<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RYDEX ADVISOR VARIABLE
[LOGO] ANNUITY ACCOUNT
ANNUAL REPORT
December 31, 1997
6116 Executive Boulevard, Suite 400
Rockville, MD 20852
(301) 468-8520 888/667-4936
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dear Contract Owners:
In our first Annual Report to Rydex Advisor Variable Annuity Account
contract holders, we would like to take this opportunity to welcome you to the
Great American Reserve Insurance Company and Rydex family. It is our continuing
goal to provide you with innovative investment vehicles that offer you the
flexibility to take advantage of market fluctuations.
1997 can be described as a year of volatility and impressive stock market
gains. Market momentum, driven by the best performing stock market quarter in a
decade, continued into the third quarter. Propelled by lower interest rates,
improved business productivity and robust corporate profits, the broad market
averages reached new highs by the beginning of August.
Market momentum then began to stall as earnings disappointments and the
Asian currency implosion caused stocks to retreat. A trading range was
established through late summer until early fall as Asian worries began to
mushroom into broad-based fears about U.S. stock prices. For three consecutive
trading days in late October, Wall Street's major indices took a beating,
culminating on October 27th, when the Dow Jones Industrial Average tumbled more
than 550 points. This was its biggest point loss in history and its worst
decline since the "Black Monday" crash 10 years earlier. Other equity indices,
most notably the S&P 500 Composite Stock Price Index and the NASDAQ 100-TM-
Index also sustained similar losses. In addition, the Philadelphia Gold and
Silver (XAU) Index's long-term downward trend was exacerbated by the prospect of
lower inflation and by potentially weaker demand from Asia.
By November, the major market indices had recovered from the big October
plunge. This volatility, along with future uncertainty in the equity markets,
ignited a bond market rally as a flight to safety and the anticipation of slower
growth sent investors to the refuge of U.S. Government Bonds. At year end, the
yield on the 30 year U.S. Treasury Bond fell to 5.92%, the lowest yield since
December of 1995.
What a year! In 1997, the U.S. economy reveled in strong 3.8% growth, mild
1.8% inflation, 4.6% unemployment, low interest rates, fat profits, and a
seemingly unstoppable
<PAGE>
stock market. Aside from the Asian scenario, the U.S. economy heads into 1998
easily in the best shape it has been in since the 1960s.
Thank you for investing in the Rydex Advisor Variable Annuity. If you need
additional information or have any questions, please call us at (888) 667-4936
to request a current prospectus containing more complete information including
management fees, charges and expenses. Please read the prospectus carefully
before you invest or send money.
[/S/ ALBERT P. VIRAGH, JR.]
Albert P. (Skip) Viragh, Jr.
Chairman
2
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
NOVA SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
----------- -----------
<S> <C> <C>
COMMON STOCKS 8.9%
Standard & Poor's Depository Receipts (Cost $795,090) 9,120 $ 885,210
-----------
<CAPTION>
CONTRACTS
-----------
<S> <C> <C>
OPTIONS PURCHASED 14.8%
Call Options on:
S&P 500 Index Expiring March 1998 at 700 (Cost
$1,437,407) 53 1,470,087
-----------
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
REPURCHASE AGREEMENT 76.3%
Repurchase Agreement Collateralized by U.S. Treasury
Obligations-- 6.50% 1/02/1998 $ 7,573,896 7,573,896
-----------
Total Investments 100% (Cost $9,806,393) $ 9,929,193
-----------
-----------
- --------------------------------------------------------------------------------
<CAPTION>
UNREALIZED
CONTRACTS GAIN
----------- -----------
<S> <C> <C>
FUTURES CONTRACTS PURCHASED
S&P 500 Futures Contracts Expiring March 1998
(Underlying Face Amount at Market Value $7,588,025) 31 $ 76,118
-----------
-----------
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
URSA SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
------------ -----------
<S> <C> <C>
REPURCHASE AGREEMENT 100%
Repurchase Agreement Collateralized by
U.S. Treasury Obligations-- 6.50%
1/02/1998 $ 1,560,137 $ 1,560,137
-----------
Total Investments 100% (Cost
$1,560,137) $ 1,560,137
-----------
-----------
- -------------------------------------------------------------------
<CAPTION>
UNREALIZED
SHARES LOSS
------------ -----------
<S> <C> <C>
COMMON STOCK SOLD SHORT
Standard & Poor's Depository Receipts
(Underlying Face Amount at Market
Value $1,892,719) 19,500 $ (63,495)
-----------
-----------
<CAPTION>
CONTRACTS
------------
<S> <C> <C>
FUTURES CONTRACTS SOLD
S&P 500 Future Contract Expiring March
1998
(Underlying Face Amount at Market
Value $979,100) 4 $ (13,828)
-----------
-----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
MONEY MARKET SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
----------- -----------
<S> <C> <C>
REPURCHASE AGREEMENT 100%
Repurchase Agreement Collateralized by
U.S. Treasury Obligations--
6.50% 1/02/1998 $17,605,331 $17,605,331
-----------
Total Investments 100% (Cost
$17,605,331) $17,605,331
-----------
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
OTC SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
----------- ----------
<S> <C> <C>
COMMON STOCKS 89.6%
Microsoft Corp.* 3,836 $ 495,803
Intel Corp. 5,223 366,916
Cisco Systems, Inc.* 3,320 185,062
Worldcom, Inc.* 3,038 91,899
Dell Computer Corp.* 1,093 91,812
MCI Communications Corp. 1,858 79,546
Oracle Corp.* 3,221 71,857
Sun Microsystems, Inc.* 1,227 48,927
Amgen, Inc.* 879 47,576
Tele-Communications, Inc.* 1,572 43,918
3Com Corp.* 1,152 40,248
Applied Materials, Inc.* 1,231 37,084
Comcast Corp. Special Class A 1,028 32,446
Tellabs, Inc.* 603 31,884
HBO & Company 661 31,728
Costco Companies, Inc.* 708 31,595
Peoplesoft, Inc.* 744 29,016
BMC Software, Inc.* 334 21,919
PanAmSat Corp.* 495 21,347
Nextel Communications, Inc.* 802 20,852
Parametric Technology Corp.* 420 19,897
Compuware Corp.* 574 18,368
Paychex, Inc. 361 18,276
ADC Telecommunications, Inc.* 431 17,994
Ascend Communications, Inc.* 635 15,558
Nordstrom, Inc. 253 15,275
Northwest Airlines Corp.* 316 15,128
<CAPTION>
MARKET
SHARES VALUE
----------- ----------
<S> <C> <C>
Staples, Inc.* 541 $ 15,013
Maxim Integrated Products, Inc.* 434 14,973
Linear Technology Corp. 257 14,810
Adaptec, Inc.* 379 14,070
PACCAR, Inc. 259 13,597
Sigma Aldrich Corp. 335 13,316
Cintas Corp. 324 12,636
Network Associates, Inc.* 232 12,267
Qualcomm, Inc.* 224 11,312
KLA-Tencor Corp.* 278 10,738
Starbucks Corp.* 263 10,093
Chiron Corp.* 593 10,081
Adobe Systems, Inc. 244 10,065
Altera Corp.* 298 9,871
Biomet, Inc. 368 9,430
DSC Communications Corp.* 387 9,288
Quantum Corp.* 452 9,068
Novell, Inc.* 1,198 8,985
Biogen, Inc.* 247 8,985
Xilinx, Inc.* 243 8,520
Netscape Communications Corp.* 307 7,483
US Office Products Company* 375 7,359
Atmel Corp.* 327 6,070
Oxford Health Plans, Inc.* 264 4,108
Electronics for Imaging, Inc.* 175 2,909
----------
Total Common Stocks
(Cost $2,304,292) $2,196,978
----------
</TABLE>
* NON-INCOME PRODUCING SECURITIES
See Notes to Financial Statements.
