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Rule 497(e)
Registration No.: 333-03093
Rydex Advisor Variable Annuity Account
of
Great American Reserve Insurance Company
Administrative Office: 11815 North Pennsylvania Street,
Carmel, Indiana 46032
Phone: (800) 437-3506
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS - NONPARTICIPATING
Offered through
PADCO Financial Services, Inc.
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
Phone: (888) 667-4936
The variable annuity contract described in this Prospectus (the
"Contract") is designed to provide retirement benefits for
certain types of purchasers. This Contract is intended for use
by Contract Owners who intend to invest as part of a "tactical
asset allocation" or "market timing" investment strategy advised
by professional money managers. Tactical asset allocation
involves moving assets among several or all of the investment
portfolios available for investment under the Contracts (the
"Subaccounts"); market timing involves moving assets between the
Nova and Money Market Subaccounts. The investment options
a v a i lable under the Contract involve certain aggressive
investment techniques, which may include engaging in short sales
and transactions in futures contracts and options on securities,
stock indexes, and futures contracts. As discussed more fully
below, these techniques are specialized and involve risks that
a r e not traditionally associated with otherwise similar
contracts.
Accumulation of the Contract values may be on either a fixed or
variable basis, or on a combination fixed and variable basis.
Accumulation on a variable basis is provided by allocations to
the Rydex Advisor Variable Annuity Account (the "Separate
Account"). Variable benefits are not guaranteed and will vary
according to investment performance. Accumulation on a fixed
basis is provided by allocations to the General Account of Great
American Reserve Insurance Company. (See "The Fixed Account" on
page I-__.) Annuity payments are only available on a fixed
basis. This Prospectus describes only the Separate Account
features of the Contract except where specific reference is made
to the Fixed Account.
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The Separate Account is a segregated investment account of Great
American Reserve Insurance Company ("Great American Reserve"),
and is comprised of seven investment portfolios each of which is
managed by PADCO Advisors II, Inc. ("PADCO"). Allocations to the
Separate Account will be invested in the separate investment
p o r tfolios ("Subaccounts") selected. You bear the full
investment risk with respect to the Separate Account. Seven
Subaccounts are currently available under the Contract with the
following investment objectives:
The Nova Subaccount - To provide investment returns that
correspond to the performance of a benchmark for common stock
securities.
The Ursa Subaccount - To provide investment results that will
inversely correlate to the performance of a benchmark for common
stock securities.
The OTC Subaccount - To attempt to provide investment results
that correspond to the performance of a benchmark for over-the-
counter securities.
The Precious Metals Subaccount - To attempt to provide investment
results that correspond to the performance of a benchmark
primarily for metals-related securities.
The U.S. Government Bond Subaccount - To provide investment
results that correspond to the performance of a benchmark for
U.S. Government securities.
The Juno Subaccount - To provide total return before expenses and
costs that inversely correlates to the price movements of a
benchmark for U.S. Treasury debt instruments or futures contracts
on a specified debt instrument.
T h e Money Market Subaccount - To provide current income
consistent with stability of capital and liquidity.
Six of these Subaccounts seek investment results that correspond
over time to a specified benchmark, as follows:
SUBACCOUNT BENCHMARK
The Nova Subaccount 125% of the performance of the S&P500
Composite Stock Price Index
The Ursa Subaccount Inverse (opposite) of the S&P500
Composite Stock Price Index
The OTC Subaccount NASDAQ 100 Index (NDX)
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The Precious Metals Philadelphia Stock Exchange
Subaccount Gold/Silver Index (XAU)
The U.S. Government 120% of the price movement of current
Bond Subaccount Long Treasury Bond
The Juno Subaccount Inverse (opposite) of the price
movement of the current Long Treasury
Bond
This Contract is designed to be used with tactical asset
allocation or market-timing investment services. Providers of
such services are engaged by you to make allocation and transfer
decisions on your behalf. You should consider whether this
Contract with such services is appropriate for your needs as well
as the tax consequences related to such services (see "Tactical
Allocation Services" and "Federal Income Taxes -- Pre-Retirement
Distributions").
Investments in the Money Market Subaccount are neither insured
nor guaranteed by the U.S. Government.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED
U P ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus contains information about the Contract and the
Separate Account that a prospective Contract Owner should know
before investing. It should be read and retained for future
reference. Additional information about the Contract and the
Separate Account is contained in a Statement of Additional
Information, dated November 1, 1996, and as supplemented October
24, 1997, which has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The
Statement of Additional Information is available without charge
upon request by writing to or calling PADCO Financial Services,
Inc. ("PFS"), at the above address or number. The table of
contents for the Statement of Additional Information is included
on page II-__ of this Prospectus.
The date of this Prospectus is November 1, 1996, as supplemented
October 24, 1997.
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TABLE OF CONTENTS
Page
PART I
DEFINITIONS I-
PROSPECTUS SUMMARY I-
FEES AND EXPENSES OF THE SUBACCOUNTS I-
FINANCIAL STATEMENTS I-
FINANCIAL HIGHLIGHTS OF THE SUBACCOUNTS I-
GREAT AMERICAN RESERVE INSURANCE COMPANY I-
THE SEPARATE ACCOUNT I-
INVESTMENTS OF THE SUBACCOUNTS I-
Eligible Investments I-
Investment Objectives I-
The Nova Subaccount I-
The Ursa Subaccount I-
The OTC Subaccount I-
The Precious Metals Subaccount I-
The U.S. Government Bond Subaccount I-
The Juno Subaccount I-
The Money Market Subaccount I-
Special Risk Considerations I-
Addition or Deletion of Subaccounts I-
TACTICAL ALLOCATION SERVICES I-
CHARGES AND DEDUCTIONS I-
Withdrawal Charge I-
Mortality and Expense Risk Charge I-
Administrative Fee I-
Investment Advisory Fee and Other Expenses I-
Subaccount Administration Fee I-
Payments of Certain Charges and Deductions I-
Page
Premium Taxes I-
DESCRIPTION OF THE CONTRACT I-
Purchase Payments I-
Changing Financial Advisors I-
Accumulation Provisions I-
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Accumulation Units I-
Value of an Accumulation Unit I-
Valuation Periods I-
The Fixed Account I-
Payment on Death I-
Beneficiary I-
Ownership I-
Account Transfers I-
Withdrawals I-
Suspension or Deferral of Payments I-
Annuity Provisions I-
General I-
Selection of Annuity Date and Annuity Options I-
Change of Annuity Date or Annuity Option I-
Annuity Options I-
Minimum Annuity Payments I-
Proof of Age, Sex, and Survival I-
Notices and Elections I-
Amendment of Contract I-
Ten-Day Right to Review I-
FEDERAL INCOME TAXES I-
Pre-Retirement Distributions I-
General I-
Diversification I-
Multiple Contracts I-
Contracts Owned by Non-Natural Persons I-
Tax Treatment of Assignments I-
Income Tax Withholding I-
Tax Treatment of Withdrawals;
Non-Qualified Contracts I-
Tax Treatment of Withdrawals; Qualified Plans I-
Tax Treatment of Withdrawals; Qualified Contracts I-
Tax-Sheltered Annuities; Withdrawal Limitations I-
Page
SEPARATE ACCOUNT VOTING RIGHTS I-
REPORTS TO CONTRACT OWNERS I-
DISTRIBUTION OF CONTRACTS I-
STATE REGULATION I-
LEGAL PROCEEDINGS I-
INDEPENDENT ACCOUNTANTS I-
REGISTRATION STATEMENT I-
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LEGAL MATTERS I-
PART II
THE SEPARATE ACCOUNT II-
INVESTMENT OBJECTIVES AND POLICIES OF THE SUBACCOUNTS II-
General II-
The Nova Subaccount II-
The Ursa Subaccount II-
The OTC Subaccount II-
The Precious Metals Subaccount II-
The U.S. Government Bond Subaccount II-
The Juno Subaccount II-
The Money Market Subaccount II-
The Benchmarks II-
SPECIAL RISK CONSIDERATIONS II-
Portfolio Turnover II-
Tracking Error II-
Aggressive Investment Techniques II-
INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES II-
PERFORMANCE INFORMATION II-
PORTFOLIO TRANSACTIONS AND BROKERAGE II-
Page
MANAGEMENT OF THE SEPARATE ACCOUNT II-
Board of Managers II-
PADCO Advisors II, Inc. II-
PADCO Service Company, Inc. II-
Costs and Expenses II-
TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION II-
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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.
This Prospectus does not constitute an offer of, or solicitation
of an offer to acquire, any variable annuity contracts offered by
this Prospectus in any jurisdiction to anyone to whom it is
u n lawful 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
m a rket 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.
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Contract Date: The date a Contract is issued to a Contract
Owner.
Contract Owner: The person entitled to exercise all rights under
a Contract. This person is also referred to in this Prospectus
as "you." A Contract Owner may be a non-natural person (e.g., a
corporation, trust, or certain other entities). (See page I-__.)
Contract Value: The sum of the amounts allocated to the Fixed
Account and the amounts allocated to the Separate Account. (See
page I-__.)
Financial Advisor: A registered investment adviser, or an
investment adviser who is excluded from registration with the
Securities and Exchange Commission, selected to provide your
tactical allocation or market-timing investment services.
Fixed Account: The general account of Great American Reserve
which provides guaranteed values and periodically adjusted
interest rates.
Fixed Account Value: The value of the portion of your Contract
Value allocated to the Fixed Account.
Fixed Annuity: A series of periodic payments of predetermined
amounts beginning with the Annuity Date that do not vary with
investment experience.
General Account: The assets of Great American Reserve with the
exception of the Separate Account and other segregated asset
accounts.
Great American Reserve: Great American Reserve Insurance
Company.
Joint Contract Owner: If named, a person entitled to exercise
all rights under a Contract along with the Contract Owner. Any
Joint Contract Owner must be the spouse of the Contract Owner.
Market Timing: An investment strategy involving potentially
frequent shifting of assets between investments in domestic
equity securities (e.g., the Nova Subaccount) and investments in
cash items (e.g., the Money Market Subaccount).
Nonqualified Contract: A Contract issued under a nonqualified
plan, which is not a Qualified Contract.
PADCO: PADCO Advisors II, Inc.
PFS: PADCO Financial Services, Inc.
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Purchase Payments: Premium payments made to Great American
Reserve under the terms of the Contract.
Qualified Contract: A Contract issued under a retirement plan
which receives favorable tax treatment under Sections 401(a),
403(a) and (b), 408, or 457, or any similar provision of the
Internal Revenue Code where pre-tax contributions are accepted.
(See page I-__.)
Separate Account: The segregated asset account that Great
American Reserve has established pursuant to the provisions of
the insurance code of the State of Texas, and identified as the
Rydex Advisor Variable Annuity Account.
Separate Account Value: The value of the portion of your
Contract Value allocated to the Separate Account.
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
( f orty-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-__.)
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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.
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PROSPECTUS SUMMARY
"You" refers to the Contract Owner. "We," "us," or "Great
American Reserve" refers to Great American Reserve Insurance
Company.
The Separate Account
The Separate Account is currently divided into seven
Subaccounts in which Purchase Payments under this Contract may be
invested. Initial Purchase Payments allocable to the Separate
Account will first be allocated to the
Subaccount. During the first 14 days following the date of issue
of the Contract (the "Contract Date"), no transfers will be
allowed. Subsequently, transfers may only be made by your
Financial Advisor. Your Contract Value will reflect the
investment performance of your Subaccounts. (See "The Separate
Account" on page I-__, "Investments of the Subaccounts" on page
I-__, "Account Transfers" on page I-__, and "Tactical Allocation
Services" on page I-__.)
T h e s even Subaccounts, including the Money Market
Subaccount, are managed by PADCO. (See "PADCO" in Part II of
this Prospectus.)
Retirement Plans
T h e C ontract may currently be issued pursuant to
nonqualified retirement plans, individual retirement annuities
("IRAs"), or Section 403(b) Annuities ("TSAs").
Purchase Payments
The Contract permits Purchase Payments to be paid on a
flexible basis at any time in any amount meeting specified
minimum requirements. The minimum initial Purchase Payment that
Great American Reserve will accept is $25,000. The minimum
subsequent Purchase Payment is $1,000. (See "Purchase Payments"
on page I-__.)
The full amount of your Purchase Payments, less applicable
premium tax due, if any, will be invested. However, certain
charges and deductions will be made from your Contract Value.
(See "Charges and Deductions" on page I-__.)
Charges and Deductions
Withdrawal Charge. A withdrawal charge is deducted in the
event of withdrawal of Contract Values, subject to certain
exceptions. If the withdrawal charge applies, it will equal a
specified percentage of each Purchase Payment paid under the
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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 related to
administration of the Contracts. (See "Administrative Fee" on
page I-__.)
Mortality and Expense Risk Charge. Great American Reserve
will deduct a daily mortality and expense risk charge equal to an
annual rate of 1.25% of the average daily net assets of each
Subaccount. This charge is made to compensate Great American
Reserve for the risk of guaranteeing not to increase the
administrative fee regardless of actual administrative costs and
for the mortality guarantees Great American Reserve makes under
the Contract. (See "Mortality and Expense Risk Charge" on page
I-__.)
Subaccount Administration Fee. Various Subaccount
administration fees, with maximum annual rates ranging from 0.20%
to 0.25% of a Subaccount's average daily net assets, also are
payable by the Subaccounts to PADCO Service Company, Inc. (the
" S e rvicer"), 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
p r ovided tactical allocation or market-timing services by
investment advisers registered, or excluded from registration,
under the Investment Advisers Act of 1940. Tactical Allocation
Services consist of making allocation and transfer decisions.
You are responsible for selecting, supervising, and paying your
F i n ancial Advisor and must execute a power of attorney
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authorizing your Financial Advisor to provide Tactical Allocation
Services. In this regard, you may redeem your Contract in whole
or in part, but only your Financial Advisor may contact the
Servicer with allocation and transfer decisions. The Board of
Managers of the Separate Account (the "Managers") has not
reviewed the qualifications of any Financial Advisor and has not
considered payments to Financial Advisors in connection with its
review of investment advisory contracts for the Separate Account.
(See "Tactical Allocation Services" at page I-__.)
Upon notification to the Servicer of the death, termination,
or resignation of your Financial Advisor, your Separate Account
Value will immediately be transferred into the Money Market
Subaccount. (See "Changing Financial Advisors" at page I-__ for
a description of the applicable procedures when your Financial
Advisor dies, resigns, or has been terminated.)
Annuity Payments
Monthly annuity payments will start on the Annuity Date.
You may select the Annuity Date. You may also select an annuity
payment option. You may change your selections later. (See
"Change of Annuity Date or Annuity Option" on page I-__.)
If the net Contract Value at the Annuity Date is less than
$10,000 ($3,500 for Qualified Contracts), Great American Reserve
reserves the right to pay the Contract Value in a lump sum in
lieu of annuity payments. For further information regarding the
tax consequences of a lump sum payment, see "Tax Treatment of
Withdrawals; Non-Qualified Contracts" at page I-__ and "Tax
Treatment of Withdrawals; Qualified Contracts" at page I-__. If
any annuity payment would be less than $50, Great American
Reserve may change the frequency of payments to intervals that
will result in payments of at least $50. (See "Minimum Annuity
Payments" on page I-__.)
Account Transfers
All or part of your Contract Value may be transferred among
the Subaccounts by your Financial Advisor at any time and without
charge prior to the Annuity Date. Transfers to and from the
Fixed Account are also permitted, but are subject to certain
limitations. (See "Account Transfers" on page I-__.)
Payment on Death
If the Contract Owner dies prior to the Annuity Date, Great
American Reserve will pay the greater of Purchase Payments (less
withdrawals) or the Contract Value (subject to certain state
variations). (See "Payment on Death" on page I-__.)
Withdrawals
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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
e a c h Subaccount. Consequently, PADCO expects that each
S u baccount will generally experience significant portfolio
t u r n over, 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
t h e Money Market Subaccount) also may engage in certain
aggressive investment techniques, which may include engaging in
short sales and transactions in futures contracts and options on
securities, stock indexes, and futures contracts.
