Fair Practice and federal and state securities law
requirements applicable in connection with the distribution of
the Contracts. In this connection, PADCO shall maintain
written supervisory procedures in compliance with Rule 3010 of
the NASD Conduct Rules.
(c) Unless otherwise permitted by applicable law, each
person engaged in the distribution of Contracts under this
Agreement shall be both an agent of Great American Reserve and
a person associated with a broker or dealer, within the
meaning attributed to that phrase under the 1934 Act (each
such person, an "Agent," and, collectively, "Agents"). With
respect to all Agents, PADCO or, in connection with the Sales
Agreements authorized under section 2 of this Agreement, the
broker-dealers which have agreed to participate in the
distribution of Contracts pursuant to said Sales Agreements
(the "Participating Broker-Dealers"), as appropriate, will be
responsible for the training, qualification, registration,
supervision, and control of the Agents in the manner and to
the extent required by the applicable rules of the Securities
and Exchange Commission (the "Commission") and the NASD and by
any applicable securities laws or rules of the various states
relating to the distribution of the Contracts.
2<PAGE>
(d) PADCO agrees to offer the Contracts for sale in
accordance with the then-current prospectus and statement of
additional information ( SAI ) therefor filed with the
Commission. The costs of preparing the prospectus and SAI
shall be borne jointly by PADCO and Great American Reserve, as
appropriate.
(e) Great American Reserve shall furnish PADCO with all
application materials and other documentation that Great
American Reserve requires applicants to complete in connection
with their purchase of Contracts. Great American Reserve also
shall furnish PADCO with copies of all financial statements
and other documents which PADCO reasonably requires for use in
connection with the distribution of the Contracts. PADCO will
be entitled to rely on all documentation and information
furnished to it by Great American Reserve s or the Annuity
Account s management. To the extent required by law, PADCO
shall file all marketing materials with the NASD, the
Commission, and other securities regulatory authorities, and
Great American Reserve shall file all marketing materials with
state insurance regulatory authorities, and PADCO and Great
American Reserve shall each exert commercially reasonable
efforts to obtain any necessary approvals of such marketing
materials from the respective regulatory authorities.
(f) Great American Reserve shall accept the initial
purchase payment under the Contract, which payment must be
paid in full to Great American Reserve and be accompanied by a
completed application and/or such other documentation or
information that Great American Reserve may require in
connection with the purchase of a Contract. Any check, draft,
or money order used by the applicant to cover the initial
purchase payment shall be made payable to "Great American
Reserve Insurance Company," and Great American Reserve shall
return to the applicant any check, draft, or money order made
payable to any person or entity other than Great American
Reserve. It is understood that Great American Reserve
reserves the right to reject any Contract application in its
sole discretion.
(g) PADCO shall not accept payments made by a Contract
owner, either initially or subsequent to the initial purchase
payment under the Contract, and PADCO shall remit to Great
American Reserve any such payments, as well as any application
materials, received by PADCO.
(h) P A D CO or the Participating Broker-Dealer, as
appropriate, shall take reasonable steps to ensure that the
Agents shall not make recommendations to an applicant to
purchase Contracts in the absence of reasonable grounds to
believe that the purchase of Contracts is suitable for such
3<PAGE>
a p p licant. While not limited to the following, the
determination by PADCO or the Participating Broker-Dealer, as
appropriate, of suitability shall be based on information
furnished to an Agent after reasonable inquiry concerning the
applicant s insurance and investment objectives and financial
situation and needs.
(i) PADCO shall have no authority to, and shall not: (i)
add, alter, waive or discharge any Contract or application
provision or prospectus provision or represent that such can
be done by Great American Reserve or PADCO; (ii) extend the
time of making any payments; (iii) alter or substitute Great
American Reserve's forms in any manner; (iv) give or offer to
give, on behalf of Great American Reserve, any tax or legal
advice related to the purchase of a Contract; (v) guarantee
the issuance of any Contract or the reinstatement of any
lapsed Contract; or (vi) exercise any authority on behalf of
Great American Reserve other than that expressly conferred on
PADCO by this Agreement.
(j) Except as may be necessary to comply with the
requirements of any applicable law or regulation, PADCO shall
not, absent Great American Reserve's consent, actively promote
the replacement of any Contract or the redirection of the cash
value of a Contract into any other product. "Actively
promote" shall include mailings specifically sent to or
conversations specifically held with Contract owners or
licensed agents of PADCO which induce or attempt to induce a
Contract owner to surrender the Contract and replace it with
another variable annuity product (other than a product offered
by Great American Reserve or its affiliates), or to direct
premiums, cash values or deposits from a Contract to any other
variable annuity product (other than a product offered by
Great American Reserve or its affiliates). Notwithstanding
the foregoing, in no event shall this provision prevent PADCO
from concurrently or subsequently offering and selling to a
Contract owner any non-variable annuity product, whether or
not offered by Great American Reserve or its affiliates. This
provision shall not be violated in connection with business
contacts by PADCO with, or investment decisions made by,
registered investment advisers performing tactical asset
allocation services with respect to the Contracts. This
provision shall survive this Agreement for one (1) year after
its termination, and Great American Reserve shall have the
right to cease commission payments to PADCO in the event of
its violation.
2. Sales Agreements
(a) Great American Reserve and PADCO may, from time to
t i m e, enter into separate written agreements ( Sales
Agreements ), on such terms and conditions as Great American
4<PAGE>
Reserve and PADCO may determine not to be inconsistent with
this Agreement, with broker-dealers which agree to participate
in the distribution of Contracts. Such Participating Broker-
D e alers and their agents or representatives soliciting
applications for Contracts shall be duly licensed, registered,
or otherwise qualified for the offer and sale of Contracts
under the applicable insurance laws and any other applicable
laws of each state or other jurisdiction in which Great
American Reserve is licensed to sell the Contracts. Each such
Participating Broker-Dealer shall be both registered as a
broker-dealer under the 1934 Act and a member of the NASD, or,
if not so registered or not such a member, then the agents and
representatives of such organization soliciting applications
for Contracts shall be agents and registered representatives
of a registered broker-dealer and NASD member which is the
parent or other affiliate of such organization and which
maintains full responsibility for the training, supervision,
a n d control of the agents and representatives selling
Contracts. In addition, each such Participating Broker-Dealer
also shall be licensed to sell insurance policies and
contracts in each state or other jurisdiction in which the
Participating Broker-Dealer solicits sales of the Contracts.
Such Sales Agreements with Participating Broker-Dealers shall
be subject to approval by Great American Reserve.
(b) PADCO shall have the responsibility for training,
monitoring, and supervising all such Participating Broker-
Dealers involved in the offer and sale of the Contracts to the
extent required by applicable law. Application materials for
Contracts solicited by such Participating Broker-Dealers
through their agents or representatives shall be forwarded to
Great American Reserve. All initial purchase payments shall
be remitted promptly by such Participating Broker-Dealers
directly to Great American Reserve.
(c) All compensation payable for sales of Contracts by
such Participating Broker-Dealers involved in the offer and
sale of the Contracts shall be paid by Great American Reserve
to such Participating Broker-Dealers on behalf of PADCO in the
form of commissions and service fees pursuant to the terms and
conditions set forth in the applicable Sales Agreements.
3. State Insurance Agent Licensing Requirements
(a) As to any activities that would require either PADCO
or any of PADCO s Agents to be licensed as an insurance agent
in a particular state or jurisdiction, neither PADCO nor any
of PADCO s Agents (as the case may be) shall engage in such
activities until such persons are properly licensed in such
state or jurisdiction. As used herein, "properly licensed"
includes the filing of an appointment by Great American
5<PAGE>
Reserve when required by the laws or regulations of the
applicable state or jurisdiction.
(b) PADCO, from time to time, shall advise Great
American Reserve of the identity of all persons or entities
that PADCO desires Great American Reserve to appoint as Great
American Reserve insurance agents. In that connection, PADCO,
either on its own or in conjunction with the efforts of other
broker-dealers with whom PADCO has contracted to offer the
product, will ensure that, after careful investigation, the
insurance agents selected to engage in the sale of the
Contracts are trained and qualified to make such sales. PADCO
shall prepare and submit completed agent appointment forms for
Great American Reserve's approval, and Great American Reserve
shall forward all approved agent appointment forms in a timely
manner to the appropriate state insurance departments. PADCO
shall pay all required appointment fees.
(c) With respect to each agent appointment executed by
Great American Reserve, Great American Reserve shall take all
a c tion necessary to effect the renewals of the agent
appointments, however, PADCO shall be responsible for the
payment of all required renewal fees paid to state insurance
authorities.
4. Books and Records
(a) Great American Reserve, the Annuity Account, and
PADCO shall cause to be maintained and preserved all required
books of account and related financial records as each is
required to maintain and preserve under the 1934 Act, the
NASD, and any other applicable laws and regulations, including
state insurance laws and regulations.
(b) All the books and records (including completed
applications and/or such other documentation or information
that Great American Reserve may require in connection with the
purchase of a Contract) maintained by Great American Reserve
in connection with the offer and sale of the Contracts shall
b e m a intained and preserved in conformity with the
requirements of the 1934 Act, to the extent that such
requirements are applicable to the obligations imposed on the
parties under this Agreement. All such books and records
shall be maintained and held by Great American Reserve, whose
property these books and records are and shall remain. Such
books and records shall be at all times subject to inspection
by the Commission in accordance with Section 17(a) of the 1934
Act and shall be made accessible to PADCO.
(c) Great American Reserve shall have the responsibility
for maintaining the records of any sales commissions paid by
Great American Reserve on behalf of PADCO to broker-dealers
6<PAGE>
a n d /or sales representatives licensed, registered, and
otherwise qualified to sell the Contracts.
5. Reports
PADCO shall cause Great American Reserve and/or the
Annuity Account to be furnished with such reports as either or
both may reasonably request in connection with the offer and
sale of Contracts for the purpose of meeting reporting and
record keeping requirements under the insurance laws of the
S t a t e of Texas and any other applicable states or
jurisdictions. Likewise, Great American Reserve and/or the
Annuity Account shall cause PADCO to be furnished with such
reports as PADCO reasonably may request in connection with the
offer and sale of Contracts for the purpose of meeting
reporting and record keeping requirements under applicable
federal or state securities laws or regulations.
6. Compensation and Expenses
(a) In consideration of the services performed by PADCO
hereunder, Great American Reserve shall compensate PADCO
weekly (or, to the extent applicable law requires that such
compensation be paid to an Agent of PADCO, to such Agent).
The amount of this compensation shall be based on a percentage
of all premiums received by Great American Reserve and
allocated to the Annuity Account under the Contracts. The
current rate of compensation is shown on Schedule A, attached
hereto.
(b) The Annuity Account shall not be liable to PADCO (or
Great American Reserve) for any expense incurred for services
related to the distribution of the Contracts (except to the
extent that profits from the mortality and expense risk charge
paid to Great American Reserve were to be used by Great
American Reserve to cover a portion of Great American
Reserve's obligations to pay such distribution expenses).
PADCO shall be responsible for all expenses relating to the
distribution of the Contracts, including, but not limited to:
(i) t h e costs and expenses of providing the
n e c essary facilities, personnel, office equipment, and
supplies, telephone services, and other utility service
necessary to carry out PADCO s obligations hereunder;
(ii) charges and expenses of outside legal counsel
r e t a i ned with respect to activities related to the
distribution of the Contracts;
(iii) the costs and expenses of underwriting and
issuance of the Contracts;
7<PAGE>
(iv) the costs and expenses of printing definitive
p r ospectuses and SAIs and any supplements thereto for
prospective purchasers;
(v) expenses incurred in connection with PADCO s
registration as a broker or dealer or in the registration or
q u a l ification of PADCO's officers, directors, or
representatives under federal and state securities laws;
(vi) the costs of designing and printing
promotional, sales, and advertising material;
(vii) the costs of licensing PADCO and PADCO's
Agents pursuant to state insurance laws, as required under
section 3 of this Agreement; and
(viii) a n y expenses incurred by PADCO or its
representatives in connection with performing the obligations
of PADCO under this Agreement.
7. Non-Exclusivity
Great American Reserve and the Annuity Account agree that
the services to be provided by PADCO hereunder are not to be
deemed exclusive and PADCO is free to act as distributor or
underwriter of other variable insurance products, investment
company shares, or other securities or instruments issued by
entities other than Great American Reserve and the Annuity
Account. PADCO shall, for all purposes herein, be deemed to
be an independent contractor of Great American Reserve and the
Annuity Account. Neither PADCO nor Great American Reserve
shall exercise any authority on behalf of the other except to
the extent such authority is expressly conferred under this
Agreement, and, in connection therewith, PADCO shall have no
authority to act for or represent Great American Reserve or
the Annuity Account in any way or otherwise be deemed an agent
of Great American Reserve or the Annuity Account other than in
furtherance of PADCO s duties and responsibilities as set
forth in this Agreement.
8. Indemnification
(a) Great American Reserve agrees to indemnify and hold
harmless PADCO and its affiliates and each Agent, officer, and
director thereof, and each person, if any, who is associated
with PADCO within the meaning of the 1934 Act, and each person
who controls PADCO within the meaning of the 1933 Act or the
1934 Act (collectively, the "PADCO Indemnitees"), against any
losses, claims, damages, or liabilities, joint or several, to
which any of the PADCO Indemnitees may become subject, under
the 1933 Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise
8<PAGE>
out of or are based upon any untrue statement or alleged
untrue statement of a material fact, or omission or alleged
omission required to be stated therein or necessary to make
the statements therein not misleading, contained:
(i) in any registration statement, or prospectus,
or any amendment thereof, or
(ii) in any document executed by Great American
Reserve filed with any state insurance authority for the
purpose of qualifying the Contracts for sale under the
insurance laws of any jurisdiction, or
(iii) in any sales materials relating to the
Contracts prepared by Great American Reserve.
Great American Reserve will reimburse each of the PADCO
Indemnitees for any legal or other expenses reasonably
incurred by PADCO or such officer or director of PADCO in
connection with investigating or defending any such loss,
claim, damages, liability, or action; provided, that Great
American Reserve will not be liable in any such case to the
extent that such loss, claim, damage, or liability arises out
of, or is based upon, an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance
upon and in conformity with information (including, without
limitation, negative responses to inquiries) furnished to
Great American Reserve by or on behalf of PADCO specifically
for use in the preparation of any registration statement, or
prospectus, or any amendment thereof, or any submission to a
state insurance authority, or supplement thereto, or any sales
materials for use in connection with the Contracts. This
indemnity agreement will be in addition to any liability which
Great American Reserve may otherwise have.