6
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
OTC SUBACCOUNT
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
CONTRACTS VALUE
----------- ----------
OPTIONS PURCHASED 0.2%
<S> <C> <C>
Call Options on:
NASDAQ 100 Call Option Contract Expiring January
1998 at 990 2 $ 4,725
----------
Total Call Options Purchased (Cost $7,006) $ 4,725
----------
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
REPURCHASE AGREEMENT 10.2%
Repurchase Agreement Collateralized by U.S.
Treasury Obligations--
6.50% 1/02/1998 $249,003 249,003
----------
Total Investments 100% (Cost $2,560,301) $2,450,706
----------
----------
- ----------------------------------------------------------------------------
<CAPTION>
MARKET
CONTRACTS VALUE
----------- ----------
<S> <C> <C>
WRITTEN OPTIONS CONTRACTS
Put Options On:
NASDAQ 100 Call Option Contract Expiring January
1998 at 990
(Proceeds $7,994) 2 $ 4,200
----------
----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
PRECIOUS METALS SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------- --------
<S> <C> <C>
COMMON STOCKS 98.2%
Mining and Precious Metals Stocks
Barrick Gold Corp., Class A 10,075 $187,647
Newmont Mining Corp. 4,190 123,081
Placer Dome, Inc. 6,550 83,103
Battle Mountain Gold Co., Class A 6,120 35,955
Homestake Mining Co. 3,910 34,701
TVX Gold, Inc.* 4,300 14,513
Echo Bay Mines, Ltd. 3,660 8,921
Hecla Mining Co.* 1,390 6,863
ASA Limited 330 6,786
Coeur D'Alene Mines 590 5,310
Pegasus Gold, Inc.* 1,040 650
--------
Total Common Stocks (Cost $467,626) $507,530
--------
<CAPTION>
FACE
AMOUNT
-------
<S> <C> <C>
REPURCHASE AGREEMENT 1.8%
Repurchase Agreement Collateralized by U.S. Treasury
Obligations--
6.50% 1/02/1998 $9,133 9,133
--------
Total Investments 100% (Cost $476,759) $516,663
--------
--------
</TABLE>
* NON-INCOME PRODUCING SECURITIES
See Notes to Financial Statements.
8
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
U.S. GOVERNMENT BOND SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
----------- --------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS 76.3%
U.S. Treasury Bond 6.375% due 08/15/2027 (Cost $96,540) $ 99,000 $104,352
U.S. Treasury Bond 6.125% due 11/15/2027 (Cost $565,685) 555,000 570,262
--------
Total U.S. Treasury Obligations (Cost $662,225) 674,614
--------
<CAPTION>
CONTRACTS
-----------
<S> <C> <C>
OPTIONS PURCHASED 9.2%
Call Options On:
U.S. Treasury Bond Futures Contract Expiring March
1998 at 100 (Cost $77,632) 4 81,875
--------
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
REPURCHASE AGREEMENT 14.5%
Repurchase Agreement Collateralized by U.S. Treasury
Obligations--
6.50% due 1/02/1998 $128,019 128,019
--------
Total Investments 100.0% (Cost $867,876) $884,508
--------
--------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY
JUNO SUBACCOUNT
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
FACE AMOUNT VALUE
----------- -------
<S> <C> <C>
REPURCHASE AGREEMENT 100.0%
Repurchase Agreement Collateralized by U.S. Treasury
Obligations--
6.50% 1/02/1998 $3,739 $ 3,739
-------
Total Investments 100% (Cost $3,739) $ 3,739
-------
-------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY
NOVA URSA MARKET
SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Securities at Market Value--See
Accompanying Schedules $ 9,929,193 $1,560,137 $17,605,331
Receivable for Securities Sold -- -- --
Receivable from Advisor, Net -- -- 3,505
Investment Income Receivable 4,829 282 3,179
Segregated Cash with Broker 376,875 830,661 --
Segregated Cash with Custodian -- 540,188 --
Receivable for Units Purchased 235,039 -- 620,308
Receivable--Short Sales Open -- 1,829,224 --
Unamortized Organization Costs 102,062 102,062 102,062
Prepaid Expenses -- -- 165
Other Assets 168 28,214 5,803
----------- ---------- -----------
Total Assets 10,648,166 4,890,768 18,340,353
----------- ---------- -----------
LIABILITIES
Short Sale at Market Value -- 1,892,719 --
Payable for Units Redeemed 49,937 -- 235,014
Organizational Expense Payable to
Advisor 105,883 104,298 109,201
Amounts due to GARCO 38,935 13,934 92,766
Other Liabilities 5,375 973 --
----------- ---------- -----------
Total Liabilities 200,130 2,011,924 436,981
----------- ---------- -----------
NET ASSETS $10,448,036 $2,878,844 $17,903,372
----------- ---------- -----------
----------- ---------- -----------
Units Outstanding 855,862 356,784 1,734,974
----------- ---------- -----------
----------- ---------- -----------
Unit Value $12.21 $8.07 $10.32
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRECIOUS U.S.