Although liquidity risks are often inherent in market timing
a r rangements, the Subaccounts have procedures designed to
maximize liquidity of the Subaccounts. In particular, the
Subaccounts' use of futures contracts and options on securities,
stock indexes and futures contracts offer a highly liquid, cost-
effective method of investing in securities and are an effective
means by which to accommodate the massive switching and high
portfolio turnover rates that may result from asset allocation
and market timing investment strategies. A discussion of the
special risks associated with the investment in the Subaccounts
is provided under "Special Risk Considerations" under
"Investments of the Subaccounts" in Part I and in Part II of this
Prospectus. For further information concerning the investment
policies and strategies of the Subaccounts, see "Investments of
the Subaccounts" in Part I and "Investment Objectives and
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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.
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FEES AND EXPENSES OF THE SUBACCOUNTS
<TABLE>
<CAPTION>
<S> <C>
Contract Owner Transaction Expenses1/
Sales Load Imposed on Purchases None
Withdrawal Charge (as a percentage of
Purchase Payments)
First and Second Years Since Payment 7%
Third Year Since Payment 6%
Fourth Year Since Payment 5%
Fifth Year Since Payment 4%
Sixth Year Since Payment 3%
Seventh Year Since Payment 2%
Eighth Year or More Since Payment 0%
Surrender Fee None
Exchange Fee None
Annual Contract Fee None
Separate Account Annual Expenses (as a percentage of average daily net assets
in
each Subaccount)
Mortality and Expense Risk Charge 1.25%
Administrative Fee 0.15%
</TABLE>
1/ Neither state premium taxes nor fees that you pay to your Financial
Advisor are shown. Any premium tax due will be deducted from
P u rchase Payments or from Contract Values at a later date.
Currently, state premium taxes range from 0% to 3.5%.
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<TABLE>
<CAPTION>
Subaccount Annual Expenses
Nova Ursa
Subaccount Subaccount
<S> <C> <C>
Investment Advisory Fees 0.75% 0.90%
Subaccount Administration Fees 0.25% 0.25%
Other Expenses (after
reimbursement)2/ 0.40% 0.35%
Total Separate Account Annual
Expenses (after reimbursement)3/ 2.80% 2.90%
</TABLE>
2/ Other Expenses are based on estimates.
3/ The total subaccount annual expense ratios for the Nova, Ursa, OTC,
Precious Metals, Bond, Juno, and Money Market Subaccounts (as of June
30, 1997) would have been 3.41%, 8.11%, 4.69%, 10.75%, 4.43%, 4.73%,
and 2.23%, respectively, had PADCO and the Servicer not agreed to
reduce advisory and subaccount administration fees, respectively, in
accordance with the expense limitation described below. To limit the
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 these expense
limitations 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 October 24,
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 October 24, 1999.
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<TABLE>
<CAPTION>
Subaccount Annual Expenses
Precious
OTC Metals
Subaccount Subaccount
<S> <C> <C>
Investment Advisory Fees 0.75% 0.75%
Subaccount Administration Fees 0.20% 0.20%
Other Expenses (after
reimbursement)2/ 0.45% 0.45%
Total Separate Account Annual
Expenses (after reimbursement)3/ 2.80% 2.80%
</TABLE>
2/ Other Expenses are based on estimates.
3/ The total subaccount annual expense ratios for the Nova, Ursa, OTC,
Precious Metals, Bond, Juno, and Money Market Subaccounts (as of June
30, 1997) would have been 3.41%, 8.11%, 4.69%, 10.75%, 4.43%, 4.73%,
and 2.23%, respectively, had PADCO and the Servicer not agreed to
reduce advisory and subaccount administration fees, respectively, in
accordance with the expense limitation described below. To limit the
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 these expense
limitations 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 October 24,
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 October 24, 1999.
<PAGE> I-18
<PAGE>
<TABLE>
<CAPTION>
Subaccount Annual Expenses
Money
Bond Juno Market
<S> Subaccount Subaccount Subaccount
<C> <C> <C>
Investment Advisory Fees 0.50% 0.90% 0.50%
Subaccount Administration
Fees 0.20% 0.25% 0.20%
Other Expenses (after
reimbursement)2/ 0.30% 0.35% 0.10%
2/ Other Expenses are based on estimates.
<PAGE> I-19
<PAGE>
Total Separate Account
Annual Expenses (after
reimbursement)3/ 2.40% 2.90% 2.20%
</TABLE>
EXAMPLES
1. If you surrender your Contract, or if you annuitize, at
the end of the applicable period:
<TABLE>
<CAPTION>
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 these expense
limitations 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 October 24,
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 October 24, 1999.
<PAGE> I-20
<PAGE>
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 $98 $139
Subaccount
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 $28 $86
Subaccount
The Bond Subaccount $24 $74
The Juno Subaccount $29 $89
The Money Market Subaccount $22 $68
</TABLE>
The purpose of the above table is to assist you in
understanding the various costs and expenses that you will
bear directly or indirectly. The Examples should not be
considered a representation of future expenses and charges.
Actual expenses may be greater or less than those shown.
Similarly, the assumed 5% annual rate of return is not an
estimate or a guarantee of future investment performance.
Neither the table nor the Examples reflect any state premium
<PAGE> I-21
<PAGE>
taxes that may be applicable to a variable annuity contract,
which taxes currently range from 0% to 3.5%, or any fees that
you pay your Financial Advisor. See "Charges and Deductions"
at page I-__.
FINANCIAL STATEMENTS
Financial statements of Great American Reserve, for the
fiscal year ended December 31, 1996, can be found in the
Statement of Additional Information, copies of which are
available upon request and without charge. This information
may be obtained by writing or calling PFS at the address or
telephone number set forth on the cover page of this
Prospectus. Unaudited financial statements of the Separate
Account, for the period from May 7, 1997 (the date that the
Separate Account commenced operations), through June 30, 1997,
found in the Statement of Additional Information, are included
in the Separate Account's 1997 Semi-Annual Report to Contract
Owners, which was filed on Form N-30D with the SEC via EDGAR
transmission on September 2, 1997.
<PAGE> 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 Subaccount and the U.S. Government Bond
Subaccount each commenced operations on May 29, 1997. The
following financial highlights relating to the Subaccounts,
for the period identified, are unaudited. This information
should be read in conjunction with the financial statements
and related notes included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
The Nova The Ursa
Subaccount Subaccount
For the Period From For the Period From
May 7, 1997, to May 7, 1997, to
June 30, 1997 June 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value at
Beginning of Period $ 10.00 $ 10.00
Investment Income 0.03 0.04
Expenses 0.06 0.11
Net Investment Income (Loss) (0.03) (0.07)
Net Realized and Unrealized
Gains (Losses)on Securities 1.00 (0.77)
Net Increase (Decrease) in
Accumulation Unit Value 0.97 (0.84)
Accumulation Unit Value
at End of Period $ 10.97 $ 9.16
Net Increase (Decrease) in Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 9.7% (8.4)%
Ratios to Average Net Assets*
Net Expenses+ 2.80% 2.90%
Net Investment Income (1.77)% (5.20)%
Supplementary Data
<PAGE> I-23
<PAGE>
Portfolio Turnover Rate** 101.18% 0%
Number of Accumulation Units
Outstanding at End of
Period 427,743 23,715
</TABLE>
____________________
+ The annualized ratios of gross expenses to average net
assets for the Nova Subaccount and the Ursa Subaccount are
3.41% and 8.11%, respectively, for the period from May 7,
1997 to June 30, 1997. (See Footnote 3 under "Fees and
Expenses of the Subaccounts" at page I-___.)
* Annualized.
** Portfolio turnover rate is calculated without regard to
short-term securities having a maturity of less than one
year. Each of the Nova Subaccount and the Ursa Subaccount
typically holds most of its investments in options and
futures contracts which are deemed short-term securities.
<PAGE> 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
June 30, 1997 June 30, 1997
<S> <C> <C>
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income 0.07 0.01
Expenses 0.07 0.09
Net Investment Income (Loss) 0 (0.08)
Net Realized and Unrealized
Gains (Losses)
on Securities 0.40 (1.05)
Net Increase (Decrease)
in Accumulation Unit Value 0.40 (1.13)
Accumulation Unit Value
at End of Period $ 10.40 $ 8.87
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 4.0% (11.3)%
Ratios to Average Net Assets*
Net Expenses+ 2.80% 2.80%
Net Investment Income (0.07)% (9.35)%
Supplementary Data
Portfolio Turnover Rate** 0% 97.1%
Number of Accumulation Units
Outstanding at End of Period 64,764 14,795
</TABLE>
____________________
<PAGE> I-25
<PAGE>
+ The annualized ratios of gross expenses to average net
assets for the OTC Subaccount and the Precious Metals
Subaccount are 4.69% and 10.75%, respectively, for the
period from May 7, 1997 to June 30, 1997 (for the OTC
Subaccount), and the period from May 29, 1997 to June 30,
1997 (for the Precious Metals Subaccount). (See Footnote
3 under "Fees and Expenses of the Subaccounts" at page I-
___.)
* Annualized.
** Portfolio turnover rate is calculated without regard to
short-term securities having a maturity of less than one
year.<PAGE> I-26
<PAGE>
<TABLE>
<CAPTION>
The U.S. Government
Bond Subaccount The Juno Subaccount
<S> <C> <C>
For the Period From For the Period From
May 29, 1997, to May 7, 1997, to
June 30, 1997 June 30, 1997
Per Accumulation Unit
Income Performance:
Accumulation Unit Value
at Beginning of Period $ 10.00 $ 10.00
Investment Income 0.06 0.07
Expenses 0.04 0.07
Net Investment Income (Loss) 0.02 0
Net Realized and Unrealized
Gains (Losses)
on Securities 0.28 0.22
Net Increase (Decrease) in
Accumulation Unit Value 0.30 0.22
Accumulation Unit Value
at End of Period $ 10.30 $ 10.22
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 3.0% 2.2%
Ratios to Average Net Assets*
Net Expenses+ 2.40% 2.90%
Net Investment Income 2.30% 0.62%
Supplementary Data
Portfolio Turnover Rate** 189.7% 0%
Number of Accumulation
Units Outstanding
at End of Period 5,126 146,687
</TABLE>
______________________
+ The annualized ratios of gross expenses to average net
assets for the Bond Subaccount and the Juno Subaccount are
<PAGE> I-27
<PAGE>
4.43% and 4.73%, respectively, for the period from May 29,
1997 to June 30, 1997 (for the Bond Subaccount), and the
period from May 7, 1997 to June 30, 1997 (for the Juno
Subaccount). (See Footnote 3 under "Fees and Expenses of
the Subaccounts" at page I-___.)
* Annualized.
** Portfolio turnover rate is calculated without regard to
short-term securities having a maturity of less than one
year. The Juno Subaccount typically holds most of its
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> I-28
<PAGE>
<TABLE>
<CAPTION>
The Money Market
Subaccount
For the Period From
May 7, 1997, to
June 30, 1997
<S> <C>
Per Accumulation Unit Income Performance:
Accumulation Unit Value at
Beginning of Period $ 10.00
Investment Income 0.24
Expenses 0.10
Net Investment Income (Loss) 0 .14
Net Realized and Unrealized
Gains (Losses)on Securities 0.01
Net Increase (Decrease) in
Accumulation Unit Value 0.15
Accumulation Unit Value at End of
Period $ 10.15
Net Increase (Decrease) in
Accumulation Unit
Value as a % of Beginning
Accumulation Unit Value 1.5%
Ratios to Average Net Assets*
Net Expenses+ 2.20%
Net Investment Income 3.32%
Supplementary Data
Portfolio Turnover Rate** 0%
Number of Accumulation Units
Outstanding at End of Period 193,123
</TABLE>
______________________
+ The annualized ratio of gross expenses to average net assets
for the Money Market Subaccount is 2.23% for the period from
May 7, 1997 to June 30, 1997. (See Footnote 3 under "Fees
and Expenses of the Subaccounts" at page I-___.)
<PAGE> I-29
<PAGE>
* Annualized.
** Portfolio turnover rate is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 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
T e x as and a wholly-owned subsidiary of Conseco, Inc.
("Conseco"). The operations of Great American Reserve are
handled by Conseco. Conseco is a publicly-owned financial
services holding company, the principal operations of which
a r e the development, marketing and administration of
specialized annuity and life insurance products. Conseco is
located at 11825 N. Pennsylvania Street, Carmel, Indiana
46032.
A l l inquiries regarding the Separate Account, the
Contracts, or any related matter should be directed to Great
American Reserve's Administrative Office at the address and
telephone number shown on the cover page of this Prospectus.
The financial statements of Great American Reserve included in
the Statement of Additional Information should be considered
only as bearing upon the ability of Great American Reserve to
meet the obligations under the Contracts. Furthermore,
neither the assets of Conseco nor those of any company in the
Conseco group of companies other than Great American Reserve
support these obligations. As of December 31, 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 diversified 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
G r eat American Reserve's property, the Subaccounts, as
segregated investment accounts of the Separate Account, are
not chargeable with liabilities arising out of any other
business that Great American Reserve may conduct. Obligations
of the Subaccounts, however, are obligations of Great American
Reserve. Income, gains, or losses, whether or not realized,
f r om assets allocated to each of the Subaccounts, in
accordance with the Contracts, are credited to or charged
<PAGE> I-31
<PAGE>
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
Annuity Date will vary with the performance of the Subaccounts
your Financial Advisor selects.
INVESTMENTS OF THE SUBACCOUNTS
Eligible Investments
Each Subaccount is a separate investment portfolio of the
Separate Account. Purchase Payments allocated to a Subaccount
will be added to the assets of that Subaccount at Accumulation
Unit Value (without any fee or charge) and will be invested as
determined by PADCO.
All of your Purchase Payments allocable to the Separate
A c c ount will first be allocated to the Money Market
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
E a c h Subaccount has its own distinct investment
objective. There is, of course, no guarantee that any
Subaccount will achieve its investment objective. The
i n v e stment objectives of the Subaccounts and certain
investment restrictions are fundamental policies and may not
be changed without the affirmative vote of the majority of the
Contract Owners of that Subaccount. Except for the Money
Market Subaccount, each Subaccount is intended to provide
<PAGE> I-32
<PAGE>
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 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 &
Poor's Corporation and Standard & Poor's Corporation makes no
representation regarding the advisability of investing in the
Nova Subaccount through the Contract or otherwise (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
t r ading 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
<PAGE> I-33
<PAGE>
due to a compounding effect. In seeking to achieve its
objective, the Ursa Subaccount primarily engages in short
s a les 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 correspond to the performance of a
b e n c h mark 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
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
s e curities. The Precious Metals Subaccount s current
benchmark is the Philadelphia Stock Exchange Gold/Silver
Index (the "XAU Index"). To achieve its objective, the
Precious Metals Subaccount invests in securities included in
the XAU Index. In addition, the Precious Metals Subaccount
may invest in other securities that are expected to perform in
a manner that will 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
<PAGE> I-34
<PAGE>
i n vestments 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
m i n i ng 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.
G o v e rnment ("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 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.
<PAGE> I-35
<PAGE>
Government, its agencies or instrumentalities, as well as in
repurchase agreements collateralized fully by U.S. Government
S e c urities, and in bank money market instruments and
commercial paper.
Special Risk Considerations
The assets of the Subaccounts will be derived from
Contract Owners who use the Subaccounts as part of a tactical
allocation or market-timing investment strategy pursuant to
advice received from professional money managers. In that
circumstance, Subaccount values may be transferred frequently
to take advantage of anticipated changes in market conditions.
The strategies employed by a Contract Owner's Financial
Advisor may result in considerable assets moving in and out of
the Subaccounts. Consequently, PADCO expects that the
Subaccounts will generally experience significant portfolio
t u rnover, 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
i n f o rmation concerning the portfolio turnover of the
Subaccounts, see "Financial Highlights of the Subaccounts;"
"Special 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
" I nvestment Objectives and Policies" and "Special Risk
Considerations" in Part II of this Prospectus for a discussion
of these factors.
The Subaccounts (other than the Money Market Subaccount)
may engage in certain aggressive investment techniques, which
may include engaging in short sales and transactions in
futures contracts and options on securities, stock indexes,
and futures contracts. As discussed more fully under
"Investment Objectives and Policies," "Special Risk
C o n s iderations," and "Investment Techniques and Other
Investment Policies" in Part II of this Prospectus, these
techniques are specialized and involve risks that are not
traditionally associated with similar contracts.
Addition or Deletion of Subaccounts
Great American Reserve may, at its discretion, no longer
make available any of the Subaccounts shown on the Contract
Schedule. Great American Reserve may also offer additional
new Subaccounts.