(b) PADCO agrees to indemnify and hold harmless Great
American Reserve and its officers and directors and each
person, if any, who controls Great American Reserve within the
meaning of the 1933 Act or the 1934 Act (collectively, the
"Great American Reserve Indemnitees"), against any losses,
claims, damages, or liabilities, joint or several, to which
any of the Great American Reserve Indemnitees may become
subject, under the 1933 Act or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon:
(i) A n y untrue statement or alleged untrue
statement of a material fact or omission or alleged omission
to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading,
contained (a) in any registration statement, or prospectus, or
9<PAGE>
any amendments thereof, or (b) in any submission to a state
insurance authority, in each case to the extent, but only to
the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance
upon and in conformity with information (including, without
limitation, negative responses to inquiries) furnished to
Great American Reserve by PADCO specifically for use in the
preparation of any registration statement, or prospectus, or
any amendments thereof or any submission to a state insurance
authority or supplement thereto; or
(ii) Any unauthorized use of sales materials or
any verbal or written misrepresentations or any unlawful sales
practices concerning the Contracts by PADCO; or
(iii) C l aims by agents or representatives or
employees of PADCO for commissions, service fees, expense
allowances, or other compensation or remuneration of any type.
PADCO will reimburse each of the Great American Reserve
Indemnitees for any legal or other expenses reasonably
incurred by Great American Reserve, such director, officer, or
c o ntrolling person in connection with investigating or
defending any such loss, claim, damage, liability, or action.
This indemnity agreement will be in addition to any liability
which PADCO may otherwise have.
(c) Promptly after receipt by a party entitled to
indemnification ( indemnified party ) under this section 8 of
notice of the commencement of any action, if a claim in
respect thereof is to be made against any person obligated to
provide indemnification under this section 8 ( indemnifying
party ), the indemnified party will notify the indemnifying
party in writing of the commencement thereof, but the omission
to so notify the indemnifying party will not relieve the
indemnifying party from any liability under this section 8,
except to the extent that the omission results in a failure of
actual notice to the indemnifying party and the indemnifying
party is damaged solely as a result of the failure to give
such notice. In case any such action is brought against any
indemnified party, and the indemnified party notifies the
i n d e m nifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein,
and to the extent that the indemnifying party may wish, to
a s s u m e the defense thereof, within separate counsel
satisfactory to the indemnified party. Such participation
shall not relieve the indemnifying party of the obligation to
reimburse the indemnified party for reasonable legal and other
expenses incurred by the indemnifying party in defending
i t s e lf, except for such expenses incurred after the
indemnifying party has deposited funds sufficient to effect
the settlement, with prejudice, of the claim in respect of
10<PAGE>
which indemnity is sought. An indemnifying party shall not be
liable to an indemnified party on account of any settlement of
any claim or action effected without the consent of the
indemnifying party.
(d) The indemnity agreements contained in this section 8
s h all remain operative and in full force and effect,
regardless of:
(i) any investigation made by or on behalf of
PADCO or any officer or director thereof or by or on behalf of
Great American Reserve or any officer or director thereof;
(ii) d e livery of any Contracts and payments
therefore; and
(iii) any termination of this Agreement.
(e) A successor by law of PADCO or of any of the parties
to this Agreement, as the case may be, shall be entitled to
the benefits of the indemnity agreements contained in this
section 8.
9. Liability
(a) PADCO shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Annuity
Account in connection with the matters to which this Agreement
relates. Nothing herein contained shall be construed to
protect PADCO against any liability resulting from the willful
malfeasance, bad faith, or gross negligence of PADCO in the
performance of its obligations and duties or from reckless
disregard of its obligations and duties under this Agreement
or by virtue of violation of any applicable law.
(b) In no event shall any party under this Agreement be
liable for lost profits or for exemplary, special, or punitive
damages alleged to have been sustained by another party.
10. Regulation
(a) This Agreement shall be subject to the applicable
provisions of applicable state law and the 1940 Act, the 1934
Act, and the rules, regulations, and rulings thereunder, and
the rules, regulations, and rulings of the NASD, as in effect
from time to time, including such exemptions and other relief
as the Commission, its staff, or the NASD may grant, and the
terms hereof shall be interpreted and construed in accordance
therewith. Without limiting the generality of the foregoing,
the term assigned shall not include any transactions
exempted from Section 15(b)(2) of the 1940 Act.
11<PAGE>
(b) PADCO shall submit to all regulatory and
administrative bodies having jurisdiction over the present and
future operations of the Annuity Account, any information,
reports, or other material which any such body by reason of
this Agreement may request or require pursuant to applicable
laws or regulations. Without limiting the generality of the
foregoing, PADCO shall furnish the Commission, and/or the
S t a t e of Texas Superintendent of Insurance with any
information or reports which the Commission, and/or the
Superintendent of Insurance may request in order to ascertain
whether the operations of the Annuity Account are being
conducted in a manner consistent with the applicable laws or
regulations.
11. Investigations and Proceedings
(a) Great American Reserve, the Annuity Account, and
PADCO agree to cooperate fully in any insurance or securities
regulatory inspection, inquiry, investigation, or proceeding,
or any judicial proceeding with respect to Great American
Reserve, the Annuity Account, or PADCO, their affiliates and
their representatives, to the extent that the inspection,
inquiry, investigation, or proceeding is in connection with
the Contracts distributed under this Agreement.
(b) Great American Reserve, the Annuity Account, and
PADCO will cooperate in investigating customer complaints and
shall arrive at mutually satisfactory responses to such
complaints.
12. Confidentiality
S u bject to the requirements of legal process and
regulatory authority, each of the parties hereto shall treat
as confidential (a) the identity of existing or prospective
Contract owners, (b) any financial or other information
provided by existing or prospective Contract owners, and (c)
any other information reasonably identified as confidential in
writing by any other party hereto (collectively "confidential
information"). Except as permitted by this Agreement, none of
the parties hereto shall disclose, disseminate, or utilize any
confidential information without the express written consent
of the affected party until such time as such confidential
information may come into the public domain, except as
permitted by this Agreement or as otherwise necessary to
service the Contracts and/or to respond to appropriate
regulatory authorities. Each of the parties hereto shall take
a l l reasonable precautions to prevent the unauthorized
disclosure of any confidential information.
12<PAGE>
13. Licenses
(a) PADCO owns all rights, title, and interest in and to
the name, trademark, and service mark "PADCO," and such other
trade names, trademarks, and service marks identified in
Schedule B, attached hereto (the "PADCO licensed marks" or the
"licensor's licensed marks"). PADCO hereby grants to Great
American Reserve a non-exclusive license to use the PADCO
licensed marks in connection with Great American Reserve s
performance of the services contemplated under this Agreement,
subject to the terms and conditions set forth in this Section
13.
(b) Great American Reserve is the owner of all rights,
title, and interest in and to the trade name, trademarks, and
service mark "Great American Reserve Insurance Company," and
s u c h other trade names, trademarks and service marks
identified in Schedule C, attached hereto (the "Great American
Reserve licensed marks" or the "licensor's licensed marks").
Great American Reserve hereby grants to PADCO a non-exclusive
license to use the Great American Reserve licensed marks in
c o n n e ction with PADCO's performance of the services
contemplated by this Agreement, subject to the terms and
conditions set forth in this Section 13.
(c) The grant of license by PADCO and Great American
Reserve (each, a "licensor") to the other (the "licensee")
shall terminate upon termination of this Agreement and the
licensee shall cease to use the licenses granted hereunder,
except that Great American Reserve shall have the right to
administer any outstanding Contracts bearing any of the PADCO
licensed marks and in connection therewith to use the PADCO
licensed marks.
(d) Notwithstanding any provision in this Agreement to
the contrary, a licensee shall obtain the prior written
approval of the licensor for the public release by such
licensee of any materials bearing the licensor s licensed
marks. The licensor s approval shall not be unreasonably
withheld.
(e) E a ch licensee hereunder: (i) acknowledges and
stipulates that the licensor's licensed marks are valid and
enforceable trademarks and/or service marks and that such
licensee does not own the licensor s licensed marks and claims
no rights therein other than as a licensee under this
Agreement; (ii) agrees never to contend otherwise in legal
proceedings or in other circumstances; and (iii) acknowledges
and agrees that the use of the licensor s licensed marks
pursuant to this grant of license shall inure to the benefit
of the licensor.
13<PAGE>
14. Injunctive Relief
Each of the parties hereto agrees that monetary damages
may be an inadequate remedy in the event of a breach or
threatened breach of any of the covenants contained in Section
12 or Section 13 of this Agreement, and the covenants
contained in such sections shall be specifically enforceable
by temporary, preliminary, and permanent injunctive relief in
addition to, and not in limitation of, any other rights or
remedies, whether at law or in equity, that the party seeking
such injunctive relief may have. If any court shall determine
that any covenant contained in said sections of this Agreement
is invalid in whole or in part as to time or location, or as
to both, it is the intention of the parties hereto that such
covenant shall not thereby be terminated but shall be deemed
amended to the minimum extent required to render such covenant
valid and enforceable.
15. Duration and Termination of the Agreement
(a) This Agreement shall become effective with respect
to the Contracts as of the date first written above. This
A g r eement shall become effective with respect to any
subsequently offered contract when the contract has been
approved by the Board of Managers of the Annuity Account
(including a majority of the members thereof who are not
parties to this Agreement nor interested persons of any such
parties) specifically for such contract. Subsequently
offered contract means a contract issued and funded by the
Annuity Account subsequent to the initial effective date of
this Agreement.
(b) This Agreement shall continue in effect for two
years from the date of its execution and thereafter from year
to year, but only so long as such continuance is specifically
approved at least annually by (i) the Board of Managers of the
Annuity Account, or by the vote of a majority of the
outstanding voting securities of the Annuity Account, and (ii)
a vote of a majority of those members of the Board of Managers
of the Annuity Account who are not parties to this Agreement
nor interested persons of any such parties, cast in person at
a meeting called for the purpose of voting on such approval.
This Agreement shall continue in effect with respect to each
subsequently created Subaccount so long as such continuance is
s p ecifically approved at least annually in the manner
described in (i) and (ii) above of this section 15(b).
(c) This Agreement may be terminated, without the
payment of any penalty, by Great American Reserve, the Annuity
Account, or PADCO on sixty (60) days written notice to the
other parties. This Agreement shall automatically terminate
in the event of its assignment.
14<PAGE>
(d) U p o n termination of this Agreement, all
authorizations, rights, and obligations shall cease except the
obligation to settle accounts hereunder and the agreements
contained in sections 8, 11, 12, 13, and 14 of this Agreement.
16. Amendments
This Agreement may be amended at any time by mutual
consent of the parties, provided that the consent of the
Annuity Account shall be given in the manner contemplated
under section 15(b)(i) and (ii) of this Agreement.
17. Definitions
The terms assignment, interested person, and
majority of the outstanding voting securities, when used in
this Agreement, shall have the respective meanings specified
under the 1940 Act and the rules thereunder.
18. Further Actions
Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate
the purposes hereof.
19. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of
Maryland, as at the time in effect, and the applicable
provisions of the 1940 Act and rules thereunder or other
federal laws and regulations which may be applicable. To the
extent that the applicable law of the State of Maryland, or
any of the provisions herein, conflict with the applicable
provisions of the 1940 Act and rules thereunder or other
federal laws and regulations which may be applicable, the
latter shall control.
20. Counterparts
T h is Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and
all of which shall be deemed one instrument.
21. Notices
A l l notices and other communications provided for
hereunder shall be in writing and shall be delivered by hand
or mailed first class, postage prepaid, addressed as follows:
(a) If to Great American Reserve:
15<PAGE>
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Office of the General Counsel
(b) If to the Annuity Account:
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Office of the General Counsel
With a copy to:
Rydex Advisor Variable Annuity Account
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
(c) If to PADCO:
PADCO Financial Services, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
or to such other address as Great American Reserve, the
Annuity Account, or PADCO shall designate by written notice to
the others.
22. Miscellaneous
Captions in this Agreement are included for convenience
or reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
16<PAGE>
IN WITNESS WHEREOF, Great American Reserve, the Annuity
Account, and PADCO, have caused this Agreement to be executed
in their names and on their behalf by and through their duly
authorized officers on the day and year first above written.
ATTEST: GREAT AMERICAN RESERVE
INSURANCE COMPANY
By: /s/ Lisa R. Nordhoff /s/ L. Gregory Gloeckner
Name: Lisa R. Nordhoff L. Gregory Gloeckner
Title: Second Vice President Senior Vice President
ATTEST: RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT
By: /s/ Michael P. Byrum /s/ Albert P. Viragh, Jr.
Name: Michael P. Byrum Albert P. Viragh, Jr.
Title: Assistant Secretary President
ATTEST: PADCO FINANCIAL
SERVICES, INC.
on its own behalf and on
behalf of its insurance
agency subsidiary
By: /s/ Michael P. Byrum /s/ Robert M. Steele
Name: Michael P. Byrum Robert M. Steele
Title: Secretary Vice President
17<PAGE>
SCHEDULE A
TO
PRINCIPAL UNDERWRITING AGREEMENT
FOR THE CONTRACTS FUNDED BY
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
CURRENT RATE OF COMPENSATION
The amount payable weekly by Great American Reserve to
PADCO in consideration of the services performed by PADCO
under this Agreement is six percent (6.0%) of the premiums (as
that term is used in section 6(a) of this Agreement) received
by Great American Reserve and allocated to the Separate
Account under the Contracts during each week.<PAGE>
SCHEDULE B
TO
PRINCIPAL UNDERWRITING AGREEMENT
FOR THE CONTRACTS FUNDED BY
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
PADCO LICENSED MARKS
PADCO owns all rights, title, and interest in and to the
following names, trademarks, and service marks:
PADCO
Padco
Rydex<PAGE>
SCHEDULE C
TO
PRINCIPAL UNDERWRITING AGREEMENT
FOR THE CONTRACTS FUNDED BY
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
GREAT AMERICAN RESERVE INSURANCE COMPANY
LICENSED MARKS
Great American Reserve owns all rights, title, and
interest in and to the following names, trademarks, and
service marks:
Great American Reserve Insurance Company
Great American Reserve
GARCO
Garco
Great American Future Reserve<PAGE>
EXHIBIT 6
Form of Variable Annuity Contract Endorsement<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Home Office: Amarillo, Texas 79105
Administrative Office: 11815 North Pennsylvania Street,
Carmel Indiana 46032
Telephone (317) 817-3700
A Stock Company
ENDORSEMENT
The contract to which this endorsement is attached is hereby
amended as follows:
The PAYMENT ON DEATH SECTION, DEATH BENEFIT AMOUNT DURING THE
ACCUMULATION PERIOD PROVISION has been amended to:
DEATH BENEFIT AMOUNT DURING THE ACCUMULATION PERIOD: The death
benefit is the greater of the Contract Value or the Purchase
Payments, less any withdrawals, on the date due proof of death
is received at Great American Reserve's Administrative Office.