OTC METALS GOVERNMENT JUNO
SUBACCOUNT SUBACCOUNT BOND SUBACCOUNT SUBACCOUNT
---------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Securities at Market Value--See
Accompanying Schedules $2,450,706 $516,663 $ 884,508 $ 3,739
Receivable for Securities Sold 2,522 -- -- --
Receivable from Advisor, Net 5,893 4,686 3,328 --
Investment Income Receivable 657 330 6,821 1
Segregated Cash with Broker 15,010 -- -- --
Unamortized Organization Costs 102,062 102,136 102,062 102,126
Other Assets 5,822 78 -- --
---------- ----------- ---------------- -----------
Total Assets 2,582,672 623,893 996,719 105,866
---------- ----------- ---------------- -----------
LIABILITIES
Written Options at Market Value 4,200 -- -- --
Payable for Units Redeemed 90,730 -- -- --
Organization Expense Payable to
Advisor 102,681 102,060 102,430 101,949
Amounts due to GARCO 17,656 3,587 2,220 3,695
Other Liabilities -- 336 50 222
---------- ----------- ---------------- -----------
Total Liabilities 215,267 105,983 104,700 105,866
---------- ----------- ---------------- -----------
NET ASSETS $2,367,405 $517,910 $ 892,019 $ --
---------- ----------- ---------------- -----------
---------- ----------- ---------------- -----------
Units Outstanding 222,217 73,827 75,493 --
---------- ----------- ---------------- -----------
---------- ----------- ---------------- -----------
Unit Value $10.65 $7.02 $11.82 $0.00
---------- ----------- ---------------- -----------
---------- ----------- ---------------- -----------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Period Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY
NOVA URSA MARKET
SUBACCOUNT* SUBACCOUNT* SUBACCOUNT*
----------- ----------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 91,346 $ 25,037 $367,414
Dividends 11,944 -- --
----------- ----------- -----------
Total Income 103,290 25,037 367,414
----------- ----------- -----------
EXPENSES
Advisory Fees 20,858 8,957 33,131
Tactical Allocation Fees 6,953 2,488 13,252
Mortality and Expense Risk Fee 34,763 12,441 82,827
Organizational Expenses 28,331 10,007 48,103
Administration Fees 4,172 1,493 9,939
Custodian Fees 6,272 3,904 6,151
Portfolio Accounting Expenses 28,067 9,871 47,084
Legal Expenses 75,651 26,606 126,905
Audit Fees 20,517 7,215 34,417
Miscellaneous 27,284 7,896 50,137
----------- ----------- -----------
Total Expenses 252,868 90,878 451,946
Less Expenses Waived and Reimbursed
by Investment Advisor 174,988 62,511 306,170
----------- ----------- -----------
Net Expenses 77,880 28,367 145,776
----------- ----------- -----------
Net Investment Income (Loss) 25,410 (3,330) 221,638
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net Realized Gain (Loss) on:
Investment Securities 122,727 (180,926) --
Futures Contracts (10,350) 14,864 --
Securities Sold Short -- (88,459) --
----------- ----------- -----------
Total Net Realized Gain (Loss) 112,377 (254,521) --
Net Change in Unrealized Appreciation
(Depreciation) on Investments,
Options and Futures Contracts 198,918 (77,323) --
----------- ----------- -----------
Net Gain (Loss) on Investments 311,295 (331,844) --
----------- ----------- -----------
Net Increase (Decrease) in Net Assets
from Operations $336,705 $ (335,174) $221,638
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
* DATE OF COMMENCEMENT OF OPERATIONS--MAY 7, 1997--NOVA SUBACCOUNT, URSA
SUBACCOUNT AND MONEY MARKET SUBACCOUNT.
See Notes to Financial Statements.
13
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Period Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRECIOUS U.S.
OTC METALS GOVERNMENT JUNO
SUBACCOUNT* SUBACCOUNT* BOND SUBACCOUNT* SUBACCOUNT*
---------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 19,099 $ 430 $ 9,670 $ 13,970
Dividends 803 1,116 -- --
---------- ---------- -------- -----------
Total Income 19,902 1,546 9,670 13,970
---------- ---------- -------- -----------
EXPENSES
Advisory Fees 9,458 1,912 793 2,375
Tactical Allocation Fees 2,509 512 319 660
Mortality and Expense Risk Fee 15,764 3,203 1,982 3,299
Organizational Expenses 13,197 2,922 1,703 2,867
Administration Fees 1,892 384 238 396
Custodian Fees 10,315 5,270 3,216 3,942
Portfolio Accounting Expenses 12,717 2,832 1,766 2,663
Legal Expenses 34,276 5,748 3,655 6,419
Audit Fees 9,296 2,070 1,291 1,947
Miscellaneous 4,876 -- -- --
---------- ---------- -------- -----------
Total Expenses 114,300 24,853 14,963 24,568
Less Expenses Waived and Reimbursed
by Investment Advisor 79,023 17,722 11,151 16,914
---------- ---------- -------- -----------
Net Expenses 35,277 7,131 3,812 7,654
---------- ---------- -------- -----------
Net Investment Income (Loss) (15,375) (5,585) 5,858 6,316
---------- ---------- -------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net Realized Gain (Loss) on:
Investment Securities (117,977) (365,727) 14,916 (11,273)
Written Options 36,474 -- -- --
Futures Contracts -- -- -- (15,207)
---------- ---------- -------- -----------
Total Net Realized Gain (Loss) (81,503) (365,727) 14,916 (26,480)
Net Change in Unrealized Appreciation/
(Depreciation) on Investments,
Options and Futures Contracts (105,801) 39,904 16,633 --
---------- ---------- -------- -----------
Net Gain (Loss) on Investments (187,304) (325,823) 31,549 (26,480)
---------- ---------- -------- -----------
Net Increase (Decrease) in Net Assets
from Operations $ (202,679) $ (331,408) $ 37,407 $ (20,164)
---------- ---------- -------- -----------
---------- ---------- -------- -----------
</TABLE>
* DATE OF COMMENCEMENT OF OPERATIONS--MAY 7, 1997--OTC SUBACCOUNT AND JUNO
SUBACCOUNT; MAY 29, 1997--PRECIOUS METALS SUBACCOUNT AND U.S. GOVERNMENT
BOND SUBACCOUNT.
See Notes to Financial Statements.