<PAGE> I-36
<PAGE>
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
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 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.
<PAGE> I-37
<PAGE>
Great American Reserve will send you a notice not more than
five business days after receipt of information from the
Servicer that no Financial Advisor is serving in relation to
your Contract. This notice will include a reminder that you
will be required to notify the Servicer of the name of your
new 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
v a riations, the withdrawal charge will be a specified
percentage of the sum of the Purchase Payments paid within
seven years prior to the date of withdrawal, adjusted for any
prior withdrawals. There is no charge on withdrawals of (a)
Purchase Payments that have been in the Contract more than
seven complete Contract years or (b) free withdrawal amounts
described below. The length of time from receipt of a
Purchase Payment to the time of withdrawal determines the
withdrawal charge. For the purpose of calculating the
withdrawal charge, withdrawals will be deemed made first from
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>
<PAGE> I-38
<PAGE>
Complete Years
Withdrawal Charge Since Receipt of
Payment
<S> <C>
7% 0
7% 1
6% 2
5% 3
4% 4
3% 5
2% 6
0% 7 and thereafter
</TABLE>
In addition, in certain states the following
circumstances further limit or reduce withdrawal charges: for
issue ages up to 56, there is no withdrawal charge made after
you attain age 67 and later; for issue ages 57 and later, any
otherwise applicable withdrawal charge will be multiplied by a
factor ranging from 0.9 to 0 for Contract years one through
10.
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
p a i d to your Financial Advisor are treated as free
withdrawals, and are not counted toward the 10% limit;
however, there may be certain adverse tax consequences. (See
"Federal Income Taxes -- Pre-Retirement Distributions" on page
I-__.) In addition, with respect to any Contract which is
owned by a "charitable remainder unitrust" or a "charitable
remainder annuity trust" within the meaning of Section 664(d)
of the Code ("Charitable Remainder Trust"), Great American
Reserve may, in its discretion, permit an additional free
withdrawal necessary to fund required distributions by the
Charitable Remainder Trust in any contract year. In order for
a Charitable Remainder Trust to qualify for such an increase,
the trustee or trustees of the Charitable Remainder Trust will
be required to certify: (i) that such trust is a bona fide
"charitable remainder unitrust" or a "charitable remainder
annuity trust" within the meaning of Section 664 of the Code,
and 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
<PAGE> I-39
<PAGE>
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.
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
t o increase over the life of the Contract, will be
i n s ufficient 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
<PAGE> I-40
<PAGE>
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
b e a r certain expenses incurred in their operations.
Information on the investment advisory fees and other expenses
payable by the Separate Account is set forth under "Management
of the Separate Account" in Part II of this Prospectus and
"Board of Managers of the Separate Account" in the Statement
of Additional Information.
Subaccount Administration Fee
The Subaccounts also pay Subaccount administration fees
to the Servicer. Pursuant to a subaccount administration
agreement between the Separate Account and the Servicer, the
Subaccounts pay Subaccount administration fees at an annual
rate applied to the daily net assets of each Subaccount. The
Servicer provides the Subaccounts with tactical allocation
administrative services, including, among others,
communications with Financial Advisors (including receipt of
and acting upon transfer requests), bookkeeping, determination
o f Accumulation Unit Values, and Subaccount accounting
services. Information on the Subaccount administration fee
payable by the Subaccounts is set forth under "Management of
the Separate Account" in Part II of this Prospectus and "Board
of Managers of the Separate Account" in the Statement of
Additional Information.
Payments of Certain Charges and Deductions
The mortality and expense risk charge, the administrative
f e e, 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
<PAGE> I-41
<PAGE>
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%.
P r emium tax rates are subject to change by law,
administrative interpretations, or court decisions. Premium
tax amounts will depend on, among other things, your state of
residence, Great American Reserve's status within your state,
and the premium tax laws of your state.
DESCRIPTION OF THE CONTRACT
Purchase Payments
The minimum initial Purchase Payment for a Contract is
$25,000. The minimum subsequent Purchase Payment is $1,000.
Subsequent Purchase Payments may be paid at any time to the
Administrative Office. The maximum deposit without prior
approval from Great American Reserve is $500,000.
Application for a Contract or acceptance of the first
Purchase Payment is subject to Great American Reserve's
underwriting rules for such transactions. Great American
Reserve reserves the right to reject any application. A
properly-completed application that is accompanied by the
initial Purchase Payment and all information necessary for the
processing of the application will be accepted within two
business days of Great American Reserve's receipt of the
properly- completed application (i.e., information sufficient
to permit Great American Reserve to determine to issue a
Contract). Great American Reserve may retain an initial
Purchase Payment for up to five business days while attempting
to obtain information sufficient to issue the Contract. If an
application is not completed properly and cannot be processed
and necessary information obtained within five business days,
Great American Reserve will inform you of the reasons for the
delay and offer to return your Purchase Payment unless you
consent to Great American Reserve retaining the initial
Purchase Payment until we have received the information we
require.
Changing Financial Advisors
You may change your Financial Advisor. However, prior to
a change taking effect, the new Financial Advisor must satisfy
the requirements of Great American Reserve, the Servicer, and
PADCO, as set forth in the Contract application, and you must
<PAGE> I-42
<PAGE>
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
( i i i ) surrender your Contract, subject to applicable
withdrawal charges and tax penalties. Great American Reserve
will notify you upon receipt of notification from the Servicer
t h at the Servicer has received notice terminating the
relationship, or if the Servicer receives notice from either a
court of competent jurisdiction or the applicable regulatory
authority terminating such relationship. (See "Tactical
Allocation Services" on page I-__.)
Accumulation Provisions
Accumulation Units
Purchase Payments may be allocated to the Fixed Account
or the Separate Account. Initial Purchase Payments allocated
to the Separate Account will first be deposited in the Money
Market Subaccount. During the first 14 days following the
Contract Date, no transfers are allowed. (See discussion
under "Eligible Investments" on page I-__.) After this 14-day
period, the Separate Account Value may be transferred to the
S u baccounts selected pursuant to instructions from the
Financial Advisor. Upon allocation, Purchase Payments are
converted into Accumulation Units for that Subaccount. The
number of Accumulation Units is determined by dividing the
amount allocated to the Subaccount by the dollar value of an
Accumulation Unit for that Subaccount for the Valuation Period
in which the Purchase Payment is received at Great American
Reserve's Administrative Office or, in the case of the initial
Purchase Payment in accordance with the procedures described
above under "Purchase Payments." The number of Accumulation
Units will not change as a result of investment experience.
Value of an Accumulation Unit
For each Subaccount, the value of an Accumulation Unit
w a s arbitrarily set at $10 when the Subaccount was
established. The value of an Accumulation Unit may increase
or decrease from one Valuation Period to the next. The value
<PAGE> I-43
<PAGE>
for any Valuation Period is determined by dividing the current
market value of total Subaccount assets, less liabilities, by
the total number of units of that Subaccount outstanding.
Valuation Periods
A Valuation Period is the interval from one valuation day
of any Subaccount to the next valuation day, measured from the
time each day the Subaccount is valued.
The Fixed Account
In addition to providing for the allocation of Purchase
Payments to the Separate Account, the Contract also provides
for allocation of Purchase Payments and transfer of Contract
Values to the Fixed Account, which accumulate at a guaranteed
interest rate and become part of Great American Reserve's
General Account. Fixed Annuity Cash Values increase based on
interest rates that may change from time to time. Great
American Reserve guarantees that it will credit daily interest
of at least 3% on an annual basis, compounded annually.
Purchase Payments and transfers to the Fixed Account become
part of the general account of Great American Reserve. The
gains achieved or losses suffered by the Subaccounts have no
effect on the Fixed Account. The mortality and expense risk
charge, administrative fee, investment advisory fees, and the
Subaccount administration fee, as discussed above, are not
deducted from the Fixed Account. The Fixed Account is subject
to certain transfer restrictions (i.e., in any six-month
period, a maximum of 20% of the Fixed Account Value may be
transferred; this restriction, however, is not effective until
one year after the Contract Date). (See "Account Transfers"
at page I-__.) The interests of Contract Owners arising from
the allocation of Purchase Payments or the transfer of
Contract Values to the Fixed Account are not registered under
the Securities Act of 1933. Great American Reserve's general
account is not registered as an investment company under the
Investment Company Act of 1940. Accordingly, the Fixed
Account values are not subject to the provisions that would
apply if registration under those acts were required.
Great American Reserve has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus
that relate to the Fixed Account. Disclosures regarding the
Fixed Account and Great American Reserve's general account,
however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the
a c c u racy and completeness of statements made in the
Prospectus.
<PAGE> I-44
<PAGE>
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 annuity 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
c o ntinue at least as rapidly as under the method of
distribution in effect at such Contract Owner's or Joint
Contract Owner's death. Upon the death of any Contract Owner
during the Annuity Period, the Beneficiary becomes the
Contract Owner. Upon the death of any Joint Contract Owner
during the Annuity Period, the surviving Joint Contract Owner,
if any, will be treated as the Primary Beneficiary. Any other
Beneficiary designation on record at the time of death will be
treated as a Contingent Beneficiary.
If the Contract Owner is not the Annuitant and the
Annuitant dies prior to the Annuity Date, the Contract will
continue in force on the same terms and the Contract Owner
shall thereafter be the Annuitant, unless another person is
designated by the Contract Owner to Great American Reserve's
Administrative Office within thirty days. If the Contract
<PAGE> I-45
<PAGE>
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
i n the application. Unless the Beneficiary has been
irrevocably designated, the Beneficiary may be changed upon
written request to Great American Reserve's Administrative
Office. If acceptable to Great American Reserve, a change of
Beneficiary will take effect as of the date signed, unless
Great American Reserve has already acted in reliance on the
prior status. The estate or heirs of a Beneficiary who dies
before the annuity payment is due have no rights under the
Contract. If no Beneficiary survives when the annuity payment
is due, payment will be made to the Contract Owner's estate.
Ownership
The Contract Owner is the person entitled to all rights
under the Contract. The Annuitant is the Contract Owner
u n l ess otherwise designated in the application or by
endorsement. No contingent owner may be named. Ownership of
the Contract may be transferred to a new Contract Owner. A
transfer of ownership must be in writing and a new power of
attorney to appoint a Financial Advisor must be executed.
These documents must be received by Great American Reserve's
Administrative Office before the transfer of ownership becomes
effective. Such a transfer of ownership does not affect a
designation of Beneficiary. Contracts may not be assigned,
p l edged, or transferred, unless permitted by law. A
collateral assignment does not change contract ownership. The
rights of a collateral assignee have priority over the rights
of a Beneficiary. Any assignment may have adverse tax
consequences. You should consult a competent tax adviser
before making any such designations, transfers, or
assignments.
Account Transfers
Before the Annuity Date, Separate Account Value may be
transferred from one Subaccount 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
<PAGE> I-46
<PAGE>
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)
k e ep your Separate Account Value in the Money Market
Subaccount; (ii) transfer all or part of your Separate Account
Value to the Fixed Account and become subject to Fixed Account
transfer restrictions; or (iii) surrender your Contract,
subject to applicable withdrawal charges and tax penalties.
The Servicer maintains a list of Financial Advisors, but does
not recommend any particular Financial Advisor. (See "Federal
Income Taxes -- Pre-Retirement Distributions" at page I-__).
Transfers may be made in writing, by telephone, or by
electronic medium only from your Financial Advisor directed to
the Servicer. By authorizing the Servicer to accept telephone
and electronic transfer instructions, a Contract Owner agrees
to accept and be bound by the conditions and procedures
established by the Servicer from time to time. 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
T i mes will be approximately thirty minutes (forty-five
minutes, in the case of the Precious Metals Subaccount) prior
to the close of such exchange or market. Telephone and
electronic transfer privileges may be terminated or modified
by the Separate Account at any time. (See page I-__.)
When acting on instructions believed to be genuine,
neither Great American Reserve nor the Servicer will be liable
for any loss resulting from a fraudulent telephone or
electronic transaction request and the Contract Owner would
bear the risk of any such loss. The Servicer will employ
<PAGE> I-47
<PAGE>
r e asonable procedures to confirm that any instructions
communicated by telephone or electronic medium are genuine;
and if the Servicer does not employ such procedures, then
Great American Reserve and the Servicer, as appropriate, may
be liable for any losses due to unauthorized or fraudulent
instructions. The Servicer follows specific procedures for
transactions initiated by telephone or electronic medium,
including, among others, requiring some form of personal
identification or password prior to acting upon instructions
received by telephone or electronic medium, and/or tape
recording of telephone and electronic instructions. Contract
Owners also should be aware that telephone and electronic
transfers may be difficult to implement in a timely manner
during periods of drastic economic or market changes. If such
conditions occur, transfer orders can be made by mail.
Withdrawals
Prior to the earlier of the Annuity Date or the death of
the Annuitant, you may withdraw all or part of your Contract
Value upon written request, less any charges. You may make
one free withdrawal per Contract year from Contract Value of
an amount up to 10% of the Contract Value (as determined on
the date of receipt of the requested withdrawal). Withdrawals
which are authorized by you to remit fees paid to your
Financial Advisor are treated as free withdrawals, and are not
counted toward this 10% limit. Withdrawals may have certain
adverse tax consequences. (See "Federal Income Taxes -- Pre-
Reimbursement Distributions" at page I-___.) There is no
charge on withdrawals of (a) Purchase Payments that have been
in the Contract more than seven complete Contract years or (b)
free withdrawal amounts described above. (See "Charges and
Deductions -- Withdrawal Charge.") A Contract Owner's
election to withdraw must be in writing. The withdrawal
election must be received by Great American Reserve prior to
the Annuity Date. Under certain Qualified Plans, withdrawals
by Contract Owners prior to age 59 1/2 may be restricted and
the consent of your spouse may be required.
On receipt of a Contract Owner's election, Great American
Reserve will cancel the number of Accumulation Units necessary
to equal the dollar amount of the withdrawal plus any
applicable withdrawal charge. (See "Charges and Deductions"
on page I-__.) Unless a Contract Owner instructs otherwise, a
partial withdrawal made by a Contract Owner (including any
withdrawals to remit fees payable to a Financial Advisor) will
be made pro rata among the Subaccounts and the Fixed Account
in which the Contract Owner is invested. Withdrawals and
related charges will be based on values for the Valuation
Period in which the withdrawal election (and the Contract, if
required) are received by written request at Great American
Reserve's Administrative Office. Withdrawal requests may be
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<PAGE>
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
Q u a lified Contracts); otherwise Great American Reserve
reserves the right to treat the partial withdrawal as a total
withdrawal of the Contract Value. Payment of withdrawals may
be deferred (see "Suspension of Payments" below and "Federal
Income Taxes" on page I-__).
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
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.
<PAGE> I-49
<PAGE>
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
g u aranteed annuity payments remaining after that date,
computed on the basis of the assumed net investment rate used
in determining the first monthly payment. See "Determination
<PAGE> I-50
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of Amount of the First Monthly Variable Annuity Payment"
below.
Because it provides a specified minimum number of annuity
payments, this option results in somewhat lower payments per
month than the First Option.
Third Option--Installment Refund Life Annuity. Payments
are made for the installment refund period, which is the time
required for the sum of the payments to equal the amount
applied, and thereafter for the life of the payee.
Fourth Option--Payments for a Fixed Period. Payments are
made for the number of years selected, which may be from 3
through 20. Should the Annuitant die before the specified
number of monthly payments is made, the remaining payments
will be commuted and paid to the designated Beneficiary in a
lump sum payment.
Fifth Option--Joint and Survivor Annuity. Great American
Reserve will make monthly payments during the joint lifetime
of the Annuitant and a joint Annuitant. Payments will
continue during the lifetime of the surviving Annuitant and
will be computed on the basis of 100%, 50%, or 66 % of the
Annuity payment (or limits) in effect during the joint
lifetime.
Minimum Annuity Payments
Annuity payments will be made monthly. However, if any
payment would be less than $50, Great American Reserve may
change the frequency so payments are at least $50 each. If
the net Contract Value to be applied at the Annuity Date is
less than $10,000 ($3,500 for Qualified Contracts), Great
American Reserve reserves the right to pay such amount in a
lump sum. For information regarding the tax consequences of a
lump sum payment, see "Tax Treatment of Withdrawals; Non-
Qualified Contracts" at page I-__ and "Tax Treatment of
Withdrawals; Qualified Contracts" at page I-__.