Upon Great American Reserve's receipt of notification of
death, the Separate Account Value under the Contract will be
transferred to the Money Market II 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 the death or for the life
or within the life expectancy of the beneficiary. The life or
life expectancy option must begin payments 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.
The FIXED ACCOUNT SECTION, TRANSFER RIGHTS PROVISION has been
amended to:
The TRANSFER RIGHTS: A Contract Owner may transfer Fixed
Account value to one or more Subaccounts (except Money Market
II) subject to the following:
(a) The transfer must be by written authorization before
the Annuity Date; and
(b) A Financial Advisor provides asset allocation advice
with respect to the Contract Owner's Contract (if
no Financial Advisor is appointed, a Contract Owner
may only transfer to Money Market II); and
(c) (i) During the first contract year, transfers are
unlimited;
(d)(ii) During contract years 2 and thereafter, the
transfer may not exceed 20% of the Fixed
Account value once in any six month period.<PAGE>
IN WITNESS WHEREOF, Great American Reserve Insurance Company
h a s c aused this endorsement to be executed at its
administrative office in Carmel, Indiana.
/s/ Michael Colliflower
Secretary<PAGE>
EXHIBIT 7
Form of Applications for
Variable Annuity Contract<PAGE>
GREAT AMERICAN RESERVE INSURANCE COMPANY
Administrative Office: 11815 N. Pennsylvania Street
P.O. Box 1911, Carmel, Indiana 46032-4911
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT APPLICATION
1. CONTRACT OWNER(S) If no annuitant is specified in Section 2,
the contract owner will be the annuitant
______________________________________________
(Print) Last First MI
______________________________________________
Address
______________________________________________
City State Zip
Soc. Sec. No./Tax I.D. ___-___-___
Marital Status __________
Annuitization Age ____________
Date of Birth ________ ________ _________
Month Day Year
Sex M______ F______
1.(b) JOINT OWNER (If Applicable)
(Spouse Only)
______________________________________________
(Print) Last First MI
______________________________________________
Address
______________________________________________
City State Zip
Soc. Sec. No./Tax I.D. ___-___-___
Date of Birth ________ ________ _________
Month Day Year
Sex M______ F______
2. ANNUITANT (Complete only if different from the contract
owner)
______________________________________________
(Print) Last First MI
______________________________________________
Address
______________________________________________<PAGE>
City State Zip
Soc. Sec. No./Tax I.D. ___-___-___
Date of Birth ________ ________ _________
Month Day Year
Marital Status __________
Sex M______ F______
3. BENEFICIARY
Primary
______________________________________________
(Print) Last First MI
______________________________________________
Relationship To Owner(s)
Contingent
______________________________________________
(Print) Last First MI
______________________________________________
Relationship To Owner(s)
4. TYPE OF PLAN
a. Nonqualified
______ Regular
______ 1035 Transfer
b. Qualified
______ IRA/SEP Transfer/Rollover
______ 403(b) Transfer/Rollover
5. INVESTMENT INFORMATION
Minimum Initial Purchase Payment: $25,000.00
Minimum Subsequent Purchase Payment: $1,000.00
a. An initial purchase payment $_______ is attached.
b. Allocated to year __________
(Complete for IRA contributions)
2<PAGE>
6. PAYMENT ALLOCATION (Use whole percentages. The percentages
for all allocations must equal 100%)
____ A. Separate Account/Money Market I Subaccount
____ B. Fixed Account (Subject to transfer restrictions)
7. REPLACEMENT
Will the proposed contract replace any existing annuity or
insurance contract?
_____ No _____ Yes
If Yes, list company name, plan and year of issue.
________________________________________________
If Yes, replacement requirements must be completed.
______ Agent s initials certifying any replacement criteria
required in this state have been met.
In accordance with TEFRA (August 14, 1982), please provide
the cost basis of the contract.
Pre-TEFRA $________ Post-TEFRA $__________
8. SPECIAL REQUESTS
Please read the Contract carefully. The Contract Owner, may, for
any reason, return the Contract within 10 days of receipt for a
full refund of premium. The Company will, upon written request,
supply information about the benefits and provisions of this
policy to the Owner or Annuitant. All information will be
provided within a reasonable time from receipt of the written
request at the Company s Administrative Office.
9. LIMITED POWER OF ATTORNEY
I hereby authorize the person set forth under Financial
Advisor to be my advisor and attorney-in-fact, and in such
capacity to give instructions to PADCO Service Co., Inc. And
its affiliates ( PADCO ) for transactions within the Rydex
Advisor Variable Annuity, including authorizing telephone
transfers and to take all other actions necessary or
incidental thereto. PADCO may rely on such instructions
without obtaining my approval, counter-signature, or co-
signature. I will indemnify and hold PADCO and Great
3<PAGE>
American Reserve their directors, officers, and employees
harmless from all liabilities and costs, including attorney
fees and expenses, which PADCO and Great American Reserve
may incur by relying upon the representations of the
Financial Advisor or upon this authorization.
Contract Owner Signature X _________________________
Date _____________________
Joint Contract Owner Signature X ____________________
Date ______________________
10. FINANCIAL ADVISOR/TELEPHONE TRANSFER AUTHORIZATION
I, the Financial Advisor, have received a written power of
attorney from each Contract Owner for whom I have been
granted the power to direct the allocation and exchange of
funds invested within the Rydex Advisor Variable Annuity
Account. Pursuant to the Power of Attorney, I authorize and
direct PADCO to act on telephone instructions, when proper
identification is furnished, to exchange units from any
subaccount or the fixed account to any other subaccount or
the fixed account subject to any limitations set forth in
the Contract. I agree that neither PADCO nor Great American
Reserve will be liable for any loss arising from the
exchange by acting in accordance with these telephone
instructions.
Financial Advisor Signature X _________________________
Date ________________
Name of Firm ________________________________________
Financial Advisor/Group Number ________________
11. SIGNATURE
All statements made in this application (including the reverse
side) are true to the best of my knowledge and belief, and I
agree to all terms and conditions as shown on the front and back.
I further agree that this application shall be part of the
annuity contract, and I verify my understanding that all payments
and values provided by the contract, when based on investment
experience of subaccounts, are variable and not guaranteed as to
dollar amount. I acknowledge receipt and have read current
prospectuses. Under penalty of perjury, I certify that the
Social Security (or Taxpayer identification) number is correct as
it appears in the application.
Any person who knowingly and with intent to injure, defraud, or
deceive any insurer files a statement of claim of an application
containing any false, incomplete, or misleading information is
4<PAGE>
guilty of a felony of the third degree.
Signed at _______________________ this _______ day of
_______________, 19________.
______________________________________________
Signature of Contract Owner/Applicant
_______________________________________________
Signature of Joint Contract Owner (Spouse Only)
REGISTERED REPRESENTATIVE CERTIFICATION
I certify that I have asked all questions in the application and
correctly recorded the proposed Contract Owners answers. To the
best of my knowledge, I have presented to Great American Reserve
all the pertinent facts. I further certify that I am properly
licensed to sell variable annuities in the state in which the
proposed Contract Owner resides and that no sales material other
than that approved by the Administrative Office was used.
S i g n ed at __________________ this ________ day of
_______________________, 19__________.
_________________________________
Agent s Number
_________________________________
Agent s License ID # (if required)
__________________________________
Registered Representative
__________________________________
2nd Agent s Number
__________________________________
Agent s License ID # (if required)
__________________________________
Other Registered Representative
__________________________________
Registered Representative Printed Name
__________________________________
Broker Dealer
__________________________________
Broker Dealer Phone Number
[ ] For Broker Dealer Use Only
5<PAGE>
FINANCIAL ADVISOR REPRESENTATIONS
TO
GREAT AMERICAN RESERVE INSURANCE COMPANY
AND
PADCO ADVISORS II, INC.
In connection with the variable annuity contracts issued by
the Rydex Advisor Variable Annuity Account of the Great American
Reserve Insurance Company (the Contracts ) to persons who are
clients of mine ( Contract Owners ), I, the Financial Advisor,
hereby represent to Great American Reserve Insurance Company and
PADCO Advisors II, Inc., and their affiliates, that:
1. I have filed, and amended as necessary, YES NO
my investment adviser registration
application on Form ADV with the
Securities and Exchange Commission. _____ _____
2. I am excluded from registration
with the Securities and YES NO
Exchange Commission as an investment
adviser under the Investment
Advisers Act of 1940. _____ _____
3. No federal or state regulatory agency has ever taken
any action which would prevent me from providing
tactical asset allocation advisory services or other
advisory services to my client Contract Owner(s).
4. In the event of a positive IRS private letter ruling,
I agree that I will not make payments to or otherwise
credit the account of my client Contract Owner(s), and
will not provide additional services or property to the
Contract Owner(s) at a discount, on account of, or in
exchange for all or part of the Tactical Asset
Allocation Advisory Fees I receive under the Contracts.
5. In the event of a positive IRS private letter ruling,
I agree that I will not require my client Contract
Owner(s) to pay any compensation for the market timing
or tactical asset allocation advisory services that I
provide to my client Contract Owner(s) under the
Contracts, and that the Contracts are solely liable for
the payment of such compensation.
Financial Advisor Signature:
Date:
Name of Firm:
Financial Advisor/Group Number:<PAGE>
EXHIBIT 11(a)
Subaccount Administration Agreement
Between Rydex Advisor Variable Annuity Account
and PADCO Service Company, Inc.<PAGE>
SUBACCOUNT ADMINISTRATION AGREEMENT
THIS SUBACCOUNT ADMINISTRATION AGREEMENT (the "Agreement"),
dated as of November 1, 1996, is entered into by and between THE
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT (the "Separate Account"),
a managed separate account of Great American Reserve Insurance
Company ("Great American Reserve") established under the laws of
the State of Texas on April 15, 1996, and PADCO SERVICE COMPANY,
INC. (the "Servicer"), a company incorporated under the laws of
the State of Maryland on October 6, 1993.
W I T N E S S E T H:
WHEREAS, the Separate Account is registered with the
Securities and Exchange Commission (the "Commission") as a
diversified open-end management investment company pursuant to
the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act");
WHEREAS, the Servicer is registered with the Commission as a
transfer agent under the Securities Exchange Act of 1934, as
amended;
W H EREAS, the assets of the Separate Account may be
segregated by eligible investments, thus establishing a series of
eligible investment portfolios (or "Subaccounts") within the
Separate Account pursuant to the laws of the State of Texas and
the 1940 Act;
WHEREAS, the variable annuity contracts proposed to be sold
by Great American Reserve and to be funded by the Separate
Account (the "Contracts") are designed for use by purchasers of
the Contracts (the "Contract Owners") who intend to utilize an
asset allocation or market-timing investment strategy and are
advised by professional money managers ("Financial Advisors");
WHEREAS, the board of managers of the Separate Account (the
"Managers"), pursuant to Article III, Section 2.m., "Board of
Managers; Powers," of the rules and regulations of the Separate
Account, dated June 26, 1996, have created the following
Subaccounts of the Separate Account: The Nova Subaccount, The
U r sa Subaccount, The OTC Subaccount, The Precious Metals
Subaccount, The Juno Subaccount, The U.S. Government Bond
Subaccount, The Money Market I Subaccount, and The Money Market
II Subaccount (collectively, the "Subaccounts");
WHEREAS, the accounting unit of measure used to compute the
value of a Contract Owner's interest in a Subaccount is the
"Accumulation Unit," or "Unit," and the current market value of
the Accumulation Units of a Subaccount is the "Accumulation Unit
Value;"<PAGE>
WHEREAS, the Separate Account wishes to have the Servicer
p e r form certain asset allocation administrative services,
including, among others, communications with Financial Advisors
(including receipt of and acting upon transfer requests), asset
a l location bookkeeping, determination of Accumulation Unit
Values, Subaccount accounting and recordkeeping services, and
other services for the Subaccounts (other than the Money Market
II Subaccount), and Contract Owners, and to act in such capacity
in the manner set forth in this Agreement, and the Servicer is
willing to act in such capacity in accordance with the provisions
of this Agreement; and
WHEREAS, the Separate Account desires to appoint the
Servicer as the accounting services agent for the Subaccounts
(other than the Money Market II Subaccount): (i) to perform
certain accounting and recordkeeping functions required of a
d u l y-registered investment company; (ii) to file certain
financial reports; (iii) to maintain and preserve certain books,
accounts, and records as the basis for such reports; and (iv) to
perform certain daily functions in connection with such accounts
and records; and the Servicer is willing to perform such
functions upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, and for other good and
valuable consideration, the receipt, sufficiency, and adequacy of
which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree and promise as follows:
1. Services To Be Provided
In consideration of the compensation to be paid by the
Separate Account to the Servicer pursuant to Section 4 of this
Agreement and pursuant to Schedule I, Schedule II, and Schedule
III of this Agreement, attached hereto, as applicable, the
Servicer will:
a. Manage, supervise, and conduct the affairs and business
of the Subaccounts (other than the Money Market II Subaccount)
and matters incidental thereto. In the performance of its
duties, the Servicer will comply with the Separate Account's
Prospectus and Statement of Additional Information, as the same
may be amended from time to time, all as delivered to the
Servicer (collectively, the "Controlling Documents"). The
Servicer will also use its best efforts to safeguard and promote
the welfare of the Separate Account and to comply with other
policies which the Managers from time to time may specify. The
Servicer will furnish or provide to the Subaccounts (other than
t h e Money Market II Subaccount) general asset allocation
administrative services as the Subaccounts may reasonably require
in the conduct of their affairs and business, including, without
limitation, the services described on Schedule I attached hereto.