14
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVA SUBACCOUNT URSA SUBACCOUNT
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997* 1997*
--------------- ---------------
<S> <C> <C>
CHANGES FROM OPERATIONS
Net Investment Income (Loss) $ 25,410 $ (3,330)
Net Realized Gain (Loss) on
Investments 112,377 (254,521)
Net Change in Unrealized Appreciation
(Depreciation) of Investments 198,918 (77,323)
--------------- ---------------
Net Increase (Decrease) in Net Assets
from Operations 336,705 (335,174)
--------------- ---------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract Purchase Payments less Sales
and Administrative Expenses and
Applicable Premium Taxes 76,198,580 45,239,040
Contract Terminations (66,087,249) (42,025,022)
--------------- ---------------
Net Increase (Decrease) in Net Assets
Derived from Principal Transactions 10,111,331 3,214,018
--------------- ---------------
Net Increase in Net Assets 10,448,036 2,878,844
--------------- ---------------
NET ASSETS--Beginning of Period -- --
--------------- ---------------
NET ASSETS--End of Period $ 10,448,036 $ 2,878,844
--------------- ---------------
--------------- ---------------
</TABLE>
* COMMENCEMENT OF OPERATIONS: MAY 7, 1997--NOVA SUBACCOUNT AND URSA SUBACCOUNT
See Notes to Financial Statements.
15
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRECIOUS
METALS
OTC SUBACCOUNT SUBACCOUNT
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997* 1997*
--------------- ---------------
<S> <C> <C>
CHANGES FROM OPERATIONS
Net Investment Income (Loss) $ (15,375) $ (5,585)
Net Realized Gain (Loss) on
Investments (81,503) (365,727)
Net Change in Unrealized Appreciation
(Depreciation) of Investments (105,801) 39,904
--------------- ---------------
Net Increase (Decrease) in Net Assets
from Operations (202,679) (331,408)
--------------- ---------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract Purchase Payments less Sales
and Administrative Expenses and
Applicable Premium Taxes 18,825,274 4,476,176
Contract Terminations (16,255,190) (3,626,858)
--------------- ---------------
Net Increase (Decrease) in Net Assets
Derived from Principal Transactions 2,570,084 849,318
--------------- ---------------
Net Increase in Net Assets 2,367,405 517,910
--------------- ---------------
NET ASSETS--Beginning of Period -- --
--------------- ---------------
NET ASSETS--End of Period $ 2,367,405 $ 517,910
--------------- ---------------
--------------- ---------------
</TABLE>
* COMMENCEMENT OF OPERATIONS: MAY 7, 1997--OTC SUBACCOUNT; MAY 29,
1997--PRECIOUS METALS SUBACCOUNT
See Notes to Financial Statements.
16
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT JUNO
BOND SUBACCOUNT SUBACCOUNT
PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997* 1997*
--------------- ---------------
<S> <C> <C>
CHANGES FROM OPERATIONS
Net Investment Income (Loss) $ 5,858 $ 6,316
Net Realized Gain (Loss) on
Investments 14,916 (26,480)
Net Change in Unrealized Appreciation
(Depreciation) of Investments 16,633 --
--------------- ---------------
Net Increase (Decrease) in Net Assets
from Operations 37,407 (20,164)
--------------- ---------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract Purchase Payments less Sales
and Administrative Expenses and
Applicable Premium Taxes 3,840,174 6,578,572
Contract Terminations (2,985,562) (6,558,408)
--------------- ---------------
Net Increase (Decrease) in Net Assets
Derived from Principal Transactions 854,612 20,164
--------------- ---------------
Net Increase in Net Assets 892,019 --
--------------- ---------------
NET ASSETS--Beginning of Period -- --
--------------- ---------------
NET ASSETS--End of Period $ 892,019 $ --
--------------- ---------------
--------------- ---------------
</TABLE>
* COMMENCEMENT OF OPERATIONS: MAY 29, 1997--U.S. GOVERNMENT BOND SUBACCOUNT; MAY
7, 1997--JUNO SUBACCOUNT
See Notes to Financial Statements.
17
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET
SUBACCOUNT
PERIOD ENDED
DECEMBER 31,
1997*
---------------
<S> <C>
CHANGES FROM OPERATIONS
Net Investment Income (Loss) $ 221,638
Net Realized Gain (Loss) on
Investments --
Net Change in Unrealized Appreciation
(Depreciation) of Investments --
---------------
Net Increase (Decrease) in Net Assets
from Operations 221,638
---------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract Purchase Payments less Sales
and Administrative Expenses and
Applicable Premium Taxes 122,126,822
Contract Terminations (104,445,088)
---------------
Net Increase (Decrease) in Net Assets
Derived from Principal Transactions 17,681,734
---------------
Net Increase in Net Assets 17,903,372
---------------
NET ASSETS--Beginning of Period --
---------------
NET ASSETS--End of Period $ 17,903,372
---------------
---------------
</TABLE>
* COMMENCEMENT OF OPERATIONS: MAY 7, 1997--MONEY MARKET SUBACCOUNT
See Notes to Financial Statements.
18
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Period Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
URSA URSA URSA
SUBACCOUNT* SUBACCOUNT* SUBACCOUNT* MONEY
NOVA MAY 7, 1997 TO MAY 24, 1997 TO JUNE 10, 1997 TO MARKET
SUBACCOUNT* MAY 21, 1997 JUNE 3, 1997 DECEMBER 31, 1997 SUBACCOUNT*
------------ --------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
PER ACCUMULATION UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT VALUE-- BEGINNING OF
PERIOD $ 10.00 $ 10.00 $ 9.57 $ 9.36 $ 10.00
------------ --------------- ---------------- ---------- ------------
Investment Income .29 .01 .01 .12 .52
Expenses .22 .05 .01 .13 .21
------------ --------------- ---------------- ---------- ------------
Net Investment Income (Loss) .07 (.04) .00 (.01) .31
Net Realized and Unrealized Gains
(Losses) on Securities 2.14 (.33) .01 (1.28) .01
------------ --------------- ---------------- ---------- ------------
Net Increase (Decrease) in
Accumulation Unit Value 2.21 (.37) .01 (1.29) .32
------------ --------------- ---------------- ---------- ------------
ACCUMULATION UNIT VALUE-- END OF PERIOD $ 12.21 $ 9.63 $ 9.58 $ 8.07 $ 10.32
------------ --------------- ---------------- ---------- ------------
------------ --------------- ---------------- ---------- ------------
RATIOS TO AVERAGE NET ASSETS **
Gross Expenses 9.09% 13.62% 85.10% 9.21% 6.82%
Net Expenses 2.80% 2.90% 2.90% 2.90% 2.20%
Net Investment Income (Loss) 0.91% (10.05)% 2.76% (0.27)% 3.34%
SUPPLEMENTARY DATA:
Portfolio Turnover Rate*** 178.34% 0% 0% 0% 0%
Net Assets, End of Period (000's
omitted) $ 10,448 $ -- $ -- $ 2,879 $ 17,903
Number of Accumulation Units
Outstanding at End of Period 855,862 -- -- 356,784 1,734,974
</TABLE>
* COMMENCEMENT OF OPERATIONS: NOVA SUBACCOUNT AND URSA SUBACCOUNT--MAY 7,
1997; MONEY MARKET SUBACCOUNT--MAY 7, 1997
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. RESULTS ARE PRESENTED FOR
PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER ACCUMULATION UNIT
AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING UNITS.