Proof of Age, Sex, and Survival
Great American Reserve may require proof of age, sex, or
survival of any person upon whose continuation of life annuity
payments depend.
Notices and Elections
All notices and elections under the Contract must be in
writing, signed by the proper party, and be received at Great
American Reserve's Administrative Office to be effective,
except that account transfers may be made by telephone
<PAGE> I-51
<PAGE>
p u r s uant 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.
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
<PAGE> I-52
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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 investment in the
Contract may be zero. The taxable portion of the lump sum
payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess
of an exclusion amount is includible in taxable income. The
exclusion amount for payments based on a fixed annuity option
is determined by multiplying the payment by the ratio that the
investment in the Contract (adjusted for any period certain or
refund feature) bears to the expected return under the
Contract. Payments received after the investment in the
Contract has been recovered (i.e., when the total of the
excludible amounts equals the investment in the Contract) are
fully taxable. The taxable portion is taxed at ordinary
i n c o m e tax rates. Contract Owners, Annuitants and
Beneficiaries under the Contracts should seek competent
f i n a n cial advice about the tax consequences of any
distributions.
Great American Reserve is taxed as a life insurance
company under the Code. For federal income tax purposes, the
Separate Account is not a separate entity from Great American
Reserve and its operations form a part of Great American
Reserve.
Diversification
S e c tion 817(h) of the Code imposes certain
diversification standards on the underlying assets of variable
annuity contracts. The Code provides that a variable annuity
contract will not be treated as an annuity contract for any
<PAGE> I-53
<PAGE>
period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the
United States Treasury Department ("Treasury Department"),
adequately diversified. Disqualification of the Contract as
an annuity contract would result in the imposition of federal
income tax on the Contract Owner with respect to any earnings
allocable to the Contract prior to the receipt of payments
under the Contract. The Code contains a safe harbor provision
which provides that annuity contracts such as the Contracts
meet the diversification requirements if, as of the end of
each quarter, the underlying assets meet the diversification
standards for a regulated investment company and no more than
fifty-five percent (55%) of the total assets consist of cash,
cash items, U.S. Government securities, and securities of
other regulated investment companies. PADCO intends to manage
each of the Subaccounts in a manner that ensures that the
u n d erlying investments of each Subaccount will remain
"adequately diversified" in accordance with the
diversification requirements of Section 817(h) of the Code.
O n March 2, 1989, the Treasury Department issued
R e gulations (Treas. Reg. Section 1.817-5), which established
diversification requirements for the investment portfolios
underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for
variable contracts set forth in the Code and provide an
alternative to the safe harbor provision described above.
Under the Regulations, an investment portfolio will be
adequately diversified if: (1) no more than 55% of the value
of the total assets of the subaccount is represented by any
one investment; (2) no more than 70% of the value of the total
a s s e ts of the subaccount is represented by any two
investments; (3) no more than 80% of the value of the total
a s sets of the subaccount is represented by any three
investments; and (4) no more than 90% of the value of the
total assets of the subaccount is represented by any four
investments.
The Code provides that, for purposes of determining
whether or not the diversification standards imposed on the
underlying assets of variable contracts by Section 817(h) of
the Code have been met, each United States government agency
or instrumentality shall be treated as a separate issuer.
The Treasury Department has indicated that guidelines may
be issued concerning the extent to which variable annuity
contract owners may direct their investments to particular
divisions of a separate account. It is possible that if and
when such guidelines are issued, the Contract may need to be
modified to comply with such guidelines. For these reasons,
Great American Reserves the right to modify the Contract as
<PAGE> I-54
<PAGE>
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
i s generally exempt from federal income tax, but the
provisions of Section 72(u) of the Code may affect the
computation and taxation of the distributions to the income
beneficiary. Purchasers should consult their own tax counsel
or other adviser before purchasing a Contract to be owned by a
non-natural person.
Tax Treatment of Assignments
An assignment or pledge of all or any portion of a
Contract may be treated as a taxable event. Any gain in the
Contract subsequent to the assignment may also be treated as
taxable income in the year in which it is earned. Contract
Owners should therefore consult competent tax advisers should
they wish to assign or pledge their Contracts.
<PAGE> I-55
<PAGE>
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
a u t h o rize 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
i n cludible in gross income (i.e., return of after-tax
contributions).
If the payment of asset allocation advisory fees from
retirement plans qualified under Section 401 and Section
403(b) annuity contracts are treated as distributions, then
Great American Reserve believes that the payment of such fees
will be treated as "eligible rollover distributions," which
are subject to mandatory 20% withholding.
Furthermore, payments from Section 457 plans are wages
subject to mandatory regular income tax withholding, rather
than the pension withholding rules described above.
Participants should consult their own tax counsel or
other tax advisor regarding withholding requirements.
Tax Treatment of Withdrawals; Non-Qualified Contracts
Section 72 of the Code governs treatment of distributions
from annuity contracts. It generally provides that if the
Contract Value exceeds the aggregate Purchase Payments made,
<PAGE> I-56
<PAGE>
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 are not incorporated into Great American
R e s erve's administrative procedures. Contract Owners,
participants, and Beneficiaries are responsible for
d e termining that contributions, distributions and other
t r ansactions 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
<PAGE> I-57
<PAGE>
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
s c h ools and certain charitable, educational scientific
organizations described in Section 501(c)(3) of the Code.
These qualifying employers may make contributions to the
C o n tracts for the benefit of their employees. Such
contributions are not includible in the gross income of the
employees until the employees receive distributions from the
Contracts. The amount of contributions to the tax-sheltered
annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions
g o verning such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of
Withdrawals; Qualified Contracts" and "Tax Sheltered
Annuities; Withdrawal Limitations," below.) Any employee
should obtain competent tax advice as to the suitability of
such an investment.
B. Individual Retirement Annuities. Section 408(b) of
the Code permits eligible individuals to contribute to an
i n d ividual retirement program known as an "Individual
Retirement Annuity" ("IRA"). Under applicable limitations,
certain amounts may be contributed to an IRA which will be
deductible from the individual's gross income. These IRAs are
s u b j ect to limitations on eligibility, contributions,
transferability and distributions. (See "Tax Treatment of
Withdrawals; Qualified Contracts," below.) Under certain
conditions, distributions from other IRAs and other qualified
plans may be rolled over or transferred on a tax-deferred
basis into an IRA. Sales of Contracts for use with IRAs are
subject to special requirements imposed by the Code, including
the requirement that certain informational disclosure be given
to persons desiring to establish an IRA. Purchasers of
Contracts to be qualified as Individual Retirement Annuities
should obtain competent tax advice as to the tax treatment
suitability of such an investment.
C. Qualified Pension and Profit-Sharing Plans for
Corporations and Self-Employed Individuals. Sections 401(a)
and 403(a) of the Code permit employers to establish various
types of retirement plans for employees, and permit self-
e m ployed individuals to establish retirement plans for
themselves and their employees which qualify for special
federal income tax treatment. These retirement plans may
permit the purchase of the Qualified Contracts to provide
benefits under the plans. The Code sets forth restrictions on
contributions and distributions which depend on the design of
the specific plan. Any purchaser should obtain competent tax
advice as to the suitability of such an investment.
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D. Section 457 Plans. Section 457 of the Code provides
for certain deferred compensation plans which qualify for
special federal income tax treatment and which may be offered
w i t h respect to service for state governments, local
g o v e r n m ents, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and
tax exempt organizations. The plans may permit participants
t o specify the form of investment for their deferred
compensation account. All investments are owned by the
sponsoring employer and are subject to the claims of the
general creditors of the employer, until December 31, 1998, or
such earlier date as may be established by plan amendment.
However, amounts deferred under a plan created on or after
August 20, 1996, and amounts deferred under any Section 457
plan after December 31, 1998, must be held in a trust, a
custodial account, or an annuity contract for the exclusive
benefit of plan participants and their beneficiaries. The
Code sets forth restrictions on contributions and
distributions which depend on the design of the specific plan.
Any purchaser should obtain competent tax advice as to the
suitability of such an investment.
Tax Treatment of Withdrawals; Qualified Contracts
In the case of a withdrawal under a Qualified Contract
other than a Section 457 Plan, a ratable portion of the amount
received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued
benefit under the retirement plan. Special tax rules may be
available for certain distributions from a Qualified Contract.
Section 72(t) of the Code imposes a 10% penalty tax on the
taxable portion of any distribution from qualified plans,
including Contracts issued and qualified under Code Sections
4 0 3(b) (Tax-Sheltered Annuities) and 408(b) (Individual
Retirement Annuities). To the extent amounts are not
includible in gross income because they have been rolled over
to an IRA or to another eligible qualified plan, no tax
penalty will be imposed. The tax penalty will not apply to
the following distributions: (a) if any distribution is made
on or after the date on which the Contract Owner or Annuitant
( a s applicable) reaches age 59 1/2; (b) distributions
following the death or disability of the Contract Owner or
Annuitant (as applicable) (for this purpose disability is as
defined in Section 72(m)(7) of the Code); (c) after separation
from service, distributions that are part of substantially
equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the Contract Owner or
Annuitant (as applicable) or the joint lives (or joint life
e x pectancies) of such Contract Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d)
d i s t ributions to an Contract Owner or Annuitant (as
applicable) who has separated from service after he or she has
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attained age 55; (e) distributions made to the Contract Owner
or Annuitant (as applicable) to the extent such distributions
do not exceed the amount allowable as a deduction under Code
Section 213 to the Contract Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; and
(f) distributions made to an alternate payee pursuant to a
qualified domestic relations order. The exceptions stated in
(d), (e) and (f) above do not apply in the case of an
Individual Retirement Annuity. The exception stated in (c)
above applies to an Individual Retirement Annuity without the
requirement that there be a separation from service.
Generally, distributions from a qualified plan must
commence no later than April 1 of the first calendar year
following the later of (i) the calendar year in which the
employee attains 70 1/2 or (ii) the calendar year in which the
employee retires. Distributions from an IRA must begin no
later than April 1 of the calendar year following the calendar
year in which the IRA holder attains age 70 1/2. Required
distributions must be made over a period not exceeding the
life expectancy of the individual or the joint lives or life
expectancies of the individual and his or her designated
beneficiary. If the required minimum distributions are not
made, a 50% penalty tax is imposed as to the amount not
distributed. In addition, distributions in excess of $150,000
per year may be subject to an additional 15% excise tax unless
an exemption applies.
Tax-Sheltered Annuities; Withdrawal Limitations
Section 403(b)(11) of the Code limits the withdrawal of
amounts attributable to contributions made pursuant to a
salary reduction agreement to circumstances only on or after
the Contract Owner: (1) attains age 59 1/2; (2) separates
from service; (3) dies; (4) becomes disabled (within the
meaning of Section 72(m)(7) of the Code); or (5) in the case
of hardship. However, withdrawals for hardship are restricted
to the portion of the Contract Owner's Contract Value which
represents contributions made by the Contract Owner and does
not include any investment results. The limitations on
withdrawals became effective on January 1, 1989 and apply only
to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to
income attributable to amounts held as of December 31, 1988.
The limitations on withdrawals do not affect transfers between
certain qualified plans. Contract Owners should consult their
o w n tax counsel or other tax adviser regarding any
distributions.<PAGE> I-60
<PAGE>
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.
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
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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-
d e alers and their registered representatives, including
r e g i stered 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 Reserve's contract liabilities and
reserves so that the Insurance Department may certify that
these items are correct. Great American Reserve's books and
accounts are subject to review by the Insurance Department at
all times. A full examination of Great American Reserve's
o p e r ations is conducted periodically by the National
Association of Insurance Commissioners. Such regulation does
not, however, involve any supervision of management or Great
American Reserve's investment practices or policies. In
addition, Great American Reserve is subject to regulation
under the insurance laws of other jurisdictions in which it
operates.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate
Account is a party or to which the assets of the Separate
Account is subject. Neither Great American Reserve, PADCO,
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.
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.
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REGISTRATION STATEMENT
A registration statement has been filed with the SEC
under the Securities Act of 1933, as amended, with respect to
the variable portion of the Contracts. This Prospectus does
not contain all information set forth in the registration
statement, its amendments, and exhibits, to all of which
reference is made for further information concerning the
Separate Account, Great American Reserve, and the Contract.
Statements contained in this Prospectus as to the content of
the Contract and other legal instruments are summaries. For a
complete statement of the terms thereof, reference is made to
such instruments as filed.
LEGAL MATTERS
Legal matters involving the applicability of the federal
securities laws have been reviewed by Jorden Burt Berenson &
Johnson LLP, Suite 400 East, 1025 Thomas Jefferson Street,
N.W., Washington, D. C. 20007, and, the validity of the
Contracts under state law has been passed upon by Karl W.
Kindig, Esquire, Great American Reserve Insurance Company,
11815 North Pennsylvania Street, Carmel, Indiana 46032.
<PAGE> I-63
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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
s p e c i f ied benchmark. The Subaccounts may be used
independently or in combination with each other as part of an
overall investment strategy. Additional Subaccounts may be
created from time to time.
The following are the Subaccounts and their investment
objectives:
Subaccount Investment Objective
The Nova Subaccount To provide investment returns that
correspond to a specified
percentage of the performance of a
benchmark for common stock securities.
The Ursa Subaccount To provide investment results that will
inversely correlate to the performance of
a benchmark for common stock securities.
The OTC Subaccount To attempt to provide investment results
that correspond to the performance of a
benchmark for over-the-counter
securities.
The Precious Metals To attempt to provide investment results
Subaccount that correspond to the performance of a
benchmark primarily for metals-related
securities.
The U.S. Government To provide investment results that
Bond Subaccount 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.
<PAGE>
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 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,
r e s pectively. 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-_.
PADCO, 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
p r o v ides investment advisory services to an open-end
management investment company (the "Rydex Series Trust") that
consists of nine publicly-available no-load mutual funds
having, as of September 1, 1997, aggregate net assets in
excess of $1.8 billion.
This Part II of the Prospectus sets forth information
relating to the Separate Account, particularly information on
the investment objectives, policies, and restrictions of the
Subaccounts and on PADCO. Additional information concerning
the Separate Account and the Subaccounts is also contained in
the Statement of Additional Information.
INVESTMENT OBJECTIVES AND POLICIES
OF THE SUBACCOUNTS
<PAGE> II-2
<PAGE>
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 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
t h a n 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.
T h e investment objectives and certain investment
restrictions of the Subaccounts are fundamental policies and
may not be changed without the affirmative vote of the
majority of the Contract Owners of that Subaccount. All other
investment policies of the Subaccounts not specified as
fundamental (including the benchmarks of the Subaccounts) may
be changed by the Managers of the Separate Account without the
approval of Contract Owners.
None of the Subaccounts will invest 25% or more of the
value of the Subaccount's total assets in the securities of
one or more issuers conducting their principal business
activities in the same industry; except, that to the extent
that the benchmark index selected for a particular Subaccount
is concentrated in a particular industry, that Subaccount will
be concentrated in that industry, but will not otherwise be
concentrated.
The Managers may consider changing a Subaccount s
benchmark (to the extent permitted) if, for example, the
current benchmark becomes unavailable; the Managers believe
<PAGE> II-3
<PAGE>
the current benchmark no longer serves the investment needs of
a majority of Contract Owners or another benchmark better
serves their needs; or the financial or economic environment
makes it difficult for the Subaccount s investment results to
correspond sufficiently to the Subaccount's current benchmark.
If believed appropriate, the Managers may specify a benchmark
for a Subaccount that is "leveraged" or proprietary. Of
course, there can be no assurance that a Subaccount will
achieve its objective. 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
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
a p proximate the return of the S&P500 Index, the Nova
Subaccount should increase gains to Contract Owners invested
in the Nova Fund during periods when the prices of the
securities in the S&P500 Index are rising and increase losses
to Contract Owners invested in the Nova Fund during periods
when they are declining. Contract Owners invested in the Nova
S u b a ccount could experience substantial losses during
sustained periods of falling equity prices.
The Ursa Subaccount
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
<PAGE> II-4
<PAGE>
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
C o ntract 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 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 U rsa Subaccount involves special risks not
traditionally associated with annuity contracts, and intends
to pursue its investment objective regardless of market
conditions and does not intend to take defensive positions in
<PAGE> II-5
<PAGE>
anticipation of rising equity prices. Consequently, Contract
O w ners invested in the Ursa Subaccount may experience
substantial losses during sustained periods of rising equity
prices.