2<PAGE>
b. Provide the Subaccounts (other than the Money Market II
Subaccount) with all required Contract Owner services, including,
without limitation, those services described on Schedule II,
attached hereto. The Servicer will maintain sufficient trained
personnel and equipment and supplies to perform such services in
c o nformity with the Controlling Documents and such other
reasonable standards of performance as said Subaccounts may from
time to time specify, and otherwise in an accurate, timely, and
efficient manner.
c. Provide the Subaccounts (other than the Money Market II
Subaccount) with all other required asset allocation
administration services, including, without limitation, those
services described on Schedule III attached hereto. The Servicer
will maintain sufficient trained personnel and equipment and
supplies to perform such services in conformity with the
Controlling Documents and such other reasonable standards of
performance as said Subaccounts may from time to time specify,
and otherwise in an accurate, timely, and efficient manner.
2. Obligations of the Separate Account
The Separate Account will have the following obligations
under this Agreement:
a. T h e S eparate Account shall keep the Servicer
continuously and fully informed as to the composition of the
investment portfolio of each Subaccount of the Separate Account
(other than the Money Market II Subaccount) and the nature of all
of the assets and liabilities of each Subaccount (other than the
Money Market II Subaccount), and shall cause the portfolio
investment managers of said Subaccounts to cooperate with the
Servicer in all matters so as to enable the Servicer to perform
the Servicer's functions under this Agreement.
b. The Separate Account shall furnish the Servicer with
any materials or information which the Servicer may reasonably
request to enable the Servicer to perform the Servicer's
functions under this Agreement. The Servicer shall be entitled
to rely exclusively on the completeness and correctness of the
materials and information furnished to the Servicer by the
Separate Account; provided, that such reliance is made in good
faith; and provided, further, that such materials and information
s h a ll belong to the Separate Account and be considered
confidential, and shall not be disclosed to other than Federal
and state regulators without permission from the Separate
Account.
3. Payment of Fees and Expenses
a. The Servicer shall pay all of the fees and expenses
incurred by the Servicer in providing each Subaccount (other than
3<PAGE>
the Money Market II Subaccount) with the services and facilities
described in this Agreement, except as otherwise provided herein.
b. Notwithstanding any other provision of this Agreement,
each Subaccount (other than the Money Market II Subaccount) shall
pay, or reimburse the Servicer for the payment of, all fees and
expenses not directly related to the Servicer's providing each
such Subaccount with the services and facilities described in
this Agreement, including, but not limited to, the following
described fees and expenses of the Separate Account (hereinafter
called "Direct Expenses"), whether or not billed to the Separate
Account or said Subaccount, the Servicer, or any related entity:
(i) f e es and expenses relating to investment
advisory services;
(ii) fees and expenses of custodian and depositories
and banking services fees and costs;
(iii) fees and expenses of outside legal counsel and any
legal counsel directly employed by the Subaccounts
and the Separate Account;
(iv) fees and expenses of independent auditors and
income tax preparation and expenses of obtaining
quotations for the purpose of calculating the
value of the assets of the Subaccounts;
(v) fees and expenses of consultants;
(vi) interest charges;
(vii) all Federal, state, and local taxes (including,
w i t hout limitation, premium, stamp, excise,
income, and franchise taxes);
(viii) costs and expenses of issuing and surrendering
Units of the Separate Account;
(ix) costs incidental to or associated with meetings
of Contract Owners;
(x) fees and expenses of registering or qualifying
Contracts for sale under Federal securities laws
and state insurance laws;
(xi) costs (including postage) of printing and
m a iling prospectuses, confirmations, proxy
statements, and other reports and notices to
Contract Owners and to governmental agencies;
4<PAGE>
(xii) the Separate Account portion of premiums on all
insurance and bonds and other expenses of fidelity
and liability insurance and bonding covering the
Separate Account;
(xiii) fees and expenses of the disinterested Managers
and expenses incidental to the meetings of the
Board;
(xiv) fees and expenses paid to any securities pricing
organization;
(xv) dues and expenses associated with membership in
any industry association;
(xvi) costs for incoming telephone WATS lines; and
(xvii) organizational costs.
4. Compensation
As consideration for the services provided hereunder, the
Subaccounts (other than the Money Market II Subaccount) shall
accrue daily and pay the Servicer monthly a fee not later than
the fifth (5th) business day of the month following the month for
which services have been provided, at the following annual rates
based on the average daily net assets (the "Assets") of each of
said Subaccounts for such month:
The Nova Subaccount
0.25% of Assets
The Ursa Subaccount
0.25% of Assets
The OTC Subaccount
0.20% of Assets
The Precious Metals Subaccount
0.20% of Assets
The U.S. Government Bond Subaccount
0.20% of Assets
5<PAGE>
The Juno Subaccount
0.25% of Assets
The Money Market I Subaccount
0.20% of Assets
In the event that this Agreement commences on a date other
than on the beginning of any calendar month, or if this Agreement
terminates on a date other than the end of any calendar month,
t h e fees payable hereunder by said Subaccounts shall be
proportionately reduced according to the number of days during
such month that services were not rendered hereunder by the
Servicer.
5. Reports to the Board of Managers
The Servicer shall consult with the Managers at such times
as the Managers reasonably request with respect to the services
provided hereunder, and the Servicer shall cause its officers to
attend such meetings with the Managers, and to furnish such oral
or written reports to the Managers, as the Managers may
reasonably request. In addition, the Servicer agrees to provide
to the Managers such reports and other information as the
Managers may reasonably request in order to enable the Managers
to perform a review of the Servicer's performance under this
Agreement.
6. Term of Agreement
This Agreement is effective on the date hereof. This
Agreement shall remain in full force and effect until October 1,
1997, unless terminated earlier in accordance with its terms, and
thereafter from year to year; provided, that: (a) such
continuance is approved by (i) either a vote of the majority of
the Managers or a vote of a "majority of the outstanding voting
securities" (as defined at Section 2(a)(42) of the 1940 Act) of
the Separate Account and (ii) a majority of the Managers who are
not "interested persons" (as defined at Section 2(a)(19) of the
1940 Act); and (b) the following findings are made by a majority
of the Managers who are not "interested persons" (as defined at
Section 2(a)(19) of the 1940 Act): (i) that this Agreement is in
the best interests of the Separate Account; (ii) that the
services to be performed pursuant to this Agreement are services
required for the operation of the Separate Account; (iii) that
the Servicer can provide services the nature and quality of which
are at least equal to those provided by others offering the same
or similar services; and (iv) that the fees for such services are
fair and reasonable in light of the usual and customary charges
made by others for services of the same nature and quality.
6<PAGE>
7. Termination
This Agreement may be terminated, without the payment of any
penalty, by either party hereto upon at least sixty (60) days'
written notice to the other party. Any termination by the
Separate Account will be pursuant to a vote of a majority of the
Managers.
8. Standard of Care
a. Except as provided by law, the Servicer shall have no
liability or be under any obligation to anyone with respect to
any failure on the part of the Managers or any portfolio
investment manager to perform any of their obligations under the
Controlling Documents, or for any error or omission whatsoever on
the part of the Managers or any portfolio investment manager.
b. The Servicer shall not be liable for any error of
judgment or mistake of law or for any loss caused by the Separate
Account in connection with the matters to which this Agreement
relates; provided, however, that the Servicer has acted in the
circumstances with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in
like capacity and familiar with such matters would use in the
conduct of any enterprise of a like character and with like aims,
and in accordance with such other requirements of law; provided,
further, however, that nothing in this Agreement will protect the
Servicer against any liability to the Separate Account to which
the Servicer would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of
the Servicer's duties hereunder or by reason of the Servicer's
reckless disregard of the Servicer's obligations and duties
hereunder.
9. Other Activities of the Servicer
Subject to the provisions of Section 5 of this Agreement,
with respect to advance notice of the Servicer's taking on of new
clients or ventures of material significance, nothing herein
contained will limit or restrict the right of the Servicer to
engage in any other business or to render services of any kind to
any other corporation, firm, individual, or association.
10. Scope of Authority
Neither the Servicer nor any of the Servicer's officers,
employees, agents, or assigns are authorized to make any
representations concerning the Separate Account or the Contracts,
except for those representations contained in the Controlling
Documents, copies of which will be supplied by the Separate
Account to the Servicer, or in such supplemental literature or
7<PAGE>
advertising as may be authorized by the Separate Account in
writing.
11. Indemnification
a. The Separate Account shall indemnify the Servicer and
hold the Servicer harmless from and against all actions, suits,
and claims, whether groundless or otherwise, arising directly or
i n d irectly out of or in connection with the Servicer's
performance under this Agreement and from and against any and all
losses, damages, costs, charges, attorneys' and accountant's
fees, payments, expenses, and liabilities incurred by the
Servicer in connection with any such action, suit, or claim
unless caused by the Servicer's breach of this Agreement,
negligence, or willful misconduct. The Separate Account shall
not be liable under this indemnification provision with respect
to any claim made against the Servicer unless the Servicer shall
have notified the Separate Account in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon the Servicer (or after the Servicer shall have received
notice of such service on any designated agent), but failure to
notify the Separate Account of any such claim shall not relieve
the Separate Account from any liability which the Separate
Account may have to the Servicer against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Servicer, the Separate Account shall be entitled to participate,
at its own expense, in the defense of such action. The Separate
Account also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action.
After notice from the Separate Account to such party of the
Separate Account's election to assume the defense thereof, the
Servicer shall bear the fees and expenses of any additional
counsel retained by the Servicer, and the Servicer will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs
of investigation. The Servicer will promptly notify the Separate
Account of the commencement of any litigation or proceedings
against the Servicer in connection with the Contracts or the
operations of the Subaccounts.
b. The Servicer shall indemnify the Separate Account and
hold the Separate Account harmless from all actions, suits,
damages, claims, demands, losses, and liabilities (including
r e asonable attorneys' and accountants' fees and expenses)
incurred or assessed against the Separate Account arising
directly or indirectly from the Servicer's negligence, wilful
misconduct, or breach of this Agreement. The Servicer shall not
be liable under this indemnification provision with respect to
any claim made against the Separate Account unless the Separate
8<PAGE>
Account shall have notified the Servicer in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon the Separate Account (or after the Separate Account
shall have received notice of such service on any designated
agent), but failure to notify the Servicer of any such claim
shall not relieve the Servicer from any liability which it may
have to the Separate Account against whom such action is brought
otherwise than on account of this indemnification provision. In
case any such action is brought against the Separate Account, the
Servicer shall be entitled to participate, at its own expense, in
the defense of such action. The Servicer also shall be entitled
to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Servicer to
such party of the Servicer's election to assume the defense
thereof, the Separate Account shall bear the fees and expenses of
any additional counsel retained by the Separate Account, and the
Servicer will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other
than reasonable costs of investigation. The Separate Account
will promptly notify the Servicer of the commencement of any
litigation or proceedings against the Separate Account in
c o n nection with the Contracts or the operations of the
Subaccounts.
12. Notices
a. Communications to the Servicer shall be addressed to:
PADCO Service Company, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
b. C o mmunications to the Separate Account shall be
addressed to:
Rydex Advisor Variable Annuity Account
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Office of the General Counsel
With a copy to:
Rydex Advisor Variable Annuity Account
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
9<PAGE>
c. In the event of a change of address, communications
will be addressed to such new address as designated in a written
notice from the Separate Account or the Servicer, as the case may
be. All communications addressed in the above manner and by
registered mail or delivered by hand will be sufficient under
this Agreement.
13. Governing Law
This Agreement is governed by the laws of the State of
Maryland (without reference to such state's conflict of law
rules).
14. Counterparts
This Agreement may be executed in counterparts, each of
which shall be deemed an original, but which together shall
constitute one and the same instrument.
15. Binding Effect and Assignment
This Agreement shall be binding upon the parties hereto and
their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Separate Account
without the written consent of the Servicer, or by the Servicer
without the written consent of the Separate Account, in each case
authorized or approved by a resolution of the Separate Account's
Managers.
16. Amendment, Modification, and Waiver.
No term or provision of this Agreement may be amended,
modified, or waived without the affirmative vote or action by
written consent of the Servicer and the Separate Account effected
in accordance with the provisions of the 1940 Act, and the rules
thereunder, and Section 6 of this Agreement.
IN WITNESS WHEREOF, the Servicer and the Separate Account
have executed this Agreement as of the date first written above.
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/ L. Gregory Gloeckner
L. Gregory Gloeckner
Vice President
10<PAGE>
PADCO SERVICE COMPANY, INC.
By: /s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr.
President
11<PAGE>
Schedule I
General Asset Allocation Administrative Services
The Servicer agrees to provide the Subaccounts (other than
t h e Money Market II Subaccount) with all required asset
a l l ocation administrative services, including, without
limitation, the following:
1. Office space, equipment, and personnel.
2. Clerical and general back office services.
3. Bookkeeping, internal accounting, secretarial, and
other general administrative services.
4. Preparation of all reports, prospectuses,
s t a tements of additional information, proxy
statements, and all other materials required to be
filed or furnished by the Separate Account under
Federal and state securities laws. [Confirm]
5. Maintaining ledgers and determining accumulation
unit values.
I-1<PAGE>
Schedule II
Contract Owner Services
The Servicer agrees to provide the Subaccounts (except the
Money Market II Subaccount) and the Contract Owners with all
required Contract Owner services ("Services"), including, without
limitation, the following:
1. The Servicer shall provide the following Services to the
Contract Owners with respect to the Subaccounts (except for
the Money Market II Subaccount):
a. Aggregate and process purchases and transfer
r e quests for Subaccount Units from Contract
Owners.
b. Arrange for bank wires.
c. Respond to Contract Owner and/or Financial Advisor
inquiries relating to the services performed by
the Servicer.
d. Provide accounting with respect to Units owned by
Contract Owners.
e. A s required by law, forward Contract Owner
communications from the Separate Account (such as
proxies, Contract Owner reports, annual and semi-
annual financial statements, and disbursement and
tax notices) to Contract Owners. [Confirm]
f. P r ovide such other similar services as the
Subaccounts may reasonably request to the extent
t h e Servicer is permitted to do so under
applicable statues, rules, or regulations.
2. The Servicer shall also provide the following additional
Services:
a. Maintain all records required by law relating to
transactions in Units and, upon request by the
Separate Account, promptly make these records
available to the Separate Account as the Separate
Account may reasonably request in connection with
the operations of the Separate Account.
b. Promptly notify the Separate Account if the
Servicer experiences any difficulty in maintaining
the records described in this Schedule II to the
Agreement in an accurate and complete manner.