** 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 URSA SUBACCOUNT TYPICALLY HOLDS MOST OF ITS INVESTMENTS
IN OPTIONS AND FUTURES CONTRACTS WHICH ARE DEEMED SHORT-TERM SECURITIES.
19
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Period Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
U.S. U.S. U.S. GOVERNMENT
GOVERNMENT GOVERNMENT GOVERNMENT BOND
BOND BOND BOND SUBACCOUNT*
PRECIOUS SUBACCOUNT* SUBACCOUNT* SUBACCOUNT* AUGUST 18, 1997
OTC METALS MAY 29, 1997 TO JUNE 24, 1997 TO JULY 29, 1997 TO TO
SUBACCOUNT* SUBACCOUNT* JUNE 5, 1997 JULY 14, 1997 AUGUST 12, 1997 DECEMBER 31, 1997
----------- ----------- --------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
PER ACCUMULATION UNIT
INCOME PERFORMANCE:
ACCUMULATION UNIT
VALUE--BEGINNING OF
PERIOD $ 10.00 $ 10.00 $10.00 $10.44 $10.92 $ 10.70
----------- ----------- ------- ------- ------- -----------------
Investment Income .12 .03 .01 .13 .03 .24
Expenses .21 .14 .01 .03 .01 .09
----------- ----------- ------- ------- ------- -----------------
Net Investment Income
(Loss) (.09) (.11) .00 .10 .02 .15
Net Realized and
Unrealized Gains
(Losses) on
Securities .74 (2.87) .15 .13 (.38) .97
----------- ----------- ------- ------- ------- -----------------
Net Increase (Decrease)
in Accumulation Unit
Value .65 (2.98) .15 .23 (.36) 1.12
----------- ----------- ------- ------- ------- -----------------
ACCUMULATION UNIT
VALUE--END OF PERIOD $ 10.65 $ 7.02 $10.15 $10.67 $10.56 $ 11.82
----------- ----------- ------- ------- ------- -----------------
----------- ----------- ------- ------- ------- -----------------
RATIOS TO AVERAGE NET
ASSETS**
Gross Expenses 9.07% 9.76% 5.43% 12.68% 49.63% 8.47%
Net Expenses 2.80% 2.80% 2.40% 2.40% 2.40% 2.40%
Net Investment Income
(Loss) (1.22)% (2.19)% 1.86% 7.94% 3.80% 3.49%
SUPPLEMENTARY DATA:
Average Commission Rate
Paid on Equity
Securities -- 0.0381 -- -- -- --
Portfolio Turnover
Rate*** 449.91% 913.83% 0% 0% 0% 760.78%
Net Assets, End of
Period (000's
omitted) $ 2,367 $ 518 $ -- $ -- $ -- $ 892
Number of Accumulation
Units Outstanding at
End of Period 222,217 73,827 -- -- -- 75,493
</TABLE>
* COMMENCEMENT OF OPERATIONS: OTC SUBACCOUNT--MAY 7, 1997; PRECIOUS METALS
SUBACCOUNT--MAY 29, 1997; U.S. GOVERNMENT BOND SUBACCOUNT--MAY 29, 1997
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
** ANNUALIZED
*** PORTFOLIO TURNOVER RATE IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR.
20
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Period Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNO
JUNO JUNO JUNO SUBACCOUNT* JUNO JUNO
SUBACCOUNT* SUBACCOUNT* SUBACCOUNT* JULY 24, 1997 SUBACCOUNT* SUBACCOUNT*
MAY 7, 1997 TO JUNE 16, 1997 TO JULY 7, TO AUGUST 26, 1997 TO OCTOBER 22, 1997 TO
JUNE 3, 1997 JULY 2, 1997 1997 AUGUST 11, 1997 OCTOBER 19, 1997 DECEMBER 11, 1997
-------------- ---------------- ----------- --------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
PER ACCUMULATION
UNIT INCOME
PERFORMANCE:
ACCUMULATION UNIT
VALUE--BEGINNING
OF PERIOD $ 10.00 $ 9.71 $ 9.59 $ 9.41 $ 9.72 $ 9.50
-------------- ------- ----------- ------- ------- -------
Investment Income .04 .02 .00 .03 .07 .07
Expenses .04 .02 .00 .02 .06 (.04)
-------------- ------- ----------- ------- ------- -------
Net Investment
Income (Loss) .00 .00 .00 .01 .01 .11
Net Realized and
Unrealized Gains
(Losses) on
Securities (.14) (.03) (.05) .26 (.21) (.60)
-------------- ------- ----------- ------- ------- -------
Net Increase
(Decrease) in
Accumulation
Unit Value (.14) (.03) (.05) .27 (.20) (.49)
-------------- ------- ----------- ------- ------- -------
ACCUMULATION UNIT
VALUE--END OF
PERIOD $ 9.86 $ 9.68 $ 9.54 $ 9.68 $ 9.52 $ 9.01
-------------- ------- ----------- ------- ------- -------
-------------- ------- ----------- ------- ------- -------
RATIOS TO AVERAGE
NET ASSETS**
Gross Expenses 6.13% 5.71% 111.10% 3.23% 7.88% 19.73%
Net Expenses 2.90% 2.90% 2.90% 2.90% 2.90% 2.90%
Net Investment
Income (Loss) (0.37)% 1.29% 0.74% 1.50% 0.80% 8.68%
SUPPLEMENTARY DATA:
Portfolio Turnover
Rate*** 0% 0% 0% 0% 0% 0%
Net Assets, End of
Period (000's
omitted) $ -- $ -- $ -- $ -- $ -- $ --
Number of
Accumulation Units
Outstanding at End
of Period -- -- -- -- -- --
</TABLE>
* COMMENCEMENT OF OPERATIONS: JUNO SUBACCOUNT--MAY 7, 1997
DUE TO THE NATURE OF THE INVESTMENT ACTIVITY, CERTAIN SUBACCOUNTS MAY
EXPERIENCE PERIODS WITH ZERO NET ASSETS. FINANCIAL HIGHLIGHTS ARE
PRESENTED FOR PERIODS WITH NET ASSETS GREATER THAN ZERO ONLY. PER
ACCUMULATION UNIT AMOUNTS ARE CALCULATED USING AVERAGE OUTSTANDING
UNITS.