In pursuing its investment objective, the Ursa Subaccount
generally does not invest in traditional securities, such as
common stock of operating companies. Rather, the Ursa
Subaccount employs certain investment techniques, including
engaging in short sales and in certain transactions in stock
index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. Under
these techniques, the Ursa Subaccount will generally incur a
loss if the price of the underlying security or index
increases between the date of the employment of the technique
and the date on which the Ursa Subaccount terminates the
position. The Ursa Subaccount will generally realize a gain
if the underlying security or index declines in price between
those dates. The amount of any gain or loss on an investment
technique may be affected by any 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-
c o u n t er ("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, depth of experienced management, or
financial resources and the ability to generate funds. The
s e c u rities of these companies also may have limited
m a rketability 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
<PAGE> II-6
<PAGE>
securities of certain smaller OTC companies are the less
certain growth prospects of comparably smaller firms and the
g r eater 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
T h e investment objective of the Precious Metals
Subaccount is to attempt to provide investment results that
correspond to the performance of a benchmark primarily for
metals-related securities. The Precious Metals Subaccount s
c u r r ent 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.
Metals-related investments are considered speculative and
are influenced by a host of world-wide economic, financial,
and political factors. Historically, the prices of gold and
precious metals have been subject to wide price movements
caused by political as well as economic factors, and,
accordingly, prices of equity securities of companies involved
in the precious metals-related industry have been volatile.
Such fluctuation and volatility may be due to changes in
inflation or in expectations regarding inflation in various
countries, the availability of supplies of such precious
metals and minerals, changes in industrial and commercial
demand, metal and mineral sales by governments, central banks,
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
<PAGE> II-7
<PAGE>
countries. Foreign companies may not be subject to accounting
standards or governmental regulations comparable to those that
affect United States companies, and there may be less public
i n formation about the operations of foreign companies.
Foreign securities also may be subject to foreign government
taxes that could reduce the yield on such securities.
The U.S. Government Bond Subaccount
The investment objective of the Bond Subaccount is to
provide investment results that correspond to the performance
of a benchmark for U.S. Government Securities. 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
t o tal return before expenses and costs that inversely
correlates to the price movements of a benchmark debt
instrument or futures contract on a specified debt instrument.
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
c o ntracts on U.S. Treasury bonds and options on such
<PAGE> II-8
<PAGE>
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 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 Subaccount 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
i n repurchase agreements collateralized fully by U.S.
Government Securities. An investment in the Money Market
<PAGE> II-9
<PAGE>
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 Subaccount will
not benefit from insurance from the Bank Insurance Fund or the
Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation. Investments in time deposits
and certificates of deposits are limited to domestic banks
that have total assets in excess of one billion dollars.
Bankers' acceptances are credit instruments evidencing the
obligation of a bank to a draft drawn on the bank by a
customer of the bank. These credit instruments reflect the
obligation both of the bank and of the drawer to pay the face
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.
I n v e stments in commercial paper and other short-term
promissory notes issued by corporations (including variable
and floating rate instruments) must be rated at the time of
purchase "A-2" or better by Standard & Poor's Ratings Group,
"Prime-2" or better by Moody's Investors Service, Inc.
("Moody's"), "F-2" or better by Fitch Investors Service, Inc.
("Fitch"), "Duff 2" or better by Duff & Phelps Credit Rating
Co. ("Duff"), or "A2" or better by IBCA, Inc., or, if not
rated by Standard & Poor's Ratings Group, Moody's, Fitch,
<PAGE> II-10
<PAGE>
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
i n s truments that are rated "high quality" by certain
nationally-recognized statistical rating organizations.
Money market instruments are generally described as
short-term debt obligations having maturities of 13 months or
less. Yields on such instruments are very sensitive to short-
term lending conditions. The principal value of such
instruments tends to decline as interest rates rise and
conversely tends to rise as interest rates decline. In
addition, there is an element of risk in money market
instruments that the issuer may become insolvent and may not
make timely payment of interest and principal obligations.
The Benchmarks
The S&P500 Index. The S&P500 Index is composed of 500
c o mmon 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
<PAGE> II-11
<PAGE>
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
h e r ein, 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
" X A U " ) 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.
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.
<PAGE> II-12
<PAGE>
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
" N A SDAQ"); 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
A N Y OF THE SUBACCOUNTS, THE CONTRACT OWNERS OF THE
SUBACCOUNTS, OR ANY PERSON OR ENTITY FROM THE USE OF THE
S & P500 INDEX, THE NASDAQ 100 INDEX , THE XAU INDEX,
RESPECTIVELY, OR ANY DATA INCLUDED THEREIN. NONE OF THE S&P,
THE NASDAQ, AND THE XAU MAKES ANY EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE FOR USE WITH RESPECT TO THE S&P500 INDEX, THE NASDAQ
100 INDEX , THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED
THEREIN.
For additional information regarding these benchmark
indexes, see "The Benchmarks" in the Statement of Additional
Information.
SPECIAL RISK CONSIDERATIONS
Contract Owners should consider the special factors
discussed below that are associated with the investment
policies of the Subaccounts in determining the appropriateness
of investing in the Subaccounts.
Portfolio Turnover
PADCO expects that the assets of the Subaccounts will be
derived from Contract Owners who intend to invest in the
Subaccounts as part of a tactical allocation or market-timing
investment strategy. These Contract Owners are likely to
exchange their Accumulation Units of a particular Subaccount
for Accumulation Units in other Subaccounts frequently,
pursuant to the exchange policy of the Separate Account, in
order to attempt to take advantage of anticipated changes in
market conditions (see "Investments of the Subaccounts;
<PAGE> II-13
<PAGE>
Addition and Deletion of Subaccounts" in Part I of this
Prospectus). The strategies employed by Contract Owners
invested in the Subaccounts may result in considerable 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
c o rrespondingly greater brokerage commissions and other
expenses which would be borne by a Subaccount, and would
directly reduce the return to a Contract Owner from an
investment in the Subaccount. Furthermore, a Subaccount's
portfolio turnover level may adversely affect the ability of
the Subaccount to achieve its investment objective. For
further information concerning the portfolio turnover of the
Subaccounts, see "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,
e s pecially 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)
<PAGE> II-14
<PAGE>
changes to the benchmark index that are not disseminated in
advance; (7) the need to conform a Subaccount s portfolio
holdings to comply with investment restrictions or policies or
regulatory or tax law requirements; or (8) market movements
that run counter to a leveraged Subaccount's investments
(which will cause divergence between the Subaccount and its
benchmark over time due to the mathematical effects of
leveraging).
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
b y these Subaccounts as "cover" for these investment
techniques.
Participation in the options or futures markets by a
Subaccount involves investment risks and transaction costs to
which the Subaccount would not be subject absent the use of
these strategies. Risks inherent in the use of options,
futures contracts, and options on futures contracts include:
(1) adverse changes in the value of such instruments; (2)
imperfect correlation between the price of options and futures
contracts and options thereon and movements in the price of
the underlying securities, index, or futures contracts; (3)
the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities;
and (4) the possible absence of a liquid secondary market for
a n y particular instrument at any time. For further
i n f ormation regarding these investment techniques, see
"Investment Techniques and Other Investment Policies" in this
Part II of the Prospectus.
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES
Futures Contracts and Options Thereupon
The Nova Subaccount and the OTC Subaccount may purchase
stock index futures contracts as a substitute for a comparable
market position in the underlying securities. The Ursa
Subaccount may sell stock index futures contracts. The Bond
<PAGE> II-15
<PAGE>
Subaccount may purchase futures contracts on U.S. Government
Securities as a substitute for a comparable market position in
the cash market. The Juno Subaccount may sell futures
contracts on U.S. Government Securities.
A futures contract obligates the seller to deliver (and
the purchaser to take delivery of) the specified commodity on
the expiration date of the contract. A stock index futures
contract obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock
index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. It is
the practice of holders of other futures contracts to close
out their positions on or before the expiration date by use of
offsetting contract positions and physical delivery is thereby
avoided.
The Nova Subaccount and the OTC Subaccount may purchase
call options and write (sell) put options, and the Ursa
Subaccount may purchase put options and write call options, on
stock index futures contracts. The Bond Subaccount may
purchase call options and write put options on U.S. Government
Securities futures contracts and the Juno Subaccount may write
call options and purchase put options on futures contracts on
U.S. Government Securities.
When a Subaccount purchases a put or call option on a
futures contract, the Subaccount pays a 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
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<PAGE>
exposure of its position, or to create a synthetic money
market position.
The Subaccounts may purchase and sell futures contracts,
index futures contracts, and options thereon only to the
extent that such activities would be consistent with the
requirements of Section 4.5 of the regulations under the
Commodity Exchange Act promulgated by the Commodity Futures
Trading Commission (the "CFTC Regulations"), under which each
of these Subaccounts would be excluded from the definition of
a "commodity pool operator." Under Section 4.5 of the CFTC
Regulations, a Subaccount may engage in futures transactions,
either for "bona fide hedging" purposes, as this term is
defined in the CFTC Regulations, or for non-hedging purposes
to the extent that the aggregate initial margins and premiums
required to establish such non-hedging positions do not exceed
5% of the liquidation value of the Subaccount s portfolio. In
the case of an option on a futures contract that is "in-the-
money" at the time of purchase (i.e., the amount by which the
exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the
current market value of the underlying security exceeds the
exercise price of the call option), the in-the-money amount
may be excluded in calculating this 5% limitation.
When a Subaccount purchases or sells a stock index
futures contract, or sells an option thereon, the Subaccount
"covers" its position. To cover its position, a Subaccount
may maintain with its custodian bank (and mark to market on a
daily basis) a segregated account consisting of cash or 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
t r a ding 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. Additionally,
such segregated accounts will generally assure the
availability of adequate funds to meet the obligations of the
Subaccount arising from such investment activities.
A Subaccount may cover its long position in a futures
contract by purchasing a put option on the same futures
contract with a strike price (i.e., an exercise price) as high
or higher than the price of the futures contract, or, if the
strike price of the put is less than the price of the futures
contract, the Subaccount will maintain in a segregated account
cash or liquid securities equal in value to the difference
<PAGE> II-17
<PAGE>
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
i n struments the prices of which are expected to move
relatively consistently with the call option. A Subaccount
may cover its sale of a put option on a futures contract by
taking a short position in the underlying futures contract at
a price greater than or equal to the strike price of the put
option, or, if the short position in the underlying futures
contract is established at a price less than the strike price
of the written put, the Subaccount will maintain in a
segregated account cash or 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
<PAGE> II-18
<PAGE>
permitted in futures contract prices during a single trading
day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond
that limit or trading may be suspended for specified periods
during the day. Futures contract prices could move to the
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures
p o s i tions and potentially subjecting a Subaccount to
substantial losses. If trading is not possible, or a
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.
U n like the options on securities discussed below, all
settlements of index options transactions are in cash.
Some stock index options are based on a broad market
index such as the S&P500 Index, the NYSE Composite Index, or
the AMEX Major Market Index, or on a narrower index such as
t h e Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board Options
E x c hange (the "CBOE"), the AMEX, and other exchanges
(collectively, the "Exchanges"). Purchased over-the-counter
options and the cover for written over-the-counter options
will be subject to the respective Subaccount s 15% limitation
<PAGE> II-19
<PAGE>
o n 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
l i mitations, 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
<PAGE> II-20
<PAGE>
premium paid during the term of the option, to buy the
securities underlying the option at the exercise price. By
writing a call option and receiving a premium, a Subaccount
becomes obligated during the term of the option to deliver the
securities underlying the option at the exercise price if the
option is exercised. By buying a put option, a Subaccount has
the right, in return for a premium paid during the term of the
option, to 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
<PAGE> II-21
<PAGE>
option is not exercised or sold, the option will become
worthless on its expiration date.
A Subaccount will realize a gain (or a loss) on a closing
purchase transaction with respect to a call or a put option
previously written by the Subaccount if the premium, plus
commission costs, paid by the Subaccount to purchase the call
or put option to close the transaction is less (or greater)
than the premium, less commission costs, received by the
Subaccount on the sale of the call or the put option. The
Subaccount also will realize a gain if a call or put option
which the Subaccount has written lapses unexercised, because
the Subaccount would retain the premium.
A Subaccount will realize a gain (or a loss) on a closing
sale transaction with respect to a call or a put option
previously purchased by the Subaccount if the premium, less
commission costs, received by the 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
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<PAGE>
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
s h ort position or replaces the borrowed security, the
Subaccount will: (a) maintain a segregated account containing
cash or liquid securities at such a level that the amount
deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the
security sold short, or (b) otherwise cover the Subaccount s
short position.
The Nova Subaccount, the OTC Subaccount, and the Metals
Subaccount each may engage in short sales if, at the time of
the short sale, the Subaccount owns or has the right to
acquire an equal amount of the security being sold at no
additional cost. These Subaccounts may make a short sale when
the Subaccount wants to sell the security the Subaccount owns
at a 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
y e a r s at the date of issuance. Yields on short-,
intermediate-, and long-term U.S. Government Securities are
dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt
securities with longer maturities tend to produce higher
yields and are generally subject to potentially greater
<PAGE> II-23
<PAGE>
capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S.
Government Securities generally varies inversely with changes
in market interest rates. An increase in interest rates,
therefore, would generally reduce the market value of a
S u b account s portfolio investments in U.S. Government
Securities, while a decline in interest rates would generally
increase the market value of a Subaccount s portfolio
investments in these securities.
C e r tain U.S. Government Securities are issued or
guaranteed by agencies or instrumentalities of the U.S.
Government including, but not limited to, obligations of U.S.
Government agencies or instrumentalities such as the Federal
N a t ional Mortgage Association, the Government National
Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan
Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the
Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan
M a r k eting Association, and the National Credit Union
Administration.
Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government are backed by the
full faith and credit of the U.S. Treasury. Such agencies and
instrumentalities may borrow funds from the U.S. Treasury.
However, no assurances can be given that the U.S. Government
will provide such financial support to the obligations of the
other U.S. Government agencies or instrumentalities in which a
Subaccount invests, since the U.S. Government is not obligated
to do so. These other agencies and instrumentalities are
supported by either the issuer s right to borrow, under
certain circumstances, an amount limited to a specific line of
credit from the U.S. Treasury, the discretionary authority of
the U.S. Government to purchase certain obligations of an
agency or instrumentality, or the credit of the agency or
instrumentality itself.
U . S. Government Securities may be purchased at a
discount. 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
a g reement, a Subaccount purchases a debt security and
simultaneously agrees to sell the security back to the seller
at a mutually agreed-upon future price and date, normally one
<PAGE> II-24
<PAGE>
day or a few days later. The resale price is greater than the
purchase price, reflecting an agreed-upon market interest rate
during the purchaser s holding period. While the maturities
of the underlying securities in repurchase transactions may be
more than one year, the term of each repurchase agreement will
always be less than one year. A Subaccount will enter into
repurchase agreements only with member banks of the Federal
R e s erve System or primary dealers of U.S. Government
Securities. PADCO will monitor the creditworthiness of each
of the firms which is a party to a repurchase agreement with
any of the Subaccounts. In the event of a default or
bankruptcy by the seller, the Subaccount will liquidate those
securities (whose market value, including accrued interest,
must be at least equal to 100% of the dollar amount invested
by the Subaccount in each repurchase agreement) held under the
applicable repurchase agreement, which securities constitute
collateral for the seller s obligation to pay. However,
liquidation could involve costs or delays and, to the extent
proceeds from the sales of these securities were less than the
agreed-upon repurchase price, the Subaccount would suffer a
loss. A Subaccount also may experience difficulties and incur
certain costs in exercising its rights to the collateral and
may lose the interest the Subaccount expected to receive under
the repurchase agreement. Repurchase agreements usually are
for short periods, such as one week or less, but may be
longer. It is the current policy of the Subaccounts to treat
repurchase agreements that do not mature within seven days as
illiquid for the purposes of their investment policies.
Zero Coupon Bonds
The Bond and Juno Subaccounts may invest in U.S. Treasury
zero coupon securities. Unlike regular U.S. Treasury bonds
which pay semi-annual interest, U.S. Treasury zero coupon
bonds do not generate semi-annual coupon payments. Instead,
zero coupon bonds are purchased at a substantial discount from
the maturity value of such securities, and this discount is
amortized as interest income over the life of the security.