II-1<PAGE>
c. Furnish the Separate Account or any designee of
the Separate Account ("Designee") with information
relating to the Servicer's performance under this
Agreement as the Separate Account or the Designee
may reasonably request (including, without
limitation, periodic certifications confirming the
provision to Contract Owners of the Services
described herein), and shall otherwise cooperate
w i th the Separate Account and the Separate
A c count's Designees (including, without
l i m itation, any auditors designated by the
S e p a rate Account), in connection with the
preparation of reports to the Managers concerning
this Agreement and the monies paid or payable by
the Separate Account pursuant hereto, as well as
any other reports or filings that may be required
by law.
II-2<PAGE>
Schedule III
Asset Allocation Administration Services
The Servicer agrees to provide the Subaccounts (except for
t h e Money Market II Subaccount) with all required asset
a l l ocation administration services, including, without
limitation, the following:
1. R e c e ive Subaccount transfer requests from Financial
A d v i sors, and validate the authority of the party
originating the transaction.
2. Enforce transaction cut-off times as set forth in the
Controlling Documents.
3. Process and post all exchange transactions initiated by
Financial Advisors to the Contract Owner file, including:
4. A n s w er all service-related telephone inquiries from
Financial Advisors, including:
- General and policy inquiries (research and resolve
problems)
- Separate Account yield inquiries
- Submit pending requests to correspondence
- Monitor online statistical performance of Units
- Develop reports on telephone activity
- C o m m unicate by electronic data transmission to
Financial Advisors the activity of Contract Owners
III-1<PAGE>
EXHIBIT 11(b)
Accounting Services Agreement
Between Rydex Advisor Variable Annuity Account
and PADCO Service Company, Inc.<PAGE>
ACCOUNTING SERVICES AGREEMENT
between
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
and
PADCO SERVICE COMPANY, INC.
This Agreement, dated the 1st day of November, 1996, made by
and between the RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT (the
"Separate Account"), a managed separate account of the Great
American Reserve Insurance Company ("Great American Reserve")
established under the laws of the State of Texas on April 15,
1996, and organized as an open-end management investment company,
and PADCO Service Company, Inc. (the "Agent"), a company
incorporated under the laws of the State of Maryland on October
6, 1993.
W I T N E S S E T H:
WHEREAS, the Separate Account is registered with the
Securities and Exchange Commission (the "Commission") as a
diversified open-end management investment company pursuant to
the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act");
WHEREAS, the Agent is registered with the Commission as a
transfer agent under the Securities Exchange Act of 1934, as
amended;
W H EREAS, the assets of the Separate Account may be
segregated by eligible investments, thus establishing a series of
eligible investment portfolios (or "Subaccounts") within the
Separate Account pursuant to the laws of the State of Texas and
the 1940 Act;
WHEREAS, the variable annuity contracts proposed to be sold
by Great American Reserve and to be funded by the Separate
Account (the "Contracts") are designed for use by purchasers of
the Contracts (the "Contract Owners") who intend to utilize an
asset allocation or market-timing investment strategy and are
advised by professional money managers ("Financial Advisors");
WHEREAS, the board of managers of the Separate Account (the
"Managers"), pursuant to Article III, Section 2.m., "Board of
Managers; Powers," of the rules and regulations of the Separate
Account, dated June 26, 1996 (the "Separate Account Rules"), have
created the following Subaccounts of the Separate Account: The
Nova Subaccount, The Ursa Subaccount, The OTC Subaccount, The
Precious Metals Subaccount, The Juno Subaccount, The U.S.
Government Bond Subaccount, The Money Market I Subaccount, and
The Money Market II Subaccount (collectively, the "Subaccounts");
WHEREAS, the accounting unit of measure used to compute the
value of a Contract Owner's interest in a Subaccount is the<PAGE>
"Accumulation Unit," or "Unit," and the current market value of
the Accumulation Units of a Subaccount is the "Accumulation Unit
Value;"
WHEREAS, the Separate Account desires to appoint the Agent
as the Separate Account's Accounting Services Agent and as the
Accounting Services Agent for each of the Subaccounts other than
the Money Market II Subaccount, and desires to have the Agent, as
said Accounting Services Agent, to perform certain accounting and
recordkeeping functions required of a duly-registered investment
company; to file certain financial reports; to maintain and
preserve certain books, accounts, and records as the basis for
s u ch reports; and to perform certain daily functions in
connection with such accounts and records; and
WHEREAS, the Agent is willing to perform such functions upon
the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, and for other good and
valuable consideration, the receipt, sufficiency, and adequacy of
which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree and promise as follows:
1. Accounts and Records of the Separate Account
a. The Separate Account shall provide to the Agent the
necessary and appropriate documents, information, instructions,
accounts, and records maintained or to be maintained by or for
the Separate Account. The Agent shall be entitled to rely
exclusively on the completeness and correctness of the accounts
and records provided to the Agent by the Separate Account;
provided, that such reliance is made in good faith, and the
Separate Account shall indemnify and hold the Agent harmless of
and from any and all expenses (including, without limitation,
attorneys' and accountants fees), damages, claims, suits,
liabilities, actions, demands, and losses whatsoever arising out
of or in connection with any error, omission, inaccuracy, or
other deficiency of such accounts and records or in connection
with the failure of the Separate Account to provide any portion
of such accounts and records or to provide any information to the
Agent necessary or appropriate to perform the Agent's functions
hereunder.
b. Accounts, records, and other information shall belong
to the Separate Account and shall be considered confidential.
Accounts, records, and other information will not be disclosed to
other than Federal and state regulators without permission from
the Separate Account.
2. Maintenance of Accounts and Records of the Separate Account
a. The Agent shall examine and review the Separate
Account's existing accounts, records, pertinent documents, and<PAGE>
systems in order to determine or recommend how such accounts,
records, documents, and systems shall be maintained.
b. Upon receipt of necessary and appropriate information,
instructions, accounts, records, and documents from the Separate
Account, the Agent shall maintain and keep current and accurate
the following books, accounts, records, journals, or other
records of original entry, relating to the business of the
Separate Account and each of the Subaccounts other than the Money
Market II Subaccount, and necessary or appropriate for compliance
with applicable regulations, including Rule 31a-1 and Rule 31a-2
of the 1940 Act, and as may be mutually agreed to between the
Separate Account and the Agent:
(1) Cash Receipts
(2) Cash Disbursements
(3) Dividend Record
(4) Purchase and Sales of Portfolio Securities
(5) Subscription and Redemption Journals
(6) Security Ledger
(7) Broker Ledger
(8) General Ledger
(9) Daily Expense Accruals
(10) Daily Interest Accruals
(11) Securities and Monies borrowed or loaned and collateral
therefor
(12) Trial Balances
c. Unless appropriate information necessary to perform the
above functions is furnished to the Agent in a timely manner, the
Agent shall incur no liability to the Separate Account or any
other person. The Agent shall promptly notify the Separate
Account in writing of any discrepancy, error or non-compliance in
items (1) through (12) in Section 2(b), above, of which the Agent
has knowledge.
d. It shall be the responsibility of the Separate Account
promptly to furnish the Agent with the declaration, record, and
payment dates and amounts of any dividends or income and any
other special actions taken concerning the portfolio securities
of each of the Subaccounts other than the Money Market II
Subaccount.
e. The Agent shall maintain all accounts and records
mentioned above as required by regulation and as agreed upon
between the Separate Account and the Agent.
3. Accounting Entries and Confirmations
Upon receipt by the Agent of written or oral instructions
from the Separate Account, the Agent shall make proper accounting
e n t ries in accordance with Generally Accepted Accounting
Principles and regulations of the Commission. The Separate
Account shall direct that each broker-dealer, or other person<PAGE>
t h r o ugh whom a transaction has occurred, shall send a
confirmation thereof to the Agent. The Agent shall verify this
confirmation against the written or oral instructions when
received from the Separate Account and forward the confirmation
to the Separate Account's custodian (the "Custodian"). The Agent
shall promptly notify the Separate Account of any discrepancy
between the confirmation and the Separate Account's written
instructions when received from the Separate Account but shall
incur no responsibility or liability for such discrepancy. The
Separate Account shall cause any necessary corrections to be made
and shall advise the Agent and the Custodian accordingly.
4. Calculation of Accumulation Unit Value
a. The Agent shall calculate the Accumulation Unit Value
for each of the Subaccounts other than the Money Market II
Subaccount, in accordance with the Separate Account's currently-
effective prospectus, once daily.
b. The Agent shall prepare and maintain a daily evaluation
of securities for which market quotations are available by the
Agent's use of Bloomberg and ILX quotation services; all other
securities shall be evaluated in accordance with the Separate
Account's written instructions, and the Agent shall have no
responsibility or liability for the accuracy of the information
supplied by the Separate Account or provided in the written
instructions.
c. The Separate Account assumes all responsibility for
computation of "amortized cost," valuation of securities, and all
valuations not ascertainable solely by mechanical procedures.
5. Statements From Custodian
At the end of each month, the Agent shall obtain from the
Custodian a monthly statement of cash and portfolio transactions,
which shall be reconciled with the Agent's accounts and records
maintained for the Separate Account. The Agent shall report any
discrepancies to the Custodian, and shall report any unreconciled
items to the Separate Account.
6. Daily and Periodic Reports
The Agent shall supply daily and periodic reports to the
Separate Account, as required by law or regulation, and as
requested by the Separate Account and agreed upon by the Agent.
7. Reports and Confirmations to Subaccount Administration Agent
a. The Separate Account shall report and confirm to the
Separate Account's Subaccount administration agent the (the
"Servicer") all Unit purchases and redemptions for each of the
Subaccounts, other than the Money Market II Subaccount, of which
the Separate Account is aware. The Agent shall obtain from the<PAGE>
Servicer daily reports of Unit purchases, redemptions, and total
Units outstanding for each of the Subaccounts, other than the
Money Market II Subaccount.
b. The Agent shall reconcile outstanding Units for each of
the Subaccounts, other than the Money Market II Subaccount, with
the Servicer periodically and certify at least monthly to the
Separate Account the reconciled Unit balance outstanding for each
of the Subaccounts, other than the Money Market II Subaccount.
8. Review of Accounts and Records of the Separate Account
The accounts and records of the Separate Account maintained
by the Agent shall be the property of the Separate Account, and
shall be made available to the Separate Account, within a
reasonable period of time, upon demand. The Agent shall assist
the Separate Account's independent auditors, and, upon approval
of the Separate Account, or upon demand by any governmental or
q u asi-governmental entity, assist any such entity in any
requested review of the Separate Account's accounts and records,
but shall be reimbursed for all expenses and employee time
invested in any such review outside of routine and normal
periodic reviews. Upon receipt from the Separate Account of the
necessary information, the Agent shall supply the necessary data
for the Separate Account's completion of any necessary tax
returns, questionnaires, periodic reports to unit holders, and
such other reports and information requests as the Separate
Account and the Agent shall agree upon from time to time.
9. Uniform Procedures
The Agent and the Separate Account, from time to time, may
a d opt uniform or standard procedures, and the Agent may
conclusively assume that any procedure approved by the Separate
Account, or directed by the Separate Account, does not conflict
with or violate any requirements of the Separate Account's
prospectus, the Separate Account Rules, or other governing
documents, or any rule or regulation of any regulatory body or
governmental agency. The Separate Account shall be responsible
to notify the Agent of any changes in the Separate Account Rules
which might necessitate changes in the Agent's procedures.
10. Reliance
The Agent may rely upon the advice of the Separate Account
and upon statements of the Separate Account's accountants and
other persons believed by the Agent in good faith to be expert in
matters upon which such persons are consulted, and the Agent
shall not be liable for any actions taken in good faith upon such
statements.<PAGE>
11. Indemnification and Liability
a. The Agent shall not be liable for any action taken in
good faith reliance upon any authorized oral instructions, any
written instructions, any certified copy of any resolution of the
M a nagers of the Separate Account, or any other document
reasonably believed by the Agent to be genuine and to have been
executed or signed by the proper person or persons. The Separate
A c c o unt will send written instructions to confirm oral
instructions, and the Agent will compare the written instructions
against the oral instructions previously furnished. The Agent
w i l l inform the Separate Account promptly of any noted
discrepancy.
b. The Agent shall not be held to have notice of any
change or lack of authority of any officer, employee, or agent of
the Separate Account until receipt of written notification
thereof by the Separate Account.
c. The Separate Account shall indemnify the Agent and hold
the Agent harmless from and against all actions, suits, and
claims, whether groundless or otherwise, arising directly or
indirectly out of or in connection with the Agent's performance
under this Agreement and from and against any and all losses,
damages, costs, charges, attorneys' and accountant's fees,
payments, expenses, and liabilities incurred by the Agent in
connection with any such action, suit, or claim unless caused by
the Agent's breach of this Agreement, negligence, or willful
misconduct. The Separate Account shall not be liable under this
indemnification provision with respect to any claim made against
the Agent unless the Agent shall have notified the Separate
Account in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon the Agent (or after the Agent
shall have received notice of such service on any designated
agent), but failure to notify the Separate Account of any such
claim shall not relieve the Separate Account from any liability
which the Separate Account may have to the Agent against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Agent, the Separate Account shall be entitled to
participate, at its own expense, in the defense of such action.
The Separate Account also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the
action. After notice from the Separate Account to such party of
the Separate Account's election to assume the defense thereof,
the Agent shall bear the fees and expenses of any additional
counsel retained by the Agent, and the Agent will not be liable
to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs
of investigation. The Agent will promptly notify the Separate
Account of the commencement of any litigation or proceedings<PAGE>
against the Agent in connection with the Contracts or the
operations of the Subaccounts.
d. The Agent shall indemnify the Separate Account and hold
the Separate Account harmless from all actions, suits, damages,
claims, demands, losses, and liabilities (including reasonable
attorneys' and accountants' fees and expenses) incurred or
assessed against the Separate Account arising directly or
indirectly from the Agent's negligence, willful misconduct, or
breach of this Agreement. The Agent shall not be liable under
this indemnification provision with respect to any claim made
against the Separate Account unless the Separate Account shall
have notified the Agent in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon the Separate
Account (or after the Separate Account shall have received notice
of such service on any designated agent), but failure to notify
the Agent of any such claim shall not relieve the Agent from any
liability which it may have to the Separate Account against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Separate Account, the Agent shall be entitled to
participate, at its own expense, in the defense of such action.
The Agent also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action.