** 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.
21
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Rydex Advisor Variable Annuity Account (the "Account") is registered with
the Securities and Exchange Commission under the Investment Company Act of 1940
as a non-diversified, open-ended investment company. The Account consists of
seven Subaccounts: the Nova Subaccount, the Ursa Subaccount, the Money Market
Subaccount, the OTC Subaccount, the Precious Metals Subaccount, the U.S.
Government Bond Subaccount, and the Juno Subaccount and is managed by PADCO
Advisors II, Inc. ("PADCO"). PADCO Financial Services, Inc. ("PFSI") acts as
principal underwriter for the Account. The following significant accounting
policies are in conformity with generally accepted accounting principles and are
consistently followed by the Account in the preparation of its financial
statements.
The Account was established as a segregated investment account for individual
variable annuity contracts issued by Great American Reserve Insurance Company
("GARCO"). GARCO is an indirect wholly owned subsidiary of Conseco, Inc., a
publicly-held specialized financial services company listed on the New York
Stock Exchange.
SECURITY VALUATION
Securities listed on an exchange are valued at the latest quoted sales prices as
of 4:00 P.M. on the valuation date. Securities not traded on an exchange are
valued at their last sales price. Listed options held by the Account are valued
at their last bid price. Over-the-counter options held by the Account are valued
using the average bid price obtained from one or more securities dealers. The
value of futures contracts purchased and sold by the Account are accounted for
using the unrealized gain or loss on the contracts that is determined by marking
the contracts to their current realized settlement prices. Short term securities
with less than sixty days to maturity are valued at amortized cost, which
approximates market. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Managers.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on a trade date basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income and
expenses are accrued on a daily basis.
22
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ORGANIZATION COSTS
Deferred organization costs represent expenses incurred and paid on behalf of
the Account by GARCO and PADCO. These expenses which total approximately
$821,573 will be reimbursed to GARCO and PADCO by the Account. These initial
costs were allocated to the Subaccounts within the Account. The Account is
amortizing the total organization costs on a straight line basis over a five
year period beginning with the commencement of operations. These amortized costs
are then allocated to the Subaccounts daily and reconciled and settled monthly
between the Subaccounts on the basis of the relative net assets of each
Subaccount to the total assets of the Account. The monthly amortized amount is
paid to PADCO and GARCO. At December 31, 1997, accrued organization costs
payable by the Account to GARCO and PADCO were $173,266 and $555,120,
respectively.
VALUE OF AN ACCUMULATION UNIT
The value of an accumulation unit is determined daily by dividing the current
market value of total Subaccount assets, less liabilities, called net assets, by
the total number of units of that Subaccount outstanding. When the asset level
of a Subaccount is at zero, the Account's policy is to calculate the
accumulation unit value for that Subaccount each day based on the same day
change in the net asset value of the public Rydex Mutual Fund comparable to that
Subaccount, commencing with the last reported unit value of the Subaccount.
OPTIONS AND FUTURES
Upon the purchase of a put option or a call option by a Subaccount, the premium
paid is recorded as an investment, the value of which is marked-to-market daily.
When a purchased option expires, the Subaccount will realize a loss in the
amount of the cost of the option. When a Subaccount enters into a closing sale
transaction, the Subaccount will realize a gain or loss depending on whether the
proceeds from the closing sale transaction are greater or less than the cost of
the option. When a Subaccount exercises a put option, it will realize a gain or
loss from the sale of the underlying security and the proceeds from such sale
will be decreased by the premium originally paid. When a Subaccount exercises a
call option, the cost of the security which the Subaccount purchases upon
exercise will be increased by the premium originally paid.
When a Subaccount writes a call option or a put option, an amount equal to the
premium received by the Subaccount is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Subaccount
realizes a gain equal to the amount of the premium received. When a Subaccount
enters into a closing purchase transaction, the Subaccount realizes a gain (or
loss if the cost of the closing purchase transaction exceeds the premium
received when the option
23
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
was sold) without regard to any unrealized gain or loss on the underlying
security, and the liability related to the option is eliminated. When a written
call option is exercised, the Subaccount realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
premium originally received. When a written put option is exercised, the amount
of the premium originally received will reduce the cost of the security that the
Subaccount purchased upon exercise.
Futures contracts provide for the future sale by one party and the future
purchase by another party of a specified amount of a specified financial
instrument at an agreed upon price, date, time, and place. Upon entering into a
futures contract, the Subaccount is required to deposit with the broker an
amount of cash or cash equivalents equal to a certain percentage of the contract
amount. This is known as the "initial margin." Subsequent payments ("variation
margin") are made or received by the Subaccount each day, depending on the daily
fluctuation of the value of the contract. The daily changes in contract value
are recorded as unrealized gains or losses and the Subaccount recognizes a
realized gain or loss when the contract is closed. Futures contracts are valued
daily at the settlement price established by the board of trade or exchange on
which they are traded.
SHORT SALES
The Subaccounts may make short sales of securities. A short sale is a
transaction in which the Subaccount sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Subaccount may make short sales to offset a potential decline in a long position
or a group of long positions, or if the Subaccount believes that a decline in
the price of a particular security or group of securities is likely.
When a Subaccount makes a short sale, the proceeds it receives are retained by
the broker until the Subaccount replaces the borrowed security. In order to
deliver the security to the buyer, the Subaccount must arrange through a broker
to borrow the security and, in so doing, the Subaccount becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Subaccount may have to pay a premium to borrow
the security. The Subaccount must also pay any dividends or interest payable on
the security until the Subaccount replaces the security.