Zero coupon U.S. Treasury issues originally were created by
government bond dealers who bought U.S. Treasury bonds and
issued receipts representing an ownership interest in the
interest coupons or in the principal portion of the bonds.
Subsequently, the U.S. Treasury began directly issuing zero
coupon bonds with the introduction of "Separate Trading of
R e g i stered Interest and Principal of Securities" (or
"STRIPS"). While zero coupon bonds eliminate the reinvestment
r i sk of regular coupon issues, that is, the risk of
subsequently investing the periodic interest payments at a
lower rate than that of the security held, zero coupon bonds
fluctuate much more sharply than regular coupon-bearing bonds.
Thus, when interest rates rise, the value of zero coupon bonds
<PAGE> II-25
<PAGE>
will decrease to a greater extent than will the value of
regular bonds having the same interest rate.
Reverse Repurchase Agreements
The Ursa Subaccount, the Juno Subaccount, and the Money
Market Subaccount each may also use reverse repurchase
agreements as part of the Subaccount s investment strategy.
Reverse repurchase agreements involve sales by the Subaccount
of portfolio assets concurrently with an agreement by the
Subaccount to repurchase the same assets at a later date at a
fixed price. Generally, the effect of such a transaction is
that the Subaccount can recover all or most of the cash
invested in the portfolio securities involved during the term
of the reverse repurchase agreement, while the Subaccount will
be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only
if the interest cost to the Subaccount of the reverse
repurchase transaction is less than the cost of obtaining the
cash otherwise. Opportunities to achieve this advantage may
not always be available, and the Subaccounts intend to use the
reverse repurchase technique only when it will be to the
Subaccount s advantage to do so. Each Subaccount will
establish a segregated account with the Separate Account s
custodian bank in which the Subaccount will maintain cash or
cash equivalents or other portfolio securities equal in value
to the Subaccount s obligations in respect of reverse
repurchase agreements.
Borrowing
Each Subaccount may borrow money to facilitate management
of the Subaccount s portfolio by enabling the Subaccount to
meet transfer or withdrawal requests when the liquidation of
portfolio instruments would be inconvenient or
disadvantageous. Such borrowing is not for investment
purposes and will be repaid by the borrowing Subaccount
promptly.
As required by the 1940 Act, a Subaccount must maintain
continuous asset coverage (total assets, including assets
acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If, at any time,
the value of the Subaccount s assets should fail to meet this
300% coverage test, the Subaccount, within three days (not
including Sundays and holidays), will reduce the amount of the
Subaccount s borrowings to the extent necessary to meet this
300% coverage. Maintenance of this percentage limitation may
result in the sale of portfolio securities at a time when
investment considerations otherwise indicate that it would be
disadvantageous to do so.
<PAGE> II-26
<PAGE>
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
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
s e c urities are subject to termination by the lending
Subaccount on four business days' notice, or by the borrower
on one day's notice. Borrowed securities must be returned
when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term
of the loan inures to the lending Subaccount. A lending
S u b account may pay reasonable finders, borrowers,
administrative, and custodial fees in connection with a loan.
<PAGE> II-27
<PAGE>
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
S u b account may purchase illiquid securities, including
securities that are not readily marketable. A Subaccount will
not invest more than 15% (10% with respect to the Money Market
Subaccount) of the Subaccount s net assets in illiquid
securities. Each Subaccount will adhere to a more restrictive
l i mitation on the Subaccount s investment in illiquid
securities as required by the insurance laws of those
jurisdictions where Contracts are sold. The term "illiquid
securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of
business at approximately the amount at which the Subaccount
has valued the securities. Under the current guidelines of
the SEC staff, illiquid securities also are considered to
include, among other securities, purchased over-the-counter
options, certain cover for over-the-counter options,
repurchase agreements with maturities in excess of seven days,
and certain securities whose disposition is restricted under
the federal securities laws. The Subaccount may not be able
to sell illiquid securities when PADCO considers it desirable
to do so or may have to sell such securities at a price that
is lower than the price that could be obtained if the
<PAGE> II-28
<PAGE>
securities were more liquid. In addition, the sale of
illiquid securities also may require more time and may result
in higher dealer discounts and other selling expenses than
does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the
u n a vailability of reliable market quotations for such
securities, and investment in illiquid securities may have an
adverse impact on Accumulation Unit Value.
Cash Reserve
As a cash reserve or for liquidity purposes, each
Subaccount may temporarily invest all or part of its assets in
cash or cash equivalents, which include, but are not limited
to, short-term money market instruments, U.S. Government
Securities, certificates of deposit, banker s acceptances, or
repurchase agreements secured by U.S. Government Securities.
PERFORMANCE INFORMATION
Performance information for the Subaccounts may appear
from time to time in advertisements or sales literature.
Performance information reflects only the performance of a
h y p othetical investment in the Subaccounts during the
particular time period on which the calculations are based.
Performance information will include 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
o f Return Quotations" in the Statement of Additional
Information for a description of the methods used to determine
total return information for the Subaccounts.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
Subject to policies established by the Managers, PADCO
determines which securities to purchase and sell for each
S u baccount, selects brokers and dealers to effect the
transactions, and negotiates commissions. PADCO expects that
t h e Subaccounts may execute brokerage or other agency
t r a n sactions through registered broker-dealers, for a
commission, in conformity with the 1940 Act, the Securities
E x change Act of 1934, as amended, and the rules and
<PAGE> II-29
<PAGE>
regulations thereunder. In placing orders for portfolio
transactions, PADCO's policy is to obtain the most favorable
p r i c e and efficient execution available. Brokerage
commissions are normally paid on exchange-traded securities
transactions and on options and futures transactions, as well
as on common stock transactions. In order to obtain the
brokerage and research services described below, a higher
commission may sometimes be paid.
W h en selecting broker-dealers to execute portfolio
transactions, PADCO considers many factors, including the rate
of commission or size of the broker-dealer s "spread," the
size and difficulty of the order, the nature of the market for
t h e security, the willingness of the broker-dealer to
p o sition, the reliability, financial condition, general
execution and operational capabilities of the broker-dealer,
and the research, statistical and economic data furnished by
the broker-dealer to PADCO. Conversely, broker-dealers which
supply research may be selected for execution of transactions
for such other accounts, while the data may be used by PADCO
in providing investment advisory services to the Subaccounts.
MANAGEMENT OF THE SEPARATE ACCOUNT
Board of Managers
Although the assets of the Separate Account are the
property of Great American Reserve, certain responsibilities
and powers with respect to the Separate Account have been
conferred upon the Managers of the Separate Account in order
to comply with applicable provisions of the 1940 Act. Those
responsibilities and powers are: (i) to approve the Separate
Account's investment advisory agreement and its continuance;
(ii) to select the Separate Account's independent public
accountants; (iii) to recommend changes in the fundamental
investment policies of the Subaccount for approval by Contract
Owners and to make changes in non-fundamental investment
policies of the Subaccounts; (iv) to review periodically the
investment portfolios of the Subaccounts to ascertain that the
S u b accounts are being managed in accordance with the
investment objectives and policies of the Subaccounts; (v) to
make findings or determinations contemplated for an investment
company's board of directors by the 1940 Act or rules or
interpretations thereunder; and (vi) to approve agreements,
acts, or transactions respecting the Separate Account that are
submitted to the Separate Account by Great American Reserve.
The identity and principal occupations of the initial members
of the Managers appointed by Great American Reserve and
certain officers of the Separate Account elected or appointed
by the Managers are set forth in the Statement of Additional
Information.
<PAGE> II-30
<PAGE>
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
M a nagement Co., of Chicago, Illinois, an institutional
c o nsulting firm specializing in developing hedging and
<PAGE> II-31
<PAGE>
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
m a sters 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 conformity with the
stated investment objectives, policies, and restrictions of
the Separate Account, PADCO will manage the investment and
<PAGE> II-32
<PAGE>
reinvestment of the assets of each of the Subaccounts and
determine the composition of assets of each Subaccount,
i n c luding the purchase, retention, and disposition of
securities and other investments. Under the PADCO Advisory
Agreement, the Subaccounts each pay PADCO a fee at an
annualized rate, based on the average daily net assets of each
respective Subaccount, of 0.75% for the Nova Subaccount, the
OTC Subaccount, and the Precious Metals Subaccount, 0.90% for
the Ursa Subaccount and the Juno Subaccount, 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 services, 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; asset allocation
bookkeeping, internal accounting, and secretarial services;
<PAGE> II-33
<PAGE>
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.
A d ditional information concerning the Subaccount
Administration Agreement and the Servicer is set forth in the
Statement of Additional Information.
Costs and Expenses
Each Subaccount bears all expenses of its operations
other than those assumed by PADCO or the Servicer. Subaccount
e x p e nses include: the advisory fee; the Subaccount
a d m inistration fee; custodian and accounting fees and
expenses; legal and auditing fees; securities valuation
e x penses; fidelity bonds and other insurance premiums;
e x p e nses of preparing and printing prospectuses,
confirmations, proxy statements, and Contract Owner reports
and notices; registration fees and expenses; proxy and annual
meeting expenses, if any; all federal, state, and local taxes
(including, without limitation, stamp, excise, income, and
franchise taxes); organizational costs; and non-interested
Managers fees and expenses; the costs and expenses of
surrendering Accumulation Units of a Subaccount; fees and
expenses paid to any securities pricing organization; dues and
expenses associated with membership in any mutual fund or
insurance organization; and costs for incoming telephone WATTS
lines. In addition, each of the 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
i n i tial 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 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 these expense limitations may
be continued thereafter at the discretion of PADCO and the
Servicer. Fees waived or expenses paid or assumed by PADCO
<PAGE> II-34
<PAGE>
and the Servicer under these voluntary agreements, after
October 24, 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 October 24, 1999.
Great American Reserve and PADCO have advanced the
organizational expenses of the Separate Account. These
e x p enses (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.
<PAGE> 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
<PAGE> II-36
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1997,
as supplemented October 24, 1997
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
of
GREAT AMERICAN RESERVE INSURANCE COMPANY
Administrative Office: 11815 North Pennsylvania Street,
Carmel, Indiana 46032
Phone: (800) 437-3506
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
FLEXIBLE PREMIUMS -- NONPARTICIPATING
Offered through
PADCO Financial Services, Inc.
6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852
Phone: (888) 667-4936
Purchase Payments for the variable annuity contract
described in the Prospectus (the "Contract") will be allocated
to the Rydex Advisor Variable Annuity Account (the "Separate
Account"), a segregated investment account of Great American
Reserve Insurance Company ("Great American Reserve"), unless
allocation to Great American Reserve's Fixed Account is
selected. Initial Purchase Payments allocated to the Separate
Account will first be placed in the Money Market Subaccount
for the 14 days following the date of issue (the "Contract
Date"). You bear the full investment risk with respect to the
Separate Account.
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the Separate Account, dated November 1, 1996,
and as supplemented October 24, 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
<PAGE> 2
<PAGE>
GENERAL INFORMATION AND HISTORY
Great American Reserve, originally organized in 1937, is
principally engaged in the life insurance business in 47
states and the District of Columbia. Great American Reserve
is a stock company organized under the laws of the State of
T e x as and a wholly-owned subsidiary of Conseco, Inc.
("Conseco"). The operations of Great American Reserve are
handled by Conseco. Conseco is a publicly-owned financial
services holding company, the principal operations of which
are in the development, marketing, and administration of
specialized annuity and life insurance products. Conseco is
located at 11825 N. Pennsylvania Street, Carmel, Indiana
46032.
The Separate Account was established by Great American
Reserve.
INVESTMENT POLICIES AND TECHNIQUES
OF THE SUBACCOUNTS
The following discussion supplements the discussion under
"Investment Objectives and Policies of the Subaccounts" and
"Investment Techniques and Other Investment Policies" in Part
II of the Prospectus.
General
Set forth below is further information relating to the
Subaccounts. Portfolio investment advice is provided to each
Subaccount by PADCO Advisors II, Inc. ("PADCO"), a Maryland
corporation with offices at 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852. The investment strategies of
the Subaccounts discussed below, and as discussed in the
Separate Account's Prospectus, may be used by a Subaccount if,
in the opinion of PADCO, these strategies will be advantageous
to the Subaccount. A Subaccount is free to reduce or
eliminate the Subaccount's activity in any of those areas
without changing the Subaccount's fundamental investment
policies. There is no assurance that any of these strategies
or any other strategies and methods of investment available to
a S u baccount will result in the achievement of the
Subaccount's objectives.
Options Transactions
The Nova Subaccount, The OTC Subaccount, and the Precious
Metals Subaccount may buy call options and write (sell) put
options on securities, and the Ursa Subaccount may buy put
options and write call options on securities for the purpose
of realizing the Subaccount's investment objective. By
<PAGE> 3
<PAGE>
writing a call option on securities, a Subaccount becomes
obligated during the term of the option to sell the securities
underlying the option at the exercise price if the option is
exercised. By writing a put option, a Subaccount becomes
obligated during the term of the option to purchase the
securities underlying the option at the exercise price if the
option is exercised.
During the term of the option, the writer may be assigned
an exercise notice by the broker-dealer through whom the
option was sold. The exercise notice would require the writer
to deliver, in the case of a call, or take delivery of, in the
case of a put, the underlying security against payment of the
exercise price. This obligation terminates upon expiration of
the option, or at such earlier time that the writer effects a
closing purchase transaction by purchasing an option covering
the same underlying security and having the same exercise
price and expiration date as the one previously sold. Once an
option has been exercised, the writer may not execute a
closing purchase transaction. To secure the obligation to
deliver the underlying security in the case of a call option,
the writer of a call option is required to deposit in escrow
the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation (the "OCC"), an
institution created to interpose itself between buyers and
sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so,
gives its guarantee to the transaction.
Foreign Securities
The Precious Metals Subaccount may invest in issuers
located outside the United States. These purchases may be
made by purchasing American Depository Receipts ("ADRs"),
"ordinary shares," or "New York shares" in the United States.
ADRs are dollar-denominated receipts representing interests in
the securities of a foreign issuer, which securities may not
necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are
receipts typically issued by United States banks and trust
companies which evidence ownership of underlying securities
issued by a foreign corporation. Generally, ADRs in registered
form are designed for use in domestic securities markets and
are traded on exchanges or over-the-counter in the United
States. Ordinary shares are shares of foreign issuers that
are traded abroad and on a United States exchange. New York
shares are shares that a foreign issuer has allocated for
trading in the United States. ADRs, ordinary shares, and New
York shares all may be purchased with and sold for U.S.
dollars, which protects the Precious Metals Subaccount from
the foreign settlement risks described below.
<PAGE> 4
<PAGE>
Investing in foreign companies may involve risks not
t y p i cally associated with investing in United States
companies. The value of securities denominated in foreign
currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than
United States markets, and prices in some foreign markets can
be very volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those that
apply to United States companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's
financial condition and operations. In addition, the costs of
foreign investing, including withholding taxes, brokerage
commissions, and custodial fees, generally are higher than for
United States investments.
Investing in companies located abroad carries political
and economic risks distinct from those associated with
investing in the United States. Foreign investments may be
affected by actions of foreign governments adverse to the
interests of United States Contract Owners, including the
possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on United States
investment, or on the ability to repatriate assets or to
convert currency into U.S. dollars. There may be a greater
possibility of default by foreign governments or foreign-
government sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or
social instability, military action or unrest, or adverse
diplomatic developments.
At the present time, there are five major producers and
processors of gold bullion and other precious metals and
minerals. In order of magnitude, these producers and
processors are: the Republic of South Africa, the former
republics of the former Soviet Union, Canada, the United
States, and Australia. Political and economic conditions in
several of these countries may have a direct effect on the
mining, distribution, and price of precious metals and
minerals, and on the sales of central bank gold holdings,
particularly in the case of South Africa and the former
republics of the former Soviet Union. South African mining
stocks represent a special risk in view of the history of
political unrest in that country. Besides that factor,
various government bodies such as the South African Ministry
of Mines and the Reserve Bank of South Africa exercise
regulatory authority over mining activity and the sale of
gold. The policies of these South African government bodies
in the future could be detrimental to the Precious Metals
Subaccount's objectives.