After notice from the Agent to such party of the Agent's election
to assume the defense thereof, the Separate Account shall bear
the fees and expenses of any additional counsel retained by the
Separate Account, and the Agent will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
The Separate Account will promptly notify the Agent of the
commencement of any litigation or proceedings against the
Separate Account in connection with the Contracts or the
operations of the Subaccounts.
e. The unit holders, Managers, officers, employees, and
agents of the Separate Account shall not be personally bound by
or liable hereunder, nor shall resort be had to such person's
private property for the satisfaction of any obligation or claim
hereunder as provided for in the Separate Account Rules.
12. Compensation
The Separate Account agrees to pay the Agent compensation
for its services and to reimburse the Agent for expenses, as set
forth in Schedule A attached hereto, or as shall be set forth in
amendments to such Schedule approved by the Separate Account and
the Agent.
13. Days of Business<PAGE>
Nothing contained in this Agreement is intended to or shall
require the Agent, in any capacity hereunder, to perform any
functions or duties on any holiday or other day of special
observance on which the New York Stock Exchange is closed.
Functions or duties normally scheduled to be performed on such
days shall be performed on, and as of, the next business day on
which the New York Stock Exchange is open for business.
14. Term of Agreement
This Agreement is effective on the date hereof. This
Agreement shall remain in full force and effect until November 1,
1997, unless terminated earlier in accordance with its terms, and
thereafter from year to year; provided, that: (a) such
continuance is approved by (i) either a vote of the majority of
the Managers or a vote of a "majority of the outstanding voting
securities" (as defined at Section 2(a)(42) of the 1940 Act) of
the Separate Account and (ii) a majority of the Managers who are
not "interested persons" (as defined at Section 2(a)(19) of the
1940 Act); and (b) the following findings are made by a majority
of the Managers who are not "interested persons" (as defined at
Section 2(a)(19) of the 1940 Act): (i) that this Agreement is in
the best interests of the Separate Account; (ii) that the
services to be performed pursuant to this Agreement are services
required for the operation of the Separate Account; (iii) that
the Agent can provide services the nature and quality of which
are at least equal to those provided by others offering the same
or similar services; and (iv) that the fees for such services are
fair and reasonable in light of the usual and customary charges
made by others for services of the same nature and quality.
15. Termination
This Agreement may be terminated, without the payment of any
penalty, by either party hereto upon at least ninety (90) days'
written notice to the other party. Any termination by the
Separate Account will be pursuant to a vote of a majority of the
Managers.
16. Notices
a. Communications to the Agent shall be addressed to:
PADCO Service Company, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
b. C o mmunications to the Separate Account shall be
addressed to:
Rydex Advisor Variable Annuity Account
Great American Reserve Insurance Company<PAGE>
11815 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Office of the General Counsel
With a copy to:
Rydex Advisor Variable Annuity Account
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
c. In the event of a change of address, communications
will be addressed to such new address as designated in a written
notice from the Separate Account or the Agent, as the case may
be. All communications addressed in the above manner and by
registered mail or delivered by hand will be sufficient under
this Agreement.
17. Governing Law
This Agreement is governed by the laws of the State of
Maryland (without reference to such state's conflict of law
rules).
18. Counterparts
This Agreement may be executed in counterparts, each of
which shall be deemed an original, but which together shall
constitute one and the same instrument.
19. Binding Effect and Assignment
This Agreement shall be binding upon the parties hereto and
their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Separate Account
without the written consent of the Agent, or by the Agent without
the written consent of the Separate Account, in each case
authorized or approved by a resolution of the Separate Account's
Managers.
20. Amendment, Modification, and Waiver
No term or provision of this Agreement may be amended,
modified, or waived without the affirmative vote or action by
written consent of the Agent and the Separate Account effected in
accordance with the provisions of the 1940 Act, and the rules
thereunder, and Section 14 of this Agreement.<PAGE>
IN WITNESS WHEREOF, the Agent and the Separate Account have
executed this Agreement as of the date first written above.
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/ L. Gregory Gloeckner
L. Gregory Gloeckner
Vice President
PADCO SERVICE COMPANY, INC.
By: /s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr.
President<PAGE>
SCHEDULE A
PADCO SERVICE COMPANY, INC.
FEE SCHEDULE FOR ACCOUNTING SERVICES
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT - Each Separate Subaccount
A. MINIMUM ANNUAL FEE - (Based upon average net assets -
payable monthly) shall be the greater of:
First Year - $7,500
Second Year - $15,000
Third and Subsequent Years - $20,000
or
Basis Point Fee
10 Basis Points on first $30 million of assets
5 Basis Points on next $20 million of assets
3 Basis Points on next $50 million of assets
2 Basis Points on assets over $100 million
B. In addition, all out-of-pocket expenses shall be separately
charged, shall include but not be limited to: printed
forms, postage, overnight mail and telephone expense.
C. PADCO Service Company, Inc. warrants that the above rates of
compensation are guaranteed for a two-year period. At that
time, the Separate Account acknowledges that the Agent has
the right to revise the Agent's compensation schedule.<PAGE>
EXHIBIT 11(c)
Fidelity Bond Allocation Agreement
Among Rydex Advisor Variable Annuity Account,
PADCO Advisors II, Inc., Rydex Series Trust,
PADCO Advisors, Inc., and PADCO Service Company, Inc.<PAGE>
AMENDED AND RESTATED
ALLOCATION AGREEMENT
THIS ALLOCATION AGREEMENT (the "Agreement"), is made as of
this 23rd day of June, 1997, by and among:
R Y D EX SERIES TRUST (the "Trust"), a registered
investment company organized as a Delaware business
trust on March 9, 1993, with its principal place of
business at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, on behalf of the Trust and
the Trust's series of THE NOVA FUND, THE URSA FUND, THE
RYDEX OTC FUND, THE RYDEX PRECIOUS METALS FUND, THE
RYDEX U.S. GOVERNMENT BOND FUND, THE JUNO FUND, THE
RYDEX U.S. GOVERNMENT MONEY MARKET FUND, THE RYDEX
INSTITUTIONAL MONEY MARKET FUND, and THE RYDEX HIGH
YIELD FUND, and all future registered investment
companies which are named insureds under a joint
fidelity bond, as described below, and for which PADCO
Advisors, Inc. acts as investment adviser and for which
PADCO Service Company, Inc. acts as transfer agent and
s h areholder servicing agent (the above-referenced
entities hereinafter are collectively referred to as
the "Rydex Funds");
P A D CO ADVISORS, INC. ("PADCO I"), a registered
investment adviser incorporated under the laws of the
State of Maryland on February 5, 1993, with its
p r i n cipal place of business at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852;
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT (the "Separate
Account"), a registered investment company established
as a managed separate account of Great American Reserve
Insurance Company ("Great American Reserve") under the
laws of the State of Texas on April 15, 1996, with its
principal place of business at 11815 North Pennsylvania
Street, Carmel, Indiana 46032, and with offices at 6116
Executive Boulevard, Rockville, Maryland 20852, on
behalf of the Separate Account and the Separate
Account's subaccounts of THE NOVA SUBACCOUNT, THE URSA
SUBACCOUNT, THE OTC SUBACCOUNT, THE PRECIOUS METALS
SUBACCOUNT, THE U.S. GOVERNMENT BOND SUBACCOUNT, THE
JUNO SUBACCOUNT, THE MONEY MARKET I SUBACCOUNT, and THE
MONEY MARKET II SUBACCOUNT, and all future registered
investment companies which are named insureds under a
joint fidelity bond as described below and for which
PADCO Advisors II, Inc. acts as investment adviser and
f o r which PADCO Service Company, Inc. acts as
subaccount asset allocation administration servicer
(the above-referenced subaccounts of the Separate
Account hereinafter are collectively referred to as the
"Rydex Subaccounts");<PAGE>
PADCO ADVISORS II, INC. ("PADCO II"), a registered
investment adviser incorporated under the laws of the
State of Maryland on July 5, 1994, with its principal
p l a ce of business at 6116 Executive Boulevard,
Rockville, Maryland 20852;
P A DCO SERVICE COMPANY, INC. (the "Servicer"), a
registered transfer agent incorporated under the laws
of the State of Maryland on October 6, 1993, with its
p r i n cipal place of business at 6116 Executive
Boulevard, Rockville, Maryland 20852; and
PADCO 401(k) & PROFIT SHARING PLAN (the "PADCO Plan"),
an employee benefit welfare or pension benefit plan
established effective January 1, 1994, subject to the
supervision of the rules and regulations promulgated by
the Secretary of the Department of Labor, that: (i) is
a "qualified" retirement plan, under the provisions of
the U.S. Internal Revenue Code of 1986, as amended;
(ii) is designed to reward eligible employees of PADCO
I, PADCO II, the Servicer, and PADCO Financial Services
Company, Inc., with retirement benefits and to serve as
a funding medium for the accumulation of assets; (iii)
is administered by PADCO I; and (iv) has designated
Albert P. Viragh, Jr., as the PADCO Plan trustee.
This Agreement is entered into by the aforementioned parties
( c o llectively, the "Joint Insureds") under the following
circumstances:
W I T N E S S E T H
WHEREAS, Section 17(g), "Transactions of Certain Affiliated
Persons and Underwriters," of the Investment Company Act of 1940,
as amended (the "1940 Act"), provides that the Securities and
Exchange Commission (the "Commission") is authorized to require
that officers and employees of registered investment companies be
bonded against larceny and embezzlement, and the Commission,
u n der Rule 17g-1, "Bonding of Officers and Employees of
Registered Management Investment Companies," under the 1940 Act,
has promulgated rules and regulations dealing with this subject;
WHEREAS, the Trust, the Rydex Funds, PADCO I, the Separate
Account, the Rydex Subaccounts, PADCO II, the Servicer, and the
PADCO Plan are named or will be named as joint insureds under the
terms of a certain bond or policy of insurance which insures
against larceny and embezzlement of officers and employees (the
"Fidelity Bond"), a copy of which Fidelity Bond is attached
hereto as Exhibit A;
WHEREAS, the trustees of the Trust (the "Trustees"),
including each of the Trustees who is not an "interested person"
of the Trust, as that term is defined in Section 2(a)(19) of the
1940 Act (the "Independent Trustees"), and the managers of the<PAGE>
Separate Account (the "Managers"), including each of the Managers
who is not an "interested person" of the Separate Account (the
"Independent Managers"), as that term is defined in Section
2(a)(19) of the 1940 Act, have considered all relevant factors,
including, but not limited to, the number of the parties named as
"joint insureds" under the joint Fidelity Bond, the nature of the
business activities of such Joint Insureds, the amount of the
joint insured bond, the amount of the premium for such bond, and
the ratable allocation of the premium among all parties named as
insureds under the joint Fidelity Bond, and have determined that
the share of the premium allocated to each of the Rydex Funds and
to each of the Rydex Subaccounts is less than the premium each
such Rydex Fund and each such Rydex Subaccount, respectively,
would have had to pay if each such Rydex Fund and each such Rydex
Subaccount had provided and maintained a single insured bond, as
required pursuant to paragraph (e) of Rule 17g-1, and also have
determined that it would be in the best interests of (i) the
Trust and the Rydex Funds and (ii) the Separate Account and the
Rydex Subaccounts for (i) the Trust and the Rydex Funds and (ii)
the Separate Account and the Rydex Subaccounts, respectively, to
be included as covered joint insureds under the joint insured
Fidelity Bond, pursuant to the requirements of Rule 17g-1 under
the 1940 Act;
WHEREAS, the Trustees of the Trust, including each of the
Independent Trustees, and the Managers, including each of the
Independent Managers, has given due consideration to all factors
relevant to the form, amount, and apportionment of premiums and
recoveries on such joint insured Fidelity Bond and such Managers
have approved the term and amount of the Fidelity Bond, the
portions of the premium payable by each of the Rydex Funds, the
Rydex Subaccounts, PADCO I, PADCO II, the Servicer, and the PADCO
Plan, and the manner in which recovery of said Fidelity Bond, if
any, shall be shared by and among the parties hereto as set
forth; and
WHEREAS, the Trust, the Rydex Funds, PADCO I, the Separate
Account, the Rydex Subaccounts, PADCO II, the Servicer, and the
PADCO Plan now desire to enter into the agreement required by
Rule 17g-l(f) under the 1940 Act to establish the manner in which
recovery on said Fidelity Bond, if any, shall be shared.
NOW, THEREFORE, IT IS HEREBY AGREED by and among the parties
as follows:
1. Payment of Premiums
PADCO I shall pay twelve percent (12%), PADCO II shall pay
three percent (3%), the Servicer shall pay three percent (3%),
and the Rydex Funds and the Rydex Subaccounts shall pay eighty
percent (80%) of the premium payable under the Fidelity Bond; and
PADCO I also shall pay an additional two percent (2%) of the
premium payable under the Fidelity Bond, which portion of this
premium is attributable to the PADCO Plan, which is administered<PAGE>
by PADCO I. Each of the Rydex Funds and the Rydex Subaccounts
shall pay that percentage of said amount of the premium due under
the Fidelity Bond which is derived by a fraction, (i) the
denominator of which is the total net assets of all the Rydex
Funds and Rydex Subaccounts combined, and (ii) the numerator of
which is the total net assets of each such Rydex Fund or each
such Rydex Subaccount individually.
Each of the Rydex Funds, PADCO I, each of the Rydex
Subaccounts, PADCO II, the Servicer, and the PADCO Plan, agree
that the appropriateness of the allocation of said premium will
be determined jointly by PADCO I and PADCO II (collectively, the
"Advisors") on a monthly basis, subject to approval by both the
Trustees and the Managers of both the Fidelity Bond and this
Allocation Agreement no less often than annually.
2. Allocation of Recoveries
(a) If more than one of the parties hereto is damaged in a
single loss for which recovery is received under the Fidelity
Bond, each such party shall receive that portion of the recovery
which represents the loss sustained by that party, unless the
recovery is inadequate to indemnify fully such party sustaining a
loss.
(b) If the recovery is inadequate to indemnify fully each
such party sustaining a loss, then the recovery shall be
allocated among such parties as follows:
(i) Each such party sustaining a loss shall be
allocated an amount equal to the lesser of that party's actual
loss or the minimum amount of bond which would be required to be
maintained by such party under a single insured bond (determined
as of the time of the loss) in accordance with the provisions of
Rule 17g-l(d)(1) under the 1940 Act.
(ii) The remaining portion of the proceeds shall be
allocated to each such party sustaining a loss not fully covered
by the allocation under subparagraph 2(b)(i), above, in the
proportion that each such party's last payment of premium bears
to the sum of the last such premium payments of all such parties.