The Subaccount's obligation to replace the security borrowed in connection with
the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, the Subaccount will be required to maintain collateral
consisting of cash, cash items, or U.S. Government securities segregated with
its custodian in an amount such that the
24
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
value of the sum of both collateral deposits is at all times equal to at least
100% of the current market value of the securities sold short. The deposits do
not necessarily limit the Subaccount's potential loss on a short sale, which may
exceed the entire amount of the collateral.
If the price of the security sold short increases between the time of the short
sale and the time the Subaccount replaces the borrowed security, the Subaccount
will incur a loss, and if the price declines during this period, the Subaccount
will realize a capital gain. Any realized gain will be decreased, and any
incurred loss increased, by the amount of transactional costs and any premium,
dividend, or interest which the Subaccount may have to pay in connection with
such short sale.
2. FINANCIAL INSTRUMENTS
As part of its investment program, the Subaccounts may utilize options and
futures. The risk associated with purchasing options is limited to the premium
originally paid. Options written by a Subaccount involve to varying degrees,
risk of loss in excess of the option value reflected in the Statement of Assets
and Liabilities. The risk in writing a covered call option is that a Subaccount
may forego the opportunity for profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a covered
put option is that a Subaccount may incur a loss if the market price of the
underlying security decreases and the option is exercised. In addition, there is
the risk a Subaccount may not be able to enter into a closing transaction
because of an illiquid secondary market or, for over-the-counter options,
because of the counterparty's inability to perform.
There are several risks in connection with the use of futures contracts. Futures
contracts involve, to varying degrees, risk of loss in excess of amounts
reflected in the financial statements. The change in the value of futures
contracts primarily corresponds with the value of their underlying instruments,
which may not correlate with the change in the value of the hedged instruments.
In addition, there is the risk that a Subaccount may not be able to enter into a
closing transaction because of an illiquid secondary market.
In conjunction with the use of options and futures, as well as short sales of
securities, the Subaccounts are required to maintain collateral in various
forms. The Subaccounts use, where appropriate depending upon the financial
instrument utilized and the broker involved, margin deposits at the broker, cash
segregated at the custodian bank, and the repurchase agreements allocated to
each Subaccount as collateral for options, futures, and securities sold short.
3. FEDERAL INCOME TAXES
No provision for Federal income taxes has been made in the accompanying
financial statements because the operations of the Account are included in the
operations of GARCO, which is treated as
25
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
a life insurance company for federal income tax purposes under the Internal
Revenue Code. Net investment income and net realized gains (losses) are retained
in the Account and are not taxable until received by the contract owner or
beneficiary in the form of annuity payments or other distributions.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5. DEDUCTIONS AND EXPENSES
Although periodic retirement payments to contract owners vary according to the
investment performance of the portfolios, such expenses are not affected by
expense or mortality experience because GARCO assumes the mortality risk and the
expense risk under the contracts.
The mortality risk assumed by GARCO results from the life annuity payment option
in the contracts in which GARCO agrees to make annuity payments regardless of
how long a particular annuitant or other payee lives. The annuity payments are
determined in accordance with annuity purchase rate provisions established at
the time the contracts are issued. Based on the actual determination of expected
mortality, GARCO is required to fund any deficiency in the annuity payment
reserves from its general account assets.
A fee, which is equal on an annual basis to 1.25% of the daily value of the
Account, is deducted on a daily basis from each Account for assuming the
mortality and expense risks. These fees were $154,279 for the period ended
December 31, 1997.
An administrative charge, which is equal on an annual basis to .15% of the daily
value of the Account, is deducted on a daily basis from each Account for
contract administrative charges. These fees were $18,514 for the period ended
December 31, 1997.
6. REPURCHASE AGREEMENTS
The Account transfers uninvested cash balances into a single joint account, the
daily aggregate balance of which is invested in a repurchase agreement
collateralized by Federal agency obligations. Collateral is in the possession of
the Account's custodian and it is evaluated daily to ensure that its
26
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
market value exceeds the delivery value of the repurchase agreements at
maturity. As of December 31, 1997, the repurchase agreement with Fuji
Securities, Inc. in the joint account totalled $27,129,258 in par at 6.500%,
maturing 1/2/1998, to be repurchased at $27,138,920. The repurchase agreement
was collateralized by $26,024,000 in par of United States Treasury Notes,
6.375%, maturing 1/15/2000, with a current market value of $27,130,020.
Risks arise from the possible delay in recovery of potential loss of rights in
the collateral should the issuer of the repurchase agreement fail financially.
The Account's investment advisor, acting under the supervision of the Board of
Managers, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which the Account enters into repurchase agreements to
evaluate potential risks.
7. INVESTMENT ADVISORY AND TACTICAL ALLOCATION SERVICES
Under the terms of an investment advisory contract, the Account pays PADCO
investment advisory fees calculated at an annual percentage rate of one half of
one percent (0.50%) of the average net assets of the Money Market Subaccount and
the U.S. Government Bond Subaccount, three-quarters of one percent (0.75%) of
the average net assets of the Nova Subaccount, the Precious Metals Fund, and the
OTC Subaccount, and nine-tenths of one percent (0.90%) of the average net assets
of the Ursa Subaccount and the Juno Subaccount.
PADCO Services, Inc. (the "Servicer") provides tactical allocation
administrative services to the Account calculated at an annual percentage rate
of two-tenths of one percent (0.20%) of the average net assets of the Money
Market Subaccount, U.S. Government Bond Subaccount, Precious Metals Subaccount,
and the OTC Subaccount; and at an annual rate of one-quarter of one percent
(0.25%) of the average net assets of the Nova Subaccount, the Ursa Subaccount,
and the Juno Subaccount.
The Servicer also provides other necessary services to the Account, such as
accounting and auditing services, legal services, custody, printing and mailing,
etc., on a pass-through basis. Such expenses vary from Subaccount to Subaccount.
PADCO and the Servicer have voluntarily agreed to waive their investment
advisory and tactical allocation administrative service fees and, if necessary,
to reimburse any Subaccount expenses which would cause the ratios of expenses to
average net assets to exceed 2.80%, 2.90%, 2.20%, 2.80%, 2.80%, 2.40%, and 2.90%
for the Nova, Ursa, Money Market, OTC, Precious Metals, U.S. Government Bond,
and Juno Subaccounts, respectively, through December 31, 1997. Effective January
1, 1998, these voluntary limitations increased to 3.60%, 3.70%, 3.00%, 3.60%,
3.60%, 3.20%, and 3.70%, respectively.