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Repurchase Agreements
As discussed in the Separate Account's Prospectus, each
of the Subaccounts may enter into repurchase agreements with
financial institutions. The Subaccounts each follow certain
procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-
established financial institutions whose condition will be
continually monitored by PADCO. In addition, the value of the
collateral underlying the repurchase agreement will always be
at least equal to the repurchase price, including any accrued
interest earned on the repurchase agreement. In the event of
a default or bankruptcy by a selling financial institution, a
Subaccount will seek to liquidate such collateral. However,
the exercising of each Subaccount's right to liquidate such
collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price,
the Subaccount could suffer a loss. The investments of each
of the Subaccounts in repurchase agreements, at times, may be
substantial when, in the view of the appropriate Subaccount
Advisor, liquidity or other considerations so warrant.
Borrowing
The Nova Subaccount and the Bond Subaccount do not
presently, but may in the future, borrow money, including
borrowing for investment purposes. Borrowing for investment
is known as leveraging. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique
which increases investment risk, but also increases investment
opportunity. Since substantially all of a Subaccount s assets
will fluctuate in value, whereas the interest obligations on
borrowings may be fixed, the Accumulation Unit Value of the
Subaccount will increase more when the Subaccount s portfolio
a s s ets increase in value and decrease more when the
Subaccount s portfolio assets decrease in value than would
otherwise be the case. Moreover, interest costs on borrowings
may fluctuate with changing market rates of interest and may
partially offset or exceed the returns on the borrowed funds.
Under adverse conditions, the Nova Subaccount and the Bond
Subaccount might have to sell portfolio securities to meet
i n t e rest or principal payments at a time investment
c o nsiderations would not favor such sales. The Nova
Subaccount and the Bond Subaccount intend to use leverage
during periods when PADCO believes that the respective
Subaccount s investment objective would be furthered.
When-Issued and Delayed-Delivery Securities
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As discussed in the Separate Account's Prospectus, each
Subaccount, from time to time, in the ordinary course of
business, may purchase securities on a when-issued or delayed-
delivery basis, (i.e., delivery and payment can take place
b e tween a month and 120 days after the date of the
transaction). At the time of delivery of the securities, the
value of the securities may be more or less than the purchase
price. The Subaccount will also establish a segregated
account with the Subaccount's custodian bank in which the
Subaccount will maintain cash or cash equivalents or other
portfolio securities equal in value to commitments for such
when-issued or delayed-delivery securities.
Portfolio Turnover
As discussed in the Separate Account's prospectus, PADCO
anticipates that owners of the Contract ("Contract Owners")
w h o s e Purchase Payments are being allocated to the
Subaccounts, as part of an asset allocation or market-timing
i n v e stment strategy, will frequently transfer amounts
allocated under the Contract ("Contract Values") among the
Subaccounts. Because each Subaccount's portfolio turnover
r a te to a great extent will depend on the purchase,
withdrawal, and exchange activity of the Subaccount's Contract
Owners, it is very difficult to estimate what the Subaccount's
actual turnover rate will be in the future.
"Portfolio Turnover Rate" is defined under the rules of
the Securities and Exchange Commission (the "SEC") as the
v a lue of the securities purchased or securities sold,
e x c luding all securities whose maturities at time of
acquisition were one year or less, divided by the average
monthly value of such securities owned during the year. Based
on this definition, instruments with remaining maturities of
less than one year are excluded from the calculation of
portfolio turnover rate. Instruments excluded from the
calculation of portfolio turnover generally would include the
f u t u res contracts and option contracts in which the
Subaccounts invest since such contracts generally have a
remaining maturity of less than one year. All instruments
held by a Subaccount during a specified period may have a
remaining maturity of less than one year in which case the
portfolio turnover rate for that period, under the definition,
would be equal to zero. However, because of the nature of the
Subaccounts, as described above, it is anticipated that their
portfolio turnover will be unusually high.
The Benchmarks
The S&P500 Index. Standard & Poor's Corporation
("S&P"), a division of The McGraw-Hill Companies, Inc.,
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chooses the 500 stocks comprising the S&P500 Index on the
s t a tistical 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
S u b account may use the S&P500 Index as the standard
performance comparison because this index represents
approximately 70% of the total market value of all common
stocks and is well known to investors. "Standard & Poor's ,"
"S&P ," "S&P 500 ," "Standard & Poor's 500 ," and "500 " are
trademarks, trade names, and service marks of The McGraw-Hill
Companies, Inc.
Neither the Nova Subaccount nor the Ursa Subaccount is
sponsored, endorsed, sold, or promoted by the S&P. The S&P's
only relationship to the Nova and Ursa Subaccounts is the use
by these Subaccount of the Standard & Poor's , S&P , S&P 500 ,
Standard & Poor's 500 , and 500 trademarks or service marks,
and certain trade names of the S&P, and the use by these
S u baccounts 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
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technology (3.79%); and transportation (0.74%). As used
h e r ein, 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
1 0 0 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
t r a ding volume, company visibility, continuity of the
components in the NASDAQ 100 Index , and a good mix of
industries represented on the Nasdaq. Chicago Board Options
Exchange, the largest options exchange in the world, began
trading NASDAQ 100 Index options on February 7, 1994.
The OTC Subaccount is not sponsored, endorsed, sold, or
promoted by the Nasdaq or any of the Nasdaq's affiliates (the
Nasdaq and its affiliates hereinafter collectively referred to
as the "NASDAQ"). The NASDAQ's only relationship to the OTC
Subaccount is the use by the OTC Subaccount of the NASDAQ
100 , NASDAQ 100 Index , NASDAQ , and NASD trademarks or
service marks, and certain trade names of the NASDAQ, and the
use of the NASDAQ 100 Index , which is determined, composed,
and calculated by the NASDAQ without regard to the Servicer or
the Subaccounts, but which is used by the OTC Subaccount as
the OTC Subaccount s benchmark.
The XAU Index. The Philadelphia Stock Exchange (the
" X A U " ) 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
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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.
T h e 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
B E CONVERTED INTO CASH; (3) IS A DISTRIBUTOR OF THE
SUBACCOUNTS; (4) HAS ANY OBLIGATION OR LIABILITY IN CONNECTION
W I TH THE ADMINISTRATION, MARKETING, OR TRADING OF THE
SUBACCOUNTS; AND (5) HAS NOT PASSED ON THE LEGALITY OR
SUITABILITY OF, OR THE ACCURACY OR ADEQUACY OF DESCRIPTIONS
AND DISCLOSURES RELATING TO, THE SUBACCOUNTS.
NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) GUARANTEES
THE ACCURACY, COMPLETENESS, AND/OR THE UNINTERRUPTED
CALCULATIONS OF THE S&P500 INDEX, THE NASDAQ 100 INDEX , AND
THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN; (2)
MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE SUBACCOUNTS, THE CONTRACT
OWNERS OF THE SUBACCOUNTS, OR ANY OTHER PERSON OR ENTITY, FROM
THE USE OF THE S&P500 INDEX, THE NASDAQ 100 INDEX , AND THE
XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN,
R E G ARDING THE ADVISABILITY OF INVESTING IN SECURITIES
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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.
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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.
T h e f ollowing restriction is applicable to all
Subaccounts:
A Subaccount shall not:
1. Purchase the securities of any issuer if the
purchase would cause more than 5% of the value of
the Subaccount's total assets to be invested in the
s e curities of any one issuer (excluding U.S.
Government Securities) or cause more than 10% of the
voting securities of the issuer to be held by the
Subaccount, except that up to 25% of the value of
each Subaccount's total assets may be invested
without regard to these restrictions.
2. Invest 25% or more of the value of the Subaccount's
total assets in the securities of one or more
issuers conducting their principal business
activities in the same industry; except that the
Precious Metals Subaccount will invest 25% or more
of the value of the Precious Metals Subaccount's
total assets in the securities in the metals-related
and minerals-related industries; and except that, to
the extent that the benchmark index selected for a
particular Subaccount is concentrated in a
p a r ticular industry, that Subaccount will be
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c o n centrated in that industry, but will not
otherwise be concentrated. This limitation does not
apply to investments or obligations of the U.S.
G o v e rnment or any of its agencies or
instrumentalities.
T h e following restrictions are applicable to all
Subaccounts other than the Money Market Subaccount:
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
s e curities provided the borrower maintains
collateral equal to at least 100% of the value of
the borrowed security and marked-to-market daily.
4. Underwrite securities of any other issuer.
5. Purchase, hold, or deal in real estate or oil and
gas interests, although the Subaccount may purchase
and sell securities that are secured by real estate
or interests therein and may purchase mortgage-
related securities and may hold and sell real estate
acquired for the Subaccount as a result of the
ownership of securities.
6. Issue any senior security (as such term is defined
in Section 18(f) of the 1940 Act) (including the
amount of senior securities issued but excluding
liabilities and indebtedness not constituting senior
securities), except that the Subaccount may issue
senior securities in connection with transactions in
options, futures, options on futures, and other
s i m ilar investments, and except as otherwise
permitted herein and in Investment Restriction Nos.
6, 8, 9, 10, 11, and 12, as applicable to the
Subaccount.
7. Pledge, mortgage, or hypothecate the Subaccount's
assets, except to the extent necessary to secure
permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with
(i) the writing of covered put and call options,
(ii) the purchase of securities on a forward-
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commitment or delayed-delivery basis, and (iii)
collateral and initial or variation margin
arrangements with respect to currency transactions,
options, futures contracts, including those relating
to indexes, and options on futures contracts or
indexes.
8. Invest in commodities except that (i) the Subaccount
may purchase and sell futures contracts, including
those relating to securities, currencies, indexes,
and options on futures contracts or indexes and
currencies underlying or related to any such futures
contracts, and purchase and sell currencies (and
o p tions thereon) or securities on a forward-
commitment or delayed-delivery basis, and (ii) the
Precious Metals Subaccount may invest in precious
metals and precious minerals.
The following restriction is applicable to the Ursa
S u b a c count, the OTC Subaccount, the Precious Metals
S u baccount, the Juno Subaccount, and the Money Market
Subaccount:
A Subaccount shall not:
9. Borrow money, except (i) as a temporary measure for
extraordinary or emergency purposes and then only in
amounts not in excess of 5% of the value of the
Subaccount's total assets from a bank or (ii) in an
a m ount up to one-third of the value of the
Subaccount's total assets, including the amount
borrowed, in order to meet redemption requests
without immediately selling portfolio instruments.
This provision is not for investment leverage but
solely to facilitate management of the portfolio by
enabling the Subaccount to meet redemption requests
when the liquidation of portfolio instruments would
be inconvenient or disadvantageous. The Juno
Subaccount shall not make purchases while borrowing
in excess of 5% of the value of its total assets.
For purposes of this limitation, Subaccount assets
i n vested in reverse repurchase agreements are
included in the amounts borrowed.
The following restriction is applicable to the Nova
S u b a c count, the OTC Subaccount, the Precious Metals
Subaccount, and the Bond Subaccount:
A Subaccount shall not:
10. Make short sales of portfolio securities or purchase
any portfolio securities on margin, except for
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short-term credits necessary for the clearance of
transactions. The deposit or payment by the
S u baccount of initial or variation margin in
connection with futures or options transactions is
not considered to be a securities purchase on
margin. The Subaccount may engage in short sales
if, at the time of the short sale, the Subaccount
owns or has the right to acquire an equal amount of
the security being sold at no additional cost
("selling against the box"); except that the Bond
Subaccount may not engage in short sales against the
box.
The following restriction is applicable to the Nova
Subaccount and the Bond Subaccount:
A Subaccount shall not:
11. Borrow money, except the Subaccount may borrow money
(i) from a bank in an amount not in excess of 33 %
of the total value of the Subaccount's assets
( i ncluding the amount borrowed) less the
Subaccount's liabilities (not including the
Subaccount's borrowings), and (ii) for temporary
purposes in an amount not in excess of 5% of the
total value of the Subaccount's assets.
The following restriction is applicable to the Ursa
Subaccount and the Juno Subaccount:
A Subaccount shall not:
12. Make short sales of portfolio securities or maintain
a short position unless at all times when a short
position is open (i) the Subaccount maintains a
segregated account with the Subaccount's custodian
to cover the short position in accordance with the
position of the SEC or (ii) the Subaccount owns an
equal amount of such securities or securities
convertible into or exchangeable, without payment of
any further consideration, for securities of the
s a me issue as, and equal in amount to, the
securities sold short.
The following restrictions are applicable to the Money
Market 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.
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14. Lend the Subaccount's portfolio securities in excess
of 15% of the Subaccount's total assets. Any loans
of the Subaccount's portfolio securities will be
made according to guidelines established by the
Board of Managers of the Separate Account, including
maintenance of cash collateral of the borrower equal
at all times to the current market value of the
securities loaned.
15. Issue senior securities, except as permitted by the
Subaccount's investment objectives and policies.
16. Write or purchase put or call options.
17. Invest in securities of other investment companies,
except as these securities may be acquired as part
of a merger, consolidation, acquisition of assets,
or plan of reorganization.
18. Mortgage, pledge, or hypothecate the Subaccount's
assets except to secure permitted borrowings. In
those cases, the Subaccount may mortgage, pledge, or
h y pothecate assets having a market value not
exceeding the lesser of the dollar amounts borrowed
or 10% of the value of total assets of the
Subaccount at the time of the borrowing.
19. Make short sales of portfolio securities or purchase
any portfolio securities on margin, except for
short-term credits necessary for the clearance of
transactions.
The Managers have adopted additional investment
restrictions for each Subaccount. These restrictions are not
fundamental investment policies, but rather are operating
policies of each Subaccount, as indicated, and may be changed
by the Managers without Contract Owner approval. With respect
to each of the Subaccounts, except as otherwise indicated,
these additional investment restrictions adopted by the
Managers, to date, are as follows:
1. The Subaccount will not invest in warrants.
2. The Subaccount will not invest in real estate
limited partnerships.
3. The Subaccount will not invest in mineral leases;
except that the Precious Metals Subaccount may
invest in mineral leases although the Precious
Metals Subaccount does not presently intend to
invest in such leases.
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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. To purchase and sell real property (including
limited partnership interests), to purchase and sell
securities that are secured by real estate or
interests therein, to purchase mortgage-related
securities, or to hold and sell real estate acquired
for the Subaccount as a result of the ownership of
securities.
If a percentage restriction is adhered to at the time of
a n i nvestment, a later increase or decrease in the
investment's percentage of the value of the Subaccount's total
assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction.
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. 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.
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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
S e p arate 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
T r ust, 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)*
Manager of the Separate Account; Senior Vice President,
Conseco, Inc., October 1994 to present; Vice President,
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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.
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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
i n vestment 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
S e r v ices, Inc., 1996 to present; Investment
Representative, Money Management Associates, a registered
i n v estment adviser, 1992 to 1993; Student, Miami
U n i v ersity, of Oxford, Ohio (B.A., Business
A d m inistration, 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; Compliance 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.,
1996 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.
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PADCO Advisors II, Inc.
PADCO, which has its office at 6116 Executive Boulevard,
S u i t e 400, Rockville, Maryland 20852, provides the
Subaccounts with investment advisory services. PADCO was
incorporated in the State of Maryland on July 5, 1994. Albert
P. Viragh, Jr., the Chairman of the Board of Managers of the
S e p arate Account and the President of PADCO, owns a
controlling interest in PADCO.
Under an investment advisory agreement with PADCO, dated
November 1, 1996, PADCO serves as the investment adviser for
e a ch Subaccount and provides investment advice to the
Subaccounts and oversees the day-to-day operations of the
Subaccounts, subject to direction and control by the Managers.
Pursuant to the advisory agreement with PADCO, the Subaccounts
pay PADCO the following fees at an annual rate based on the
a v e r age daily Accumulation Units for each respective
Subaccount, as set forth below:
Nova Subaccount 0.75%
Ursa Subaccount 0.90%
OTC Subaccount 0.75%
Precious Metals Subaccount 0.75%
Bond Subaccount 0.50%
Juno Subaccount 0.90%
Money Market 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
i n i tial 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 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 these expense limitations may
be continued thereafter at the discretion of PADCO and the
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Servicer. Fees waived or expenses paid or assumed by PADCO
and the Servicer under these voluntary agreements, after
October 24, 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 . 8 0 %, 2.90%, 2.80%, 2.80, 2.40%, 2.90%, and 2.20%,
respectively; however, no reimbursement will be made by a
Subaccount after October 24, 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 Subaccounts, the selection of brokers and dealers
to effect the transactions, and the negotiation of brokerage
commissions, if any. PADCO expects that the Subaccounts may
e x ecute brokerage or other agency transactions through
registered broker-dealers, for a commission, in conformity
with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
PADCO, and its affiliates (collectively, the "PADCO
Advisors"), may serve as investment managers to a number of
clients, including other investment companies. It is the
practice of the PADCO Advisors to cause purchase and sale
transactions to be allocated among the Subaccounts and others
whose assets the PADCO Advisors manage as the PADCO Advisors
deem equitable. The main factors considered by the PADCO
Advisors in making such allocations among the Subaccounts and
other client accounts of the PADCO Advisors are the respective
investment objectives, the relative size of portfolio holdings
of the same or comparable securities, the availability of cash
for investment, the size of investment commitments generally
held, and the opinions of the person(s) responsible, if any,
for managing the portfolios of the Subaccounts and the other
client accounts.