If such allocation would result in any party which had sustained
a loss receiving a portion of the recovery in excess of the loss
actually sustained, such excess portion shall be allocated among
the other parties whose losses would not be fully indemnified.
The allocation shall bear the same proportion as each such
party's last payment of premium bears to the sum of the last
premium payments of all parties entitled to receive a share of
the excess. Any allocation in excess of a loss actually
sustained by any such party shall be reallocated in the same
manner.<PAGE>
3. Obligation to Maintain Minimum Coverage
(a) Each of the Rydex Funds and each of the Rydex
Subaccounts represents and warrants to each of the other parties
hereto that the minimum amount of coverage required of each such
Rydex Fund and each such Rydex Subaccount, respectively, shall be
determined as of the date hereof pursuant to the schedule set
forth in paragraph (d)(1) of Rule 17g-1 under the 1940 Act. The
parties hereto agree that the Advisors will determine jointly, no
less than at the end of each calendar quarter, the minimum amount
of coverage which would be required of each of the Rydex Funds
and each of the Rydex Subaccounts by Rule 17g-1(d)(1) if a
determination with respect to the adequacy of the coverage were
currently being made.
(b) In the event that the total amount of the minimum
coverages thus determined exceeds the amount of coverage of the
then-effective Fidelity Bond, the Trustees and the Managers will
be notified and will determine whether it is necessary or
appropriate to increase the total amount of coverage of the
Fidelity Bond to an amount not less than the total amount of such
minimums, or to secure such excess coverage for one or more of
the parties hereto, which, when added to the total coverage of
the Fidelity Bond, will equal an amount of such minimums.
(c) Unless either or both the Trust and the Separate
Account elects to terminate this Agreement (pursuant to Paragraph
4, below) and the Trust's and the Separate Account's respective
participation in a joint-insured bond, each Rydex Fund and each
Rydex Subaccount agrees to pay the Rydex Fund's and the Rydex
Subaccount's respective fair portion of the new or additional
p r e m i um (taking into account all of the then-existing
circumstances).
4. Prior Agreements; Termination
This Agreement shall supersede all prior agreements relating
to an allocation of premium on any joint insured bond and shall
apply to the present Fidelity Bond coverage and any renewal or
replacement thereof. This Agreement shall continue until
terminated by any party hereto upon the giving of not less than
sixty (60) days notice to the other parties hereto in writing.
5. Law Governing
This Agreement is governed by the laws of the State of
Maryland (without reference to such state's conflict of law
rules).
6. Counterparts
This Agreement may be executed in counterparts, each of
which shall be deemed an original, but which together shall
constitute one and the same instrument.<PAGE>
7. Amendment, Modification, and Waiver
No term or provision of this Agreement may be amended,
modified, or waived without the affirmative vote or action by
written consent of each of the parties hereto.<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused these
presents to be duly executed by their duly-authorized officers as
of the date first above written.
ATTEST: RYDEX SERIES TRUST
By: /s/ Robert M. Steele By: /s/ Albert P. Viragh, Jr.
Robert M. Steele Albert P. Viragh, Jr.
Vice President President
ATTEST: RYDEX SERIES TRUST on behalf of
the RYDEX FUNDS of RYDEX SERIES
TRUST
By: /s/ Robert M. Steele By: /s/Albert P. Viragh, Jr.
Robert M. Steele Albert P. Viragh, Jr.
Vice President President
ATTEST: PADCO ADVISORS, INC.
By: /s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr.
Amanda C. Viragh Albert P. Viragh, Jr.
Secretary President
ATTEST: RYDEX ADVISOR VARIABLE
ANNUITY ACCOUNT
By : /s/ Robert M. Steele By: /s/ L. Gregory Gloeckner
Robert M. Steele L. Gregory Gloeckner
Vice President Vice President <PAGE>
ATTEST: RYDEX ADVISOR VARIABLE ANNUITY
ACCOUNT on behalf of the
RYDEX SUBACCOUNTS of RYDEX
ADVISOR VARIABLE ANNUITY
ACCOUNT
By: /s/ Robert M. Steele By: /s/ L. Gregory Gloeckner
Robert M. Steele L. Gregory Gloeckner
Vice President Vice President
ATTEST: PADCO ADVISORS II, INC.
By: /s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr.
Amanda C. Viragh Albert P. Viragh, Jr.
Secretary President
ATTEST: PADCO SERVICE COMPANY, INC.
By: /s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr.
Amanda C. Viragh Albert P. Viragh, Jr.
Secretary President
ATTEST: PADCO 401(k) & PROFIT
SHARING PLAN
By: /s/ Robert M. Steele By: /s/ Albert P. Viragh, Jr.
Robert M. Steele Albert P. Viragh, Jr.
Vice President PADCO Plan Trustee
PADCO Advisors, Inc.
PADCO Plan Administrator<PAGE>
EXHIBIT 11(d)
Joint Account Agreement Between
Rydex Advisor Variable Annuity Account
and PADCO Advisors II, Inc.<PAGE>
JOINT ACCOUNT AGREEMENT
THIS JOINT ACCOUNT AGREEMENT (the "Agreement"), is made as
of this 1st day of November, 1996, by and among:
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT (the "Separate
Account"), a registered investment company established
as a managed separate account of Great American Reserve
Insurance Company ("Great American Reserve") under the
laws of the State of Texas on April 15, 1996, with its
principal place of business at 11815 North Pennsylvania
Street, Carmel, Indiana 46032, and with offices at 6116
Executive Boulevard, Rockville, Maryland 20852, on
behalf of the Separate Account and the Separate
Account's subaccounts of THE NOVA SUBACCOUNT, THE URSA
SUBACCOUNT, THE OTC SUBACCOUNT, THE PRECIOUS METALS
SUBACCOUNT, THE U.S. GOVERNMENT BOND SUBACCOUNT, THE
JUNO SUBACCOUNT, THE MONEY MARKET I SUBACCOUNT, and THE
MONEY MARKET II SUBACCOUNT (collectively, the
"Subaccounts"), and all future registered investment
companies for which PADCO Advisors II, Inc. acts as
i n vestment adviser (collectively, the "Future
Subaccounts") (the above-referenced Subaccounts and
Future Subaccounts hereinafter are collectively
referred to as the "Rydex Subaccounts");
PADCO ADVISORS II, INC. ("PADCO II"), a registered
investment adviser incorporated under the laws of the
State of Maryland on July 5, 1994, with its principal
p l a ce of business at 6116 Executive Boulevard,
Rockville, Maryland 20852; and
any other persons which become parties hereto, as
contemplated by the application for an order under the
Investment Company Act of 1940 (the "1940 Act")
(Commission File No. 812-8788) (the "Application"), in
respect of which an Order of the Commission was granted
on March 15, 1994 (Investment Company Act Release No.
20136) (the "Order").
This Agreement is entered into by the aforementioned parties
under the following circumstances:
W I T N E S S E T H
WHEREAS, Rydex Series Trust (the "Trust") is a registered
investment company organized as a Delaware business trust on
March 9, 1993, with its principal place of business at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852, and
currently is composed of eight separate series, including The
Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious
Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund,<PAGE>
The Rydex U.S. Government Money Market Fund, and The Rydex
Institutional Money Market Fund (collectively, the "Funds");
WHEREAS, PADCO Advisors, Inc. ("PADCO I"), is a registered
investment adviser incorporated under the laws of the State of
Maryland on February 5, 1993, with its principal place of
business at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852, and currently serves as the investment adviser
to the Funds;
WHEREAS, the Separate Account currently is composed of eight
separate Subaccounts, including The Nova Subaccount, The Ursa
Subaccount, The OTC Subaccount, The Precious Metals Subaccount,
The U.S. Government Bond Subaccount, The Juno Subaccount, The
Money Market I Subaccount, and The Money Market II Subaccount;
W H E R E AS, other separate Future Subaccounts may be
a u thorized, added, and registered under the 1940 Act as
subaccounts of the Separate Account in the future;
WHEREAS, the Separate Account is authorized as the signatory
to this Agreement on behalf of the Rydex Subaccounts, including
any Future Subaccounts;
WHEREAS, the Trust, on behalf of the Trust and the Funds,
and all future registered investment companies for which PADCO I
acts as investment adviser (collectively, the "Future Funds")
(the above-referenced Funds and Future Funds hereinafter are
collectively referred to as the "Rydex Funds"), and PADCO I have
obtained the Order, a copy of which is attached hereto as Exhibit
A, permitting the Rydex Funds to deposit their daily uninvested
cash balances into a single joint account to be used to enter
into repurchase agreements and to participate in such a joint
repurchase agreement account (the "Trust Joint Account") on the
basis set forth in the Application, a copy of which Application
is attached hereto as Exhibit B;
WHEREAS, the applicants under the Application are the Trust,
including the Rydex Funds, PADCO I, and all future registered
investment companies and series thereof for which PADCO I, or any
entity controlled by, controlling, or under common control with
PADCO I, serves as investment adviser (collectively, "Future
PADCO Companies");
WHEREAS, the terms and conditions of the Application and the
Order authorize all Future PADCO Companies to enter into joint
repurchase agreements and to deposit their daily uninvested cash
balances into a joint repurchase agreement account;
WHEREAS, PADCO I and PADCO II are under the common control
of Albert P. Viragh, Jr., the Chairman of the Board of Directors,
the President, and the majority shareholder of PADCO I, and the
Chairman of the Board of Directors, the President, and the sole
shareholder of PADCO II;<PAGE>
W H E REAS, the managers of the Separate Account (the
"Managers") have determined that it would be in the best
interests of the Separate Account and the Rydex Subaccounts, to
authorize the Rydex Subaccounts to deposit their daily uninvested
cash balances into a single joint account to be used to enter
into repurchase agreements (the "Subaccount Joint Account");
WHEREAS, Condition M under the Application requires that the
Board of Managers of the Separate Account evaluate this joint
account arrangement annually and approve the continuation of said
participation in the Subaccount Joint Account only if the Board
of Managers determines that there is a reasonable likelihood that
the Subaccount Joint Account will benefit the Rydex Subaccounts
and their unitholders; and
WHEREAS, the Rydex Subaccounts desire that their respective
rights and obligations in respect of the Subaccount Joint Account
be reflected in this Agreement in form and substance consistent
w i t h representations and undertakings set forth in the
Application and Order.
NOW, THEREFORE, the parties hereto agree as follows:
1. R e purchase agreements entered into by the Rydex
Subaccounts pursuant to the Subaccount Joint Account are entered
into by each Rydex Subaccount severally, in proportion to its
interest in the Subaccount Joint Account, and not jointly. No
Rydex Subaccount shall be liable in respect of the obligations of
any other Rydex Subaccount in respect of any repurchase agreement
entered into pursuant to the Subaccount Joint Account. PADCO II
shall ensure that the documentation entered into by the Rydex
Subaccounts appropriately reflects the several, and not joint,
nature of each Rydex Subaccount's obligations.
2. No Rydex Subaccount shall create a negative balance in
the Subaccount Joint Account for any reason, and it is understood
and agreed that no Rydex Subaccount shall have any obligation to
any other party hereto to maintain any balance whatsoever in the
Subaccount Joint Account.
3. T h e Separate Account, on behalf of each Rydex
Subaccount, shall ensure that its Custodian Agreement with Boston
Safe Deposit and Trust Company, the custodian for the Rydex
Subaccounts, and with any future custodian(s) of the Rydex
Subaccounts, permits the establishment of a separate cash account
into which each Rydex Subaccount would cause its uninvested net
cash balances to be deposited daily. Each such Custodian
Agreement will be in form and substance identical to each other
such agreement.
4. Subject to the contrary determinations of the Board of
Managers of the Separate Account, the Separate Account, on behalf
o f e ach Rydex Subaccount, shall ensure that the Rydex
Subaccount's repurchase agreement standards are identical to the<PAGE>
standards adopted by each other Rydex Subaccount, except insofar
as the maximum amount of a Rydex Subaccount's assets subject to a
repurchase agreement with any single counter-party may be limited
by different absolute dollar amounts depending on the size of the
Rydex Subaccount. PADCO II acknowledges that, in effecting
repurchase agreements on behalf of the Rydex Subaccounts, each
repurchase agreement entered into by a Rydex Subaccount is
subject to the applicable standards and limitations adopted by
the Separate Account's Board of Managers.
5. Each Rydex Subaccount shall participate in the net
income earned or accrued in the Subaccount Joint Account on the
basis of the total amount in the Subaccount Joint Account on any
day represented by such Rydex Subaccount's proportionate share of
the Subaccount Joint Account.
6. PADCO II shall administer the investment of the cash
balance in the operation of the Subaccount Joint Account as part
of the duties of PADCO II under PADCO II's existing, or any
future, investment advisory contract with the Separate Account
and/or each Rydex Subaccount and no fees shall be payable by the
Rydex Subaccounts in respect of the Subaccount Joint Account
other than the fees based upon the assets of each Rydex
Subaccount, as provided in the Separate Account's and/or the
Rydex Subaccount's respective investment advisory contract.
7. This Agreement may be terminated by any party hereto
upon thirty (30) days' written notice to each other party hereto.
Upon any such termination, the Subaccount Joint Account shall be
liquidated in an orderly fashion and the proceeds of the
liquidation shall be distributed to each respective Rydex
Subaccount in proportion to the Rydex Subaccount's interest in
the Subaccount Joint Account.
8. A l l notices or other communications required or
permitted to be given hereunder shall be in writing and shall be
delivered or sent by prepaid, first-class letter posted to the
following addresses, or to such other address as shall be
designated in a notice given in accordance with this section, and
such notice shall be deemed to have been given at the time of
delivery of, if sent by post, five (5) week days after posting by
airmail.
If to the Separate Account:
Rydex Advisor Variable Annuity Account
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Office of the General Counsel<PAGE>
with a copy to:
Rydex Advisor Variable Annuity Account
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
If to PADCO II:
PADCO Advisors II, Inc.
6116 Executive Boulevard
Suite 400
Rockville, Maryland 20852
Attention: President
9. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland (without
reference to such state's conflict of law rules).
10. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective corporate officers,
thereunto duly authorized, as of the date first hereinabove
written.
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
By: /s/ L. Gregory Gloeckner
L. Gregory Gloeckner
Vice President
PADCO ADVISORS II, INC.
By: /s/ Albert P. Viragh, Jr.
Albert P. Viragh, Jr.