27
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1997, the Subaccounts had net receivables for reimbursement of
miscellaneous expenses of $17,412 from the Servicer. All investment advisory
fees and tactical allocation fees accrued had been waived by the provider of
these services.
During the period ended December 31, 1997, the following fees and expenses were
waived by PADCO and the Servicer, or reimbursed by PADCO in the Subaccount
shown:
<TABLE>
<CAPTION>
MISCELLANEOUS TOTAL FEES AND
ADVISORY TACTICAL ALLOCATION EXPENSES EXPENSES WAIVED/
FEES WAIVED FEES WAIVED REIMBURSED REIMBURSED
------------ -------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Nova $20,858 $ 6,953 $147,177 $174,988
Ursa 8,957 2,488 51,066 62,511
Money Market 33,131 13,252 259,787 306,170
OTC 9,458 2,509 67,056 79,023
Precious Metals 1,912 512 15,298 17,722
U.S. Government Bond 793 319 10,039 11,151
Juno 2,375 660 13,879 16,914
------------ -------- -------------- -----------------
Total $77,484 $26,693 $564,302 $668,479
------------ -------- -------------- -----------------
------------ -------- -------------- -----------------
</TABLE>
Effective October 24, 1997 through October 24, 1999, the Subaccounts are
required to reimburse PADCO and the Servicer for these expenses, provided that
average net assets have grown or expenses have declined sufficiently to allow
reimbursement without causing the Subaccount's ratio of expenses to average net
assets to exceed the specified rates. Through December 31, 1997 the fees waived
and expenses reimbursed subject to reimbursement to PADCO and the Servicer for
each Subaccount was as follows:
<TABLE>
<S> <C>
Nova $106,519
Ursa 50,027
Money Market 210,946
OTC 36,400
Precious Metals 8,312
U.S. Government Bond 7,321
Juno 8,232
--------
Total $427,757
--------
--------
</TABLE>
28
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. SECURITIES TRANSACTIONS
During the period ended December 31, 1997 purchases and sales of investment
securities were:
<TABLE>
<CAPTION>
U.S.
MONEY PRECIOUS GOVERNMENT
NOVA URSA MARKET OTC METALS BOND JUNO
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases $2,277,849 $-- $-- $8,087,040 $4,376,739 $3,362,746 $--
Sales $1,524,977 $-- $-- $5,664,771 $3,546,494 $2,710,575 $--
</TABLE>
The transactions shown above exclude short term and temporary cash investments.
9. NET ASSETS
Net assets consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
U.S.
MONEY PRECIOUS GOVERNMENT
NOVA URSA MARKET OTC METALS BOND JUNO
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Paid-In-Capital $10,111,331 $3,214,018 $17,681,734 $2,570,084 $ 849,318 $854,612 $ 20,164
Net Investment Income 25,410 221,638 5,858 6,316
Net Investment Loss (3,330) (15,375) (5,585)
Accumulated Net Realized Gain (Loss) on
Investments 112,377 (254,521) (81,503) (365,727) 14,916 (26,480)
Net Unrealized Appreciation
(Depreciation) on Investments, Options
and Futures Contracts 198,918 (77,323) (105,801) 39,904 16,633 0
----------- ---------- ----------- ---------- ---------- ---------- ----------
Net Assets $10,448,036 $2,878,844 $17,903,372 $2,367,405 $ 517,910 $892,019 $ 0
----------- ---------- ----------- ---------- ---------- ---------- ----------
----------- ---------- ----------- ---------- ---------- ---------- ----------
</TABLE>
10. INCREASE/DECREASE IN ACCUMULATION UNITS
Transactions in units for the period ended December 31, 1997 were:
<TABLE>
<CAPTION>
U.S.
MONEY PRECIOUS GOVERNMENT
NOVA URSA MARKET OTC METALS BOND JUNO
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units Purchased 6,454,734 5,384,612 11,946,671 1,654,828 500,396 358,829 683,854
Units Withdrawn (5,598,872) (5,027,828) (10,211,697) (1,432,611) (426,569) (283,336) (683,854)
----------- ----------- ------------- ----------- ----------- ----------- -----------
Net Units Purchased 855,862 356,784 1,734,974 222,217 73,827 75,493 0
----------- ----------- ------------- ----------- ----------- ----------- -----------
----------- ----------- ------------- ----------- ----------- ----------- -----------
</TABLE>
29
<PAGE>
RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Transactions in dollars for the period ended December 31, 1997 were:
<TABLE>
<CAPTION>
U.S.
MONEY PRECIOUS GOVERNMENT
NOVA URSA MARKET OTC METALS BOND JUNO
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units Purchased $ 76,198,580 $ 45,239,040 $ 122,126,822 $ 18,825,274 $ 4,476,176 $ 3,840,174 $ 6,578,572
Units Withdrawn (66,087,249) (42,025,022) (104,445,088) (16,255,190) (3,626,858) (2,985,562) (6,558,408)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Units Purchased $ 10,111,331 $ 3,214,018 $ 17,681,734 $ 2,570,084 $ 849,318 $ 854,612 $ 20,164
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
</TABLE>
11. OPTION CONTRACTS WRITTEN
During the period ended December 31, 1997 contracts written were:
Put Options Written:
<TABLE>
<CAPTION>
OTC SUBACCOUNT
---------------------
NUMBER OF INITIAL
CONTRACTS PREMIUMS
--------- ---------
<S> <C> <C>
Outstanding at Beginning of Period 0 $ 0
Options Written 82 213,312
Options Terminated (80) (205,318)
--------- ---------
Outstanding at End of Period 2 $ 7,994
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Rydex Advisor Variable Annuity Account
We have audited the accompanying statements of assets and liabilities of the
Nova Subaccount, Ursa Subaccount, Money Market Subaccount, OTC Subaccount,
Precious Metals Subaccount, U.S. Government Bond Subaccount and Juno Subaccount
(collectively the "Account"), including the portfolios of investments, as of
December 31, 1997, and the related statements of operations, statements of
changes in net assets and the financial highlights for each of the periods
presented therein. These financial statements and financial highlights are the
responsibility of the Account's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Nova Subaccount, Ursa Subaccount, Money Market Subaccount, OTC Subaccount,
Precious Metals Subaccount, U.S. Government Bond Subaccount and Juno Subaccount
of Rydex Advisor Variable Annuity Account as of December 31, 1997, the results
of their operations, the changes in their net assets, and financial highlights
for each of the periods presented therein in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 6, 1998