The policy of each Subaccount regarding purchases and
sales of securities for the Subaccount's portfolio is that
primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions.
Consistent with this policy, when securities transactions are
effected on a stock exchange, each Subaccount's policy is to
pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible
commissions are paid in all circumstances. Each Subaccount
believes that a requirement always to seek the lowest possible
commission cost could impede effective portfolio management
and preclude the Subaccount and the PADCO Advisors from
obtaining a high quality of brokerage and research services.
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In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the PADCO Advisors rely
upon their experience and knowledge regarding commissions
generally charged by various brokers and on their judgment in
evaluating the brokerage and research services received from
the broker effecting the transaction. Such determinations are
necessarily subjective and imprecise, as in most cases an
exact dollar value for those services is not ascertainable.
Purchases and sales of obligations of the U.S. Treasury,
or obligations either issued or guaranteed, as to principal
and interest, by agencies or instrumentalities of the U.S.
G o vernment ("U.S. Government Securities"), are normally
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 brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission
paid by the issuer to the underwriters; transactions with
dealers normally reflect the spread between bid and asked
prices.
Portfolio turnover rate is defined as the value of the
s e curities purchased or securities sold, excluding all
securities whose maturities at time of acquisition were one
year or less, divided by the average monthly value of such
securities owned during the year. Based on this definition,
it is anticipated that a Subaccount's policy of investing in
government securities with remaining maturities of less than
one year will not result in a quantifiable portfolio turnover
rate. However, because of the short-term nature of a
Subaccount's portfolio securities, it is anticipated that the
number of purchases and sales or maturities of such securities
will be substantial. Nevertheless, as brokerage commissions
are not normally charged on purchases and sales of these
securities, the large number of 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
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availability of securities for purchase or sale; statistical
or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio
securities.
If the broker-dealer providing these additional services
is acting as a principal for its own account, no commissions
would be payable. If the broker-dealer is not a principal, a
higher commission may be justified, at the determination of
the PADCO Advisors, for the additional services.
The information and services received by the PADCO
Advisors from brokers and dealers may be of benefit to the
PADCO Advisors in the management of accounts of some of the
PADCO Advisors' other clients and may not in all cases benefit
a Subaccount directly. While the receipt of such information
and services is useful in varying degrees and would generally
reduce the amount of research or services otherwise performed
by the PADCO Advisors and thereby reduce the PADCO Advisors'
e x p enses, this information and these services are of
indeterminable value and the advisory fees paid to the PADCO
A d v isors are not reduced by any amount that may be
attributable to the value of such information and services.
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DETERMINATION OF ACCUMULATION UNIT VALUES
The current market values of the Accumulation Units (the
"Accumulation Unit Values") for each of the Nova, Ursa,
Metals, and OTC Subaccounts are determined each day on which
the New York Stock Exchange (the "NYSE") is open for business
as of the close of normal trading on the NYSE (currently 4:00
P.M., Eastern Time). The Accumulation Unit Values for the
Money Market Subaccount are determined at 4:00 P.M., Eastern
Time, each day on which both the NYSE and the Federal Reserve
Bank of New York (the "New York Fed") are open for business.
Currently, the NYSE and the New York Fed are closed on
weekends, and the following holiday closings have been
scheduled for 1997 and 1998: (i) New Year's Day, Martin
Luther King Jr.'s Birthday, Washington's Birthday, Good
Friday, Memorial Day, July Fourth, Labor Day, Columbus Day,
Thanksgiving Day, and Christmas Day; and (ii) the preceding
Friday when any of those holidays falls on a Saturday or the
subsequent Monday when any of these holidays falls on a
Sunday.
The Accumulation Unit Values for each of the Bond and
Juno Subaccounts are determined each day on which the Chicago
Board of Trade (the "CBOT") is open for trading futures
contracts on U.S. Treasury bonds as of the close of normal
trading on the CBOT (normally 3:00 P.M., Eastern Time).
Currently, the CBOT is closed on weekends, and the following
holiday closings have been scheduled for 1997 and 1998: (i)
New Year s Day, Martin Luther King, Jr. Day, President s Day,
Memorial Day, July Fourth, Labor Day, Columbus Day, Veterans
Day, Thanksgiving Day, and Christmas Day; and (ii) the
preceding Friday when any one of those holidays falls on a
Saturday or the subsequent Monday when any one of those
holidays falls on a Sunday.
To the extent that portfolio securities of a Subaccount
are traded in other markets on days when the Subaccount's
principal trading market(s) is closed, the Subaccount's
Accumulation Unit Value may be affected on days when investors
do not have access to the Subaccount to purchase or redeem
shares. Although the Separate Account expects the same
holiday schedules to be observed in the future, the NYSE, the
CBOT, and the New York Fed each may modify its holiday
schedule at any time.
For purposes of determining the Accumulation Unit Value
of a Subaccount, options and futures contracts will be valued
15 minutes after the 4:00 P.M., Eastern Time, close of trading
on the NYSE, except that U.S. Treasury bond options and
futures contracts traded on the CBOT will be valued at 3:00
P.M., Eastern Time, the close of trading of that exchange.
Options on securities and indices purchased by a Subaccount
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generally are valued at their last bid price in the case of
exchange-traded options or, in the case of options traded in
the OTC market, the average of the last bid price as obtained
from two or more dealers unless there is only one dealer, in
which case that dealer s price is used. The value of a
futures contract equals the unrealized gain or loss on the
contract that is determined by marking the contract to the
current settlement price for a like contract acquired on the
day on which the futures contract is being valued. The value
of options on futures contracts is determined based upon the
current settlement price for a like option acquired on the day
on which the option is being valued. A settlement price may
not be used for the foregoing purposes if the market makes a
limit move with respect to a particular commodity.
OTC securities held by a Subaccount shall be valued at
the last sales price or, if no sales price is reported, the
mean of the last bid and asked price is used. The portfolio
securities of a Subaccount that are listed on a national
exchange or foreign stock exchange are taken at the last sales
price of such securities on that exchange; if no sales price
is reported, the mean of the last bid and asked price is used.
For valuation purposes, all assets and liabilities initially
expressed in foreign currency values will be converted into
U.S. dollar values at the mean between the bid and the offered
quotations of such currencies against U.S. dollars as last
quoted by any recognized dealer. If such quotations are not
available, the rate of exchange will be determined in good
f a i t h by the Managers. Dividend income and other
distributions are recorded on the ex-dividend date, except for
certain dividends from foreign securities which are recorded
as soon as the Separate Account is informed after the ex-
dividend date.
I l liquid securities, securities for which reliable
quotations or pricing services are not readily available, and
all other assets will be valued at their respective fair value
a s determined in good faith by, or under procedures
established by, the Managers, which procedures may include the
delegation of certain responsibilities regarding valuation to
PADCO or the officers of the Separate Account. PADCO and
officers of the Separate Account report, as necessary, to the
Managers regarding portfolio valuation determination. The
Managers, from time to time, will review these methods of
valuation and will recommend changes which may be necessary to
assure that the investments of the Subaccounts are valued at
fair value.
Rule 2a-7 under the 1940 Act (the "Rule") requires that
the Money Market Subaccount limit its investments to U.S.
dollar-denominated instruments which the Managers determine
present minimal credit risks and which are Eligible Securities
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(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.
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
o v e rsight by the Managers pursuant to guidelines and
procedures adopted by the Managers, the authority to determine
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which securities present minimal credit risks and which
u n rated 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 capital gains distributions
during the period are reinvested in Accumulation Units of the
Subaccount at Accumulation Unit Value. Total return is based
on historical earnings and asset value fluctuations and is not
intended to indicate future performance.
Average annual total return quotations for various
periods are computed by finding the average annual compounded
rate of return over the period that would equal the initial
amount invested to the ending contract value available for
withdrawal. A more-detailed description of the method by
which the total return of a Subaccount is calculated is
contained in this Statement of Additional Information under
"Calculation of Return Quotations."
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Comparisons of Investment Performance
Performance information for each of the Subaccounts
contained in reports to Contract Owners or prospective
C o n tract Owners, advertisements, and other promotional
literature may be compared to the record of various unmanaged
indexes for the same period. In conjunction with performance
reports, promotional literature, and/or analyses of Contract
Owner service for a Subaccount, comparisons of the performance
information of the Subaccount for a given period to the
performance of recognized, unmanaged indexes for the same
period may be made. Such indexes include, but are not limited
to, ones provided by Dow Jones & Company, Standard & Poor s
Corporation, Lipper Analytical Services, Inc., Shearson Lehman
Brothers, National Association of Securities Dealers, Inc.,
The Frank Russell Company, Value Line Investment Survey, the
American Stock Exchange, the Philadelphia Stock Exchange,
Morgan Stanley Capital International, Wilshire Associates, the
Financial Times-Stock Exchange, and the Nikkei Stock Average
and Deutcher Aktienindex, all of which are unmanaged market
indicators. Such comparisons can be a useful measure of the
quality of a Subaccount s investment performance.
In particular, performance information for the Nova
Subaccount, the Ursa Subaccount, and the Precious Metals
Subaccount may be compared to various unmanaged indexes,
including, but not limited to, the Standard & Poor's 500
Composite Stock Price Index (the "S&P500 Index") or the Dow
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
C o mposite 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
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various unmanaged indexes, including, but not limited to, the
Shearson Lehman Government (LT) Index . Such unmanaged
i n dexes may assume the reinvestment of dividends, but
generally do not reflect deductions for operating costs and
expenses.
In addition, rankings, ratings, and comparisons of
investment performance and/or assessments of the quality of
Contract Owner service appearing in publications such as
Money, Forbes, Kiplinger s Magazine, Personal Investor,
Morningstar, Inc., the Morningstar Variable Annuity/Life
Reporter, VARDS, and similar sources which utilize information
compiled (i) internally, (ii) by Lipper Analytical Services,
Inc. ("Lipper"), or (iii) by other recognized analytical
services, may be used in sales literature. The Morningstar
Variable Annuity/Life Reporter consists of nearly 700 variable
life and annuity funds, all of which report their data net of
investment advisory fees, direct operating expenses, and
separate account charges. VARDS is a monthly reporting
service that monitors approximately 760 variable life and
variable annuity funds on performance and account information.
The total return of each Subaccount (other than the Money
Market Subaccount) may be compared to the performance of broad
groups of comparable subaccounts or mutual funds with similar
investment goals, as described below, and as such performance
is tracked and published by such independent organizations as
Lipper, and CDA Investment Technologies, Inc., among others.
When Lipper's tracking results are used, the Subaccount will
be compared to Lipper's appropriate fund category, that is, by
fund objective and portfolio holdings. Accordingly, the
Lipper ranking and comparison, which may be used by the
Separate Account in performance 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
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National Association of Securities 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.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of
a Subaccount (other than the Money Market Subaccount) to that
of relevant market indexes in advertisements or in reports to
Contract Owners, performance for the Subaccount may be stated
in terms of average annual total return. Total return is
calculated according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = ending Contract Value available for
withdrawal of a hypothetical $1,000
payment, made at the beginning of the
1, 5, or 10 year periods, at the end
of the 1, 5, or 10 year periods (or
fractional portion thereof).
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters,
updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover
1, 5, and 10 year periods or a shorter period dating from the
effectiveness of the Registration Statement of the Separate
Account. In calculating the ending redeemable value, all
dividends and distributions by a Subaccount are assumed to
have been reinvested. Total return, or "T" in the formula
above, is computed by finding the average annual compounded
rates of return over the 1, 5, and 10 year periods (or
fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. The deduction
for the asset allocation on advisory fee will be included in
the determination of standard total return in any performance
advertising for the Subaccounts.
From time to time, each Subaccount, other than the Money
Market Subaccount, also may include in such advertising a
total return figure that is not calculated according to the
formula set forth above in order to compare more accurately
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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
a s s u ming 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
d i viding 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.
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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
a u t h o r ized broker-dealers, including registered
representatives of PFS. These registered representatives are
also Great American Reserve's licensed insurance agents.
Great American Reserve, from its general account, pays
commissions to PFS not to exceed 6.0% of Purchase Payments.
INDEPENDENT ACCOUNTANTS
The financial statements of Great American Reserve and
the Statement of Assets and Liabilities of the Separate
Account included in the Prospectus and the Statement of
Additional Information have been examined by Coopers & Lybrand
LLP, independent accountants, for the periods indicated in
their reports as stated in their opinions, and have been so
included in reliance upon such opinion given upon the
authority of that firm as experts in accounting and auditing.
CUSTODY
Boston Safe Deposit and Trust Company, a Massachusetts
trust company with its principal place of business at One
Boston Place, Boston, Massachusetts 02108, acts as the
Custodian bank for the Separate Account and each of the
Subaccounts. The securities of the Subaccount are held by the
Custodian in the federal book-entry system pursuant to a
custodial agreement.
FINANCIAL STATEMENTS
Financial statements of Great American Reserve, for the
fiscal year ended December 31, 1996, included herein, should
be considered only as bearing on the ability of Great American
Reserve to meet its obligations under the Contract. Unaudited
financial statements of the Separate Account, for the period
from May 7, 1997 (the date that the Separate Account commenced
operations), through June 30, 1997, found at the end of this
Statement of Additional Information, are included in the
Separate Account's Semi-Annual Report, which was filed on Form
N-30D with the SEC via EDGAR transmission on September 2,
1997. A copy of the Separate Account's Semi-Annual Report
may be obtained without charge by contacting the Separate
Account at 6116 Executive Boulevard, Suite 400, Rockville,
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Maryland 20852, or by telephoning the Separate Account at
(888) 667-4936.
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APPENDIX A
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Commercial paper rated "Prime" by Moody's Investors
Service, Inc. ("Moody's"), is based upon Moody's evaluation of
many factors including: (1) the management of the issuer; (2)
the issuer's industry or industries and the speculative-type
risks which may be inherent in certain areas; (3) the issuer's
products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6)
trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist
with the issue; and (8) recognition by the management of
obligations which may be present or may arise as a result of
public interest questions and preparations to meet such
obligations. Relative differences in these factors determine
whether the issuer's commercial paper is rated "Prime-1,"
"Prime-2," or "Prime-3" by Moody's.
"Prime-1" indicates a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity
will normally be evidenced by the following characteristics:
(1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and
ample asset protection; (4) broad margins in earnings coverage
of fixed financial charges and high internal cash generation;
and (5) well-established access to a range of financial
markets and assured sources of alternative liquidity.
"Prime-2" indicates a strong capacity for repayment of
short-term promissory obligations. This repayment capacity
normally will be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to
v a riation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
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-
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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."
Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co.
("Duff") are consistent with the rating criteria utilized by
m o ney market participants. The ratings apply to all
obligations with maturities of under one year, including
commercial paper, the uninsured portion of certificates of
d e p o sit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper
is also rated according to this scale.
An emphasis of Duff's short-term ratings is placed on
" l i quidity," which is defined as not only cash from
operations, but also access to alternative sources of funds
including trade credit, bank lines, and the capital markets.
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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.
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
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are taken into account by IBCA when assigning IBCA's ratings.
Before dispatch to subscribers, a draft of the report is
submitted to each company to permit the correction of any
factual errors and to enable the clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to
review all ratings and to ensure that individual ratings are
assigned consistently for institutions in all the countries
covered. Following these committee meetings, IBCA ratings are
issued directly to subscribers. At the same time, the company
is informed of the ratings as a matter of courtesy, but not
for discussion.
A1+ -- This designation rating indicates obligations
supported by the highest capacity for timely repayment.
A1 -- This designation rating indicates obligations
supported by a very strong capacity for timely repayment.
A2 -- This designation rating indicates obligations
supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
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