President<PAGE>
EXHIBIT 13(a)
Consent of Coopers & Lybrand LLP<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement
on Form N-3 (File Nos. 333-03093 and 811-07615), of our report
dated March 14, 1997 on our audit of the financial statements of
Great American Reserve Insurance Company. We also consent to the
r e f e r e nce to our firm under the caption "Independent
Accountants."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
September 19, 1997
<PAGE>
EXHIBIT 13(b)
Consent of Jorden Burt Berenson & Johnson LLP<PAGE>
JORDEN BURT BERENSON & JOHNSON LLP
Suite 400 East
1025 Thomas Jefferson Street, N.W.
Washington, D. C. 20007-0805
(202) 965-8100
Telecopier (202) 965-8104
September 22, 1997
Great American Reserve Insurance Company
11815 North Pennsylvania Street
Carmel, Indiana 46032
Re: The Rydex Advisor Variable Annuity Account
Post-Effective Amendment No. 1 to
Registration Statement on Form N-3
File Nos. 333-03093 and 811-07615
Ladies and Gentlemen:
We hereby consent to the use of our name under the caption
"Legal Matters" in Part I of the Prospectus contained in Post-
Effective Amendment No. 1 to the Registration Statement on Form
N-3 (Registration Nos. 333-03093 and 811-07615) filed by Great
American Reserve Insurance Company and The Rydex Advisor Variable
Annuity Account with the Securities and Exchange Commission on or
around September 24, 1997, under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended.
Very truly yours,
/s/Jorden Burt Berenson & Johnson LLP
Jorden Burt Berenson & Johnson LLP <PAGE>
EXHIBIT 16(a)
Schedules of Performance Quotations
for the Rydex Subaccounts of
The Rydex Advisor Variable Annuity Account<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
THE NOVA SUBACCOUNT
Average Annual Total Return (As of June 30, 1997):
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5, or 10 year periods, at the end of the
periods (or fractional portion thereof).
EXAMPLE:
For the Period From Commencement of Operations (May 7,
1997) to June 30, 1997:
P = $1,000
T = 86.9564%
n = 0.1479
ERV = $1,096.99
1<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
THE URSA SUBACCOUNT
Average Annual Total Return (As of June 30, 1997):
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5, or 10 year periods, at the end of the
periods (or fractional portion thereof).
EXAMPLE:
For the Period From Commencement of Operations (May 7,
1997) to June 30, 1997:
P = $1,000
T = (44.6381)%
n = 0.1479
ERV = $916.24
2<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
THE OTC SUBACCOUNT
Average Annual Total Return (As of June 30, 1997):
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5, or 10 year periods, at the end of the
periods (or fractional portion thereof).
EXAMPLE:
For the Period From Commencement of Operations (May 7,
1997) to June 30, 1997:
P = $1,000
T = 29.9588%
n = 0.1479
ERV = $1,039.53
3<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
THE PRECIOUS METALS SUBACCOUNT
Average Annual Total Return (As of June 30, 1997):
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5, or 10 year periods, at the end of the
periods (or fractional portion thereof).
EXAMPLE:
For the Period From Commencement of Operations (May 29,
1997) to June 30, 1997:
P = $1,000
T = (74.6948)%
n = 0.0877
ERV = $886.50
4<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
THE U.S. GOVERNMENT BOND SUBACCOUNT
Average Annual Total Return (As of June 30, 1997):
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5, or 10 year periods, at the end of the
periods (or fractional portion thereof).
EXAMPLE:
For the Period From Commencement of Operations (May 29,
1997) to June 30, 1997:
P = $1,000
T = 40.4684%
n = 0.0877
ERV = $1,030.24
5<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
THE JUNO SUBACCOUNT
Average Annual Total Return (As of June 30, 1997):
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5, or 10 year periods, at the end of the
periods (or fractional portion thereof).
EXAMPLE:
For the Period From Commencement of Operations (May 7,
1997) to June 30, 1997:
P = $1,000
T = (13.8713)%
n = 0.1479
ERV = $978.15
6<PAGE>
EXHIBIT 16(b)
Schedules of Performance Quotations and
Adjusted Performance Quotations
for the Rydex Funds of Rydex Series Trust<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX SERIES TRUST
THE NOVA FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year July 12, 1993 1/ May 7, 1997 2/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = 44.7899% 25.8205% 116.6572%
n = 1.00 3.9699 0.1479
ERV = $1,447.90 $2,488.85 $1,121.18
</TABLE>
____________
1/ The Nova Fund commenced operations on July 12, 1993.
2/ The Nova Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF ADJUSTED PERFORMANCE QUOTATIONS1/
RYDEX SERIES TRUST
THE NOVA FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).1/
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year July 12, 1993 2/ May 7, 1997 3/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = 42.8801% 24.7657% 113.2074%
n = 1.00 3.9699 0.1479
ERV = $1,428.80 $2,407.05 $1,118.52
</TABLE>
____________
1/ T h e se total return performance quotations for the Nova Fund
(specifically, the ending redeemable value of a hypothetical $1,000
payment, or fractional portion thereof), for the periods indicated,
have been adjusted to reflect the charges, deductions, fees, and
expenses paid by and deducted from the Nova Subaccount (i.e., 4.80%,
the estimated total subaccount annual operating expenses), rather than
the fees and expenses paid by the Nova Fund (i.e., 1.16%, the total
fund annual operating expenses). These performance quotations,
however, have not been further adjusted to reflect a benchmark
objective that seeks to provide investment returns that correspond to
125% of the performance of the S&P500 Composite Stock Price Index (the
Nova Subaccount's current benchmark), rather than to 150% of the
performance of the S&P Composite Stock Price Index (the Nova Fund's<PAGE>
current benchmark). In a rising market (such as those in recent
years), returns based on 125% of the performance of a benchmark would
be significantly less than those based on 150% of the performance of
the benchmark; in a falling market, returns based on 125% of the
performance of the benchmark would be significantly greater than 150%
of the performance of that benchmark.
2/ The Nova Fund commenced operations on July 12, 1993.
3/ The Nova Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX SERIES TRUST
THE URSA FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year January 7, 1994 1/ May 7, 1997 2/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = (19.8908)% (12.7103)% (39.7891)%
n = 1.00 3.4795 0.1479
ERV = $801.09 $623.14 $927.69
</TABLE>
___________________
1/ The Ursa Fund commenced operations on January 7, 1994.
2/ The Ursa Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF ADJUSTED PERFORMANCE QUOTATIONS1/
RYDEX SERIES TRUST
THE URSA FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).1/
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year January 7, 1994 2/ May 7, 1997 3/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = (21.3621)% (14.5045)% (40.7373)%
n = 1.00 3.4795 0.1479
ERV = $786.38 $579.70 $925.52
</TABLE>
____________
1/ T h e se total return performance quotations for the Ursa Fund
(specifically, the ending redeemable value of a hypothetical $1,000
payment, or fractional portion thereof), for the periods indicated,
have been adjusted to reflect the charges, deductions, fees, and
expenses paid by and deducted from the Ursa Subaccount (i.e., 4.90%,
the estimated total subaccount annual operating expenses), rather than
the fees and expenses paid by the Ursa Fund (i.e., 1.34%, the total
fund annual operating expenses ).
2/ The Ursa Fund commenced operations on January 7, 1994.
3/ The Ursa Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX SERIES TRUST
THE RYDEX OTC FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year February 14, 19941/ May 7, 19972/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = 43.5738% 29.1204% 43.0495%
n = 1.00 3.3753 0.1479
ERV = $1,435.74 $2,369.44 $1,054.40
</TABLE>
__________________
1/ The Rydex OTC Fund commenced operations on February 14, 1994.
2/ The OTC Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF ADJUSTED PERFORMANCE QUOTATIONS1/
RYDEX SERIES TRUST
THE RYDEX OTC FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).1/
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year February 14, 19942/ May 7, 19973/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = 41.7152% 27.9685% 40.8721%
n = 1.00 3.3753 0.1479
ERV = $1,417.15 $2,298.85 $1,052.01
</TABLE>
____________
1/ These total return performance quotations for the Rydex OTC Fund
(specifically, the ending redeemable value of a hypothetical $1,000
payment, or fractional portion thereof), for the periods indicated,
have been adjusted to reflect the charges, deductions, fees, and
expenses paid by and deducted from the OTC Subaccount (i.e., 4.80%,
the estimated total subaccount annual operating expenses), rather than
the fees and expenses paid by the Rydex OTC Fund (i.e., 1.27%, total
fund annual operating expenses).
2/ The Rydex OTC Fund commenced operations on February 14, 1994.
3/ The OCT Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX SERIES TRUST
THE RYDEX PRECIOUS METALS FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year December 1, 19931/ May 29, 19972/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = (22.6519)% (9.2648)% (70.4675)%
n = 1.00 3.5808 0.0877
ERV = $773.48 $706.00 $898.59
</TABLE>
__________
1/ The Rydex Precious Metals Fund commenced operations on December 1,
1993.
2/ The Precious Metals Subaccount commenced operations on May 29, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF ADJUSTED PERFORMANCE QUOTATIONS1/
RYDEX SERIES TRUST
THE RYDEX PRECIOUS METALS FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year December 1, 19932/ May 29, 19973/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = (23.8809)% (10.8048)% (70.8649)%
n = 1.00 3.5808 0.0877
ERV = $761.19 $664.02 $897.52
</TABLE>
___________
1/ These total return performance quotations for the Rydex Precious
M e t als Fund (specifically, the ending redeemable value of a
hypothetical $1,000 payment, or fractional portion thereof), for the
periods indicated, have been adjusted to reflect the charges,
deductions, fees, and expenses paid by and deducted from the Precious
Metals Subaccount (i.e., 4.80%, the estimated total subaccount annual
operating expenses), rather than the fees and expenses paid by the
Rydex Precious Metals Fund (i.e., 1.45%, total fund annual operating
expenses).
2/ The Rydex Precious Metals Fund commenced operations on December 1,
1993.
3/ The Precious Metals Subaccount commenced operations on May 29, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX SERIES TRUST
THE RYDEX U.S. GOVERNMENT BOND FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year January 3, 19941/ May 29, 19972/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = 6.6878% 1.3570% 65.2488%
n = 1.00 3.49041 0.0877
ERV = $1,066.88 $1,048.17 $1,045.02
</TABLE>
1/ The Rydex U.S. Government Bond Fund commenced operations on January 3,
1994.
3/ The U.S. Government Bond Subaccount commenced operations on May 29,
1997.<PAGE>
SCHEDULE FOR COMPUTATION OF ADJUSTED PERFORMANCE QUOTATIONS1/
RYDEX SERIES TRUST
THE RYDEX U.S. GOVERNMENT BOND FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).1/
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year January 3, 19942/ May 29, 19973/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = 5.7528% 0.7999% 63.7523%
n = 1.00 3.49041 0.0877
ERV = $1,057.53 $1,028.20 $1,044.19
</TABLE>
____________
1/ T h ese total return performance quotations for the Rydex U.S.
Government Bond Fund (specifically, the ending redeemable value of a
hypothetical $1,000 payment, or fractional portion thereof), for the
periods indicated, have been adjusted to reflect the charges,
deductions, fees, and expenses paid by and deducted from the U.S.
G o v ernment Bond Subaccount (i.e., 4.40%, the estimated total
subaccount annual operating expenses), rather than the fees and
expenses paid by the Rydex U.S. Government Bond Fund (i.e., 1.49%,
total fund annual operating expenses).
2/ The Rydex U.S. Government Bond Fund commenced operations on January 3,
1994.
3/ The U.S. Government Bond Subaccount commenced operations on May 29,
1997.<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
RYDEX SERIES TRUST
THE JUNO FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year March 3, 19951/ May 7, 19972/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = (0.5817)% (2.5557)% (10.1788)%
n = 1.00 2.33 0.1479
ERV = $994.18 $941.49 $984.24
</TABLE>
___________
1/ The Juno Fund commenced operations on March 3, 1995.
3/ The Juno Subaccount commenced operations on May 7, 1997.<PAGE>
SCHEDULE FOR COMPUTATION OF ADJUSTED PERFORMANCE QUOTATIONS1/
RYDEX SERIES TRUST
THE JUNO FUND
Average Annual Total Return (As of June 30, 1997):
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5, or 10 year periods, at
the end of the periods (or fractional portion thereof).1/
<TABLE>
<CAPTION>
EXAMPLE:
For the Period For the Period
For the from from
One-Year March 3, 19952/ May 7, 19973/
Period Ended to to
P (1 + T)n = ERV June 30, 1997 June 30, 1997 June 30, 1997
<S> <C> <C> <C>
P = $1,000 $1,000 $1,000
T = (1.8958)% (3.8324)% (11.3636)%
n = 1.00 2.3288 0.1479
ERV = $981.04 $913.01 $982.31
</TABLE>
____________
1/ T h e se total return performance quotations for the Juno Fund
(specifically, the ending redeemable value of a hypothetical $1,000
payment, or fractional portion thereof), for the periods indicated,
have been adjusted to reflect the charges, deductions, fees, and
expenses paid by and deducted from the Juno Subaccount (i.e., 4.90%,
the estimated total subaccount annual operating expenses), rather than
the fees and expenses paid by the Rydex U.S. Government Bond Fund
(i.e., 1.58%, total fund annual operating expenses).
2/ The Juno Fund commenced operations on March 3, 1995.
3/ The Juno Subaccount commenced operations on May 7, 1997.<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001013169
<NAME> RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
<SERIES>
<NUMBER> 1
<NAME> THE NOVA SUBACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 4,708,960
<INVESTMENTS-AT-VALUE> 4,683,136
<RECEIVABLES> 19,209
<ASSETS-OTHER> 92,364
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,794,709
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102,407
<TOTAL-LIABILITIES> 102,407
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,622,382
<SHARES-COMMON-STOCK> 427,743
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (5,099)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 100,843
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (25,824)
<NET-ASSETS> 4,692,302
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,696
<OTHER-INCOME> 0
<EXPENSES-NET> 9,795
<NET-INVESTMENT-INCOME> (5,099)
<REALIZED-GAINS-CURRENT> 100,843
<APPREC-INCREASE-CURRENT> (25,824)
<NET-CHANGE-FROM-OPS> 69,920
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 751,064
<NUMBER-OF-SHARES-REDEEMED> 323,321
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,692,302
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,150<PAGE>
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,843
<AVERAGE-NET-ASSETS> 1,942,056
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 1.00
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.97
<EXPENSE-RATIO> .05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001013169
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